Thanks chairman!
Ladies and gentleman, good morning!

In this short speech I would like approach our focus from the perspective of trade relationship between China and developing countries. Because I believe that foreign direct investment follow the suits of comparative advantage in many circumstances especially among developing countries in south-south cooperation. There are three points I would like talk about. One is the pattern of trade between China and developing countries. Two is the competitiveness and complementarities between China and developing countries, and three is the China’s going out strategy and the south-south cooperation. This speech based on a study that has been conducted last year financially supported by CICETE. All the details are available.
Let’s briefly look at the trade relation between china and developing countries. In 2004, China’s total trade amounts to US$ 1160 billions, among them US$ 220 billions are with developing countries that accounts for 18.6% of the total. Although developing countries only take a relative smaller share in China’s total trade, it has experienced a great increase in last over ten years. The growth rate is faster than those with developed countries and shows a great momentum. During the period after 2000, China’s export to developing countries has been increasing at an average rate of 25.23%, and import increasing even faster with an average rate of 42.68%. The difference in growth rate inevitably make China suffering a trade deficit, which amounts to US$ billion 24.355 in 2004 and is still increasing. It is apparent that China’s domestic demands are providing more export opportunities for developing countries that serve as a growth engine.
Now what does the trade pattern between China and developing countries feature itself?
Firstly, the trade pattern with countries in different regions varies greatly. Asian is the dominant trade partner of China with a share of about 70% in total import and export in 2005 because of close geographic and economic relationship. America and Africa each account for about 15% and Oceania only less than 1%. Although Asia’s share decreased slightly from 1990 to 2005, the trade structure by regions keeps a similar profile all over the time.
Secondly, the trade pattern with countries in different income level show that middle- and low-income countries have a share of about 40% in China’s total trade, the share of high-income country group takes about 20%. For export, the share of middle-income country group keeps increasing over time with a highest growth rate. However, for import, the high-income countries take the lead because most of these countries are oil and other nature resources exporters. It is evident that all country groups have had an equal opportunity to access to China’s market but nature resources abundant countries have more advantages in potential.
In general, the trade structure by commodity between China and developing countries has the similar picture with that of trade with the world. Manufacture dominates the trade and primary product takes a relatively smaller share. However, the share of primary product in China’s trade with developing countries account for 34.53% of the total trade in 2004. It is much higher than that of trade with all over the world that accounts for only 13.60%. This shows the importance of trade in primary product between China and developing countries as a whole. If we look at the product components, machinery and transportation-equipments ranks the top with a share of 30.19% in total trade, the manufactures classified by materials and the mineral products rank the second, with a share of 17.72% and 17.73 respectively. It is quite clear that China trades with developing countries mainly in capital-intensive products; labor- and resources-intensive products follow the suit.
Overall trade does not provide an insight in pattern of trade. So we need to further see the import and export structure in details. In 2004, China’s total export to developing countries is US$ 95.76 billions, account for 21.13% of total export of developing countries averagely in all product catalogues. In primary product, the main export good is food and live animal that account for 15.04% of the total. In manufactures, miscellaneous that includes garments and textile products rank the top of 55.44%. China has a greater share in manufacture export to developing countries than that of primary product, which account for 34.11% and 8.15% respectively. Regarding the fast increase of China’s export in most product catalogues, a greater share of export in the total of developing countries is expected.
Comparing with the export, the significance of China’s import in developing countries is even more apparent. In 2004, China’s total import accounts for 27.29% of the total averagely in all product catalogues that is significantly greater than that of export. Further more, China imports relatively more primary product than export. In total import of developing countries, China’s import of primary product account for 25.9%, and that of manufacture is 28.68%, slightly bigger than the former. For product in different catalogue, no-food fuel takes the greatest share of 54.45% in primary product, and miscellaneous take the second of 40.21% in manufactures. More important is that the import from developing countries grows very fast than that of export. Comparing with 2000, China’s import of miscellaneous has increased 167.82% and animal/plant oil has increased 144.6%, with an annual growth rate of 22.37% and 34.58%. It means that China has provided developing countries more opportunity of market excess not only in primary product but also in manufactures.
The facts show above seems apparent that are competitiveness and complementarities between China and developing countries. But what is it? Here I employ several indexes to give you a profile picture.
It is quite common in literature to use the index of Revealed Comparative Advantage (RCA) to disclose the existing trade pattern between two parties. Generally speaking, China has comparative advantage over all country groups in capital and technology intensive product and comparative disadvantage in resources-intensive one. This has been enhancing since 1990. The RRCA in capital-intensive product increased from 1.3524 in 1990 to 1.5731 in 2004, but in the same period the resource-intensive product decreased from 0.5070 to 0.1779. For labor-intensive product, it has a greatest comparative advantage over all country groups before 2000, however, it begun to decline afterward. This shows that China has shifted the comparative advantage gradually from labor-intensive products to capital-intensive ones.
According to Extended TC index, China has obvious competitive advantage over developing counties in capital intensive products such as machinery and transport equipment, but in a decreasing manner. This is mainly caused by the rivalry coming from Asian developing countries. In labor-intensive products such as shoes, textile and clothing, metal products, weapons, miscellaneous products, China shows absolute competitive advantages. Therefore, for the purpose of trade and industrial policies, China and other developing countries should take different strategies. China should continue to develop labor-intensive industries as it has the greatest advantages in labor force. For other developing countries, in despite of the key role of these industries for the economic development in the past, they should actively upgrade the economic structure on the basis of macro-economy stability, carry out industrial cooperation and policies adjustment, and develop the intra-industry trade with China on a deeper level under the framework of economic integration. In this way, they can meet the challenge and avoid cut-throat competition from China.
The pictures in the above can be detailed by region, which have provided more information on the topic. However, considering the time constraint, I have to leave it along.
Next we look at another side of the issue, the complementarities. I have mad my argument by looking at the extent of trade integration, trade compatibility, and export similarity between China and developing countries.
The study shows that trade integration between China and developing countries as a whole has been steadily deepening with an increase in the index from 0.68 in 1990 to 1.36 in 2004. However, if we look at the region, the situation is obviously different. We can see that, in 2004, Asia has a highest of 1.76 and America has the lowest of 0.76. During 1990 to 2004, trade integration in Asia has been deepening in the greatest extent, but Africa experienced a decline although it still keeps at an average level.
The study also shows that China’s export is compatible to other developing countries’ import for most of commodity groups. In 2004, Africa accounts for the highest of 0.7760 in different regions. That means a relative high complementary in trade between China and Africa than other regions. Comparing with 1990, the index of trade compatibility in different regions increased slightly in 2004. This indicates that the compatibility between China and developing countries are enhancing although the change is slow.
We can see that China has a very high export similarity in third market with all the developing countries in different regions. This means that China compete seriously with developing countries in world market, especially with American countries, the index is as high as 74.42. This is not only because they have similar industry structure but also because they have similar trade policy. Most of developing countries, after late 80s last century, pursue an export oriented policy which target to the world market. So the competition among them is not avoidable. Take American market as example, it is the biggest market for China and Mexico in labor-intensive product such as garments and footwear etc. The similarity has caused great competition and Mexico’s products are substituting that of China in American based upon the comparative advantage of NAFTA.
Taking the situation as granted, what policy should we take into account for improving further trade and economic relations with developing countries as a whole? In the following we discuss policy issue from three perspectives, i.e. trade liberalization in market access, regional trade arrangement, and industrial cooperation based upon direct investment.
According to the analysis in section one, China’s trade structure features itself with a greater proportion in Asia and of middle and low-income countries. So more attentions should be paid to America and Africa countries in order to enable more developing countries, especially those lest developed countries in these regions, share the benefits of China’s economic growth and expansion. However, these countries should further reduce the trade barrier and increase the capacity of production and trade.
Regional economic cooperation is an efficient means of strengthening economic and trade relations. China should promote regional cooperation with developing countries to speed up foreign trade. The empirical studies have shown that a greater margin exists in a south-south FTA than that of north-south FTA as developing countries have a relative higher tariff and non-tariff barriers. However, when choosing a trade arrangement, developing countries should take following issues into account in order to maximize its benefits. We should aware that any free trade arrangement is by no mean a free lunch. The trade diversion effects and the adjustment and administration costs might offset the gain from trade resulted from free trade arrangement, especially when different FTA take effect in different time.
FDI is another important way to strengthen economic ties between countries other than regional economic cooperation. China’s Going-out strategy might play an important role in south-south cooperation. On one hand, the Going Out strategy will enables Chinese enterprises access to world resources and international market. China is poor in natural resources in the sense of per capita. This has prevented the economic development and foreign trade. Through direct investment in developing countries with rich resources, China is able to make full use of the world resources. In addition, foreign direct investment can avoid tariff and non-tariff barriers and helps China find a foothold in international market. Meanwhile, quid pro quo investment is an important method to deal with trade protectionism, because it can form a common interest community on the level of enterprises and lower the possibility of host country’s adoption of trade protection measures. On another hand, the strategy will help other developing countries also. The capital outflows along side some kind of technology and industrial transfers based upon international division of labor will evidently push the economic growth in related developing countries and increase the national welfare on both side.
In general, developing countries are very important trade partner of China as a whole and the trade with developing countries is increasing relatively fast in last over ten years. The pattern of trade shows that China has complementarities in trade with most of developing countries although competitiveness exists in certain counties and on some of the products. This close trade relationship laid a solid foundation for broader practice in south-south cooperation including foreign direct investment. In this area China have an important role to play. The Going Out strategy provides an opportunity for Chinese firms to capture the international market and resources, and also for other developing countries to increase their domestic capital and production capability. So based upon the division of labor in would scope, a win-win scenario is expected for China and developing countries that will contribute to the south-south cooperation.