The emergence of China as a major player in the global trade of goods and services has undoubtedly delivered benefits for Latin America—primarily by enhancing the value of its exports of natural resources and related products. But China’s growth as a commercial power has also created a major competitor in the markets of Latin America’s trading partners, especially in the United States, the European Union and the domestic markets of Latin American countries. In many of those countries, national manufacturing industries are already starting to suffer because of Chinese imports.
While there are several studies that confirm the positive impact exerted by Chinese demand on export prices and the regional export basket, there is little recent empirical evidence, especially at the industry and product level, to show the effect of competition in third markets and within countries.
My colleagues and I at the UN Economic Commission for Latin America and the Caribbean analyzed U.S., EU and Latin American imports from four selected countries (Argentina, Brazil, Colombia, and Mexico)—all of which have developed different trade relations directly and indirectly with China—and China, to understand how their products in third markets are affected by Chinese exports. In addition, by looking at domestic production, import trends in intermediate inputs, consumption patterns, and the proportion of demand for products of Chinese origin, we determined the domestic industries most affected by imports from China.
Competition in Third Markets
To analyze competition in third markets, we selected industries exporting to the U.S., the EU and Latin America (approximated by South America and Mexico), and traced the evolution of market share between 2005 and 2010 (or the most recent year in the four countries mentioned above). This was compared to the evolution of China’s participation in the same markets during the same period. Subsequently, we selected those industries where China’s overall market increased in comparison to the four selected countries. In this way, we could determine which industries were most affected by Chinese competition in third markets.
Our study showed that the sectors that experienced the greatest impact in all four countries—all of it negative—were industrial machinery and equipment, office machinery, electrical equipment and metal products [SEE FIGURE 1].
The four countries have seen their market share decline in both high- and low-tech products in the U.S. and Latin America. In 2009–2010, China overtook the selected countries in total imports in both markets [SEE FIGURE 4].
In the U.S. market, Chinese competition has affected a large group of domestically produced goods, especially electronics and electrical machinery, radio and television transmitters, telephone equipment, radio receivers, recording and reproduction equipment, insulated wires and cables, motors, electrical generators and transformers, and chemicals. Overall, in 2010 the affected market share for the four selected countries represented 25 percent of their total exports to the U.S., with Mexico alone accounting for 93 percent of the total loss.
In the four Latin American markets, the share of exports subject to increased competition from China reached 12 percent of their total intraregional industry exports, with products especially affected in the export industries of Brazil, Mexico and Argentina, which combine for a total share of 94 percent of the total.
As for the EU market, the share of affected exports from the selected Latin American countries was just 4 percent, leading to the conclusion that there has been no significant change in the past five years. Since 1998 China had already surpassed the market share of Latin America and the Caribbean in the EU market, and there was little room for more growth.
Competition in Domestic Markets
To measure the impact of Chinese competition on the domestic industries of the selected countries, we monitored industrial imports, and calculated the proportion of imports from China in the apparent consumption level of 11 industry groups and six industrial sectors. This helped identify the principal Chinese imports eroding domestic products: textiles and garments, rubber and plastic products, metal products, machinery and equipment, and motor vehicles and parts. In Figure 3 we present the extent to which Chinese products in those sectors in the Colombian, Brazilian and Mexican markets increased between 2005 and 2010.
For Argentina, apparent consumption data by sector were not available, but we discovered several sensitive sectors by reviewing the countermeasures taken to curb Chinese imports, such as import licensing and the application of anti-dumping surcharges. The industries classified as sensitive include textiles, footwear, metal products, and machinery and equipment. By product, particularly sensitive cases are cotton, screws, nuts and bolts, pipes and pipe fittings, steel, toys, Christmas trees and ornaments, and vehicle spare parts.1
In Colombia, the domestic industries most affected by Chinese competition are metals and products, machinery and equipment, rubber and plastics, and textiles and clothing. Imports of these four groups of industries from China increased at an annualized rate of 28 percent between 2005 and 2010, while the combined imports of the same group from the rest of the world grew at a much lower rate (15 percent). In the same period, the expansion of the apparent consumption of the entire Colombian economy was about 14 percent. The difference in growth rates between the consumption of imported goods and the explosive expansion of Chinese products led to a rise in the Chinese share of imports in apparent consumption from 1.3 percent to 2.9 percent between 2005 and 2010.
In Brazil, textiles, clothing, footwear, industrial machinery and equipment, office machines, and nonmetallic minerals have been hard hit in the domestic market, especially from products made of steel and alloys, such as tools, parts and pieces, kitchenware, etc. This explains the rise of anti-dumping investigations against Chinese imports. Imports as a percentage of apparent consumption increased from 1.1 percent to 2.2 percent. The increase of 2 percent is explained by the greater increase in imports of the most affected products, which reached an above-average annual growth rate. Imports from China increased by twice the rate of those originating in other countries (39 percent versus 18 percent).
Comparatively greater effects were observed in industries in Mexico, which experienced a bigger increase in apparent consumption in the share of imports from China, rising from 3.3 percent to 6.4 percent between 2005 and 2010. The most affected sectors were the textile and apparel industry, auto parts, industrial machinery and equipment, metals and derivatives, and other manufactures.
Mexican products with greater sensitivity to increased imports from China are antibiotics, seamless carbon steel, alloy steel pipes and chains, coaxial cable, carbon electrodes, and various types of watches. Responding to the economic crisis of late 2008 and 2009, the demand for greater restrictions increased.2 Nevertheless, Mexico applied few restrictive measures such as anti-dumping investigations. The growth rate of Mexican imports from China was almost five times higher than the import growth from other countries (21 percent versus 4 percent).
Our analysis of exports by destination as well as of imports by origin, with the inclusion of the effect caused by competition from China in third markets and in the domestic markets of the four selected countries, found that the same set of industrial sectors are affected by Chinese exports: office machinery, metal products, wood, pulp and paper, textiles and apparel, and footwear.
By 2010, approximately 22 percent of the combined industrial exports of the four selected countries to the two major regional markets (U.S. and Latin America) were threatened by competition from China. As for competition in the domestic market, the three countries for which it was possible to calculate the coefficient showed a rise of imports in apparent consumption from 6 percent to 11 percent in all the manufactures, with the above-mentioned sectors (office machinery, metal products, wood pulp, etc.) being the most affected ones.
The story is far from over. Although our study shows Chinese imports have made serious inroads in the market share of domestic industries in Latin America’s largest economies, as well as in their share of industrial exports to third markets, public policy can make a difference.
Competitiveness in industries that compete with similar products of Chinese origin, especially in sectors dominated by low-skilled labor, can be strengthened in at least three ways.
- Reducing logistics costs to take advantage of lower costs associated with distance, especially in trade with the U.S., and in neighboring markets for intraregional trade.
- Increasing spending on research, development, design and marketing of products with a higher probability of maintaining internal or external market share, specializing in areas where differentiation is higher.
- Improving quality and fostering innovation in products at risk of being replaced by Chinese competitors, through targeted incentives and investments in areas such as quality control, ISO certification norms and, ultimately, reducing the carbon footprint in exports.
Efforts to articulate public policies are increasingly necessary to define national strategies, involving both private and public actors—like similar efforts developed in East Asian countries—to create the conditions necessary to meet the challenge posed by China. If these coordinated efforts are not deployed, the future of the industries in question could be seriously compromised.
1. www.globaltradealert.com, Last accessed January, 2012.