Competing with Giants: Who Wins, Who Loses? Betina Dimaranan, Elena Ianchovichina, and Will Martin National University of Singapore 15 September 2006

Export Growth: China and India Two giant labor-intensive exporters, growing rapidly, but some important differences  Services much more important in India  Only China integrated into global networks But both now rapidly integrating into world production networks What will be the implications for them, and for other countries?

Importance of Services

Import Share: Parts & Components

Radically different export patterns 6-digit

Major reforms under way in India Reductions in non-agricultural protection Improvements in the operation of duty exemption/drawback schemes Improvements in infrastructure/lowering of trade costs

Questions to be addressed What are the likely effects of India’s move to greater integration in the world economy? What will be the effects of rapid growth by two large, globalized exporters?  On each other?  On other developing countries?

Methodology Modify the GTAP-6 model to allow duty exemptions on intermediates used for exports  Move from 2001 base to 2005 incorporating agreed reforms– especially China’s WTO commitments  Examine globalizing reforms in India Project the global economy forward to 2020  Compare with higher-than-expected growth in China and India  Allow for increases in the variety of goods exported from China and India  Consider growth biased to physical or human capital

India’s Reforms Reductions in non-agricultural tariffs Making duty exemption/drawback schemes more effective  Modeled as introduction of such schemes for all exported goods 20% reduction in trade costs

Changes in India’s Exports Big increases in exports of metals, machinery and electronics But the correlation with China’s exports of manufactures declines from 0.01 to % Chem., Rubber, Plastics 90 Metals 108 M. Vehicles & Parts 60 Machinery & Equip 168 Electronics 140

Implications for the composition of India’s exports

Baseline simulation, % pa,

Impacts of higher growth in China & India on other countries Benefits from increases in direct trade  Strengthening of demand for exports  Greater supplies of goods from China & India Challenges from third market competition Quality and variety growth based on Hummels and Klenow (2005)  Quality of exports represented as an increase in the effective services provided  Variety growth based on H-K assessment that 2/3 of export growth from new varieties

Implementation Primary exogenous shock an increase in GDP growth of 2.1% per year in China &1.9% in India  Based on a model of potential growth rates  Designed to replicate Hummels-Klenow increase in varieties 66% of growth rate & increase in actual prices of 0.09% for each 1% of growth Quality & variety shocks introduced through changes in λ & N in Hummels-Klenow price aggregator

Impacts on world welfare

Impacts on exports,

Impacts on industry output,

Productivity growth likely biased We consider scenarios where growth is biased towards more advanced sectors  Sectorally, or through capital growth Perhaps the most interesting is bias towards strong export sectors in China and India  metals, electronics, machinery and equipment, motor vehicles and commercial services Consider 2% productivity growth per year

Growth in strong export sectors,

Impacts on sectoral outputs, %

Conclusions China and India currently compete relatively little, despite being labor-intensive giants  Increasing globalization by India looks unlikely to greatly intensify that competition Higher growth by China and India likely to be beneficially for the world as a whole, and for most developing countries  Especially when improved quality and variety of exports is considered But substantial adjustments in production and exports required in some cases