Firms and credit constraints along the global value chain: Processing trade in China
Kalina Manova, Zhihong Yu , 13 May 2013
What can we learn from China’s experience as a linchpin in the global value chain? This column presents new research showing that financial frictions influence the organisation of production across firm and country boundaries. If you’re credit-constrained, you might be stuck in the low value-added stage of the supply chain. Strengthening capital markets might thus be an important prerequisite for moving into higher value-added, more profitable activity. China’s experience tells us that liquidity-constrained manufacturers might therefore benefit more from import liberalisation and from the fragmentation of production across borders.
The past 20 years of globalisation have witnessed a dramatic expansion in the fragmentation of production across countries. Firms today can not only trade in final goods, but also conduct intermediate stages of manufacturing by importing foreign inputs, processing and assembling them into finished products, and re-exporting these to consumers and distributors abroad.
Topics: International trade
Tags: China, global supply chain, global value chain
Finance and growth in China and India: Have firms benefited from the capital-market expansion?
Tatiana Didier, Sergio Schmukler, 6 May 2013
The growth of China and India’s financial sectors is hard to ignore. This column presents a new dataset on domestic and international capital raising activity and performance of the publicly listed firms in China and India. The data suggest that expanding capital markets might tend to directly benefit the largest firms – those able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to elucidate.
China and India are hard to ignore. Over the past 20 years they have risen as global economic powers, at a very fast pace. By 2012, China has become the second-largest world economy (based on nominal GDP) and India the tenth. Together, they account for about 36% of world population.
Topics: International finance
Tags: China, India
Investigating the effect of exchange-rate changes in Japan, China, east Asia, and Europe
Willem Thorbecke, 26 February 2013
Policymakers everywhere are concerned about currency wars. Are quantitative easing and managed exchange rates bad for the global economy? This column looks at the hard empirical evidence, arguing that, in fact, Japan is behaving rather responsibly and that other strong economies have themselves benefited from undervalued currencies. That said, it is true that politicians’ short time horizons often lead to stealthy policy and large swings in exchange rates. Economists should therefore aim to promote longer-run cosmopolitan interests rather than shorter-run nationalistic agendas where possible.
Policymakers are concerned about currency wars and competitive devaluations. Many complain that trading partners are artificially lowering their exchange rates through quantitative easing and managed exchange rates in order to gain price competitiveness for their exporters.
Topics: Exchange rates
Tags: China, Europe, Eurozone crisis, Japan, US
China and the end of extrapolation
George Magnus, 31 January 2013
In 2013, China is at an important crossroads in its economic development. This column argues that we cannot continue to extrapolate from China’s recent economic record. If growth is to remain high and stable, choosing the right course will require nothing less than a significant change in China’s economic model, brought about by what might be the most important political reforms since the 1980s. Whether or not its growth performance tips it into the middle-income trap depends on engaging with and implementing widespread reforms that may be incompatible with the primacy of the Communist Party.
That the Chinese economy is slowing down as it quickly matures should come as no surprise. The global economic conditions of the two decades leading up to the financial crisis were exceptional; things are far more sober now.
Many of China’s development achievements are unrepeatable. Only once can you:
Tags: China, Communist Party, growth, middle-income trap
Exchange-rate volatility is a problem for trade … especially when financial development is low
Jérôme Héricourt, Sandra Poncet, 19 January 2013
The increasing volatility of exchange rates after the fall of the Bretton Woods agreements has been a constant source of concern for both policymakers and academics. Does exchange-rate risk dangerously increase transaction costs and reduce gains to international trade? This column uses recent research to argue that there is indeed a negative impact of exchange-rate volatility on firms’ exporting behaviour, magnified for financially vulnerable firms and dampened by financial development. Thus, emerging countries should be careful when relaxing their exchange-rate regime.
The increasing volatility of exchange rates after the fall of the Bretton Woods agreements has been a constant source of concern for both policymakers and academics.
Topics: Exchange rates, International trade
Tags: China, exchange-rate volatility, trade
Capital controls: Gates versus walls
Michael W Klein, 17 January 2013
Capital controls are back in vogue. This column argues that we should distinguish between episodic controls (gates) and long-standing controls (walls). Research shows that the apparent success of 'walls' in China and India tells us little about the consequences of capital controls imposed or removed in countries like Brazil and South Korea, as circumstances change. Walls and gates are fundamentally distinct, and policy debate needs to take into account these differences.
Capital controls are no longer considered rogue policies.
Topics: Macroeconomic policy
Tags: Brazil, capital controls, China, South Korea
Trade liberalization and embedded institutional reform: Evidence from Chinese exporters
Amit Khandelwal, Shang-Jin Wei, Peter K. Schott , 2 December 2012
If trade barriers are managed by inefficient institutions, trade liberalization can lead to greater-than-expected gains. This paper examines Chinese textile and clothing exports before and after the removal of externally imposed quotas. Both the surge in export volumes and the decline in prices after the quota removal are driven by net entry, implying that the pre-liberalisation quota allocation is not based on firm productivity. Removing this misallocation accounts for a substantial share of the overall productivity gains associated with the quota removal.
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Topics: Development, International trade
Tags: China, misallocation, multifibre agreement, productivity
Growth slowdowns redux: Avoiding the middle-income trap
Barry Eichengreen, Donghyun Park, Kwanho Shin, 11 January 2013
The rapid economic growth of emerging markets is the leading headline of our age. But growth is slowing. Using new research, this column asks why this might be, and how policymakers might remedy flagging economies. The answer seems to be education. Recent research suggests, for instance, that the rapid expansion of secondary and tertiary education helped Korea’s successful transition from middle- to high-income status, very much unlike Malaysia and Thailand. Whether China can avoid the middle-income trap will depend in part upon developing an education system producing graduates with skills that Chinese employers require.
The rapid economic growth of so-called emerging markets is one of the leading storylines of our age. Arguably, it is the most important economic development affecting the world’s population in the first decade of the 21st century. Rapid economic growth has lifted millions out of poverty.
Tags: China, middle income gap, slowdown
The appreciating renminbi
Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis, 9 January 2013
China is perennially accused of currency manipulation. Yet, this column argues that a weak currency value doesn’t necessarily reflect currency manipulation. China is a fast growing economy with strong financial frictions and a high saving rate, and such countries naturally have weak currencies. Instead of focussing on accusations of currency manipulation, it might be more helpful for economists to encourage policies that foster Chinese consumption, gradually leading the renminbi to an appreciating path.
In the recent US presidential campaign, China was accused again of currency manipulation. In other words, the Chinese central bank is accused of maintaining the exchange rate at an artificially low level compared to its equilibrium value, including heavy intervention in the foreign exchange market.
Topics: Exchange rates
Tags: China, Currency manipulation, Currency wars
Trade liberalisation and embedded institutional reform: Evidence from Chinese exporters
Amit Khandelwal, Peter K. Schott , Shang-Jin Wei, 15 January 2013
The institutions that manage trade barriers are subject to corruption, imposing additional distortions. This column shows that in China, the government misallocated quota licenses permitting firms to export. When the US and EU abolished quotas governing textile exports in 2005, China experienced productivity gains not only from the actual elimination of the quota but also from the termination of the misallocation due to inefficient licensing.
Economists traditionally assess the welfare losses of trade barriers without considering the underlying institutions that support them. In fact, these institutions may amplify welfare losses substantially.
Topics: Institutions and economics, International trade
Tags: China, export licence, import quota