## _apd1601 ## Source details **Canonical URL:** [_apd1601](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2016/_apd1601.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2016/_apd1601.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/dp/2016/_apd1601.pdf.json) --- ### Executive Summary — China’s role, value chain movement, and rebalancing - China’s share of world trade: - Exports: 12 percent of the global total. - Imports: 10 percent of world imports. - Export growth and FDI: - Nominal exports grew by 17 percent on average each year from 1990 to 2012. - China is the world’s largest importer of intermediate goods and the world’s largest recipient of foreign direct investment. - Labor and demographics: - Estimated 270 million migrant workers are in the 10 coastal provinces that account for 90 percent of China’s exports. - Private sector wages across the country have risen by close to 15 percent per year over the past decade. - By comparison with 2005, China’s wages are higher by nearly 50 percent; wages in the coastal provinces are more than double those in the interior. - China is expected to reach the Lewis turning point by 2025. - Rising unit labor costs have reduced competitiveness in labor-intensive production. - Movement up the value chain and geography: - China has onshored more sophisticated production and is producing higher-value-added upstream and downstream products. - Exit from lower-end, labor-intensive sectors has begun but is slower than in prior cases (Japan, Taiwan Province of China, Korea). - Exports are still produced almost exclusively on the coast despite inland production claims. - Network effects, scale, efficient logistics, and automation may alter the traditional “flying geese” pattern. - Rebalancing and external balances: - Rebalancing is shifting demand away from exports toward domestic demand, and within domestic demand from investment toward consumption. - Current account surplus history: - Peaked at over 10 percent of GDP in 2008. - Declined to 2 percent of GDP in 2014. - Import composition: - Declines: coal and copper imports clearly declining; iron ore real demand weakened. - Stable/strong: oil, food, and agricultural commodities remain strong. - Consumption goods and services imports remain modest except for tourism. - Onshoring of inputs may reduce import opportunities even as consumption demand rises. - CLMV implications (overview): - CLMV are heterogeneous but highly integrated with China. - Opportunities: manufacturing assembly expansion, exports of consumption goods and tourism services to Chinese consumers. - Challenges: reduced Chinese demand for commodity exports (notably for Lao P.D.R. and Myanmar); low wages alone are insufficient. - Structural priorities: strengthen infrastructure; improve education; enhance governance and business climate; deepen trade openness; run sound macroeconomic policies. - Key findings summarized: - Clear move up the value chain via onshoring sophisticated production. - China is at an inflection point for lower-value-added labor-intensive products; market shares have started to plateau or decline in sectors like garments, footwear, toys, and furniture. - Evidence on rebalancing is mixed: some commodity imports declining, others strong; consumption imports modest except tourism. ### Box 1.1 — Global Value Chains (GVCs) and China’s position - GVC overview and trade patterns: - Production fragmentation enabled global trade growth faster than GDP for two decades; more than half of developing-country value-added exports involve GVCs. - The share of developing-country global trade in components has quadrupled since the mid-1980s. - OECD TiVA dataset provides value-added measurement to correct misleading gross trade data. - China’s role in GVCs and regional spillovers: - Processing trade rose to 60 percent of China’s total trade by the early 2000s (has since declined); foreign value added (FVA) in China’s exports was as high as 50 percent. - China became the world’s largest exporter in value-added terms. - China accounts for about two-thirds of Asia’s imports of intermediate goods, 25 percent of capital goods exports from Japan and Korea, and nearly 50 percent of the region’s exports of intermediate goods. - Bilateral trade balances: China ran substantial surpluses with the United States, Europe, and Japan, and deficits with Asian upstream neighbors and commodity producers. - Spillovers: China’s imports fueled growth in Asian neighbors and commodity exporters; complementarities often outweighed competition for Asia as a whole. - Value-added versus gross trade findings: - As of 2011, the U.S. bilateral trade deficit with China was 35 percent smaller in value-added terms than in gross terms (OECD TiVA). - Growth became less sensitive to export dynamics and exchange rate movements given larger import components of exports. - Composition of Chinese exports and imports: - Exports: four categories—clothing and plastic toys, electronics, industrial machinery, and manufactured metal goods—consistently account for 60–70 percent of total exports. - Final goods account for roughly 60 percent of total exports. - Export partners shifted: U.S. and Japan share fell from 45 percent to about 30 percent (20 percent U.S., 10 percent Japan); another 15 percent to Korea, Germany, Netherlands; emerging markets’ share increased since 2008. - Imports: five categories—electronics, energy, industrial machinery, raw ore/metal scrap, and vehicles—account for about 60 percent of total imports; intermediate goods are 70 percent of imports. - Import origins changed: Japan’s share fell from almost 25 percent in early 1990s to under 10 percent by 2010s; Korea grew to become the biggest source by 2013. - Evidence on China moving up the value chain: - China’s domestic value-added (DVA) ratio has risen over time and exceeds those of Korea and Taiwan Province of China (TiVA latest observation referenced is for 2011); still below Japan, U.S., and Germany. - Knowledge-intensive sectors (electronics, chemicals, machinery, electrical and optical equipment, transport equipment) now account for close to two-thirds of China’s total value added. - Processing trade share fell from more than half in the early 2000s to about one-third in the period discussed. - Import intensity in key export sectors is falling, consistent with increased domestic production of inputs. ### Onshoring, sectoral patterns, and labor-intensive production - Onshoring and inputs: - Ratios from Figures 1.17 and 1.18 suggest the ratio of imported parts to exports of final goods has declined over time—China started producing some inputs onshore. - Onshoring may be understated because some imported inputs are used for final domestic consumption. - Onshoring continued for computers; import intensity in other sectors flattened around the global financial crisis. - Gains in sophisticated, upstream production: - China’s imports of sophisticated inputs from Korea and Japan (electrical circuits, LCD screens, valves/tubes) grew sharply during integration into supply chains. - Over the past decade, China gained export market share in sophisticated products it earlier imported (example: LCDs; certain transistors). - Net result: “China has moved up the value chain.” - Labor-intensive production: persistence and plateauing signs - Share of labor-intensive goods in China’s gross exports started declining as early as the early 1990s; “difficult to imitate” and “easy to imitate” research-intensive production increased. - Since the global financial crisis there has been some reversal; too soon to judge persistence. - China’s world market share in labor-intensive production is higher than in any other sector and has been increasing steadily, with recent evidence of plateauing. - Inflection points observed in furniture (dropping), garments, footwear, toys show plateauing or slight declines; final electronics show mixed evidence (telephones exhibit continued sharp growth). - Possible reasons for sustained competitiveness in labor-intensive exports: - Large labor force and ability to draw cheap labor to coastal production areas. - Increase in inland share of FDI to 50 percent though inland provinces’ share of total exports has not risen materially. - Strong network effects, economies of scale, and coastal hub efficiencies. ### Rebalancing: macro effects, trade composition, and commodities - Macro rebalancing and internal adjustments: - After the global financial crisis, an investment-led stimulus raised investment share of GDP from 40 to almost 47 percent, reducing the current account surplus from 10 percent of GDP in 2008 to 2 percent "today" (as stated). - Growth contribution from net exports fell from 0.5 percentage points in 2001–07 to –0.8 percentage points in 2008–14. - Reserve accumulation ceased and foreign exchange sales began in 2014–15. - The stimulus created excess capacity in manufacturing and real estate and rising financial sector vulnerabilities. - Authorities have attempted a shift toward consumption- and services-led growth; services overtook manufacturing as the largest GDP share in 2012. - Consumption fell from 62 percent of GDP in the late 1990s to 49 percent at the start of the global financial crisis; plateaued and started increasing marginally since. - Trade, import-intensity, and commodity demand: - Consumption is currently half as import-intensive as investment (Figure 1.36); rebalancing toward consumption could imply lower overall imports during transition. - Since 2005, real import demand for commodities outpaced imports more broadly; China accounts for about 15 percent of global commodity imports. - Key commodity imports: petroleum, iron ore, and copper; other metals and coal significant. - Recent trends: - Petroleum demand remained robust. - Iron ore and copper demand weakened relative to earlier peaks. - Coal demand down by almost 50 percent. - China’s demand historically had elasticity on commodity prices far above unity; China has also increased supply, contributing to weaker global commodity markets. - Quantities and prices of imported machinery and other investment inputs have declined. - China’s share of world consumption imports increased, particularly since 2008, but consumption goods are a smaller share of China’s imports than in other countries. - Main goods imports: passenger cars; services trend: outward tourism increased sharply. - Caveat: some items classified as capital goods may understate consumption import growth (example SITC 764.11 → BEC 41 telephones). ### Chapter 2 — Evolution of the CLMV’s trade and integration with China - CLMV heterogeneity and basics: - Population: Cambodia and Lao P.D.R. <20 million; Myanmar ~50 million; Vietnam >90 million. - Vietnam is the most dynamic trader: diversified and major in electronics GVCs. - Cambodia concentrated in garments; Lao P.D.R. and Myanmar focused on natural resources and energy. - Myanmar at start of liberalization with potential for transformation. - Common features: proximity to China; among poorest in Southeast Asia; low wages; staged transitions from centrally planned economies; export-led strategies with rising FDI and regional integration. - Asia accounts for between 30 percent (Cambodia) and 80 percent (Lao P.D.R.) of these countries’ exports. - Trade growth and market shares (2000 → 2014): - Vietnam: export share rose from 0.2 percent to 0.9 percent. - Lao P.D.R.: export market share roughly quadrupled to 0.025 percent. - Cambodia: world export market share more than tripled to 0.07 percent. - Myanmar: export market share doubled to 0.06 percent. - Global import shares in the region grew roughly fourfold—faster than exports on average. - FDI and diversification: - Vietnam: FDI at times approached 10 percent of GDP; FDI recently into electronics and machinery; FDI now a major production center for global technology firms. - Cambodia: FDI-driven garments expanded employment and FDI into shoes, toys, wood products. - Lao P.D.R.: FDI in hydroelectric power and mining. - Myanmar: limited manufacturing FDI to date; liberalization and SEZs suggest likely future expansion. - Vietnam improved diversification and sophistication; Cambodia, Lao P.D.R., and Myanmar stagnated or deteriorated. - Participation in GVCs (TiVA evidence where available): - Vietnam and Cambodia show high FVA in exports of electronics, garments/footwear, and machinery—about 60 percent—indicating low-value-added processing roles. - Vietnam shows declining import intensity in some electronics (cell phones), indicating increasing domestic value added in some product categories. - Garments remain highly reliant on Chinese fabric imports in Vietnam and Cambodia. - Vietnam and Cambodia exhibit strong backward linkages but weak forward linkages; China internalizes higher share of value than these countries. - Lao P.D.R. and Myanmar less involved in GVCs; focused on commodity and energy exports. - China–CLMV integration specifics: - China supplies 25 percent of CLMV’s imports. - China demands between 10 and 25 percent of CLMV’s exports (Cambodia is an exception where garments go mainly to U.S./EU). - CLMV account for 1½ percent of China’s total imports in 2014; share rose sharply since 2000. - CLMV share in China’s exports rose fourfold since 2000; CLMV share in China’s imports more than tripled. - Composition of China→CLMV exports: 15 percent consumption items, 28 percent capital goods, 57 percent intermediate inputs. - CLMV imports from China: 14 percent consumption, 17 percent capital goods, 68 percent intermediate inputs. - Country specifics: - Cambodia and Vietnam: intermediate inputs relatively more important (assembly/manufacturing). - Myanmar & Lao P.D.R.: machinery, vehicles, mining/energy links more important. - Bilateral balances: each CLMV runs a bilateral trade deficit with China despite rising flows. - Chinese FDI: - Important investor in Cambodia, Lao P.D.R., and Myanmar in primary sectors. - Not a major FDI source for Vietnam relative to Japan and Korea. - Implications of China’s rebalancing for CLMV: - Decline in Chinese demand for investment-related intermediate goods would hurt commodity exporters (Lao P.D.R., Myanmar). - Increased Chinese consumption demand could create opportunities for CLMV exports; Vietnam shows penetration of Chinese consumption markets. - Chinese outbound tourism growth offers service export channels. ### Integration, FDI, and country case studies (Box 2.1; Appendix highlights) - FDI and spillovers: - CLMV received more FDI relative to economic size than most other Asian economies in recent years. - Mixed evidence on FDI spillovers; firm-level absorptive capacity matters. - FDI can diversify exports if targeted at new categories; can increase concentration if targeted at dominant sectors. - Cambodia: - Garment sector accounts for 9.1 percent of GDP, >70 percent of export revenues, and 27 percent of manufacturing employment. - Garment productivity ratio to China: 68 percent (China = 100). Comparative ratios: Bangladesh 77 percent, Pakistan 88 percent, India 92 percent (McKinsey & Company 2011). - Garment sector is low-value-added (cut-make-trim) with limited technology spillovers. - Vietnam: - FDI and foreign companies account for close to 70 percent of exports. - Samsung alone employs over 100,000 people in Vietnam and generates close to US$30 billion in exports. - FDI sector-generated trade surpluses offset structural trade deficits of the domestic economy. - Domestic value added in electronics and apparel among the lowest worldwide—Vietnam primarily a final assembly base importing most high-value inputs. - Policy constraints: weak banking sector, SOE competition with preferential resource access, weak property rights, low tax revenues from FDI incentives. - Lao P.D.R.: - Real GDP average growth ~8 percent in past decade; per capita income doubled to about US$2,900 (PPP). - Poverty rate fell from ~33 percent in 2002/3 to 22 percent in 2012/13. - China became biggest foreign investor in 2013 with cumulative stock of US$5.4 billion (~one-third of total investments). - Proposed China–Yunnan–Vientiane–Thailand railroad estimated cost US$6 billion = 50 percent of Lao GDP; China to finance ~70 percent and extend loans to Lao government’s equity share. - China’s share in Lao imports rose from 8 to 26 percent (2008–2014); Lao exports to China increased eightfold (China share 10 percent → 35 percent). - China’s official loans rose from ~25 percent to ~50 percent of all bilateral debt (2008–2013); official loans = 26 percent of Lao total external debt. - Myanmar: - Post-liberalization growth accelerated to almost 8½ percent in 2013/14. - Human Development Index rank: 149 of 186 countries. - Exports shifted to mineral fuels (natural gas); garments earlier developed but mineral fuels overtook. - China major supplier of consumer and capital goods; Myanmar supplies timber and natural gas to China. - Border trade dominates bilateral trade. - Vietnam (appendix highlights): - Pre-GFC growth averaged >7 percent; post-crisis averaged 5¾ percent (2011 onward). - FDI annual average $2.5 billion (2000–05); $8.4 billion (2008–14). - FDI share in exports reached 60 percent; trade openness >150 percent of GDP. - World export market share rose from ~0.2 percent (2000) to ~1 percent (2014). - China supplies one-third of Vietnam’s imports; Vietnam runs large bilateral trade deficit with China. - TPP, FTAs with EU, Korea, Eurasian Economic Union, and ASEAN-China FTAs present opportunities. ### Chapter 3 — Policy implications: drivers, benchmarking, and recommendations - Key drivers of trade growth and GVC participation: - Distance, income level (proxy for wages), exchange rate measures; structural variables (infrastructure, education, institutional quality) are crucial. - FDI can be important but may lead to concentration. - Econometric summary coefficients (Global EMS regressions; panel detrended; 48 countries; 1995–2011): - Infrastructure: 0.171*** - Education: 2.702*** - Governance: 0.209*** - Labor Regulation: -0.055 - Free Trade: 0.191*** - Benchmarking CLMV shortfalls and strengths: - Low wages attract FDI; CLMV labor costs below China’s poorer inland regions; wage gap with China opened since 2009. - Structural deficits: education (secondary/tertiary/vocational), governance, infrastructure, trade openness, public investment efficiency. - Lao P.D.R. cost to export high; inland transportation and handling = 70 percent of this cost. - Vietnam fares better on structural factors relative to CLMV peers. - Export concentration vulnerabilities: Cambodia heavily concentrated in garments; local textile inputs largely absent. - General policy recommendations for CLMV: - Do not rely on low wages alone; pursue structural reforms. - Priorities: education (secondary/tertiary/vocational), governance, infrastructure (transport, electricity, logistics), trade openness (tariff reduction, streamline regulations, services openness). - Strengthen public financial and project management to improve capital spending efficiency. - Reduce impediments to doing business: transparency, predictability, bureaucratic streamlining; formalize SMEs. - Diversify export composition (upgrade to higher-value activities) and export markets. - Maintain prudent macroeconomic policies to provide stable reform conditions. - Country-specific recommendations (high-level bullets): - Cambodia: - Reduce logistics costs: cheaper, reliable, accessible electricity; highway and secondary road development. - Strengthen PPP legal framework; improve elementary education quality; expand vocational/apprenticeship training. - Streamline customs, permits, registration; encourage SME formalization. - Near-term: diversify export destinations; improve productivity and lead times. - Lao P.D.R.: - Improve human capital: increase vocational and tertiary enrollment; reallocate budget and secure donor support for education. - Accelerate trade integration; revise trade laws to meet WTO/AEC commitments. - Increase social safety nets; reduce regulatory and trade costs—transport infrastructure investment critical. - Strengthen public financial/project management; improve project selection and implementation. - Myanmar: - Advance AEC initiative and trade liberalization: phase out commercial export tax; reduce tariffs on intermediate inputs. - Promote export diversification: target labor-intensive manufacturing (electronics assembly, garments, footwear, lumber processing). - Improve business climate and infrastructure for transport and electricity. - Increase health and education spending with absorptive capacity improvements. - Strengthen governance and legal frameworks; improve use of natural resource rents and review extractive fiscal regime. - Vietnam: - Address structural constraints: per capita GDP slightly above US$2,000; working-age population ratio started to decline. - Boost total factor productivity: large productivity reallocation potential; nearly half workforce in agriculture; three-quarters employed at household level. - Deepen linkages between FDI sector and domestic suppliers; improve domestic manufacturing productivity (domestic manufacturing output per worker ~20 percent of foreign-owned enterprises). - Accelerate structural reforms: improve governance, strengthen private sector, property rights, enforce competition policy, pursue SOE reform. - Increase R&D spending (currently very low); raise public investment efficiency; improve vocational and tertiary education. - Summary implication: - China’s changes create opportunities and challenges; CLMV must combine low wages with structural reforms (education, governance, infrastructure, trade openness, public investment management) to capture new export opportunities; rebalancing in China may reduce commodity demand but open other markets. ### Conclusion — synthesized outcomes and indicators - Core conclusions: - Clear move into higher-value-added activities in China has been ongoing for years. - No obvious aggregate exit from labor-intensive production yet, but plateauing and slight declines in garments, footwear, toys, and furniture indicate China may be at an inflection point. - Inland production increased but mainly serves domestic demand; exports remain coast-produced. - Mixed rebalancing evidence: machinery and some commodity imports (coal, iron ore) are declining; oil imports continue to grow; consumption is increasing but import growth in consumption goods modest; outbound tourism grew sharply. - Time series coverage referenced: 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014. - Data sources cited in figures: UN Comtrade; CEIC Data Company Ltd.; and IMF staff estimates. *International Monetary Fund — Content unit: _apd1601.* ### Executive Summary ...................................................................................................... ### Executive Summary ### China’s rise as an export powerhouse - Chinese exports now account for 12 percent of the global total; Chinese imports account for 10 percent of world imports. - Nominal exports grew by 17 percent on average each year from 1990 to 2012. - China is the world’s largest importer of intermediate goods and the world’s largest recipient of foreign direct investment. - Key structural labor facts: - An estimated 270 million migrant workers are in the 10 coastal provinces that account for 90 percent of China’s exports. - Over the past decade, private sector wages across the country have risen by close to 15 percent per year. - By comparison with 2005, China’s wages are higher by nearly 50 percent; wages in the coastal provinces are more than double those in the interior. - Demographics and competitiveness: - China is expected to reach the Lewis turning point by 2025. - Rising unit labor costs have reduced competitiveness in labor-intensive production. ### Movement up the value chain and changes in manufacturing geography - China began with light manufacturing and assembly as part of global supply chains and has been moving up the value chain by onshoring more sophisticated production and producing higher-value-added upstream and downstream products. - China’s exit from some lower-end, labor-intensive sectors has begun, though it has been slower than prior cases (Japan, Taiwan Province of China, Korea), in part due to China’s large scale and remaining cheap labor in rural areas. - Production relocation within China: - Some argue inland relocation explains continued competitiveness in low-end goods, but the data suggest exports are still produced almost exclusively on the coast. - The traditional “flying geese” pattern (lower-value activities relocating abroad as countries move up) may unfold differently because of China’s scale, regional heterogeneity, network effects, extremely efficient logistics, and increasing automation. ### Rebalancing and implications for imports and external balances - China’s rebalancing is moving away from exports toward domestic demand, and within domestic demand from investment toward consumption. - External balance history: - The current account surplus peaked at over 10 percent of GDP in 2008. - The current account surplus declined to 2 percent of GDP in 2014. - Import composition shifts: - Imports of certain commodities, like coal and copper, are clearly declining. - Other imports—oil, food, and agricultural commodities—remain strong. - Imports of consumption goods and services remain modest except for tourism (not the focus of this report). - The shift toward consumption could raise demand for consumption items, but greater onshoring of inputs and production could reduce import opportunities. ### Implications for the CLMV (Cambodia, Lao P.D.R., Myanmar, Vietnam) - The CLMV are heterogeneous but all are open economies highly integrated with China. - Potential opportunities: - Low labor costs suggest manufacturing assembly for export could expand as China becomes less competitive in labor-intensive production. - Rising Chinese consumption could create opportunities for exports of consumption goods and tourism services aimed at Chinese consumers. - Vietnam and Cambodia are already established manufacturing countries; Myanmar has a large labor force and nascent opening. - Potential challenges: - Rebalancing in China may reduce demand for commodity exports; Lao P.D.R. and Myanmar may see energy and materials exports decline. - Low wages alone will not ensure success in global trade. - Structural constraints and priorities for CLMV to capitalize on opportunities: - Strengthen infrastructure. - Improve education. - Enhance governance and the business climate. - Deepen trade openness and modernize trade regimes. - Run sound macroeconomic policies. ### Key findings summarized in the report - There is a clear move up the value chain by onshoring more sophisticated production, and this has been happening for a number of years. - China appears to be at an inflection point with respect to lower-value-added labor-intensive products: after a three-and-a-half-decade rise, market shares have started to plateau and even decline in some key sectors like garments, footwear, toys, and furniture. - Evidence on rebalancing is mixed: imports of certain commodities are declining, while others remain strong; consumption imports remain modest except for tourism. *International Monetary Fund — Executive Summary (Content unit: _apd1601 - Executive Summary).* ### Box 1.1. Global Value Chains in International Trade ### Box 1.1. Global Value Chains in International Trade ### Overview of global value chains (GVCs) - Production has been broken into component parts, allowing economies to focus on the stage(s) at which they are most competitive. - Goods like electronics lend themselves to supply chain trade because they are lightweight, have robust components, and feature an assembly process that can be broken into a series of standardized components. - Advanced economies generally participate in high-value-added activities—upstream in R&D and production of sophisticated components, and far downstream in branding, marketing, and distribution. - Emerging and developing economies increasingly perform lower-value-added activities such as processing and assembly; this pattern is captured in the value-added “smile” schematic. - GVCs promote technology transfer and productivity gains and typically enable countries to move to higher-value-added activities over time. ### Trade growth, fragmentation, and the rise of new manufacturers - Fragmentation of production means unfinished goods often cross national borders multiple times before reaching final destinations, helping explain why global trade grew faster than GDP over much of the past two decades. - More than half of developing-country value-added exports involve GVCs. - The share of developing-country global trade in components has quadrupled since the mid-1980s. - Importance of value-added measurement: gross trade data can be misleading; the OECD Trade in Value Added (TiVA) dataset enables examination of value added by country. ### China’s role in GVCs and regional spillovers - By the early 2000s, processing trade rose to 60 percent of China’s total trade (though it has since declined). - The share of foreign value added (FVA) in China’s total exports was as high as 50 percent. - China has become the world’s largest exporter in value-added terms. - China accounts for: - about two-thirds of Asia’s imports of intermediate goods, - 25 percent of capital goods exports from Japan and Korea, - nearly 50 percent of the region’s exports of intermediate goods. - FDI inflows from Japan and ASEAN surged as China became the primary assembly point of the Asian supply network. - Bilateral trade balances evolved such that China ran substantial surplus with the United States, Europe, and Japan, while running deficits with Asian neighbors upstream in the supply chain (notably Malaysia, Taiwan Province of China, Korea, Philippines, and Thailand) and with commodity producers (Australia, Brazil, Saudi Arabia, Russia, Angola, Iran, and Indonesia). - Spillovers: - China’s imports fueled growth in Asian neighbors and commodity exporters worldwide. - Complementarities have often outweighed competition for Asia as a whole; losses in U.S./Europe market share were often offset by gains in exports of higher-value-added intermediate goods to China. ### Value-added vs. gross trade findings - Gross bilateral trade can overstate relative competitiveness; according to the OECD TiVA database, as of 2011, the U.S. bilateral trade deficit with China was 35 percent smaller in value-added terms than in gross terms. - Adjusted for value added, global trading patterns align better with factor endowments (Heckscher-Ohlin theory). - Given the larger import component of exports, growth has become less sensitive to export dynamics and exchange rate movements than in a non-supply-chain world. ### Composition of Chinese exports and imports - Exports: - Four categories—clothing and plastic toys, electronics, industrial machinery, and manufactured metal goods—have consistently accounted for 60–70 percent of total exports. - Final goods account for roughly 60 percent of total exports (much the same as in the 1990s). - China moved from simple TVs, radios, and white goods in the early 1990s to computers in the early 2000s, and to mobile phones and valves and tubes in more recent years. - In export partners, advanced economies still dominate but their share has declined: - The United States and Japan used to receive 45 percent of Chinese exports; now about 30 percent (20 percent for the United States and 10 percent for Japan). - Another 15 percent of Chinese exports go to Korea, Germany, and the Netherlands. - Emerging markets’ share increased materially since 2008, especially Vietnam, Malaysia, Indonesia, Thailand, and Mexico. - Imports: - Five categories—electronics, energy, industrial machinery, raw ore/metal scrap, and vehicles—account for about 60 percent of total imports. - Imports are dominated by intermediate goods, which account for 70 percent of the total. - Within electronics, China mostly imports relatively sophisticated intermediate goods such as circuits, resistors, and semiconductors. - Changes in import origins over two decades: - Japan’s share fell from almost 25 percent in the early 1990s to under 10 percent by the 2010s. - Korea’s share grew and by 2013 had become the biggest source of imports into China. - Commodity exporters such as Australia, South Africa, Iraq, and Switzerland grew in importance, especially since 2008. - “China” appears as a major source of imports in the early 2000s due to goods exported to Hong Kong SAR for light processing and then re-imported. ### Evidence on China moving up the value chain - Domestic value-added (DVA) ratio: - China’s DVA ratio has risen over time and now exceeds those of Korea and Taiwan Province of China, though China still lags Japan, the United States, and Germany. - The TiVA dataset’s latest observation referenced is for 2011. - Sectoral patterns: - “Knowledge-intensive” production has had lower domestic value-added content than “capital-intensive” and “labor-intensive” production in each year shown. - Growth in domestic value added has been especially pronounced in “knowledge-intensive” sectors (electronics, chemicals, machinery and equipment, electrical and optical equipment, and transport equipment). - These knowledge-intensive sectors now account for close to two-thirds of China’s total value added. - Processing trade: - Processing trade accounted for more than half of total Chinese exports in the early 2000s but has stagnated over the past five years in the period discussed. - The share of processing trade has fallen to about one-third of the total. - The relative decline in processing trade suggests China is replacing reliance on sophisticated imported inputs with domestic production. - Import intensity: - Import intensity in key export sectors is falling, consistent with an increase in domestic production of inputs for exports. *International Monetary Fund — Box 1.1. Global Value Chains in International Trade* ### 1.17 and 1.18, such ratios suggest that the value of imported parts required to produce these ### _apd1601 - 1.17 and 1.18, such ratios suggest that the value of imported parts required to produce these ### Onshoring and moving up the value chain - Evidence from Figures 1.17 and 1.18 suggests the ratio of imported parts to exports of final goods has declined over time, implying China has started producing some inputs onshore rather than importing them. - This onshoring likely understates the true degree of domestic input production because some imported inputs are used for final domestic consumption in China. - The onshoring process appears to be continuing for computers; for other sectors, import intensity began to flatten around the time of the global financial crisis. ### Gains in sophisticated, upstream production - China’s imports of sophisticated inputs from Korea and Japan grew sharply as it integrated into global supply chains; top imported intermediate products include electrical circuits, LCD screens, and valves/tubes (Figure 1.19). - These goods are classified as “parts and accessories” under BEC and as “difficult-to-imitate research-intensive goods” per Hufbauer and Chilas 1974 and Yilmaz 2002 classifications. - Over the past decade, China has been gaining export market share in sophisticated products it earlier exclusively imported (example: LCDs — Figure 1.20; certain transistors — Figure 1.21). - Net result: “China has moved up the value chain.” ### Bilateral trade balances and sectoral composition - Advanced North Asia historically ran a large collective trade surplus with China; this surplus decreased sharply after the global financial crisis, with most of the decline in relatively high-technology sectors (Figure 1.22). - Interpretation: China may now be producing higher-technology parts onshore while continuing to export low-tech goods. - As China moved up the value chain: - The processing trade became less important. - China became less reliant on imported inputs even within regular trade. - China’s value-added ratio rose. - Bilateral trade deficits with Asian neighbors decreased materially. - These developments suggest increasing competition between China and advanced economies such as Japan, Korea, and Taiwan Province of China. ### Labor-intensive production: persistence and signs of plateauing - The share of labor-intensive goods in China’s total gross exports started declining as early as the early 1990s (Figure 1.23), while both “difficult to imitate” and “easy to imitate” research-intensive production increased in relative importance. - Since the global financial crisis there has been some reversal in these trends, but it is too soon to judge persistence. - China’s world market share in labor-intensive production is higher than in any other sector and has been increasing steadily, with only recent evidence of plateauing (Figure 1.24). - China is the largest global exporter of labor-intensive goods; its share is only beginning to flatten (Figure 1.25). - Some light manufacturing sectors show inflection points: global market shares have plateaued in many categories and are even dropping for furniture; final electronic goods show mixed evidence with continued sharp growth in telephones (Figures 1.26–1.27). - Possible explanations for sustained competitiveness in labor-intensive exports include: - Size of China’s labor force and ability to draw cheap labor to coastal production areas. - Inland production rising and share of FDI going inland reaching 50 percent, though the share of total exports produced by inland provinces has not risen materially (Figures 1.28–1.31). - Network effects, economies of scale, and extreme efficiencies associated with China’s coastal export hubs. ### Demographics and wage dynamics - The working-age population is expected to start shrinking "this year" (as stated) before contracting deeply over coming decades. - Demographic pressures and falling demand for factory jobs by Chinese youth have put sharp upward pressure on China’s wages, which have risen considerably faster than productivity and faster than wages in competing countries (albeit from a very low level). - Some argue that difficult demographics could be materially delayed with policy changes such as an increase in the retirement age or a change in pension policy to reduce an implicit penalty on late retirement. ### Rebalancing: external and domestic implications - China rebalanced after the global financial crisis via an investment-led stimulus that raised the share of investment in GDP from 40 to almost 47 percent, reducing the current account surplus from 10 percent of GDP in 2008 to just 2 percent "today" (as stated). - Growth contribution from net exports fell from 0.5 percentage points in 2001–07 to –0.8 percentage points in 2008–14. - Reserve accumulation ceased and foreign exchange sales began in 2014–15. - The investment-led response created large domestic imbalances: excess capacity in manufacturing and real estate and rising financial sector vulnerabilities due to easy credit conditions. - More recently, authorities have attempted to shift toward consumption- and services-led growth: - Services overtook manufacturing as the largest share of GDP in 2012. - Consumption fell from 62 percent of GDP in the late 1990s to 49 percent at the start of the global financial crisis; it has plateaued and started to increase marginally since. - China remains an outlier on both consumption and investment (Figure 1.33); progress could accelerate with structural reforms outlined during the Third Plenum in 2013. ### Trade and import-intensity shifts related to rebalancing - Input-output evidence: consumption is currently only half as import-intensive as investment (Figure 1.36). Rebalancing toward consumption could imply lower overall imports during a transition period, though import intensity of consumption could rise in the longer run as relative prices adjust. - Rebalancing will shift the composition of China’s trade partners, adversely affecting countries that export investment-related goods but not consumption goods to China. - Onshoring of upstream inputs will directly lower imports. ### Commodity imports and demand patterns - Since 2005, real import demand for commodities has outpaced imports more broadly; China accounts for about 15 percent of global commodity imports. - Key commodities for China: petroleum, iron ore, and copper; other metals and coal also significant (Figure 1.37). - Recent trends: - Petroleum demand remained robust. - Real demand for iron ore weakened with the slowdown in infrastructure and real estate investment. - Copper demand weakened relative to 2012–13. - Coal demand is down by almost 50 percent. - China’s demand historically has an elasticity on commodity prices far above unity; China has also increased supply, contributing to weaker global commodity markets. - Quantities and prices of imported machinery and other investment inputs have declined. - China’s share of world consumption imports has increased, particularly since 2008, but remains small; consumption goods are a smaller share of China’s imports than in other countries. - Main goods imports: passenger cars; services trend: outward tourism has increased sharply. - Caveat: Some items classified as capital goods (e.g., telephones, SITC 764.11 → BEC 41) may understate consumption import growth; higher consumption could induce higher imports of intermediate goods assembled domestically. ### Outlook and policy implications - Rebalancing is expected to continue, though not necessarily monotonically; temporary reversals of external rebalancing may occur because consumption is less import-intensive than investment. - Over time, aggregate reform effects—including greater exchange rate flexibility, financial sector liberalization, reduced capital controls, and a smaller role for the state—should: - Reduce the current account surplus. - Increase the sustainability of domestic demand. - Trading partners will need to adjust as changes in Chinese demand composition are likely to be long-lasting. *INTERNATIONAL MONETARY FUND* ### Conclusion ### Conclusion ### Changes in China's trading patterns — key findings - There is a clear move into higher-value-added activities, and this has been happening for a number of years. - There has been no obvious exit from labor-intensive production in aggregate, but it appears to be starting to plateau, with slight declines evident in some key sectors: - garments - footwear - toys - furniture - China may be at an inflection point with respect to labor-intensive goods. - Inland production has picked up, but this appears mostly to be to service domestic demand in China; exports are still produced almost exclusively on the coast. - Mixed evidence on rebalancing: - imports of machinery and certain commodities, like coal and iron ore, are clearly declining - imports of oil continue to grow - Chinese consumption is increasing, but this has so far translated into just a modest increase in imports of consumption goods - Chinese outbound tourism has picked up more sharply ### Trends and indicators referenced - Time series coverage mentioned: 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 - Data sources cited in figures: UN Comtrade; CEIC Data Company Ltd.; and IMF staff estimates. ### Annex 1.1. Taxonomy of Trade Classifications — Technology Intensity (ISIC Rev. 3) - Classification of manufacturing industries into categories based on R&D intensities. See OECD. - High-technology industries: - Aircraft and spacecraft - pharmaceuticals - office, accounting, and computing machinery - radio, TV, and communications equipment - medical, precision, and optical instruments - Medium-high-technology industries: - Electrical machinery and apparatus, not elsewhere classified (n.e.c.) - motor vehicles, trailers, and semi-trailers - chemicals excluding pharmaceuticals - railroad equipment and transport equipment, n.e.c. - machinery and equipment, n.e.c. - Medium-low-technology industries: - Building and repairing of ships and boats - rubber and plastics products - coke, refined petroleum products, and nuclear fuel - other non-metallic mineral products - basic metals and fabricated metal products - Low-technology industries: - Manufacturing, n.e.c. - recycling - wood, pulp, paper, paper products, printing, and publishing - food products, beverages, and tobacco - textiles, textile products, leather, and footwear ### Annex 1.1. Taxonomy of Trade Classifications — National Accounts and Broad Economic Categories - Final Goods - Consumer Goods - 112 – Food and beverages, primary, mainly for household consumption - 122 – Food and beverages, processed, mainly for household consumption - 522 – Transport equipment, non-industrial - 51 – Passenger motor cars - 61 – Consumer goods not elsewhere specified, durable - 62 – Consumer goods not elsewhere specified, semi-durable - 63 – Consumer goods not elsewhere specified, non-durable - Capital Goods - 41 – Capital goods (except transport equipment) - 521 – Transport equipment, industrial - Intermediate Goods - 111 – Food and beverages, primary, mainly for industry - 121 – Food and beverages, processed, mainly for industry - 21 – Industrial supplies not elsewhere specified (n.e.s.), primary - 22 – Industrial supplies, n.e.s., processed - 31 – Fuels and lubricants, primary - 321 – Fuels and lubricants, processed (motor spirit) - 322 – Fuels and lubricants, processed (other than motor spirit) - 42 – Parts and accessories of capital goods, (except transport) - 53 – Parts and accessories of transport equipment ### Annex 1.1. Taxonomy of Trade Classifications — Trade by Factor Intensity - Raw-Material-Intensive Goods - SITC 0 Food and live animals - SITC 2 Crude material, inedible, except fuels (excluding 26) - SITC 3 Mineral fuels, lubricants, and related materials (excluding 35) - SITC 4 Animal and vegetable oils, fats and waxes - SITC 56 Fertilizers - Labor-Intensive Goods - SITC 26 Textile fibers - SITC 6 Manufactured goods classified chiefly by material (excluding 62, 67, 68) - SITC 8 Miscellaneous manufactured articles (excluding 88, 87) - Capital-Intensive Goods - SITC 1 Beverages and tobacco - SITC 35 Electric current - SITC 53 Dyeing, tanning, and coloring materials - SITC 55 Essential oils and resinoids and perfume materials; cleansing preparations - SITC 62 Rubber manufactures, n.e.s. - SITC 67 Iron and steel - SITC 68 Non-ferrous metals - SITC 78 Road vehicles - Easy-to-Imitate Research-Intensive Goods - SITC 51 Organic chemicals - SITC 52 Inorganic chemicals - SITC 54 Medicinal and pharmaceutical products - SITC 58 Plastics in non-primary forms - SITC 59 Chemical materials and products, n.e.s. - SITC 75 Office machines and automatic data-processing machines - SITC 76 Telecommunications and sound apparatus and equipment - Difficult-to-Imitate Research-Intensive Goods - SITC 57 Plastics in primary forms - SITC 7 Machinery and transport equipment (includes semiconductors/excludes 75, 76, 78) - SITC 87 Professional, scientific, and controlling instruments and apparatus, n.e.s. ### OECD Factor Intensity Breakdown — sector groupings - Capital-Intensive - Food, beverages, tobacco - Wood, paper, and publishing - Basic metals and fabricated metals - Labor-Intensive - Textiles, textile products, leather, and footwear - Manufacturing n.e.c., recycling - Knowledge Intensive - Chemicals and non-metallic mineral products - Machinery and equipment - Electrical and optical equipment - Transport equipment *International Monetary Fund* ### Chapter 2: Evolution of the ### Chapter 2: Evolution of the CLMV’s Trade ### Overview - The CLMV are heterogeneous: - Cambodia and Lao P.D.R. have populations of less than 20 million. - Myanmar has a population of some 50 million. - Vietnam has a population of more than 90 million. - Vietnam is the most dynamic trading nation in the group: well diversified and a major participant in global supply chains for electronics. - Cambodia has long been a major garments exporter (to the United States and Europe) but remains concentrated in that sector. - Lao P.D.R. and Myanmar focus on natural resources and energy, exported largely to ASEAN and China. - Myanmar is at the start of economic liberalization and could witness major trade transformation. - Common features across CLMV: - Close neighbors of China to the southwest and proximate to Asian supply chains. - Among the poorest nations in Southeast Asia with low wages. - Originally centrally planned economies at different stages of transition. - Following export-led growth strategies with rising FDI and regional trade integration. - Asia accounts for between 30 percent (Cambodia) and 80 percent (Lao P.D.R.) of these countries’ exports. - Policy and institutional changes since the late 1980s: - Trade barriers lowered, bilateral FTAs negotiated, structural reforms passed to attract FDI, SEZs established. - Vietnam joined ASEAN in 1995; Lao P.D.R. and Myanmar in 1997; Cambodia in 1999. - All four countries are WTO members. - China-ASEAN, Korea-ASEAN, and other FTAs contributed to increased openness and substantial FDI inflows from China, Japan, and Korea. ### Basic Facts of CLMV Trade - Rapid growth in trade since 2000; gains in both export and import market shares: - Vietnam: exports share rose from 0.2 percent in 2000 to 0.9 percent in 2014. - Lao P.D.R.: export market share roughly quadrupled to 0.025 percent in 2014. - Cambodia: world export market share more than tripled to 0.07 percent in 2014. - Myanmar: export market share doubled to 0.06 percent in 2014. - Global import shares across the region grew roughly fourfold—faster than exports on average. - Gravity-model results: - Country economic size and distance explain a large proportion of bilateral trade variation. - Cambodia, Lao P.D.R., and Myanmar trade levels broadly align with gravity predictions; Vietnam is an outlier, appearing exceptionally open. - Sectoral composition and recent trends: - Vietnam transitioned from commodity exports to garments and electronics; gaining market share in light manufactures and final electronic goods. - Myanmar became a substantial exporter of commodities, especially natural gas, with 40 percent directed to ASEAN and China’s share growing. - Lao P.D.R. shifted toward hydro power and mining; earlier had machinery (assembly of motorbike kits) and apparel accounting for more than half of exports as recently as 2005. - Cambodia remains heavily focused on garments; it has lost share in the U.S. market while gaining in the EU (partly due to preferential access). - FDI’s role: - Cambodia: FDI-driven garments exports supplied employment and income for female workers; recently FDI expanded into shoes, toys, wood products. - Lao P.D.R.: foreign investment in hydroelectric power and mining is boosting GDP growth and employment. - Myanmar: limited manufacturing FDI to date, but liberalization and SEZs suggest likely future expansion. - Vietnam: FDI at times approached 10 percent of GDP; initially went to light manufacturing and garments, more recently into electronics and machinery; Vietnam became a major production center for large global technology manufacturers. - FDI flows from Korea to Vietnam have risen as those to China have fallen, suggesting Vietnam offers some competition to China in supply chain trade. - Export diversification and sophistication: - Vietnam moved into more sophisticated products; Cambodia, Lao P.D.R., and Myanmar have not advanced much in sophistication. - Using a Hirschman index of export concentration: - Vietnam improved and caught up with China’s diversification level. - Cambodia, Lao P.D.R., and Myanmar stagnated or deteriorated in recent years. - Partner diversification: - Vietnam expanded its portfolio of import and export partners but increased reliance on China for intermediate inputs and investment goods. - Cambodia diversified export destinations (mostly within the OECD) but import sources for garments inputs concentrated: in 2014 China, Thailand, and Vietnam accounted for more than 60 percent of Cambodia’s imports, up from just over 31 percent in 2000. - Lao P.D.R. and Myanmar rely heavily on regional partners: China and Thailand together account for more than 55 percent of Lao P.D.R.’s exports and 82 percent of its imports, and over 60 percent of Myanmar’s exports and imports. ### Participation of the CLMV in Global Value Chains (GVCs) - TiVA data (not available for Lao P.D.R. or Myanmar) indicate increasing integration of Cambodia and Vietnam: - High foreign value-added (FVA) in key noncommodity sectors for Vietnam and Cambodia suggests substantial low-value-added processing. - FVA accounts for about 60 percent of Vietnam’s and Cambodia’s gross exports of electronics, garments and footwear, and machinery—among the highest in the data sample. - Vietnam’s changing import intensities: - Declining import intensity in some electronic product categories (for example, cell phones) suggests more production steps and increasing domestic value added in Vietnam over time. - Garments remain highly reliant on Chinese fabric imports for both Vietnam and Cambodia. - Linkages: - Vietnam and Cambodia exhibit very strong backward linkages (high FVA in their exports) but weak forward linkages (their domestic value added does not figure prominently in other countries’ exports), consistent with final-assembly manufacturing roles. - China internalizes a higher share of value in similar industries than Vietnam or Cambodia. - Lao P.D.R. and Myanmar are less involved in supply-chain relationships and focus largely on commodity and energy exports; Myanmar has potential to expand into manufacturing and supply chain integration over time. ### Integration with China - Growing integration between China and the CLMV; China is a major supplier and market: - China supplies 25 percent of the CLMV’s imports. - China demands between 10 and 25 percent of the CLMV’s exports (Cambodia is an exception, with almost all garments going to the United States and Europe). - CLMV account for a small share of China’s total imports—just 1½ percent in 2014—but this share rose sharply since 2000. - The share of CLMV in China’s exports has risen fourfold since 2000; the share of CLMV in China’s imports has more than tripled. - Vietnam has driven much of the increase in China’s imports, and since 2008 Vietnam recorded the largest dollar increase in Chinese imports of any country in the world. - Composition of China–CLMV trade: - About 15 percent of China’s exports to CLMV are consumption items, 28 percent are capital goods like machinery, and 57 percent are intermediate inputs like iron/steel and fabrics/yarn. - From the CLMV side: 14 percent of consumption imports come from China, 17 percent for capital goods, and 68 percent for intermediate inputs. - Country variation: - Intermediate inputs relatively more important in Cambodia and Vietnam (assembly/manufacturing). - China a relatively more important source for Myanmar. - Fabric and other textile materials accounted for about 60 percent of China’s exports to Cambodia. - Machinery and vehicles were more important in exports to Myanmar and Lao P.D.R. - Vietnam imports predominantly investment goods (machinery, equipment, steel) and intermediate inputs (electronic components and fabric) from China. - Exports from CLMV to China are diversified and mainly raw materials and manufactured goods: - Raw materials: wood, rubber, fresh food (all four CLMV). - Mining products: Lao P.D.R. and Myanmar. - Natural gas and gems: Myanmar. - Garments: Cambodia and Vietnam. - Consumer electronics: Vietnam. - Vietnam’s main exports to China: electronics, followed by agricultural products and garments. - Bilateral balances and investment links: - In aggregate, each CLMV country runs a bilateral trade deficit with China despite surging bilateral flows. - Gravity regressions confirm trade links with China exceed what size and distance alone predict. - China is an increasingly important investor in Cambodia, Lao P.D.R., and Myanmar, mainly in primary sectors: forest development, timber processing, power, farming, textiles in Cambodia; energy and mining in Lao P.D.R.; and natural gas in Myanmar. - Chinese FDI is not a major source for Vietnam relative to investors from Japan and Korea; Vietnam sometimes competes with China in supply-chain trade. - Implications of China’s rebalancing: - A decline in China’s demand for intermediate goods used for investment would affect commodity exporters to China such as Lao P.D.R. and Myanmar. - Increased Chinese demand for consumption imports could present export opportunities for CLMV, with evidence that Vietnam has increased penetration of Chinese consumption goods markets. - Beyond goods, Chinese outbound tourism to Southeast Asia has grown substantially, offering additional channels of economic linkage. *Italic line: Chapter 2 summary based solely on content from _apd1601 - Chapter 2: Evolution of the* ### 1992. Supported by China’s official assistance, the program has promoted the integration of ### _apd1601 - 1992. Supported by China’s official assistance, the program has promoted the integration of ### Integration with China and regional connectivity - China’s official assistance has promoted the integration of trade, tourism, transport, and power between China’s western areas and the CLMV. - Value-added trade data confirm increasing integration with China: China’s value added in the exports of Cambodia and Vietnam has increased sharply, outpacing the growth of China’s value added in world exports. - In level terms, China is now more important than Korea or Japan as a supplier of production inputs to Cambodia and Vietnam. - Yin (2012) documents that the import intensity of Cambodian garment exports increased significantly from 2006 to 2010, with almost all of those imports coming from China; similarly, in Vietnam, the import intensity of the electrical machinery sector grew dramatically. ### Value-added trade patterns and competition - Cambodia and Vietnam function as downstream assemblers and processers of Chinese inputs in garments and electronics. - China and Cambodia are characterized as collaborators, with Chinese textiles stitched in Cambodia into garment exports. - Vietnam’s relationship with China is more complex: - Chinese inputs enter Vietnam’s production, but Vietnam’s products can compete directly with China’s on world markets (example: Samsung phones assembled in Hanoi from Chinese parts are sold alongside Huawei phones assembled in Guangdong). - There is evidence of a two-way supply chain relationship in electronics, with Vietnam exporting components to China. - As Vietnam’s export profile becomes more similar to China’s, trade linkages span within single supply chains and across different supply chains led by different upstream countries. - The Trans Pacific Partnership (TPP), which includes Vietnam but not China, may further evolve supply chain relationships—rules of origin might stimulate relocation of intermediate goods production from China to Vietnam. ### FDI, foreign ownership, and development in the CLMV (Box 2.1) - CLMV have become an attractive destination for foreign direct investment (FDI); relative to economic size, they have received more FDI than most other Asian economies in recent years. - Foreign enterprises contribute significantly to growth, employment, and exports in the CLMV. - Cross-country evidence on FDI’s role in development is mixed: - Openness to trade is fairly consistently associated with higher GDP growth. - Manufacturing has seen many successful domestic spillovers from FDI, but the literature on spillovers is mixed. - Export-led growth does not necessarily require foreign investment; examples exist of successful export development with little foreign ownership. - Impact of FDI on export diversification/sophistication is ambiguous: - FDI can enable entry into new export categories (e.g., Vietnam’s rise as an electronics exporter). - If FDI concentrates on already-dominant sectors (e.g., commodities), it can increase export concentration and hamper diversification. - Evidence on spillovers and absorptive capacity: - Foreign-owned firms are typically more efficient than domestic firms. - Positive spillovers to domestic firms are found in some studies, especially via joint ventures and supplier relationships, but many studies find limited or negative spillovers. - Firm-level absorptive capacity is important for creating positive spillovers. ### Country experiences: Cambodia and Vietnam - Cambodia - The garment industry is the major recipient of FDI inflows, accounting for a quarter of the total FDI stock (UNCTAD 2013). - The garment sector accounts for 9.1 percent of GDP, more than 70 percent of export revenues, and 27 percent of manufacturing employment. - The FDI-driven garment sector remains concentrated in low-value-added activities (cut-make-trim), with limited technology spillovers; design and higher-level decisions are made at foreign parent headquarters. - Vietnam - FDI and foreign companies have transformed Vietnam’s exports: Vietnam moved from commodity exports to a diversified set of products, with electronics the biggest category. - Foreign companies account for close to 70 percent of exports, mostly in electronics manufacturing and apparel. - Foreign sector-generated trade surpluses have more than offset the structural trade deficit of the domestic economy in recent years. - FDI remains strong, with large investors from Korea, Japan, and Singapore. - In electronics, global firms including Samsung, Intel, and Foxconn have built significant production capacity in Vietnam. - Samsung alone employs over 100,000 people in Vietnam and generates close to US$30 billion in exports. - Vietnam’s increasing FDI stock is mirrored by rising payments to foreign firm headquarters, resulting in increasing income debits in Vietnam’s balance of payments. - Despite benefits in growth and employment, technology and growth spillovers to domestic industry remain limited: domestic value added in electronics and apparel is among the lowest worldwide, indicating Vietnam is primarily a manufacturing base for final assembly while importing most high-value-added inputs. - Domestic private businesses generally lack technological capacity and scale to form supplier relationships with the FDI sector; state-owned enterprises remain large but relatively inefficient. - Policy and structural constraints cited include a weak banking sector, competition from state-owned enterprises with preferential access to resources, weak property rights, and weak enforcement of antitrust policy. - Tax incentives to attract FDI limit direct state revenues from foreign enterprises. ### Policy implications and recommendations - Governments can influence FDI outcomes; positive effects (market access, technology, finance, skills) are not automatic. - Policy measures to support positive spillovers and maximize benefits of FDI include: - Local research and development requirements. - Structural reforms to improve the business environment for domestic firms and enhance absorptive capacity. - Strengthening property rights and enforcement of antitrust policy to encourage domestic firms to scale up and join the formal sector. - Balancing tax incentives to attract FDI with preserving direct state revenues. - Country-specific priorities: - Vietnam: policies to strengthen linkages between FDI and domestic industry may still yield gains as stronger links could form over time. - Cambodia: the immediate challenge is to diversify and upgrade exports beyond apparel and attract FDI to support this transition. *Sources: OECD TiVA; IMF staff estimates; Yin (2012); UNCTAD 2013; IMF staff calculations.* ### Chapter 3: Policy Implications ### Chapter 3: Policy Implications for the CLMV ### Overview - China is moving up the value chain and bringing upstream activities onshore, with evidence that China may be beginning to exit downstream, labor-intensive activities. - China’s rebalancing will likely challenge commodity exporters like Lao P.D.R. and Myanmar, while providing new markets for manufactured goods and service exports. - The chapter examines drivers of trade growth and GVC participation, benchmarks the CLMV on those drivers, and provides general and country-specific policy recommendations. ### Drivers of Trade Growth and GVC Participation - Literature highlights distance, income level (often a proxy for wage costs), and exchange rate measures as significant determinants of trade performance. - Structural variables identified as particularly important include infrastructure, education, and institutional quality. - FDI is found important in some studies but can lead to concentration if targeted at already important sectors. Key econometric findings (from cross-country panel regressions; unbalanced panel of 48 countries, 1995–2011): - Infrastructure, education, governance, and trade freedom contribute positively to export market share and are particularly important for more sophisticated goods. - As an industry requires more technological sophistication, structural factors (especially education) become even more important. - Summary coefficients from Table 3.1 (Global EMS regressions; coefficients shown as in source): - Infrastructure: 0.171*** - Education: 2.702*** - Governance: 0.209*** - Labor Regulation: -0.055 - Free Trade: 0.191*** - Regression sample and specification notes: - Panel is detrended and includes country and time fixed effects for 48 countries from 1995 to 2011. - “Infrastructure” is the first principal component of infrastructure (following Seneviratne and Sun 2013). - “Education” is years of schooling from World Development Indicators. - “Governance” is the principal component of World Bank governance subindices. - “Labor regulation” is from the IMD world competitiveness database. - “Free trade” is the number of preferential trading agreements from the WTO. ### Benchmarking the CLMV: Key Shortfalls and Strengths - Low wages in the CLMV have attracted FDI; CLMV labor costs are below even China’s poorer inland regions. Wage gap with China opened since 2009. - Unit labor costs matter, but low wages alone are insufficient—structural fundamentals matter for moving up the value chain. - General deficits across the CLMV relative to drivers of export success: - Education: Further improvements needed, especially in Cambodia, Myanmar, and Lao P.D.R. Secondary and tertiary enrollment and vocational education are low in these countries. - Governance and institutional quality: Except for Vietnam (which fares on par with China on many structural factors), CLMV need progress. - Infrastructure and cost to export: Significant gaps remain; Lao P.D.R.’s cost to export is the highest in the region with inland transportation and handling making up 70 percent of this cost. - Trade openness: Tariff liberalization remains incomplete; Vietnam is more integrated via preferential arrangements (TPP, EU comprehensive trade agreement). - Public investment efficiency: CLMV score in the lowest quartile on project selection, project management and implementation, and project evaluation and audit in broad samples of low- and middle-income countries. - Vulnerabilities from limited diversification: - Export concentration remains high (except Vietnam), increasing vulnerability to external shocks. - Cambodia’s garment industry accounts for the bulk of exports; local textile inputs are largely absent, creating import dependence (notably on China) and exposure to volatile input prices. - Specific infrastructure and business climate observations: - Cambodia: High cost of electricity; ranks 139 out of 189 in getting electricity (Doing Business 2015). - Myanmar: Needs as much as US$80 billion to address major infrastructure gaps by 2030 (ADB estimate); ranked low in infrastructure quality among LICs. - Lao P.D.R.: High transport costs and high regulatory burden for exporters; grants currently 40 percent of public investment spending. ### General Policy Recommendations for the CLMV - Do not rely on low wages alone; pursue structural reforms across multiple dimensions associated with trade success. - Prioritize improvements in: - Education (particularly secondary, tertiary, and vocational training). - Governance and institutional quality. - Infrastructure (transport, electricity, logistics). - Trade openness (reduce tariffs, streamline trade-related laws and regulations, expand services trade openness). - Strengthen public sector financial and project management to improve the efficiency of capital spending and public investment outcomes. - Reduce impediments to doing business: improve transparency, predictability, and streamline bureaucratic procedures to attract private investment and deepen integration into regional supply chains. - Diversify both the composition of exports (upgrading skills and infrastructure to move into higher-value activities) and export markets (further integration into regional trade). ### Country-Specific Policy Recommendations - Cambodia - Upgrade infrastructure to reduce logistics costs: - Cheaper, more reliable, and more accessible electricity is a top priority. - Highway and secondary road development to reduce operation/transportation costs. - Strengthen legal framework for public-private partnership projects to facilitate infrastructure investment. - Improve human capital to capture higher-value-added production: - Lift quality of elementary education; expand vocational and industry-led training, apprenticeships, and dissemination of market information on skills shortages. - Streamline red tape in doing business: - Make customs procedures and permit/authorization requirements more transparent and predictable. - Simplify registration and accounting standards to encourage SMEs to enter the formal sector. - Near-term priorities: - Accelerate diversification of export destinations to mitigate concentration risks. - Improve productivity (e.g., reduce production lead times) to maintain competitiveness and enable upgrading in products, processes, and functions. - Lao P.D.R. - Further improve human capital formation: - Low vocational and tertiary enrollment constrains supply of high-skilled workers. - Education spending remains low compared with peers; recent budget increases mainly went to public sector wages. - Reallocate budget resources and secure more donor support for education. - Accelerate trade integration and increase social spending: - Revisions to trade-related laws and regulations to meet WTO and AEC commitments. - Increase social safety nets for vulnerable workers to make growth more inclusive. - Reduce regulatory and trade costs: - Regulatory burden remains high for exporters; inland transportation and handling make up 70 percent of cost to export—investment in transportation infrastructure is crucial. - Lowering trade costs could disproportionately benefit high-value perishable agricultural exports. - Strengthen public sector financial and project management: - Efficiency of capital spending assessed to be very low; grants currently 40 percent of public investment spending and are expected to decline—better project selection and management are priorities. - Myanmar - Move ahead with AEC initiative and trade liberalization: - Phase out the commercial tax on exports. - Reduce tariffs, especially on intermediate input imports (empirical evidence shows strong negative correlation between intermediate good tariff rates and GVC participation). - Promote export diversification and sophistication: - Focus on labor-intensive manufacturing and commodity-related sectors for diversification: final assembly of electronics, garments, footwear, and lumber processing. - Improve business climate via regulatory reform to attract FDI in manufacturing and infrastructure. - Prioritize infrastructure development for transport and electricity: - Myanmar needs physical connectivity to capitalize on its position as a bridge between South and Southeast Asia. - Ranked low on the World Bank logistics performance index—urgent need for transport and electricity development. - Promote human capital formation: - Government spending on health and education remains low; strategic increases with improved absorptive capacity needed. - Strengthen governance and institutional frameworks: - Stable, transparent business conditions and sound legal frameworks are critical for GVC participation. - Make better use of natural resource rents via Extractive Industries Transparency Initiative efforts and by reviewing the fiscal regime for extractive industries. - Vietnam - Address structural constraints to sustain export performance and long-term growth: - Per capita GDP only slightly above US$2,000; on track to become one of the world’s fastest-aging societies; working-age population ratio has started to decline. - Growing exports driven by FDI sector (70 percent of exports) while domestic manufacturing lags. - Boost total factor productivity: - Productivity reallocation potential large: almost half the workforce in agriculture and three-quarters employed at the household level. - Output per worker in domestic manufacturing (including SOEs) is around twenty percent of that in foreign-owned enterprises. - Deepen integration between FDI sector and domestic suppliers to internalize more production value and realize productivity spillovers. - Accelerate structural reforms, improve governance, and strengthen the private sector: - Vietnam ranks 90th in the World Bank’s Doing Business report. - Strengthen property rights and enforcement of competition policy. - Accelerate SOE reform: governance reform, privatization, divestment from noncore areas, level the playing field by curtailing SOEs’ preferential access to credit and other resources. - Increase spending on research and development (currently very low relative to peers) and raise the efficiency of public investment in infrastructure. - Continue to improve vocational and tertiary education (human capital investment is paying off at primary and secondary levels). ### Summary - Changes in China create both significant opportunities and challenges for the CLMV. - Low wages are an important advantage but are not sufficient given China’s productivity and low-wage inland provinces. - Structural reforms across education, governance, infrastructure, trade openness, and public investment management are needed to move up value chains and capture new export opportunities. - Macroeconomic policies should remain prudent to provide stable conditions for these reforms. - Rebalancing in China may reduce demand for commodities (a challenge for Lao P.D.R. and Myanmar), but with reforms, the CLMV can seize emerging export opportunities. *International Monetary Fund — Chapter 3: Policy Implications (from _apd1601 - Chapter 3: Policy Implications)* ### Appendix Figure 1. Total FDI Stock from China ### Appendix Figure 1. Total FDI Stock from China to Cambodia (Millions of U.S. dollars) ### Cambodia: garment productivity and FDI context - Cambodia’s garment productivity ratio to China is only 68 percent (China = 100). - Comparative garment productivity ratios: Bangladesh 77 percent, Pakistan 88 percent, and India 92 percent (McKinsey & Company 2011). - Figure timeframe shown: 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012. - Figure vertical scale markers: 0, 200, 400, 600, 800, 1,000, 1,200, 1,400, 1,600. - Source for figure: OECD 2013a. ### Lao P.D.R.: growth drivers, China links, and debt exposure - Real GDP grew at an average of about 8 percent in the past decade. - Per capita income doubled to about US$2,900 in purchasing power parity terms. - Poverty rate fell from about 33 percent in 2002/3 to 22 percent in 2012/13. - Government medium-term growth target lowered to 7.5 percent per year. - In 2013, China became the biggest foreign investor in Lao P.D.R., with a cumulative stock of US$5.4 billion. - China’s investment corresponds to about a third of total investments in the country. - Proposed railroad linking China’s Yunnan Province to Vientiane and then to Thailand estimated cost: US$6 billion, equivalent to 50 percent of the Lao GDP. - China will finance the majority of the railroad investment (about 70 percent) and extend loans to finance Lao P.D.R. government’s equity share. - From 2008 to 2014, China’s share in Lao P.D.R. imports increased from 8 to 26 percent. - Lao P.D.R.’s exports to China increased eightfold, with China’s share growing from 10 percent to 35 percent. - China’s official loans to Lao P.D.R. rose from about 25 percent of all bilateral debt in 2008 to about 50 percent in 2013. - China’s official loans are equivalent to 26 percent of Lao P.D.R.’s total external debt. - Official loans financed a large part of government capital expenditures, concentrated mostly in hydropower plants and other large infrastructure projects. - WTO accession: Lao P.D.R. became the 158th member of the World Trade Organization (WTO) in February 2013. - Structural and regulatory reforms enacted include laws and regulations related to import licensing, custom valuation, investment, sanitary and phytosanitary measures, technical barriers to trade, and intellectual property rights. - Business climate reforms cited: - Simplify business startup procedures, including establishment of a one-stop shop to coordinate foreign investment application. - Modernize electronic data interchange systems to facilitate cross-border trade. - Establish the Lao trade portal to facilitate international trade and enhance transaction transparency. - Productivity notes: - Labor productivity remains low compared with higher-income ASEAN neighbors. - Productivity growth is among the highest in the region. - Leading contributors to productivity growth: Finance, real estate, business services, transport and communication, and construction. - Maintaining productivity growth requires further investments in education, infrastructure, and institutional reform. ### Myanmar: reform path, trade composition, and China relations - Since economic liberalization in 2011, economic growth accelerated and reached almost 8½ percent in 2013/14. - Myanmar’s per capita GDP (PPP) and Human Development Index rank remain much lower than regional peers; Human Development Index rank: 149 out of a total 186 countries. - Comparative advantages: young and large labor force, low wages, strategic geographic location for Asian supply chains. - Trade openness ratio historically much lower than most other Asian countries. - Exports highly concentrated by products and partners; concentration increasing due to rising natural gas exports. - Historical main exports: foodstuffs (primarily pulses and rice) and nonfuel crude materials (mostly teak and other hardwoods). - Recent export shift: mineral fuels became top export; garments had developed but mineral fuels overtook. - Imports composition stable: manufactured goods, including machinery and transport equipment, account for bulk of imports. - Trade growth: fastest among the CLMV (albeit from a low base). - China is now a major supplier of consumer and capital goods to Myanmar; Myanmar supplies timber and natural gas to China. - Border trade constitutes the lion’s share of bilateral trade in both directions. - Economic cooperation with China includes infrastructure and energy projects involving state-owned enterprises. - Policy note: In 2013, authorities introduced their Framework for Economic and Social Reforms as a long-term strategy for sustainable growth and poverty reduction. - Regional integration opportunity: ongoing establishment of the ASEAN Economic Community. ### Vietnam: growth history, external sector, FDI, and China linkage - Pre-global financial crisis growth averaged over 7 percent. - Post-crisis stabilization: growth averaged an annual 5¾ percent from 2011 onward. - FDI inflows: - Annual average $2.5 billion over 2000–05. - Annual average $8.4 billion over 2008–14. - FDI concentration: increasingly in manufacturing, with major inflows from Korea, Japan, Singapore, and Taiwan Province of China. - Examples of multinational production shifts: Intel, Nokia/Microsoft, and Samsung have shifted significant parts of production to Vietnam. - FDI sector’s share in Vietnam’s total exports has reached 60 percent. - Vietnam’s trade openness: trade amounting to more than 150 percent of GDP. - World export market share increased from about 0.2 percent in 2000 to close to 1 percent of world exports in 2014. - Export product shift: from agricultural products, oil and gas, and apparel to cell phones, other electronics, and garments. - China’s role: - China is Vietnam’s most important supplier, accounting for one-third of imports. - Vietnam has a large bilateral trade deficit with China. - FDI from China to Vietnam is limited. - China increasingly supplies intermediate goods for final assembly in Vietnam. - Policy and market opportunities: - Import duty reductions under the ASEAN-China free trade agreements starting in 2015 could help boost bilateral trade between Vietnam and China. - TPP and new FTAs present opportunities for further export growth. - Vietnam’s comparative advantage among TPP signatories: lowest per capita GDP and strengths in labor-intensive manufacturing. - In 2015 Vietnam concluded FTA negotiations with the European Union, Korea, and the Eurasian Economic Union. - The European Union accounts for a fifth of Vietnamese exports. *International Monetary Fund* ### Bibliography ### _apd1601 - Bibliography ### FDI, Spillovers, and Firm-Level Effects - Abraham, F., J. 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