ASIA-PACIFIC RESEARCH AND TRAINING NETWORK ON TRADE ARTNeT CONFERENCE cbfcoconference ARTNeT Trade Economists Conference Trade in the Asian century - delivering on the promise of economic prosperity 22-23 rd September 2014 Parallel Session 8: Trade inclusiveness and inequality www.artnetontrade.org
Have workers in the South been competing through trade with workers in the North? Jorge Chami Batista (Federal University of Rio de Janeiro) and Yan Liu (Dalian Nationalities University) September 2014
Introduction World Merchandise Exports 100% 80% 60% 40% 20% 73% 27% 53% 47% 0% 1991 2011 South North Source: Unctad
Exports of the North and the South: Review of the literature A new pattern of trade specialization in the 1990s and 2000s (Schott,2004) Large differences among exporters' prices within the same product The North specializes in high-price varieties of each product The South specializes in low-price varieties of the same products (Hummels and Klenow, 2005) The factor proportion argument applies to specialization within products rather than within industries (Schott,2004) High-unit value varieties intensive in capital and skill Low-unit-value varieties intensive in unskilled labor Do the North and the South compete with each other directly? Fontagné, Gaulier, and Zignago (2008) suggest that they do not and therefore one should not worry too much about the effect of North s losses to the South on employment and relative wages of skilled labor. Too optimistic! Fontagné et al (2008) also argues that West Europe has been more resilient to South competition than the US and Japan. Methodology not appropriate.
Main Objectives Address the question. Do the varieties exported by the North compete directly with the varieties exported by the South? Draw the implications for the trade derived demand for unskilled and skilled labor in developed and developing countries
Main Concepts: Direct competition and Relevant product markets Two exporters are in direct competition when they export varieties of a product that are substitutes to each other. The varieties that are substitutes define the relevant product market.
Methodology to deal with vertically differentiated products Three existing methods combined in a pioneer fashion Segmentation method The CMS Distribution method of gains and losses
Segmentation Method: Fontagné et al. (2008) Each product market is divided into three segments: low, medium and high, according to the relative unit value of the variety exported by each country relative unit value ratio of variety j from country h If the share of low range is the share in medium range is the complement If share in top range is r 1 (1 r ) hj r 1 (1 1 r ) hj and share in medium range is hj hj 1 r hj r hj r UV / UV hj hj wj
The CMS Model Direct and Indirect Competition Components of the macro share change: A HL [ a HL (t)-a HL (0)] b L (0)+a HL (t)[ b L (t)- b L (0)] Laspeyres A HL [ a HL (t)-a HL (0)] b L (t)+a HL (0)[ b L (t)- b L (0)] Paasche where A HL A HL (t)-a HL (0) is the macro share change; A HL (t) i X HLi (t)/ i M Li (t) a HL (t)b L (t) is the macro share of country H in country L s imports in year t a HL (a HL1,... a HLi,..., a HLn ) is the vector of micro shares of country H in L imports of each product i in year t: a HLi (t) X HLi (t) /M Li (t) and b L (b L1,,b Li,...,b Lm ) and b Li M Li (t)/ i M Li (t) is the vector of each product i s share in L s total imports
The Model of Distribution of Market Share Changes: Chami Batista (2008) and (2010) a Hi (t) J H a HJi (t) J H ( a Hi a Ji - a Ji a Hi ) a HJi is defined as the part of the micro share change of H that is ascribed to the micro share change of J a HJi = a Hi a Ji - a Ji a Hi = a Hi a Ji ( a Hi /a Hi - a Ji /a Ji )
Empirics Trade Data Annual data on Japanese imports of manufactured products (chapter 28 to 96) 9-digit level of the Harmonized System (HS) 6108 manufactured products in 2010 (x 3 segments) 9-digit HS starts in 1988; revised in 1992, 1996, 2002 and 2007 5 sub-periods: 1988-1991, 1992-1995, 1996-2001, 2002 2006 and 2007-2010 Aggregated period: 1988-2010 Trade Statistics of Japan - Ministry of Finance
Japan imports Market Share of the North 59% 69% 84% 77% 31% 38% 1988 2010 Year low medium high alpha = 4
percentage points Changes in the North share in Japan imports Annual Change in Market Shares (pp) 1.00 0.50 0.00-0.50-1.00-1.50-2.00-2.50-3.00 alpha = 4 1991-1988 1995-1992 2001-1996 2006-2002 2010-2007 low medium high
percentage points The CMS Model Laspeyres equation North Direct Compe on with the South Annual Change in Market Shares (pp) 1.00 0.50 0.00-0.50-1.00-1.50 low medium high -2.00 1988-1991 1992-1995 1996-2001 2002-2006 2007-2010 Segmentation with alpha = 4
percentage points The CMS Model Paasche equation 1.00 North Direct Compe on with the South Annual Change in Market Shares (pp) 0.50 0.00-0.50-1.00-1.50 low medium high -2.00 1988-1991 1992-1995 1996-2001 2002-2006 2007-2010 Segmentation with alpha = 4
Main Result: North-South competition The North loses market share, both in general as well as in direct and indirect competition with the South, in each and in all of the three segments (low, medium and high) and in each and every sub-period from 1988 to 2010, except in the high segment in the 1988-1991 sub-period. This result is robust to alpha=3, 4, and 5 and to Laspeyres and Paasche indices.
Result 2: North-South Direct Competition Most of the North s direct loss to the South takes place in the low and medium segments. Overtime, however, the North s direct loss to the South in the high segment increased to reach over one third of the North s total loss to the South in 2007-2010. China accounts for most of the South direct gains in the low segment, while the rest of developing countries of Asia accounts for most of the South gains in the high segment.
Result 3: North-South Direct Competition Fontagné s, Gaulier s and Zignago s thesis that WE is more resilient than NA to South competition cannot be confirmed for Japan s imports.
Result 4: China's gains in direct competition The share of the high segment in China s gains is small in the first sub-periods but goes up to between 19% (P3) and 37% (L5) in 2007-10. In 2007-10 China lost market share in direct competition with the South in the low segment.
Conclusion 1: China's gains in direct competition As China relative per capita income rose and moved from a classification of low income to lower-middle and to upper-middle income, it became quite evident: 1.China s immense difficulties in further penetrating the low-end of product markets; and 2.China s increasing capability to directly compete in upmarket products.
Conclusion 2: Labor Market Effects of North-South Trade Considering that the low segment is intensive in unskilled labor while the high segment is intensive in skilled labor, the massive losses of market share of the North in the low and medium segments must have had a deleterious effect on the demand conditions for unskilled labor in the North. Trade competition with the South is expected to continue to negatively affect the demand for unskilled workers in manufacturing industry in the North, but the effect will diminish as the North s share in the low segment gets smaller and smaller.
Conclusion 3: Labor Market Effects of North-South Trade Since the South has been gaining market share in the high segment, the demand for skilled labor in the North has also been negatively affected by international trade with the South.
Conclusion 4: Labor Market Effects of North-South Trade As to the future of skilled workers in the North and the South, much will depend on the rate of innovation in the North relatively to the rate of imitation in the South and the rate of transfer of technology of Northern firms to the South. Thank you
Conclusion: North-South direct competition Considering the North-South models in which the North innovates, the South imitates and Northern firms can transfer technology to the South, our results imply that imitation and technology transfers to the South have been faster than innovation in the North in this period. As a result, Southern firms have become more competitive than firms in the North in each and every segment.