U.S.-Asia trade: dynamic general equilibrium linkages Robert Koopman, Marinos Tsigas, Zhi Wang (USITC) and Xin Li (Peking University)

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1 The Institute for International Economic G2 at GW The 5th Annual Conference on U.S.-China Economic Relations and China s Economic Development October 12, Lindner Commons, Elliott School of International Affairs The George Washington University U.S.-Asia trade: dynamic general equilibrium linkages Robert Koopman, Marinos Tsigas, Zhi Wang (USITC) and Xin Li (Peking University) The views expressed in this presentation are those of the authors alone. These views do not necessarily reflect the views of the U.S. International Trade Commission, any of its individual Commissioners, or the National School of Development at Peking University.

2 Overview A global database: Zhi Wang, Mark Gehlhar,, How a Global Inter-Country Input-Output Table with Processing Trade Account Can be constructed from GTAP Database A dynamic global trade computable general equilibrium (CGE) model to fit this global database Simulations of several hypothetical developments in U.S.-Asia trade 2

3 Dynamic CGE Model Dynamic CGE simulation model has two parts First part is a comparative-static CGE model simulating changes within a given year Perfect competition, constant returns to scale Single-output firms minimize costs subject to production function Households maximize utility subject to budget constraint Labor and capital are region specific, mobile across sectors, fully employed International trade: products differentiated by region of origin, at the agent level Second part provides inter-temporal linkages and simulates changes between years Linearized model implemented in GEMPACK software (CoPS, Monash University) 3

4 This AGE model Sourcing of imports at the agent level Product of sector j σ=0 Value added Interm 1 Interm 2 Interm N σ>0 σ>0 Land Labor Capital Sourcing of imports at the agent level Region 1 Imported σ>0 Region 2 Region R Domestic 4

5 Intertemporal linkages in the CGE model To simulate changes between years t and t+1, CGE model incorporates physical capital accumulation for the economy as a whole: K r,t+1 = (1 D r ) K r,t + I r,t K r,t is the quantity of capital available for use in region r during year t; I r,t is the quantity of new capital created in region r during year t; and D r is the rate of capital depreciation in economy r 5

6 Database has 26 Economies or Aggregate Regions CHINA, MEXICO have Processing Trade (PT) components 1 Australia and New Zealand 2 China China - processing trade Rest of China 3 European Union European Union Hong Kong 6 Indonesia 7 Malaysia 8 Philippines 9 Singapore 10 Thailand 11 Taiwan 12 Vietnam 13 India 14 Japan 15 Korea 16 Canada 17 USA 18 Mexico Mexico - processing trade Rest of Mexico 19 Russia Federation 20 Brazil 21 Rest of East Asia 22 Rest of Asia 23 Rest of South America 24 South Africa 25 Rest of High Income 26 Rest of the world 6

7 Processing Trade Linkages China PT Duty-free imports Japan Rest of China Two-way trade in commodities and services One-way trade in commodities and services Two-way movements in primary factors 7

8 Database has 41 Sectors Processing Trade has 19 Manufacturing Sectors Agriculture, Natural Resource based Manufactruring Services 1 Crops 8 Meat and dairy products 27 Electricity 2 Liv estock 9 Other foods 28 Gas manufacture, distribution 3 Forestry 10 Beverages and tobacco products 29 Water 4 Fishing 11 Textiles 30 Construction 5 Coal 12 Wearing apparel 31 Trade 6 Oil and gas 13 Leather products 32 Transport nec 7 Minerals nec 14 Wood products 33 Water transport 15 Paper products, publishing 34 Air transport 16 Petroleum, coal products 35 Communication 17 Chemical, rubber, plastic products 36 Financial services nec 18 Mineral products nec 37 Insurance 19 Ferrous metals 38 Business services nec 20 Metals nec 39 Recreational and other services 21 Metal products 40 Public Admin., Defense, Educ., Health 22 Motor vehicles and parts 41 Dwellings 23 Transport equipment nec 24 Electronic equipment 25 Machinery and equipment nec 26 Manufactures nec 8

9 CHINA manufacturing imports PT imports have different sourcing patterns Manufacturing imports into CHINA from the rest of the world A u s tra lia, N Z B ra z il C anada E U 1 2 E U 1 5 H ong Kong Indonesia In d ia Japan K o re a R e s t o f M exico M exico-p T M alaysia Philippines R e s t o f A s ia R est of high in c o m e R e s t o f w o rld R ussia Singapore R est of South A m e ric a Thailand T a iw a n U nited States Vietnam R est of E ast A s ia S o u th A fric a 60,000 50,000 40,000 30,000 20,000 10,000 0 Rest of China China-PT Markets of origin 9 M illio n U S $ d o lla rs

10 140, , ,000 80,000 60,000 40,000 20,000 CHINA manufacturing exports PT exports have different destination patterns Manufacturing exports from CHINA to the rest of the world Rest of China China-PT 0 A u s tra lia, N Z B ra z il C anada E U 1 2 E U 1 5 H ong Kong Indonesia India Japan K o re a R s t o f M e x ic o M exico-p T M alaysia P h ilip p in e s R e s t o f A s ia R est of high in c o m e R e s t o f w o rld R ussia Singapore R est of South A m e ric a T h a ila n d T a iw a n U nited States Vietnam R est of E ast A s ia South Africa Destination markets 10 M illio n U S $ d o lla rs

11 CHINA manufacturing exports to the rest of the world PT exports are concentrated in electronic equipment Rest of China, $269 bl China-PT, $399 bl Meat and dairy products Other foods Beverages and tobacco products Textiles Wearing apparel Leather products Wood products Paper products, publishing Petroleum, coal products Chemical, rubber, plastic products Mineral products nec Ferrous metals Metals nec Metal products Motor vehicles and parts Transport equipment nec Electronic equipment Machinery and equipment nec Manufactures nec Manufacturing sectors 11 Percent of manufacturing exports

12 U.S. sourcing of electronic equipment imports Producers sourcing is different from consumers Electronic equipment imports into the United States 12 Canada Rest of China China-PT EU 12 EU 15 Hong Kong Indonesia India Japan Korea R est of M exico M exico-pt M a la ysia P h ilipp ine s Rest of Asia Rest of high incom e Rest of world Russia Singapore Rest of South America T h ailan d Taiwan Imports by producers Imports by private household Markets of origin P ercen t o f to tal im p orts

13 Three policy scenarios are simulated against the baseline (1) the national saving rate in China declines from 44 percent to 36 percent (2) the national saving rate in the United States increases from 5.6 percent to 7.2 percent (3) productivity improvements in unskilled labor employed in selected industries/economies 13

14 28,000,000 v. policy U.S. real GDP effect from a decline in China s saving rate from 44 percent to 36 percent 26,000,000 24,000,000 22,000,000 20,000,000 18,000,000 Base 16,000,000 14,000,000 12,000,000 14

15 Selected simulated effects from a decline in China s saving rate from 44 percent to 36 percent 10,000,000 9,000,000 Real savings in China 8,000,000 Real consumption in China 8,000,000 7,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Real investment in China Index of China's real exchange rate, = ,500, ,500,000 8,500, ,500, ,500,000 5,500, ,500,000 3,500, ,500,000 1,500, U.S. trade balance with China 200, , , , , ,000 U.S. trade balance 400, , ,000 1,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 15

16 Selected simulated results from a decline in the U.S. saving rate from 5.6 percent to 7.2 percent U.S. real savings U.S. real consumption 2,000,000 19,000,000 1,800,000 17,000,000 1,600,000 1,400,000 1,200,000 15,000,000 13,000,000 1,000, , ,000 11,000,000 9,000,000 U.S. real investment 6,900,000 6,400,000 5,900,000 5,400,000 4,900,000 4,400,000 3,900,000 3,400,000 2,900,000 2,400,000 China's real exchange rate relative to U.S. real exchange rate, = U.S. trade balance with China U.S. trade balance -100, , , , , , ,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800, , , , ,000 D 16

17 Scenario 3: productivity improvements in unskilled labor employed in selected industries/economies Sectors/economies with simulated improvement in unskilled labor productivity in Sectors Economies Indonesia India Malaysia Philippines Thailand Vietnam Textiles Wearing apparel Leather products Wood products Motor vehicles and parts Electronic equipment Manufactures nec 17

18 Selected simulated results from a 50 percent productivity improvement from the employment of unskilled labor in selected sectors/countries Percent change in real GDP over baseline Percent change in real GDP over baseline Vietnam Thailand Philippines India Indonesia China USA U.S. trade balance U.S. trade balance with China 400, , , , , , , , , , , , , , ,000,000 1,200,000 1,400,000 1,600,000 1,800,000 U.S. trade balance with Vietnam 10,000 15,000 20,000 25,000 30,000 Percent Percent ,000 U.S. trade balance with Thailand 15,000 20,000 25,000 30,000 35,000

19 Selected simulated effects from a decline in China s saving rate from 44 percent to 36 percent Improvement in U.S. bilateral trade deficit with China over baseline, selected sectors, percent Textiles Wearing apparel Percent 15 Leather products Fabricated metal products Electronic equipment 19

20 Selected simulated results from a decline in the U.S. saving rate from 5.6 percent to 7.2 percent Improvement in U.S. bilateral trade deficit with China over baseline, selected sectors, percent Textiles Wearing apparel Percent 5 4 Leather products Fabricated metal products Electronic equipment 20

21 Selected simulated results from a 50 percent productivity improvement from the employment of unskilled labor in selected sectors/countries Improvement in U.S. bilateral trade deficit with China over baseline, selected sectors, percent Textiles Percent 4 Wearing apparel Leather products Other manuf., nec Electronic equipment

22 Thank you! 22