Just how export-dependent is China? (This is a follow-up on a discussion over at Brad Setser's blog)
China's exports are roughly 35-40 % of GDP.
However, China uses a lot of foreign-sourced components, as well as foreign-sourced raw material in its exports. Therefore, it becomes important to identify the value-added component of China's exports.
Broadly speaking, China's exports fall in three categories:
- Electronics exports have grown very fast; these products use a very large amount of foreign-sourced components from Taiwan, Korea and Japan. Though some have argued that the value-added of this sector, while still low, has increased over time as more and more components are being produced in China.
- Labor-intensive consumer goods (e.g. cloths, shoes, toys); these products use comparatively few foreign-sourced components; the growth of this sector has slowed, as more and more of it has been moved to places like Indonesia, Vietnam, etc.
- Heavy Industry (Steel, ships, etc.); these products use foreign-sourced commodities (e.g. iron ore), but have a comparatively high domestic value-added
Opinions differ as to the overall value-added of China's exports. Estimates are as low as 10 % for electronics and 25 % overall, but several academic studies have come to the conclusion that 45-50 % is more realistic.
45-50 % value-added on 35-40 % exports/GDP leaves us with 15-20 % of export value-added in % of GDP.
This also sounds reasonable based on a plausibility check:
The value-added must be the sum of current account surplus and imports for domestic use. Let's see:
- Current account surplus has been 5 % of GDP or more in recent years
- Commodity imports (oil, iron ore, etc.) should have been at least 5 % of GDP as well
- Imports of capital-goods and consumer goods can be expected to make up another 5 % of GDP
=> Sum total is at least 15 %, probably more
In other words: If demand for Chinese exports drops by 10 %, this translates into 1.5-2.0 % less GDP growth (assuming the drop in export demand is similar over all sectors of the export industry; if the drop is more pronounced in electronics, the drag on GDP would be lower).
Compared to the US, China's export dependency is higher: The US export value-added is roughly 10 % of its GDP.
Compared to Germany, it is lower: German exports are roughly 40 % of GDP. I don't have any solid numbers for value-added, but my guess is that 30 % is a reasonable estimate. Anything lower than 25 % would definitely be unrealistic (it has been argued that the importance of foreign-sourced components has increased dramatically over the last 10 years, due to extensive sourcing from Eastern Europe and Asia; Hans-Werner Sinn even wrote a book about what he considered the hollowing-out of German industry and its transformatio to a trading-based "bazaar economy"; however, many key sectors such as cars still rely to a very large extent on a locally-clustered supplier network).
2:00PM Water Cooler 3/24/2017
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