Student Research Projects/Outputs
No.029
Competition May Be Fierce, But Still
More Room for Cooperation
Stella Xu
MBA 2009
China Europe International Business School
699, hong feng Road
Pudong, Shanghai
People’s Republic of China
Proposal of research project for EU-BMT Exchange Scholarship
By Stella Xu 20091165
Research title: Analysis of comparative and competitive advantages in international trade
between China and Eastern European economies.
Objective: The paper aims to use statistics data to develop a comprehensive overview of
the comparative and competitive advantages for trades between China and Eastern
European countries; to analyze the degree of overlap of these advantages; and further on to
identify trade directions and areas where the two economies can collaborate with each
other to a win-win situation.
Proposal:
The Eastern European economy (the ex-Socialist Bloc) used to be a heavy weight trade
partner to China in 1950s/1960s. The reason is largely political at a time the western world
closed their doors to new China, while the socialist bloc countries stepped forward to
support the new born economy. The foreign trade to Eastern Europe was once 20% of total
foreign trade volume of China. However, that share has since declined to much lower level
and remains so up to today. It is encouraging to note that since 1990s the bilateral trade
between China and Eastern Europe has leaped forward when both emerging economies
drive on the fast track of economic development. But the ratio remains less than 1% and
there is a lot more room for improvement.
In the meanwhile, the 2 economies are considered as key low cost countries (LCCs) by
developed countries for sourcing/manufacturing of goods and equipments. Competition is
evident and it becomes even fiercer when Chinese manufacturers improved their know-how,
quality and technological levels to erode the solid ground of their Eastern European
counterparts, for example in areas of heavy manufacturing – forging, castings and heavy
equipment manufacturing.
The paper will tap on the principal theories behind internal trade – comparative advantage
(by Classical economist David Ricardo) and competitive advantage (by Michael Porter) to
analyze what are the advantages for China and Eastern European economies. The paper
hopes to serve as references for businesses in China and Eastern Europe to develop more
collaboration in bilateral/international trade.
Sectors to focus:
Light industries – hardware, appliances, FMCG; Heavy industries – steels, heavy machineries;
Telecommunications
Case studies: Huawei
Source of data: UNSD data on international trade; trade statistics data from China customs.
Note:
According to UN statistics division, Eastern Europe refer to following 10 countries: Belarus,
Bulgaria, Czech Republic, Hungary, Moldova, Poland, Romania, Russia, Slovakia, Ukraine.
The paper will focus on Poland and Romania.
Competition may be fierce, but still more room for
cooperation
A review on revealed competitive advantages between China and Central & Eastern
European Countries – with focus on Poland and Romania
By Stella Xu for EU-BMT Exchange 2010
The huge success of World Expo in Shanghai in year 2010 revealed something
which is often overlooked by the general public – a closer tie of China, with most (if
not all) parts of the world. China is viewed as a locomotive to world economy in the
recent recession, and has been playing a strategic role as largest importer/consumer
of global commodities.
The inclusion of Eastern European countries (Poland in 2004 and Romania in 2007)
into European Union has made EU, as a whole entity, the largest trade partner for
China, taking over US, Japan and others. There have been numerous articles
debating on the pros and cons of trade between China and Central and Eastern
European countries (CEECs). This article aims to look at a more specific factor – the
comparative advantage between China and CEECs. Given the limits of time and
space allowed, the scope will be focused on 2 countries – Poland and Romania as
the most populous countries in the CEEC region, and also traditional trade partners
with China.
Chapter 1: General Facts (Data from Economy Watch):
Poland
Following are the products that feature prominently in Poland exports:
Machinery and equipment
Textiles and footwear
Metals and metal products
Machinery and equipment
Minerals and fuels
Agricultural products.
In 2008, Poland‟s leading trading partner is its neighbor Germany, followed by Italy,
France, Turkey, Hungary and Bulgaria.
The main products that are imported are:
Machinery and equipment
Fuels and minerals
Chemicals
Textile and products
Metals
Agricultural products
The main import partners for Poland as of 2008 are Germany, Italy, Hungary, Russia,
France, Turkey, Austria, Kazakhstan and China
Romania
Similar to Poland, Romania has always been troubled by trade deficit. While the
estimated total exports in Romania amounted to $49.41 billion in 2009, its total
imports were $76.17 billion.
Leading export categories include:
Machinery and equipment
Textiles and footwear
Metals and metal products
Machinery and equipment
Minerals and fuels
Chemicals
Leading import categories include:
Machinery and equipment
Fuels and minerals
Chemicals
Textile and products
Metals
Agricultural products
The leading countries with which Romania trades with are: For export (2008),
Germany 16.3%, Italy 15.4%, France 7.3%, Turkey 6.5%, Hungary 5%, Bulgaria
4.1%; For import (2008), Germany - 16.1%, Italy 11.2%, Hungary 7.3%, Russia
5.9%, France 5.6%, Turkey 4.9%, Austria 4.8%, Kazakhstan 4.5%, China 4.2%
Chapter 2: Trade with China
Before 1990s, the trade between China and Poland/Romania was conducted on
„book keeping‟ style where there was no physical foreign exchange involved. While
the switch to FOREX physical trade impacted the trade volumes at the beginning of
1990s, the trade volume increased significantly in the following years, especially in
the years of 2000s, the period in which Poland and Romania were accepted into EU,
and in which China enjoyed tremendous economic boom.
All 3 countries have exhibited similar growth patterns in export/import – a continuous
growth (with exception of year 2009 due to global economic recession). Poland was
the only country in EU which exhibited positive GDP growth in 2009 when crisis hit.
Besides an order of magnitude difference in trade volumes between China and
Poland/Romania, another sharp contrast that can be seen from the graph is that
China has been enjoying a huge trade surplus (export in excess of import) while both
Poland and Romania have been seeing a quite huge (percentage wise) trade deficit.
And China has contributed to this trade deficit in very heavy weight percentage.
Figure 1. Data Source from UNSD Annual Table 2009, Figures in USD
Bilateral Trade History between China and Poland:
Figure 2. Figure in 100 M USD unit, Source: Polish Embassy in China, China Customs
For Romania, in 2009, the total bilateral trade (import plus export) with China is
3.041 Billion USD, while China export to Romania stands at 2.662 Billion USD, and
import from Romania is 0.379 Billion USD. (Source: Li,Lu, 2010, Interview with
Sorin Toader).
The large trade deficit certainly worries both Polish and Romanian officials. They
have been promoting measures to ease the deficit situation, and to reach a dynamic
balance in bilateral trades with China. China, as the counterpart, also takes serious
measures to turn around the situation.
Chapter 3: Balassa Index Analysis of Comparative Advantages
The Balassa Index is used to determine a country‟s comparative advantages (literally
its strong sectors) by analyzing the export data from the country, relative to other
countries. It was invented by Liesner, and popularized by Bela Balassa. It is known
as Balassa Index, also referred to as “Revealed Comparative Advantage‟.
The Balassa index is defined as:
BI jA 
share of industry j in country A exports
share of industry j in reference country exports
If BIAj >1, the country (A) is said to have a revealed comparative advantage in this
specific industry(j). The Balassa data (for 36 countries, including Poland and China)
that is available at website of Utrecht University (by Prof. C. van Marrewijk) is based
on the reference countries of the basket of 15 most populous countries. The focus of
this paper will be China and Poland.
China’s strong sectors (in HS codes, Harmonized System 2007 classification):
Articles of leather (HS 42), Manufacturing of plaiting materials, basket work (HS 46),
Silk (HS 50) and from HS 50 to HS 70 which covers apparels, footwear, ceramic
products, glass and etc; Railway, rolling stock equipments (HS 86); Musical
instruments (HS 92), Furniture (HS 94) and Toys (HS 95).
Poland’s export strengths lie on: HS 01 to 10 and HS 15 to 20 covering meat,
fishery, dairy products, vegetables; Rubber and articles (HS 40); Wood and articles
(HS 44), Paper (HS 48); Various from HS 60 to HS 70; Iron & Steel (HS 73); Copper
(HS 74), HS 82 to 89; Furniture (HS 94).
It is notable that the similarity between the economic structure of Poland and China
is high. However there are certain areas that the two countries showed distinctive
revealed comparative advantages. The example is in copper related (HS 74) where
Poland is endowed with good reserve of copper and the Polish Copper group
company KGHM (Kombinat Górnictwa i Hutnictwa Miedziowego), which has
exported copper related products to China Minmetals Group for the past 10+ years.
2009 was a good one for KGHM in China, as the company‟s sales revenue in China
contributed nearly 14 percent of the company's global sales. KGHM has just signed
a copper cathode delivery agreement with China Mine Metal Group, with deal valued
between USD 0.4-0.8 billion
Another study by Li, Xie, 2001 (of all HS categories where the export data from
China and CEECs to original EU countries (Western and Northern Europe) with
value larger than 1 B EUR) revealed that on certain categories such as HS 39
(Plastics and articles), HS 84 (Nuclear components) and HS 85 (Motors), the overlap
of China and CEECs are not very limited/little.
To validate the viability of the Balassa Index, let‟s have a look at HS 89 - ship, boats.
Due to tight requirements by the European Commission to cut off government
subsidiaries to shipbuilding sectors (in order to fulfill the obligations as conditions to
join EU), the Polish shipbuilding sector suffered a painful restructure and lost its
competitive edge against rising stars such as Korea, China and Vietnam.
Figure 3. Development of Balassa Index for shipbuilding sector of Poland
Chapter 4: Room for cooperation? A lot
Looking forward, the room to increase bilateral trade and cooperation between China
and Poland, China and Romania is enormous.
We have to take into consideration that the trade pattern changes as economic
structure (industrial base structure) of the subject countries change. Quoted from Mr.
Tomasz Ostaszewicz, the chief of Bilateral Trade Cooperation Bureau, Polish
Ministry of Commerce “In the past, China mainly exported textile products, footwear
and teas to Poland, now China is the largest electronics products supplier to Poland”.
China is also putting investment into Poland. In 2007, the FDI volume by China in
Poland reached 70B EUR. The Polish government and officials have been promoting
Chinese companies to invest in Poland to achieve a more balanced trade.
The recent visit of Chinese leader Mr. Jia Qinglin to Poland drew closer bilateral ties.
During his visit, Jia suggested the two countries enhancing political mutual trust,
expanding economic and technology cooperation, encouraging two-way investment
and focusing on such sectors as infrastructure construction, machinery equipment,
energy and environmental protection, including coordination on international affairs
such as climate change and global governance. Jia also suggested the two states
should increase trade of high-tech products to re-balance trade, stimulate
cooperation between small and middle-sized enterprises.
China's ambassador to Poland, Sun Yuxi, has confirmed China‟s intention to invest
in all fields accessible to foreign investment in Poland. Meanwhile, Polish Deputy
Prime Minister Waldemar Pawlak has declared that this year's bilateral trade
between the two countries would exceed €13 billion.
An excellent example is Huawei, the much applauded Chinese technology firm who
provides top-notch telecommunication products and solutions to customers globally.
Huawei has been very successful in winning a few major contracts from telecom
operators in Romania (Vodafone) and other parts of CEEC region. In addition to
selling in the CEEC market, Huawei has been promoting local procurement from the
CEECs. Huawei has held numerous supplier conferences, engineering partner
conventions in the past few years in Poland and Romania to promote bilateral trust
and for enhancing long term cooperation with partners in the region.
The speech delivered by Mr. Jia, Qinglin on his visit to Poland exactly covers the 2
main routes for development of bilateral trade relations between China and Poland
(as well as other CEECs):
1. Upgrade the portfolio of goods traded to balance the trade deficit situation of today;
Even the traded portfolio of goods has been changing between China and CEECs,
the large percentage of traded goods remains primary products (textiles, footwear)
with low added values. The opportunities for trading of High-tech products,
environmental technologies and renewable energies remain large.
2. To boost FDI investment of Chinese companies in the area, and Polish and
CEECs companies in China. Below table gives an example of FDI volume into
Poland. Even though the Chinese FDI investment in Poland has been leaping in
magnitude, but still it is mere 0.4% of its total FDI volume. And the room to grow is
huge.
Inflow of FDI into Poland 2004–2007
Region/countr
y
World
EU
Japan
China
2004
2005
2006
2007
10,304.8
9,052.1
150
2.1
8,259.9
6,783.2
239.3
36.6
15,575.9
13,362.3
253.7
20.0
16,582.1
12,303.9
191.6
62.0
Table 1. Inflow of FDI into Poland, 2004 to 2007
References:
AgroTrade, Ministry of Commerce China, 2009, Guide to export market for Chinese
agricultural goods: Poland.
Balassa, B., 1965, „Trade liberalization and “revealed” comparative advantage‟, The
Manchester School of Economic and Social Studies No.33: Page 92–123.
Che, Huichun, 2007, the influence of the east expansion of EU on Sino-EU trade
relations and China‟s countermeasures. China Academic Journal Electronic
Publishing House.
China customs, 2010, Statistics of bilateral trade between China and Poland
Jia, Ruixia, 2010, Trade relationship between China and Central Eastern European
countries. Institute of European Studies, CASS, China.
Jin,Xin, 2009, Polish Food: From Europe to China, Food and Beverage Industry,
Issue No.8 2009
Li, Lu, 2010, Interview with Sorin Toader, Imp-Exp Executive, Issue No.4 2010
Li, Xie, 2001, the competitiveness of Chinese and Central Eastern European exports
to Europe, Intertrade, Issue No.12
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Import and Export Co.,Ltd.) in Romania, Master‟s Thesis, Hunan University
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since 2004, Asia Eur J (2010) 8:369-378
Santiso, Javier, 2005, “Angel or Devil? Chinese impact on Latin America”, Annual
Bank Conference on Development Economics, Amsterdam
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Competitiveness: A case study for Turkey towards the EU, Journal of Economics
and Social Research, 10(2) 2008, 25-41
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2002