China and Brazil after the great recession
XVI ENCONTRO DE ECONOMIA DA REGIÃO SUL
Área 5: Economia Internacional
André Moreira Cunha – PPGE/UFRGS and CNPq. E-mail: andre.cunha@ufrgs.br
Julimar da Silva Bichara. UAM/Spain. Email: julimar.dasilva@uam.es
Marcos Tadeu Caputi Lélis. Unisinos. Email: mcaputi@uol.com.br
Abstract: This paper aims at analysing the impacts of China’s rise on Latin American countries. The
literature on the topic has stressed the emergence of an asymmetrical pattern of relationship, where
the region would be trapped in a less dynamic status of producer and exporter of raw materials. We
focus on identifying the post-global financial crisis trends, providing fresh evidence concerning the
characteristics of Sino-Latin American economic relationships, emphasizing the Brazilian experience.
Ours results suggest that, particularly in the Brazilian case, there is evidence of the emergence of an
increasingly regressive pattern of production and trade specialisation.
Key Words: regressive specialisation; great recession; Brazil, China
JEL: F5; F63
Resumo: Este trabalho analisa a evolução recente, nos marcos do quadro da grande recessão, das
relações entre China e América Latina, com ênfase para o caso do Brasil. A despeito das intenções de
reorientação do seu modelo de crescimento, a resposta chinesa à crise reforçou a dependência das
exportações e dos investimentos. Assim, para além do papel de fornecedora de recursos naturais, as
economias latino-americanas passam a ter uma importância renovada como destino das exportações
de manufaturas e capitais chineses. Países com estruturas produtivas mais maduras e diversificadas,
como o Brasil, irão deparar-se com o risco de um processo de regressão em seus padrões de
especialização.
Palavras-chave: especialização regressiva; grande recessão; Brasil; China
Introduction
This paper offers a Brazilian perspective on China´s rise. Many commentators have argued that the
global economy will be increasingly Asian-centred and Sino-centred in the decades to come1, which has
stimulated a growing literature about the impacts of such a transformation on Latin American countries
(Jenkins, 2010; Phillips, 2011). The emergence of an asymmetrical pattern of relationship, where the region
would be trapped in a less dynamic status of producer and exporter of raw materials, has received particular
attention (Bittencourt, 2012; Rosales and Kuwayama, 2012; Ferchen, 2012). Accordingly, China´s
interaction with the region could reinforce long-term problems such as the “natural resource curse” (Sachs
and Warner, 1987; Sinnot, Nash and De La Torre, 2010), the “Dutch Disease” and the deindustrialisation
(Rowthorn and Wells, 1987; Palma, 2007). As a consequence the region’s development perspectives could
be undermined.
This paper highlights how China´s rise as a global power has affected Latin American economies,
drawing special attention to the post-2008 period. Most previous analyses have focused on pre-crisis
tendencies. Considering that the Sino-Latin American relationship has evolved rapidly we must take into
account the new landscape brought about by the great recession2. We provide some fresh evidence
1
See, among others: Goldman Sachs (2007); Castro (2008); Cepal (2011); Canuto and Giugale (2010); Halper (2010); Subramanian (2011);
Jacques (2012).
2 Phillips (2011) argues that “(things) are changing very rapidly in Chinese, Latin American and Sino-Latin American landscape, and one
wonders, reading these volumes, whether many conclusions that the authors draw from their analyses will stand the test of time”. Moreover, that
1
concerning the characteristics of Sino-Latin American economic relationships, emphasizing the Brazilian
experience.
While bilateral trade and financial cooperation have surged, China has engaged in a new wave of
diplomacy towards Latin America (Dadush and Shimelse, 2012; Ferchen, 2012; Jiabao, 2012). We suggest
that China’s increased interest in the region represents a crucial challenge to Brazil. When other major
partners, such as the United States and the European Union, tried to promote free trade agreements with
Brazil, throughout Mercosur, the country rejected their attempts, because Brazilian negotiators realized that
the policy space to stimulate the country’s economy would be reduced, its manufacturing sector would be
threatened, and agricultural exports would be restricted by protectionism. Now, China has created new
pressures which potentially reinforce regional divergences. The re-emerging power offers a huge market for
raw materials and financial support as well (Jinbao, 2012), which seduce many sectors within Brazil and its
regional partners. At the same time, China’s exports of manufactured products and capital threaten local
producers. In this context, we show evidence that the Brazilian economy’s competitive gaps with China
have increased.
We have focused Brazil because while small open economies in the region are more prone to explore
their comparative advantages and complementarities with Asian emerging countries, particularly with
China, Brazil tends to prioritize its manufacturing sector, domestic market and regional partnerships (Cepal,
2011; Eclac, 2012; Rosales and Kuwayama, 2012; Bittencourt, 2012; Estevadeordal, 2012). Moreover,
previous studies usually addressed the regional perspective or case studies of other countries rather than
Brazil. Our emphasis in Sino-Brazilian relationship is also important because China and Brazil are,
respectively, the world’s second and sixth largest economies. Nevertheless, since the early 1980s both
countries have experienced markedly different trajectories. While the Brazilian economy has had a weak
economic performance, particularly in terms of capital accumulation, productivity gains and physical and
social infrastructure, the Chinese economy has experienced one of the most remarkable structural
transformations in the modern era (Palma, 2007 and 2012; Rodrik and McMillan, 2012).
Our main hypothesis is that despite the intentions of a growth model re-orientation, Chinese
policymakers’ response to the great recession reinforced, at least in the short and medium terms, the
previous reliance on exports and investments (Ferby, 2011). Considering the sluggish recovery in advanced
economies, this strategy will amplify Chinese pressures to access dynamic domestic markets in emerging
countries (Rodrik, 2011). In this context, Latin America will represent not only a source of natural resources
but an increasingly important market for manufactured products. Accordingly, countries with more diverse
productive and export structures might experience a regressive pattern of specialisation. That is, a reversal of
the modernisation trends experienced during the developmentalist period (1930s to 1980s) which resulted in
the emergence of productive and foreign trade structures characterised, among other things, by: (i)
diversification – at sector and product levels; (ii) an increase in manufacturing sector’s share in the total
value added; (iii) an increase in manufacturing products’ share in total merchandise exports; and (iv) a
significant increase in productivity associated with those structural changes (McMillan and Rodrik, 2011;
Thirlwall, 2011; Palma, 2007 and 2011). Therefore, a regressive specialisation should be expected when
productivity is stagnated, manufacturing sector value added grows below the GDP average, and exports are
increasingly natural resources-oriented. Using different production and trade performance indicators we
have identified a reinforcement trend in that direction.
We organize our arguments as follows: firstly we present the broader picture of what the literature
concerning the impacts of China’s rise on Latin America has argued; then we examine some features of the
Chinese internationalisation process and its impacts on the region, emphasising the post-2008 period. We
conclude by exploring some potential implications of our results.
literature did not incorporate the effects of the great recession. Recent comprehensive research, such as Bittencourt (2012), has also emphasized
pre-crisis trends.
2
2. China and Latin America: back to the past?
Between the 1820s and 1930s, Latin American countries followed an outward development model,
based on production and trade specialisation in agriculture and mining (Prebisch, 1984; Furtado, 2003;
Unctad, 2003). The export-led model based on agriculture and mining did not deliver stability, self-sustained
growth and the modernization of the institutions and the economy. During this period the region experienced
fiscal and external imbalances, which had to be financed by volatile capital flows, thanks to the fact that the
export sector, mainly dependent on commodities, was incapable of generating enough hard currency to
finance the merchandise imports demand and other financial commitments. Capital flow reversals were
frequent, and government used to be pressured by creditors to promote deflationary adjustments in domestic
income and absorption.
During that period the business cycles of Latin American peripheral countries were tightly correlated
with the core countries’ business cycles, led by Great Britain, the then hegemonic power. Industrialisation
and urbanisation at the core increased the demand for natural resources at the periphery, which helped to
improve the terms of trade. The interwar crisis opened room for a radical change. The breakdown of the
global trading system, the collapse of the gold standard, the outbreak of the World War II, and the
hegemonic transition from Great Britain to the United States brought to an end the export-oriented model.
Latin American countries started to manufacture goods previously imported from the ‘centre’, in a process
lately named ‘import substitution’. The ‘development from within’, led by the State, generated reasonable
results until its crisis in 1980s (Unctad, 2003).
This historical summary is important to our argument because some structural features of the
outward oriented model pursued by Latin American countries, particularly the overdependence on
production and export of natural resources, has returned, particularly in the early twenty-first century.
Differently from the previous period, countries such as Brazil are not fighting to industrialise their
economies, but, instead, they are trying to avoid re-primarisation3 of their exports and deindustrialisation.
From theoretical and political perspectives, many development economists and other scholars and
policymakers have assumed that development implies economic and social structural transformations within
countries in order to achieve higher living standards (Thirlwall, 2011). Based on the pioneers of
development economics and their contemporary followers it should be argued that: investment is a key
determinant of income expansion; the economic growth process is not sector-indifferent or linear and stable;
manufacturing leads economic growth thanks to its backward and forward linkages to other sectors;
technological progress has, at least in a certain extent, an endogenous dynamics associated with the capital
accumulation led by the manufacturing sector; and income-elasticity differences in manufacturing products
and natural resource-intensive products to balance of payments constraints to economic growth. The latter is
in a context where primary-product prices tend to decline in relation to manufacture product prices in the
long run. In short, manufacturing matters and governments should have an active role to support structural
transformations. Emphasizing this point, the higher the growth of the manufacturing sector and its
productivity, the higher will be the growth of the whole economy and the productivity of other economic
sectors. Therefore, in order to achieve growth-cum-stability, governments should prioritise the
industrialisation process or avoid deindustrialisation (Palma, 2007; Thirlwall, 2011; Rodrik and McMillan,
2012).
Considering this broader picture, it is worth mentioning that since the late 1970s, under the umbrella of
Deng Xiaoping’s strategy of reforms and economic opening4, China has been re-emerging as a global
power. Its rapid economic growth and internationalisation process resulted in the fact that in 2011 China was
responsible for more than 10% of global trade, 10% of the world´s GDP measured at market prices, and 14%
of the world’s GDP measured using purchasing-power-parity (IMF, 2012). The Asian superpower has also
3
It refers to the composition of exports, where raw materials share on total exports surpass manufacturing products share, particularly
technology-intensive products (Bresser-Pereira, 2009 and 2010; Oreiro and Feijó, 2010).
4 See, among others: Zheng Bijian (2005); Kang (2007); Naughton, (2007); Kurlantzick (2007.); Hao, Wei and Ditter (2009); Halper (2010);
Kissinger (2011).
3
become an important player in global financial markets, holding more than USD 3 trillion in foreign
exchange reserves and USD 300 billion in foreign direct investment (FDI) abroad. The country is the
world’s second largest net creditor5. As argued by Jacques (2012) China might still be a middle income
economy, but it is no long a weak country. Even if Chinese economic and technological capabilities cannot
match the most advanced countries’ ones, as Nolan (2012) points out, China’s rise can markedly affect other
low and middle income countries.
China’s re-emergence as a global power is part of a broader process, which is the consolidation of Asia
as the most dynamic growth pole of the globalized economy (Yang, 2006; Palma, 2007 and 2011; Canuto
and Giugale, 2010; Timmer et al. 2011). In 2010, Asia’s shares in world population, income and exports
were, respectively, 55%, 34% and 30%. To put in perspective, in 1980 Latin America accounted for 11% of
the world GDP (measured in purchasing power parity), while Asia’s share (excluding Japan) was 9%.Three
decades later, Latin America had 8.5% and Asia, 28%. During this period, Asian countries averaged a GDP
growth of 7% per year, while Latin American and African countries experienced lower rates, between 2% to
3% (IMF, 2012). Considering the manufacturing sector value added (United Nations, 2012), Asian
countries’6 contribution to the world total increased from 4.4% to 27.6%, and Latin America’s7 share
decreased from 6.7% to 5.5%. Advanced countries8 and the rest of the world also experienced a relative
reduction in their shares, respectively, from 61.1% to 47% and from 27.8% to 20.8%. Similar figures can be
found for merchandise trade9.
Considering production and technological capabilities, it should be stressed that China’s rapid
modernization markedly contrasts with the Latin American and the Brazilian semi-stagnation. Figure 1
shows that Brazil used to be a catch-up country until the late 1970s. Nevertheless, since the early 1980s
Asian economies in general, and China, in particular, have experienced impressive records in capital
accumulation (panel B) and in efficiency improvements measured both by labour productivity (panel A) and
total factor productivity (panel C).
Figure 1. Capital Accumulation and Productivity in Selected Economies, 1960-2011
5
See, among others, Deutsche Bank (2011); Unctad (2011), Morrison and Labonte (2011, p.2).
Asia 9 = China, India, Korea, Philippines, Indonesia, Hong Kong, Thailand, Singapore and Malaysia.
7 AL 7 = Mexico, Brazil, Argentina, Colombia, Chile, Peru and Venezuela.
8 G7 = United States, Japan, Germany, Italy, United Kingdom, France and Canada.
9 In 1980, Asia 9’s share of the world exports was 4.4%. In 2010, it was 27.2%. In the same timeframe, AL7’s share decreased from 6.7% to 5%.
6
4
(B) Gross capital formation, 1960-2010 (% of GDP)
(A) Labour Productivity, 1960-2011 (GDP per Person
Employed, in 1990 GK $)
45
80.000
40
68.155
70.000
35
60.000
43.275
20
7.992
1960
East Asia & Pacific (developing only)
High income: OECD
Latin America & Caribbean
Brazil
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
Japan
United States
Germany
10
1964
15
1.120
Mexico
8.939
1.998
India
4.451
South Korea
-
13.690
6.148
Brazil
10.000
25
19.725
14.914
14.196 12.696
China
30.000
20.000
30
29.874
1962
40.000
40.953
1960
45.158
50.000
2011
(C) Total Factor Productivity - Cumulative Growth, 1990- 2009
(1990=100)
180
163
160
158
141
140
120
116
109
98
93
100
89
80
60
40
20
0
Germany
United
States
China
India
Japan
South Korea
Brazil
Mexico
Source: author´s calculation based on (i) The Conference Board Total Economy Database™, January 2012. Available at:
http://www.conference-board.org/data/economydatabase/ (obtained on 25/04/ 2012); and (ii) World Bank (2012).
To put in perspective, China has invested, on average, more than 40% of its GDP since the early 2000s.
In the same period Latin American economies have invested 20% of their GDP (World Bank, 2012). In
2010, China’s gross fixed capital formation amounted USD 1,394 billion, while all Latin American
economies invested only USD 628 billion. The Brazilian cumulative investment from 2001 to 2010 was
USD 1,262 billion, which is less than Chinese investment in 2010 only10. China’s investment per worker
evolved from USD 178 in 1990 to USD 1,747 in 2010, while Brazilian figures were, respectively, USD
1,347 and USD 1,699.
As a consequence of its investments, massive pool of workers, and development strategy, China has
become the world’s factory. Chinese manufacturing sector produced USD 1,654 billion in 2010, more than
three times the production of USD 531 billion observed in all Latin American (United Nations, 2012). China
has surpassed Latin America in research and development expenditures as a share of GDP. Between 2001
and 2009, Chinese technology outlays averaged 1.2% of its GDP, while Latin American averaged 0.6% and
high income countries 2.4% (World Bank, 2012).
It is important to stress that most of the global value chains, trade, research and development, marketing,
and finance are under the control of transnational corporations (Nolan, 2012). These corporations come
mainly from advanced countries and since the early 1980s have intensified the reallocation of their physical
production. Some emerging countries, particularly in Asia, have hosted them and, as a consequence,
important shares of exports from emerging countries are, essentially, exports from advanced countries’
corporations located in emerging economies (Gill and Kharas, 2007). In this context, there is a huge
difference between “Made in” and “Designed, Marketed or Financed in”. This explains why policymakers in
countries such as China have been emphasizing developmental policies aimed to consolidate “national
champions” and to up-grade indigenous technological capabilities (Casey and Koleski, 2011; Nolan, 2011;
Wong, 2011).
10
In 2000 constant US$. Source: World Bank (2012).
5
China’s presence in global markets has become a major source of dynamism, whose impacts have deeply
affected through trade and financial channels both advanced and emerging economies. This reality also
implies that China’s rise has not been perceived as neutral in a geopolitical sense. The recent literature on
that topic explores sensitive issues such as whether China will eventually overtake the United States as the
major global power, whether its rise will be peaceful or not, whether there is a Chinese model alternative11
to the Western liberal model, and so forth12.
China has become a major partner for many countries in Latin America (Cepal, 2011; Eclac, 2012;
Rosales and Kuwayama, 2012; Bittencourt, 2012). Trade and FDI have boomed and China’s demand for raw
materials has represented an important source of dynamism for countries rich in natural resources,
particularly in South America13. Studies about the impacts of China’s rise on Latin America can be divided
into, at least, three different perspectives (Jenkins, 2010; Phillips, 2011). The optimistic view stresses that
China’s pattern of development and internationalisation has increased export revenues for countries rich in
natural resources. 14 The rise in terms of trade has helped to improve fiscal and external accounts; cheap
consumer goods and low-cost machinery and parts have increased consumers’ welfare and producers’
competitiveness. China has become a new source of capital to finance infrastructure projects and external
deficits. Moreover, local companies would be able to integrate into global production networks through
strategic partnerships with Chinese companies.
The pessimistic view15 usually admits the potential benefits listed above. Nevertheless, it emphasises
that China’s rise represents a return to the classic centre–periphery dichotomy16, in the sense that it tends to
reinforce regional specialisation in primary commodity production, while the manufacturing sector contracts
in the face of increased Chinese competition both at home and abroad. Another adverse effect could be the
FDI diversion, where multinational companies relocate their plants from Latin America to China in Asia.
A third perspective17 explores the differentiated impacts of China on the region, where Mexico, Central
America and the Caribbean emerge as potential losers, because they face competition from Chinese
manufactured goods in the United States’ market and have not been major exporters to China, while South
American countries would be the winners who have benefited from Chinese demand for raw materials and
food, and supply of cheaper consumer goods.
We consider that Brazil must be treated as a mixed case, because, while it is a major producer and
exporter of natural resources, it has also a large manufacturing sector. As a consequence, the country has
experienced both positive stimulus from Chinese demand for raw material and food and competitive
pressures from its exports, particularly to Latin American countries, which are the main destinies for
Brazilian exports of manufactured products.
3. New Normal and China’s Response to the Great Recession
China was deeply affected by the global financial crisis, particularly through trade channels (Wong,
2011; Nolan, 2011 and 2012; Fenby, 2011). In order to avoid a recession, the policy response was “quick,
Breslin (2011) provides an updated discussion on the so-called “China model” debate.
Ramo (2004) advanced the term “Beijing Consensus” to illustrate the Chinese pattern of development as an alternative to the Washington
Consensus. In a Chinese perspective, Kang (2007), Zheng Bijian (2005), Wu Jinglian (2005) and Hu Angang (2010) believe that China´s rise
represents both a positive element to the global order and a stimulus to the own process of Chinese modernization. Nye Jr (2011), Kissinger
(2011) and Ikenberry (2011) argue that the United States and China can cooperate and mutually be benefited in the consolidation of a liberal and
multilateral new world order in the 21st century. According to then it would be possible to envisage that rise in a global “peaceful and
harmonious” landscape. Mearsheimer (2006; 2010) is skeptical about the so-called “peaceful rise”. Halper (2010) and Subramanian (2011) argue
that China will overtake the Western powers, while Shirk (2007), Babones (2011), Clark (2011) and Nolan (2012) assume the opposite
reasoning. They consider that Chinese power has been overstated and its fragilities have been underestimated.
13 See: CAF (2006); Devlin, Estevadeordal and Rodriguez (2006); Lederman, Olarreaga and Perry (2008); Jenkins (2010); CEPAL (2011); Leão,
Pinto and Acioly (2011).
14 Yang (2006), Devlin, Estevadeordal and Rodríguez-Clare (2006); Blazquez-Lidoy, Rodrıguez and Santiso (2006); Castro (2008). Phillips
(2011) reviews influent books published between 2008 and 2010. For the Brazilian case see Leão, Pinto and Acioly (2011).
15 Moreira (2007), Paus (2007), Jenkins (2010), Leão, Pinto and Acioly (2011).
16 See Prebisch (1984); Furtado (2003).
17 Rosales and Kuwayama (2007 and 2012); Cepal (2011); Leão, Pinto and Acioly (2011).
11
12
6
determined, and effective” (IMF, 2010, p. 4). On the fiscal front the RMB 4 trillion (or USD 586 billion)
public stimulus included infrastructure spending, which resembled the previous reaction during the 19971998 Asian crisis. It also comprised an expansion of social spending (equivalent to 2 to 3 percent of GDP)
and incentives to support private consumption. Monetary policy stimulated a massive credit expansion.
These policies were successful if one considers that GDP growth stood around 9% between 2008 and 2011.
The Chinese post-crisis strategy reinforced the previous path of growth centred in investments and
exports. Despite the fact that the 11th and the 12th Five-Year Plans have emphasised income redistribution
and improvements in the social safe net in order to bust household consumption18 (Angang Hu, 2010; Nolan,
2012), investment as a share of GDP increased after 2008, while household consumption kept its decline
trend19. Nevertheless, the country has consolidated its position as the world’s second largest economy and
the world’s largest exporter. Of course, after 2008, economic and political landscape offers new sources of
instability and, potentially, new waves of speculation and low economic growth. Advanced economies’
sluggish recovery, the euro zone crisis, Chinese local governments’ indebtedness, speculation on commodity
markets and emerging countries assets, to name but a few, are well-known candidates for the next round of
turbulences (Wong, 2011; Nolan, 2011, 2012; Fenby, 2011; Chang, 2011; Rodrik, 2011; Cepal, 2011; Eclac,
2012; Rosales and Kuwayama, 2012).
For the purpose of this paper it is important to emphasize that three crucial features of Chinese postcrisis strategy are (Aoki and Wu Jinglian, 2013): (i) markets and products diversification; (ii) national
companies’ internationalisation; and (iii) a pro-active diplomacy20 to spread its influence among developing
countries and in the global governance structures. Here, we provide fresh evidence of the trade performance
and the foreign direct investment (FDI).
We can see the market diversification through the concentration rate of exports (CR)21,22. In 1995 the
CR(10) of Chinese exports was 54%, while in 2011 it was 47%. Western advanced countries still rank as
important markets for Chinese exports. Nevertheless, regional partners and emerging countries, such as
Brazil, have been representing an increasing share of Chinese trade 23. In order to access the product
dimension of Chinese exports diversification, considering their final destination, we calculate the
Herfindhal-Hirschman Index (HHI)24. An index below 1,000 suggests lower concentration or higher
diversification. Chinese exports can be considered diversified in all final destinies, particularly in Latin
America, Asia and Africa. Moreover, since 2003 exports have become even more diversified25.
“The 12th FYP is distinctive in its heightened focus on economic restructuring, the environment and energy efficiency, and scientific
development. Differences between key targets and how these key targets are categorized in the 11th and 12th FYP reflect changing government
priorities. These indicators reveal that the 12th FYP places greater emphasis upon economic development versus simply growth, scientific
education, and improving overall welfare.” (Casey and Koleski, 2011, p.2)
19 For the period 2001-2007, consumption as a share of GDP averaged 40.6%. In 2008 to 2010 these figures were, respectively, 35.2, 35.6 and
33.5. Investment as a share of GDP averaged 40.8% between 2001 and 2007, and reached 48.3% in 2009 and 2010. See: Asian Development
Bank - Asian Development Bank - Key Indicators for Asia and the Pacific 2011 (http://beta.adb.org/key-indicators/2011/country-tables, access –
24/01/2012).
20 See, among others, Kurlantzick (2007), Hao Yufan, Wei and Ditter (2009), Halper (2010), Aladi (2011) and Wen (2012).
21 We calculate the concentration rate using GTIS (2012). CR(1) is the share of the major trade partner in total exports; CR(2) is the share of the
two largest trade partners, and so on.
22 For this and the following trade performance indicators (Herfindhal-Hirschman Index, trade intensity, trade complementarity etc.) data were
disaggregated according to the CNAE 1.0 (Classificação Nacional das Atividades Econômicas – IBGE) which corresponds to the three-digit
level of the Standard International Trade Classification (SITC rev 3), except from the H-H Index that was calculated at the two digit level.
23 In 2002, high-income countries absorbed 85% of China’s exports, while developing countries responded for 15%; in 2010, these figures were,
respectively, 74% and 26% (World Bank, 2012).
18
We calculated the Exports Concentrations Index using the formula:
; where: (i) pi represents sector “i’s” share in total
exports of the country “j”, normalized by the number of observations, “n”. See: Hoekman, Mattoo and English (2002).
25 The 2008-2011 averages in each market were: 939.9 (USA); 905.0 (Euro zone); 712.3 (Africa); 713.2 (Asia, exc. China, Macau, Taiwan and
Hong Kong); 703.1 (Latin America). Source: authors’ estimations based on GTIS (2012).
24
7
We also estimate the trade intensity index of Chinese exports26. For the 2008-2011 period, the
average figures ranged from 1.02 (Africa) to 1.73 (United States). Euro zone index was 0.66, which means
that trade between China and the Euro Zone is less intense than it would be expected considering the
importance of the region as a destination of the world’s exports. We also noticed a slight reduction of trade
intensity between China and the United States after 2008; and that trade intensity between China and its
partners in Africa and Latin America increased rapidly in the last few years.
China’s trade pattern has also deeply changed. In 1995, primary products and manufactured products
that are labour, natural resource and scale intensive represented 81% of total exports, while high-technology,
high-value added and other products accounted for 19%. In 2011, these figures were, respectively, 60% and
40%27. In the imports side there was a major increase in both natural resource and science based products. It
has been argued that important bulks of these exports represent labour-intense activities of each industry
value chain, which, ultimately, is controlled by advanced countries’ transnational corporations (Nolan,
2012). Nevertheless, in a dynamic analysis, and considering the perspective of low and middle income
countries, that upgrade has intensified competitive pressures upon local producers. If, in the next years,
Chinese companies succeed in their effort to catch-up with advanced economies leading companies, that
pressure might be even greater.
The rapid internationalisation of Chinese companies, particularly the state-owned ones, has been a major
trend in the post-2008 period. Trying to estimate the amount of FDI originated in China can be a tricky
exercise (Salidjanova, 2011). Official figures reported by the Ministry of Commerce (Mofcom, 2011) and
mainly reproduced by the United Nations Commission on Trade and Development (Unctad, 2011) usually
diverge significantly from official data of host countries and, moreover, from the investments announced by
the Chinese companies themselves. One major methodological problem is that official data ignores
companies’ strategies to use Hong Kong and tax havens as transit points (hubs) for their investments. For
example, according to MOFCOM, 2/3 of Chinese FDI stock is hosted in Hong Kong. Non-official sources,
such as the Heritage Foundation (2012) or FDI Markets (2012) have tried to track what Chinese companies
have actually been doing. They report important differences for the same trend. Nevertheless, all sources
converge in a fundamental point: since 2008 Chinese outward investments have boomed, despite the great
recession. It is reasonable to assume that Chinese companies invested abroad something between USD 230
to 240 billion from 2005 to 2010.
The Unctad (2011) informs that FDI stock abroad was about USD 297.6 billion in 2010, which makes
China the eighteenth largest investor with 1.5% of world total stock. Nevertheless, in 2010, and considering
not stocks, but flows, China was the fifth largest source of foreign investments, amounting USD 68 billion.
In order to characterise the geographical distribution of the Chinese FDI Table 1 ranks regions according
to the relative intensity of the investment. Emerging regions, such as Latin America, Africa and Middle East,
which are abundant in natural resources, have been receiving more attention from Chinese companies than
the world’s average.
Table 1. China – FDI Regional Distribution Announced Investments, 2005-2011 (until June)
Latin America
Middle East
Africa
Asia and Oceania
Europe
North America
A. China
B. World
14.7%
11.6%
19.5%
38.1%
12.0%
4.2%
4.5%
4.6%
9.7%
51.9%
16.8%
12.4%
Relative Intensity
(A/B)
3.26
2.52
2.00
0.73
0.71
0.34
26
Authors’ estimations based GTIS (2012) data. We use the formula: Tij = (xij/Xit)/(xwj/Xwt), where: (i) xij and xwj are the values of country
i’s exports and of world exports to country j; and (ii) Xit and Xwt are country i’s total exports and total world exports, respectively. An index of
more (less) than unity suggests that their bilateral trade flow is larger (smaller) than expected, given the partner country’s share in world trade.
See Hoekman, Mattoo and English (2002).
27 Author’s estimation using Pavitt (1984) taxonomy and data from GTIS (2012).
8
Source: authors’ estimations based on FDI Markets (2012).
Evidence suggests that the great recession has been perceived as an opportunity to China’s companies.
FDI has been a major driver to access markets, new technologies and strategic natural resources (Nolan,
2011, 2012).
In the next section we explore how these new trends have affected Latin American countries.
4. China and Latin America with a special reference to Brazil
Since 2002, the Latin American and Caribbean region has been reducing its income gap relative to
industrialised countries. Inflation is no longer a dramatic problem in most of the countries. Improvements in
the terms of trade marked the post-2002 period, as a reflection of commodities’ price boom. In this context,
most countries experienced current account surpluses, which helped to reduce the external vulnerability.
External debt as a share of the GDP or exports revenues was reduced. Governments produced fiscal primary
surpluses and public debt/GDP ratio decreased (Cepal, 2011; Rosales and Kuwayama, 2012).
The new landscape was a result of the international buoyant markets of the 2003 to 2008 period,
combined with the implementation of national policies aimed to redistribute income and to overcome
decades of low levels of investment, both by public and private sectors. Notwithstanding, many Latin
American countries experienced a re-primarisation of its exports. Trade with Asia is particularly
characterized by a North-South pattern, where Latin American countries export natural resource-intensive
products and import manufactured products. Considering the Latin America’s export structure to its main
destinations it is remarkable that, except for intra-regional trade and the Mexico-United States trade, the
North-South pattern is dominant (Cepal, 2011; Rosales and Kuwayama, 2012).
It is worth mentioning that most of South American countries already had a highly specialized
production and trade structures. Countries such as Argentina, Chile, Colombia and Venezuela, among
others, have had 60% to 95% of their exports concentrated in primary products. Brazil and Mexico, who
have the largest manufacturing sectors in the region, experienced a structural change in their trade profile
after 1970, characterized by an increase in the manufactured products’ share in total exports. Nevertheless,
since 2002 primary exports share has increased, particularly in Brazil.
Echoing Prebisch (1984) and the Latin American structuralism (Unctad, 2003), Figure 2 shows business
cycles synchronization between Brazil and its main trade partners between 1975 and 2010, measured trough
the 15 year-window rolling correlations of real output fluctuations using Hodrick-Prescott filter (Baster and
King, 1999). It suggests that the country’s business cycles have been much more correlated with Asian
economies, particularly China, and with its Latin American neighbours, than with the United States, Brazil’s
former main trade partner, or the other advanced countries. Following the empirical strategy pioneered by
Frankel and Rose (1998) and expanded by Calderón (2008), the Appendix provides an exercise which
suggests that bilateral trade intensity helps to explain that synchronisation.
Calderón (2008) found similar results considering Latin American countries in their relation to China
and India. Cesa-Bianchi et al. (2011) also showed that because of trade channels the long-term impact of a
China GDP shock on the typical Latin American economy has tripled since the mid-1990s, while the longterm impact of a US GDP shock has halved. In a recent report, the Inter-American Development Bank
(IADB, 2012) assumes that the evolution of Chinese economy has increasingly become important to the
region.
Figure 2. Business Cycles Synchronization between Brazil and Its Main Trade Partners, 1975-2010*
9
(B) Asia
(A) Main Partners
1
1
0,8
0,5
0,6
0,4
0,2
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0
-0,2
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0
-0,5
-0,4
-0,6
-1
Argentina
USA
(C) Latin America
0,5
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0
-1
Bolivia
Chile
Colombia
Ecuador
Mexico
Uruguay
Venezuela
Indonesia
Japan
Korea
Malaysia
Thailand
(D) Advanced Economies
1
-0,5
India
1
0,8
0,6
0,4
0,2
0
-0,2
-0,4
-0,6
-0,8
-1
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
China
Canada
France
GB
Germany
Italy
Source: author’s elaboration from World Bank (2012).
Figure 3 reveals that the manufacturing sector had an increasing external deficit between 2008 and
2011, while primary products performed a massive surplus. Using OECD sector classification it is possible
to envisage that, except from low-technology manufactures, all other sectors experienced trade deficits.
Among low-technology sectors, labour-intensive sectors such as textiles, leather, footwear, manufacturing
and recycling products used to be surplus sectors until recently. In 2010 and 2011 they all had trade deficits.
On the other hand, food products, beverages, tobacco, wood, pulp, paper, paper products, printing and
publishing, which, essentially, process raw materials, can produce trade surplus.
Therefore, Figure 3 displays the contradictions of the Chinese-effect on the Brazilian economy, where
Chinese demand stimulates overall trade surplus through the natural resources trade surplus, while Chinese
competition both at home and abroad, in a context of buoyant internal markets and currency overvaluation in
Brazil, has been pointed out as a source of the manufacturing sector trade deficit. It also expresses the debate
about the risks of further deindustrialisation28 (Bresser-Pereira, 2010; IEDI, 2011).
Figure 3. Brazil – Trade Balance in Selected Sectors, 1996-2011 (USD billions)
28
In 1980 Brazil had the largest manufacturing sector among developing countries, ranked in the eighth position with a 2.6% percent of the
world total production. To put in perspective, China ranked twelfth, with 1.7%, and South Korea ranked twentieth-eighth with 0.6%. In 2010,
Brazil ranked eleventh, behind China, South Korea, India and Mexico (Unctad, 2012; Palma, 2011)
10
(A) Total
(B) OECD technology-intensity classification
80.000
60.000
60.000
40.000
40.000
20.000
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
-20.000
1998
1997
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-20.000
1996
20.000
-40.000
-40.000
-60.000
Total
-60.000
Manufacturing Sector (*)
High technology (I)
Medium-high-technology (II)
Agriculture, Mining and other raw material
Medium-low technology (III)
Low technology(IV)
Source: MDIC (2012)
Since its apex in the early 1980´’s, right before the debt external crisis, the manufacturing sector has
reduced its relative share on Brazilian GDP29 (from 33% in 1980 to 16% in 2010) and on total employment.
As stressed by Palma, Brazil apparently suffered from a premature deindustrialisation (Palma, 2007). The
exports structure also changed. Between 1997 and 2011, primary products and natural resource intensive
manufactures increased their share in total exports from 52% to 68%, while labour and scale-intensive
manufactures experienced a share reduction from 33% to 19%30. These sectors have been subject to intense
competitive pressures from China and other Asian economies, both at home and abroad, particularly in Latin
American markets. Moreover, according to the exports concentration index31, Brazilian exports have
concentrated, particularly in markets located in Africa and Asia.
Emerging and developing countries, such as China, Argentina, Chile, Russia, Venezuela, South Korea
and Mexico, among others, have been upgrading their shares as final destinies for Brazilian exports.
However, the bulk of manufactured products goes to South American neighbours. Not surprisingly,
Brazilian trade is more intense with Latin American countries (Leão, Pinto and Acioly, 2011; Lélis, Cunha
and Lima, 2012; Bittencourt, 2012). Except from the African countries, China’s exports have been much
more complementary to all highlighted markets than the Brazilian exports. It is worth mentioning that
Brazilian and Chinese trade complementary indexes markedly diverged in the most important markets for
the Brazilian exports of manufactured products, namely the United States and Latin America (Figure 4).
Figure 4. Trade Complementarity Index (TCI)*, Brazil and China – 1999-2011
29
At current US dollars prices. Source: United Nations Statistics Division - National Accounts.
Author’s estimation using Pavitt (1984) taxonomy and data from GTIS (2012).
31 We followed the same procedure reported to the Chinese index. The 2008-2011 averages in each market were: 879.0 (USA); 1,099.7 (Euro
zone); 2,705.2 (Africa); 1,831.1 (Asia); 1,016.3 (Latin America, excl. Brazil), 2,594.4 (China) Source: authors´ estimations based on the Global
Trade Information Services (GTIS) data.
30
11
(C) Euroland
(B) USA
(A) Great Britan
58
65
60
58
56
60
56
54
54
55
52
52
50
50
50
48
46
48
45
44
China
Brasil
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
Brasil
China
(D) Latin America
2001
1999
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Brasil
46
40
2000
42
China
(F) Africa
(E) Asia
58
54
56
65,0
52
Brasil
China
China*
40,0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Brasil
2010
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
40
45,0
2009
40
2008
42
50,0
2007
42
2006
44
44
2005
46
55,0
2004
46
2003
48
48
2002
50
60,0
2001
50
1999
52
2000
54
Brasil
China
Source: authors’ estimations based on GTIS (2012).
n m
k , j  xk ,i

TCI

100

(*)

i, j
2
k 1 


 Where: mk , j 

sector “k’s” share in total imports of the country “j”; and
x k ,i 
share in total
exports of sector “k” in total exports of the country “i”. The index is 100 when the export and import shares exactly match and zero there is no
trade.
Considering the relevance of intra-regional trade to Brazil it must be asked if China has been displacing
Brazil in Latin American and other markets for manufactured products. Recent research suggests that this
might be the case (Bittencourt, 2012; Lélis, Cunha and Lima, 2012; Jenkins and Barbosa, 2012). According
to this literature both Brazilian and Chinese exports of manufactured products to Latin America have
boomed, particularly in the post-2003 period. The region economic recovery after 2002 has opened space for
that expansion. Nevertheless, since 2007 Chinese manufactured-products exports trend has been growing
faster than the Brazilian manufactured-products exports trend.
The Chinese exports to Latin America are less concentrated than Brazilian exports to the same region 32,
while Chinese exports matched Latin American imports more than Brazilian exports (Figure 4). In 1999,
trade complementary index33 for Chinese exports to Latin America (excluding Brazil) was 50.9, while in
2011 it was 55.9. In the same period, the trade complementary index for Brazilian exports was, respectively,
48.9 and 42.6. Lélis, Cunha and Lima (2012) report evidence which strongly suggests that the Chinese
exports have been dislocating the Brazilian exports in the region, because of their volume-effect and
diversification. Similar dislocation effect can be observed in other markets (Jenkins and Barbosa, 2012).
32
Exports Concentration Index (HHI) of Brazilian exports fluctuated around 1,000, between 1996 and 2008, and reached 1007 in 2008, while
the same Index for Chinese exports had evolved from 895 in 1996 to 685 in 2008 (Lélis, Cunha and Lima, 2012).
33 TCij = 100 – sum (|mik – xij| / 2), where: (i) xij is the share of good “i” in the global exports of country “j”; and (ii) “mik” is the share of good
“i” in all imports of country k. When the index is zero, no goods are exported by one country or imported by the other. When the index is 100
the export and import shares exactly match (Hoekman, Mattoo and English, 2002).
12
To sum up, the robust Chinese growth in recent years has created some externalities for Latin American
countries. The Chinese demand for agricultural and mineral commodities has contributed to the trade
surpluses observed in countries rich in natural resources. Therefore, it has supported the virtuous cycle of
growth with less external and fiscal vulnerabilities (Cepal, 2011; Dadush and Shimelse, 2012; Bittencourt,
2012; Ferchen, 2012; Rosales and Kuwayama, 2012; Timmer et al., 2012). Countries already characterised
by a high degree of specialisation in commodities production and exports, such as Argentina, Chile,
Venezuela, to name but a few, have reinforced their pattern of international integration. However, countries
with a larger manufacturing sector, such as Brazil, have concentrated their exports on commodities and
experience large trade deficits in the manufacturing sector. Therefore, a renewed stimulus to the previous
process of deindustrialisation might be emerging.
Moreover, Latin American economies became strongly dependent on China, so any major slowdown in
the Chinese economy might cause a crisis in these countries (Iadb, 2012). China has also become a source of
capital to the region, particularly FDI. Therefore, we can suggest that there is no “one size fits all” pattern of
relationship between China and Latin American countries. The ultimate results of this interaction will
depend, mostly, on how Latin American countries will respond to the Chinese presence in the region. Small
and open economies that are highly specialized as producers and exports of raw materials would probably
try to deepen its trade ties with Asian countries, exploring their comparative advantages and
complementarities. Not surprisingly Chinese leaders have emphasised this pattern of relationship (Dadush
and Shimelse, 2012; Ferchen, 2012; Jiabao, 2012), offering financial and technical cooperation and
demanding more market access.
Considering the Brazilian case, and allowing for the fact that further research will be necessary to clarify
the connections between trade and deindustrialisation, we cannot cast aside the possibility that a closer
relationship with China would result in a regressive pattern of specialisation34. Previous studies showed
evidence that China’s exports have been dislocating other countries’ exports and, therefore, stimulated
deindustrialisation among developing and advanced countries35.
5. Summary and Conclusions
In this paper we have analysed how China’s rise as a global power has affected Latin American
economies, paying special attention to the post-2008 period. Most previous analyses focused on pre-crisis
tendencies. Considering that the Sino-Latin American relationship has evolved rapidly we have tried to
contribute providing fresh evidence and exploring what could potentially be considered as new trends. We
have showed that despite intentions of a growth model re-orientation, Chinese policymakers responded to
the 2008 financial crisis with massive fiscal and monetary stimulus that reinforced, at least in the short and
medium terms, the previous investment-intensive and export-led growth pattern. As a consequence, Chinese
pressures to access dynamic domestic markets in emerging countries were amplified. In this context, Latin
American countries represented not only a source of natural resources but also an increasingly important
market for manufactured products.
Our evidence allows us to conclude that, particularly to the Brazilian case: (i) China’s influence might
amplify a regressive pattern of production and trade specialisation; and (ii) there is a strong connection
between business cycles and trade intensity which seems to be associated with that specialisation pattern.
Thus, it must be expected that policymakers will react to avoid what would probably be perceived as a major
threat36. Nevertheless, further research will be necessary to clarify: (i) the role played by Chinese (or other
emerging economies) exports of manufactured products in dislocating the Brazilian and the other Latin
34
See, among others, Gallagher and Porzecanski (2010), Barbosa (2011), Amaral (2011), Dadush and Shimelse (2012) and Ferchen (2012).
See, among others, Greenway, Mahabir, Milner (2008); Giovannetti and Sanfilippo (2009); Wood and Mayer (2010), Gallagher and
Porzecanski (2010), Giovannetti, Sanfilippo and Velucchi (2011); Lélis, Cunha and Lima (2012); Jenkins and Barbosa (2012).
36 According to Cepal (2011): “Since the beginning of the recent global economic crisis, many countries, including some in Latin America and
the Caribbean, have initiated anti-dumping investigations into imports from China. ... Most of the new investigations (81% of the total) were
initiated by Argentina and Brazil. The main items involved are iron and steel products, textiles, footwear, domestic appliances and tyres.” (p.21).
35
13
American countries exports; and, as a consequence (ii) the connections between trade and
deindustrialisation. Notwithstanding, our results have explored new trends and have reinforced the
conclusions of correlated studies, such as Moreira (2007), Paus (2007), Greenway, Mahabir and Milner
(2008), Jenkins (2010), Giovannetti and Sanfilippo (2009), Wood and Mayer (2010), Leão, Pinto and Acioly
(2011), Cesa-Bianchi et al. (2011), Lélis, Cunha and Lima (2012), Jenkins and Barbosa (2012), Bittencourt
(2012), among others.
We have assumed that China’s rise might be a major challenge to Brazil, which is major producer and
exporter of natural resources and has a large manufacturing sector as well. As a consequence, the country
has experienced both positive stimulus from Chinese demand for raw materials and food and the competitive
pressures from its exports. The balance between opportunity and threat will depend on the evolution of the
Sino-Brazilian relationship. It is an open question whether China will treat Brazil and other Latin American
countries as partners in a South-South pattern, or as markets in a North-South style.
Brazil, as many other Latin American countries, has improved its economic and social performance.
Growth acceleration, lower inflation, lowers levels of public and external debt, income redistribution, among
other economic indicators, represent a new beneficial combination. In the past, particularly during the period
of industrialisation, the country experienced high economic growth, but in a context of similarly high levels
of macroeconomic imbalances and social inequalities. However, despite recent progress, the country has not
yet recovered from a quarter of a century of semi-stagnation (Palma, 2007 and 2011).
In order to overcome old and new structural problems and to avoid the negative trends potentially
associated with the well-known “natural resource curse” the country and its neighbours must recover their
capacity to implement robust development strategies. In the Brazilian case, this means that government
must: (i) re-orient its macroeconomic policy to preserve growth and employment; (ii) manage exchange rate
and capital flows in order to reduce the impacts of external turbulences; (iii) improve income distribution,
invest in human capital and reduce social gaps; (iv) implement robust and sustainable development policies
aimed to reduce the infrastructure bottlenecks, to increase competitive capabilities of local enterprises, to
attract FDI and, moreover, to preserve the environment and the country’s biodiversity. This is an ambitious,
complex and still open agenda.
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Appendix: Business Cycles Synchronization and Trade
In order to assess if the Brazilian business cycle synchronization with its main trade partners is
associated with the trade intensity, we use the empirical strategy pioneered by Frankel and Rose (1998) and
expanded by Calderón (2008). This methodology represents an innovative way of measuring the integration
and structural specialisation relationship.37 Kenen (1969) argues that the symmetry of business cycles across
countries is related to the similarity of economic structure. Eichengreen (1992) and Krugman (1993)
complete this idea and conclude that trade would produce productive specialisation derived from
comparative advantages in intra-regional trade. With this perspective, Frankel and Rose (1998) suggest that
this relation is not, in principle, deterministic, especially in the context of a common monetary policy:
“closer international trade could result in either tighter or looser correlations of national business cycles”
(p.1013). Assuming by hypothesis that higher intensity trade leads to more specialization and lower business
cycles correlation, they argue that this is an open question that can only be solved empirically.
We used the GDP, at constant prices in local currency, from World Bank - World Development
Indicators (WDI), to measure the business cycle through two different methodologies: Hodrick-Prescott
(HP) and Baxter-King (BK). We use 50 countries in our exercise: Algeria, Argentina, Australia, Belgium,
Bolivia, Brazil, Canada, Chile, China, Colombia, Costa Rica, Ecuador, Egypt, Finland, France, Germany,
India, Indonesia, Iran, Italy, Japan, Korea, Kuwait, Malaysia, Mexico, Morocco, Netherlands, Nigeria,
Norway, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Russia, Saudi Arabia, Singapore, South
Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom,
United States, Uruguay and Venezuela.
The Bilateral Trade Intensity between countries i and j, in time t, are calculated using two proxies, also
proposed by Frankel and Rose:
1. (ITT) Trade Intensity weighted to the total trade: ITTijt = (Xijt + Mijt) / (Xit + Xjt + Mit + Mjt)
Where Xijt represents the total export of country i to country j, in the time t; Xit and Mit represents the
total export and import of the country i, respectively.
2. (ITY) Trade Intensity weighted to the GDP, is represented by Y: ITYijt = (Xijt + Mijt) / (Yit + Yjt)
The data of trade are from IMF, Direction of Trade Statistics, and the GDP data is from WDI-World
Bank.
Thereafter we estimate the relationship between business cycle and trade intensity using the model of
Frankel and Rose (1998), i.e.,:
Corr (v, s)ijt = α + β ITijt + εijt
(1)
Corr (v, s)ijt denotes the correlation of business cycles between country i and j, at time t. IT refers to
the intensity of trade. Finally, α and β are the regression coefficients to be estimated.
Therefore, we estimate the equation: Corr (v, s)ijt = α + β ITijt + εijt, where: Corr (v, s)ijt = GDP
correlation between countries i and j; IT = trade intensity. The Appendix details the methodology and data
sources. Table A1 reports the results: β was statically significant in our four estimations. According to the
underlying literature, a positive β suggests that higher trade intensity is positively correlated with business
cycles synchronization, and the intra-industrial shocks dominate. If β is negative, the economies operate
37
Mundell (1961), McKinnon (1963) and Kenen (1969) are the seminal contributions to this debate, which became even more important in the
1990s because of the analysis of the costs and benefits of European Monetary Union (EMU). Eichengreen (1992), Krugman (1993), Frankel and
Rose (1998), among others, contributed throughout the development of new theoretical insights and empirical methodologies to estimate and to
interpret the relationship between integration, industrial specialization, business cycles synchronization and integration costs.
20
more independently and the Ricardian effect of trade would be expected, with countries increasing the
production of the export goods.
Table A1. Effects of Trade Intensity on Business Cycles Synchronization – Brazil and China, 1975-2010
Filter
GDP
GDP
Baster King
Hodrick Prescott
BRAZIL
CHINA
ITT
ITY
ITT
ITY
11.178*
21.466*
-7.083*
-6.658*
(-0.03)
(-0.06)
(-0.01)
(-0.01)
25.807*
46.466*
-8.434*
-7.762*
(-0.04)
(-0.08)
-0.02
(-0.02)
* p<0.05, ** p<0.01, *** p<0.001
Standard Deviation in parenthesis
ITT - trade intensity weighted by total trade;
ITY - trade intensity weighted by GDP
Coefficients were multiplied by 100.
To estimate the equation we used trade intensity (IT) as Instrumental Variable (IV) to solve the homogeneity between trade and GDP.
The IT was estimated through a traditional gravitational model, i.e., using Language, Frontier and Distance as instruments.
After that we estimate the equation using a Panel Data model. The Hausman test shows that Two-Stages Least Squares (2SLS) is efficient
and the Sargan Test support the null hypothesis that the all the instruments (IV M odel) were valid.
It is also worth mentioning that all estimations returned a negative β for the Chinese case. Accordingly,
trade intensity does not contribute to business cycles synchronizations, but does contribute to a structural
specialization across countries. At the same time, the Brazilian economy seems to be more sensitive to intraindustry shocks, and therefore business cycles may become more similar across countries through trade. The
opposite is true in the Chinese case, if one considers the trade intensity effect within China. Therefore,
according the international trade theory and our estimation, we expect that China and Brazil’s international
trade tends to lead an industrial specialisation in a Ricardian sense.
21