China thirst for commodities: What does it mean for Latin American and Asian commodity exporters?

China thirst for commodities: What does it mean for Latin American and Asian commodity exporters? Alicia Garcia Herrero, Chief Economist for Emerging Markets BBVA Based on work by Alicia García-Herrero and Mario Nigrinis (BBVA) in collaboration with Matt Ferchen (Tsinghua U.) and KC Fung (U. of California) Seminar at ADBI, Tokyo Oct 11, 212

Main messages Exports concentration as a source of concern There seems to be a growing consensus that excessive concentration of exports may be detrimental for economic development, in particular when concentration is in commodities What has happened in LATAM? Historically Latin American exports have concentrated on commodities although a process of diversification did take place until 28 when it reverted rapidly What has happened in Asia-Pacific The rise of China has also change the export structure but to a lesser extent. The appearance of the world value chain has diversified the export destination in the region and fostered intraregional trade Dependence on Chinese demand South American commodity exporters are even more dependent on China than Asian commodity exporters because of South America s heavier export concentration by destination and sector Page 2

Outline 1 Introduction 2 Measuring commodity export concentration in Latin America and Asia Pacific 3 Empirical results 4 How important is China for commodity export concentration? 5 Conclusions Page 3

Motivation Page 4

Perceived increase of export concentration vs the potential benefits of product diversification In the last years concerns have risen about the commodity windfall. In particular policy maker have had different approaches: Australia vs Latin America Some concerns are focused on the danger of excessive specialization of commodity exports by developing countries, including Latin America but also some others in Asia-Pacific region One major worry is the potential adverse impact of commodity export concentration on the economic growth of developing countries What about concentration by destination? The rise of China as a powerhouse is making some regions of the world more vulnerable to its business cycle Page 5

Measuring export concentration Page 6

Measuring concentration Definitions, sample and data source Groups of countries Time span and data source LATAM 7: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela South America: LATAM7 excluding Mexico Southeast Asia: Malaysia, Thailand, Indonesia and The Philippines Asia Pacific: South East Asia and Australia Sample: 74 economies; 45 emerging and 29 industrialized COMTRADE, we use trade data according to classification SITC rev 1 with a two digit disaggregation 1962-211, exports and imports reported by country Missing values: Peru didn t report data for 1981 and Venezuela in 27 Commodities: We group as commodities groups xxx How is it measured? Exports concentration: Top 5 goods cumulative share, Gini index, HH index Commodity exports concentration: Commodity exports share of total exports Excessive commodity exports: Difference between the commodity exports concentration for a country or region relative to the world average Page 7

Measuring concentration Latam export diversification stalled in the last decade LATAM Exports: Top 5 goods cumulative share Source: COMTRADE and BBVA Research 9 9 9 9 Latin America South America 8 8 8 8 7 7 7 7 5 5 5 5 3 Argentina Brazil Chile Colombia Mexico Peru Venezuela 3 3 3 2 2 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211 1962 1965 197 1975 198 1985 199 1995 2 21 22 23 24 25 26 27 28 29 21 211 In the case of South America there has been a reversal which began 1 years ago, coinciding with the emergence of China as a world powerhouse Page 8

Measuring concentration Asian export diversification process heterogeneous Asia Pacific Exports: Top 5 goods cumulative share Source: COMTRADE and BBVA Research 1 1 9 9 9 9 Southeast Asia Asia Pacific 8 8 8 8 7 7 7 7 6 6 5 5 5 5 4 4 3 Australia Indonesia Malaysia 3 Philippines Thailand 3 3 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211 1962 197 198 199 2 22 24 26 28 21 In the case of South East Asia and Pacific the rise of China and becoming part of the World value chain speeded their diversification process Page 9

Measuring concentration Mexico: an outlier in Latin America Raw Materials Exports: Share of total exports (%) Source: COMTRADE and BBVA Research 1 1 9 9 9 9 8 8 8 8 7 7 7 7 6 6 5 5 4 4 5 5 3 3 Latin America South America 1 Argentina Brazil Chile Colombia 1 3 3 1962 1969 1976 1983 199 1997 24 211 Mexico Peru Venezuela 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 Commodities have always taken an important share of LATAM exports. After NAFTA, Mexican economy structure changed Page 1

Measuring concentration Asian commodity exporters also suffering from more concentration recently Raw Materials Exports: Share of total exports (%) Source: COMTRADE and BBVA Research 1 1 1 1 9 9 9 Australia Indonesia 9 8 7 8 7 8 7 Malaysia Thailand Philippines 8 7 6 6 6 6 5 5 5 5 4 4 4 4 3 3 3 3 1 Asia Pacific Southeast Asia 1 1 1 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 China s thirst for raw materials has also increased their share in total exports but to a lesser extent than in South America Page 11

Measuring concentration Latam generally more concentrated than world average Excessive raw materials exports: LATAM s share vs World average Source: COMTRADE and BBVA Research 8 7 6 5 4 3 1-1 - Argentina Brazil Chile Colombia Mexico Peru Venezuela 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 8 7 6 5 4 3 1-1 - NAFTA helped changing the structure of Mexican economy It was only since 28 that the share of South American economies commodity exports rose more than the world average. This may imply the following: The rise of China and its impact on the commodity markets have a similar effect all over the world until 27 The Chinese hunger for commodities may have had an impact on South American exports since 28. Some caveats should be taken into account like the grim performance of Venezuela s economy and its negative effect on Colombian manufactured goods exports Compared with the rest of the World, South American economies have always been intensive in commodity exports Page 12

Measuring concentration The same is true for some Asian commodity exporters but not all Excessive raw materials exports: Asia Pacific share vs World average Source: COMTRADE and BBVA Research 8 7 6 5 4 3 1 Australia Indonesia Malaysia Philippines Thailand 8 7 6 5 4 3 1 The creation of the world value chain changed the export structure of these economies The recent rise of China and its hunger for raw materials had a smaller effect in the region with the exceptions of Australia and Indonesia The world value chain is more complex than only China including other economies like Japan, Korea and Taiwan which help diversifying the export destinations -1-1 - - 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 Asia Pacific economies are less intensive in raw material exports. More over Malaysia, Thailand and The Philippines are more reliant of high value added goods Page 13

Latin America US is still, by far, the most important partner for Latin American region US, EU and China: Total imports from LATAM 7 in USD Billions Source: COMTRADE and BBVA Research 35 China USA Europe 7 Raw Materials Non Raw Materials 3 5 25 2 15 3 2 5 2 21 22 23 24 25 26 27 28 29 21 211 2 21 22 23 24 25 26 27 28 29 21 211 The rise of China is dramatic and in 21 almost caught up with EU (EZ+UK) as the region s second largest partner. Commodities are about half of the total exports Page 14

South America But considering only South America the picture is different US, EU and China: Total imports from South America in USD Billions Source: COMTRADE and BBVA Research 1 12 China USA Europe 35 3 Raw Materials Non Raw Materials 25 8 2 15 2 5 2 21 22 23 24 25 26 27 28 29 21 211 2 21 22 23 24 25 26 27 28 29 21 211 Although the US is still the top export destination, the difference with EU and China is not as large. Commodities dominate export flows. China s demand was a buffer in 29 Page 15

Asia-Pacific China by far is more important than US and EU US, EU and China: Total imports from Asia Pacific in USD Billions Source: COMTRADE and BBVA Research 2 2 18 1 1 China USA EU 18 1 1 35 3 Raw Materials Non Raw Materials 35 3 12 12 25 25 2 2 8 8 15 15 2 2 5 5 2 21 22 23 24 25 26 27 28 29 21 2 21 22 23 24 25 26 27 28 29 21 Other partners are also more important than US and EU; for instance Japan, Korea and Taiwan. Trade is mainly of commodities different from raw materials Page 16

Southeast Asia China also the most important partner in Asia US, EU and China: Total imports from Southeast Asia in USD Billions Source: COMTRADE and BBVA Research 1 1 3 3 12 12 25 Raw Materials Non Raw Materials 25 China USA EU 2 2 8 8 15 15 2 2 5 5 2 21 22 23 24 25 26 27 28 29 21 2 21 22 23 24 25 26 27 28 29 21 When excluding Australia the importance of China and trade of raw materials diminishes Page 17

In Latam intraregional trade growing and relatively focused on manufactured goods Intraregional trade and Sino imports: in USD Billions Source: COMTRADE and BBVA Research LATAM 7 South America 1 1 1 1 12 Raw Materials Non Raw Materials China 12 12 Raw Materials Non Raw Materials China 12 8 8 8 8 2 2 2 2 2 21 22 23 24 25 26 27 28 29 21 211 2 21 22 23 24 25 26 27 28 29 21 211 Note: Intraregional trade is among Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela for the LATAM7 aggregate, and excluding Mexico for the South America aggregate Page 18

In Asia, intraregional trade growing fast also and relatively focused on manufactured goods Intraregional trade and Sino imports: in USD Billions Source: COMTRADE and BBVA Research Asia Pacific Southeast Asia 12 12 12 12 Raw Materials Non Raw Materials China Raw Materials Non Raw Materials China 8 8 8 8 2 2 2 2 2 21 22 23 24 25 26 27 28 29 21 2 21 22 23 24 25 26 27 28 29 21 Note: Intraregional trade is among Australia, Indonesia, Malaysia, The Philippines and Thailand for the Asia Pacific aggregate, and excluding Australia for the Southeast Asia aggregate Page 19

Empirical results Based on Fung, Garcia Herrero and Nigrinis (212) Page 2

Empirical results Definitions Purpose Is export concentration of commodities related to the growing importance of China, after controlling for other relevant determinants? Dependent variable ComExport TotalExport WorldComExport WorldTotalExport it Independent variables Label Com Price Index / CPI VA ln (GDPpct/wGDPpct) Infrastructure dummy Variable CompriceIndex CPI t ValueAddedinCom WorldValueAddedinCom ValueAddedinGDP WorldValueAddedinGDP GDPpct ln( ) WordGDPpct Dummy of it Quality of Infrastructure Index 21 t it g GrowthRateOfCom modityexporttochina it CN CNCom Im ports WorldComIm ports CNTotal Im ports WorldTotalIm ports t Page 21

Empirical results China behind higher concentration of commodity exports Label 198-21 199-21 2-21 Com Price Index/CPI.92***.269***.99***.299***.124***.363*** (.84842) (.2433) (.81242) (.195782) (.67679) (.16277) va.857***.82***.988***.992*** 1.367*** 1.357*** (.469829) (.425693) (.479426) (.448415) (.29813) (.31374) ln(gdppct/wgdppct) -.4 -.5.5.3.43***.42*** (.46766) (.44361) (.51616) (.545) (.5842) (.5641) infrastructure dummy -.76*** -.78*** -.63*** -.51** -.79*** -.61** (.215151) (.21573) (.22228) (.214127) (.247188) (.2994) g 8.69 e-7** 1.9 e-6** 1.18 e-6 (4.45 e-7) (4.41 e-7) (1.1 e-6) CN 3.712*** 4.69*** 4.96*** (.261742) (.25846) (.293698) _cons.21 -.261***.3 -.337*** -.22 -.435*** (.2392) (.368113) (.22455) (.348343) (.255795) (.337675) GLS We control for the standard determinants of export concentration, such as terms of trade, the endowment (va) relative income per capita and infrastructure Page 22

Case of study: dependence on China Based on Ferchen, Garcia Herrero and Nigrinis (211 and 212) Page 23

China top trading partner in both regions but not only for exports, also for imports! China s ranking as trade partner in Latin America Source: BBVA Research and COMTRADE China s ranking as trade partner in Asia Pacific Source: BBVA Research and COMTRADE Country Exports to China Imports from China 2 21 2 21 Country Exports to China Imports from China 2 21 2 21 Argentina 6 2 4 2 Brazil 12 1 11 2 Chile 4 1 4 1 Colombia 36 2 9 2 Mexico 19 3 6 2 Peru 2 1 9 2 Australia 6 1 3 1 Indonesia 5 2 5 1 Malaysia 1 2 6 1 Philippines 12 4 12 4 Thailand 5 1 4 2 Venezuela 35 7 18 2 Page 24

The importance of commodities in exports is not homogeneous in Latam Total exports: % of GDP Source: COMTRADE, Haver and BBVA Research Commodity exports: % of total exports Source: COMTRADE, Haver and BBVA Research 45% 45% 45% 45% 4 Argentina Brazil Chile Peru 4 4 ARG-soy CHI-copper BRA-soy & iron ores PER-copper ores 4 35% 35% 35% 35% 3 3 3 3 25% 25% 25% 25% 15% 15% 15% 15% 1 1 1 1 5% 5% 5% 5% 199 1993 1996 1999 22 25 28 211 199 1993 1996 1999 22 25 28 211 South American economies have become more open in recent years. Raw materials are key in their export structure Page 25

In Asia, a couple of case of high concentration in certain commodities can also be identified Total exports: % of GDP Source: COMTRADE, Haver and BBVA Research Commodity exports: % of total exports Source: COMTRADE, Haver and BBVA Research 1 1 6 6 Australia Indonesia Malaysia AUS-Coal & Iron ores 1 1 5 IND-Coal & Gas & Oil & Palm oil MLS-Oil & Palm oil 5 8 8 4 4 6 6 3 3 4 4 1 1 199 1993 1996 1999 22 25 28 211 199 1993 1996 1999 22 25 28 211 The AsiaPac economies selected have heterogeneous export structures too. Australian and Indonesian exports are heavy reliant on raw materials Page 26

However, there are cases of high concentration in electronics (similarly to Mexico) Total exports: % of GDP Source: COMTRADE, Haver and BBVA Research Commodity exports: % of total exports Source: COMTRADE, Haver and BBVA Research 1 1 1 1 1 Malaysia The Philippines Thailand 1 9 8 MLS-Machinery & components PHP-Machinery & components THA-Machinery & components 9 8 8 8 7 7 6 6 6 6 5 5 4 4 4 4 3 3 1 1 199 1993 1996 1999 22 25 28 211 199 1993 1996 1999 22 25 28 211 Malaysia and Thailand are the most open economies in the sample. Along with The Philippines their exports are heavy relying on machinery and its components Page 27

China is a key destination for South American exports Exports to China: % of total exports Source: COMTRADE, Haver and BBVA Research Commodity exports to China: % of total exports to China Source: COMTRADE, Haver and BBVA Research 3 3 9 9 ARG-soy BRA-soy & iron ores 25% Argentina Brazil Chile Peru 25% 8 CHI-copper PER-copper ores 8 7 7 6 6 5 5 15% 15% 4 4 1 1 3 3 5% 5% 1 1 199 1993 1996 1999 22 25 28 211 199 1993 1996 1999 22 25 28 211 China is a bigger buyer in South America. It is worrisome the exports to China are concentrated in one or two raw materials Page 28

China is the key destination for Australian exports Exports to China: % of total exports Source: COMTRADE, Haver and BBVA Research Commodity exports to China: % of total exports to China Source: COMTRADE, Haver and BBVA Research 3 25% Australia Indonesia Malaysia 3 25% 9 8 AUS-Coal & Iron ores MLS-Oil & Palm oil IND-Coal & Gas & Oil & Palm oil 9 8 7 7 6 6 5 5 15% 15% 4 4 1 1 3 3 5% 5% 1 1 199 1993 1996 1999 22 25 28 211 199 1993 1996 1999 22 25 28 211 Australia is the economy (in the sample) with the highest share of exports towards China; mainly coal and iron ores. Indonesian exports are also concentrated in raw materials Page 29

SE Asian exports structure is more diversified Exports to China: % of total exports Source: COMTRADE, Haver and BBVA Research Commodity exports to China: % of total exports to China Source: COMTRADE, Haver and BBVA Research 3 3 1 1 Malaysia Philippines Thailand 9 PHP-Machinery & components THA-Machinery & components MLS-Machinery & components 9 25% 25% 8 8 7 7 6 6 15% 15% 5 5 4 4 1 1 3 3 5% 5% 1 1 199 1993 1996 1999 22 25 28 211 199 1993 1996 1999 22 25 28 211 These economies also concentrate a big share of their exports to China in two commodities, although with high value added Page 3

Commodity markets highly concentrated Market concentration: Gini index Source: COMTRADE and BBVA Research Exports Gini Index Imports Gini Index 1. 1. 1. 1..9.9.9.9.8.8.8.8.7.7.7.7.6.6.6.6.5.5.5.5.4.4.4.4.3 Copper Iron Ores Ores Non Ferrous Soybean.3.3 Copper Iron Ores Ores Non Ferrous Soybean.3.2.2 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211.2.2 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211 In recent years China gained lots of market power as the main buyer whereas South American countries are not always the largest suppliers Page 31

Commodity markets highly concentrated Market concentration: Gini index Source: COMTRADE and BBVA Research Exports Gini Index Imports Gini Index 1. 1. 1. 1..9.9.9.9.8.8.8.8.7.7.7.7.6.6.6.6 Palm Oil NE Machinery E Machinery Coal Palm Oil NE Machinery E Machinery Coal.5.5 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211.5.5 1967 1971 1975 1979 1983 1987 1991 1995 1999 23 27 211 China also gained market power as the main buyer of machinery and its components while new exporters are making the supply of this commodities less concentrated Page 32

Playing with fire? 7 5 Exports dependency of China index: no dependency absolute dependency Source: COMTRADE and BBVA Research 22 21 7 5 Dependency on Chinese demand for all commodities considered have increased compared to year 22 3 2 1 3 2 1 South American countries considered are more reliant on Chinese demand than the AsiaPac exporters considered ANG SAU RUS ARG BRA USA JAP CHI PER AUS ZAR Oil Soy beans Copper Iron ores Ores non ferrous metals Electronic components BRA PER ZAR CHI AUS IND PHI MAL THA PHI THA MAL Non-electric office machines IND AUS Coal MAL IND Palm Oil AsiaPac more diversified exports structure by destination explains this result These results must be reviewed considering the size of exports relative to GDP, their weight on fiscal revenues and their appeal for FDI projects Page 33

Conclusions Page 34