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GDUFS-UST
CHINA-CHILE
BUSINESS BULLETIN
Boletín de Negocios Chile - China
September 2015
volumen 1
In this issue,
Column-Opinion:
Chilean Economy: An Unavoidable but Needed
Slowdown. - Page.3
Academic Articles:
A Tale of Giants and Gnomes. Export Behavior
China-Chile - Page.6
Trade Opportunities with China or Exportation
Bottlenecks. Page.12
Editor:
Luis Chancí, Director of the Center at UST.
Contact: Chile
[email protected]
Business Bulletin / September 2015 1
China - Chile Business Bulletin
THE CHINA-CHILE BULLETIN
The China-Chile Bulletin is the magazine of the China-Chile Research Center, Universidad Santo Tomas
and Guangdong University of Foreign Studies, which
aims to publish studies in relation to business and
economics between China and Chile. The Bulletin publishes academic articles, opinion columns, and news
in English, Mandarin, and Spanish twice a year. The
purpose of the Bulletin is to stimulate academic and
applied research that contributes to firms and policy
makers in both countries in order to make decisions
related to trade.
The ideas expressed in the text published here are
the sole responsibility of their authors and do not necessarily reflect the viewpoints of the China-Chile Research Center.
THE CHINA-CHILE RESEARCH CENTER
The China-Chile Research Center was born
from the close relationship between Universidad Santo Tomas in Chile and Guangdong
University of Foreign Studies in China. It
was first launched in 2011 in China and
2012 in Chile. Its aim is to generate new
opportunities for academic exchange and
cooperation through the creation of connections between companies in the two nations.
One of the advantages of the center is having offices located in both countries, working under the guidance of an academic in
each of the partner universities.
2 Chile Business Bulletin / September 2015
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EDITOR’S NOTE
Dear Reader,
Welcome to the China-Chile Bulletin of Business. In this semi-annual publication you will find articles, reviews,
opinions, and topics related to the relationship between China and Chile. Its main purpose is to contribute to
developing applied research that favors exporting firms and policy makers in both countries.
In this first volume you will find topics related to macroeconomics and international trade. Specifically, the column
of analysis written by Alejandro Puente - Professor of the Faculty of Business and Economics at UST, discusses
why the current economic slowdown in Chile was not only unavoidable, but also necessary, considering the potential of growth in this country.
Furthermore, the two academic articles included in this edition offer a detailed description of the international
trade between China and Chile. The first article, written by the Director of the Center in Chile, presents a comparison between the large export structure of China and the commodities based structure of Chile. The second article
written by the associated researchers of the Center Danitza Estay and Yasmin Valdés, looks into whether there are
products that Chile produces and exports, which in turn China demands from Latin America, but are not currently
being traded between the two countries in spite of having signed a free trade agreement ten years ago.
I hope you enjoy this inaugural issue of the China-Chile Bulletin,
Luis Chancí
Director of the China-Chile Research Center at UST
Chile Business Bulletin / September 2015
3
China - Chile Business Bulletin
CHILEAN ECONOMY: AN UNAVOIDABLE BUT NEEDED
SLOWDOWN1
By Alejandro Puente,
Researcher at the Center of Applied Research and Business (CIAN)
Professor of Economics, Universidad Santo Tomás,
Santiago de Chile
4 Chile Business Bulletin / September 2015
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When reviewing the determinants of the economic growth it is important to spare the discussion of the economic cycle (short-term growth) and the tendency or longterm growth. Furthermore, it is pertinent to remember
that long-term growth is not independent of short-term.
With this in mind, it is not my intention to highlight
the obvious conclusion, that is, that growth in the long
term is the sum of the results in the short term. What I
would like to emphasize is the fact that the economic
cycle also depends on the potential growth. Without understanding this it is difficult to explain the intensity
of the Chilean slowdown, the low unemployment and
the growing inflation. The corollary is that the current
Chilean economic decline was not only inevitable, but
also necessary.
On the one hand, it is inevitable because the factors
that have previously been used to explain the expansion
of the aggregated demand are either no longer present,
or at least not with the same intensity as after the international crisis. To illustrate, monetary and fiscal policies are still expansive but with less intensity, the high
price of copper is a thing of the past, external financing
is more expensive due to the imminent rise of the interest rate by the US Federal Reserve Board (FED), and
finally salaries are growing but inflation has reduced
its expansion in real terms. Taking into account all of
the above, the aggregated demand grew by 3.7 percent
in 2013 and suffered a contraction of 0.6 percent in
2014.
On the other hand, in order to understand why this economic slowdown was not only inevitable, but also necessary, it is important to take a look at the ‘supply side’
of the economy and therefore review the potential GDP.
Indeed, despite the fact there has been a sharp downturn in the growth of aggregated demand, inflation continues to increase. Thus, in June the Chilean economy
achieved fourteen months with an annual inflation over
the upper band of the Chilean Central Bank target (3%
+/- 1 percentage point). The underlying question is:
How can this result be possible? Should we not have a
1
lower inflation in this context of lower demand?
The answer to the previous question could be yes, unless the aggregated demand is greater than the supply
and the downturn has not yet fully reduced the excess
of demand. In other words, if the current GDP is over, or
even close to the potential GDP, any way of stimulating
the demand is increasing the inflation and not the GDP
growth.
It is possible to argue that one solution would be to increase the potential output by introducing policies that
stimulate the “supply side”. However, this possibility
has its limits in economies with a similar level of development to the Chilean, as it depends on the marginal productivity of capital and therefore of the level of
investment. In order to understand this is sufficient to
review the growth projections for this year and the next
five years of countries with a similar development to
Chile. According to the April World Economic Outlook
database, the twenty one countries with a per capita
GDP, in Purchasing Power Parity, between US$20.000
and US$30.000 will have an average growth of 2.5%
for this year and 2.8% between 2015 and 2020.
The aforementioned does not disregard the possibility
that the uncertainty resulting from the latest political
reforms and policy shifts in Chile (i.e. the tax reform)
may have played a role in the current economic slowdown. However, what apparently has not yet been well
understood is that if for many years the Chilean economy has grown over the potential output, at some point
and for a period of time it must fall below the potential.
The relevant point now is attempting to determine if the
actual potential growth rate and the value of the output
gap – the difference between the current and potential
GDP- is what we have thought, because the trend of
inflation and unemployment suggests that the potential
growth is lower and the output gap is narrower.
The original article was written in Spanish and does not pretend to provide a literal translation. Any translation mistakes are responsibility of the editor.
Chile Business Bulletin / September 2015
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China - Chile Business Bulletin
A TALE OF GIANTS AND GNOMES
EXPORT BEHAVIOR CHINA–CHILE
David Chancí A.
Director of the China-Chile Research Center
Universidad Santo Tomás,
Santiago de Chile
INTRODUCTION
The successful experience of Asian economies, which
have presented a representative increase in exports, especially in manufactures goods, and a high economic
growth; has prompted other governments to reconsider
exports and their diversification as an engine for growth.
Like a ‘giant’ in terms of exports, China has become the
world center of attention in recent decades due to both
the stronger volume of exports and its economic growth
rate, which remained above two digits for many years.
To illustrate this, in 2014 China’s exports were valued
at US$2.342 billion in nominal terms, according to
the latest available information of exports at Comtrade (United Nations). Conversely, Chile, as a small economy, exported a total value which represents only 3%
of the total Chinese value.
Moreover, for the period between 2000 and 2014, Chile and China have developed a strong trade relationship. In this period, the role that China has played as the
main market for the Chilean exports has been remarkable. Thus, in 2011 and 2014 Chile sent more than US$
20 billion to China each year, which accounts for nearly
a quarter of all Chilean exports. On the contrary, Chile
imported around US$12 billion from China, which is
less than 0.6% of total Chinese exports. One important
feature behind these results is that while Chinese exports are more diverse, in terms of goods and also markets, Chilean exports are more concentrated in copper
and copper-related products.
For many years researchers have studied the negative
relationship between export concentration and economic performance. To illustrate, the Prebisch-Singer
Thesis in the 50’s established negative consequences
of export concentration in raw materials and the declining in terms of trade. Recently, a number of authors, such as Agosin (2009)(1) or Lederman and Maloney (2003)(2), have related export diversification with
economic growth for developing economies. The greater
the degree of export concentration, the more vulnerable
exports become to external shocks. This implies greater
volatility in the income from exports and therefore less
economic growth. This argument has also been used to
counter the so-called “Natural Resources Curse”, which
has become a policy concern.
Other problems related to the geographical concentration of exports come from the degree of dependence
that an exporter country can develop from the economic growth of the destination country. For instance, the
greater the fraction of exports sent to the Chinese market from Chile and the American market from China,
the more exposed is Chile becomes in the event of an
economy contraction in China and/or the USA. In other
words, there is a strong chain effect.
EXPORTS GROWTH RATE
The performance of the export growth rate in the two
countries also exposes remarkable differences. Thus,
Agosin, R. (2009). “Export Diversification and Growth in Emerging Economies”, CEPAL REVIEW, Vol 97. Pgs 115-131.
Lederman D. and Maloney W. “Trade Structure and Growth”. In Natural Resources: Neither Curse Nor Destiny, D. Lederman and W.F. Maloney, Editors,
Palo Alto: Stanford University Press.
1
2
6 Chile Business Bulletin / September 2015
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over the period of 1992 to 2011, the average annual
rate was 10.5% for Chile and 15.7% for China. Additionally, a major volatility has characterized the Chilean
exports growth, considering the standard deviation of
18% against China’s 12%. Furthermore, in figure 1 we
can appreciate that there were less years with negative
rate for China and more for Chile. Something noticeable
for both countries was the big contraction during the
financial crisis around the year 2009.
Conversely, Chinese export data presents an increase
in export diversification in terms of markets. As can be
seen in Figure 6, although the USA, Hong Kong and Japan remain as the main partners of China, the share of
exports sent to the main five destinations shrank from
more than 55% to less than 45% of the total Chinese
exports.
Figure 1. Chile and China Export Growth Rate, 1992-2011.
Between 2002 and the beginning of the financial crisis in 2009, Chilean exports experienced an unprecedented
expansion. This behavior is mainly explained by a positive shock over the copper price that benefited the Chilean
exports. While, the mean price of copper was less than one dollar per pound before 2003, in February 2011 it
reached a maximum value of $4.58 per pound.
Chile Business Bulletin / September 2015
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China - Chile Business Bulletin
Export Diversification.
The Hirschman-Herfindahl index (HH)
A common approach to measure the degree of diversification is by using the Hirschman-Herfindahl index
(HH). This index takes a value between zero and one.
If the HH is closer to one, HH 1, this signifies high
concentration and low diversification (conversely, when
is closer to zero, we have high diversification). Thus, we
calculate the value of the HH Index using export data
from Comtrade recorded under the Standard Industrial
Trade Classification (SITC) - revision 3, at the 3-digit
Figure 2. Export Diversification Index (1-HHI), 1992-2012.
8 Chile Business Bulletin / September 2015
level of disaggregation.
The mean HH index is 0.13 (or diversification is 0.87)
for Chile and 0.02 for China, revealing great differences
between both countries. Looking at figure 2, we can
observe that in recent years Chilean exports followed a
path of concentration, while Chinese exports remained
highly diversified.
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What are we sending?
If we explore which goods are exported and how much
they represent over the total, we can see that in the
case of Chile, copper (SITC code 682) and products
related to copper (SITC code 283) represent more than
50% of total exports (figure 3). Most of these goods
have a low value added, given that they are fundamentally raw materials.
However, it is important to mention that up to now, this
study considered all exported commodities, but when
separating copper from non-copper exports, the picture
is quite different. Berthelon (2011) developed a deep
study of the Chilean exports separating copper and
non-copper exports and found a relevant increase in the
diversification of Chilean exports.
Figure 3. Share of Exports by Commodities (Chile)
Source: Author’s calculation, using Comtrade database (United Nations).
Conversely, the large volumes of Chinese exports are
not concentrated in a small quantity of goods (figure 4).
Although it is not shown in the above graph, when reviewing the database, it is remarkable how China change from mainly exporting clothing related products in
the 90’s to exporting goods with a higher value added,
such as telecommunication equipment. This last point
is extremely relevant as these types of goods require a
more qualified human capital and are aimed at improving the Total Factor Productivity (TPF) in the economy,
which is a key component of the economic growth in
the long term.
Figure 4. Share of Exports by Commodities (China).
Source: Author’s calculation, using Comtrade database (United Nations).
Chile Business Bulletin / September 2015
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China - Chile Business Bulletin
Where do the exports go?
The question that emerges now is of whether the exports
are sent to a small number of countries or contrarily
to many markets with a considerable trade relationship. This idea of geographic diversification implies that
economies which export to a small number of markets
could be affected by a negative economy context in the
destination country.
By reviewing the total number of countries listed by the
United Nations, Chile reports a trade relationship with
176 countries. This result is remarkable for Chile, considering that in 1992 Chilean exports were sent to only
130 countries. In comparison, China has developed trade relationships with almost all countries listed. Thus,
in 2011 China reported having a trade relationship with
a total of 217 different countries.
exports by country, it is clear that there are also remarkable differences in terms of market diversification between Chile and China. Figure 5 shows that more than
55% of Chilean exports are sent to only five countries,
meaning a high concentration of export destinations.
This result is even more remarkable when taking into
account that Chile reported having a commercial relationship with more than 150 countries.
Another important fact is the role that China has begun
to play as the main destination of Chilean exports during recent years. As we mentioned, this result implies
that if China’s economic growth starts to decline this
will have a direct effect on the Chilean export sector. To
illustrate this, the slump in the Chinese growth rate to
nearly 7% over the last two years has had a remarkable
impact on the Chilean economic growth.
Furthermore, if we review in more detail the share of
Figure 5. Share of Exports by Destination (Chile)
Source: Author’s calculation, using Comtrade database (United Nations).
Conversely, Chinese export data presents an increase
in export diversification in terms of markets. As can be
seen in Figure 6, although the USA, Hong Kong and Japan remain as the main partners of China, the share of
10 Chile Business Bulletin / September 2015
exports sent to the main five destinations shrank from
more than 55% to less than 45% of the total Chinese
exports.
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Figure 5. Share of Exports by Destination (China)
Source: Author’s calculation, using Comtrade database (United Nations).
CONCLUSION
In this article we have explored differences between
the export behavior of China and Chile. Like a tale of
giants and gnomes, in terms of international trade, the
amount of values involved in Chinese exports exceeded
remarkably that of the Chilean. Moreover, it is not only
important to review the total exports, but also the cha-
racteristics of these exports. In doing so, we observe large differences in terms of export diversification. Thus,
China’s exports are more diverse not only in terms of
goods, but also in their destinations. Conversely, Chilean exports are mainly Copper related products, which
are sold at a relevant percentage to China.
Chile Business Bulletin / September 2015
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China - Chile Business Bulletin
TRADE OPPORTUNITIES WITH CHINA OR EXPORTATION
BOTTLENECKS
Danitza Estay M. and Yasmín Valdés V. 1
Associate Researchers
China-Chile Research Center
Universidad Santo Tomás
INTRODUCCIÓN
Commercial integration has been a relevant issue in
Chile since the country has identified in its trade agreements an opportunity to enhance economic development and the quality of life of its inhabitants through
mutually beneficial relationships with other countries.
In doing so Chile began a compelling process of openness during the nineties and today holds more than
twenty-three active trade agreements. Moreover, Chile
has been characterized as a pioneer in Latin America
for its relations with Asia, welcoming the incorporation
of China to the World Trade Organization (WTO) and
also being the first country in the region to sign a Free
Trade Agreement (FTA) with the Asian giant.
This vision has been accurate if we consider that currently China is the second economic global power and
is expected to overtake the USA before the year 2020,
according to the International Monetary Fund (IMF).
Furthermore, it is an important market for exportation,
given that it has a population of over 1,360 billion whose purchasing power continues to rise.
Ten years since signing the China-Chile FTA, the importance that China represents to Chile is notable. As
Chile’s primary trade partner it receives more than 25%
of all exported goods, which represented $19 billion
USD in the year 2014, according to the latest available
figures at Comtrade, United Nations. While Chile relies
on certain trade advantages with China, unfortunately
its export basket remains undiversified, instead concentrated in raw materials such as (and including goods
related to) copper.
1
The authors thank Luis Chancí for useful comments.
12 Chile Business Bulletin / September 2015
Exploring new trade opportunities with China may prove
to be a challenging task, taking into consideration the
numerous variables involved; namely market insight,
Chile’s production capacity, cultural differences and
language etc. In this article, however, we will attempt
to conduct a simple investigation of existing trade relations between Chile and China with a view to identify
new trade opportunities. Specifically, we will ask whether there are products that Chile produces and exports
(in order to review the country’s productive capacity and
exportation), which in turn China demands from Latin
America (so as to check for characteristics of the market, transportation costs, cultural differences and other
trade determinants), but are not however being traded
between the two countries in spite of the FTA.
Preliminary results show that there are more than 1000
potential exports, which could represent a value of over
$4 billion USD; such as laboratory instruments, medical supplies, medication and drill pipe among others.
DATA AND METHODOLOGY
An analysis of the exportation and importation figures
will be carried out using the last available information
contained in the COMTRADE database from the United
Nations, recorded under the Standard Industrial Trade
Classification (SITC) - revision 3, at the 5-digit level of
disaggregation. Specifically, we will review the flow of
imports to China from certain Latin American countries
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such as Brazil, Argentina, Colombia, Mexico and Peru.
In turn, this data will be merged with the Chilean exports.
This procedure will be developed using the statistical
software STATA v.12, and will allow us not only to identify which goods Chile produces and exports globally
(excluding China), but also which goods China purchases from our neighbors.
RESULTS
When processing the exportation data for the period of
2003 - 2013, it shows that per year China demanded
on average 1020 products from Latin America, however
while these items are both produced and exported by
Chile, they were not traded between the two countries
(green line, Figure 1). Furthermore, when adding up
the total value of these goods that China imported from
Brazil, Argentina, Colombia, Mexico and Peru; it reached over $3.8 billion USD (blue bars). It can also be
seen that the value of ‘potential exports’ rapidly increased after the period in which the global financial crisis
hit in 2009.
Conversely, the Chilean exports of the same goods with
other parts of the world represented an average value
superior to $4.2 billion USD (red bars), exceeding that
of potential exports. A preliminary look at these results
could lead us to believe that Chile has the capacity for
the production and exportation of those same goods
which China demands from our neighbors.
Figure 1. Export Value (in millions of US Dollars, left axis) and Number of Goods (right axis), period 2003-2013.
Source: Authors calculations using data from Comtrade, United Nations.
The databases were used with the highest available disaggregation, (5 digits (SITC) - Rev. 3), which corresponds to goods.
Chile Business Bulletin / September 2015
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China - Chile Business Bulletin
As Figure 2 shows, when analyzing this result by sector,
we can observe that the highest number of potential
exports would principally was in manufacturing (Sectors 6 and 8), followed by machinery and transportation
equipment (Sector 7) and also chemical products and
related goods (Sector 5), since each one represents on
average 350, 250 and 250 goods respectively.
The exports of manufactured goods is generally associated with increased benefits arising from trade, as
the production of these goods typically employs greater
technology and advanced human capital. Thus, an im-
petus to diversify Chilean exports in this sector could
lead to a boost in economic growth in comparison with
exporting raw materials.
Conversely, when we break down the value of potential
exports to China by sector, we see that although the
food product sector did not produce the highest recorded number of potential exports, in 2013 it did in fact
reach over 40% of the total value of potential exports
(Figure 3). Additionally, we can see that other important
sectors were chemical products, machinery and equipment, with 20% and 15% respectively.
Figure 2. Number of goods per Productive Sector, period of 2003-2013.
Source: Authors calculations using data from Comtrade, United Nations. The left axis refers to the quantity of goods (5 digits
of disaggregation) that are active per sector (1 digit of disaggregation). Classification SITC Rev. 3.
14 Chile Business Bulletin / September 2015
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Figure 3. Distribution of Potential Value per Productive Sector, period of 2003-2013.
Source: Source: Authors calculations using data from Comtrade, United Nations. Classification SITC Rev. 3
Finally, by way of example we can note which goods
items are among the 1000 potential exports for 2013.
The first two columns of Table 1 show the sector and
code, while the third details each product. The fourth
column shows the value which China imports from the
selected Latin American Countries, while the last column shows which countries are the principal exporters
of the corresponding items. The fifth column displays
the value exported globally by Chile (of the same products). Thus as the table shows, there are a number of
items exported by Chile which are of a significant value
in comparison with the potential, as is in the case of
avocado and medication.
Chile Business Bulletin / September 2015
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China - Chile Business Bulletin
Table 1. Products imported by China from Latin America (Potential products). Year 2013.
Source: Authors calculations using data from Comtrade, United Nations
(*) Latin America corresponds to selected countries.
(**) China does not report imports from Chile. Exports are found from Chile to Hong Kong.
CONCLUDING REMARKS
Preliminary conclusions suggest two possible hypotheses. The first being that when speaking of export diversification, this does not necessarily refer to the invention
and patenting of new products but also to the exploration and exportation of existing products. In reviewing
the list of potential exports, we can conclude that there
is a favorable scenario for Chile in order to diversify its
exports to China.
The second perspective is associated with the design
of public policies. It means that this result can be interpreted not only as a trade opportunity, but also as a
bottleneck at the point of exportation. In this case, we
16 Chile Business Bulletin / September 2015
would need to explore in closer detail why these trade
agreements are not being granted, especially given that
Chile both holds an FTA with China and has capacity to
realize the production of these goods.
Although the list of bottlenecks could involve from issues related to trade tariffs to infrastructure, it is necessary to underline that this article is a first glance in
an effort to work towards expanding the Chilean export
basket, in order that Chile can continue adding to the
successes that it has achieved since the FTA with China
was implemented in 2006.
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Chile Business Bulletin / September 2015
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