There may be some lingering terminological confusion, at least in my mind. My impression was that Anderson defined export sector value added to exclude both import and domestic content. (He discusses at some length the difference in general between valued added and content of either type.)

Perhaps this is just semantics, but I get the impression you generally treat export sector value added as including domestic content. My one point on the relevance or not of the valued added/domestic content composition of the net export sector was in the context of what I thought was Anderson’s definition of value added.

Then there’s an additional derivative question, more conceptual rather than terminological, about the recognition or not of the secondary import content within the primary domestic content of exports. I agree that’s relevant.

3 important points from your post are :
- Chinas growing external reliance
- Tnvestment to gdp is abt 40-50% of gdp
- The biggest risk to Chinese growth isn’t a collapse in export demand. It is a collapse in domestic investment following China’s current boom… If investment to GDP fell back to a more normal level for high growth Asian economies, Chinese growth would slow significantly…

With the US recession highly likely, the risk of a severe global recession is a sharp drop in chna;s domestic investment..

But is it likely that china;s domestic investment contracts?
what are the possible causes? and potential cures?

Would appreciate your views… Thanks for your time..

mrskeptical

I don’t remember Anderson explicitly differentiating between the value added in the export sector and the value added in the sectors creating components for the export sector. But the distinction still seems relevant to me. It certainly seems like the Chinese definition of the export sector — the one Anderson uses to argue that the ratio between the value added in key export sectors and the value added in all industry has been stable at around 20% recently — may not be counting value added in domestic sectors that generate components for the export sector (in effect, the export sector is defined too narrowly). Some such sectors may generate components for both the domestic and the export market — auto parts for example.

My sense is that the imported content of exports has gone down recently, which implies that — using a more trade based analysis — E(m) [an aside M (x) -- for imports used in exports seems more natural to me]/M is falling, which implies that value added in the export sector is rising. And given the rise in the trade surplus, i tend to think export value added is probably around 20% of GDP, if not higher — and, more crucially, that export value added has increase substantially since 2004. Anderson by contrast would argue that export value added hasn’t increased all that much recently — as the big rise in the share of the export sector to overall value added in industry in the data he looked at came in the 1990s.

Hope this helps.

The overarching issue seems to be China’s effective exposure to the global economy via its export sector. Anderson decomposes exports into domestic input content, foreign input content (i.e. import content), and export sector value added. He then uses export sector value added as an index of export exposure. I think this latter application is misleading.

Gross exports arguably overstate effective export exposure by including import content. To the degree that China can respond to slowing export growth by cutting back on imports, its overall GDP level will be relatively immunized. At the same time export sector value added understates effective export exposure. Value added excludes the value of domestic content in exports. To the degree that China responds to slowing export growth by cutting back on domestic inputs to its export sector, its overall GDP level will be exposed to that slowdown.

Therefore, Anderson’s juxtaposition of mountain climbing gross export value against flat-lining export value added is quite misleading, because it compares an exaggerated interpretation with an understated one.

On the other hand, between these two representations lies the more appropriate measure of gross exports less import content, or equivalently, export sector value added plus domestic content. This measure recognizes the sensitivity of GDP to changes in domestic content inputs and the relative GDP immunization offered by import content.

Thinking about this more, it seems to me that a country’s trade surplus (or deficit) can be decomposed into the trade surplus of its export sector and the trade deficit of its domestic sector. The trade surplus of the export sector would be defined as gross exports less imports used as content in exports. This is the measure I’ve suggested above is most representative of a country’s GDP exposure to exports. I think you refer to this same measure as “net revenue”.

The export sector trade surplus has a lower bound equal to the overall trade surplus level. This reflects a situation in which all imports are used as export content. It is the boundary point where effective GDP exposure to exports is minimized.

Similarly, the export sector trade surplus has an upper bound equal to the level of exports. This reflects a situation in which no imports are used as export content. It is the boundary point where effective GDP exposure to exports is maximized.

The critical point to be drawn from these boundary conditions is that China’s overall trade surplus is a lower bound for the size of its export sector surplus. This means that China’s trade surplus is a lower bound for its GDP exposure to exports. To the degree that China’s trade surplus has been growing, this means that China’s GDP exposure to exports has been increasing, which would support your view directionally more than Anderson’s.

(At this stage, I wonder if I’m making a point that is completely obvious and redundant, at least to you, or wrong.)

Returning to the export/domestic decomposition of the overall trade surplus, the trade deficit of the domestic sector would be defined as imports used as content in “non-exported” final output (there must be a better label than that).

All that said, it’s not clear to me that the decomposition of the export sector trade surplus into value added and domestic content components is conceptually critical in the analysis of effective export exposure. In fact, GDP is exposed to the contraction of either or both of value added and domestic content components as contributors to the contraction of the export sector trade surplus.

Several concluding points:

First, the greater the import input content of exports, the more that GDP should be “immunized” from a global slowdown. Anderson’s methodology seems to acknowledge the direct import content of exports. But I don’t see any recognition of upstream import content in those domestic components that are direct inputs for exports. This would seem to amount to additional immunization for GDP levels, directionally favouring his argument.

Second, Anderson observes that China’s trade surplus has improved because import growth has slowed. He goes on to say that this reduces exposure to the export sector because imports have been replaced by import competing domestic substitutes. But such a conclusion depends on an assumption that import substitution is not used as content for exports. If it is, then export exposure has actually increased. I think you allude to this in your comments.

Third, I think I’ve constructed a round numbers solution to the following puzzle:

“I never have quite been able to quite figure out how Anderson reconciles his data showing that the domestic value added in China’s export sector is only around 10% of China’s GDP with the data showing that China’s trade surplus is about 9% of China’s GDP. China’s export sector presumably generates enough net revenue to cover the bill for the commodities China imports and still generate a large surplus that fuels reserve growth.”

(I hope I’m assuming correctly here that 10 per cent refers to export sector value added and not domestic content.)

So in round numbers, assume exports at 40 per cent of GDP, imports at 30 per cent of GDP, the trade surplus at 10 per cent of GDP; and export sector value added at 10 per cent of GDP.

Let:
E = exports
M = imports
S = trade surplus
E (M) = the import content of exports
D (M) = the import content of non-exported final domestic output
E (D) = the domestic content of exports
EVA = export sector value added

Then:
E = M + S
= E (M) + D (M) + S

So:
40 = E (M) + D (M) + 10
E (M) + D (M) = 20

But also:
E = E (M) + E (D) + EVA

So:
40 = E (M) + E (D) + 10
E (M) + E (D) = 20

Thus, there are two equations to be satisfied, which is easy enough to do.

In this example, because S = EVA, it turns out that D (M) = E (D), and there are an infinite number of solutions to these equations. That won’t be the case when S is different from EVA.

“…Ken Lay: “The only thing that differentiates Enron from our competitors is our people, our talent.”… They were there looking for people who had the talent to think outside the box… if everyone had to think outside the box, maybe it was the box that needed fixing… the problem was how the talent was focused…” http://www.memestreams.net/thread/bid451/

“…the rich-poor gulf has continued to widen despite increased government spending on rural schools, health care and aid to farmers. The Xinhua report on Sun’s statement mentioned no new initiatives to narrow the income gap. Sun said income per person for the 900 million Chinese officially classed as rural residents rose 7% in 2007 to $550…” as compared with inflation… http://www.time.com/time/world/article/0,8599,1698449,00.html

“…The headline statistics… often mask widening inequalities and an underclass with little to lose by hurling stones and lighting flames when aspirations are frustrated. Or take Angola. The champions of recent Africa optimism point out that it, not China, is the world’s fastest growing economy – yet [like China?] its rapacious elite makes Congo’s look like mere pickpockets and its billionaires, like Nigeria’s, live amid unemployment and poverty so widespread there are no reliable statistics to describe it. For every cosmopolitan university graduate living in a comfortable suburb, there are dozens in slums and villages with no access to electricity, clean water or education…” http://www.ft.com/cms/s/0/ae66167a-bb2f-11dc-9fbc-0000779fd2ac.html

The only country that did not undergo a recession along with the US in 2000-2001 was China, but it will not escape this time.

The reason: the 2000-2001 recession was a capital spending led recession, with US telecom and dotcoms having overcapacity, and US corporations going bankrupt (Enron, Worldcom, and many smaller ones). Credit to consumers kept flowing, and despite unemployment at almost 6%, the US consumer kept spending due to credit that was created by surplus money entering the US. Credit cards and home equity withdrawal were taking off.

China will not escape unscathed this time. The US consumer will slow down too.

What China needs, is a minimum wage and social safety net. They need to transform away from export dependence.

Yeah those Enron guys were not completely stupid. Only partially so. They covered their tracks very well.

Twofish: “The trouble with Enron is that every single off-book and suspicious transaction that Enron did was properly reported in its annual reports and securities filings, its just that very few people bothered to read any of this.”

I wouldn’t go that far. Fastow, Lay Skilling etc did get convicted, didn’t they? And David Duncan was not using the shredder to destroy a few thousand letters to his mistress.