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Sh h i d Chi ’ I t tiShanghai and China’s Integration Into the World Economyto t e o d co o y
Wolfgang Keller (Colorado)Ben Li (Boston College)Ben Li (Boston College)Carol H. Shiue (Colorado)
In a word:hi ’ i fChina’s recent economic performance
“Red‐Hot” (National Public Radio 2011)
“Breathtaking” (di Giovanni, Levchenko, Zhang, IMF/U Michigan 2011)
“Astonishing” (Lin, Chief Economist, The World Bank, 2011)Astonishing (Lin, Chief Economist, The World Bank, 2011)
Trade‐led Growth?Trade led Growth?20
14
16
18
8
10
12
Share of World GDP
4
6
8 Share of World Exports
0
2
1960 1970 1980 1990 2000 2010YearYear
Size mattersSize matters
• China’s impact on richer countriesp– Local U.S. Labor Markets (Autor, Dorn, Hanson)– Employment in Europe (Bloom, Draca, van Reenen)
• China’s impact on poorer countries– Latin America (Devlin Estevadeordal Rodriguez‐Clare)Latin America (Devlin, Estevadeordal, Rodriguez Clare)
• China’s global impact– Global CA Imbalances (Ju, Shi, Wei)– Global Welfare (di Giovanni, Levchenko, Zhang)
Questions we pursueQuestions we pursue
• How extraordinary is China’s tradeHow extraordinary is China s trade performance today?
• What is the cause of China’s current trade f h 1978 k f ?performance‐‐the 1978 market reforms?
• Is China’s trade and its growth rates related?
Two elementsTwo elements
1 A longer view: two of China’s trade1. A longer view: two of China s trade liberalizations
– After the Opium War 1840s– After the Opium War, 1840s– After the 1978 reforms
2. A city view: China’s trade through the lens of Sh h iShanghai
The longer view: Chi ’ Sh i W ld GDP d W ld EChina’s Share in World GDP and World Exports
GDP Exports
14
16
18
10
12
14
6
8
0
2
4
1860 1880 1900 1920 1940 1960 1980 2000 2020
The longer view: Chi ’ Sh i W ld GDP d W ld EChina’s Share in World GDP and World Exports
GDP Exports
14
16
18
10
12
14
6
8
0
2
4
1860 1880 1900 1920 1940 1960 1980 2000 2020
Shanghai ‐‐ ChinaShanghai China
• Why a city?Why a city?– A country’s trade liberalization rarely occurs at a point in time
• Rather, it takes time to spread• Regional heterogeneity
– Shanghai potentially important for China as a whole
• Why this city?1850 : Shanghai had half of China’s foreign tradeToday : Shanghai is the world’s biggest port
China’s trade liberalization in 19th c.China s trade liberalization in 19 c.
• Before 1840, Guangzhou (Canton) only port open to trade /w/ Western countries
• West desires more imports from China without exportingWest desires more imports from China without exporting silver; searches pretext for opening
• Britain exports opium from India; China resists => war;• Britain exports opium from India; China resists => war; China defeated by Britain
N t d t t d ith W t (T t f N ji• New ports opened to trade with West (Treaty of Nanjing, 1842)– Shanghai one of them
ff l f d– Low tariffs, close to free trade
Shanghai: some basicsShanghai: some basics
• Located at the mouth of the Yangzi river: easy accessLocated at the mouth of the Yangzi river: easy access to seafaring routes and river traffic
• Long overshadowed by nearby administrative capital cities (Suzhou Hangzhou and Nanjing)cities (Suzhou, Hangzhou, and Nanjing)
• Emerged quickly as China’s most important port for foreign trade in treaty port era (1842 to 1942)
Chinese Maritime Customs (CMC) serviceChinese Maritime Customs (CMC) service
• Formally reporting to China’s Foreign Office – Each member of the CMC was “a paid agent of the Chinese government for the performance of specified work” (Robert g p p (Hart, Inspector General)
• De facto a Western‐led organizationDe facto a Western led organization
• Operated customs system with more and more treaty i 1854ports since year 1854
• Tariff revenue net of collection costs sent to QingTariff revenue net of collection costs sent to Qing emperor
Maritime Customs House, Shanghai 1857
Customs and HSBC bank on the Bund, 1927
Shanghai: Center of China’s Foreign d dTrade during Treaty Port Era
• Shanghai’s unique geographic position had long• Shanghai s unique geographic position had long been recognized
• Overtook Guangzhou as most important port in early 1850searly 1850s
• By the 1860s the North‐China Herald wrote:By the 1860s, the North China Herald wrote:“The heart of foreign trade is Shanghai,and the outports mere blood vessels”and the outports mere blood vessels
Shanghai’s importance: Half of China’s gross foreign trade 1870 to 1930Half of China’s gross foreign trade, 1870 to 1930
0.8
0.6
0.7
0.4
0.5
0.2
0.3
0
0.1
1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930
Share of China's imports of foreign goods
Share of China's Exports and Re‐Exports Going Abroad
Change versus continuity, recovery and income growthrecovery and income growth
21
China’s and Shanghai’s foreign imports since 1865
19
20
17
18
ade
14
15
16
log tra
12
13
14
111860 1880 1900 1920 1940 1960 1980 2000 2020
Shanghai’s openness since 19th cg p
• Analyze levels and trends of y– Trade– FDIi t ti l i ti– international migration
• Question throughout: Extraordinarily high today• Question throughout: Extraordinarily high today, return to trend, or identical to past trend?
• Start with Shanghai’s re‐exports, the link between regional and national economy
Jiujiang
JAPAN
1
6
7
Shanghai
1
58
1: Imports from Foreign
CHINA9
p g2: Re‐exports to Foreign (F)3: Re‐exports to China (F)4: Imports from China (F)5: Exports to Foreign6: Re‐exports to Foreign (D)
Xiamen
2
3
4 7: Exports to China8: Re‐exports to China (D)9: Imports from China (D)
PHILIPPINES
Exports versus re‐exports of Chinese goodsExports versus re exports of Chinese goods
100%
70%
80%
90%
50%
60%
70%
20%
30%
40%
0%
10%
1865 ‐ 1925 1990 ‐ 20091865 1925 1990 2009
Re‐exports Exports of Local Production
Re‐exports of foreign imports to elsewhere in China: l f it t dless of it today
100%
70%
80%
90%
50%
60%
20%
30%
40%
0%
10%
1865‐1925 1999‐2009
Re‐Exports Net Foreign Imports
Re‐exports as trade intermediation in a h d lsearch model
• Similar level over time on export sideSimilar level over time on export side
• Lower now than in 19th c. on import side
• Re‐exports as trade intermediation when matching of buyers and sellers is costly
• Shanghai vs hinterland: relative costs of finding foreign customer constant over timefinding foreign customer constant over time
• Foreigners vs Shanghai: relative costs of fi di hi h d dfinding Chinese customers have decreased
Income growth reallocates trade share away from British EmpireImport Composition 1870 to 2009Import Composition, 1870 to 2009
0 35
0.4
0 25
0.3
0.35
0 1
0.2
0.25
1870 ‐ 1900
0.1
0.151990‐2009
0
0.05
The level of tradeThe level of trade
• Suppose a forecaster in Shanghai in 1900• Naïve: knew nothing except past trade
– Not the fall of the Qing dynasty; two world wars; Japanese invasion; the Great Depression; restrictive trade policyinvasion; the Great Depression; restrictive trade policy before, opening after 1978 reforms…
– Not the evolution of world income, falling trade costs, vertical specialization & offshoring…vertical specialization & offshoring…
Q: How close would the forecaster have come in di ti Sh h i’ i t f J ?predicting Shanghai’s imports from Japan now?
A:A:
Answer: Pretty much right onShanghai’s imports from JapanShanghai s imports from Japan
30
y = 0.052x ‐ 79.3
25
y = 0.140x ‐ 256.3
15
20
ports ($U
S 20
06)
10log gross im
5
01860 1880 1900 1920 1940 1960 1980 2000 2020 2040
History predicts level in early 21st centuryb t t d th ti i t f B it ibut trade growth continues: imports from Britain
23
y = 0.0004x + 19.7
19
21
y = 0.12x ‐ 215.315
17
mpo
rts ($U
S 20
06)
9
11
13
log gross im
5
7
9
1860 1880 1900 1920 1940 1960 1980 2000 2020
No extraordinary levels of trade: Shanghai’s i f US b l h ï fimports from US are below the naïve forecast35
30
y = 0.097x ‐ 164.9
20
25
rts ($U
S 20
06)
y = 0.126x ‐ 228.8
10
15
log gross impo
5
10
0
1850 1870 1890 1910 1930 1950 1970 1990 2010
Lessons from bilateral trade and the gravity model:Continuity and ChangeContinuity and Change
(1) (2) (3) (4)log Exports log Imports log Exports log Imports log Exports log Imports log Exports log Imports
log GDP 1.504*** 1.722*** 0.945*** 1.197*** (0.105) (0.110) (0.082) (0.318)log Shanghai population ‐0.565 ‐0.308 1.575*** 3.686* (0.533) (0.427) (0.408) (1.966)log distance ‐0.755*** ‐1.944*** ‐0.471*** ‐0.856*** (0.262) (0.203) (0.127) (0.290)Entrepot dummy 7 771*** 9 725*** 3 580*** 2 464**Entrepot dummy 7.771*** 9.725*** 3.580*** 2.464** (0.606) (0.641) (0.346) (1.195)Sample History History Modern ModernObservations 58 54 69 52R‐squared 0.81 0.89 0.76 0.62
Now, Shanghai’s size matters for trade more
(1) (2) (3) (4)l E t l I t l E t l I t log Exports log Imports log Exports log Imports
log GDP 1.504*** 1.722*** 0.945*** 1.197*** (0.105) (0.110) (0.082) (0.318)log Shanghai population ‐0.565 ‐0.308 1.575*** 3.686* (0.533) (0.427) (0.408) (1.966)log distance ‐0.755*** ‐1.944*** ‐0.471*** ‐0.856*** (0.262) (0.203) (0.127) (0.290)Entrepot dummy 7.771*** 9.725*** 3.580*** 2.464** (0.606) (0.641) (0.346) (1.195)Sample History History Modern ModernObservations 58 54 69 52R‐squared 0.81 0.89 0.76 0.62q
19th c liberalization also allowed people and firms to move: Multinational Firms in Shanghaig
Jardine, Matheson & Co. in the International Settlement
Income convergence makes Britain less important ‐B t l t t t d ’ t 5 FDIBut only one entrant among today’s top‐5 FDI sources
1872 to 1921 1995 to 20091872 to 1921 1995 to 2009
Great Britain30%
Other13%
USA32%
Germany9%
Great Britain7%
Others11%
Germany
Japan35% Singapore
10%
9%
7%
USA11%France
4%Japan31%
FDI into Shanghai today is neither di il hi h i f l l hextraordinarily high in terms of levels or growth
Year 1872 1921 1995 2009
No. of foreign
153 1,741 3,912 6,516
firms
Period 1872‐1921 1921‐1995 1995‐2009
Av. Annual growth
5% 1.1% 3.6%
Continuity: yAlso for FDI, gravity in FDI holds in both periods
1872‐1930 1990‐2009log GDP 0.772** 1.232***g (0.325) (0.119)log Shanghai population 1.235** 15.167** (0.567) (5.329)( ) ( )log distance ‐0.488** ‐0.776*** (0.205) (0.077)Observations 19 15R‐squared 0.59 0.95
Foreign Residents in Shanghai: C i f id ?Carriers of new ideas?
1872 to 1921 2000 to 2009
Japan29%
France4%
Other22% Japan
23%
Others44%
USA
Germany7%
USA13%
Great Britain28%
10% Republic of Korea11%
Singapore5%
France4%
Number of British residents in Shanghai:Match up with treaty port era trend in 2020Match up with treaty port era trend in 2020
12
13
11
s
predicted 2009 number: 68,251actual 2009 number: 5,137
y = 0.031x ‐ 50.6
9
10
nts in Shan
ghai, logs
y = 0.167x ‐ 326.4
7
8
British Residen
y
5
6
41860 1880 1900 1920 1940 1960 1980 2000 2020 2040
Shanghai’s Trade Openness, 1870 – 2009Trade per capita
3.5
2
2.5
3
g
1
1.5
2
ports p
er Cap
ita, log
0
0.5
Expo
rts p
lus Imp
‐1
‐0.5
‐1.5
1860 1880 1900 1920 1940 1960 1980 2000 2020
Continuity, Change, Income Growth and Recovery: SSummary
• Openness has been high recently, and in some Ope ess as bee g ece t y, a d so eways going beyond expectations
• Though an analysis in terms of
1. Return to trends from depressed post‐WWII levels2. Growth and convergence in the world economy3 C i i f hi i d3. Continuity of historic trends
goes a long waygoes a long way
Trade & Openness→ ShanghaiTrade & Openness → Shanghai1.60.016
1.2
1.4
0.012
0.014
0.8
1
0.008
0.01
ade Share
latio
n Share
0.4
0.6
0.004
0.006
Tra
Popu
0
0.2
0
0.002
1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20091870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009Year
Shanghai's Population Share Shanghai Trade Share
Back to China’s long‐run GDP growthBack to China s long run GDP growth20
14
16
18
10
12
14
4
6
8
0
2
4
1860 1880 1900 1920 1940 1960 1980 2000 20201860 1880 1900 1920 1940 1960 1980 2000 2020
China's Share of World GDP
China’s Trade→ China’s GDP?China s Trade → China s GDP?20
14
16
18
10
12
14
4
6
8
0
2
4
1860 1880 1900 1920 1940 1960 1980 2000 20201860 1880 1900 1920 1940 1960 1980 2000 2020
China's Share of World GDP China's Trade Openness
Shanghai’s Trade→ China’s GDP?Shanghai s Trade → China s GDP?25
20
10
15
5
10
01860 1880 1900 1920 1940 1960 1980 2000 2020
China's Share of World GDP China's Trade Openness Shanghai's Trade Openness
Shanghai and China’s Growth in the World
18
20China Openness China's Share in World GDP Shanghai Openness
14
16
10
12
Correlation = 0.74
6
8
2
4
0
2
1865 1885 1905 1925 1945 1965 1985 2005
Conclusions
• China’s performance is truly extraordinary … in some ways
M h f i i d f b• Much of it is accounted for by1. Return to trend from depressed post WWII levels2. Income growth and convergence2. Income growth and convergence3. Continuity of 19th c. trends
• Shanghai’s openness a good predictor of China’s share in g p g pworld GDP– Shanghai initiated mobilization of today’s Chinese economy?
• Importance of integrating analysis of int’l and regional trade– New empirical support for economic geography models
Chinese Junk at Shanghai
Junk in the Yangzi Gorges near YichangJunk in the Yangzi Gorges near Yichang