China's Growing Demand for Energy and Primary Inputs - Terms of trade Effects on Neighbouring Countries

In this study, we analysed the terms of trade effects of China's rapid growth on its neighbouring countries using a dynamic global CGE model, the MMC model. We first simulated a "real" or convergence scenario -showing how the economies of China and its neighbours might evolve based on historical data during 1997-2005 and on prevailing historical trends during 2005-2010. We then simulate a non-convergence scenario, in which it is assumed that technological progress in China proceeds in line with progress in the United States, rather than at the rate consistent with the convergence scenario. The simulation results show that, indeed, China's technological convergence leads to increased world prices for mining products and to lower world prices for manufactures, especially those it exports extensively. However, this study also identified positive effects that China's convergence has on the neighbouring countries' terms of trade. The rise in the prices of energy and primary inputs tends to increase the export price index of exporters of these products. The fall in the price of manufactured goods reduces the import price index for countries that source a significant share of their manufactured imports from China. Furthermore, China's convergence leads to expansion in world trade which, in turn, leads to increased demand for exports of transportation and insurance services. Consequently, China's convergence tends to have a positive impact on prices of services exports. Due to the offsetting factors, the overall impact of the convergence on terms of trade is small and varies depending on the economic structure of each of the neighbouring countries. The impact of China's rapid growth on most of the neighbouring countries' real GDP and GNP are positive.