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