China's exports

Just how export-dependent is China? (This is a follow-up on a discussion over at Brad Setser's blog)

China's exports are roughly 35-40 % of GDP.

However, China uses a lot of foreign-sourced components, as well as foreign-sourced raw material in its exports. Therefore, it becomes important to identify the value-added component of China's exports.

Broadly speaking, China's exports fall in three categories:

- Electronics exports have grown very fast; these products use a very large amount of foreign-sourced components from Taiwan, Korea and Japan. Though some have argued that the value-added of this sector, while still low, has increased over time as more and more components are being produced in China.

- Labor-intensive consumer goods (e.g. cloths, shoes, toys); these products use comparatively few foreign-sourced components; the growth of this sector has slowed, as more and more of it has been moved to places like Indonesia, Vietnam, etc.

- Heavy Industry (Steel, ships, etc.); these products use foreign-sourced commodities (e.g. iron ore), but have a comparatively high domestic value-added

Opinions differ as to the overall value-added of China's exports. Estimates are as low as 10 % for electronics and 25 % overall, but several academic studies have come to the conclusion that 45-50 % is more realistic.

45-50 % value-added on 35-40 % exports/GDP leaves us with 15-20 % of export value-added in % of GDP.

This also sounds reasonable based on a plausibility check:

The value-added must be the sum of current account surplus and imports for domestic use. Let's see:

- Current account surplus has been 5 % of GDP or more in recent years
- Commodity imports (oil, iron ore, etc.) should have been at least 5 % of GDP as well
- Imports of capital-goods and consumer goods can be expected to make up another 5 % of GDP

=> Sum total is at least 15 %, probably more

In other words: If demand for Chinese exports drops by 10 %, this translates into 1.5-2.0 % less GDP growth (assuming the drop in export demand is similar over all sectors of the export industry; if the drop is more pronounced in electronics, the drag on GDP would be lower).

Compared to the US, China's export dependency is higher: The US export value-added is roughly 10 % of its GDP.

Compared to Germany, it is lower: German exports are roughly 40 % of GDP. I don't have any solid numbers for value-added, but my guess is that 30 % is a reasonable estimate. Anything lower than 25 % would definitely be unrealistic (it has been argued that the importance of foreign-sourced components has increased dramatically over the last 10 years, due to extensive sourcing from Eastern Europe and Asia; Hans-Werner Sinn even wrote a book about what he considered the hollowing-out of German industry and its transformatio to a trading-based "bazaar economy"; however, many key sectors such as cars still rely to a very large extent on a locally-clustered supplier network).