Economic Linkages with Northeast Asia

The geographical proximity gives the Jing-Jin-Ji area locational advantages to develop strong economic linkages with Northeast Asia. The strong complementarities between the Jing-Jin-Ji area and Northeast Asia in resource endowments and

economic development further promote their economic linkages. Due to the data limitations, this study focuses on FDI and international trade to examine economic linkages between the Jing-Jin-Ji area and Northeast Asia.

Foreign direct investment

Multinational corporations play a substantial role in linking the Jing-Jin-Ji area with Northeast Asia. The Jing-Jin-Ji area is attractive to foreign investment because it has fairly good access to the domestic markets and relatively cheap labor forces and resources. In addition, the central and local governments have established a large number of development zones along the industrial corridor Beijing-Langfang-Tianjin to attract foreign investments. Northeast Asian economies have been increasingly important foreign investors in the Jing-Jin-Ji area (Figure 17). As expected, Hong Kong has been the dominant investor, contributing to 1200-2600 million US dollars annually during the period of 1997-2005, accounting for 20-45% of total FDI realized in the area. Recently, both Japan and South Korea have improved their status as foreign investors. In 2004 and 2005, Japan invested 1548.34million US dollars and 1503.95million US dollars, respectively, accounting for 21.56% and 17.15% of total FDI in the Jing-Jin-Ji area. South Korea invested 703million US dollars and 797 million US dollars, responsible for about 9-10% of total FDI in the area.

0 50000 100000 150000 200000 250000 300000

1997 1998 1999 2000 2001 2002 2003 2004 2005

Year 10000 US

Dollars

Hong Kong Taiwan South Korea Japan US

Figure 17 Utilized Foreign Direct Investment in the Jing-Jin-Ji area (1997-2005)

Source: Various issues of Beijing Statistical Yearbooks and Tianjin Statistical Yearbooks; Hebei Economic Yearbooks

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Table 2 reports the shares of Japanese and South Korea investments in Beijing, Tianjin and Hebei during the period of 1997-2005. Beijing and Tianjin are the most favored locations for investors from South Korea and Japan, but South Korea favored Tianjin while Japan preferred Beijing. Japan and South Korea heavily invest in transportation equipment, telecommunication and electronic equipment, electrical machinery and equipment in Beijing and Tianjin. The South Korean companies like Hyundai, LG, Samsung and Japanese companies such as Toyota, Sony, and Panasonic are important investors. Recently, Japan has been the most important foreign investor in Beijing and Tianjin. In 2004, some 25.51% of FDI in Beijing and 24.84% of FDI in Tianjin were from Japan. As expected, Hebei province has not been the top location for investments from Japan and South Korea (Figure 18). In 2005, Japan and South Korea invested about 135million US dollars and 103million US dollars in Hebei, accounting for 7.06% and 5.37% of total FDI in Hebei. Compared to Beijing and Tianjin, Hebei is less attractive to investments from Japan and South Korea while capital and technology intensive investments are drawn to Beijing and Tianjin. Only some labor and resource intensive projects from Japan and South Korea may invest in Hebei.

Table 2 Utilized FDI in Beijing, Tianjin and Hebei and Shares of Japanese and Korean Investments

Beijing Tianjin Hebei

Year Million dollars

S. Korea (%)

Japan (%)

Million dollars

S. Korea (%)

Japan (%)

Million dollars

S. Korea (%)

Japan (%)

1997 1077 3.83 13.65 2511 4.58 14.17 1496 12.41

1998 1812 2.55 17.00 2518 13.44 8.61 1639 16.28

1999 1782 2.47 8.10 2532 4.13 11.08 1443 8.41

2000 2187 3.13 22.84 2560 1.08 6.44 1024 7.75

2001 1663 1.09 11.32 3220 12.23 8.37 757 5.83 11.84

2002 1793 1.80 10.65 3806 6.40 7.80 824 7.49 8.40

2003 2147 10.64 11.31 1633 12.69 14.94 1116 5.96 10.72

2004 3084 10.89 25.51 2472 11.63 24.84 1623 4.93 9.09

2005 3526 7.31 22.65 3329 13.12 17.13 1913 5.37 7.06

Source: Beijing Statistical Yearbook 2006; Tianjin Statistical Yearbook 2006 and Hebei Statistical Yearbook 2006

Spatial division of labor between the Jing-Jin-Ji area and Northeast Asia particularly facilitates foreign investments from Japan and South Korea to the Jing-Jin-Ji area. Market potential and cheap labor and resources are the main factors that attract foreign investments to the Jing-Jin-Ji area. High quality work force and good transportation infrastructure are the additional attraction. To take advantage of cheap labor and market access, multinational corporations from Northeast Asian economies largely invest in the assembly functions in the Jing-Jin-Ji area, which import intermediate goods from home economies and export finished goods back to those economies or the third party economies. As FDI from Northeast Asia increases,

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international trade with those economies also grow rapidly, leading to further

economic integration in Northeast Asia. For example, the Korean automaker Hyundai established a joint venture which has focused on the assembly of cars in Beijing. This assembly plant has heavily relied on the imports of automobile designs, high quality steel products, and some auto components and parts from South Korea and Japan. The joint venture has also attracted several suppliers of auto components and parts to the Shunyi district from South Korea, providing for more than 50% of auto components.

Many electronic assemblers in Beijing and Tianjin such as those invested by Sony-Ericsson, Panasonic, Sony, and JVC, LG, and Samsung are also heavily dependent on the imports of electronic components and parts from Japan and South Korea. It is no surprise that electronic products dominate the exports and imports in Beijing and Tianjin.

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

1997 1998 1999 2000 2001 2002 2003 2004 2005

10000 US Dollars

Hongkong Taiwan South Korea Japan US

0 20000 40000 60000 80000 100000 120000 140000 160000 180000

1997 1998 1999 2000 2001 2002 2003 2004 2005

10000 US Dollars Hong Kong

Taiwan South Korea Japan US

21 0

10000 20000 30000 40000 50000 60000 70000 80000

1997 1998 1999 2000 2001 2002 2003 2004 2005

10000US Dollars Hong Kong

Taiwan South Korea Japan US

Figure 18 Utilized FDI in Beijing (upper), Tianjin (middle) and Hebei (bottom)

Source: Beijing Statistical Yearbook 1998-2006; Tianjin Statistical Yearbook 1998-2006; Hebei Economic Yearbook 1998-2006.

International trade

The Jing-Jin-Ji area has strong trade linkages with South Korea and Japan.

Recently, the volumes of exports and imports have grown rapidly (Figure 19). Beijing and Tianjin share similar patterns of trade with the two countries. First, imports from Japan and South Korea have experienced fast growth since 2002. By 2005, Beijing and Tianjin realized imports of 4.27 billion US dollars and 5.31 billion US dollars from Japan, respectively. Japan was responsible for 18.4% and 20.4% of total imports in Beijing and Tianjin. Imports from South Korea to Beijing saw an exponent growth since 2002, which was partially associated with the introduction of automaker

Hyundai. About 24.4% of total imports in Tianjin were from South Korea in 2005 (Table 3). Overall, about 30% of imports in Beijing and 45-50% of imports in Tianjin were from South Korea and Japan, indicating the strong economic linkages between the Jing-Jin-Ji area and Northeast Asia. Second, exports to South Korea and Japan were smaller than imports from the two countries and have grown slowly. Beijing and Tianjin were net importers for South Korea and Japan. In 2005, exports from Beijing and Tianjin to Japan were 2.03 billion US dollars and 2.85billion US dollars. Exports to South Korea were much smaller. In Jing-Jin-Ji area, Hebei has the least trade volumes with South Korea and Japan. In 2005, Hebei realized exports of 1.21 billion US dollars to Japan and 1.16 billion US dollars to South Korea, respectively, which accounted for about 10.6% and 11.0% of total exports from Hebei. Imports from the two countries were much smaller. South Korea and Japan have been responsible for about 20-30% of total exports and15-25% of total imports in Hebei (Table 2). Unlike Beijing and Tianjin, Hebei has been a net exporter for South Korea and Japan.

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Table 3 Importance of International Trade with South Korea and Japan in the Jing-Jin-Ji Area (%)

Year Beijing Tianjin Hebei

S. Korea Japan S. Korea Japan S. Korea Japan

EX IM EX IM EX IM EX IM EX IM EX IM

1998 23.8 17.6 8.5 19.9 16.6 27.5 4.1 24.4 6.0 54.7

1999 2.2 6.0 22.3 19.3 9.1 21.9 17.7 25.3 10.4 9.2 17.2 14.3 2000 2.1 4.9 21.6 20.4 9.2 22.3 17.4 24.6 13.4 11.3 18.6 13.8 2001 8.2 4.2 20.8 19.4 10.4 21.2 18.3 23.7 12.3 10.3 16.8 12.5 2002 6.5 6.1 18.5 21.2 9.9 24.7 14.4 25.3 13.5 9.4 14.9 16.4 2003 3.8 12.7 17.9 17.7 10.6 25.9 12.6 26.0 10.4 7.1 12.7 11.2

2004 16.9 19.8 8.6 24.6 11.4 24.1 10.5 6.9 11.9 9.5

2005 11.9 18.4 8.6 24.4 10.4 20.4 10.6 7.0 11.0 8.5

Sources: Various issues of Beijing Statistical Yearbooks, Tianjin Statistical Yearbooks and Hebei Statistical Yearbooks.

The different trade patterns with Japan and South Korea among Beijing, Tianjin and Hebei are attributed to several reasons. First, Beijing and Tianjin are comparably developed and may have similar demands with Japan and South Korea in products like machinery, equipment and high-tech goods. Second, the large amount of

investments in Beijing and Tianjin from Japan and South Korea resulted in growth of imports of intermediate goods and services. Foreign enterprises are responsible for 65% of imports in Beijing and 80% of imports in Tianjin, illustrating the relation between foreign investment and imports in the Jing-Jin-Ji area.

Third, Hebei is abundant in resources and cheap labor and is underdeveloped. The strong complementarities between Hebei and Japan and South Korea in resource endowment and economic development encouraged Hebei to export labor intensive and resource-based products to Japan and South Korea. Foreign investments from Japan and South Korea in Hebei have been largely concentrated in the labor and resource intensive industries, facilitating foreign enterprises to export back to home countries.

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500 1000 1500 2000 2500 3000 3500 4000 4500

1998 1999 2000 2001 2002 2003 2004 2005

Million US Dollars

Imports from Japan Exports to Japan

Imports from South Korea Exports to South Korea

0 1000 2000 3000 4000 5000 6000 7000

1998 1999 2000 2001 2002 2003 2004 2005

Million US Dollars

Imports from Japan Exports to Japan

Imports from South Korea Exports to South Korea

0 200 400 600 800 1000 1200 1400

1998 1999 2000 2001 2002 2003 2004 2005

Million US Dollars

Imports from Japan Exports to Japan Imports from South Korea

Exports to South Korea

Figure 19 Exports to and imports from Japan and South Korea in Beijing (upper), Tianjin (middle) and Hebei (bottom)

Sources: Various issues of Beijing Statistical Yearbooks, Tianjin Statistical Yearbooks and Hebei Statistical Yearbooks.

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Our analysis suggests that the Jing-Jin-Ji area has strong economic linkages with the Northeast Asian economies. In particular, Beijing and Tianjin has been fairly economically integrated with the two countries. Foreign investments have played a substantial role in strengthening the economic linkages. To enter the Chinese market and exploit the cheap labor and resources, Japanese and Korean corporations relocate labor-intensive functions or industries to the Jing-Jin-Ji area and sell the finished products in China or export back to the home economies. Japanese and Korea corporations have also heavily invested in some capital and technology intensive industries but focus on assembly functions, creating huge demand for intermediates goods from the home countries. As Japanese and Korean corporations increase their resource commitments in China, they started to transfer other high profile functions such as regional headquarters, research and development and technical services, to the Jing-Jin-Ji area. The new international division of labor established by Japanese and Korean multinational corporations has gradually integrated the Jing-Jin-Ji area with the Northeast Asian economies.