Substitution of Exports to the United States
Substitution of Exports to the United States

Pochih Chen
National Taiwan University
21 Hsu Chow Rd.
Taipei, Taiwan
pochih@taiwanthinktank.org

The Substitution among the Exports
of Taiwan, China, and Other Countries
to the United States*

Abstract
The substitution among the exports of countries is a major phe-
nomenon and foundation of the fast-changing global economy.
However, the econometric method using aggregate data can usu-
ally estimate the extent of substitution only several years after the
substitution has happened. This paper designed a detailed market
share (DMS) analysis method that uses detailed trade data to
document the actual replacement among the exports of different
countries. The DMS indicators can measure the replacement that
happened in every product or product group for every year.
Therefore, DMS indicators can also be used as variables in further
econometric research. This paper employed indicators to analyze
the exports of Taiwan and China to the United States during
1990 and 2006. We found that the proportion of Taiwan’s ex-
ports to the United States that was replaced by China during this
period was about 71 percent to 85 percent. Taiwan, Japan, and
other developed countries were the major sources of China’s ex-
port growth. China also replaced a great part of developing coun-
tries’ exports. China has also started to replace the high-end
products of advanced countries. We found that 63 percent,
60 percent, and 33 percent of the highly human capital–intensive
exports from Taiwan, Korea, and Japan, respectively, have been re-
placed by China. Most of these replacements happened in high-
end products after 2000. Therefore, more products from ad-
vanced countries will be replaced by China in the near future.

1. Flying geese are not flying one after another now

During the 1960s and 1970s, it was widely believed that
export opportunities moved from high-income countries
to low-income countries and then to even lower-income

* I would like to thank Chen Yi Chen and Hsiao Hui Wu for their

helpful assistance and suggestions.

Asian Economic Papers 7:2

© 2008 The Earth Institute at Columbia University and the Massachusetts

Institute of Technology

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Substitution of Exports to the United States

countries. This view is called the ºying geese hypothesis (Morris-Suzuki 1989, 151).
Therefore, many products exported by Japan were expected to become the exports
of the four newly industrialized countries (NICs) in Asia, which were Hong Kong,
Singapore, South Korea, and Taiwan, some years later. Industrial development in
the NICs did follow the route of Japan, especially Taiwan and Korea. Executives in
Taiwan often looked for their new products from existing Japanese products.

Successful economic growth led by export expansion in the Asian NICs attracted the
attention of other countries, and other East Asian developing countries started their
own export-oriented growth strategy in the 1980s. At ªrst, they followed the route
of the four NICs. They attracted investment from the four NICs and Japan and re-
placed the exports of the four NICs and Japan in the world market. The ºying geese
hypothesis was still valid.

However, because the population of the developing countries today is almost 100
times larger than the population of the four NICs in 1960s, the process of export re-
placement after the 1980s is not happening as gradually and orderly as before. Com-
petition among the developing countries resulted in developing countries replacing
not only the exports of NICs, but also the exports of other developing countries. It is
believed that the 1997 East Asian ªnancial crisis was at least partly caused by the
rise of China and the signiªcant depreciation of the RMB in the early 1990s. The
trade data show that the share of Thailand, Malaysia, and Indonesia in the U.S. mar-
ket was increasing rapidly before 1995, but decreased after 1995. In other words,
some of the export opportunities for these three countries were taken away by other
countries, including China, around 1995. The relative decline of the export growth
rate in these countries then decreased their economic growth rates.

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The huge labor supply of developing countries also means that simply replacing the
exports of the four NICs is not sufªcient to maintain the fast economic growth of de-
veloping countries, they also had to replace some of the exports of the advanced
countries directly. The free and more convenient international ºow of goods, capital,
technology, and business organization under globalization has also enabled devel-
oping countries to attract investment and cooperation directly from advanced coun-
tries. Many geese are now ºying directly from the advanced countries to the devel-
oping countries. The ºying geese hypothesis can no longer explain much of the
shifts of production sites.

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This paper has two aims. The ªrst aim is to capture the substitution of exports
among East Asian countries, by developing a model that can represent the replace-
ment among exporting countries. The second aim is to employ these indicators to

2

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Substitution of Exports to the United States

analyze the export replacement among Taiwan, China, and other countries in
U.S. imports.

2. Detailed market share analysis of substitution

When there are only two producers for one product, it is quite natural to assume
that the reduction in the sale of one producer must mean that there has been an in-
crease in the sale of the other producer. When there are many producers, it becomes
harder or even impossible to identify who replaced whose products. If we are inter-
ested in a single product, we may trace everything that happened in the market to
ªnd out the actual substitution. If we are interested in a limited number of indus-
tries, we may use the information about prices and supply capacity in some econo-
metric model to guess the actual substitution. However, the data might not be avail-
able, the models might not be able to catch the structural changes, and the results
would change drastically with changes in model assumptions.

Fortunately, when we look at a single product or a small category of products in the
imports of a country, we may ªnd that there is usually only a small number of major
exporting countries. We may also ªnd that major changes of market share in a single
period often happen among an even smaller number of countries. Therefore, when
the market share of a country increases or decreases, it is often not so difªcult to
identify or guess the sources or destinations of the changes in this market share.
When we do not have any information other than the changes in market share, a
simple and neutral guess is to assume that the reduction in the share of any country
is divided by all countries whose share increased in the same period. It is also natu-
ral to assume that the share lost by any country is divided by the gaining countries
according to the size of each country’s actual increase in the market share.

Similar to the method used by Chen (1999), we will use the following symbols to il-
lustrate the method for estimating the substitution among countries:

S(i,t,n): Country i’s share in the U.S. import of product n in period t.
(cid:2)S(i,t,n): The increase of S(i,t,n) in period t.
r(i,j,t,n): The share of country i replaced by country j in period t.
A(i,t,n): The set of countries with (cid:2)S(i,t,n) (cid:3) 0.
B(i,t,n): The set of countries with (cid:2)S(i,t,n) (cid:2) 0.
M(t): U.S. total imports in period t.
M(t,n): U.S. total imports of product n in period t.
R(i,j,t,n): Country i’s export value of product n replaced by country j in period t.

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Substitution of Exports to the United States

We will assume:

r i j t n
( , , ,

)

(cid:2) (cid:3)

D

S i t n
( , ,

)

D
(cid:3) (cid:5)

S j t n
)
( , ,
D
S k t n
( , ,
(cid:4)
k A i t n
)

( , ,

(cid:4)

;

i

)

(cid:4)

B j A i t n

( , ,

,

)

(1)

Then country i’s export value of n replaced by country j is assumed to be:

(cid:4) 0

otherwise.

R(i,j,t,n) (cid:4) r(i,j,t,n) (cid:3) M(t,n).

(2)

R(i,j,t,n) will be the basic data for the indicators of replacement in the following
analysis. It is true that R(i,j,t,n) may not be an accurate estimator for the actual sub-
stitution. The most detailed trade statistics contain more than 10,000 commodity cat-
egories; many categories still contain more than a single product. When the statistics
of product n actually contain a number of different products, substitution among ex-
porting countries might be quite speciªc, such as country P replacing country Q,
and country X replacing country Y, rather than PQ together replacing XY, as as-
sumed in equation (1). Because our interest is in the general trend and characteris-
tics of substitution rather than the substitution in any speciªc product, we will add
the R(i,j,t,n) of all products or of products with similar characteristics together in our
analysis. This aggregation process is expected to reduce the possible estimation er-
rors in equation (2) through the law of large numbers.

The idea here is similar to the constant market share (CMS) analysis of international
competitiveness (see Leamer and Stern 1970, ch. 7). It is assumed in CMS that a de-
crease (increase) in the market share of any product implies a decrease (increase) in
the competitiveness. Therefore, the sum of changes in the export of all products due
to the changes in the market share of each product can be a measure for the changes
in competitiveness. The method in equations (1) and (2) is to further attribute the
decrease in one country’s market share of each product to countries with increasing
share in that product, so that we can measure the substitution among countries.

When we add the R(i,j,t,n) of all products together, we have

R i j t
( , , )

(cid:2) (cid:5)

n

R i j t n
( , , ,

),

(3)

which is the estimated total exports of country i replaced by country j in this period.
We can also calculate the gross replacement ratio in terms of U.S. total imports as

G(i,j,t) (cid:4) R(i,j,t)/M(t).

(4)

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Substitution of Exports to the United States

3. The replacement between Taiwan and other countries

We classiªed other countries exporting to the United States into some individual
countries and some country groups, as shown in Table 1.

We calculated the r(i,j,t,n) for each of the most detailed product categories in the
U.S. trade statistics from 1990 to 2006. Then we calculated the R(i,j,t) and G(i,j,t) of
Taiwan. We found that the share replaced by China was not only the highest, but
also much higher than other countries or country groups in all periods.

To make the data easier to read, the G(i,j,t) of each period from 1990 to 2006 was
summed to show the total replacement in the past 17 years. The results are shown in
the ªrst column of Table 1. Taiwan’s exports to the United States replaced by China
in the whole period are equivalent to 3.14 percent of the total imports of United
States. Japan and other developed countries also replaced signiªcant shares of Tai-
wan’s export. Japan replaced 0.75 percent and other developed countries replaced
1.30 percent. However, it might be a surprise to some people in East Asia that Mex-
ico replaced more Taiwanese exports to the United States than any Asian country
except China. The total amount replaced by Mexico is 1.03 percent, which is about
one-third of the amount replaced by China.

Taiwan’s exports were also replaced by Korea, Hong Kong, and Singapore. The total
share replaced by these three together is higher than the share replaced by Japan.
Malaysia replaced more of Taiwan’s products than Thailand did. Indonesia and the
Philippines replaced roughly the same amount (0.25 percent) of Taiwan’s share,
with Indonesia replacing more in the early periods. Vietnam started its exports to
the United States later than other countries. Despite the signiªcant development in
Vietnam, Taiwan’s share replaced by Vietnam until 2006 is only 0.03 percent.
Adding these ªve South East Asian countries together, the share they replaced is
only half of the share replaced by China in the same period. Despite economists’
high expectations of India, East Europe, and Brazil, the share of Taiwan’s export to
the United States replaced by them is only 0.11 percent, 0.08 percent, and 0.10 per-
cent, respectively, in the past 17 years. The total amount replaced by them is less
than Taiwan’s export replaced by Thailand alone, and is only about one-tenth of the
share replaced by China. Taiwan’s share replaced by all other developing countries
together is only 0.6 percent, which is just a little bit higher than the share replaced
by Malaysia and is only one-ªfth of the share replaced by China.

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Substitution of Exports to the United States

4. The net substitution of Taiwan exports by other countries

When Taiwan’s exports were replaced by the exports of other countries in one cate-
gory, Taiwan’s exports were also replacing the exports of other countries in other
categories. In fact, Taiwan has been replacing many exports of Japan and other de-
veloped countries for several decades, as expected by the ºying geese hypothesis.
Using equation (4), with j representing Taiwan and i representing other countries,
we found Taiwan is still replacing the exports from developed countries in the
U.S. market. Table 1 shows that Japan’s export to the United States replaced by Tai-
wan during the past 17 years was equivalent to 1.34 percent of U.S. total imports.

The exports of other developed countries replaced by Taiwan during the same peri-
od also reached 1.24 percent of U.S. total imports. We can also ªnd from the replace-
ment ratios of each year that the ratio of Taiwan replacing Japan was declining and
the ratio of Taiwan replacing other developed countries was ºuctuating but stayed
roughly the same in 1990 and 2006.

Let’s deªne the net replacement ratio country i replaced by country j as

N(i,j,t) (cid:4) G(i,j,t) (cid:5) G(j,i,t).

(5)

Using equation (5) to deduct the ratio of Taiwan replacing another country from the
ratio of that country replacing Taiwan, we have the net ratio of Taiwan replaced by
that country. The net ratio was always negative in the case of Japan in the past
17 years, except in the year 2000. In other words, Taiwan is still replacing Japan’s ex-
port as expected by the ºying geese hypothesis. However, the absolute value of the
net replacement ratio is declining. The total net replacement ratio during the past
17 years is only (cid:5)0.59 percent of U.S. total imports. In other words, the share Japan
replaced Taiwan was 56 percent of the share Taiwan replaced Japan. The relation-
ship between Taiwan and Japan is not a simple one-way replacement but a two-way
competition, which is not expected by the ºying geese hypothesis.

Developed countries replaced more exports of Taiwan than Japan, but Taiwan re-
placed more exports of Japan than of other developed countries. The net result was
that the exports of other developed countries were replacing Taiwan’s exports rather
than being replaced by Taiwan’s exports. However, the net ratio was small and was
sometimes positive and sometimes negative in the data period. In order to compare
the relative importance of the exports replaced by other countries and the exports
taken from the same country, we can deªne the relative replacement ratio I as

7

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I i j
( , )

(cid:2) (cid:5)

t

G i j t

( , , ) /

(cid:5)

t

G j i t
( , , )

.

(6)

I(i,j) will be close to zero if the exports of i rarely replaced the exports of j. I(i,j) will
be large if j rarely replaced the exports of i. When i and j are close competitors, I(i,j)
will be close to one. We can ªnd from the fourth column of Table 1 that the relative
replacement ratio of Taiwan replaced by other developed countries is 0.95. They
were replacing each other by almost the same amount. Therefore, we may say that
Taiwan and the developed countries, other than Japan, are competitors in the
U.S. market.

Besides the exports of Japan, the exports of Singapore and Korea were also replaced
by the exports of Taiwan. The cumulative net replacement ratio in the past 17 years
was 0.0583 percent and (cid:5)0.0773 percent for Korea and Singapore, respectively (Ta-
ble 1). The scales are much smaller than in the case of Japan. The relative replace-
ment ratio with Taiwan is 1.36 for Singapore and 1.13 for Korea. Both of them are
lower than the ratio of 1.78 for Japan, but higher than the ratio of 0.96 for other de-
veloped countries. Taiwan seems to have paid more attention in replacing the ex-
ports of neighboring developed countries than replacing the exports of other devel-
oped countries. The pattern between Taiwan and Hong Kong is different. Like the
case of developing countries, the exports of Hong Kong replaced more exports of
Taiwan than the amount of Hong Kong exports replaced by Taiwan. This difference
is probably caused by the fact that a great part of Hong Kong’s exports to the United
States is actually Chinese products.

Table 1 shows the relative replacement ratio of each country in the data period.
There is a tendency that the relative replacement ratio (I) is higher in the higher in-
come countries. The share of exports of each developing country replaced by Tai-
wan’s exports is generally much smaller than the share that that country replaced of
Taiwan. However, the relative replacement ratio is still higher than 33 percent in
most of the developing countries. We may say that Taiwan did not give up compet-
ing in many products that developing countries were exporting. However, Taiwan’s
relative replacement ratio with China and Vietnam is only 0.1067 and 0.1036, respec-
tively. Geese ºying from Taiwan to China and Vietnam rarely ºy back to Taiwan.
One of the reasons is probably because China and Vietnam are more competitive
than other developing countries in production costs. Another possible reason is the
more important role Taiwan’s investment has in these two countries. A great part of
Taiwan’s replacement by these two countries is actually caused by Taiwanese com-
panies that have moved their production and exports from Taiwan to these two
countries. If the export share was taken away by foreign competitors, producers in
Taiwan might be able to take back some of the markets later. When Taiwan’s own

8

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Substitution of Exports to the United States

ªrms moved to foreign countries and took the export share, Taiwan could hardly
take the markets back because it had already lost the production facilities.

China replaced more shares from Taiwan than other countries did. Moreover, Tai-
wan’s relative replacement ratio with China is also much lower than the replace-
ment ratio between Taiwan and other countries. Consequently, Taiwan’s net replace-
ment by China is even more signiªcant. Taiwan’s net share replaced by China in the
past 17 years is 2.80 percent of total U.S. imports. This is higher than the total net
shares Taiwan replaced by other countries. China obtained almost 70 percent of the
shares Taiwan lost to all countries in the past 17 years. The second biggest winner,
Mexico, obtained only 17.4 percent of the shares obtained by China, despite the fact
that Mexico is so close to the United States and has a signed free trade agreement
(FTA) with the United States.

5. The replacement between China and other countries

We found that China replaced huge amounts of Taiwan’s export in the last two sec-
tions. It is also interesting to see what happened between China and other countries.
Column (2) of Table 2 shows the cumulated shares of other countries replaced by
China in the past 17 years. The share of Japan replaced by China (0.514 percent) is
very close to Taiwan’s share replaced by China (0.3358 percent). The share of other
developed countries replaced by China is even higher (1.1956 percent). Developed
countries together lost 6.92 percent of total U.S. imports to China, the four Asian
NICs lost 7.04 percent, Mexico lost 0.7550 percent, and other developing countries
together lost 0.7561 percent. In other words, China has been replacing exports from
all kinds of countries. China did not just replace the exports of NICs or middle-
income countries, as predicted by the ºying geese hypothesis. Many geese now ºy
to China directly without stopping in middle-income countries. The fact that China
can replace so many exports from countries with different factor costs and at differ-
ent stages of economic development is also a challenge to the conventional
Heckscher-Ohlin theory of international trade.

Some years ago when the impacts of the huge labor supply from developing coun-
tries were not so obvious, there were researchers saying that the rise of China and
other developing countries would not hurt the advanced countries because the
products that developing countries can produce had moved to NICs already. More
recently, Bhagwati (2004) also argued that the export growth of low-income coun-
tries could be offset by the decline of the exports from middle-income countries.
However, the data here clearly indicate that advanced countries were also hurt by
the export growth from both lower- and middle-income countries, even though the

9

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Substitution of Exports to the United States

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middle-income countries, especially Taiwan, seemed to have been hurt more. The
analysis on the structure of the exports replaced by China in later sections will show
the tendency that advanced countries would face an even higher challenge from
China very soon.

Other countries also replaced some exports of China. However, we can see from Ta-
ble 2 that the shares other countries replaced China’s export are much lower than
the shares of their exports replaced by China’s exports, except in the case of Viet-
nam. Taiwan’s cumulative net shares replaced by China are the highest among all
countries. The net loss of Japan and other developed countries is slightly lower than
Taiwan’s net loss. Korea’s net replacement by China is about two-thirds of Taiwan’s
net replacement by China. The net replacement ratios in Table 2 are all positive ex-
cept for Vietnam.

Dividing the cumulated share of China replaced by other countries by the cumu-
lated share of other countries replaced by China, we obtained the relative replace-
ment ratio (I) in column (4) of Table 2, but ratios for other countries (both developed
and developing) are less than one. Vietnam’s ratio is 1.49. This is because Vietnam is
the only country in this table that replaced more of the Chinese export share than
had been replaced by China. This ratio is the lowest in the case of Taiwan. The share
of Taiwan replaced by China is only one-tenth of China’s share replaced by Taiwan.

China’s relative replacement ratio with Korea, Singapore, and Japan is 0.1202 per-
cent, 0.1430 percent, and 0.1689 percent, respectively. This ratio is higher in Hong
Kong than in other NICs possibly because some exports from China were reported
as exports from Hong Kong so that the share China replaced by Hong Kong was ex-
aggerated. The relative replacement ratio is about one-third in many countries in-
cluding Thailand, Malaysia, Indonesia, East European countries, Mexico, and other
developed countries. The share replaced by India is only 0.1710 percent. India and
Vietnam did not replace Chinese exports as rapidly as some people expected. How-
ever, the relative replacement ratio for India is 0.6549 percent, which is higher than
all the other countries except Vietnam. Therefore, Vietnam and India might have the
potential to attract more geese from China in the future.

If we apply I(i,j) of equation (6) for a shorter period or for each year, we may also
ªnd that the relative replacement ratio also tends to decline in the past 10 years. Be-
fore 2000, there were several developing countries having the experience of replac-
ing more of China’s export share than the share replaced by China in some of the
years. Vietnam is the only country to have this experience after 2001. China is taking
export market shares from almost all countries. Generally speaking, a country with

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Substitution of Exports to the United States

a higher income and that is closer to China tends to have a lower relative replace-
ment ratio with China.

6. The effects of the replacement between Taiwan and other countries

We used the share in the total imports of the United States as a common scale to an-
alyze the replacement among all countries. The beneªt of this common scale is to fa-
cilitate cross-country comparison. However, the exporting countries are diversiªed
in export size; a loss of small market share by a small country might be much more
harmful to that country than a loss of larger market share by a large country. This
section will use the total exports of the replaced country as the denominator to show
the impact of export replacement on the replaced country. Therefore, we deªne

H(i,j,t) (cid:4) R(i,j,t)/X(i,t) ,

where X(i,t) is the U.S. import from country i in year t.

We can also use the export of the country replacing others as the denominator to
show the beneªt of replacing other countries’ exports:

F(i,j,t) (cid:4) R(i,j,t)/X(j,t).

Then the net replacement ratio using the export of the replaced country as the de-
nominator is

T(i,j,t) (cid:4) H(i,j,t) (cid:5) F(i,j,t).

(7)

(8)

(9)

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d

.

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.

.

T(i,j,t) can represent the net impact effect of the replacement between i and j on i.
The net effect on j is

T(j,i,t) (cid:4) H(j,i,t) (cid:5) F(j,i,t),

(10)

which represents the same net replacement as T(i,j,t) but in a different sign and us-
ing the export of country j as the denominator.

In the case between Taiwan and China, Taiwan’s exports replaced by China (H) was
a large proportion of Taiwan’s exports in the past 17 years. On the other hand,
China’s exports replaced by Taiwan (F) were much smaller.

Consequently, Taiwan’s net replacement by China every year was a signiªcant pro-
portion of Taiwan’s total exports to the United States (Table 3). The ratio is 4.64 per-

f

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12

Asian Economic Papers

Substitution of Exports to the United States

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13

Asian Economic Papers

Substitution of Exports to the United States

cent for 1990 and 5.08 percent for 2006. The ratio ºuctuated between these two
years. The lowest and highest ratio is 2.08 percent in 1996 and 11.75 percent in 2004.

From China’s point of view, the importance of replacing Taiwan’s exports was de-
clining because the total exports of China to the United States were growing faster
than the exports of Taiwan to the Unites States. The net replacement accounted for
6.95 percent of China’s total exports to the United States in 1990 (Table 4). Taiwan
was an important source for China to fetch export opportunities. However, the ratio
declined gradually to slightly above 1 percent in 2000, then rose again because Tai-
wanese companies moved the production and export of more products, such as
notebook computers, to China. After the major movement ended, the ratio declined
again, and became only 0.66 percent of China’s total exports to the United States in
2006. From China’s point of view, Taiwan’s share is much less important now than
in the early 1990s.

Although Taiwan’s exports replaced by other countries were mainly taken by China,
the part taken by other countries was still a signiªcant gain from some countries’
point of view. More than 5 percent of the exports of Thailand and Indonesia to the
United States were taken from Taiwan in 1990 (Table 4). The ratio is also higher than
3 percent in Malaysia and the Philippines in 1990. However, the ratios were declin-
ing in general.

A method to capture the accumulated replacement in terms of the exports of the re-
placed country is to divide the sum of the net value replaced during the period by
the export value of the ªnal year:

CW i j
( , )

(cid:2)

2006

(cid:5)

R i j t
[ ( , , )

(cid:3)

(cid:2)

t

1990

R j i t

X i
( , , )] / ( ,

2006

)

.

(11)

The negative value of the accumulated replacement in terms of the export of the re-
placing country is

CW j i
( , )

(cid:2)

2006

(cid:5)

R j i t
[ ( , , )

(cid:3)

(cid:2)

t

1990

R i j t

X j
( , , )] / ( ,

2006

)

.

(12)

Table 5 summarizes the net replacement between Taiwan and other countries during
1990 and 2006. China replaced 71.21 percent of Taiwan’s exports to the United States
during this period. In other words, Taiwan’s exports to the United States in 2006
could have been 71.21 percent higher if Taiwan’s exports had not been replaced by
China, even if the replaced part of the exports could not grow with other exports
and the imports of the United States.

14

Asian Economic Papers

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Substitution of Exports to the United States

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