Transcript China and the Global Economy - East

China’s Economic Success

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1980s: agricultural de-collectivization, SEZs, etc.
1990s: strengthened profit incentives; modern
management reforms; increasingly privatized corporate
system; urban layoffs; rural hardship; social unrest
2001-2007: urban job growth and rural tax reforms
finally began alleviating hardships inherited from the
previous period; but intensified pollution; greater
attention to social and environmental concerns
2008- : “scientific development” strategy to promote
both economic growth and other important social and
economic goals
Exports: not China’s Engine of Growth
Domestic shifts in investment and
consumption have been responsible for
China’s growth
 The contributions to growth from the
country’s trade surplus have had
secondary importance

Currency Exchange Rate: A Secondary
Influence at Best
China’s exchange rate has remained fairly
stable: $ weakened, but the euro strengthened,
RMB shifts split the difference between these
two major currencies
 Currency misalignment not a convincing
explanation for China’s trade surplus.
China’s global trade surplus is rather small
before 2004. The large increase in trade surplus
after 2004 had domestic economic origins:
tightened credit and reduced investment slowed
imports

Size of the Chinese economy
•
2010 GDP $5.9 trillion (compared to $14.7
trillion for the U.S.)
China’s total economy will be twice as large as
America’s by midcentury, while its standard of
living will be only two-thirds of America’s at
that time
GDP Development of China and India
Year
GDP
(million
USD)
GDP
GDP per
(growth capita
rate)
(USD)
GDP per
capita
(growth
rate)
2010
5,926,600
10.4
4,430
9.9
2009
4,990,526
9.2
3,748
8.6
2008
4,521,827
9.6
3,414
9.1
2007
3,495,664
14.2
2,652
13.6
2006
2,713,495
12.7
2,070
12
2005
2,257,619
11.3
1,732
10.7
2004
1,931,644
10.1
1,490
9.4
2003
1,640,966
10
1,274
9.3
2002
1,453,820
9.1
1,135
8.4
2001
1,324,818
8.3
1,042
7.5
2000
1,198,475
8.4
949
7.6
1999
1,083,279
7.6
865
6.7
1998
1,019,462
7.8
821
6.8
1997
952,653
9.3
774
8.2
The Effect of Size on the Chinese Economy
Disadvantages:
global attention
need for natural resources and commodities
constraints on economic growth
 Advantages:
economies of scale
global financial market (e.g., Hong Kong & Shanghai)
abundant labor supply – attracts trade and FDI
consumers – makes it possible to transition into
domestic-oriented growth strategy
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Challenges to Sustained Economic Growth
Can China sustain its growth?
 Growing inequality
 Social unrest
 Pollution
 Corruption
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China and the Global Economic Crisis
I. Global Uncertainty
1. Compared to the Great Depressions of the
1930s:
 more sovereign actors;
more complex relationships;
the existence of functioning regional or global
economic organizations;
 the role of the dollar as the global currency;
 greater international interactions made possible
by transportation and communications revolutions
2. Differences with the 1997 Asian Financial crisis
(AFC)
 AFC took place within a relatively stable global
environment; uncertainty limited to the region
 Recovery plans could be based on familiar
patterns of increasing production and selling to
markets in the USA and Europe
 Developed countries were indifferent to the
difficulties of Asian governments
II. Global Certainties
 The US and Europe are likely to remain the
largest nodes in the world economy despite
declining share
 The growth of middle-income countries and the
emergence of some low-income countries from
destitution
 Growing pressures on world resources,
including energy, materials, and food
 Increasing problems of sustainable development
III. Challenges for China
 Shift external development strategy away from
producing goods for existing markets toward
developing new markets (especially in the
middle-income countries)
 Develop domestic markets, consumption and
national economic infrastructure
 Sustainable development
 Challenges of regional re-oganization
China in the World Economy
Openness of the Economy
Trade to GDP ratio:
1979: 17%
1982: 22%
1994: 38%
2004: 67%
Growth in Foreign Direct Investment (FDI)
Inward FDI: annual utilized FDI about $116
billion in 2011; total accumulated FDI actually
used between 1979 and 2011 were $ 1164
billion.
 Increasing Chinese outward FDI: from $2.7
billion in 2002 to $56.5 billion in 2009

Utilized FDI in China: 1983-2009
Trade Reform since 1978
I.
Development of the so-called “exportprocessing” trade (facilitated by the
establishment of Special Economic
Zones)
from the old triangular (or processing
trade) to regular trade (i.e., “walking on
two legs”)
II. Liberalizing the Foreign Trade System

Devaluation: from 1.5 yuan to the dollar in 1980 to
3.5 yuan to the dollar by 1986
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Demonopolization of the foreign trade regime:
expand the number of companies authorized to
engage in foreign trade; 5,000 FTC by 1988

Creation of a system of tariffs and non-tariff barriers

Adopted selective measures of export promotion
(e.g., rebates of value-added taxes for exports; banks
provided preferential interest rates to exporters;
generous financing to new investment projects
designed to produce exports)
China's Foreign Trade: 1978-2009
$ billion
3000
2500
2000
1500
Total
Exports
Imports
1000
Balance
500
0
-500
Source: China Statistical Yearbook, 2010.
Year
%
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Exports as % of GDP
45
40
35
30
25
20
15
10
5
0
China's Top Trading Partners, 2010 ($ billion)
Rank
Country/region
Volume
1
United States
385.3
% change over
2009
29.2
2
Japan
297.8
30.2
3
Hong Kong
230.6
31.8
4
South Korea
207.2
32.6
5
Taiwan
145.4
36.9
6
Germany
142.4
34.8
7
Australia
88.1
46.5
8
Malaysia
74.2
42.8
9
Brazil
62.5
47.5
10
India
61.8
42.4
Source: PRC General Administration of Customs, China's Customs Statistics
China's Trade with Asia, 2009
%
120
100
80
47
53
40
60
Others
Asia
40
20
53
47
Total
Exports
60
0
Source: China Statistical Yearbook, 2010.
Imports
China's Trading Partners (Countries), 2009
$10,000
3500
3000
2500
2000
Total
1500
Exports
1000
Imports
500
0
U.S.
Japan Hong Kong
Source: China Statistical Yearbook, 2010.
South
Korea
Taiwan
China's Top Export Destinations, 2010 ($ billion)
Rank
Country/region
Volume
1
United States
283.3
% change over
2009
28.3
2
Hong Kong
218.3
31.3
3
Japan
121.1
23.7
4
South Korea
68.8
28.1
5
Germany
68.0
36.3
6
The Netherlands
49.7
35.5
7
India
40.9
38.0
8
United Kingdom
38.8
24.0
9
Singapore
32.3
7.6
10
Italy
31.1
Source: PRC General Administration of Customs, China's Customs Statistics
53.8
China's Top Import Suppliers, 2010 ($ billion)
Rank
Country/region
Volume
1
Japan
176.7
% change over
2009
35.0
2
South Korea
138.4
35.0
3
Taiwan
115.7
35.0
4
United States
102.0
31.7
5
Germany
74.3
33.4
6
Australia
60.9
54.1
7
Malaysia
50.4
55.9
8
Brazil
38.1
34.7
9
Thailand
33.2
33.3
10
Saudi Arabia
32.8
39.2
Source: PRC General Administration of Customs, China's Customs Statistics
China's Trading Partners (Regions), 2009
$10,000
14000
12000
10000
8000
Total
6000
Exports
Imports
4000
2000
0
Asia
Europe
Source: China Statistical Yearbook, 2010.
North
America
Latin
America
Trade by stage of production, 2002
Imports (%)
Exports (%)
Primary goods
10.3
2.9
Intermediate goods
63.3
37.1
Parts and
Components
27.5
15.5
Semifinished goods
35.9
21.6
26.3
60.0
Consumer goods
5.1
40.3
Capital goods
21.2
19.7
Final goods
Composition of Chinese Trade, 2003
Exports
($ billion)
Imports
(% of total)
Exports
(% of total)
0-1. Food, beverages, tobacco 6.5
2-4. Crude materials, fuel,
oils
66.3
18.6
1.6
4.2
16.3
16.1
3.7
3.3 Petroleum
26.7
5,6. Chemicals and
manufactured materials 98.7
5.8
6.5
1.3
61.7
23.9
14.1
51. Organic chemicals
57. Plastics in primary
forms
15.9
5.3
3.8
1.2
13.9
0.8
3.4
0.2
67. Iron and Steel
7. Machinery and transport
equipment
22.0
4.8
5.3
1.1
192.9
187.9
46.7
42.9
51.8
22.9
12.6
5.2
123.5
150.0
29.9
34.2
Sector
71-74. Industrial
machinery
75-77. Electronic,
telecom, and electrical
machinery
Imports
($ billion)
Composition of Chinese Trade, 2003
Imports
($ billion)
Exports
($ billion)
Imports
(% of total)
Exports
(% of total)
33.0
0.5
126.1
9.0
8.0
0.1
28.8
2.1
84. Clothing
1.4
52.1
0.3
11.9
85. Footwear
0.4
13.0
0.1
3.0
89. Miscellaneous
5.6
31.5
1.4
7.2
Total
412.8
438.4
100.0
100.0
Sector
8. Miscellaneous
manufactured articles
82. Furniture
Source: Naughton, The Chinese Economy, 2007.
U.S.-China Trade: 2001-2010
$ billion
500
400
U.S. imports from China
300
200
US. Exports to China
100
0
2001
2002
2003
2004
2005
-100
2006
2007
2008
2009
2010
U.S. trade balance with
China
-200
Total
-300
-400
Source: China Statistical Yearbook, 2010.
Top US Exports to China, 2010 ($ billion)
HS#
85
84
12
88
90
39
87
28, 29
47
74
Commodity
description
Electrical machinery and
equipment
Power generation
equipment
Oil seeds and oleaginous
fruits
Aircraft and spacecraft
Optics and medical
equipment
Plastics and articles
thereof
Vehicles, excluding rail
Inorganic and organic
chemicals
Pulp and paperboard
Copper and articles
thereof
*Calculated by USCBC
Source: ITC
Volume
% change over
2009
11.5
21.9
11.2
33.6
11.0
18.1
5.8
8.0
5.2
31.2
4.8
10.5
4.5
134.4
4.5*
34.2*
3.0
22.0
2.9
62.0
Top US Imports from China, 2010 ($ billion)
HS#
Commodity description
Volume
% change over
2009
85
Electrical machinery and
equipment
90.8
24.5
84
Power generation equipment
82.7
32.5
61, 62
28.8
18.1
25.0
7.7
94
Apparel
Toys, games, and sports
equipment
Furniture
20.0
24.5
64
Footwear and parts thereof
15.9
19.4
39
Plastics and articles thereof
9.6
20.1
72, 73
Iron and steel
8.4*
4.4*
42
Leather and travel goods
7.5
24.4
90
Optics and medical equipment 7.0
25.7
95
*Calculated by USCBC
Source: ITC
U.S. Trade Deficits against China and Japan
300000
250000
200000
150000
U.S.-China Trade Deficit (million USD)
U.S.-Japan Trade Deficit (million USD)
100000
50000
0
Understanding the U.S. Trade Deficit
against China

The size of the bilateral trade imbalance is subject to
debate (ie. The role of Hong Kong)
Five Potential Explanations:
 Restrictive U.S. Export Licensing?
 Is China Pursuing Mercantilist Policies?
 China’s Low-Wage Advantage
 China’s Critical Role in Asian Production
Networks
 Undervaluation of the Chinese Currency
Restrictive U.S. Export Licensing?
Chinese
officials claim that trade
imbalance would be much less if U.S.
liberalized export licensing
However, the Department of Commerce
approved 80 percent of the total
The bilateral deficit would have been
reduced by only 0.3 percent if the Dept. of
Commerce approved both the rejected
and returned application
Is China Pursuing Mercantilist Policies?
(1) Relatively modest global current account surplus
1.6% between 1993 and 2002
(2) Chinese government reduced barriers to imports
-- average applied import tariffs have been reduced from 50%
in 1982 to 10% in 2005;
-- Import tariffs compared favorably to other major
developing-country exporters
applied import tariff rate in 2004:
China: 10.4%
India: 29.1%
Mexico: 18.1%
Brazil: 12.4%
Indonesia: 6.9%
-- Removed all licensing requirement in accession to the WTO
in 2001
Is China Pursuing Mercantilist Policies?
(continued)
(3) Ratio of imports to GDP: from 5% in 1978 to
30% in 2005
(4) fastest growing export market for U.S. firms:
U.S. exports to China rose by 160% from 2000 to
2005
China’s low wage is not necessarily the reason
for the huge U.S.-China trade deficit
Productivity of a Chinese worker on average is
only a small fraction that of an American
 Low wages can be an advantage where labor is
a larger share of total costs (shoes and apparel)
but not in other sectors where wages are only
5% of the production costs (semiconductors,
microprocessors etc)
 Overall, productivity is more important than
low wage

China’s Critical Role in Asian Production
Networks
Goods that are assembled from imported parts
and components now account for about 55
percent of China’s total exports and about 65
percent of the goods that China exports to the
U.S.
 When exported to the U.S. the entire value is
counted as imports from China.

Undervaluation of Chinese currency
Until 1994, RMB was substantially overvalued
 Nonetheless, undervaluation of RMB which has
increased since 2002 has worsened the imbalance of
bilateral trade
 China’s emergence as the main point of final assembly in
Asian production networks
 even if U.S. global trade deficit shrinks, the U.S. may
continue to have a large bilateral trade deficit with
China.
 U.S. policy should focus on reducing China’s global
current account surplus

China- an advanced technology superstate?
Engineering graduates are impressive but quality
is not (one-in-ten able to compete)
 China’s R&D expenditure is only one-tenth that
of U.S.
 U.S. accounts for 40 percent of global R&D
expenditure
 Almost 90 percent of its exports of electronic
and information technology products are
produced by foreign companies (e.g Taiwan,
South Korea)

Purchase of U.S. treasury bonds
Foreign reserve $800 billion in 2005
 China’s contribution to the total interest
rate effect of foreign purchases of U.S.
financial assets is quite small, about 20-25
points
 China accounts for only 15 percent of net
foreign purchases of U.S. financial assets

Is China’s purchase of U.S.
companies a concern?
Between 2000-2004 averaged less than
$50 million annually and accounted for
0.1 percent of inward direct investment
 It is likely to rise: Chinese companies
encourages its three major international
oil companies to build up secure supplies
 Likely to spend more on energy
 Two countries can work together to
meet energy objectives

China and the GATT/WTO
I.
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China’s Bid for the WTO: A Chronology
1948: Taiwan joined the GATT
1950: the Nationalist Regime Withdrew from the GATT
1986: Beijing submitted it’s application for GATT
Post-1989: Negotiations stalled
1998: Following the Asian financial crisis, negotiations
resumed in earnest
April 1999: Premier Zhu Rongji visited the U.S., but failed
to reach an agreement
November 15, 1999: Signed the U.S.-China Agreement on
WTO
September 2000: Congress approved Permanent Normal
Trading Rights (PNTR) for China
II. Terms of Agreement
Agricultural tariffs: fall to 17.5% by 2004
Average tariff on industrial products: falls to 9.4% by 2005; auto
tariffs fall from 80-100% to 25% by 2006
Financial services (banking, insurance, and securities) increased
access phased in over 5 years
Telecom: ends ban on foreign investment; allows 50% ownership
in internet and paging services; 49% ownership in mobile telecom,
domestic and international services.
Eliminates import quotas and licensing requirements by 2005
Grants substantial import and distribution rights to foreign
corporations
Enhances IPR protection
U.S. agrees to extend China PNTR as a WTO member
China accepted the so-called “WTO-plus” commitments,
including:
(a) will be treated as a non-market economy (NME) in
antidumping investigations for 15 years upon accession
(b) transitional country-specific safeguard
III. Political and Economic Issues during the
Accession negotiations
1.accession or resumption of membership?
2.the integration of a transitional economy into the liberal
international economic order
3.Should China join the WTO as a developing country?
4. Taiwan
IV. Managing US.-China Trade disputes
under the WTO
The difficulty for the U.S. to find the “right”
exporters for effective retaliation in disputes
vis-à-vis China
(a) the non-transparency of Chinese politics
(b) most Chinese exports to the U.S. are lowend products which have many more potential
consumers in the global economy and may be
easily exported to alternative markets
(c) the substantial share of Chinese exports
generated by U.S.-based multinational
corporations
China and the Trans-Pacific Partnership (TPP)
I.
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
Background
Plurilateral agreement
Initiated in 2009
In November 2011, 9 TPP countries (Australia, Brunei,
Chile, Malaysia, New Zealand, Peru, Singapore, the
United States, and Vietnam) announced the
achievement of the broad outlines of the agreement
Possible inclusion of Japan, Canada, and Mexico into
the agreement
U.S. Interests in the TPP




boost U.S. economic growth and support the creation and
retention of high-quality American jobs by increasing exports to the
Asia-Pacific
the U.S.’ pivot toward Asia
Move forward the trade policy agenda in light of the stalemate of
the Doha Round multilateral trade negotiations and the difficulty of
successfully negotiating bilateral free trade agreements (FTA)
The TPP as a high-quality, 21st century agreement covering policies
on investment and government procurement, labor and
environmental standards, agriculture, intellectual property, and such
new sectors as state-owned and small and medium-sized
enterprises
Potential Obstacles
High regulatory standards (e.g., expansive IPR
requirements)
 Domestic opposition (e.g., agriculture, auto, and
insurance)
 The need to harmonize the trade liberalization
requirements with those of existing bilateral
FTAs

China’s evaluation of TPP
View of U.S. intentions:
-- boost its domestic economy by increasing exports in the AsiaPacific region
-- Short-term direct benefits less important than indirect long-term
economic benefits, including strengthening the trade relationship
between the
Asia- Pacific region and the United States, helping American
enterprises enjoy an enabling FTA environment, and ensuring the
United States’ status as the rule-maker in regional trade regulations
--- U.S. geostrategic intentions: TPP as part of the U.S. strategy of
returning to Asia
--- gain greater influence over the process of Asian regional economic
integration

Chinese Views of TPP’s potential effect on China
1. Possible Negative Effects

Possible “trade diversion”

Potential threat to China’s geopolitical status in the long term

Concern about the prospect that the TPP could be successfully negotiated
and implemented
II. Possible Benefits

Gain the ability to influence the process of ruling-making if China were to
join the TPP early in the process

Facilitate the regional trade liberalization process in Asia

External pressure may propel China to improve its protection of labor and
environmental standards
China’s Strategy to Counter-balance
the Effect of the TPP

Actively promote China’s own FTA agenda
-- the launching of China-South Korea and
China-South Korea-Japan FTA negotiations
-- use of monetary resources to attract ASEAN
countries
The Effectiveness of China’s FTA Strategy
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
The constraining effect of political relations
Lack of centralized negotiation authority over FTAs and
the difficulty of inter-ministerial coordination
opposition from powerful domestic business groups