The China Bogey: The Facts Behind the Fears
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That China’s spectacular economic development is having a major impact on the world is well known, but imperfectly understood, and often exaggerated. Pundits and politicians alike tend to claim a larger role and responsibility for China, and its authoritarian government, in global ills such as high energy prices, climate change, trade and financial imbalances, than is warranted.
China’s rapid economic and industrial growth certainly does add to world demand for scarce raw materials, pushing up the price of commodities such as oil, which has now hit $100 a barrel. But China is only one buyer in world commodities markets, and still much smaller than the United States, despite having a much larger population. It is only one of several large, fast-growing developing economies—India, Russia, and Brazil being others—which are adding demand to a world market previously (and still) dominated by developed countries.
With 20 percent of the world’s population, China accounts for only 5 percent of world GDP (economic output) at market exchange rates, and only 10 percent on a purchasing-power-parity basis (adjusting for price differentials). In contrast, the United States, with less than 5 percent of the world’s population, accounts for 28 percent of world GDP at market exchange rates, and 23 percent in purchasing-power-parity terms. It consumes 25 percent of the world’s oil, while China consumes just 9 percent.
U.S. carbon emissions are more than 6 times greater than China’s on a per capita basis, and nearly 40 percent larger in total. Certainly China’s demand has contributed to high energy prices and accelerated global warming, but not as disproportionately as demand by the U.S. and other developed countries. Furthermore, a good part of China’s carbon emissions are the result not of Chinese domestic consumption, but of its massive export manufacturing machine that serves the needs of foreign—especially U.S.—consumers.
The Dollar-Yuan Link
China does contribute disproportionately to global trade imbalances, running a huge global current account surplus (excess of exports over imports). One reason for this surplus is the decline in the U.S. dollar, to which China’s currency—the yuan—was pegged in 1994. China’s currency thus rose with the dollar in the 1990s, but also fell with it in recent years, making Chinese exports cheap abroad, and foreign imports relatively expensive in the Chinese market.
A loosening of the yuan-dollar peg in July 2005 resulted in a gradual appreciation of the yuan, by over 15 percent to date against the U.S. dollar. However as the dollar itself sank, the yuan continued to fall against the euro, yen, and other currencies, resulting in Chinese exports remaining relatively cheap in world markets, including the U.S. Thus the bilateral Chinese surplus/U.S. deficit expanded even as the U.S. deficit with its other trade partners began shrinking with the weak dollar (which makes U.S. exports cheaper abroad and imports more expensive in the U.S.), and a slowing U.S. economy (which reduces consumption and investment demand for imports). Europe and other Asian countries competing with “artificially cheap” Chinese products in their home and third-country markets, also began calling for a bigger and more rapid appreciation of the yuan.
This is now happening, even as a new labor law, cuts in export subsidies, and high commodity prices add to the appreciating yuan in undermining China’s export manufacturing competitiveness and employment just as the U.S. recession hits. The undervalued currency contributed to domestic inflation, including in fuel and food prices which could lead to social unrest. Raising interest rates to choke off domestic excess demand strengthens the yuan, especially as interest rates fall in the U.S. and other countries, and this, together with continued higher growth in China than in other countries, is already increasing Chinese imports and slowing its export growth.
Still, more than 50 bills targeting bilateral trade with China are floating around the U.S. Congress, including complaints about intellectual property rights violations, restrictions on access to the China market, and safety hazards in Chinese exports. But these concerns are not peculiar to China, and affect only a small fraction of U.S.-China trade, much of which is conducted by U.S. multinationals manufacturing and sourcing in China. Thus, for example, U.S. toy manufacturer Mattel admitted responsibility for design flaws that led to safety problems in its made-in-China toys, and U.S. pharmaceutical companies are taking more responsibility for ensuring the safety of their component imports from China.
Unfair trade practices by China have declined as it has moved toward a more market-based economy, and are increasingly and appropriately settled through the multilateral WTO. Indeed, the U.S.-China trade imbalance for many years benefited U.S. consumers with cheap imports, and low inflation and interest rates. China, like the many other countries with which the U.S. runs deficits (e.g., Canada, Mexico, Japan, Germany, France, South Korea, and Middle East oil exporters), has also been willing to lend and invest its surplus dollar earnings in U.S. assets, thus restraining the fall of the dollar.
Ties to the U.S. Economy
Chinese and other foreign nations’ investments into stumbling U.S. financial services firms, such as Citigroup and Merrill Lynch, were a temporary stabilizing force in the financial market turmoil caused by the U.S. sub-prime mortgage crisis (which has notably nothing to do with China). Many U.S. savers and investors, including employee pension funds, have benefited from the large appreciation of their China stock portfolios, while U.S. companies enjoy fast-growing exports to, and profits in, the China market. Revenues from China and other emerging markets may even help to sustain the loss-making domestic operations of U.S. auto companies losing market share to (non-Chinese) foreign transplant competition at home. Continued if less-strong economic growth in China and other developing countries should reduce the severity of the U.S. recession in 2008.
Given this ever-closer and mostly mutually beneficial intertwining of the U.S. and Chinese economies, why has “China phobia” erupted in the U.S., especially but not only on Capitol Hill, “Lou Dobbs Tonight,” and the presidential campaign trail? One reason is lack of public understanding of the root causes of the U.S. global current account deficit—which include record low savings, high investment, and a large government budget deficit—and of the complex role that exchange rates, including China’s semi-fixed currency, play in this equation. It is surely easier to blame “unfair trade practices.”
Another reason is fear and suspicion of China’s authoritarian government and its motives—reflected in the political opposition which scuttled CNOOC’s bid to acquire Unocal, and Huawei’s proposed minority holding in 3Com—both on supposedly “security grounds” unlikely to be raised with foreign companies of other nationalities. And there are objections to China’s economic relations with governments that violate human rights, such as Sudan and Burma/Myanmar (though India, Malaysia, and other countries also have such relations).
A Historic Shift in the World Economy
More significant, I believe, is that China’s rise to prominence in the world economy epitomizes and signals a historic shift that is difficult for Americans, and others in rich post-industrial societies, to accept. This is the growing relative size and power of hitherto poor, mostly non-Western, developing countries, not just in world markets as buyers and sellers, savers and investors, but also in world affairs more generally, which have been dominated by Western nations for the past half-millennium. Increasingly, it is developing countries that are each other’s and the developed world’s fastest-growing trade and investment partners, such as China and India already are in Southeast Asia and Africa, and particularly for commodity-exporting countries.
China is merely the largest and currently most assertive of these developing countries, and also has many characteristics which differentiate it from the West—its poverty, size, culture, and governing regime. But China’s increasing global influence derives largely from its becoming more like the West—with a similar capitalist market economy, consumer desires, business motivations, demands on the earth’s scarce natural resources, and national interests to protect and advance. Thus, for example, China’s energy companies scour the world for resource acquisitions to better serve their customers and shareholders, in the process sometimes making deals with unsavory host governments—exactly as their Western, Russian, and Indian counterparts have done and do.
As these corporate behaviors also spread among other developing countries, the Western world’s previous dominance in global market share and political and cultural influence will inevitably recede, while resource scarcity alone is likely to force a change in its economic and business models and lifestyles. This is the uncomfortable challenge China’s rise presents to the world economy that makes it a target for so much “China bashing” in the U.S. and around the world today.
Linda Lim is Professor of Strategy at the Ross School of Business, Director of the Center for Southeast Asian Studies, and Executive Committee member of the Center for Chinese Studies. Her research includes economic relations between China and Southeast Asia, and the strategic responses of businesses in Southeast Asia to competition from China.