International trade and economic growth of China - Essay Example

? International trade and economic growth of China: How the Dragon has transformed itself into an efficient growth machine through international trade October 29, 2012 Table of Contents International trade and economic growth of China: How the Dragon has transformed itself into an efficient growth machine through international trade 1 October 29, 2012 1 1. Introduction 3 2. Chinese Economic and Trade Growth 4 3. Discussions 13 4. Conclusion 15 References 15 Appendix 16 1. Introduction The Peoples Republic of China is the world’s second largest economy when measured in terms of purchasing power parity and nominal GDP. Since the past 30 years, Chin has an enviable annual growth rate of 10%. For the year ending 2011, China had a nominal GDP of 7.29 trillion USD while the GDP per capita was 5414 USD. Even with this huge growth and volume, the inflation in 2011 was restrained to 5.4%. The main tools of this huge growth were the robust trade that China has taken up since the past decades. However, popular western media tends to project China as a nation with large trade imbalances with exports much more than imports. This is not the case since in 2011, China exported goods worth 1.904 trillion USD while imports were 1.743 trillion USD and this shows that trade imbalances are not a major sore point. Even with the huge upheavals in the western world with hundreds of banks and financial institutions collapsing, the Chinese economy has proved resilient, none of the banks has collapsed, and the economy has continued its growth. The S&P country rating for China was give as AA for trade and commerce assessment and this reflects the strong base and fundamentals of China. While many reasons have been given to this growth of the Chinese GDP, this paper will examine the relation between the Chinese economy and the manner in which International trade has contributed to its growth (Stats, 2012; World Bank, 2012). This paper will examine the various trade and economic policies that China has used and analyse data from different databases on the Chinese economy and trade. 2. Chinese Economic and Trade Growth The Chinese economy before the 1980s under the Mao rule was very restrictive. Called informally as the bamboo curtain, the Chinese economy was closed and protected and had very little interactions with the western economies. China before 1980s was agriculture based economy and almost all the businesses, factories and commercial activities were under the state control. Capitalism was a forbidden and a hated world (USChina, 2011). This section examines the growth of the Chinese economy and trade. 2.1. Growth of the Chinese Economy After the people revolution, China closed its doors to external influences, seized all private factories and businesses and nationalised all the industries and banks. The result was a total shut down of free enterprise. Capitalists and scholars were hunted down and all trade, industries were state owned. As a result, the nations stagnated and led to a sharp increase in poverty. While the rest of the world saw booms and busts, China had a stagnant and stable economy that was controlled by the state. The standard of living was slow and bicycles were the main mode of transport in the city. From 1979 onwards, the Chinese premier Deng Xiaoping started the measures of liberalisation, allowed trade with foreign nations, allowed FDI and created industrial zones along the eastern coast so that foreign firms could set up manufacturing activity (Zhang, 2007, p. 12). This far-reaching vision paid off and very soon, China started its upward trajectory of growth. The growth in the GDP and other economic indicators are given in Appendix “Table A1. China Economic Indicators – 1 of 3” to “3 of 3” that gives details of the economic indicators. Growth figures of the economy have been given for 19 indicators for the years 1980 until 2013. Projections for 2012 and 2013 are estimated figures. Following graph illustrates the growth rates in GDP, PPP and the CAB in USD billions from 1980 to 2013 (IMF, 2012). Graph 2.1. Plot of GDP, GDP on PPP and CAB, 1980-2013 As seen in the above graph, the Gross Domestic Product - GDP at current prices that was 307.6 billion USD in 1980 is expected to grow to 6.975 trillion USD by 2012. This is a tremendous growth of 23 times over the 1980 figures. The values for the GDP based on the purchasing power parity - PPP at current prices that was 249 billion USD in 1980 is projected to grow to 13779 billion USD by 2013. This is an increase of 28 times over the value of 1980. The current account balance - CAB that was 0.29 billion USD in 1980 is expected to rise by 2012 to 762.68 billion USD. Much of this growth occurred in the sectors of agriculture, industry, service trade and the construction sector (IMF. 2012). The discussion of trade cannot be complete without examining the manufacturing set up in China. In the early years when China just emerged from the world war, the economy depended on sectors such as agriculture and mining with industrial inputs to some extent. In 1950 when the economy was just growing, the contribution GDP towards the overall economy was more than 90% and industry, fishing contributed the rest. Trade in the earlier years was almost negligible. This pattern has changed and in 2011, agriculture contributed 10.1% to the economy while industry gave 46.8% and services 43.1%. While many of the larger firms and banks are owned by the state, interference from the state is less and professional managers are recruited based on their merit and not on their party affiliations (Zhao, 2001, p. p. 23). Over the decades, the liberal economic policy encouraged capitalism and millions of small and large entrepreneurs have come up. These take up work such as light manufacturing, chemicals, assembly of light machine tools and electronic items, take up contrast manufacturing of clothes, shoes and other apparel, toy manufacture and hundreds of other products (World Bank, 2012). A number of industrial centres were set up along the eat coast and these industries promised jobs to the otherwise improvised Chinese farmer and labourer. The average wages earned by a Chinese labourer was less than a dollar a day. Industries on the other hand provided high wages of more than 100 USD per month, a very high figure for the improvised worker. This made millions of labourers move from the farms in the hinterlands of China to the industrial zones looking for work. This created major crises, since agriculture was severely impacted with labour shortage. Another impact was that with the influx of millions of people into the cities, massive slums came up along the outskirts of industrial cities and towns. This not only drove down the wages but also increased the cost of living, increased the cost of groceries and food items and caused widespread misery, exploitation, such as seen during the industrial revolution in UK (Zhang, 2007, p. 8). China had practiced a strict family planning exercise over the years in order to curb the rising population. This meant that with single child family, the number of worker available reduced and by 2000 onwards, there was a shortage of skilled workers and workers who were ready to do manual work. This problem was solved to some extent by bringing in workers from the hinterlands and since these people had never seen the success of modern China, the offer of 100 USD/ month wages sounded a very good proposition. With the increase in disposable income, people began investing in land and housing. This led to a huge rise in the housing prices and the formation of a housing bubble. A very large and surplus amount of construction was built and millions of square feet of the buildings remained unsold. This led to a crash in the construction sector (WTO, 2012). It must be noted that while Chin has a huge internal demand, the nations depends mainly on exports for the foreign exchange earning. There is a huge demand for machines, automobile, clothes and other items in the domestic market. However, China meets the domestic requirement and still exports to other nations in the form of trade. The issue of trade is discussed in the next section. 2.2. Growth of Trade in China International trade contributed around 46.8% to the GDP in 2011. This indicates that trade in China is very crucial to its growth and that the trading partners are willing to trade with China. This in turn means that the value proposition offered by China is high. This section discussed the trade figures and practices of China. 2.2.1. Balance of trade with the top 10 trading partners China carries out trade with a large number of countries. However, the maximum trade in terms of value of goods is done with only a few nations. After the acceptance of WTO treaty, there was shift in the balance of trade in Chinas favour. In the previous decade, China was a net importer since it could not manufacture many of the products. However, with increase in the manufacturing sector, exports have grown. Given below are the import and export figures for 2011 trade with the top ten partners (WTO, 2012). Table 2.1. Top 10 China Trading Partners (WTO, 2012) Top 10 China Export Country Destinations for 2011 Country USD Billions Rise over 2010 United States 321.44 +30% Hong Kong 124.50 +23 Japan 84.00 +14% South Korea 35.10 +26% Germany 32.50 +37% Netherlands 25.90 +40% United Kingdom 19.00 +27% Singapore 16.60 +31% Taiwan 16.60 +22% Russia 13.20 +45% Total 688.84 Top 10 China Import Country Destinations for 2011 Country USD Billions Rise over 2010 Japan 100.50 +9% South Korea 76.80 +23% Taiwan 74.70 +15% United States 48.70 +9% Germany 30.70 +1% Malaysia 20.10 +11% Singapore 16.50 +18% Australia 16.20 +40% Russia 15.90 +31% Thailand 14.00 +21% Total 414.1 It is clear from the above table that China has a somewhat lopsided balance of trade with other nations. The value of exports is 414.11 billion USD while the value for exports is 688.84 billion USD. What is important to note is that while exports by China have been rising to all countries except Japan from 23 to 45%, imports by China have hardly risen by an average of 15%. It is clear that China is an attractive destination for other nations since they are willing to import goods even if the balance of trade is shifted in Chinas favour. The unique advantage that China offers is in the form of lower labour costs, a stable working climate, and state support with lower taxes for export and so on. 2.2.2. Balance of Trade with USA Many politicians in USA have raised the issue about how outsourcing of jobs to low wage nations such as China has increased unemployment. They seem to argue that the low wage benefit provided by China has lured many of the firms to set up manufacturing centres in China. The balance of trade for goods exported by USA and value imported from China for 2011 are given in the following table (Census, 2012). Table 2.2. USA and China trade for 2011 in USD million (Census, 2012) Month Export by USA Import from China Trade Balance January 8,022.10 31,377.30 -23,355.30 February 8,379.00 27,244.60 -18,865.60 March 9,564.60 27,599.50 -18,035.00 April 7,999.30 29,580.00 -21,580.70 May 7,843.40 32,788.10 -24,944.60 June 7,727.10 34,374.00 -26,646.80 July 8,158.30 35,152.30 -26,994.10 August 8,421.70 37,377.90 -28,956.20 September 8,370.10 36,417.80 -28,047.70 October 9,743.80 37,818.90 -28,075.00 November 9,986.30 36,762.80 -26,776.50 December 9,723.70 32,868.70 -23,145.00 TOTAL 103,939.40 399,361.90 -295,422 It can be seen from the above table that in 2011, USA exported goods worth 103,939.40 million USD. At the same time, it imported goods worth 399,361.90 million USD. This shows that USA has a trade deficit of three times. This again shows the competitive advantage and value addition offered by China to US firms. 2.2.3. Balance of trade with other nations The huge growth in trade by China has created gaps in the economies of many nations who have come to rely on China to meet their need for consumer and other type of goods. This need was earlier met by USA and other western nations and this trade gap has created deep resentment among these nations. A large number of industries such as consumer goods, automobile components, automobile assemblies, cosmetics and toiletries, apparel and many other industries have set up factories in China. These firms then export their goods to other nations and carry out international trade. Following table gives the balance of trade between China and other nations for 2 periods of January to June 2010 and 2011. The figures are in million of USD and the negative figures indicating that China has exported more goods while importing less from these nations (Stats, 2012). Table 2.3. China Trade Balance with other countries (Stats, 2012) Country Jan-June 2010 Jan - June 2011 Increase +/– % Taiwan –310.6 –255.9 21.40 Korea –216.1 –185.3 16.60 Japan –98.2 –59.3 65.70 Angola –57.2 –28.2 102.60 Saudi Arabia –54.6 –38 44.00 Philippines –52.3 –33 58.50 Malaysia –43.8 –44.5 –1.6 Thailand –36.3 –24.6 47.80 Iran –30.7 –16. 5 86 The last column has positive values meaning that shows the deficits are positive or negative. The figures show that there is an increase in exports from China to all countries and China has become a next exporter to the rest of the world. The western nations accuse China among other things of devaluating the currency so that exports become attractive to exporters from China while importers pay more. There are demands that China should revalue its currency by 20% so that imports from China are not attractive anymore. However, this just goes to show that China remains an attractive place to set up business and make profits by exporting from China to other nations (Stats, 2012). 2.2.4. Top goods exported and imported by China It is important to asses the commodities and goods that China exports. Following table gives some details of commodities that are exported and imported by China for 2011. Table 2.4. China Trading Commodities (WTO, 2012) Top China Exports 2011 USD Billion Rise over 2010 Computer accessories, peripherals and parts 28.90 +12.4% Miscellaneous household goods 26.50 +17.2% Toys & sporting goods (e.g. bicycles) 22.20 +10.2% Computers 17.40 +20.2% Non-cotton household furnishings & clothing 14.60 +11.3% Video equipment (e.g. DVD players) 14.50 +34.9% Household furniture 13.20 +14.3% Footwear 10.70 +11.1% Cotton household furnishings & clothing 9.90 +29.6% Telecommunications equipment 8.30 +23.7% Zinc 8.6 million + 616% Nickel 25.9 million +273% Lumber 74.7 million +213% Specialized mining & oil processing equipment 96.6 million +88% Oil field drilling equipment & platforms 1.6 billion +182% Top China Imports 2011 USD Billion Rise over 2010 Semi-conductors 5.9 billion +74.7% Civilian aircraft 5.3 billion +39.7% Soybeans 2.5 billion +12.5% Plastics 2.2 billion +18.8% Raw cotton 2.1 billion +47 Industrial machines 1.97 billion +29% Copper 1.86 billion +1% Computer accessories 1.82 billion '+27.5% Aluminium $1.7 billion +90.3% Steel making material 1.69 billion +11.9% It can be seen from the above table that China exports high technology items such as computers and accessories in addition to toys, household goods and sporting goods. The top imported items are Semi-conductors, Civilian aircraft and Soybeans. The exports are high volume items and help to provide employment of millions of Chinese people. The low labour costs means that the end costs are low. The dependency on the nations that import these goods is high since the items are high volume and low cost and some amount of layoff are blamed to this policy. It can also be seen that China imports many items of the high value low volume category. Some examples are semi conductor devices used in the manufacture of computer accessories and civilian aircraft. The rising number of dollar millionaires shows that China has an adequate demand for such luxury and leisure products. This is the reason why marquee brands such as Ferrari, Gucci and others have set up plants in China. The section has indicated that Chin has made use of its trade to build up it economy. 3. Discussions The previous section has given a detailed analysis of China trade with other nations and statics of the trade between China and the rest of the world. The fact remains that China has used its trade policies in a very clever manner to trap the western nations at their own games. The western nations came to China initially to make use of the low labour costs. However, the lure of China proved to be very strong and hundreds of western nations moved to China. Many firms from West have made their fortunes in trading with China. Firms such as Wal-Mart, Carrefour, Ford, Unilever, Johnson & Johnson, Proctor and Gamble and many other companies have made record profits by manufacturing in China and trading the profits. However, the nation is not free from the ills that the rise in economy has given it. Inflation had increased to 11.4% but then climbed down to 5.7%. There is a huge disparity between the urban rich and the rural poor. This disparity is causing much concern and dispute among the poor since they live on starving wages while their counterparts live a life of luxury (Zhang, 2009, p. 149). The trade has provided China with foreign exchange reserves of 1.4 trillion USD. The financial market index of Shanghai has grown from 1000 in 2005 to 6000 in 2011. Western nations claim that China is not playing fair. There are allegations that besides devaluing the currency, China keeps the wages depressed by threatening the workers. China also is reported to have refunded the 17% VAT it charges for goods exported while levying a cess of 25% on certain types of goods imported (CCICED, October 2004). In all the literature that has been reviewed (Liu, 2010; Zhao, 2001; Zhang, 2007), China is viewed as a voracious consumer of natural resources and as an exporter of goods made with child and exploitive labour. However, China buys resources at market prices and it has helped the economy of many other countries to grow. Increased liberalisation would encourage more firms to set up factories in China and increase their trade. However, trade has not just benefitted foreign nations but it has also improved the lifestyle and increased the wealth of millions of Chinese people. A large percentage of the urban people are viewed as targets by manufacturers of fast moving consumer goods, luxury products and lifestyle products. The new middle class of China with incomes of 5000 USD is expected to rise to 160 million people by 2015. This figure is an increase over the 2005 figure of 60 million. This new middle class is expected to grow even more rapidly as a large number of Chinese youth, born as single children grow older, get educated and take up white-collar office jobs. This group of younger people will form the bulk consumer of cosmetics, mobile phones, automobiles, homes, apparel and many other such items and by 2018, the total number of people in this category is expected to be more than 300 million. There is a good chance that in the future, the goods that China imports will soon be manufactured internally while China will continue to export goods (Zhang, 2009, p. 144). This will only increase the trade imbalance. 4. Conclusion The paper has examined the growth in Chinese economy and international trade. It is clear that China, which was lagging far behind the west has grown its GDP by more than 30 times from 1980 to 2011. This huge growth in GDP was brought out by growth in many sectors such as construction, industry, agriculture and trade. It was also seen that trade and industry manufacturing go together. China set up huge manufacturing centres where low cost labour was available and other benefits provided to western firms. Hundreds of firms from the west set up their factories in China and exported the goods to USA, Europe and many other nations. It was also seen that the trade balance when sees as the exports to imports are in the favour of China. With a positive trade balance, China offers a unique competitive advantage to western nations. Thus, it is seen that the Chinese Dragon has used trade and industrial growth to turn itself into a highly efficient machine that has left even nations such as USA and UK behind. References CCICED. “An environmental impact assessment of the impact of China's WTO accession: A Report by the Task Force on WTO and Environment China Council for International Cooperation on Environment and Development”. 2004. International Institute for Sustainable Development, Canada Census. “2011: U.S. trade in goods with China”. 2012. Census of US Department of Home. Retrieved 28 October 2012 IMF. “China Economic Indicators”. 2012. International Monetary Fund. 27 October 2012 < www.imf.org> Liu Ma. “Wage-related Labour Standards and FDI in China: Some Survey Findings from Guangdong Province”. 2010. Journal of Pacific Economic Review, 9 (3), pp. 225-243 USChina. “China's Economic Statistics”. 2011. US China Agency. 28 October 2012 < https://www.uschina.org/statistics/economy.html> Stats. “China's Manufacturing Purchasing Managers Index”. 2012. National Bureau of Statistics of China. 27 October 2012 World Bank. China Country Statistics. 2012. World Bank Data. 27 October 2012< http://data.worldbank.org/country/china> WTO. “International trade statistics 2011”. 2012. World Trade Organisation. 27 October 2012 < http://www.wto.org/english/res_e/statis_e/its2011_e/its11_appendix_e.htm> Zhao, Fu. “The economic effects of tariff quotas and trade liberalisation: An application to China's WTO accession”. 2001. PhD Thesis, Washington State University Zhang, Yan. “The Prospects for China’s Free Trade Agreements”. Journal of the Chinese Economy, 2007, 40 (2), pp: 5-35 Zhang Zu. “Foreign exchange rate reform, the balance of trade and economic growth: an empirical analysis for China”. Journal of Economic Development, 2009, 24 (2), pp: 143-162. Appendix China economic indicators are given in the three tables. Please use the Sl No column as the key to refer to the subject descriptors in other tables. Table A1. China Economic Indicators – 1 of 3 (IMF, 2012) Sl No Subject Descriptor Units Scale 1980 1985 1990 1995 2000 1 Gross domestic product, constant prices National currency Billions 766.57 1270.16 1854.79 3307.37 4999.84 2 Gross domestic product, constant prices Annual percent change 7.91 13.50 3.80 10.90 8.40 3 Gross domestic product, current prices National currency Billions 460.91 896.44 1854.79 6079.37 9921.46 4 Gross domestic product, current prices U.S. dollars Billions 307.60 305.26 387.77 727.95 1198.48 5 Gross domestic product, deflator Index 60.13 70.58 100.00 183.81 198.44 6 Gross domestic product per capita, constant prices National currency Units 776.62 1199.95 1622.27 2730.63 3944.86 7 Gross domestic product per capita, current prices National currency Units 466.95 846.89 1622.27 5019.25 7828.01 8 Gross domestic product per capita, current prices U.S. dollars Units 311.63 288.39 339.16 601.01 945.60 9 Gross domestic product based on purchasing-power-parity (PPP) valuation of country GDP Current international dollar Billions 249.11 532.45 909.99 1831.79 3006.52 10 Gross domestic product based on purchasing-power-parity (PPP) per capita GDP Current international dollar Units 252.38 503.02 795.91 1512.37 2372.14 11 Gross domestic product based on purchasing-power-parity (PPP) share of world total Percent 2.01 2.91 3.57 5.71 7.23 12 Implied PPP conversion rate National currency per current international dollar 1.85 1.68 2.04 3.32 3.30 13 Inflation, average consumer prices Index, 2000=100 25.37 30.20 49.88 91.47 100.00 14 Inflation, average consumer prices Annual percent change 5.99 9.30 3.10 17.10 0.40 15 Inflation, end of period consumer prices Index, 2000=100 n/a n/a 50.42 94.09 100.00 16 Inflation, end of period consumer prices Annual percent change n/a n/a 4.30 10.10 0.90 17 Population Persons Millions 987.05 1058.51 1143.33 1211.21 1267.43 18 Current account balance U.S. dollars Billions 0.29 -11.51 12.00 1.62 20.52 19 Current account balance Percent of GDP 0.09 -3.77 3.09 0.22 1.71 Table A1. China Economic Indicators – 2 of 3 (IMF, 2008) Sl No 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1 5414.82 5907.57 6498.33 7154.66 7898.74 8775.50 9775.91 10682.36 11693.00 12920.76 2 8.30 9.10 10.00 10.10 10.40 11.10 11.40 9.27 9.46 10.50 3 10965.52 12033.27 13582.28 15987.83 18386.79 21087.10 24663.70 28529.19 32367.05 37034.05 4 1324.81 1453.83 1640.96 1931.64 2243.69 2644.64 3250.83 3941.54 4430.12 4980.21 5 202.51 203.69 209.01 223.46 232.78 240.30 252.29 267.07 276.81 286.62 6 4242.69 4599.01 5028.61 5504.09 6040.83 6676.03 7400.09 8046.02 8763.42 9540.48 7 8591.85 9367.84 10510.40 12299.47 14061.91 16042.16 18669.74 21488.36 24257.77 27345.32 8 1038.04 1131.80 1269.83 1486.02 1715.93 2011.93 2460.79 2968.79 3320.19 3677.30 9 3334.18 3701.10 4157.82 4697.90 5333.24 6112.29 6991.04 7792.75 8684.51 9773.92 10 2612.44 2881.29 3217.46 3614.10 4078.77 4649.97 5292.02 5869.55 6508.68 7216.90 11 7.67 8.15 8.66 9.09 9.59 10.16 10.83 11.42 12.02 12.65 12 3.29 3.25 3.27 3.40 3.45 3.45 3.53 3.66 3.73 3.79 13 100.73 99.95 101.12 105.06 106.95 108.52 113.68 120.34 124.73 129.15 14 0.73 -0.77 1.17 3.90 1.80 1.47 4.75 5.86 3.65 3.55 15 99.88 99.29 101.99 105.28 106.76 108.89 116.08 120.63 125.03 129.46 16 -0.12 -0.59 2.72 3.23 1.40 2.00 6.60 3.92 3.65 3.55 17 1276.27 1284.53 1292.27 1299.88 1307.56 1314.48 1321.05 1327.66 1334.30 1354.31 18 17.41 35.42 45.88 68.66 160.82 249.87 360.71 385.86 442.74 546.30 19 1.31 2.44 2.80 3.55 7.17 9.45 11.10 9.79 9.99 10.97 Table A1. China Economic Indicators – 3 of 3 (IMF, 2008) Sl No 2011 2012 2013 1 14212.84 15634.13 17197.54 2 10.00 10.00 10.00 3 42182.24 47999.71 54619.47 4 5572.27 6234.37 6975.94 5 296.79 307.02 317.60 6 10339.43 11205.30 12143.67 7 30686.36 34402.36 38568.36 8 4053.66 4468.30 4925.91 9 10978.85 12308.75 13779.34 10 7986.79 8821.93 9729.98 11 13.30 13.98 14.69 12 3.84 3.90 3.96 13 133.73 138.34 143.11 14 3.55 3.45 3.45 15 134.06 138.68 143.46 16 3.55 3.45 3.45 17 1374.63 1395.24 1416.17 18 611.69 685.19 762.78 19 10.98 10.99 10.93 Read More