International Trade and Rise of China - Essay Example

Contents Introduction China is one of the fastest growing countries in the world. Due to strong economic performance of China, direction of world economy is rapidly changing due to strong demand from China especially its demand for energy sources. However China’s economic growth is not a new phenomenon. Being a country with Communist Orientation, China began its flight to reach the top of economic growth during 1970s. Traditionally, the competitive advantage which China has enjoyed was its low cost. It was due to this factor that Foreign Direct Investment began to flow into China and the country started to pick up on the economic grounds. There are various theories behind the rise of China as one of the strongest economies in the world. This work will look into and discuss the reasons behind the emergence of China as a global trading power in the world in the light of International Trade Theories. Rise of China- a Historical Perspective China has remained one of the strongest Communist countries in the world and after the fall of USSR, it has emerged as the center of the Political ideology in the world. However the subsequent reforms saw the start of the country’s transition to the market economies. The economic reforms into China started during 1978 and are considered as most successful as compared to the other controlled economies of Eastern Europe. A comparative study of the transition economies would suggest that China has been able to perform better than other transition economies of Eastern Europe mainly because of the rise of private firms into China. The emergence of Private firms into China has been extra-ordinary despite the fact that State has protected the state owned enterprises. The rise of China therefore is also attributed to the unplanned rise of private firms into the country besides the government reforms. From 1978 to 1992, the gross national product in China grew at an average rate of 9% and in 1992 and 1993, growth accelerated to over thirteen percent, giving China the worlds fastest growing economy. In 1994, even with attempts to cool down the economy, growth remained above ten percent.Error: Reference source not found. However it also must be noted that the largely held misconception that the Mao Zedong was behind the economic rise of China is not correct in its true sense as many believed that a great Opportunity to fulfill the Chinese dream remained unfulfilled during his era however the Mao era also saw the changes into health, education and other sectors of the economy however on the whole it remained largely under achieved economy during Mao Zedong’s era though it was the longest period of government after Chinese revolution.Error: Reference source not found. Some of the reforms which were undertaken and resulted into the rise of China include changes into the ownership structures of the firms including the State Ownership firms as well as private firms besides developing collective enterprises including the rural enterprises. (It is not straight out of the book) The rising power of China would eventually engage it against US as there are now the diplomatic and economic tensions taking place between the US and China. The recent incident of the refusal of Chinese made toys by the American companies is considered as just a beginning of the mounting diplomatic and economic pressure to curb the rising Chinese power. China’s rise to the economic power, therefore, is a combination of various factors including government reforms, rise of private sector firms as well as the inherent advantages which Chinese economy possess. International Trade Before discussing the rise of China in terms of the international trade theories, it is important that we must first explore the international trade theories in order to establish a theoretical base for our discussion International trade and Rise of China Theoretical framework on international trade started with the introduction of the concept of comparative advantage by Ricardo. The traditional Ricardian model suggest about the labor productivity and the comparative advantage. Ricardian Model is based on the assumptions of one factor economy i.e. Labor, however in real world, having one factor economy may not be possible as there are other factors, as we will be discussing in the following sections, which contribute to the growth of economy. Traditional Ricardian Model is therefore based on the specialization of labor only to achieve the comparative advantage. Many empirical studies suggest that China is one of the countries which have comparative advantages in many manufacturing activities especially manufacturing of the electronic goods as well as producing cloth.Error: Reference source not found.Considering the traditional comparative advantage especially into services and manufacturing, Government of China has initiated an export oriented development strategy to further exploit its economic advantage. Further studies that the revealed comparative advantage (RCA) of China is higher in the region as compared to most of its neighbors and other international economies. Research has also suggested that China has “comparative advantage in the world market in 47 sectors and 1828 commodities out of 97 sectors and 4923 commodities exported respectively by China to the world. (This is a direct quote from a research paper; you can check citation at the end of the paragraph) The sectors with the maximum number of commodities where China has Comparative advantage in the world market are articles of electrical and electronic equipment, manufacture of leather, toys, organic chemicals, articles of apparel and cotton.”Error: Reference source not found. The traditional Ricardian Model put a lot of emphasis on labor as the only factor of production through which the nations can derive their comparative advantages. However in real world, there are factors other than only labor productivity which help to achieve the comparative advantage. This was one of the biggest deficiencies in the Ricardian Model which was subsequently corrected and improved upon Heckshcer and Ohlin. The Heckshcer- Ohlin theory discusses the role of resource differences in the trade as one of the important deriver of comparative advantage. This model is of the particular view that the comparative advantage is influenced by the interaction between the various resources of a nation. Thus the relative abundance of the factors of production as well as the intensity with which technology is used in the production of different goods provides a combination of resources which can provide comparative advantages to the nations. In terms of China, it has been largely noticed that it has an optimum combination of the specialized labor and technology. One of the most important advantages which China enjoys is the availability of abundant labor force. Availability of cheap and abundant labor force allowed it to lure foreign companies to set up their manufacturing facilities in the country. Further, over the period of time, China has been able to develop its industrial base also therefore the abundance of labor as well as solid technological bases proved to be the decisive factors in the rise of China as an economic power. The success of the Heckscher-Ohlin Model is empirically being proved by assuming that the trading goods is actually an indirect way of trading factors of production thus if we have to calculate the factors of production embodied in a country’s exports and imports, we should consider the net import and export figures of the country to find out the relative resource endowment. Empirical studies suggested that China is the biggest exporter of information technology goods surpassing US and EU. The 2004 figures of the Chinese ICT export figures suggested that China has exported $ 180 billion worth of information technologyError: Reference source not found goods proving the assumption that China has the strong comparative advantage in the industrial production whereas on the other hand, China has been importing the large scale machinery to fuel its economic growth. The above theoretical frameworks suggest that China has the traditional advantage of the labor however it is also a fact that the geo-political situation of China is such that it allows it to be more aggressive in its economic expansion. Most of the large multinational companies have chosen China as their traditional base to serve the whole of the Asian Market. Due to its technological superiority in the region and labor productivity, it is serving the traditional markets in the world. China has been able to take advantage of the globalization also- mainly on two counts. The emerging trends of Globalization allowed factories to be relocated to labor intensive countries like China and India where the availability of less educated and cheap labor allowed them to reduce their operating costs whereas on the other hand, countries like China, by adapting protectionist policies, restricted the sell of output into the domestic markets. However what is critical was the shifting of white collar jobs to China due to global factor mobility giving it more room to expand upon on the jobs which required high skills. It is therefore because of this reason that China has been able to establish itself as a country having very well founded technological facilities having high tech capabilities. Further due to its openness to the international trade, Chinese government has been able to lure foreign direct investment into the country which resulted into the economic growth of the country. Foreign Direct Investment Foreign Direct Investment carries a significant importance in the development of both the developed as well as developing countries and it has now been effectively determined that the FDI has almost doubled in the recent past in almost all economies of the world.(Aqeel&Nishat,2005). This has resulted due to the increased integration of world economies and resulting globalization of the world. There are various determinants of FDI which determine what are the factors which basically attract the FDI into the country. Conducive working environment, supporting policies and ease with which foreign investors can invest into the economy are considered as the key determinants which define the flow of foreign direct investment into the country. However, on the whole there are two very strategic objectives which result into the flow of foreign direct investment in the country. The first factor is Market access and second is low production cost involved in the manufacturing processes specially. Market access generally comprises of how close the organization is to the consumers, distribution outlets and the ability to serve the local market. (Jenkins & Thomas). China being the single largest market in the world provides that important benefit to the producers of services and goods to have a direct access to one of the largest markets in the world- a market which has remained unexposed to the international organizations most of the time during its modern history. FDI and China It is being considered that the rise of China is partly because of the freedom it allowed to the flow of FDI in the country and after economic reforms in the China, it has now been considered as one of the most preferred destinations for the international investors.(Fung et al,2002). The greater increase in the FDI into the China has resulted due to the liberalization of Chinese Economic Policies since 1978 and it reached as high as USD 40 Billions during the year 1999. It picked up from merely USD 1.5Billion per year to that much figure of direct foreign investment into the country. Estimates suggest that the China attracted almost ¼ to 1/3 of the total FDI made into the developing countries. There are various reasons behind this phenomenal growth of FDI in China. Asian markets more or less remained untapped despite their huge market base. It is because of this factor that many economist argue that the development of China resulted due to the free flow of foreign capital to the country and FDI has not only filled the gap of the capital shortages and lack of capital formation in China but also been one of the main reasons behind the economic success of the country. The difference between the FDI made in China and FDI made in other countries especially USA is the fact that FDI made in China has largely been made in Greenfield investments- the investments made onto the unused land and resources rather modeling the existing constructions to start production or service facilities, i.e. establishment of new factories, power plants etc from scratch, whereas in US, it remained largely in the domain of takeovers in the existing projects rather than making new enterprises and fresh businesses. (Graham & Wada). Apart from that, the Chinese government has largely demanded from the Multinational companies working in the country to export their product rather than selling their produce into the Chinese domestic market.Error: Reference source not found thus forcing them not only to increase the Chinese made exports on one hand whereas on the other hand increasing the trade flows to the country. Further, it has also been argued and empirically proved that those firms which invested into China in its earlier phase of reforms have not established themselves and their profits are much higher than the late comers thus indirectly fuelling its economic growth through increased production and higher profitability.Error: Reference source not found It is also being witnessed that the Policy environment is not that responsive for the enterprises to make foreign direct investment in China despite such phenomenal growth in the economy as well as FDI. However, considering the political ambitions of China, many foreign investors are finding it difficult to establish themselves in longer run as the mounting diplomatic and political pressures on China are certainly going to hamper its economic growth. Chinese Policies may turn negative especially in favor of the Western companies. This fact is further substantiated by the fact the rise of new enterprises in China are purely local enterprises. The mushrooming of the local enterprises finally will gain the competitive advantage over the period of time and as the economic conditions improve and China transforms itself into a developed country, the conditions may not remain the same as they are conducive now in Chinese Economy. Trade Barriers China has remained a controlled economy for quite long period of time and it was not exposed to the international world. However its lack of exposure to the external world allowed its firms to develop their indigenous capacities with less reliance on the external world for its technological needs. The trade barriers like not allowing the external agents to buy and hold private property in the country and the simultaneous growth of private firms in China allowed it to manipulate the trade barriers in its own favor. Reports also suggest that the trade barriers imposed by China to US are enormous and that US businesses especially find it difficult to get the market access as the regulatory part of the international trade is still under the control of the government.Error: Reference source not found. Apart from that it has also being argued that China has created an artificial trade barrier by pegging its currency with the dollar and intentionally keeping Yuan undervalued to give unnecessary advantage and protection to the Chinese Exporters.Error: Reference source not found Political economy of China’s Economic Rise The economic rise of China however is not without its critics who saw the economic rise of China as a direct threat to the American hegemony in the world. Those who subscribe to the regional hegemony of the super powers strongly believe that China’s rise will start with its military prowess into the region which will directly affect Japan, India, Korea and other neighboring countries and once China established itself as a regional super power, it will start its flight to be the uni-polar world of super power. China’s defense modernization is directly being viewed as its intentions to build its strong military power and it is because of this reason that at international trade stage, China is now facing strong anti-trade tactics from its main opponent. I.e. US. The building pressure on China and increasing trade barriers, though indirect, are suggesting the nature of relations between China and US. The recent incident of Chinese toys being returned on the pretext of health issues are viewed as just the beginning of another cold war of US with a new opponent this time. China’s Future One more argument which has been put forward to explain the rise of China is its political ambitiousness and the theory of regional hegemony. This argument is mostly based on the assumptions that the US has gained its economic power mainly through containing first its neighbors in order to become a regional power and than ascend on to the ladder of becoming the economic and super power of the world. This argument is further based on the notion that in order to survive, nations must get power and in doing so they conflict with each other. This is the reason that the spotting the future power of China, US and other powers of the world are pressurizing China in order to contain its rise and in that process the neighboring countries of China i.e. Korea, Japan etc will form coalition with US to contain China.Error: Reference source not found Conclusion The emergence of China has mainly because of its low cost advantage which it has enjoyed over the period of time due to its cheap labor and other input costs besides being opening its economy to the international players. The economic rise of China is a historical process and it has evolved over the period of time mainly due to the strong political as well as economic policies of the government which gave China its most important comparative advantage. It was because of this that the China has been able to lure foreign direct investment into the country which directly and indirectly fuelled its economic growth. Besides there is very low factor mobility within China, giving it a great chance to utilize the internal and local resources to produce and export. Works Cited Error: Reference source not found Read More