Economics Research Paper on Globalization and the Chinese Economy

Economics Research Paper on Globalization and the Chinese Economy

Globalization has benefited many nations with China being one of the biggest beneficiaries as evidenced by its high growth domestic product (GDP) growth. Globalization has not been only positive, however, as it has produced many adverse effects for the Chinese economy. This paper explores those positive and negative effects of globalization and also outlines how China can help mitigate these adverse effects as well as future projections for China’s economy.

Overview

Globalization refers to the integration of economies around the world through the movement of goods, services, capital, labor, and technology across international borders (IMF). Globalization has experienced many shifts in China, with globalization being practiced in the Han dynasty through the silk route and also in the Tang dynasty when the Chinese traded with the Romans. This openness reduced in the following years and with the formation of a new government in 1949 led by the communist Party, China closed its doors, only openly trading with the Soviet Union and other socialist economies during the 1950s. China would remain closed to most of the world during the years that followed and only began a policy of opening up with the inauguration of Deng Xiaoping in 1977.

Over 15 years were taken in negotiating China’s accession to the World Trade Organization (WTO) during which time the government undertook many market-oriented reforms as well as sensitization of the public on the benefits and process of multilateral trading. Several thousand books were published regarding the WTO and opening up, and over 2,300 national laws and regulations as well as 190,000 local ones were either modified or canceled to conform to WTO rules (Wen). Finally, in 2001, China was allowed accession to WTO, an occurrence that proved to be a strong stimulus for China’s external-oriented economic growth BADEN. The WTO accession marked China’s move towards globalization of its economy and market, with far-reaching consequences both positive and negative.

Benefits of China’s Globalization

Globalization has contributed to rapid economic growth in China. In the 1965 to 1979 period, China’s GDP had been growing at a rate of 6.4% but since joining the WTO, its economy has been growing at an average rate of 10%, which is one of the fastest in the world (Ross). Beginning with the financial crisis, China’s economy has far outperformed any other economy, growing by over 80% since the 2nd quarter of 2007, while the U.S. has only grown by 8% since. From 2001 to 2005, industrial production had already increased by 15% and aggregate demand by 10%, and the trend is expected to continue. This rapid economic growth has transformed China into an economic powerhouse, rising from being the 7th largest exporter and 8th largest importer in 2000 to being the world’s largest exporter and second-largest exporter. The economic growth of China has also seen it overtake the U.S. as the world’s largest economy, a position it hopes to maintain gauging by its rapid economic progress.

China has also benefited from foreign direct investment. In the decade following its accession to the WTO, FDI to China was increasing at an annual rate of 9.5% to total at $653.1 billion for the whole decade. By 2010, the FDI flowing into China was at $107 billion, 13 times the 2000 level. This investment boom had the consequence of making China the factory of the world since most companies outsourced a part of their manufacturing to China. Besides enjoying FDI, China also transformed into a major investor, with accumulated outbound investment totaling $300 billion. China also became a major creditor to other nations, especially emerging markets and developing nations where it has funded significant investments in infrastructure. China has thus expanded its tentacles in the international arena where it earns a revenue even when domestic production is down.

Globalization has also resulted in a raising of the people’s standards of living. With opening up of the economy, many people were able to find jobs, especially in manufacturing. China has an abundance of cheap labor as well as cheap manufacturing that drove many multinationals to outsource to China, hence improving employment. The new manufacturing jobs also pay higher wages than was the tradition. These people also got access to a wide variety of cheap products from abroad. Increased competition from cheap imports also led Chinese manufacturers to lower their prices. Additionally, there has been an improvement in the per capita GDP from $1,000 in 2000 to over $5,000 in 2010 (Gao). The poverty rate has also fallen from 88% in 1981 to 4.1% in 2014, and the trend is expected to continue as China opens up more.

China has also benefited from a technological transfer that impacts on all spheres of the economy. Improvements in technology have improved China’s production process which was outdated before opening up. China has also been able to copy most of this technology which it now uses in its manufacturing processes. As a result of learning, China has now become a technology giant and today exports most of this technology which it did not even possess before opening up. This new technology has also been used in other sectors of the economy such as the financial sector, education, and medicine to great effect. Due to these advances, China now has a more educated and healthier workforce which can compete on a global scale.

The opening of China’s doors has also resulted in the migration of highly skilled labor into China. Many multinationals operating in China hired highly skilled manpower from overseas that have not only improved the productivity of Chinese workers but also benefited them from learning. In the years after opening up, China has undergone immigration reform that has lured skilled talent into China, and these immigrants have been beneficial to improving China’s production that is shifting from the manufacture of standardized goods to high-tech export goods. Without these immigrants who include ethnic Chinese, China would still be struggling to catch up with its competitors such as the USA who have highly skilled workers.

Globalization has also enabled China to keep inflation low. China now produces goods it has a comparative advantage in hence improving efficiency which keeps production prices low. Additionally, the importation of cheap raw materials from other nations helps keep production prices low, and consequently the price of commodities becomes lowered. China also has a wide market from which to import meaning it only imports the cheapest products of high quality. With the increase of cheap imports as well as competition by MNCs in the nation, Chinese companies which were oligopolistic or monopolistic can no longer charge exorbitant prices for commodities. As globalization increases, China’s productive capacity keeps on increasing with the result that the general price level is kept low.

Cons

Firstly, globalization has discouraged private businesses which had begun increasing during the 1990s. With the accession, China had to adopt policies that conformed to WTO rules, but these policies significantly restrict the role of private business in China. Most of these policies are incoherent and unfamiliar to most businesses that have to compete with large multinationals. There have also been more calls for market liberalization from China’s trading partners that further threatens the role of indigenous private businesses to China’s economy as well as reducing barriers to entry leading to more competition. Even though business reforms have been instituted to support local businesses, the competition from foreign firms has been intense. Presently, over half of China’s international trade and 85% of its total high-tech exports are controlled by foreign firms, an occurrence considered by many people as dangerous to China’s industrial security (Yue).

Another adverse impact of globalization has been a lowering of profit margins for local firms. The multinationals that flooded China upon its opening up had a global market, global brand, and global procurement systems that indigenous Chinese firms could not compete with. Many of these also do not have the financial resources to do capital investments on the cutting-edge equipment required to manufacture new products, and hence focused on undifferentiated and standardized products. Besides, since most depended on the importation of designs, critical components, and manufacturing systems, they only added little value to the production process hence lower profits.

Despite an increase in average incomes, China has witnessed increasing inequality in the years after opening up, with the Gini measure of inequality increasing from 0.31 in 1978 to 0.45 in 2004. While in the 1980s the richest 10% earned less than 20% of the national income, this figure had increased to 45% by 2005 (Sachsenmaier). Much of the inequality is attributable to the widening rural-urban divide. The multinationals that came into China were situated in the urban centers as were government efforts and investment. Productivity and wages in the urban areas have thus gone up, and in 2009 the income per capita of those in urban areas was reported to be three times that in rural areas. Most of the people in the rural areas were also sugarcane farmers but they were put out of business after cheap sugar imports lowered sugar prices from 250 yuan per ton in the 1980s to 170 yuan per ton in 2004. This has additionally resulted in rural-urban migration, with the urban share of China’s population increasing from 20% in 1978 to over 40% presently.

Globalization has resulted in increased pollution. As global production has shifted towards China, there has been an increase in the emission of carbon dioxide. Beginning in the early 2000s, China’s pollution emissions have increased and today it is the world’s leading polluter. Over the last two decades, increased industrial agriculture and commercial grazing have led to the desertification of over 2.67 million square kilometers of land or roughly 30% of China’s territory (Gao). Seven of the ten most polluted cities are now located in China, and 60% of its major rivers are classified as unsuitable for human contact. China’s coal uptake has also increased, and the pollution is expected to increase all the way to 2040 despite China’s move to a higher value economy and commitment to reducing greenhouse gas emissions by 2030.

As a result of globalization, China’s economy is now more vulnerable to shifts in global economic conditions. The actions of other nations in the international arena now have a bigger effect on China as exhibited by a decline in its GDP following the 2007/2008 financial crisis. It is also vulnerable to global business shifts such as the emergence of newer low-cost locations that could reduce FDI to the nation and hence impact the economy. Other vulnerabilities to external shocks are in the arena of competition as well as in the supply of raw materials, as China imports most of its raw materials. As China relies more on external trade, therefore, it becomes increasingly vulnerable to shocks in the external arena.

 

Mitigating Adverse Effects

Over the next decade, China is expected to become more integrated with the global economy. It, however, faces many challenges especially with regards to cushioning its economy against external shocks. China has been relatively successful in doing so, but with more integration and calls for liberalization of its market China finds itself under intense pressure. The nation needs to institute policies that will protect its key domestic industries from undue competition by outside firms. The policies in place today favor the large state-owned enterprises, but if China is to maintain its economic progress, it has to diversify into a market economy that promotes private enterprise. China already has a diversified economy, but it is concentrated on manufacturing which experiences external shocks, and thus it should diversify its economy to reduce volatility.

China also needs to tackle the domestic challenges of income inequality as well as rural-urban migration. So far, the government has been unsuccessful in stemming these two ills which might plague it politically and socially leading to lower economic outcomes. As the number one economy in the world, China will also face stiff competition from other trading nations, most of whom will seek to duplicate its technology and steal its manpower. Despite the fact that China remains a labor-rich nation, labor supply growth has stagnated. This coupled with the fact that its population is aging and that only half of Chinese students enter the job market as blue collars might mean significant problems for China’s competitive advantage.

What next for China

China has many advantages that will see its economy improve over the short-run as a result of globalization. Firstly, China still has the productive capacity, technology, and manpower to outcompete its rivals. It will also benefit from the sudden craze for infrastructure developments, an area in which Chinese companies are strong players (Guoqiang). Overseas markets also represent a good opportunity for growth as Chinese companies have become well-developed over the decades, meaning that they can compete with other global players for overseas businesses, especially in emerging markets.

In conclusion, globalization has been beneficial as well as detrimental to China’s economy. On the benefits side, globalization has resulted in rapid economic growth, an increase in foreign direct investment, lowered inflation, technology and people transfer, and an overall improvement in the people’s welfare. It, however, has unintended consequences such as income inequality, the curtailing of local private enterprise, increased pollution, and increased vulnerability to external shocks. China will need to institute numerous policy measures to safeguard its economy in the future as it integrates more into the global economy. Globalization, therefore, can be said to have had an overall positive impact on China’s economy.

 

 

Works Cited

Gao, Tao. Globalization and China: Impact on the Economy and People’s Quality of Life. Thesis . New York: Zarb School of Business, 2003. Document.

Guoqiang, Long. What is the future of Chinese trade? 21 January 2015. Web. 30 November 2016.

IMF. Globalization: A Brief Overview. 02 May 2008. Document. 30 November 2016.

Ross, John. China’s economic growth in the light of the findings of modern Western economic research. 02 September 2014. Web. 30 November 2016.

Sachsenmaier, Dominic. “China and Globalization.” Globalization, Civil Society and Philanthropy. Tarrytown, New York: University of California, 2003. 1-28. Document.

Wen, Dale. China Copes with Globalization. Briefing. San Francisco, CA: The International Forum on Globalization, 2006. Print.

Yue, Jianyong. “What does globalization mean for China’s Economic Development?” globalpolicyjournal (2012): 1-3. Document.