Principles of Economics

¶ … Economics - How China's Economy Affects Global Economy

The label "Made in China" is popular across the entire globe. The reason behind this popularity is represented by the simple fact that, due to an increased population density and low-cost labor force, China has been able to attract numerous foreign investors, who have their products manufactured here and then shipped off to other global regions. Exports from China have as such increased and generated a strengthening of the country's competitive advantage, which would come to impact the entire global economy -- a situation feared by the Western. In the aftermath of the financial tsunami, a question is being posed relative to the future of the Chinese economy.

Introduction

Globalization has offered the most adequate context for the implementation of David Ricardo's theory of the comparative advantage. The growing forces of globalization and market liberalization have as such allowed economic agents to transcend boundaries and benefit from the comparative advantages of the other global regions, such as cheap labor force or an abundance of natural resources. The final aim is that of creating free trade systems among more nations, in order to "substitute large-scale mono-cultural exports" (Cavanaugh and Mander, 2004, p.39).

A highly relevant example of how globalization contributed to the ability to benefit from the comparative advantage is offered by China. The Asian country enjoys gains of increased labor force, capable and easily adaptable labor force and finally, and probably most importantly, cheap labor force. This quickly raised the interest of economic players around the globe, who saw outsourcing opportunities to geographically and financially expand their business operations. China flourished despite the communist regime and through its actions and accomplishments, managed to impact the rest of the economic world. The aim of this report is that of revealing how exactly the Chinese economy has impacted other states. Elements to be considered in the analysis include the development of market economics, the structure and behavior of the competitive market, the wage differentials or the market of exchange rates.

2. The Development of Market Economics

Three decades ago, the Chinese economy was a strong one, but its relations with the international community were limited, if at all existent. The economy was enclosed; self sufficiency was ensured and trade with other states was non-existent. Since then however, gradual changes have been implemented to transform China into a rather market-oriented economy, which reveals a growing and strengthening private sector. The commencement of the changes occurred throughout late 1970s, as the system of collectivized work was eliminated. Since then, numerous improvements have been made to the system, the most notable of them being the following:

liberalization of prices fiscal decentralization state enterprises were granted increased levels of autonomy the creation of a diversified banking sector the emergence of stock markets the consolidation of the private sector the opening of boundaries to international trade and foreign investments (Central Intelligence Agency, 2009)

Since the time these reforms were first implemented, China has undergone a wide series of changes, to finally emerge as this large and complex market. Yet, the assessment of the contemporaneous Chinese economy has to consider the financial tsunami, or the economic crisis which started within the American real estate industry and soon expanded not only to other industries, but also to other countries. Before it reached Eastern Asian however, China was dealing with other issues. They feared that massive privatization would increase unemployment rates, so the authorities focused on a gradual privatization of the state-owned enterprises, concomitant with an increase in national product, which consequently led to an increase in the rates of economic growth. Problems were incurred relative to the low levels of taxes registered, which limited the country's ability to implement the desired reforms. Additionally, difficulties were raised by the implementation of the reforms without the previous creation of a strong legal support (Reardon, 2004). In all, the Chinese economy was growing, but it was still facing problems.

In more recent times, China is dealing with the economic crisis. Yet, since the emergence of the financial tsunami is relatively new, not enough research has been conducted to clearly state the impact it has had on China. What has however been observed is a reduction in the country's national output, followed by a reduction in both imports and exports. Before the crisis, Chinese exports were growing at high rates, impacting the global consumer by presenting him with a wider selection of goods at competitive prices and the international market by increasing competition. In terms of the immediate future, this looks rather positive for China, which is expected to easily overcome the crisis. This belief is based on the country's stability, the growth of internal demand which stimulates production, the low national debt, as well as the population's long time focus on saving, rather than spending. The expected outcome is that China will move up on the international leader of the world's greatest economies from the third to the second place. An expected outcome of such a situation is that China will be able to absorb inflows of human capital from within the international market, contributing as such to a reallocation of global resources and a reduction in the international unemployment rate (Punia, 2009).

3. Competitive Market Structure and Behavior

Now that the general features of the Chinese economy have been assessed, it is important to reveal the structure and behavior of the Eastern Asian market and assess if and how these impact the global economy. In terms of the structure and behavior of this highly competitive economy, the following data are relevant:

The gross domestic product for 2008 is of $7.973 trillion, having increased at a rate of 9% (the growth rates for 2007 and 2006 were of 13, respectively 11%)

GDP per capita in 2008 was of $6,000

The national product is derived as follows: 11.3% from agricultural activities, 48.6% from the industrial sector and 40.1% from services

The labor force is formed from 807.3 million individuals, out of which 43% work in agriculture, 25% work in industry and 32% work in services

The unemployment rate is of 4%, revealing stagnation

8% of the Chinese population continues to live below the poverty line, most of them coming from rural areas (Central Intelligence Agency)

As it can be observed from the structure, the agricultural field is fairly inefficient as it employs nearly half of the labor force but only generates 11% of the national output. This means that agriculture is mainly favorable for self sufficiency in terms of food, but that the Chinese agricultural products do not create major impacts onto the international market. Yet, industry output, mainly manufactured goods, presents a different story. China is the third largest exporter in the world (following the European Union and Germany). Its primary export commodities are manufactured items, such as machineries, equipments, textiles and apparel. The impact of this feature onto the global economy is tremendous and includes, among other things, the following:

International investors were attracted by the possibility of outsourcing, meaning that they signed off contracts to Chinese contractors; China is the largest recipient of foreign direct investments (Buckley, Clegg and Wang, 2002), which translated into the loss of contracts and jobs in the native countries of the investors

Due to high technological developments and a low cost labor force, Chinese exports were cheap and highly competitive within the international market, forcing as such participants to redesign their pricing strategies and lower their profit margins

Foreign countries however benefited from China's accession to the World Trade Organization as the large exporter began to purchase commodities from outside the country, generating as such jobs and incomes within those countries; it also means that exchange of technology or other business components is now more fruitful (Chen, 2002); the WTO accession also forced China to lower its tariffs and barriers

The international consumers were impacted in a positive manner as they were presented with a wider selection of cost effective products

4. Wage Differentials as a Competitive Advantage

As it has been previously mentioned, China offers a great competitive advantage in that it possesses a larger and inexpensive workforce. Income per capita here is of only $6,000 per annum, China being as such the 133rd entry on the top of population living standards (the classification contains of 266 countries and was realized by the Central Intelligence Agency). As a comparative note, the most expensive labor force is in Lichtenstein, where the income per capita is of $118,000; within the United States, the income per capita is of $46,900 (Central Intelligence Agency). This situation is perceived as clear comparative advantage as it allows foreign investors to manufacture their products at cost effective rates, sell them onto the international market and as such register high profit margins. The recognized impact onto the national markets of the foreign investors was that of the losses associated with outsourcing, such as the loss of jobs; increased unemployment rates; the loss of drive and motivation for the people who did maintain their jobs, pegged to job instability and so on (Kennedy, Holt, Ward and Rehg, 2002).

Aside these impacts however, more salient effects are observable, such as a necessity to change internal practices of business. A relevant example in this sense is given by Wal-Mart, in its quality of America's largest retailer, which decided, unlike within the U.S., to allow Chinese employees to unionize (Dessler, 2006). The official approach of the Chinese leaders was that of implementing reforms which further capitalize on the low cost labor force advantage in order to continually attract investors.

5. The Market of Exchange Rates

The final step of this analysis is constituted by the look at China's currency policies, in an attempt to reveal if the policies implemented have played any part in the country's competitiveness within the global market. China's currency, the yuan, was pegged to the United States Dollar in 1997, but the link only lasted until 2005. Since then, the mechanism of resetting the value of the national currency each night is a secret one. The central bank officials argued that the value of the yuan would not always be expressed in dollars, but in other currencies as well, without however naming these currencies. Additionally, they stated that the value of the yuan would be established based on the movement of other international currencies, but they once again did not offer a complete information as to which would these currencies be (Bradsher, 2005). In other words, the Chinese authorities have implemented a tactic of national currency manipulation to suit their own needs.

It is highly probable that the gesture was done in an attempt to better control the country's international affairs and attract investors. Nevertheless, investors are now put off by the lack of stability. Another impact is observable in terms of imports and exports, in the meaning that a lower value of the yuan makes exports more attractive and imports less so. For exemplification, take the case of the United States as one of China's trade partners. A reduction in the yuan means that the American consumers pay fewer dollars for the products imported from China, which translates into an increased purchasing power. The overvaluation of the yuan has the opposite effect. Trade partners can also gain or lose money due to the fluctuations, meaning that they must use tools that cover currency exchange risks. These impacts are however generally observable in the short run, with the effects on the long run being fairly reduced (Morrison and Labonte, 2006).

6. Conclusion

Before the emergence of the notorious economic crisis, hereby referred as the financial tsunami, China was following a gradual reform program on most of its sectors; it was generally registering success, but some problems had yet to be addressed. Today, China is expected to not suffer major changes as a result of the crisis, but could impact the global economy through the absorption of labor force and a reallocation of resources.