China’s role in Globalisation

1. China’s role in GlobalisationMartin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Leverhulme Centre for Research on Globalisation and Economic Policy, School of Economics, Nottingham University February 19th, 2004

2. China’s role in Globalisation “Let China sleep, for when she wakes, she will shake the world.” Napoleon Bonaparte

3. China’s role in Globalisation • China’s rising economy • China’s growing role in the world economy • Challenges in trade policy • Challenges in international monetary policy • Conclusions

4. China’s role in Globalisation • My thesis • China is already a big force in globalisation • China will become an ever more important player in the years ahead • The future of our world economy will depend, in large measure, on how China plays its role and on how the rest of the world, particularly the developed countries, respond to China

5. 1. China’s rising economy • Asia’s rise is the fourth big transformation in relative economic power since the industrial revolution • Early 19th century: rise of the UK • Late 19th and early 20th centuries: rise of US and Germany • Post-second world war: Japanese miracle • 1970 onwards: rise of the rest of Asia, including China and India

6. 1. China’s rising economy • Over the last hundred years, the world’s leading economies have been much the same group of countries. • The US has been the biggest economy. Japan has gone up, while the UK has declined. Russia was never a big player in the world economy. • China’s rise transforms this picture. It is a revolutionary upheaval in global economic power, comparable to the rise of the US between 1860 and 1910.

7. 1. China’s rising economy Source: Angus Maddison

8. 1. China’s rising economy

9. 1. China’s rising economy

10. 1. China’s rising economy

11. 1. China’s rising economy

12. 1. China’s rising economy

13. 1. China’s rising economy

14. 1. China’s rising economy

15. 2. China’s growing role in the world economy • China’s share in global exports has risen from 1.2 per cent in 1982 to 5.2 per cent in 2002. • Over the ten years 1993-2002, the volume of China’s exports grew at 17 per cent a year, twice the rate of growth of the economy • Between 1979 and 2001, China’s terms of trade deteriorated by 30 per cent,while her export volume increased 17-fold

16. 2. China’s growing role in the world economy • China’s rapidly growing imports raise the prices of commodities, including oil, and her exports drive down the prices of manufactures, especially labour-intensive manufactures • Already, China is the world’s fourth largest exporter (after US, Germany and Japan) and third equal importer in the world (with Japan, UK and France). • China will be the third largest exporter and importer, within a few years

17. 2. China’s growing role in the world economy • China now contains the world’s third largest stock of inward foreign direct investment • China holds the world’s second largest foreign currency reserves – over $400bn in November 2003 • China is a big player in the world economy already, but can only become bigger in the years ahead, as its growth outpaces that of the rest of the world

18. 2. China’s growing role in the world economy

19. 2. China’s growing role in the world economy

20. 2. China’s growing role in the world economy Source: WTO

21. 2. China’s growing role in the world economy

22. 2. China’s growing role in the world economy

23. 2. China’s growing role in the world economy

24. 2. China’s growing role in the world economy Source: World Bank

25. 2. China’s growing role in the world economy

26. 3. Challenges in trade policy • China has liberalised trade policies dramatically: • average tariffs on manufactures are down from 46.5 per cent in 1992 to 6.9 per cent after accession; • average tariffs on primary commodities are down from 22.3 per cent to 3.6 per cent • Non-tariff barrier coverage is down from 32.5 per cent to 21.6 per cent between 1996 and 2001 • Extensive liberalisation commitments in telecommunications, banking and insurance • China has moved extensively towards a market economy • The WTO accession will accelerate this trend dramatically

27. 3. Challenges in trade policy • China has accepted numerous obligations and restrictions, in return for its “renewed” membership of the World Trade Organisation in 2001 • a transitional product-specific safeguard mechanism against China, lasting 12 years • a transitional textile safeguard mechanism against China, lasting until 2008 • immediate implementation of the agreement on trade-related intellectual property rights (TRIPS) by China • a limit of 8.5 per cent on domestic subsidies to agriculture by China (which is well above budgetary outlays) • no across-the-board preferences as a developing country

28. 3. Challenges in trade policy • China was right to accept these obligations: • This is partly because WTO membership strengthen China’s reforms, not least by introducing the rule of law • Also China’s overriding interest is in maintaining a liberal global trading regime trade • The following facts are helpful to China’s cause: • 50 per cent of China’s exports are generated by FDI; and • and its production is vertically integrated, with a heavy reliance on imported components. • So outsiders have a strong interest in China’s success and in resisting protectionism against her

29. 3. Challenges in trade policy • But the speed of China’s growth will still have a big impact on the rest of the world, creating resistance to China’s exports • China should probably assume that exports will be unable to grow very much faster than GDP in the decades ahead • Also China needs to do everything she can to keep the liberal trading system working, by opening up her own economy

30. 4. Challenges in international monetary policy • China does not run a huge current account surplus, but it recycles its capital inflow into a capital outflow • This gives it a huge surplus in its basic balance of payments: the sum of the current account and autonomous private sector net flows • And remember that even Japan ran current account deficits at these levels of income per head

31. 4. Challenges in international monetary policy

32. 4. Challenges in international monetary policy

33. 4. Challenges in international monetary policy

34. 4. Challenges in international monetary policy • It would be helpful for global payments adjustment if China could move into a modest current account deficit. It would also help Chinese monetary control. • This would require currency adjustment and expanded demand, in relation to output • Free floating is impossible, without radical financial reform. But a wider band, with a managed exchange rate, would be possible. • Alternatively (or in addition), China could accelerate import liberalisation.

35. 5. Issues ahead • As a competitive and dynamic new economic power, it is in China’s interest to promote a rule-governed open world trading system based on non-discrimination: it needs the markets and the stability • It is in China’s interest to defuse US protectionism, by accommodating the needed depreciation of the US dollar • Global payments adjustment is difficult without China, since other countries do not want a big appreciation of their currencies against the renminbi

36. 5. Issues ahead • China should move towards convertibility and a floating exchange rate, with an inflation-targeting central bank • China should be invited to become a full member of the group of seven finance ministers