China's rise good news for everyone
Daniel J. Ikenson And Alec Van Gelder, Financial Post February 10, 2010
To protectionists and Sinophobes, China surpassing Germany in 2009 to become the world's largest exporter heralds a new, unwelcome world order, with the United States in third place.
But more than a reflection of China's growing economic might, this development is testament to the erosion of economic, political, physical and technological barriers to production.
China's success is due to multilateral trade with the rest of the world, despite what the anti-China lobbies in Brussels, New Delhi and Washington argue. So when U.S. President Barack Obama and American lawmakers complain about China, they forget that Chinese exports include American exports.
Beginning with the widespread liberalization of trade and investment rules after the Second World War, barriers have been falling and incomes rising around the world.
China's opening to the West in 1978; the fall of the Berlin Wall in 1989 and of the Soviet Union two years later; the collapse of communism as a model for developing countries; and the advent and proliferation of containerized shipping, GPS technology, just-in-time supply and other marvels of the information, transport and communications revolutions have spawned a global division of labor and production that defies traditional analysis. This makes trade-flow accounting highly misleading
Global economics is no longer a competition between "us and them," between "our" producers and "their" producers. Instead, because of cross-border investment and transnational production and supply chains, the factory has broken down its walls and now spans borders and oceans. Competition is often between international brands or production and supply chains that defy national identity
So what does all of this have to do with China's status as the world's biggest exporter?
The vast majority of Chinese exports are hugely dependent on imports from the rest of the world: iron ore from Australia; microchips from Taiwan, South Korea or Singapore; software from teams in Redmond (in the state of Washington) and Bangalore (India); new designs from Cambridge (whether Massachusetts or England) and Toulouse (France); investments raised from consortiums based in New York City, Sao Paulo or Johannesburg.
China has become the world's largest exporter primarily because of the global division of labour that has helped reduce poverty and create wealth: China provides lower-value-added production. The components of Apple's iPods and iPhones are put together in China, but their designers in California are worth more to the company's bottom line. Denmark's Ecco has shoe factories across Asia, but its most valuable footwear is still designed and manufactured in Europe, where the quality is guaranteed and the workforce highly trained -- and higher paid.
China has not become a key figure in global trade by accident. It has capitalized on the new reality of global production and supply chains: Since 1983, it has unilaterally removed barriers to trade, realizing they were primarily harming China.
True, China's trade policies remain far from perfect. But they have liberalized quickly and considerably, which helps explain the country's prominent role in global production and supply.
Calculating who earns the biggest amount from exports remains a problem. Intermediate goods are shipped to China from countries such as Japan, Taiwan, Singapore, Australia and the United States, snapped together (or perhaps a slightly higher-value-added operation) in China and then exported. As those goods leave the ports of Shanghai, Tianjin or Guangdong for export, simple trade accounting rules attribute the entire value of those exports to China, even when the Chinese value embedded in those goods accounts for a small fraction of the total.
That accounting method helps explain why China's exports have surged over the decades, as the division of labour evolved and manufacturing chains proliferated.
A recent study by economists at the University of California concluded that the Chinese-added value embedded in a 30G Apple iPod accounts for only $4 of the total $150 cost, yet the entire amount is chalked up as a Chinese export. Other studies estimate overall Chinese value added in all products exported from China to average somewhere between 35% and 50%, a large proportion but a lot less than gross export figures imply
Indeed, "if China grows, this pushes the world's economy -and that's good for export-oriented Germany as well," a German Chamber of Industry and Commerce economist, Volker Treier, said recently.
As we consider China's new status as global export leader, it is important to understand what it means. This data speaks much more convincingly of the virtues of economic interdependence than of China's stand-alone export prowess: Such figures present opportunities for everyone to join the global economy, including a strategically placed historic trading nation such as Turkey.
-Daniel Ikenson is associate director of the Cato Institute's Center for Trade Policy Studies and author of No Longer Us vs. Them. Alec van Gelder is a project director at the International Policy Network.
