‘Panda-monium’ - what does China’s rise mean for the rest of us?

Are we all becoming a bunch of panda-huggers? At least on the trade front, we may be. In a recent survey of Australian exporters, the bilateral free trade agreements (real and proposed) being negotiated by Australia were assessed in terms of their costs and benefits. Almost 45 per cent of exporters surveyed thought an agreement with China would be positive (20 per cent said “very positive”), 45 per cent were neutral and 10 per cent negative (4 per cent very negative). This compared with a 25 per cent positive rating for the agreement with the US (67 per cent neutral, 8 per cent negative) and a 21 per cent positive rating for Thailand (75 per cent neutral, 4 per cent negative).

Generally speaking, in these surveys exporters usually take time to warm to the free trade agreements, but in the case of China, they took to it in a positive way in terms of the potential business opportunities, almost straight out of the blocks. As Laurie Smith, Austrade’s Shanghai-based Regional Director for North-East Asia, says, “We have no trouble marketing China to Australian exporters - China just markets itself”.

Should we be surprised? Not really. After all, even with the policy to cool the economy down, China is still going gangbusters. China’s GDP is still growing at above 9 per cent (and even with the state-sponsored “cooling” is still forecast to register an 8 per cent plus growth rate). China is punching well above its weight in terms of its share of world trade and output. According to the Reserve Bank of Australia, “While accounting for only 5 per cent of world trade, China contributed approximately 15 per cent of the increase in trade in 2004 and became the world’s third largest merchandise importer. In contrast, the G7 industrialised countries, despite accounting for nearly half of world trade, contributed only a third of the increase in 2004.”

The world’s most populous nation is indeed changing at a rapid pace. It is undergoing transition from a state controlled collectivist economy to a market based system on a massive scale. It is big, it’s fast, it’s impressive, its dynamic and, believe it or not, China’s progress is good news for the region and the global economy.

But the strength of China’s growth is a two-edged sword. Many commentators fear its size and believe that China’s expansion will only come with contraction everywhere else. Most of the China articles carry alarmist titles like “Fear of the Chinese Giant”, “The China Syndrome”, and concentrate on threats - rather than opportunities. These commentaries talk about Chinese low cost labour eventually becoming the workshop of the world with manufacturing being wiped out in all nations except the People’s Republic. These articles are often run in the US press with fears of Chinese economic power spilling over to the strategic arena. They also influence political candidates with fears of China now replacing fears of Japan or Mexico in the US primaries.

But this may be the talk but how much of it is true? Let’s take a few of the usual suspects in terms of the common claims about China to see if they have any validity to them.

The first claim is about China’s speed to becoming an economic superpower that is unprecedented in world economic history. Research by Goldman Sachs shows that these claims are often exaggerated. China’s economic performance since 1978, impressive as it is, is not in the same ranks as Japan’s rise or that of the Asian Tigers or newly industrialising economies (NICs). According to Goldman Sachs, China’s growth performance “... is not unprecedented - and not particularly impressive by Asia-Pacific standards”.

The second claim is that China will “hollow out” global manufacturing. This fear is also misplaced. China largely re-exports manufacturing inputs from the rest of Asia - the amount of value added in China in a lot of its “exports” is quite small, since many are based on a high imported component from its Asian neighbours. Hence, the large increase in trade between China and the rest of the world (such as the US) should be seen in the context of the marked increase in intra-Asian trade over the past two decades.

In particular, the US’s increasing trade imbalance with China is being almost precisely offset by decreases in the United States’ trade imbalance with other Asian countries that are supplying China’s imported inputs. In other words, countries that used to send their labour intensive exports direct to the US now send them to China to get assembled or processed, and they are shipped from there to the US. Essentially China’s imports will grow together with its exports and the whole region will benefit as well as the rest of the world.

The third claim is that China is a threat to high tech manufacturing and this will ultimately threaten high tech knowledge-based manufacturing industries in other economies. However, it must be emphasised that while China may be a growing producer of ICT (information and communication technologies) products, biotechnology, autos and even space technology, it is still not a net-exporter in these industries. China still imports large amounts of capital goods and high technology manufactures so it can concentrate on industries where it has a comparative advantage, mainly labour intensive assembly and processing.

The fourth claim is that China’s low labour costs will undercut everyone else. However, China’s low labour costs do not imply that all Chinese outputs are “undervalued” and that this is going to undermine the region - what matters is not absolute costs but relative costs. China will export what it can produce relatively cheaply and import what it cannot; hence their imports and exports will grow accordingly. As a result, China will not produce everything under the sun, despite the fact that it might have lower costs than most other countries. Furthermore, China is coming from a low base and an isolated economy, real incomes have only one way to go and that is up. Furthermore, rising real incomes will be induced by demands for greater living standards and consumer goods. As Chinese people from the poorer provinces see what is available on the richer coastal areas, they will be aspiring to higher living standards and consumer goods.

The fifth claim is that China’s entry will undermine Japan and the ASEAN economies. However, during the phase of strong growth in China, Japan and ASEAN undertook structural adjustment and have moved out of areas where China has a competitive advantage. In fact, many economists in Japan see China’s rise as a benefit, not a threat. According to Tokyo-based, China specialist Dr C.H. Kwan China’s rise is greatly assisting the Japanese economy. “China is an assembler of final products and most of the components are imported from the rest of Asia. There is no point in having Japan being a low cost manufacturing exporter like it was in the 1960s,” he explained.

The sixth claim is that China entry into the WTO will cost of the rest of us. This is not so. Trade is a two-way street and China will need the world’s (and the region’s) imports as it grows its own export industries. And it has not been plain sailing for China. According to Cambridge University’s leading China specialist Professor Peter Nolan, “Most of the burden of adjustment from WTO entry is falling on the Chinese people themselves - especially those working in sectors under pressure. This includes land intensive agriculture, capital-intensive heavy industry and domestic financial services providers.”

In Nolan’s analysis of Chinese state owned enterprises (SOEs), he found “Large oligopolistic businesses like the SOEs that don’t respond adequately to price signals will find themselves under intense competitive pressures”.

The entry of China into the WTO is symbolic of the pressure put on China’s domestic economy as it opens up to the world. Economic reform will also require major social adjustments and the development of social safety nets to enable those affected to cope with the massive economic changes already underway.

What does all this mean for Australia?

Despite our historical fears of “tyranny of distance” it may well be that Australia, with China’s surge, is in the right place at the right time. Australia has exactly the right type of products and services that China needs to fuel its industrial expansion. Iron ore, Wool, Crude petroleum, Coal and LNG make up Australia’s massive $10.9 billion export account with Beijing. China is Australia’s third largest trading partner and our second largest merchandise import and export market.

According to Austrade research, there are around 3,245 Australian companies exporting to China. But it’s not just about commodities. According to Australia’s Senior Trade Commissioner to Beijing, Kym Hewett:

We see many small businesses here in China as well as the blue chip corporates. And we expect more services companies over here in the lead up to the 2008 Olympics - particularly in environmental technology, engineering and construction to supplement the strong growth we are seeing in education, tourism and architectural services.

In conclusion, there is no doubt that China’s growth is impressive but it is important not to exaggerate the claims made about the Chinese economy. The opening up of the Chinese economy will mean more exports for China, but also more imports for other nations in Asia. China’s triumph is not a zero sum game - it can benefit other nations too and ultimately improve the lives of the Chinese people. Australia will play an important role in China’s development and as shown in the initial response to a possible Australia-China FTA, the Australian exporter community see closer links with China, as being full of promise and opportunity.