Michael Dauderstädt& Jürgen Stetten* China and Globalization Internationale Politikanalyse Globalisierung und Gerechtigkeit, September 2005 C hina’s rapid growth over the last two decades has shaken the world. Globalization, the catchword of the 1990s, has gained its prominence due to the opening of the Second World(i.e. Central and Eastern Europe and the former Soviet Union) and the rise of new industrial powers in Asia, most prominently China. But it is China’s rise that worries the rich world, while competition from the post-communist transition countries worries only western Europe – if not only Germany. China’s transition has been more economic than political(in contrast to the Second World). What are the implications for the world economy, in particular for the distribution of income and wealth? How will China contribute to shaping not only the globalized world economy but also the institutions and policies of global governance? ∗ China as an Engine of Globalization China has become the world’s economic powerhouse. It may still need years to become the world’s largest economy, but, gauged in purchasing power parity(ppp), it already ranks second after the US. China also accounts for the largest shares of global growth in volume terms. Between 2000 and 2003, the growth of China’s share of global GDP(at ppp) and global imports was more than 30%, its share in the worldwide growth in fixed investment even amounted to 60%, the corresponding figure for oil consumption being about 35%(Woodall 2004). However, the gigantic level of investment points to one problem involved in Chinese growth: its low capital productivity due to a planned allocation of capital geared more to preserving structures than to rapid change. China’s share of world trade increased from about 1% to almost 6% between 1979(when China started to open up) and 2003. This rise is comparable to the past rise of Japan or other newly industrializing economies in Asia. China’s most important trading partners are its Asian neighbors(including Japan, ∗ Friedrich-Ebert-Stiftung, Bonn& New York. China’s most important trading partner), accounting for between 50% and 60% of its exports and imports, while the EU has a share that ranges between 12% and 16% and the USA accounts for a share of about 20% of exports and 10% of imports. China is importing large quantities of investment goods and raw materials. Its exports stem to a large extent from subsidiaries of multinational enterprises and consist mainly of finished manufactured goods. While, in 1990, primary goods still accounted for about one quarter of all merchandise exports, by 2002 these goods represented less than 10%. The strongest increase occurred in the machinery and transport equipment sector, where exports grew from USD 6 billion in 1990 to 127 billion in 2002, while total merchandise exports increased from USD 62 billion to 325 billion(World Bank 2003a). China’s share of global inflows of foreign direct investment was almost 10% in 2003(USD 53 billion of a world total of USD 560 billion; Schrooten 2004, UNCTAD 2004). That made China the world’s largest recipient of FDI in 2003(UNCTAD 2004:10). By 2002, China had 200.000 firms that were either foreign affiliates or funded from foreign sources(World Bank 2003a:6). The major investors were Hong Kong and Macao, the US, Japan, Korea and Taiwan. For its economic modernization China has relied more on FDI than other Asian“tigers” such as Japan, Korea and Taiwan. But it is integrating foreign investment in its domestic economy, using it as a partner and a source of competitive pressure to create a vibrant national modern sector. Recently, that sector has itself started to invest abroad. China’s largest computer firm, Lenovo, bought the IBM’s PC business while other intended acquisitions(Unocal by CNOOC, Maytag by Haier, Pakistan Telecom by China Mobile, and Noranda by China Minmetals) failed(The Economist 2005d:49). By 2003, total Chinese investment abroad amounted to USD 37 billion(Schrooten 2004:819). Thus far, migration to and from China has been relatively low. The immigration required to meet the needs of China’s booming new industries has largely been from China’s own domestic hinterland, plus a limited number of foreigners who work as expatriates.

Michael Dauderstädt& Jürgen Stetten China and Globalization Globalisierung und Gerechtigekkeit (098/20054) 2 Emigration from China could potentially be huge but is long will the adjustment take, in particular in China still limited thanks to official restrictions. However, itself? Chinese tourism has become more and more important, particularly in neighboring countries. It could also become a major source of export revenue for countries The Globalization of the Chinese Economy such as the US or Europe, balancing payments made imports of Chinese manufactured goods. While the world is concerned about an emerging However, it is basically the size of China’s populaChina, China is changing rapidly, in particular because tion that is increasingly turning globalization into a it has opened up to the world. Formally, that process Chinese process. China is actually still a very poor culminated in China’s accession to the WTO in 2001. country with a per capita income(at ppp) of USD The real opening occurred at a dramatic speed. Exports 4.900. But the overwhelming number of about 1.3 bilas a share of gross domestic product(GDP) grew from lion“capita” makes it the world’s second largest 4% in 1965, 6% in 1980, and 14% in 1989, to 24% economy. The size of its labor force is correspondingly in 1994(World Bank 1991+ 1996). In spite of that large and still, to a large extent, made up of the right large share, the absolute figures, about USD 300, exage cohort. China’s labor pool is underemployed and ports/capita are still low(3% of the German value!) marked by a huge surplus. To quote Sandra Polaski of because of China’s low GDP(in particular when measCEIP:“…if all U.S. jobs were moved to China, there ured in terms of exchange rates). Exports and imports would still be surplus labor in China”(Polaski 2004). If as a share of GDP increased from 33% in 1993 to there were a truly global market for labor, China 60% in 2003(in comparison, Japan’s share grew from would be its largest supplier, exerting enormous 14% to 18% during the same period; Schrooten downward pressure on wages and working conditions. 2004). Gross foreign direct investment increased from Of course, there is no fully integrated world market for 1.2% of GDP in 1990 to 4.9% in 2001(World Bank labor; but we will deal with these potential threats be2003b). low. As long as China, with its huge population and Measuring China= economic potential, was withdrawn from the world, it jçëí=ëí~íáëíáÅë=çå=`Üáå~=~êÉ=ëÜ~âóK=lÑÑáÅá~ä=Ç~í~=~åÇ= had very little impact on the course of the global ÉñéÉêí=Éëíáã~íÉë=î~êó=Çê~ã~íáÅ~ääóK=bîÉå=Ä~ëáÅ=áåÇáÅ~J economy and globalization. To a large extent, the new íçêë=ëìÅÜ=~ë=dam=ÖêçïíÜ=ê~íÉë=EhÉáÇÉä=OMMPFI=ÉãéäçóJ importance of China reflects a“return to normalcy,“ if ãÉåí=EëÉÉ=éKPF=çê=ÑçêÉáÖå=íê~ÇÉ==Em~ääÉó=OMMRF=~êÉ=çéÉå= we understand a certain level of economic openness íç=áåíÉåëáîÉ=ÇÉÄ~íÉ=~åÇ=Åçåíê~ÇáÅíçêó=Éëíáã~íÉëI=ïÜáÅÜ= and integration as the normal situation of a country. Å~å=î~êó=Äó=ãçêÉ=íÜ~å=NMMBK=_ÉóçåÇ=íÜ~í=ìåÅÉêí~áåíóI= The world has to and will continue to have to adjust to íÜÉêÉ=áë=~=ãçêÉ=Ä~ëáÅ=~åÇ=ãìÅÜ=ãçêÉ=êÉäÉî~åí=ÇáÑÑÉêJ the wide range of opportunities(and risks) that ÉåÅÉ=áå=ó~êÇëíáÅâëI=å~ãÉäó=íÜ~í=ÄÉíïÉÉå=ÉñÅÜ~åÖÉ= emerge with a more open China. When a fifth of the ê~íÉë=~åÇ=éìêÅÜ~ëáåÖ=éçïÉê=é~êáíáÉë=EéééFK=jÉ~ëìêÉÇ=áå= world population approaches the global average per íÉêãë=çÑ=ÉñÅÜ~åÖÉ=ê~íÉëI=`Üáå~=áë=~=ÄáÖ=Äìí=åçí=îÉêó=ÄáÖ= capita income(which is almost double the current ChiÉÅçåçãó=ïáíÜ=~=îÉêó=äçï=éÉê=Å~éáí~=áåÅçãÉK=jÉ~ëìêÉÇ= nese figure, even at ppp(purchasing power parities), ~í=éééI=`Üáå~=áë=~äêÉ~Çó=íÜÉ=ïçêäÇÛë=ëÉÅçåÇ=ÄáÖÖÉëí= let alone at exchange rates, which is almost five times ÉÅçåçãóI=~=Ñ~Åí=ïÜáÅÜ=Ü~ë=ëÉêîÉÇ=íç=êÉÇìÅÉ=íÜÉ=åìãJ as high as the Chinese average), then huge shifts in ÄÉê=çÑ=áíë=éççê=ëìÄëí~åíá~ääóK=táíÜ=ÇÉîÉäçéãÉåí=~åÇ= the global pattern of production and consumption áåíÉÖê~íáçå=áåíç=ïçêäÇ=ã~êâÉíëI=`ÜáåÉëÉ=~åÇ=ïçêäÇ= must be anticipated. Germany presently exports almost ã~êâÉí=éêáÅÉë=~êÉ=ëäçïäó=ÅçåîÉêÖáåÖI=íÜìë=êÉÇìÅáåÖ=íÜÉ= USD 10.000 per capita per year. If China approached ÄáÖ=ÇáÑÑÉêÉåÅÉ=ÄÉíïÉÉå=íÜÉ=íïç=ó~êÇëíáÅâëK== that figure, its exports would amount to about USD 13 _ìí=~ë=äçåÖ=~ë=íÜÉ=ÇáÑÑÉêÉåÅÉ=éÉêëáëíëI=áí=Ü~ë=ÜìÖÉ=ÉÑJ trillion(i.e. 150% of present US GDP). The complaints ÑÉÅíëW=içï=áåÅçãÉI=áå=é~êíáÅìä~ê=ï~ÖÉëI=ãÉ~ëìêÉÇ=áå= the world is uttering are similar to those heard when íÉêãë=çÑ=ÉñÅÜ~åÖÉ=ê~íÉë=~êÉ=~ííê~ÅíáîÉ=Ñçê=ÑçêÉáÖå=áåJ Japan or the other Asian“tigers” started to pour out îÉëíçêëI=Äìí=íÜÉó=ãÉ~å=äçï=éìêÅÜ~ëáåÖ=éçïÉê=áå=ÖäçÄ~ä= exports. Meanwhile, both sides have adjusted: the old ã~êâÉíëK=qÜÉ=ãìÅÜ=ÜáÖÜÉê=ééé=áåÅçãÉ=áåÇáÅ~íÉë=ÜáÖÜ= rich by restructuring and/or reducing work; the new êÉ~ä=Åçåëìãéíáçå=çÑ=êÉ~ä=ÖççÇë=ëìÅÜ=~ë=ÑççÇI=ÅäçíÜáåÖ= industrial powers by raising their incomes to or even ~åÇ=Ó=ÇáêÉÅíäó=çê=áåÇáêÉÅíäó=Ó=ê~ï=ã~íÉêá~äëK=fí=áë=éêçÄ~J beyond the level of the other OECD countries. But how Ääó=~=ÄÉííÉê=áåÇáÅ~íçê=Ñçê=éçääìíáçåI=íççK==

Internationale Politikanalyse International Policy Analysis Unit China still controls inward and outward capital export processing zones that are located in the coastal flows, though not completely. On the one hand, it is areas of eastern China. The rapid growth of these exslowly liberalizing its capital account(Schrooten 2004); ploding urbanized regions in the east has led to a draon the other hand, it cannot prevent capital inflows matic increase in regional, sectoral and personal indisguised by transfer pricing and overbilling of exports come disparities. While the eastern regions have exor underbilling of imports. This allows China to mainperienced dramatic growth, the rural hinterland, which tain the present exchange rate vis-à-vis the US dollar in had been the first and major beneficiary of the marketspite of a growing stock of foreign exchange reserves oriented reforms during the 1980s, has fallen back in that results largely from capital inflows and trade surrelative terms. pluses. But the export surpluses, mainly with the US Labor has moved from the hinterland to take up market, have contributed less to the accumulation of new jobs offered by the emerging modern sector, reserves than to capital inflows. Since 1995, trade surwhich now employs at least 20 million workers 1 in forpluses have averaged USD 30 billion per year, while in eign-owned firms plus additional millions in Chinese most years FDI inflows have been higher than USD 40 firms that are either relatively modern or suppliers of billion. At the same time, China is paying annually bethe modern export-oriented sector. Estimates about tween USD 10 and 20 billion in factor income to forthe number of migrants who often work in the coneign investors. However, this picture is contested by struction and in the informal rather than in the modern some experts, who estimate that China’s trade surplus sector vary wildly between 25 and 100 million(Zhao is about four times(!) higher than the Chinese statis2005:291). While nominal wages are substantially tics indicate. They base their much higher figures on higher(2-3 times higher; Zhao 2005:293) in the urban the trade data of China’s trading partners. Palley areas, real wages are less high because prices in the (2005) estimates China’s global trade surplus in 2002 coastal provinces are also much higher. China has beat USD 189.9 billion, compared with Chinese data income an economy not only of large and increasing indicating a figure of USD 45.1 billion. These discrepancome disparities but also one with price levels and cies could possibly be explained in part by trade-related structures that tend to differ greatly in regional terms. activities that disguise capital inflows. The fact that While domestically produced simple consumer goods there are large capital flows even without full capital are cheap, international brand-name products cost alaccount liberalization might explain why China is trying most as much as in rich countries. To give a few exto keep its exchange rate as it is and to accumulate a treme examples which are unlikely to be part of the huge stock of foreign exchange. Capital inflows could consumption basket of a typical Chinese worker: A Big – under certain circumstances such as political or ecoMac has a price in China of USD 1.26(US: USD 3,00; nomic crisis – turn into outflows which would be as Europe: USD 3,75). In Shanghai, a coffee at Starbucks hard to control as the former inflows. Without counon People’s Square or a scoop of ice cream at Häagens tervailing policies, a capital flight of this kind could Dazs in the center cost as much as in Europe, or about provoke a crisis similar to the Asian crisis of 1997. the average daily wage of a Chinese manufacturing Given the shakiness of China’s financial system, with worker and half a daily wage of an employee in its huge burden of non-performing loans, such a fiShanghai, where wages are more than double the nancial or banking crisis is far from improbable and Chinese average. The newly rich Chinese upper middle could interrupt China’s growth dramatically. class and foreigners living in or visiting China share Exports from China are largely produced by subsidiconsumption patterns that make possible a supply of aries of foreign firms. In 2002, foreign affiliates achigh-quality goods at correspondingly high prices, incounted for about 50% of all Chinese exports(up cluding not only consumer goods but also luxury housfrom 9% in 1989). In high-tech industries, the share ing. was even higher, reaching more than 90%(e.g. moThere is still a substantial labor surplus in agriculture bile phones; USCC 2003). The foreign-funded firms are and in state-owned industries that could be moved also absorbing a large share of all Chinese imports(5% into modern industries with much higher productivity. in 1985; 15% in 1989; 52% in 2000; Lardy 2002:7). Thanks to generous credits from the state banking sysAbout half of the overall value of China’s foreign trade tem, there has been little labor shedding from stateis thus related to FDI. In 2002, foreign-owned firms produced 28.9% of the gross output value of all indus1 Numbers given at the end of the 1990s indicate 18-20 million trial enterprises in China(up from 11.7% in 1995) workers in foreign-owned firms in Chinese export processing (World Bank 2003b). Most of that foreign investment zones(ILO 1998); other sources give much lower figures of about 8 million workers(communication by Nicholas Lardy to and corresponding export production take place in the the authors). 3

Michael Dauderstädt& Jürgen Stetten China and Globalization Globalisierung und Gerechtigekkeit (098/20054) 4 owned enterprises. The new jobs in foreign affiliates or how far globalization has contributed to the reduction new export-oriented private Chinese firms have mostly of poverty in China. Globalization advocates like to been filled by rural workers. But there are still more present China as a showcase for their argument that than 300 million workers in agriculture, many of them global economic integration benefits the poor. The working on small subsistence plots with very low proseminal work in this regard is World Bank(2002), and ductivity. During the first phase of reforms, increasing the best critique is by Robert Hunter Wade(2004). productivity in agriculture led to the development of Actually, inequality has risen in China. Poverty may rural industries supplying manufactured goods to have declined if we define it as an income of USD 1 or farmers as well as to substantial construction in rural 2 per day at ppp. But that income is less than 10% of areas. Later, structural change shifted more to the the average national per capita income in China. Most above-mentioned export-oriented and/or foreignpoverty measurements assume that poverty starts at an owned industries. With the trade liberalization to income below 50% of average income, which in China which China has committed itself by joining the WTO, amounts to a poverty threshold of at least USD 5 per the low-productivity sectors of agriculture, rural indusday. Measuring income at ppp also touches up the pictries and state-owned enterprises are coming under ture, since services account for an unrealistically(bepressure to get rid of their hidden unemployment, i.e. cause of their higher value and higher share of conworkers who are not really needed to maintain a given sumption in rich economies than in poor ones) large level of output. part of the basket of goods and services that are used Recently, the modern enterprises in the coastal arto translate a given amount of national currency from eas have had difficulties in finding enough workers to exchange rate parity into ppp. fill all vacancies. As long as the state protects its own WTO membership, globalization, and stronger inoverstaffed enterprises(and the level of employment volvement of foreign investors will eventually affect the there) and rural jobs offer an acceptable standard of fundamental and specific characteristics of the Chinese living, a low-wage job at a high-cost location will beeconomy. As any other economy, the Chinese is based come less attractive, in particular if it is dirty and danon a cultural subtext which in the Chinese context ingerous. In agriculture, income depends on productivity cludes a cultural dualism between rural and urban arand prices. Farmers can earn more by producing fruit eas, a strong localism,“political entrepreneurship,” and vegetables than grain. China still controls the and a dominance of networks(guanxi). The interaction product mix of its farmers through a variety of formal between this“style” and the practices and values of and informal measures, such as the power of local the country’s still Western-dominated globalized econparty leaders. If farmers are allowed to switch from omy will produce hybrid networks within China and grain to higher valued-added products, the growth of give rise to new challenges to global governance, in the rural economy will accelerate. The Chinese govparticular within the WTO(Herrmann-Pillath 2005). ernment is reluctant to become dependent on grain imports and still insists on maintaining domestic grain production, which, as a consequence, did not decrease Global Repercussions 1: the Rich World during the 1990s, while fruit production tripled. In employment terms, export production is still the Contrary to the often and loudly voiced concerns tip of the iceberg. The high value of exports in relation about the threat China is posing to employment and to GDP is a result of the high price of internationally prosperity in the rich industrialized countries of the traded goods, which contain a high share of imported OECD, the actual impact so far has been limited. China inputs(intermediate goods and, through depreciation, might account for a large share of the rich world’s exmodern machinery), while most of the remaining doport growth, but it is still a small market that has a cormestic economy, above all agriculture, produces cheap respondingly small share in the rich world’s total exgoods and services. That explains the above-mentioned ports. That small size of the import market reflects the fact that China achieves a share of exports in GDP relatively small size of the total Chinese economy when terms that is comparable to Germany(more than measured at exchange rates(rank 6 between France 30%), while having exports per capita of only 3% of and Italy in 2001; World Bank 2003b). Exchange parity the German value. In physical terms, domestic producactually measures – unlike ppp – the capacity of an tion still vastly exceeds exports or imports. Satisfaction economy to buy in the world market. China absorbs of basic needs depends to an overwhelming extent on less than 2% of the EU’s exports and about 3% of US that domestic production. It is therefore questionable exports. More generally, trade with developing coun-

Internationale Politikanalyse International Policy Analysis Unit tries has destroyed jobs in rich countries. But these costs(loss of physical and human capital in the declinlosses in import-competing industries have for the ing sectors). Moreover, if demand does not keep pace, most part been compensated for by gains in other sec- growth in productivity will be translated into unemtors, either exporting ones or domestic services. These ployment. Welfare gains and employment are distribgains could have been higher if demand by the devel- uted between the countries involved through the oping countries had been less constrained by under- terms of trade, which depend on exchange rates. The valuation, austerity policies and debt problems(Kucera devaluing country forgoes welfare gains and has(or is & Milberg 2003). able) to increase employment in order to achieve the Similarly, China’s share of total FDI has been signifi- same level of consumption. As Paul Samuelson has cantly below 10%. The total number of jobs shifted to shown in a recent critique(Samuelson 2004) of the China is also small in comparison with total employ- Ricardo-based justification of globalization, in the ment in countries of origin. A study submitted to the longer run rich countries will probably lose the welfare US-China Economic and Security Review Commission or employment gains achieved through specialization (Bronfenbrenner& Luce 2004) estimated that 99,000 when the developing countries start to produce, at the jobs have been relocated from the US to China(at the same level of productivity, the goods they have been same time, the report estimates that 140,000 jobs had importing. Meanwhile, as trade theory(Heckscher Ohshifted to Mexico) in 2004. That is less than 0.1% of lin, Stolper-Samuelson) suggests, trade affects income the total labor force. The employment effects of trade distribution when countries specialize in products that itself are particularly strong in the USA because of the use domestically abundant production factors. In thecountry’s large trade deficit with China. A US study ory, China specializes in low-skill, labor-intensive activiestimates that a net 1.5 million 2 job opportunities were ties, while rich countries specialize in high-skill, capitallost between 1989 and 2003 due to trade with China. intensive activities. Subsequently, wages, in particular But even that figure pales in comparison with the total of unskilled workers, will decline in rich countries job turnover in the US economy. As regards Europe (Deardorff 2001). and Germany in particular, empirical studies have also Classic trade theory, even as revised by Samuelson, detected some very limited effects of job relocation assumes that there is no movement of production facand outsourcing(Kirkegaard 2004& Geishecker tors between countries. The actual process of global2002:313). Outsourcing from Europe in any case tends ization is obviously one driven by trade and factor to shift jobs to Eastern Europe rather than to China, flows. Multinational enterprises rearrange global proalthough relocation to China has also occurred. The duction networks and value-added chains in a way welfare and employment effects of outsourcing dethat minimizes costs by locating each production step pend to a large extent on the adjustment capacity of at the location with the minimum cost(including the rich country concerned, i.e. its capacity to create wages, taxes, and other inputs). That process does not new jobs in industries such as domestic services or upnecessarily increase productivity, but it does replace market exports. A study by McKinsey has estimated higher-cost inputs with lower-cost inputs, in particular that Germany is losing from outsourcing, while the US high-wage jobs with low-wage jobs(Dauderstädt is winning, thanks to its more flexible labor market 2004). Since the high value-added segments of global (Clement 2004:527). production chains are mostly located in rich countries, Obviously, it is difficult to determine empirically the and given the strong competition between locations net trade- and offshoring-related effects of globalizawith abundant low-skill labor, poor countries hardly tion on rich countries via. Economic theory provides a benefit at all from this process, and wage dispersion in mixed picture, too. Optimistic advocates of globalizasuch locations even tends to increase(Milberg 2004). tion tend to rely on Ricardo’s classic trade theory, The price effects of China’s foreign trade in world which promises welfare gains for all, as all participating markets will be twofold: Goods produced in and execonomies specialize according to their relative comported from China are likely to become cheaper while parative advantages. These welfare gains result from goods(mostly commodities) needed by and imported increased productivity and depend on a successful to China will probably become more expensive. Since course of structural change within the economies inChina’s exports are more labor-intensive and its imvolved, a process which entails substantial adjustment ports more capital-intensive, wages in rich countries should come under pressure, with profits rising. Al2 Resulting from a gross loss of 1.7 million due to imports from though it would be difficult to establish a causal relaChina and gross gains due to US exports of 0,2 million jobs; tionship, this conclusion would fit well with the recent see Scott(2005: Tables“Effects on Employment of U.S. Trade Deficit with China, by State and Major Industry.”) pattern of factor earnings in many rich countries. Of 5

Michael Dauderstädt& Jürgen Stetten China and Globalization Globalisierung und Gerechtigekkeit (098/20054) 6 course, it is not only China but also other low-wage in the poor world typically target markets for low-skill economies such as those in Central and Eastern Europe and labor-intensive goods and services – and many exor India whose growing integration in the world econporters are increasingly struggling to beat their Chiomy is exerting pressure in that direction. nese competitors. The most recent example of the To benefit from China’s growth, rich countries must competitive pressure coming from China is the world upgrade their labor forces, shifting labor into higher textile market, which, due to the phase-out of the value-added industries. They should also expand serMultifiber Agreement(MFA), has seen a massive exvice industries that cater to the domestic market and pansion of the activities of Chinese textile and apparel need to be located close to consumers. Another option exporters(Soko 2005). is reduction of working time. In particular, the US, with The competitive pressure is twofold: First, products its high number of hours worked per year per emfrom Chinese factories meet their rivals from other deployee(about 20% higher than Europe), could transveloping countries in first-world markets, particularly late some of the welfare gains from its trade with the US and the EU; second, goods made in China are China into more leisure time, which in turn would posexported to the developing world, where they substisibly increase demand for domestic services. When tute for locally made products. Since the reach of ChiChina, under severe pressure from the US and Europe, nese activities has been expanded far beyond raised its export tariffs on some textiles in May 2005 neighboring Asian countries into Africa and Latin and slightly revalued the yuan in July 2005, it actually America, the latter form of competition has an almost chose welfare gains at the expense of employment, global reach, particularly in some product categories while its rich customers wanted to protect employsuch as toys and textiles. While governments could ment, even though this implied more expensive imguard their countries against the second type of comports. These welfare gains have to be balanced against petition by means of traditional protective measures, losses in the yuan book value of China’s exchange rethe typical reaction to the first type is downward presserves. The revaluation of July 2005 has cost China sure on wages coupled with an“or else we relocate to several billion USD, measured in yuan(McGeever China” threat. Alden(2005) provides a critical review 2005). of the growing engagement between China and AfBeyond trade, it is also essential to consider the efrica. fects of China’s accumulation of foreign exchange reA study by Enrique Dussel Peters on the case of serves. These reserves are thought to consist largely Mexico illustrates this“double whammy” effect(Dus(60%-80%) of US dollars, for China’s currency was sel Peters 2005). The author first looks at Mexico’s pegged to the dollar until July 2005. Some observers most important export market – the US. In 1990, Mexassume(The Economist 2005c) that Chinese investico was the third largest exporter to the US. Since ment in US treasury bonds contributed to keeping US then, Mexican exporters have benefited from an enviinterest rates low. Conversely, signs of China diversifyronment marked by strong US demand and trade libing its reserves by moving out of the US dollar could eralization measures. Despite this positive trend, Mexdrive bond yields up and eventually lead to a fall in US ico was merely able to consolidate its overall position. asset prices which, in turn, could cause a recession in China, however, started out in the same period from the US economy. the 12 th rank and smoothly moved ahead of Mexico to second place in 2003. It is important to note that the categories of products exported from China and MexGlobal Repercussions 2: the Poor World ico to the US largely overlap – with electronics and auto parts among the most important items. And deIn most countries of the poor world China is seen as spite the fact that Mexican exporters enjoyed tariff ada direct and fierce competitor. This has largely to do vantages thanks to NAFTA, Chinese exporters greatly with the fact that developing countries, including outperformed their Latin American rivals. As a result, China, all fish in the same pond. In countries such as goods from Mexico are today struggling to hold their Thailand, Malaysia or Indonesia the value of exports to share in the US market, while China’s climb to the top the US that are in the same product categories as Chiof the US trade statistics seems to be just a matter of nese exports to the US accounts for about two thirds; time. Dussel Peters concludes that the Mexican econthe figure for countries such as Japan or Singapore is omy has begun to sputter as a result of sluggish export 22% and 40%, respectively(The Economist 2005a: growth and due to competition from China. To make 24). As far as export activities are concerned, countries matters worse, Mexico’s bilateral trade relations with

Internationale Politikanalyse International Policy Analysis Unit China reveal a similar pattern. In the period 1993Taiwan supplied 60% of all US imports of footwear, 2003, China’s exports to Mexico achieved a whopping toys, games and sporting goods. Only twelve years annual average growth rate of 37.6%. Of a total of later(1999) it was China that supplied the 60%, partly 9.4 billion dollars worth of Chinese exports to Mexico because Korean and Taiwanese firms“offshored” their in 2003, two thirds were in the auto parts and eleclow-skill production to China(Lardy 2002:159). The tronics category. question, however, is how soon China will hand over The big question is: Why are Chinese electronics the baton to its followers. The reason for offshoring is and auto parts exporters so much more successful than a cycle of increasing labor scarcity, rising real wages their counterparts from Mexico? Dussel Peter’s study and ascent up the value chain. Given China’s huge does not provide any quick answers and sees a mix of pool of cheap labor, it would, however, seem much wage differentials and technological advantages at too soon to call on China to give the next generation a work. A look at exchange rates reveals, however, that chance. the relative price of the Mexican and Chinese currenEven if the competitive pressure from China on the cies to the US dollar may in fact have accentuated expoor world continues on for the foreseeable future, isting real wage differentials. With the RMB undervalChina is also increasingly seen as a role model. What ued relative to the dollar, the Mexican peso appears to adds to China’s attractiveness, apart from its unbe overvalued and suffering from the Dutch disease doubted success, is the unique policy mix that the Chiphenomenon typical of resource-rich countries. nese government has been pursuing(Chandrasekhar& Apart from the twofold effect exemplified by the Ghosh 2005). Particularly striking is the comparison case of Mexico, another and less obvious consequence with Latin America, where during the 1980s and of China’s growth is the expansion of Chinese invest1990s the recipes of the Washington Consensus were ments into the developing world. Although exact stafollowed and where few of the expectations placed in tistics are hard to come by, Chinese firms are certainly this model were met. In view of this sobering comparion the way to becoming major investors in global marson, governments in Latin America have started to kets. Many projects are related to resource exploitation carefully study the Chinese model. They are particularly and aim to satisfy China’s ever growing appetite for astonished by the strong role that the Chinese govoil, gas and mineral imports. ernment has played in industrial development as well Is there no way for countries in the poor world to as by the cautious approach that it has used towards survive direct competition from China? Yes, there is. A liberalization and deregulation. case in point is the success of the world’s second most populous country. India has built its success on abundant cheap labor, just as China has. But Indian firms, China and Global Governance at least in part, have gone into different product categories. Given its big pool of formerly underutilized Without any doubt, the days when the Chinese semi-skilled and highly-skilled labor, India geared its government sat comfortably in the camp of those callexport drive towards tradable service industries and the ing for solidarity with the South and demanding a production of research-intensive goods such as infor“New Economic World Order” are over. And yet in the mation processing, telephony services, medical serfield of economic global policy-making China still is a vices, software development and the production of sleeping giant. It is only when it comes to hard security medicines. interests that China – a member of the P5 in the UN But even if the niche strategy does not work, the Security Council – does no shy not away from positionpicture is not really all that gloomy. It is important to ing itself as a member of the“big league.” note that resource-rich countries have greatly beneSome new terminology is a first indicator that fited from China’s demand for commodities such as change is on the horizon. Senior Chinese leaders have iron ore and copper. Big exporters of these goods – replaced the inward-driven“peace and development” such as Brazil and South Africa – are currently enjoying paradigm with the more outward-oriented term of huge windfall profits by raising both the prices and the “peaceful rise.” One aspect that is not made clear by volumes of their commodity exports. this new rhetoric is: How fast, and in what direction, Another, if yet more distant, hope, for poor counwill China’s leadership take the country into the global tries wishing to benefit from China’s success is the policy arena? “graduation” of the Chinese economy. Initially, China An example of how Chinese leaders are shifting itself had benefited from the advancement of its Asian gears is China’s relationship with the WTO. When frontrunners. In 1987, Hong Kong, South Korea and China joined the WTO in 2001, many observers 7

Michael Dauderstädt& Jürgen Stetten China and Globalization Globalisierung und Gerechtigekkeit (098/20054) 8 pointed to domestic considerations, i.e. use of the in favor of market orthodoxy and a lean state, Beijing pressure generated by a rules-based institution such as is promoting a pragmatic approach to capitalism couthe WTO to speed up reforms at home(Reddies 2003). pled with what is known as the developmental state. Shortly after it had joined the trade body, the Chinese This approach goes down very well with many coungovernment surprised many when it joined the G20 – tries in the South, – if the many delegations from dea group of countries led by Brazil, India and South Afveloping countries recently visiting China are any rica that is pushing for reforms in the agricultural secguide. What remains to be seen, however, is how protors. In a similar vein, China has placed a bid to beactively China will play the Beijing Consensus card. come a shareholder of the Interamerican Development Ramo points to what he calls China’s asymmetric use Bank(IDB) – a move that has met with some resisof power and predicts that it will rely on a very indirect tance, particularly from the most powerful stakeholder. form of soft power rather than the arm-twisting apChina also wants to strengthen its position in other proach used by its rival. He may be right. When Chiinternational financial institutions, where the distribunese officials are asked about their attitude towards tion of power has depended on the size of the mem“development policy,” a reply that is both often heard ber states’ GDP, a fact which originally gave poor and at the same time stunning and convincing is:“If China little voice(in contrast to the situation at the China continues to grow at its current rate and pulls UN). Despite these moves, China’s approach to global out its whole population of 1.3 billion out of poverty, policy-making is still far removed from the megaphone this would be the substantial contribution to the diplomacy of other countries, and it certainly pales in achievement of the UN Millennium Development Goals comparison to the level and depth of engagement of (MDG)!” countries such as Brazil. In addition, as China moves further up the ecoTo predict the future direction of China’s engagenomic ladder, its interests in global politics will change. ment in the global policy arena, an analysis of China’s From a somewhat cynical perspective, it could be arinterests should be a good guide. First of all, China has gued that China’s ultimate ambition is to“leap to the a number of offensive and defensive interests, to speak big league and leave the rules as they are.” In some in the parlance of trade policy. On the offensive side, areas this might well be the case. Take the issue of inChina’s key interest for the foreseeable future will be vestment protection: As China moves away from being to push for open markets for its goods and services. a prime recipient of FDI and into the role of one its maDepending on the fate of the WTO- which is strugjor sources, it will more willingly support global rules gling to recover from an acute crisis – the attention of designed to safeguard foreign investors. The same may Chinese trade policy might shift to regional and bilatapply for global environmental policy. In the Kyoto Proeral agreements, as other big trading nations have tocol context, China has traditionally argued for the done. On the defensive side, the most important line right of developing countries to pollute on a“per capof defense lies with China’s capital markets. China ita basis.” This attitude could change. Not only is (rightly) resents the request for full liberalizations of its China already feeling the pain of environmental degcapital account, and it will continue to resist such reradation, it is also growing increasingly concerned quests for quite some time to come. Given its unwillabout the rising price of energy, particularly oil. Rather ingness to succumb to outside pressure, China has than promoting a relentless surge in global energy been very reluctant to accept invitations to join forums consumption, China could soon find itself in the same such as the G8, where there is a great danger that the camp as Europe – arguing for a global approach to encountry might find itself“cornered.” ergy efficiency. Less obvious is whether China has the ambition and potential to play the role of an“economic policy hegemon.” When the US government adopted the Adjusting to China’s Rapid Growth Washington Consensus approach, it was motivated by a mix of objectives, including the desire to export its Given the size of China and the success of its econown set of values and recipes and to advance the inomy, there is no doubt that China will incrementally terests of its banks and companies in relevant counmove from the engine room of globalization into the tries. Joshua Cooper Ramo – an American analyst – driver’s compartment. Whether it will stay in the camp sees China emerging as a powerful alternative to the of those who support a rules-based system of global American role model and calls this the“Beijing Congovernance, or opt instead for the“G1 approach,” will sensus”(Ramo 2004). Where Washington has argued remain an open question for some time to come. The

Internationale Politikanalyse International Policy Analysis Unit most powerful members of any club invariably tend to a weapon, as former US administrations threatened) bend the rules. If the rules serve your own interest, you would encourage such a Chinese policy. happily comply. If they do not, you claim that it would Rapid growth in China would alleviate many probbe“irresponsible” not to act in your own interest. lematic effects of its integration into the global econQuite apart from considerations of global politics, omy. A growing China would absorb its own labor the fundamental economic consequences of the procsupply, thus driving up wages and leading to a real ess of globalization should be kept in mind. In order to appreciation of its currency. Such a development shape globalization in a way that delivers or protects would ease competitive pressure, in particular on other growth and equity, several obstacles have to be overlow-wage countries, and increase demand for imports come: from the rest of the world, which in turn would create • While global trade enhances global welfare and more jobs there. But there is another side to that coin: raises productivity, global demand must increase at The growing demand for raw materials as well as more or less the same pace to maintain current levgrowing pollution, including higher output of greenels of output and employment. Productivity gains house gases.“China now consumes 40% of the can be translated into higher factor incomes, lower world’s cement, a third of its coal and a quarter of its prices or lower factor input. For China, reduction of steel”(The Economist 2005b). This above-average delabor input(be it in terms of reduced weekly workmand(compared to China’s share of world GDP, or ing hours, longer vacations or early retirement) is even population) will not last forever, as it mirrors the still less preferable than higher output, given the need to build up a modern infrastructure, including country’s continuing vast needs. Thus real wages transport, plant and housing. More developed counshould reflect(increased) productivity. Lower prices tries are already saturated with steel and concrete, and are also apt to ensure equity since they benefit all they have subsequently changed their patterns of deconsumers. mand and production from heavy industry to services. • China should not deliberately undervalue its exBut China’s huge appetite for raw materials will change rate. By doing so, it would stand to increase probably continue on for decades, and it is already a domestic employment, but at the expense of welburden on its relations with other countries, in particufare gains. If it is more flexible than its trading partlar with Japan and some other Asian neighbors(The ners in shifting labor to the most productive activiEconomist 2005a). Rising global demand for natural ties, it will be better off improving its terms of trade resources may be good news for their producby holding a higher external value for its currency. ers/owners, but it will sharpen the competition beAt the same time, this would reduce the resistance tween importers, who have to earn the money to buy of its trading partners to China’s exports, in particuraw materials by selling manufactured goods. Besides lar on the part of those that are faced with greater some East Asian countries, it is above all resourcedifficulties in adjusting. However, China must weigh poor, high-wage Europe that is bound to see its terms these benefits against the benefits which result of trade decline. But even such a development – if it from a slight undervaluation, namely the capacity to materializes- would call primarily for a European lower interest rates. agenda of ecological modernization which creates new • To avoid a race to the bottom as regards wages, it jobs by economizing on energy and natural resources. would be good if the reservation wage in China increased. That reservation wage depends on the income which potential workers could get from other activities such as jobs in state-owned enterprises or in agriculture or other firms oriented towards the domestic market. The more local rural economies flourish, the less people will be inclined to move to the coastal regions and seek low-wage jobs there. To that end, China should loosen its restrictive agricultural policy and allow more flexibility within the rural economy. By not restricting the production shift from grain to fruit and vegetables, China could increase rural productivity and incomes. A supply guarantee by other grain producers(or at least a guarantee that grain exports would not be used as 9

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