Globalization and China’s Economic and Financial D

1GlobalizationandChina’sEconomicandFinancialDevelopment(Preliminarydraft–nottobequoted9/8/05)GregoryC.ChowTounderstandChina’seconomicreformanddevelopmentsince1978onemayconvenientlydividethetopicintoitsdomesticandinternationalaspectseventhoughthetwoarecloselyrelated.ItisthepurposeofthisessaytoexaminetheinternationalaspectsasChinahastakenpartintheprocessofworldeconomicglobalization,asalientfeatureofworldhistorytoday.TheChineseleaderDengXiaopingwhoinitiatedanddirectedeconomicreformfromaplannedtoamarketeconomyunderstoodtheimportanceofglobalizationandadoptedwhathecalledan“open-doorpolicy”asanessentialpartofthereformprogram.Thetermglobalizationreferstothecrossingofnationalboundaries.Itmeanstheflowofgoods,capital,information/technologyandpeopleacrossnationalborders.ChinapracticedglobalizationintheHandynasty(206BC-220AD)whentradetookplacebetweentheHanChineseandneighboringpeopleintheNorth-westthroughtheSilkRoute.DuringtheTangdynasty(618-901)tradeflourishedandtheSilkRouteexpandedasChinesetradedwiththeRomans.However,intheQingDynastyandintheperiodofthePRCuptoDengXiaoping’sopen-doorpolicyChinatriedtocloseitsdoorsandresistedglobalization.IwillsurveytheaccomplishmentsofglobalizationforChina’seconomicdevelopmentandclarifysomecontroversialissuesconcerningglobalization.1.ForeignTrade.Firstconsiderforeigntradeortheflowofgoodsacrossnationalborders.Since1978Chinahasencouragedfreetradeandabolishedtraderestrictionsstepbystep.ThegovernmenthaschangeditspolicyfromtheadministrationofforeigntradebytheMinistryofForeignTrade,togivingprovincialgovernmentsmuchautonomyinforeigntradeandtoallowingprivateenterprisestoengageinforeigntrade.Thetotalvolumeofforeigntradeorthetotalvolumeofexportsandimportsincreasedfrom20.64billionUSdollarsin1978to620.8billionin2002,accountingfor65percentofGDPandwasgrowingattherateof35percentperyear.In2004,thetradevolumereached1.1trillionUSdollars,andhadagrowthrateof30percent.Chinabecamethethirdlargesttradingcountryintheworld,nexttotheUnitedStatesandGermany.TodayexportsfromChinacanbefoundallovertheworld.IntermsofUS-ChinaeconomicrelationsexportsfromChinahavebenefitedmanyAmericansinprovidingthemwithhigh-qualityconsumergoodsatlowprices,buthavealsogeneratedresentmentandresistancebysomeAmericanmanufacturersandworkers.ChineseexportstotheUSmayhurtsomeUSindustriesproducingsimilarproducts.USworkersintheseindustriesmaysuffertemporarily,butinthelong-runthelabormarketisabletoadjustasnewindustriesaredevelopedtohirethedisplacedworkers.Inthelongrun,theaggregateunemploymentrate(nowat5percent)hasnotbeenvisiblyaffectedbytheAmerican2importsofforeigngoods.NotealsothatexportsfromChina,infactabout60percentofthem,areproducedbyforeigninvestedenterprisesinChinaandsomeareAmericancompanies.OutsourcingofjobssuchashavingsomeoneinAsiareadX-rayoranswerphoneshasalsocreatedresentmentintheUnitedStates.Fromtheeconomicpointofview,outsourcingofjobsasillustratedaboveisthesameasimportofservicesfromChina.TheeffectsarethesameasfortheimportofgoodsproducedinChinathatIjusttalkedabout.SuchimportsaregoodforChinaandforUSalthoughsomeworkersmaybedisplacedtemporarily.Althoughthispointisvalid,ProfessorGregMankiwofHarvardandatthetimeChairmanofthePresident’sCouncilofEconomicAdvisersgotintotroublewhenhemadethisvalidpointinaCongressionalhearingin2004becausesuchaviewpointcanbeunpopularforAmericanworkersandpoliticians.AsanimporterChinaprovidesalargemarketforforeignmanufacturersandhasgainedeconomicpowerasaresult.DemandforimportstoChinapropelseconomicgrowthofothercountriesintheworld.Chinafirsttookamercantiliststandintherestrictionofimports,butaftertherapidexpansionofChineseexports,thetablehasturnedassomedevelopedcountriesincludingtheUSareconsideringtheimpositionofrestrictionsonimportsfromChina.TheimpositionofquotasontextilesfromChinaisanexample.In2001ChinajoinedtheWorldTradeOrganization.MembershipinWTOrequiredChinatoloweritstariffsformanufacturingaswellasagriculturalproducts.TheloweringoftariffshelpedincreasecompetitionforChinesemanufacturersandfarmersandprovidecheaperproductsforChineseconsumers.ForeigntradehashelpedeconomicgrowthinChinainthreeaspects.Firstinternationalspecializationthattakesplaceaseachcountryproducesthegoodsforwhichithasacomparativeadvantageinproducingwillenablethecountrytoobtainmoregoodsthanbydomesticproductionalone.Second,exportsareapartofaggregatedemandandanincreaseinaggregatedemandhelpsincreasethecountry’snationaloutput.Thirdly,tradetogetherwithforeigninvestmenthasbroughtinmoderntechnologyandmethodofmanagementthathasincreasedproductivityinChina.2.ForeignInvestmentA.FlowofphysicalcapitalintheformofforeigndirectinvestmenthasbeengoodinpromotingChina’seconomicgrowth.Sinceeconomicreformstartedin1978China’spolicyconcerningforeigninvestmenthasmadean180degreeturn,fromtreatingitasaformofexploitationbyforeignerstowelcomingitforChina’seconomicdevelopment.Intheyears2001to2003,theamountsofdirectforeigninvestmentactuallyutilizedwererespectively49.7,55.0and56.1billionUSdollars.Foreigninvestmenthasprovidedphysicalandfinancialcapital,technology,andmanagementskillandpra