Globalizations’ Win-Win Game

Stephen DeAngelis

May 2, 2007

Many people still perceive globalization as a contest in which there must be winners and losers. If China rises, for example, they assume that someone else (e.g., the U.S.) must fall. Those concerns were raised by China’s regional neighbors when it joined the World Trade Organization in 2001. The Economist reports, however, that these fears have proven unwarranted [“The export juggernaut,” 31 March 2007].

“When China joined the World Trade Organisation (WTO) in 2001, many developing neighbours felt more than a twinge of discomfort. With China already an export juggernaut, they feared that the dismantling of tariff and other barriers that went with WTO membership would make the country irresistible to manufacturers, diverting foreign direct investment that might otherwise have gone to them. This appears not to have happened.”

Does that mean that China did not reap the expected benefits from WTO membership? No.

“Certainly, foreign investment in China has increased, as have China’s already heady exports, which since 2003 have been growing at their fastest pace since the early 1990s. In 2004 China overtook Japan to become the world’s third-largest exporter, behind America and Germany.”

China’s rise, however, did not result in regional states suffering from a lack of attention.

“Foreign investment has grown elsewhere too. The ten ASEAN countries saw a record $37 billion of investment in 2005. For some manufacturers, South-East Asia (or India) serves as a hedge against something going wrong in their China operations—be it social unrest, economic problems or a business climate that turns against foreign investment.”

While other countries have benefited because they are seen as hedges against trouble in China, such thinking puts us right back in the win-lose business. The Economist notes that is a false perception because the truth is that these same countries will actually do better if China succeeds than if it fails.

“Much investment outside China is in fact contingent on the China boom. So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half’s slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China’s appetite for raw materials for a long time to come. Trade within East Asia has grown even faster than the region’s trade with the rest of the world, suggesting deeper specialisation and integration.”

That’s great for Asia, you say, but that must mean the rest of the world is losing. There has been some loss of manufacturing jobs, but that is a historical trend that will someday affect China as well. The good news for those concerned about job flight to China is that the “China Price” is eroding. That’s also good news for workers around the world.

“As the World Bank’s country director for China, David Dollar, points out, wages in China are now rising two or three times faster than in other low-wage Asian economies, and companies are having problems keeping talented staff. Encouraged by the government, companies are moving further inland to take advantage of cheaper labour. Yet the further inland they go, the less skilled the employees and the higher the transport costs to market.”

There is also good news on the security front. Most scenarios that have China and the U.S. engaged in conflict begin with Taiwan. While political tensions may still fester between Taiwan and the mainland, they are more financially interconnected than ever.

“In 2004 eight of the top ten were Taiwanese electronics companies—known as original design manufacturers (ODMs)—to which the world’s top computer brands, such as Dell, Apple and HP, outsource their production and, increasingly, much of their design and innovation. At the start of this decade less than 5% of these firms’ laptop production was on the mainland. Since 2001, when the Taiwanese government lifted restrictions preventing laptop-makers from investing in China, they have shifted virtually all of their production there. … Even China’s most successful domestic computer firm, Lenovo, which acquired IBM‘s personal-computer business in 2004, contracts its production out to Taiwanese companies.”

Foreign companies have long salivated about a consumer-driven China. That day is starting to unfold according to the article.

“Though very open to trade, China’s economy, like America’s, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports. The World Bank forecasts that this will be the first year in which China’s imports will be growing by more than America’s, becoming the biggest source of import growth in the world. Goldman Sachs, an investment bank, reckons that China’s imports for domestic use are now roughly the same as those used in assembling exports, whereas five years ago they were only half as big. Much of what is imported is in the form of raw materials—oil, copper, gas, timber—to feed the China boom.”

The boom may not be all that it seems to be. An article in BusinessWeek indicates that the Chinese are cautious consumers whose tightfistedness is worrying leaders in Beijing, which means they might not be the source of sales the rest of the world hopes they will be — at least in the near term [“Cautious Consumers,” by Dexter Roberts, 30 April 2007]. Roberts begins his article by introducing us to the Xus:

“Meet the Xus. This typical Chinese middle-class family of three shares a two-bedroom apartment in Beijing, purchased four years ago for $40,600. The father, 51-year-old Xu Zhibao, takes home $454 a month from his job as a teacher at Beijing Pharmaceutical College. His wife, Zhang Xiaoping, 50, earns $260 a month as a nurse at a local hospital. Their 25-year-old daughter, Xu Hong, is a student at People’s University. A Whirlpool microwave oven and a Haier refrigerator command pride of place in the tiny kitchen. Among the family’s other prized possessions are two Sony televisions and a Mitsubishi air conditioner. But it isnt just the things the Xus have bought that make them representative of China’s bourgeoisie; its also what they choose not to buy. Like most mainlanders, the family members sock away tons of cash, close to 40% of their earnings every month. The Xus hardly ever go to restaurants, a movie outing is a rare treat, and they have no plans to trade in their bicycles for a motorcycle or car. … Prying open the wallets of tightfisted folks like the Xus is emerging as the hottest political topic in Beijing. Although the economy is still expanding at 10%-plus annually, China’s economic mandarins are concerned that the country’s growth depends too much on its soaring exports and investment in ever more factories and luxury high-rises. Exports leave the Middle Kingdom vulnerable to potential downturns in the U.S. and Europe while causing trade tensions with Washington. And too much investment threatens overcapacity in industries from steel to autos. So Beijing has cut taxes and boosted some social outlays to spur Chinese to spend more at the mall. “

Roberts asks the billion dollar question, “When might the Chinese consumer help really drive the global economy?” That is the moment when China wins and the rest of the world wins as well. The picture is mixed, but not predominantly upbeat.

“Analysts at Credit Suisse Group have conjured a rosy scenario in which China becomes the world’s second-largest consumer nation (after the U.S.) by 2020, up from No. 5 today. UBS is less upbeat, estimating that the middle class includes only about 25 million people—just 2% of China’s population—hardly big enough to have much impact globally. And even Credit Suisse acknowledges that personal incomes, while climbing, aren’t keeping pace with rising GDP. ‘If you think the purpose of rapid economic growth is to increase consumption and the general welfare, then China isn’t doing a very good job,’ says Nicholas R. Lardy, senior fellow at the Peterson Institute for International Economics in Washington. The problem is vexing not just for Beijing but also for the legions of global companies making big bets on China. With the more prosperous coastal areas already reaching saturation in everything from cellular phones to fried chicken outlets, foreign investors have to drive deeper into the interior in search of sales.”

Companies still look longingly at the millions of Chinese who don’t even own the few luxuries the Xus have. The Chinese government is now just as apt to approve construction of foreign-owned plants that produce goods for internal consumption as they are to approve plants primarily producing goods for export. To increase consumption, the Chinese government understands they must increase China’s middle class. To increase the middle class, they must create educated, healthy, employable workers.

“The national budget for education is slated to rise by 42% this year, while outlays for public health will nearly double—though government spending as a share of GDP continues to decline. Beijing also earmarked $3 billion for employment and worker-retraining programs. At the same time, in several provinces the government is trying out a new hybrid public-private pension system.”

It’s ironic that Americans need to save more and the Chinese need to spend more in order to foster global economic growth. Both countries, however, need to better invest in their people. Investment in human capital is always a good idea. The more educated a work force becomes, the less likely it is to be exploited. The healthier a work force, the more productive it becomes. The more productive it becomes, the wealthier it becomes. The wealthier it becomes, the more concerned it becomes with the environment. It is a righteous cycle from which everyone eventually benefits.