Chinas role in Globalisation Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times Leverhulme Centre for Research on Globalisation and Economic Policy, School of Economics, Nottingham University February 19th, 2004

2 Chinas role in Globalisation Let China sleep, for when she wakes, she will shake the world. Napoleon Bonaparte

3 Chinas role in Globalisation Chinas rising economy Chinas growing role in the world economy Challenges in trade policy Challenges in international monetary policy Conclusions

4 Chinas role in Globalisation My thesis –China is already a big force in globalisation –China will become an ever more important player in the years ahead –The future of our world economy will depend, in large measure, on how China plays its role and on how the rest of the world, particularly the developed countries, respond to China

5 1. Chinas rising economy Asias rise is the fourth big transformation in relative economic power since the industrial revolution –Early 19 th century: rise of the UK –Late 19 th and early 20 th centuries: rise of US and Germany –Post-second world war: Japanese miracle –1970 onwards: rise of the rest of Asia, including China and India

6 1. Chinas rising economy Over the last hundred years, the worlds leading economies have been much the same group of countries. The US has been the biggest economy. Japan has gone up, while the UK has declined. Russia was never a big player in the world economy. Chinas rise transforms this picture. It is a revolutionary upheaval in global economic power, comparable to the rise of the US between 1860 and 1910.

7 1. Chinas rising economy Source: Angus Maddison

8 1. Chinas rising economy

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10 1. Chinas rising economy

11 1. Chinas rising economy

12 1. Chinas rising economy

13 1. Chinas rising economy

14 1. Chinas rising economy

15 2. Chinas growing role in the world economy Chinas share in global exports has risen from 1.2 per cent in 1982 to 5.2 per cent in Over the ten years , the volume of Chinas exports grew at 17 per cent a year, twice the rate of growth of the economy Between 1979 and 2001, Chinas terms of trade deteriorated by 30 per cent,while her export volume increased 17-fold

16 2. Chinas growing role in the world economy Chinas rapidly growing imports raise the prices of commodities, including oil, and her exports drive down the prices of manufactures, especially labour-intensive manufactures Already, China is the worlds fourth largest exporter (after US, Germany and Japan) and third equal importer in the world (with Japan, UK and France). China will be the third largest exporter and importer, within a few years

17 2. Chinas growing role in the world economy China now contains the worlds third largest stock of inward foreign direct investment China holds the worlds second largest foreign currency reserves – over $400bn in November 2003 China is a big player in the world economy already, but can only become bigger in the years ahead, as its growth outpaces that of the rest of the world

18 2. Chinas growing role in the world economy

19 2. Chinas growing role in the world economy

20 2. Chinas growing role in the world economy Source: WTO

21 2. Chinas growing role in the world economy

22 2. Chinas growing role in the world economy

23 2. Chinas growing role in the world economy

24 2. Chinas growing role in the world economy Source: World Bank

25 2. Chinas growing role in the world economy

26 3. Challenges in trade policy China has liberalised trade policies dramatically: –average tariffs on manufactures are down from 46.5 per cent in 1992 to 6.9 per cent after accession; –average tariffs on primary commodities are down from 22.3 per cent to 3.6 per cent –Non-tariff barrier coverage is down from 32.5 per cent to 21.6 per cent between 1996 and 2001 –Extensive liberalisation commitments in telecommunications, banking and insurance –China has moved extensively towards a market economy –The WTO accession will accelerate this trend dramatically

27 3. Challenges in trade policy China has accepted numerous obligations and restrictions, in return for its renewed membership of the World Trade Organisation in 2001 –a transitional product-specific safeguard mechanism against China, lasting 12 years –a transitional textile safeguard mechanism against China, lasting until 2008 –immediate implementation of the agreement on trade-related intellectual property rights (TRIPS) by China –a limit of 8.5 per cent on domestic subsidies to agriculture by China (which is well above budgetary outlays) –no across-the-board preferences as a developing country

28 3. Challenges in trade policy China was right to accept these obligations: –This is partly because WTO membership strengthen Chinas reforms, not least by introducing the rule of law –Also Chinas overriding interest is in maintaining a liberal global trading regime trade The following facts are helpful to Chinas cause: –50 per cent of Chinas exports are generated by FDI; and –and its production is vertically integrated, with a heavy reliance on imported components. –So outsiders have a strong interest in Chinas success and in resisting protectionism against her

29 3. Challenges in trade policy But the speed of Chinas growth will still have a big impact on the rest of the world, creating resistance to Chinas exports China should probably assume that exports will be unable to grow very much faster than GDP in the decades ahead Also China needs to do everything she can to keep the liberal trading system working, by opening up her own economy

30 4. Challenges in international monetary policy China does not run a huge current account surplus, but it recycles its capital inflow into a capital outflow This gives it a huge surplus in its basic balance of payments: the sum of the current account and autonomous private sector net flows And remember that even Japan ran current account deficits at these levels of income per head

31 4. Challenges in international monetary policy

32 4. Challenges in international monetary policy

33 4. Challenges in international monetary policy

34 4. Challenges in international monetary policy It would be helpful for global payments adjustment if China could move into a modest current account deficit. It would also help Chinese monetary control. This would require currency adjustment and expanded demand, in relation to output Free floating is impossible, without radical financial reform. But a wider band, with a managed exchange rate, would be possible. Alternatively (or in addition), China could accelerate import liberalisation.

35 5. Issues ahead As a competitive and dynamic new economic power, it is in Chinas interest to promote a rule-governed open world trading system based on non-discrimination: it needs the markets and the stability It is in Chinas interest to defuse US protectionism, by accommodating the needed depreciation of the US dollar Global payments adjustment is difficult without China, since other countries do not want a big appreciation of their currencies against the renminbi

36 5. Issues ahead China should move towards convertibility and a floating exchange rate, with an inflation-targeting central bank China should be invited to become a full member of the group of seven finance ministers