China – The World’s New Factory Part II

3: China in international trade

Until the end of the 1970s, China’s economic policy was marked by the idea of ​​strong state control. Production and pricing were subject to detailed regulations by the authorities. When it came to foreign trade, thoughts of self-salvation (autarchy) were central. The Chinese were to produce the goods and services they needed themselves. All foreign trade took place through a handful of state-owned companies.

A self-rescue policy (autarkic policy) is not very effective. Trade with other countries facilitates conditions for international division of labor . Countries can specialize in making goods they have an advantage in the production of. Such advantages can be natural resources, such as oil, but also affordable labor. The goods, which can be produced relatively reasonably, can be exported to other countries. The export earnings can be used to buy other goods from abroad. Imagine if Norway could not sell the oil we exported to other nations, and if we as consumers could only buy goods that could be produced domestically … There is no doubt that our welfare, or standard of living, would then be far lower than today .

The reforms of China’s foreign trade were introduced step by step. For example, export zones were established – geographically limited areas that received capital and technology from abroad, and which produced goods for sale to other countries. In the 19th century, Britain, the first industrialized nation, was called the “workshop of the world” – the world’s factory – because of its large production and export of industrial goods. The role that China – or more precisely: the Chinese coastal provinces – has today is similar in many areas, especially when it comes to relatively simple industrial goods.

Figure 3 shows China’s share of world exports. The growth from the late 1970s to the present has been formidable, and since China was admitted to the WTO (World Trade Organization) in 2001, the value of the country’s exports has risen by an average of over 30 percent annually.

The strong growth in Chinese exports is seen by many as a threat . In 2006, the United States had a trade deficit with China of more than $ 230 billion. In recent months, the Bush administration has filed several lawsuits against China in the World Trade Organization. The background is allegations of Chinese subsidizing the industry and the problem of Chinese companies’ copyright infringement (illegal copying). US companies claim that they are losing large sums of money on Chinese piracy, and that the Chinese authorities are not doing enough to overcome the problem. There is probably a close connection between the US trade deficit with China and the accusations brought before the World Trade Organization.

There are three sides to the trade deficit with China that are of particular concern to Americans:

  • Imports are largely financed by the sale of US securities, so the Chinese have significant foreign exchange reserves. If the foreign exchange reserves are large enough, China will be able to influence the US position in the international financial market.
  • Chinese exports are becoming increasingly advanced. While the United States previously imported clothing, shoes and toys, it is now electronics, car parts and computers that are growing fastest. This represents new competition for several American industries.
  • China’s growing importance as a trading nation has led to the country taking over from the United States as its most important trading partner for several countries. This has strategic implications – as the United States’ role as a trading partner diminishes, so does US influence.

Although much of the international focus has been on the US trade deficit with China, a country located in Asia according to, this gives a false picture of the effects of China’s entry into the international economy. For the world as a whole, the effects are undoubtedly positive – not negative. China’s overall trade surplus is significantly lower than the trade surplus with the United States. This means that China has a deficit in trade with a number of other countries. Several Asian countries benefit from supplying components to Chinese industry. In Africa, economic growth has been record high in recent years, partly due to the Chinese industry’s large appetite for raw materials such as oil and minerals. In western countries, the affordable Chinese products are helping to keep prices down. Clothes, shoes, toys and electronic products – the typical Chinese export items – have in many cases fallen in price in Norway in recent years.

4: China’s potential

Chinese workers with low wages, long working days and limited rights are undoubtedly competitive in relation to the labor force in other countries. It is therefore not surprising that China has become a major industrial exporter. At the same time, history – and first and foremost the fact that China was until recently economically isolated – makes the country’s industrial exports seem overwhelming. To what extent can we expect the Chinese “goods invasion” to continue?

China’s share of world exports is currently below ten percent. At the same time, the country has more than twenty percent of the world’s population. In China, there are large reserves of laborwhich, if given the opportunity, could contribute to continued growth in Chinese production and exports in the coming decades. So what we have seen can only be a beginning. At the same time, it is clear that growth rates of close to ten percent, which China has experienced since the reforms began, cannot continue indefinitely. Sooner or later there will be shortages – of energy, raw materials, clean water and clean air. This will put a damper on growth. In a longer perspective, income growth will push up the price of Chinese labor. When wages in China are no longer as low, the country will become less competitive in the production of labor-intensive goods. This will require a shift to more advanced products, a shift that is already underway in parts of the Chinese economy.

The Chinese government’s stated goal is to spread the economic gains to larger sections of the population . This requires large transfers or investments. Significant improvements in infrastructure are needed if inland provinces are to be able to produce for the world market. One alternative is, of course, to “move” the population to the dynamic coastal provinces, but that too has its price.

Developments in China since Deng launched reforms in the late 1970s have been described as an economic miracle. In many ways, it is a fantastic achievement to lift hundreds of millions of people out of poverty and increase the average income significantly year after year, decade after decade. The modernization that Chinese society has undergone is formidable. At the same time, there is no “miracle” behind it. It’s all about correcting an inefficient system, and giving China the place that the country – by virtue of its resources and its population – could really always have had in the world economy.

5: A historical parallel

Until the beginning of the 19th century, only a very small part of the rich resources in North America were used. Immigration, innovations and investments from Europe made it possible to utilize these resources. Trade between the “old” and the “new” worlds led to sharp improvements in living standards in both places.

In the last thirty years, parts of China’s resources and manpower have been integrated into the world economy. Demand and investment from rich countries have made this possible. The result is strong revenue growth in China. For other countries, the gains are also positive, albeit more modest. However, there is no doubt that an integrated China is far better than an isolated China, both for the Chinese and for us.

China - The World's New Factory 2

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