After a long period of existing in isolation, China’s role in the global economy has increased rapidly over the past two decades. Over this period, China’s gross domestic product has grown at an average annual rate more than 9 percent. Equally, its share of global trades has increases from I percent to about 6 percent. Globally, China is the fourth largest traders and sixths largest economy. Notably, China exports have gained significant market shares in others countries. Furthermore, its rapidly increasing volumes of imports have contributed to the strong performance neighboring economies and strength of global commodity prices (Amiti and Caroline, 2010). China’s economic integration into the global economy is expected to continue rapidly in the coming years as more structural reforms are implemented in several sectors of the country including enterprise, finance, and the labor market. Although the effect of China’s growth are expected to be positive, many economist believe that China’s effect will vary significantly across industrial sectors, social-economic groups, and countries. For instance, industrial exports to China, particularly skill intensive items may erode the market share for unskilled-labor-intensive manufacturers while other sectors in the global economy may suffer job-losses as the China’s market share expands. Furthermore, the rapid growth of China’s economy may significantly increase the world prices for some commodities such energy and agricultural products. This paper seek to investigate the impact of China growth on the global economy and provide a better understanding and knowledge of the phenomena that is China and its remarkable growth which has been envied and also become a subject of debate, and concern (Eichengreen et al. 2007; Acemoglu and Jaume, 2002).
China and the global economy
The level of China’s integration into the global economy is well reflected by its rapidly increasing role in global trade. In the past two decades, China’s exports and imports have grown much faster that global trade. Although China’s economic growth may appear dramatic, it’s not an unprecedented event. Indeed, China experience is similar to earlier integrations where there were surges in trade when rapidly developing economies were integrated into the global trading system. As China’s deepens its trade with the rest of the world, the geographical pattern and composition of its trade has also changed. Notably, the share of exports to industrial economies has increased and become more diverse. Furthermore, China has become increasingly important to Asian economic block (Alesina and Silvia, 1998). This is mostly attributed to the vertical specialization of production within the Asian region, which has resulted in an increase in China’s imports that come from within the region. Coupled with imports for domestic consumption, China has become a major export destination for countries within the Asian region. Trade reforms and commitments have also played an important role in enhancing China’s integration into the global trading system (Bernheim, 1988).
The implementation of China’s reform process has been long and gradual. Some of the critical reforms included the removal of most of nontariff barriers and substantial reduction in tariffs. Agreements with the World Trade Organization have also helped in increasing access to the global market. Further implementation of its commitments with the World Trade Organization is expected in facilitate China’s ongoing integration into the global economy. China considers itself as a developing country that is in the midst of transitioning into a market economy. However, China has emerged to become a major force in the global economy. China’s population constitutes about 20 percent of the world’s population, its size and integration into the global economy has generated a lot of concern (Haddad, 2007). China’s trade practices have raised concerns about workers and companies in both developed and developing consenters. Its currency has also become an issue of contention. Its high demand for energy has increased competition and created conflict. Furthermore, there is increasing concern about inflationary environment in the global economy. Notably, China’s has become the preferred destination for Foreign Direct Investment, rivaling developed countries including the United States and the United Kingdom. China has contributed significantly in the growth of the global economy, which has had a positive effect in many countries around the world. China is increasingly making its own major overseas investments, which are expected to enhance its position and role in the global economy(Bleaney and David, 2001; Harris et al. 2011).
Since economic reform began in early 1979, China’s has experienced remarkable economic performance. Its economy has been characterized with an average growth rate of 9 percent and its Gross Domestic Product has increased twelve fold, while trade with the rest of the world has increased by a factor of 30. Although China exports have been largely labor intensive, they have become increasingly diverse over the years. Furthermore, imports form surrounding regions including New Industrial Economies have increased more rapidly, than imports from other regions in the world. This reflects the role of China as a regional reprocessing center and as a manufacturing hub for re- reports. This means that China’s role as an engine for growth in Asia may become larger than that of Japan (Lall and Albaladejo, 2004). China has also become a major importer for primary commodities, accounting a large and rapidity increasing share in the global trade for key commodities such as oil, aluminum, copper, iron ore, and soybeans. China has become the second largest consumer of oil after the United States. Interestingly, China has become a net importer of oil despite being one of the top producers of oil worldwide. China has also significantly increased its consumption of other commodities. For instance, in 2004, China consumed about 30 percent of global iron ore. Economist, associate the recent increases of commodity prices by about 50 percent to increasing demand from China. This has resulted in the redistribution of income among countries in the world. In this case, primary exporters are experiencing rapid changes in earning from exports and better terms of trade (Robertson and Jessica, 2010; Chow and Kui-Wai, 2003; Linda, 2004).
Although China may have contributed to the increase in commodity prices, its exports have resulted in substantial fall in prices. As such, the lower import prices have contributed to a benign inflationary environment. The rise of China also threatens other economies. For instance, about 70 percent of exports from South American countries such as Costa Rica and Chile are threatened because they provide a similar export product mix. This threat is wide affecting even countries in the Asian region (Bhattasali, et al., 2004). Although Chain has been accredited for encouraging more exports from its neighboring countries, this is not enough to offset the displacement of its own exports to those and other developing markets. China’s rapid economic growth is also attributed among other factors, low cost of labor, fast growth or labor productivity, and supports from a large pool of unskilled and skilled labor. These factors have enabled China to sustain its competitiveness through periods of effective appreciation and depreciation of the nominal exchange rate (Blundell, 1998).
Even though China performance is comparable to the integration of other countries, analysts note that China will play a much bigger role in the global economy than any of its comparators. Furthermore, analysts project that China’s integration and economic growth will continue well into the future (Blundell, 1998). China has been noted of having consistently high saving, which even during a decline will enable it to continue with high level of physical capital formation over a substantial period of time. Although China’s human capital is at a lower level than its comparators, its human capital is growing rapidly and is expected to increase into the future. China’s continued growth which is supported by further financial and trade reforms are expected to have an effect on the global economy through several channels. Analysts believe that as China’s integration proceeds one of the major long-term impacts will be term of trade effects (Cai, 2001).
As China increases it labor supply for intensive manufacturing processes, it will substantially reduce the cost of labor and consequently the price of related commodities, which will significantly benefit countries are net importers of such products. Furthermore, as China’s domestic demand for intermediate inputs for manufacturing process, energy, capital and skilled products and services increases countries that provide such commodities and services stand to gain substantially. One major area where countries are also expected to make major gains is the area of service. These include service such as financial services, telecommunication, clerical services, and information processing. However, some countries are expected to their manufacturing opportunities to Chinese competition and may also suffer trade losses attributed to terms of trade. Countries that may be most affected are those which have a relatively abundant unskilled labor and compete directly with China in markets in developing countries, they may face reduced demand and lower manufacturing prices. Another group of countries that may suffer losses are countries that are net importers of commodities similar to those produced by China. Changes in terms of trade may have significant effect on the composition of output in different sectors of the economy and will also greatly impact the distribution of income of income across and within countries. Notably, sectors in other countries particularly those that provide unskilled labor may be vulnerable to the increase competition from China (Banker; 2003; Ahmad, 1997; Cai, 2001).
In the past two decades, China has initiated several economic reforms that have enabled it to develop a more conducive business environment for investors and most importantly to align Chinese business practices to those of the rest of the of the world. Coupled with stable political environment China has been able to increase the flow of inward Foreign Direct Investment. This has been has played a critical role in facilitating the rapid economic development. Most importantly, this has allowed foreign investors to diversify their holdings and earn high returns. Notably, China has become a major production hub many companies are the globe even those that were originally manufacturing products in developed countries (Lall and Albaladejo, 2004).. China has significantly changed business practices through its effect on commodity prices and cost of labor. Most companies are increasingly transferring their manufacturing functions to China while other functions such as marketing, management, and sales remain in their countries in order to remain competitive. In increase in China’s inward Direct Foreign Investment has may significantly affect the growth of some sectors of economy some countries or affect overall economic growth in some economies. This may result in the stagnations of some economies especially those of developed countries where factors such as high labor costs make them vulnerable to China. Furthermore, through its economic reforms China allows investors to invest in opportunities that have higher returns, this level of flexibility makes China attractive to investors and with increases uncertainty in the global market investors are likely to invest in China. However, developing countries may suffer significantly against Chinese competition for scarce international capital. This is because higher flows of Foreign Direct Investment to China may affect flows to other developing countries (Robertson and Jessica, 2010; Chow and Kui-Wai, 2003).
Over the years China has made numerous foreign investments globally including in developed countries. However, China has increased its focus in developing countries and emerging economies which provide more potential for growth both in terms of economic potential and market size. For China there is an urgent need to expand its market to match its increasing production capacity. China’s challenge it to sustain its current growth. Therefore, there is need to look for new markets for its products. Chinese companies have already expanded into other Asian countries and with the backing of the Chinese government have been able to influence business through various channels including technology transfer and Foreign Direct Investment. Essentially, China is focused on both financial and trade integration which increases dependency on China which is favorable for trade. China has also changed the movements of goods across the globe reflecting the changing roles of major player in the global economy including the United States (Cai, 2001). China’s expansion of its market has displaced other companies that cannot compete with it. The low costs of Chinese products have contributed significantly to the performance of China in the global market. As China develops and labor costs increase, China risks losing its business to other countries. However, China is keen to ensuring the sustainability of growth and has embraced in vertically integrating the supply chain to have increased control of key aspects of global trade. Another areas of focus is on primary commodities, where China has signed numerous agreements focuses resources. These resource including minerals such as copper are important to the survival of the Chinese businesses. Notably, such endeavors will give China more control of the commodity prices allowing it to keep them low to sustain its competitiveness. This may significantly, affect commodity prices in the global market. However, lower commodity prices can play a significant role in promoting the growth of developing countries (National Audit Office of the People’s Republic of China, 2002; Lardy, 1998).
Apart from countries such as the United States, China’s major patterns include countries in Asia, New Industrialized Economies, and developing countries. China’s interaction with developing countries has created opportunities for major reforms in those countries. Creating new markets and enabling the development of those economies. China has also used its resources inclining financial resources and technical knowhow to develop key infrastructure for trade and promote reforms. This creates room for cooperative relationships or partnership that go beyond economic assistance to focus on trade and economic development. As China seek markets and resources for its booming economy China also addresses major issues that promote growth and development. In the recent, past China has put more emphasis on south to south cooperation where emphasis has been on trade between countries in the southern hemisphere. Notably, these countries which were largely considered as developing countries and emerging have increased their economic and trade ties. This has further changes the composition and flow of good in the global economic. The change in trade has had a significant effect on export volume of developed countries. Consequently these countries import lower volumes of products form developed countries. This results in increased losses of from developed countries (Lall and Albaladejo, 2004; Lardy, 1998).
Technology transfer and financial assistance are major components of China trade cooperation. China focuses on building the technical capacities of the countries which it does business with to enhance their ability to trade and facilitate their mutual growth. As a result, the economies of other countries in increasing at a much faster rate than previously expected. The growth of other economies means that the per capita income also increases, which increases the purchasing power of individual. This means that more people are able to buy various goods and services. This increases the level of trade in the global market, which facilitates the growth of the global markets and also creates new markets for both China and emerging economies. Although China creates more and new opportunities, it may be increasingly difficult for emerging economies or New Industrialized Economies to compete effectively against China this is because of the vertical integration of the supply chain that give China more control of commodity prices (Lall and Albaladejo, 2004). The control of major commodities is essential to the sustainability of China economy. Since sustaining economic growth is essential for both economic and social stability, Chain will ensure that its interest come first. Coupled with an increasing population China understands that it has to balance its position as a global player since the country is both an importer and exporter of good and services. However, China will put more emphasis on positioning itself as a major exporter or goods and services. This will require further integration to ensure that China is better positioned (Ahmad, 1997; Cai, 2001).
In the past two decades Chain has become a major player in the global economy, its large population has provided a large market for imports while at the same time provided it with an abundant unskilled labor force that has enables it to become a major produce of goods and services at lowers cost. Although, its unprecedented China’s integration in to the global market system and the resulting boom of its economy, it cannot be compared with it countries that have undergone such processes. China approach which included providing manufacturing services at a low costs has change how business is done globally. Chain has also influenced the flow of goods in the global economy. The impact of China on the global economy will increase in future as China seek further integration.
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