The global impact of China's continued 'reform and opening up'
- By John Ross
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E-mail China.org.cn, March 15, 2016
In order to accurately grasp these trade trends, it is important to correct any misunderstanding caused by the fact that the dollar value of all major economies' trade is currently declining due to the global fall in commodity prices - the latest IMF data shows trade declining $3.5 trillion, or 11 percent, year on year. However, China's world trade share has expanded as it suffered less from this than other major economies.
As Figure 1 shows, the latest IMF data shows China's share of world trade has reached its highest ever level. China is continuing to outcompete and out trade other economies - consolidating its position as the world's largest goods trading nation.
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If China's global position in growth and trade continue well-established trends, there are new key factors which will affect other countries as China is making the transition from a "medium income" economy, by World Bank standards, towards a "high income" economy. Some, such as China becoming the world leader in renewable energy, will have a major indirect effect on other countries via their effects in fighting climate change. Two direct economic processes particularly affect other countries.
First, China is no exception to the rule that all major economies were internationalized first via trade and only later via foreign direct investment (FDI). But China has unparalleled financial resources to develop FDI. China's $3.2 trillion foreign exchange reserves are the world's highest. China's domestic savings, the raw material for its financial system, have now far overtaken the U.S. - World Bank and U.S. data show China's 2014 savings at $5.2 trillion compared to the U.S.'s $3.3 trillion.
Globally unmatched financial firepower allowed China to rapidly ramp up its annual outward FDI flow from under $20 billion in 2006 to $118 billion in 2015, to be the driving force behind the "Belt and Road" initiative, and to lead multilateral initiatives such as the Asian Infrastructure Investment Bank and New Development Bank (BRICS bank). Simultaneously, the Chinese domestic market's rapid expansion attracted $119 billion inward FDI in 2015, with 61 percent going into services. China will therefore play an increasingly large role in global bilateral and multilateral FDI.
A second decisive trend is China's technological upgrading and the priority given to developing innovative capacity. It is a romantic myth that innovation is due to creative culture or "garage start-ups" - the latter failing to mention what such garages are connected to! As Zotan Acs noted in his classic study of U.S. innovation, "When one asked the question, 'What makes Silicon Valley unique' the discussion usually comes back to one great institution - Stanford University." "It is conventional wisdom that Silicon Valley and Route 128 owe their status as centers of commercial innovation and entrepreneurship to their proximity to Stanford and MIT [Massachusetts Institute of Technology]."
The Five Year Plan will raise China's R&D spending to 2.5 percent of GDP by 2020 - almost equalling the U.S.'s current R&D spending as a proportion of GDP. It is this huge resource allocation that powers China's innovative ability. It ensures that while China will switch out the industries fundamentally dependent on very low wages it will increasingly gain competiveness in medium technology and parts of high technology industries - crucially affecting other countries. China will increasingly export higher value products while importing products dependent on very low wages. Simultaneous consolidation of China's lead in cost innovation, ability to achieve competitive prices by technological and managerial innovation, means global companies will increasingly have to locate research facilities in China.
The writer is a columnist with China.org.cn. For more information please visit:
http://www.china.org.cn/opinion/johnross.htm
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