Zhang Qi, Research Department of Foreign Economic Relations of DRC

Research Report No. 111, 2005

China became the world’s sixth largest economy and third largest trade power in 2004. The country’s rapid economic development has become a powerful engine for world economic growth. In particular, the impact of its strategies for trade and investment development and for regional cooperation on the process of economic integration in East Asia has become a focus of world attention. At the annual meeting of the high-level China Development Forum held on March 20 and 21, 2005, Chinese and foreign participants participated in a topic discussion on China’s roles in the global trade system and in regional integration.

I. China’s Development Provides Opportunities for the World Economy

Foreign scholars and entrepreneurs, represented by Professor Joseph Stiglitz, a Nobel Prize winner in economics, believe that China’s economic growth is conducive to greater prosperity and stability to the world economy and brings greater benefits and development opportunities to countries around the world than challenges to the planet. China has become an important engine for the growth of the countries in East Asia. This is manifested in several areas.

First, it expands commodity supply to the world market. The forum participants noted that based on the projection by Global Insight, China’s exports will reach 8,481 billion U.S. dollars in 2025, or 14 times that in 2004. If this projection is realized, China’s share in the world commodity market will be more than 20 percent. Meanwhile, China’s export products structure will continue to upgrade, from predominantly labor-intensive products to more capital- and technology-intensive products.

Second, it creates enormous demand. In the three years after joining the World Trade Organization, China’s imports totaled 1.2 trillion dollars. It is expected that from 2005, its average annual imports will be more than 600 billion dollars. This will create even more production and employment opportunities for other countries including resource-exporting countries, developing countries and developed countries.

Third, China’s attraction of foreign capital helps transnational corporations to share China’s development opportunities and expand their market shares and operational space. Statistics indicate that from 1990 to 2003, profit remittance by foreign investors in China was as high as 227.9 billion dollars.

Fourth, China’s opening to the outside world and participation in international division of labor promotes changes in the patterns of international trade and industrial division of labor. This trend also increases space for optimizing the industrial structures around the world. The labor-intensive industries and links of processing and manufacturing attracted by China constitute the last link in global industrial chains, which is characterized by low added value. Objectively speaking, it has helped other countries to move to the industries characterized by higher technological content and added value.

II. China Assumes Growing Responsibilities in Global Economic Development

As China integrates more deeply with the global economy, its economic status also rises and its influence on the world economy is more conspicuous. Therefore, the participants emphatically hope that China will assume the responsibilities of a major power. On the one hand, as an emerging developing country, China’s mode of economic development and its experience in poverty reduction are of unparalleled significance to other developing countries in meeting the challenges of globalization and in safeguarding their own development. On the other, the rapid development of the Chinese economy, whose share in the global economy rose from 2.4 percent in 1978 to 3.9 percent in 2003, has greatly heightened the status and expanded the influence of developing countries as a whole in the world economy. The deputy director of the United Nations Development Program believes that with the rise of its economic status, China will constantly strengthen its behavior and responsibilities in the global trade system. After WTO accession, he says, China should play even greater roles in improving the multilateral trade system and in pushing forward multilateral trade negotiations in addition to earnestly fulfilling its commitments on opening. In particular, China should help developing countries seek more peaceful environments for development in the course of globalization and help push forward the Doha Round of trade talks so that it could make substantial progress as fast as possible and can better serve the interests of developing countries.

III. China Should Play Greater Roles in Regional Cooperation in East Asia

1. China’s trade growth and the industrial development in East Asia

Foreign scholars note that because of deeper and more elaborate division of labor, the growth in the total amount of global trade has greatly outpaced the growth in added value. In addition, the growth of the trade in intermediate products, semi-finished products and services has also been faster than that of finished products. In this process, the proportions of intra-company and intra-industry trade have also become visibly higher. This is very conspicuous to China’s foreign trade. Driven by international industrial transfer, Japan, South Korea and other countries in East Asia have moved their final link of production, especially the labor-intensive processing and manufacturing industries, to China. At the same time, they have exported large amounts of raw materials and spare parts. Taking advantage of its low-cost, high-quality labor, China has concentrated on processing and production and exported the final products to Europe, America and other parts of the world. The emergence of transfer trade has resulted in a growing trade deficit for China against other East Asian countries and a swelling trade surplus against the United States and the European Union. In 2004, China’s trade deficit against its neighboring Asian economies exceeded 160 billion dollars and its trade surplus against Europe and America also reached 113 billion dollars.

Under the influence of market forces, the old mode of development in East Asia has been broken up. The forum participants believe that the new division of labor and the changes in market order have brought new opportunities to the countries in the region. The statistical data of the ASEAN secretariat indicate that during the 2000-2003 period, China’s bilateral trade with ASEAN countries took a rapidly growing share of the bloc’s total foreign trade, while ASEAN’s main trade partners (the United States, the European Union and Japan) saw their share slightly declining. China has been regarded as an important force to push forward economic development in East Asia.

While China’s trade volume has been rising rapidly, its trade structure has also undergone considerable changes. For example, the proportion of its textile and apparel export has gone down, the proportion of machinery and electronic exports has gone up sharply and become the highest among all Chinese export products. In the face of the constant upgrading of China’s export structure and the partial shrinking of the ASEAN countries’ market shares in Europe and America, other countries and regions in East Asia began feeling a growing pressure from China’s competition. The participants note that China’s electronics enterprises have passed the traditional stage of assembly and production and begun participating in the global production network as product designers and developers.

What is noteworthy is that while the countries in East Asia are adjusting their industrial policies and raising their competitiveness, they also hope to continue to maintain their superiority in some links of global production chains. The President of Korea Institute for International Economic Policy points out that as the largest trade power in East Asia, China has the responsibility to maintain and strengthen the new mode of industrial division of labor and the coordinated development of the East Asian countries will depend heavily on China’s future strategy for industrial development. The core message is that the already established market rules in East Asia should be respected and China will become the center of the production chain of East Asia’s manufacturing industry and will integrate with the all-around development of the economies in the region. Otherwise, if China abandons its current comparative advantages and promotes import substitution (including import from East Asia), China’s future development will have negative impacts on its East Asian neighbors. In fact, Japan, South Korea and other East Asian countries hope to solidify the current industrial division of labor by strengthening intra-regional industrial cooperation and to fix China as the link of processing and production characterized by labor intensity and low added value so as to maintain their comparative advantages and international competitiveness. This would have a negative impact caused by free trade arrangements. In other words, the vertical division of labor between the developing and developed members will be solidified so that the developing countries will lose their opportunities to develop their emerging industries and the industries characterized with high technological contents. In participating in regional cooperation, China should work out correct policies for industrial cooperation and do all it can to avoid solidifying industrial division of labor.

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