Spillover Effects of China Going Global

The following sections are included:

• Dedication
• Contents
• List of Tables
• List of Figures
• About the Author

With the granting of Most Favored Nation (MFN) status by the US and Europe to the People's Republic of China (PRC) in the early 1980s, the trading world radically changed. The PRC's participation in the world trading community has not only expanded beyond all expectations, it has also transformed our understanding of the importance of dynamic comparative advantage and the importance of “global value-added chains” in transforming trade in commodities into trade in skills. China's increasing footprint in the global marketplace does not only include its merchandise exports. It also covers enormous natural resource flows from Latin America and Africa, and foreign direct investment in and out of the PRC. The major challenge to the global community of China's participation in the global economy is the resulting "spillovers" that it creates for its major trading and investment partners. These spillovers are treated as both negative and positive-sum rather than as zero-sum in the global international trade game…

When the People's Republic of China (PRC) was granted Most Favored Nation (MFN) status by the United States in 1979, no one imagined that Chinese participation in the world trading community would have such a global impact. In the early post-MFN period, most of the analysts were unable to differentiate China from other Soviet type economies. Bayard et al. [1981, 1982], Pelzman [1986a, 1986b, 1992], were an exception in that they predicted a non-Soviet type response from the PRC. In fact, they predicted an expansion in Chinese exports in a single sector driven by offshore processing — textiles and apparel. When the quota system governing textile and apparel trade was dismantled in 2005 for most of the quota bound exporters and in 2008 for the PRC, bets were placed on India rather than China as the beneficiary. As Pelzman and Reese [1989] and Pelzman and Shoham [2009a] have demonstrated, betting on India was incorrect…

The magnitude of China's footprint in international trade, while significant, disguises a more complex reality of China's participation in the global economy. With China's accession into the WTO, there has been a rising investment in information and communications technology (ICT), as well as investment in domestic education and human capital development. The outcome of these trends is observed in China's exports when they are measured in terms of value added. This result is in conformity with the general principles of “globalization,” where what matters in a country's “competitiveness” is its ability to utilize intermediate goods and services from other countries without having to develop a whole integrated industry. As Baldwin [2009] and Baldwin and Venables [2010] have pointed out, what matters more today is “what you do” rather than “what you sell.” In that vein participating in a global network enhances competitiveness by providing access to cheaper, more differentiated and better quality inputs as well as technological spillovers…

China's relative competitiveness has to be measured in an increasing internationalization of markets for goods and services, financial resources, corporations, industries and technology. While the trade literature points to a wide number of explanatory factors for the increased globalization of world markets, it is convenient to think of three major factors that have facilitated this increased globalization which the PRC has relied on. First, the liberalization of capital movements and deregulation, of financial services in both market and non-market economies, has been a crucial lubricant. Second, the post Uruguay round liberalization of markets to trade and investment, spurred the growth of international competition. Third, as Baldwin [2011] has correctly pointed out, the continued globalization of the world economy and China's role in that globalization could not be accomplished without the pivotal role played by information and communication technologies (ICT) in the PRC and its trade partners…

International trade in textiles and apparel, governed by the very intricate Multi-Fiber Arrangement (MFA) for textile and apparel trade was liberalized with respect to the PRC in 2008, three years after the MFA expired for the rest of the world [OECD, 2011d; Pelzman, 1983, 1984, 1988a, 1988b]. This liberalization raised many uncertainties about the impact of the elimination of the quota system on PRC textile and apparel exports in general, and on its displacement of smaller exporter competitors in the developing countries of Asia, Latin America and the Caribbean. Some of these concerns have proven to be correct. Despite the increase in cost of production in the PRC, it remains the major global exporter of textile apparel products in the post-liberalization period. Table 5.1 summarizes the PRCs share of the world market for both textile and apparel products for the period 2001–2013. Regardless of one's priors, the PRC is currently the clear competitive winner in exports of HS 50 — Silk; HS 53 — Vegetable Fibers; HS 54 — Man-made Fibers; HS 55 — Man-made Staple Fibers; HS 58 — Special Woven Fabric; HS 59 — Coated Fabric and HS 61, 62 and 63 — Apparel. Whereas the US was once the clear-cut competitive leader in the textile and fiber segment of this industry, it has relinquished that position to the PRC. The enormity of the PRC footprint in these sectors cannot be underestimated…

On December 11, 2001 [WTO, 2001], the day the PRC became a member of the WTO, the People's Daily anticipated the following outcome for the PRC [USGAO, 1995]…

In the past 15 years, the PRC's involvement in the economies of Latin America, Africa and Southeast Asia has caused concern in the US. Unlike the US and the former Soviet Union, the PRC has bolstered its economic presence in Latin America, Africa and Southeast Asia through its offers of financing or concessional loans for infrastructure projects, large economic investments and the signing of trade agreements. To many in these recipient countries, the PRC's aid activity is viewed as filling a major unmet development need, particularly in countries that have been relatively neglected by major aid donors…

Maintaining international competitiveness in the current international environment requires rapid scientific and technological innovations. As the flow of foreign direct investment (FDI) and venture capital continues to expand across the world, the pressures to create quicker and more efficient ways to extract the benefits of technological innovation may lead to more innovative methods for its acquisition. This is especially true for countries like the PRC which are rich in foreign reserves but short in the operational research and development (R&D) it needs to alter its external sector from one based on cheap labor to one that is based on innovation and higher value added…

The following sections are included:

• Bibliography
• Index