China’s Return to Global Glory
Engagement or Protectionism? US Policy towards China
James A. Dorn
China and the United States: Learning to Live Together
China’s Economic Transformation
Shalendra D. Sharma
China’s Reformists: From Liberalism to the ‘Third Way’
Nationalism and Democratisation in Contemporary China
An Inadequate Metaphor: The Great Firewall and Chinese Internet Censorship
China and Africa: Dynamics of an Enduring Relationship
Garth le Pere
China’s Role in Central Asia: Soft and Hard Power
Islam in China: Beijing’s Hui and Uighur Challenge
Dru C. Gladney
Persians and Greeks: Hollywood and the Clash of Civilisations
Kaveh L. Afrasiabi
Choosing Chinas: Friend or Foe?
James H. Nolt
Israel’s Glass Wall
Volume 9 ● Number 1–2 ● Winter/Spring 2007—The Rise of China
China’s Economic Transformation
What explains China’s phenomenal economic growth? How stable are China’s economic foundations? What are some of the weaknesses in the economy and what must China do to correct them to sustain its impressive growth? What lessons does China’s post-Mao experience in economic development hold for other countries? And what implications does China’s economic ascendance have for the rest of the world, especially the United States? Specifically, what is at the root of the growing economic distrust between China and its largest trading partner, and what efforts has China made to defuse these tensions? This paper addresses these issues.
The Chinese Experience
In a nutshell, China’s growth is driven by its vast labour-intensive manufacturing sector (in contrast to India’s, which is fuelled by a rapid expansion in services, primarily in the information-technology sector). China has become the world’s factory, with the growth in the share of its merchandise exports quadrupling between 1983 and 2002. More precisely, China’s total share in world trade expanded from 1 per cent in 1980 to about 6 per cent in 2004. Ten years ago, China’s merchandise trade with the world totalled about $280 billion. In 2004 it was around $1.3 trillion—a consequence of annual growth rates of above 30 per cent in some years. Not surprisingly, by 2004 China had become the third-largest trading nation in dollar terms, behind the United States and Germany and just ahead of Japan. Soaring exports have also translated into bulging foreign-exchange reserves—$819 billion by the end of 2005, and $1 trillion by September 2006.
China has followed the manufacturing-led development model used successfully by Japan, South Korea and Taiwan, its industrial expansion being facilitated by its large domestic savings (some 40 per cent of GDP), its vast pool of low-cost and relatively skilled labour, and reforms that placed few restrictions on foreign ownership, besides providing a liberal investment regime. This strategy, in turn, resulted in a veritable flood of FDI (foreign direct investment), especially in the export industries. From 1978, when China’s economic reforms began, until the end of 2003, foreign firms had invested about $500 billion in China and accounted for over one-quarter of its output of manufactured goods. In 2004, China attracted some $60.6 billion in FDI. Only the United States with nearly $96 billion and Britain with $78 billion received more.
The experience of China confirms that the most powerful force for the reduction of poverty and the improvement of living standards is sustained economic growth. The proportion of Chinese living in extreme poverty (on $1 a day or less) has declined dramatically. On the eve of the reforms, the incidence of poverty in China was one of the highest in the world. However, between 1981 and 2001, the proportion of the population living in poverty fell from 53 per cent to just 8 per cent. This means that across China, there were over four hundred million fewer people living in extreme poverty in 2001 than twenty years previously. Very few countries have grown so fast over such a prolonged period of time, or reduced poverty so sharply.
Learning from China
What explains China’s phenomenal success in reducing poverty and what can other countries learn from it? While China’s labour-intensive, manufacturing-led development is widely credited for large-scale employment creation (and thereby the reduction of poverty), what is not always appreciated is the role of the reforms that preceded it, namely, the first stage of the reform programme (1978–84) in the countryside.
The agricultural reforms played a significant part in China’s economic growth and poverty reduction. Specifically, in the pre-reform period, the Chinese agricultural sector was communal, with production quotas and prices administered by the Communist Party authorities. Labourers were remunerated according to the average production of the commune rather than according to their marginal product. Not only was there little incentive for workers to relocate to other industries where their marginal productivity might have been higher, but the system’s intrinsic inefficiencies greatly undermined agricultural production and productivity.
The dismantling of the inefficient and corruption-ridden communes granted peasants a fair degree of control over farm output, labour and land. The decentralisation of agricultural production through the “household responsibility system” (which allowed peasants to produce for the market), and the liberalisation of the pricing and marketing of agricultural goods, unleashed farm production as agricultural growth shot up from 2.6 per cent a year during 1966–76 to 7.1 per cent a year during 1974–84. These increases not only resulted in improved consumption (besides providing the vital inputs required for industrial expansion), but there was also dramatic growth in rural incomes, which increased 15 per cent a year between 1978 and 1984.
Rural reforms also allowed for the reallocation of farm labour to other sectors of the economy—in a sense, an equalisation of the marginal productivity of labour across industries. The reallocation of rural households with a relatively low productivity level to other employment opportunities was pivotal to high, economy-wide productivity growth. This economy-wide growth, coupled with rising incomes, fuelled the success of a dynamic new economic sector—the so-called “township and village enterprises” (TVEs). While technically government enterprises, TVEs are generally considered to be part of the non-state sector, and function as private, profit-seeking enterprises. Subject to market competition and hard-budget constraints, but having the freedom to operate outside state planning, the TVEs’ astonishing growth allowed them to absorb millions of surplus agricultural workers in China’s labour-intensive industries. As the share of the TVEs’ industrial output rose from 9 per cent in 1978 to 58 per cent in 1997, the number of workers employed in TVEs increased from 28 million to 135 million over the same period.
The ‘Open-Door’ Policy
Equally important, at the centre of China’s successful export strategy has been its “open-door” policy, epitomised in the “special economic zones” or SEZs which were created in 1980 along the coastline in Guangdong, Fujian and Hainan. The SEZs assured favourable export conditions for both foreign investors and domestic enterprises. In the SEZs, foreign investors were allowed 100 per cent ownership. All exporters were allowed to import intermediate products and capital goods duty free, given generous tax holidays, and assured access to reliable physical infrastructure, often through the provision of land, electricity, physical security, and transport to the ports.
With such incentives, the SEZs became overnight successes, witnessing a massive influx of foreign investment in labour-intensive factories and industries. In short order, this influx created large-scale employment opportunities, in addition to bringing in new technologies and managerial know-how. The surge in FDI also resulted in a substantial increase in joint ventures with foreigners and wholly foreign-owned enterprises. Moreover, the SEZs did not remain as enclaves for very long. Rather, they served as a first step to a much wider and deeper opening up of China’s economy. In 1984, the “economic and technological zones” were set up, followed soon after by the creation of free-trade zones in fourteen coastal cities. This was followed by several more free-trade zones in inland areas, including Dalian, Guangzhou, Zhangjigang, Tianjin, Shenzhen, and Pudong New Area in Shanghai.
Ascending the Value Chain
Yet, despite these achievements, China’s economy must graduate up the value chain to remain competitive and produce sustained growth rates. As Paul Krugman has noted, growth that is achieved largely as a result of increased inputs instead of increased total factor productivity cannot continue in perpetuity.1 China’s economic growth is so driven by capacity expansion (or fixed-asset investments) that such investments now account for more than 50 per cent of GDP—more than for any other country at any time in the history of economic development.
This relentless capacity expansion has led to economy-wide overcapacity and over-competition, to such an extent that the profit margins of the firms are constantly squeezed. Evidence indicates that the prices of Chinese exports to the United States have fallen by more than a quarter since 1997, whereas the price index for China’s raw materials has risen by about 20 per cent. Undoubtedly, growth that translates only into ever-declining profitability for firms and decreasing returns to their shareholders cannot be sustained forever.
If China’s economy is to continue growing, and if its base is to evolve up the value chain in manufacturing and expand into services and knowledge-based industries such as advanced software development and pharmaceuticals, China will need to upgrade its stock of human capital; that is, it will have to improve the skills of its workforce and produce large numbers of world-class university graduates, especially in engineering and the sciences. While China has been producing many college graduates, the vast majority still lack the skills necessary for the global economy. In fact, “only about one-tenth of China’s scientific graduates can compete internationally.”2 Improving the quality of education remains a top priority for China.
President Hu Jintao is fond of saying that China’s aim is to increase the size of its economy to $4 trillion by 2020—in effect quadrupling its GDP of six years ago. If this ambitious goal is to be achieved (and it is achievable), China’s leaders will have to deal expeditiously with a number of core challenges.
Without doubt, the most important of these is to maintain the pace of economic growth over the next decade. This is essential if China is further to reduce poverty, improve living standards and provide employment, not only to its growing ranks of floating labour, but also to the large group of young people who will soon be entering the jobs market. Equally important, growth has to be more equitable and balanced in order to reduce the income gaps that have opened up between China’s urban and rural areas and its various regions (in particular, the coastal and inland regions), and to mitigate the “negative externalities” associated with environmental degradation. Undoubtedly, the key to sustaining economic growth is to continue to strengthen the structural and institutional underpinnings of the economy by continuing with the reforms.
Banking and Finance
This means that China must strengthen its financial sector. One of the lessons of the Asian financial crisis of 1997 was that a well-regulated financial sector can serve as a bulwark against global market turmoil. This means not only having in place prudential and supervisory systems to ensure financial stability, but also that the authorities should have the ability to take swift corrective action to deal with weak or insolvent institutions. Crucial to long-term growth is making the financial system more efficient at intermediating resources and directing them to the most productive investments.
Similarly, the stability and health of China’s banking sector is a big concern. A destabilised banking sector has the potential to fuel a deep recession, with severe ramifications for China and its trading partners. China’s state-owned banking system has historically made loans under government direction to unprofitable state-owned industries, with little regard for repayment or risk. For example, interest rates are completely controlled by the People’s Bank of China (the country’s central bank), and China’s big four banks (all of them possibly insolvent by international accounting standards), which control over 95 per cent of banking assets, have no credit-scoring or credit-risk-based pricing mechanisms in place. The result is a substantial portfolio of non-performing loans, estimated at 30–40 per cent of GDP.
By using its large stock of foreign reserves and its extraordinarily high savings rate, China has managed to maintain liquidity in the banking system despite the large volume of non-performing loans. However, at some point a continued escalation of non-performing loans will restrict further expansion of bank credit, thereby constraining growth, especially in the small and medium-sized sectors—which play a big role in creating jobs.
China also lacks a vibrant domestic credit market. Rather, its asset markets are very similar to those of Japan. That is, they are heavily leveraged and are primarily fuelled by property speculation. China’s property market, coupled with its leveraged and insolvent banking system, is an accident waiting to happen.
It is widely assumed that many Chinese banks are ill-equipped to face the increased foreign competition that will result when the financial sector is opened up to foreign banks in 2007 under World Trade Organisation accession commitments. Government strategies such as public-funded capital infusions and the active courting of foreign banks and financial institutions (which currently make up only 2 per cent of the Chinese market) to partner with domestic banks to provide financial support and sorely needed technical expertise may not be enough to enable China’s banking system to cope with the new situation. Competition on lending rates is still circumscribed, foreign bank participation is heavily curtailed, and foreign ownership of any domestic bank is still limited to a total of not more than 25 per cent, all of which acts as a major brake on full foreign participation. It remains to be seen whether the profit margins of China’s banking sector are sufficiently wide and its balance sheets sufficiently healthy to withstand the impending increased competition from more profitable foreign banks.
Clearly, privatisation and opening the banking sector to international competition are a short-term solution to the problem of non-performing loans. Over the long term, China’s banking-sector problems cannot be resolved simply by redressing the balance sheet. No doubt, with hundreds of thousands of employees and tens of thousands of branches spread around the country, reforming the banks will be a formidable logistical challenge. However, meaningful reforms must involve systemic change. That is, reforms must include building more effective legal, supervisory and regulatory frameworks to make the financial sector more resilient to internal and external shocks. These reforms must also do the following:
● root out the legacy of government-directed lending;
● require banks to adopt rules of good corporate governance and meet international best practices;
● promote a culture of professionalism in which senior positions and salaries are determined by performance and lending decisions are made on the basis of risk analysis and the credit-worthiness of the borrower—and not on one’s political connections.
A strong banking system is necessary for China to sustain growth because it will ensure the more efficient allocation and use of scarce resources, and enable the economy to grow on the basis of improved productivity as opposed to increased inputs. Also, as noted earlier, gross national saving in China amounts to more than 40 per cent of GDP—implying that Chinese households are unduly frugal. However, there is more to this than meets the eye. While the lack of an adequate pension system and sharply rising health-care and educational costs provide the motive to save, China’s poorly developed financial markets mean that credit is largely unavailable, so that households need to save in order to buy big-ticket items. Moreover, since there are few alternatives to putting savings in the state-owned banks, households have to be content with low returns on their savings and limited opportunities for portfolio diversification. A more robust financial market will help ameliorate this problem.
The State-Owned Enterprises
In addition, China’s unwieldy and inefficient state-owned enterprises (SOEs) consume much capital given their links to the state banks, but they produce little or no return on that capital. Many are protected from competition and poorly managed. Private enterprises are more efficient, but have difficulty raising capital. While closing or merging weak SOEs with stronger enterprises is necessary for creating businesses that respond to market signals and for shifting much-needed resources to the private sector, the process is going to be painful as the future of some 370 million–400 million Chinese workers and over 50 per cent of the country’s industrial assets are tied to these institutions.
Analysts often lament that the drive to reform SOEs has lost momentum (even though much work still needs to be done). What is essential is that deepening the reform of SOEs will require public support and must be carried out in a transparent manner. Thousands of SOEs have been bought at resale prices by politically connected persons who, in collusion with corrupt officials and wholly unaccountably, have often stripped the enterprises of assets and employees, further saddling the banking system with bad debt. If SOE restructuring continues in a crudely instrumental manner by abdicating responsibilities to workers (SOEs offered employees life-long benefits), the government will see an escalation of popular protest.
At a minimum, sales of SOEs should be executed through open auctions or stock markets, because this generally brings in a fairer price than the usual clandestine back-door privatisation. Moreover, once the sale is made, proceeds must first be used to pay overdue salaries and fair unemployment benefits to laid-off workers. As SOE reforms will mean large‑scale layoffs, an efficient social safety net is going to be very important to cushion the transitional effects. However, beyond this, an even more costly responsibility lies ahead for the government: paying for the unfunded obligations of the pension and social security system, as well as the rising expenditures deriving from the unfavourable demographics of a rapidly aging population.
On 21 July 2005, Beijing made its biggest monetary shift in more than a decade by revaluing the Chinese currency, the renminbi, and dropping its peg to the US dollar. In 1994, the value of the renminbi was pegged to the US dollar at a rate determined by China’s central bank. Since 2000, the renminbi had been trading within a range of 8.27 to 8.28 to the dollar. This nominal rate approximated an equilibrium market rate, or the rate at which the market demand for the renminbi was equal to the market supply. However, in recent years, as the demand for renminbi at this fixed price greatly exceeded the supply, the central bank finally decided to intervene to meet the excess demand.
Beijing abandoned the peg and moved to a system that now links the renminbi to a basket of currencies, in effect raising its value by 2.1 per cent. This means that prior to the revaluation, $1 bought 8.28 renminbi, whereas following revaluation, $1 buys roughly 8.11 renminbi. The Chinese government made it clear that it has set strict parameters on how much the renminbi can rise. It will not float by a big margin, but appreciate by a modest 2 per cent by moving within a tight 0.3 per cent band against a group of foreign currencies which make up China’s top trading partners.
The revaluation underscores the central bank’s stated long-term goals of building a managed floating exchange-rate mechanism based on market supply and demand, and of maintaining the renminbi’s basic stability at a reasonable equilibrium. This is because the undervalued renminbi (undervalued owing to the maintenance of a fixed exchange-rate regime) had contributed to excessive credit growth, misallocation of resources and “overheating” due to its attracting large capital inflows motivated by expectations of appreciation. In fact, tens of billions of dollars of “hot money” have been poured into the economy by speculators and China’s trading partners in recent years in the expectation of an imminent rise in the renminbi. The central bank correctly viewed these developments as inflationary and bearing the real threat of a “hard landing” or recession. Equally important, Beijing hopes that revaluation will better align China’s economy with the rest of the world and head off rising US discontent at the United States’ bilateral trade deficit with China, which reached a record $162 billion in 2004–5, the biggest deficit ever recorded with any country.
It is far from certain whether the renminbi’s appreciation will be enough to satisfy the powerful US Senators and Congressmen (both Democrats and Republican) who have demanded a Chinese currency revaluation, let alone the influential American National Association of Manufacturers and other US business groups and labour unions which have been seeking a rise in the value of the renminbi of between 10 and 40 per cent. Many American manufacturers as well as leading lawmakers in Congress have long contended that the artificially low renminbi puts US companies at a big competitive disadvantage with China, contributing to the bankruptcy of US firms and the loss of tens of thousands of American jobs. They point out that the Chinese currency is so undervalued (by as much as 40 per cent) as to amount to an unfair trade subsidy that permits a flood of cheap Chinese-made goods into the United States, but makes American products more expensive in China. Moreover, they argue that China’s unwillingness to allow the renminbi to appreciate has made other Pacific Rim countries reluctant to allow their currencies to do so for fear of losing further export sales to China.
As America’s trade deficit with China soared to record levels in the first quarter of 2005, the Bush administration came under increasing pressure to take unilateral action to address the problems associated with the artificial undervaluation of the renminbi. While the then–US Treasury secretary John Snow called for an immediate Chinese exchange-rate adjustment, many other lawmakers urged punitive tariffs on cheaply priced Chinese imports unless China sharply revalued its currency.
At its core, the source of US contention is rather simple. For several years, the United States has had a large and growing deficit in its current account—the broadest measure of a country’s trade with the rest of the world. While in 1991 the current account was roughly in balance, at the end of 2005 it showed a deficit of approximately $800 billion, or 7 per cent of GDP. To finance both the current account deficit and its own sizable foreign investments, the United States must import an estimated $1 trillion of foreign capital every year, or more than $4 billion every working day. This deficit means that the United States is buying more goods (and services) from abroad than it is selling. What mainly finances the difference in the balance of imports and exports is the flow of foreign funds into the United States. This can take the form of purchases by foreigners of US Treasuries and bonds, shares in companies, or property. Over time, the level of US net foreign liabilities relative to GDP has risen substantially.
To quell its critics, Beijing has taken various measures to reduce China’s trade surplus with the United States. For example, China reduced the export rebate from 15 per cent to 11 per cent for textiles, clothing, shoes and toys. Controls on foreign-currency holdings for individuals travelling abroad were relaxed and regulations on foreign-currency retention by exporters were revised. Most dramatically, the Chinese government greatly increased its purchase of US Treasury bonds, and also placed huge, well-publicised orders for US goods.
However, these efforts failed to impress the critics. In early May 2005, the US Senate, by a margin of 67 to 33, voted to consider a proposal to impose a 27.5 per cent tariff on all imports from China unless it stopped inflating its currency. In mid-May 2005, the United States decided to reimpose quotas on seven categories of clothing imports from China, limiting their growth to no more than 7.5 per cent over a twelve-month period. On 23 June 2005, the Bush administration finally warned China that it could be cited as a currency manipulator and face economic sanctions unless it overhauled its currency by switching to a flexible exchange system. Labelling China’s currency policies “highly distortionary”, the Bush administration warned that it would now closely monitor China’s progress towards adopting a flexible exchange system.
Yet it is important to note the possibility that an appreciation of the renminbi might be economically counter-productive for the United States. For starters, a large enough fall in the value of the dollar would force most Asian central banks to move out of their dollar assets. This would in turn dry up liquidity in the United States, push up interest rates and increase inflationary pressure.
An appreciation of the renminbi also entails a fall in the local-currency value of China’s huge holdings of US dollar assets. This means that if the renminbi continued to move upwards relative to the US dollar, the United States could expect to see a reduction of its trade deficit. Yet, everything being equal, this would largely be decided by the resulting change of relative prices. Depending on how far a higher international value of the renminbi was passed on to US consumers in the form of higher dollar prices for Chinese goods, substantial renminbi appreciation could sharply reduce the US bilateral trade deficit with China. However, if this is to happen, it will mostly come from other foreign sources, much hanging on which countries follow China in allowing their own currencies to appreciate. This means that the overall reduction in the US trade deficit would be very small.
Finally, there is also the possibility that revaluation will make China’s exports more expensive in US markets as Americans will now have to pay more dollars to buy the same amount of Chinese-made goods. China has long argued that the low prices of its manufactured goods are due to its low labour costs—from which the American economy has greatly benefited because lower prices have allowed the United States to maintain low inflation and robust household consumption. Clearly, a more expensive renminbi not only means higher prices for Chinese goods, but could in turn put pressure on US domestic inflation. The result would be higher interest rates, which could affect the real estate boom in the United States, one of the prime drivers of American economic expansion.
There is also palpable concern that revaluation will not change the make-up of China’s $700 billion in foreign-currency reserves, 70 per cent of which are in dollar assets like US Treasuries. To maintain a fixed exchange rate with the dollar, China’s central bank has been forced to purchase US dollar assets. This helps finance the US trade deficit, in addition to preventing further falls in the dollar. That is, China has kept the renminbi from strengthening by ploughing part of its trade surplus with the United States back into US Treasuries. Although there is the possibility that China might sell off some of those reserves and buy yen and euros, its central bank will still need plenty of US dollars, the world’s most liquid currency.
While the revaluation may force China to cut its investment in US Treasuries and shift to government bonds in Europe and Japan, it is unlikely that the central bank will orchestrate a destabilising sell-off of its US Treasury holdings, as this could harm its biggest export market. However, revaluation could affect interest rates by reducing China’s appetite for US Treasury bonds. Specifically, if the Chinese government reduces the amount of dollars it holds in reserve—or slows the pace at which it buys dollars—the revaluation could put upwards pressure on US interest rates. China uses US government bonds as a way of holding dollar reserves. Holding fewer dollars would mean fewer bonds. If the demand in the bond market that is attributable to China were to be reduced, bond prices might fall and yields, which move in the opposite direction, might rise.
Still at Odds
Since the revaluation, the renminbi exchange rate has been moving in both directions against the US dollar, displaying a larger flexibility based on market supply and demand. By 31 March 2006, the renminbi had appreciated against the US dollar by 3.2 per cent. This is not good enough for the US trade lobbyists and other groups, and they have continued to urge the Bush administration to pressure China on its exchange-rate policy. They have pointed out that given the small revaluation, the renminbi is still technically pegged to the dollar, with little de facto flexibility. Some have even argued that China’s maintenance of a fixed exchange rate is part of its mercantilist strategy to promote export-led growth.
In April 2006, the US Treasury Department announced it might officially label China a “currency manipulator”. This would provide a basis for trade and economic sanctions against China. Leading American economists claim that the renminbi is anywhere from 15 to 40 per cent undervalued against the dollar, making Chinese exports cheaper and contributing to China’s current $200 billion trade surplus with the United States. A bill sponsored by senators Schumer and Graham threatened to impose tariffs of 27.5 per cent on all Chinese goods entering the United States if China failed to adjust its currency. The legislation was withdrawn at the end of September 2006 following last-minute pleas from President Bush and Treasury Secretary Henry Paulson, who said the bill could provoke retaliatory measures by China and undermine a dialogue with Beijing that Paulson had just begun. However, Schumer and Graham vowed to keep up the pressure on China by introducing a new measure that was not China-specific, thus complying with international trade rules which prohibit states from raising duties on any one country.
For their part, Chinese officials continue to maintain that the renminbi will be adjusted at China’s pace, but given the level of US displeasure, it is not surprising that President Hu Jintao, during his visit to Washington in April 2006, pledged to reduce China’s trade surplus. He said China was committed to making its currency regime more flexible, strengthening consumption and modernising its financial system. However, the reality is that while every other major currency has appreciated against the dollar since April 2006, the renminbi is only 0.2 per cent stronger against it. Clearly, this issue is hardly settled. Indeed, the depreciation of the US dollar relative to the euro and the Canadian dollar has only further redirected US import demand towards China. As Chinese auto parts begin entering the US market in substantial quantities—and with the prospect of Chinese-made vehicles arriving in coming years—protectionist voices in the United States will only grow louder.
Propelling Global Growth
China’s voracious appetite for energy and commodities to feed its growing economy will continue to put pressure on a variety of global markets. The large increase in net oil imports by China, India (and the United States) since 2000 has been a major factor behind the sharp rise in oil prices. The aggressive efforts of China’s National Offshore Oil Corporation to secure reliable supplies of oil and natural gas around the world (including its bid for US-owned Unocal in 2005) reflect just how strong China’s thirst for fossil fuels has become.
However, on the positive side, China’s economic expansion has brought new opportunities for exporters, especially those of the primary commodities and manufacturing inputs that fuel China’s production centres. With its growing ranks of the affluent, China is a major consumer of imported goods. China’s imports of goods are roughly one-quarter of GDP, well above the share for the United States and Japan (for which the comparable ratio is around 10 per cent).
China’s demand for foreign manufactured goods (especially manufacturing inputs) and primary commodities (including related raw materials) has been dramatic. Imports of both manufactured goods and raw materials have doubled over the past eight years. This increased demand has boosted exports and growth in many economies, not only in China’s neighbours, but also in leading commodity exporters such as Brazil and Chile. Even in the United States, where much attention is given to imports from China and the large trade imbalance between the two countries, the increase in US exports to China generally goes unnoticed. According to a 2005 study by the Federal Reserve Bank of Atlanta,
Total U.S. exports to China were up more than 20 percent in 2004 compared to 2003 … Exports of cotton doubled to more than $1.5 billion between 2003 and 2004. Shipments of industrial metals doubled to more than $2.3 billion between 2002 and 2004, and industrial machinery exports were up over 75 percent during the same period. Exports of higher-tech goods, like semiconductors and medical equipment, are up nearly 50 percent over the last two years.3
In the end, the trade linkages between China and the United States (indeed China and the rest of the world) are substantial and growing. Therefore, both countries have a common interest in defusing protectionist threats in the United States and around the world.
2. C. Fred Bergsten et al., China: The Balance Sheet (New York: PublicAffairs, 2006), p. 4.
3. Michael Chriszt and Elena Whisler, “China’s Economic Emergence”, EconSouth 7, no. 2 (second quarter 2005), p. 3.