There is a prevalent anxiety about Chinese economic growth. It is bringing a somewhat protectionist mindframe back into economic policies of regional as well as national Western governments. In EU nations such as France, Italy, Spain and the UK, ‘national markets’ are treated as symbols of national integrity and pride. The governments of these countries are going to great lengths to save their markets from being invaded by foreign firms. China has been noticed.
China is the only country that has had an average annual GDP growth of about 10% in the past decade, which makes the Western countries envious. However, in context, China is not and will not be a threat to Western economies for a long time to come. It is only just catching up with its history.
China gains ground
In 1820, China stood for more than 30% of the world GDP (at purchasing power parity), in 1870 it decreased to less than 20%, in 1920 to less than 10% and in 1970 to less than 5%. Since then, however, China has started to gain some ground and by 2020 it is expected to have a share of more than 20% of the world’s GDP. That would be equivalent to its share of the world population (20.7%).
Americans are also getting agitated about the ‘Made in China’ labels they see on their shelves. The US trade deficit is often blamed on its trade with China, but in reality China’s contribution toward the US trade deficit is less than $150bn out of the total of more than $800bn. The biggest external contributor to the US trade deficit is Europe. However, the main reason for the trade deficit is lack of domestic savings, not Chinese competition.
According to the World Trade Organization and the Economist Intelligence Unit, China imports at least as much as it exports. In total, 75% of its GDP comes from trade in goods and services, which is almost equally divided into exports and imports. Germany is still the biggest exporter in the world. Although China represents 20.7% of the world’s population, its exports only account for 5.9% of the total world exports, while Europe, home of only 5% of the world’s population, is responsible for 31% of world exports.
In reality, it is Western firms that are reaping the benefits of Chinese growth, not only by locating their production and assembling operations in China, but also by discovering a huge market for their goods. Most shopping malls in Chinese cities carry brands such as Armani, Hugo Boss and Gucci. Merrill Lynch has estimated that the Chinese market accounted for 11% of the luxury goods industry in 2004 and this share is expected to increase to 23% by 2014. As well as local production of foreign brands, China imported 177,100 cars in 2004. The tariff on vehicle imports has been cut from 70%-80% in 2001 to 25% in 2006.
It is a common belief that China is attracting a lot of investment from the West and that assets and jobs are also moving to China with these investments. However, China is not the top FDI recipient by a long way. Data from the Organisation for Economic Co-operation and Development suggests that the UK was the top recipient of FDI with more than $160bn, and the US was the second largest recipient with $110bn in 2005. China, although having a record year, received only $72bn in FDI, less than half that of the top recipient. Mergers and acquisitions deals, although booming in China, are mostly between Chinese firms in the steel, finance and retail sector.
The only threat to world economy is therefore the protectionist policies of the Western governments and not Chinese growth – which may bring decent living standards for millions of people.
Dr Pervez N Ghauri is a professor of international business at Manchester Business School in the UK, and Priyan P Khakhar is a doctoral researcher.