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7-China and Globalization

China and Globalization: Challenges VS Opportunities

国贸03 洪丽静

Abstract: In this paper, we mainly discuss the economic globalization, the opportunities and challenges it brings on China, and the countermeasure for China to meet those challenges of the globalization.

Key words: globalization; China; opportunities; challenges; countermeasures

"The Era of Globalization" is fast becoming the preferred term for describing the current times. Globalization refers to the process of integration of nations, which has economic, political and cultural dimensions. Here in this paper we mainly focus on the economic globalization and the opportunities and challenges it brings on China.

Economic globalization can be simply defined as a process of rapid economic integration between countries. It has been driven by the increasing liberalization of international trade and foreign direct investment, and by freer capital flows. And the process shows itself mainly through the following aspects:

--rapid growth in international trade in goods and services

--frequent Cross-border labor and capital flows

--and the development of multinational corporations, and so on.

Globalization is a recognized inevitable global trend. Indeed, globalization will continue to go on regardless of you are willing to go on with it or not. No country could avoid it, neither could China. Actually, China has always been trying to follow the trend of globalization, to be part of it, and actively participate in it since its opening to the world in 1978. In 1986, China started making efforts to return to the GATT (the General Agreement on Tariffs and Trade), the predecessor of the WTO (the World Trade Organization). After 15 years of hard efforts have been made and tremendous negotiations have been undergone, China finally got access to the WTO, which marks the most important step of China towards deepening the integration of the Chinese economy into the world economy and therefore going more deeply into the globalization.

Then what’s the impact of globalization has on the Chinese economy? Opportunities? or challenges? The answer is both. Globalization is a double-edged sword. As a result, the issue of globalization is controversial in China too. The globalization debate in China continues. Following I will discuss the opportunities globalization has brought to China as well as the challenges, and the way for China to meet those challenges of globalization.

Opportunities

The rapid pace of China’s development in the last two decades should be largely attributed to the increasing integration of Chinese economy into the global economy.

First, by deepening the integration of economic interests of the great powers, globalization can help reduce the dangers of a world war and create a peaceful international community, which is advantageous for China to concentrate on developing its economy.

Second, globalization has created a favorable international environment for China to implement the policy of opening up to the world, which is a basic policy of China.

Third, in the era of globalization trade barriers have been largely reduced, which has been greatly facilitating a rapid growth in world trade. China is also one of the beneficiaries of free trade. According to the statistics published by the National Bureau of Statistics of China, the total volume of export and import of China reached USD850.99billion in the year of 2003, winning fourth place in the world, and increased by 37% compared with that of 2002. Among that USD850.99b, USD438.23b is for exports, up by 35% over the last year, and the rest USD412.76b is for imports, up by 40%. Compared with that of 1978, the total volume of foreign trade in China increased by more than 40 times in 2003, among which, exports increased to about 45 times of that in 1978, and imports almost increased by 37 folds. Since China started opening up to the world in 1978, foreign trade has become a more and more important driving power to economic development in China. The degree of dependence upon foreign trade has been increasing year by year. It reached as high as 60% in the year of 2003. Under this condition, the conclusion could be drawn that the growth of foreign trade due to the trend of globalization has done a great contribution to the rapid economic growth in China and will further contribute to China’s economic development in the future.

Fourth, globalization increases foreign direct investment in China. Globalization, together with the rapid economic development and favorable policies for FDI, has made China the most popular country in the world for attracting foreign direct investment. According to Fortune, a famous magazine in the United States, more than 400 out of the top 500 multinational companies in the world have invested in China so far. In 2003, foreign direct investment in China reached USD53.5 billion , surpassing that in the United States and winning first place in the world. Compared with that in 1994, FDI in China was nearly doubled in 2003. FDI makes a great contribution to capital accumulation in China. Since China is a country short of capital, FDI is an indispensable pusher to its rapid economic development. According to the estimation of some foreign scholars, half of the growth in the total factor productivity in China in 1990s should be attributed to the contribution of FDI.

Fifth, globalization also facilitates the implementation of the “walking out” strategy formulated by Chinese government. Although compared with developed countries, the scale of direct investment abroad of China is rather small, it marks that Chinese firms start operating internationally, shifting some marginal industries abroad and opening up the world market.

Sixth, globalization promotes educational and cultural exchange between China and foreign countries, which is beneficial to foster qualified personnel for international competition and improve the quality of human resource in China.

Finally, as the spillover effects of the rapid growth in foreign trade, foreign direct investment and direct investment abroad, globalization help China create a large quantity of job opportunities, learn advanced technology and management experiences from developed countries, improve escalation of industries, deepen the reform of the economic structure, optimize the distribution of resources on a global scale, and make domestic industry more efficient and hence more competitive toward foreign industries.

As a result of the rapid growth in foreign trade and foreign direct investment in China due to globalization, export companies and foreign enterprises are greatly developed. And as we know, most export companies and foreign enterprises in China are labor-intensive, which recruit a large number of Chinese workers and therefore help solve the problem of unemployment in China.

The development of foreign trade and foreign direct investment brings technological transfer and spillover, which is advantageous for China, as a latecomer, to learn advanced technology and management experience, though may not be the most advanced technology, developed over the past several hundred years in the more advanced nations, instead of researching and developing by itself, which is more time-consuming and costly.

The industry transfer is driven by foreign direct investment and direct investment abroad, which helps improve escalation of industries, deepen the reform of the economic structure and accelerate the establishment of sound market economy in China. China accepts industries, mostly labor-intensive, transferred from developed countries through FDI and transfers some marginal industries abroad through its direct investment abroad. Industry transfer helps enhance the integration of industrial structure and economic structure of China into that of the world, and therefore is favorable to improve escalation of industries, deepen the reform of the economic structure, and accelerate the establishment of sound market economy in China by accepting the legal and regulatory frameworks of the modern management of foreign enterprises.

Globalization offers China the opportunity of distributing resources and achieving the goal of optimization on a global scale. China’s comparative advantage is given full play with the growth of foreign trade and capital flows. Sophisticated technology and abundant capital of advanced countries are perfectly combined with ample labor forces of China.

Chinese national enterprises get chance to participate in competing with foreign enterprises in domestic market through encouraging foreign direct investment in China, and in the international market through foreign trade and direct investment abroad. Thereby Chinese domestic industries are becoming more efficient and hence more competitive toward foreign industries.

Since the international status of a country is closely related to its economic power, globalization has also greatly raised China’s status in the international community as well as promoting the economic development in China.

Challenges

Not only does globalization bring opportunities on China, but also challenges. The most critical challenges of the globalization for China could be summarized as the followings:

First, globalization enhances international capital flows and strengthens the connection of financial markets between China and foreign countries, which tend to cause instability in Chinese financial market and resulting in devastating financial crises, followed by severe national economic recession together with a sharp rise in unemployment. According to the estimation of some economic experts and scholars, there are over USD50 billion of “hot money” flowing in China. Since the financial market is immature and the banking system is fragile in China, the outcome is disastrous once massive reversals in capital flows happen. Moreover, China in fact adopts the fixed exchange rate system (pegged to US dollar), under which frequent capital flows are much more of problem. The Mundell-Fleming Model tells us that the monetary policy of a country is invalid under the condition of the fixed exchange rate system and free capital flows. Although the capital item in China is regulated and international capital flows are limited, “hot money” can still flow in and out of China by some illegal means or by taking advantage of regulations. Therefore large and frequent capital flows under the background of globalization also have unfavorable influence on the validity of China’s monetary policy.

Second, globalization increases competitive pressures on Chinese national firms, especially in the sectors of agriculture, automobiles, and certain capital intensive producers, in which China has comparative disadvantages. To meet the requirements of WTO, tariff is reduced, non-tariff barriers have to be gradually removed, export subsidy decreases, the protection for intellectual property rights must be strengthened, and the environmental quality management needs to be intensified. All those increase competitive pressures on China’s national firms, especially on those firms weak in competition which are likely to go bankrupt and cause the problem of unemployment as a result. What’s worse, it may further result in instability of society.

Third, outflows of talented persons from China to advanced countries may be caused by freer labor flows across national boundary because of the globalization, where they can give full play to their professional knowledge or skill and get better salaries and material benefits. In the era of knowledge economy, technology and knowledge become the primary impetus to economic development. Who has first-rate human resource in modern times is in an invincible position. Therefore, human capital turns into the most important production factor and the focal point nations compete for in the era of globalization.

Fourth, the gains of globalization are not equally shared among developed countries and developing countries. The benefits of economic integration have primarily extended to the industrialized countries, because the key factors in the development of industries, such as capital, advanced technology, and talented persons, are in the hand of developed countries. Whereas, developing countries participate in the process of globalization relying on their relative advantage in natural resources endowment like abundant labor forces. As a result, developed countries share the main part in the gains of globalization by producing products with high added value and high technology while developing countries can only share the small part in the gains of globalization by producing products with low added value, thus resulting in inequality in economic development between developed countries and developing countries in the era of globalization. As a developing country, the part China shares in the gains of globalization is minor compared with that shared by more advanced countries like the United States, though China does attain great many gains from its integration into the world economy. Besides, the integration of China’s economy into the current world order will further enlarge the existing income disparities in China, and as a result, aggravate the social contradictions between the different strata.

Countermeasures to Meet the Challenges of Globalization

Above we have discussed both the opportunities and challenges of globalization to China. Following we will focus on the ways for China to meet the challenges of globalization.

First, deepen the reform of banking system and develop the financial market to raise the ability of financial institutions in china to withstand financial attacks. Quicken the steps on the reform of exchange rate mechanism. Adopt the more flexible exchange rate system and enlarge the exchange rate margin gradually, which will help solve the contradiction between international capital flows and the validity of domestic monetary policies.

Second, actively adjust the internal structure to match the international economic environment. Further tear down the intervention by government agencies into enterprises, which is beneficial to the establishment of a sound market economy. Therefore, enterprises will operate more efficiently in market mechanism and the competition in domestic market will be greatly enhanced. As a result, the competitive power of Chinese enterprises in the international market will be strengthened finally.

Third, make programs to develop human capital and attract human resources. The key to succeed in the international competition in 21st century, in the final analysis, is talented persons. As a result, China must make efforts to expand educational undertakings, raise literacy rates and develop qualified personnel in all trades and professions, in order to enhance the overall quality of laborers. It’s also important to set up a competition and excitation mechanism for people of talent, which is just, fair and open, remove obstructions in the rational flow of trained personnel, pay the greatest respects to capable people and reform the system of income distribution to keep and attract well-educated human resources, particularly skilled Chinese in foreign countries to return to China.

Fourth, adjust and optimize the industrial structure. While developing labor-intensive industries which contain the high-level technology, China also has to focus on developing the high-tech industries on which we already have foundations, and raise the proportion of technology-intensive industry in the national economy, in order to avoid excessive dependence on advanced technologies of developed countries. In adjusting the internal structure of the industry, attention should be paid to the reform of traditional industries with increasing their content of technology and information. To adjust and optimize the industrial structure, researches on high technology and basic science need to be improved and a large number of elites in the area of scientific research are in eager demand.

Fifth, participate actively in the regional economic cooperation with members of ASEAN (Association of Southeast Asian Nations). Regional integrity is becoming more significant as globalization progresses rapidly. Enhancing regional economic cooperation is beneficial to overcome the side effects of economic globalization. Since the members of ASEAN are major trade partners of China, actively participating in the regional economic cooperation with ASEAN can help safeguard China’s economic security and raise the competitive power of China in the economic globalization.

As the globalization is an unavoidable external environment for China’s economic development, China has no choice but to continue enhancing the integration of its economy and society into the current world order. In this process, we must realize that the opportunities of globalization to China are predominately a long term nature while the challenges are principally of short term character, and China should try to grasp the opportunities and meet the challenges.

References:

国际贸易网络课程 国际经济与贸易课程
1.Xuewu Gu, China and its reactions to Globalization, ( http://www.bpb.de/files/E4SM4X.pdf )

2.Yu Ling, Economic Globalization and the countermeasure of China in 21st Century, Research on Financial and Economic Issues, April 2000.

  

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