A recent news article published in the Edu Birdie talks about the Importance of International Trade: Case Study of Emerging Economy of China.
International trade relationships
Our increasingly globalising world continues to create trade relationships internationally, making factors of production more substantially integrated and reliant on one another. According to Hoskisson et al (2000)Economic growth is an increase in the output capacity of a chosen economy and is an increase in aggregate demand (AD) for which the formula is: AD=Consumption +Investment +Government spending +(Exports-Imports) and when these important concepts increase, it triggers economic growth in an economy. This essay will be looking at China, one of the largest emerging economies that is experiencing especially high rates of gross domestic product (GDP) growth with reoccurring figures of 14% GDP growth in 2017 which is well above UK’s target of 2%, whilst 50 years ago being in negative figures. (The World Bank, 2019) As our global economy becomes more developed, it has given recognition to the growing importance of international trade. In China’s case it is reliant on high domestic demand but is globally infamous for its export-led growth, becoming one of the most influential and powerful economies and therefore International trade and economic growth are expected to go hand in hand. This impacts it socially in the case of the wellbeing of the people, influences on political change and conflicts as well as economic impact including inequality, labour force, balance of payments (BOP), infrastructure whilst considering the environmental impacts on the economy as well. China is one of the most dynamically debated emerging economies as it is one of a kind and therefore it is more difficult to subtract economic lessons for the relationship between international trade and the impact of economic growth.
Why countries join international corporations?
International trade partnership increase the capability capacity, which is why countries join these international corporations to benefit their trade relationships and achieve beneficial trade deals as well as follow social welfare policies to ensure balanced economic growth. Joining world organisations strengthens the country by creating better capabilities to withstand global crises as well as beneficial trade agreements. WTO accession, which represents a new milestone in China’s trade evolution, enabled China to participate in the world trade under the global framework by improving the multilateral trade system. (Sun & Heshmati, 2010) Corresponding to global framework guarantees a chance of stability for businesses, which with the example of Russia, another emerging economy that has fallen short of international trade agreement commitments has missed out on advantages that global organizations such as the WTO guarantee.
Cieslik & Tarsalewska, (2011) explored the relationship between international trade, FDI and the rate of economic growth. They exaggerate the importance of international trade in organisations. For example, according to the International Monetary Fund (IMF) “the policies toward free trade are among the more important factors promoting economic growth and convergence in developing countries,” while the Organisation for Economic Co-operation and Development (OECD) “more open and outward-oriented economies consistently outperform countries with restrictive trade and foreign investment regimes.” In a similar vein, the World Bank argues that international trade “opens up unprecedented opportunity for growth and development,” while according to the United Nations “foreign direct investment contributes toward financing sustained economic growth over the long term.” (Cieslik & Tarsalewska, 2011) This can’t sum up better the need for international cooperation as it is a requirement for countries who want to join and enjoy the benefits of an international cooperation. Countries who aren’t a part of these international organisations, face a lack of economic growth, corruption and other socio economic issues whilst missing out on the benefits of low tariffs, easier transfer of knowledge and technology transfer.
Technology transfer for achieving economic growth
Technology transfer is as much of a requirement for achieving economic growth as it is being part of world organisations. Every country experiences gaps that it doesn’t have the capacity to cope with. Integration can solve this in many ways. Coe and Helpman (1995), and Coe et al. (1997) found that international R&D spillovers are related to imports. The mere presence of new technology and knowledge in the national economy can be seen as equally important to exports. There is more interest in a country the more it imports and the more secure of a market it creates. Due to China’s size and GDP levels, it has become an attractive long-term trading partner which it has positively taken advantage of to achieve economic growth itself. developing countries can at least expect that trade and investment liberalization will allow them to close at least the part of the development gap with respect to developed economies and to achieve a permanent improvement in the standards of living as measured by per capita income. (Cieslik & Tarsalewska, 2011) The more imports that enter the country, the more its productive capacity increases through technological improvements, and methodological improvements and should increase the production possibility frontier; the maximum output level an economy can achieve and sustainably expand their economy, whilst creating new opportunities for development.
Filling the technology gap that involves technology transfer is necessary for development as it creates opportunities for innovation and a more complex understanding of situations enabling need for new technologies. China focuses on acquiring advanced technology, given its sustainability and opportunity triggers. (Child & Lu, 1996)
The importance of the domestic market consumption must be recognized, as China has been able to rely on it heavily as domestic consumption has been so high. A number of national industries were established to foster economic growth, (Sun & Heshmati, 2010) It is a fear for the Balance of Payments for one or the other being neglected and with China’s excessive export led growth, it has raised issues for domestic consumption.
However, due to lack of competition, the optimization of resource allocation could not be achieved, and the Chinese trade sectors could not enjoy the dynamic benefits from international trade such as competition effects, efficiency effects and technology improvement effects. (Sun & Heshtami, 2010)
Is China the next Japan
However, this comes at the cost of economic-financial crises affecting all countries, some more capable of handling its shock than other and emerging economies at particular risk. The cost of globalisation and international trade integration is the risk of joint crises that with existing trade policies in place, must have good enough methods in place to not suffer substantially from such events, such as the 2008 recession. Smith, (2016) compares the export-led growth of Japan to China’s in his “Is China the next Japan” publication. He recognizes that Japan had substantial infrastructures in place to build a productive economy whilst ensuring savings to protect the country from blows that international trade has a risk of. This suggests that although the impact can be felt, it can also be deterred in a way to cause minimal damage to the economy which may not even be applicable to China in ways as its population and history is extensively unique.
Equally the reason it is an evenly and vigorously debated topic as Brown (1995) wondered who will feed China. Chang (2001) announced the coming collapse of China. Henderson (1999) saw China as on the ‘‘brink”. Whilst on the other hand , Murray (1998) described China as the next superpower. A number of authors view an all-powerful China as a threat (Gertz, 2000, or Timperlake et al., 2002).(Holz, 2008) These arguments suggest China’s utter complexity which has to be acknowledged when looking at its economic impact from international trade making one thing certain, that it is constantly developing creating opportunities to be perceived as a threat due to its power as well as concerns due to the countries widespread influence. Similarly to Japan therefore it is expected to deter any major failures that economic growth persists due to its constant development filling such gaps. In the case of Japan, a large exporter of oil, found ways to reduce its energy consumption during its 1973 collapse from the Yom Kippur War, and save by moving up the technology curve and becoming more high tech from textiles to computers. Smith, (2016) suggests this as inevitable and that sufficient technology transfer, and heading in the right path of high-tech trade focus means that negative impacts from economic growth can in fact be controlled and China, given its economies size, is expected to overcome this without substantial difficulties following the case of Japan.
Econometric evidence
Wu and Yao (2015) found econometric evidence suggesting that although the government attempts to balance the three goals of growth, equality, and state ownership in the short run, stubborn state ownership as well as lopsided growth patterns jeopardize equality in the long run and have therefore delayed the turning point in the inverted U-shaped Kuznets curve for China. This can be blamed on its struggles to leave behind communist ideology as well as corruption that followed the Mao era. The Kuznets curve is a hypothesis shown on a graph that economic development ultimately leads to short run benefits of improved standards of living to decreasing economic equality in the long run. This suggests that negative impact on inequality is inevitable unless further political and economic reform including reducing state ownership. For a country with a population so large, inequality can have detrimental effects on society that remind us of governmental policies introduced by China that caused nationwide spread famine and poverty which international trade encourages to avoid. Unfortunately China’s labour force population has fallen victim to the Kuznets theory. China’s traditional growth engines, capital investment and net export, is the massive labor migration from the lower-productivity countryside to higher-productivity cities, which, together with a consumption-repressing income distribution, has expanded income disparity between the rural and urban areas and lowered the economic status of the low-income population in the entire income spectrum (Kuijs and Wang 2006).
Political changes involving ideology changes or policies are a crucial explanation when analyzing the effect of international trade on economic growth. Previously mentioned and as explained by Hoskisson et al, (2000) emerging economies can be split into two groups: developing countries in Asia, Latin America, Africa and the Middle East and the other being transition economies in the former Soviet Union and China. The latter were both suffering economic decline after the collapse of communism which makes up a large part of the group of countries that can be described as ‘emerging economies’. This significant shift in political ideology is important to understand the need for political shifts to economic liberalization that Sun & Heshmati (2010) found to be true involving various trade policies with an outward oriented approach. Trade liberalization encourages the openness to trade and increasing production capacity by lowering barriers to entry and acting upon attracting foreign investment. There’s an increasing number of liberalized markets on a global scale (Hill, 2010) According to Sun & Heshmati (2010) it also increases opportunities and effectiveness of comparative advantage, which China is successful in doing with its intensive focus on labour-intensive industries. With trade liberalization leading to comparative advantage it can be seen as a positive impact on economic growth as it is constantly encouraging growth.
Creating environmental issues
This can however create environmental issues which again is infamous in China where the pollution levels were the worst in Olympic history. Despite Chinese Government measures to reduce pollution around their capital city by shutting down factories, restricting car usage and slowing down construction, high levels of pollutants persisted, at times so bad that the sun was blotted out. (Telegraph, 2009) This has many health related implications that affect a wide range of people, those healthy, with asthma or heart problems. Being so harmful to the human body, it persists through nature which although has attracted global attention to the levels of CO2 emissions, is a less understood sensitive issue of the irreversible environmental damage that occurs along with economic growth.
This is also the case for the reliance on institutions to facilitate sustainable economic growth from international trade. To maximize results, sufficient and flexible stable legal framework must be in place to prevent bribery and corruption and poor property rights issues. This is a development usually not achieved to a satisfactory level and remain seen as unstable and risky for trade or investment. Xu (2015) argued that although the size of China’s economy is extremely important in terms of its impact on the global economy, it is misleading to ignore political and economic institutions as he suggests that the successful outcome relies on institutions. North (1990) also provided empirical evidence indicating constitutionalism to be part of the determining factors of long term growth, which suggests that if China hadn’t faced such drastic political changes and remained in the situation it was under communist rule of Mao Zedong, it is unlikely to have experienced sustainable economic growth. Under communism, there have been a substantial amount of institutions put in place since they were run by the government, however more constitutional institutions need to be in place, such as scrapping of entry barriers for private firms that have proven to cause a decline in household savings. One of the biggest challenges for China’s leaders is to limit the power of government by adhering to a genuine constitutionalism and rule of law. ( Xu, 2015)This is especially important when trying to avoid the downward spiral a lack of international trade can show such as becoming less attractive politically. A lack of political sympathy can lead to a “clash of civilizations” as described by political scientist Huntington (1996) who blamed conflict on cultural issues over economic, political and social ones, emphasizing the need to avoid this by creating an international rule of law that is neutral and compelling to all. Therefore, it is important to encourage political neutrality so that they can enjoy the benefits of being a part of the largest economic development groups in the world.
The issue of low cost labour
The issue of low cost labour producing for an export led growth country like China, means that the high value-added high-tech products exported by China are attributed to its abundance in low-cost labor. (Sun & Heshmati, 2010) China is infamous for its rapid population growth and urban migration and given its history, it faced a lack of welfare for workers including job security and healthcare. The weight of low cost manufacturing is therefore felt socially with low minimum wages, lack employee welfare and high risk jobs. The countries heavy reliance on the international market has accelerated this as well as migration to urban and coastal regions has increased inequality with a lack of social welfare attention by the government. This can disrupt economic growth through a decrease in national consumption as well as political instability and dissatisfaction. It has also been noticed that due to international trade and companies locating themselves in countries across the world, outward migration in China has also been increasing, especially with its interest in Africa, e.g. Nigeria, where alot of migrant workers went to fill labour shortages in mining and oil extraction. This can be fixed by globalisation to fill labour shortages. Although, this deprives other places of skilled labour in an inevitable cycle, considering this its social and economic impact on labour markets is a less significant impact of economic growth as it is more of a national legal framework and constitutionalist issue, rather than an issue created by international trade and economic growth.
A further social issue includes cultural clashes that can significantly slow down business and withhold aggregate supply as well as aggregate demand as integration between cultures can create problems in international business. Child and Lu (1996) have made the effort in several areas to explain the difficulties facing western investors within their joint venture operations in China. They compare the major differences between Chinese and western approaches to management. They indicate cultural collisions in management and differences in methods that can cause difficulty in communication internationally and slow productivity and thus, economic growth. This indicates that the impact is specific to a place due to their cultural certainties. The probability of issues arising culturally increases as international trade increases.
Conclusion
To conclude, the impacts of economic growth are more positive than negative due to the scale of of the successes that China is experiencing. International trade and their adoption of trade liberalization through the ‘open door policy’ has enabled opportunities to expand factors of production overseas, whilst attracting FDI as well as other investments into the export led growth production of the country. There are social welfare concerns for workers’ rights and other job securities that create questions over economic growth. However, these face limitations including deterring it from international trade to an issue created internally, such as China’s insufficient infrastructure or legal framework in place to support sustainable businesses and their output. China has remained at a high advantage from international trade and its previous oppressed and closed historical background proves that without this openness to the rest of the world, economic growth would be significantly smaller. China has defied and overstepped the negatives of economic growth by being so economically consistent that in its own way, it has successfully managed.
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Source: Edu Birdie
