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Negative Sides of Globalization on China’s Economy and Possible Solutions

Globalization is a ‘double-edge sword’ to the economic development of China. Globalization facilitates the flow of capital, information and people, making it possible for companies to set up production lines in different countries for the sake of exploiting their comparative advantages.

Owing to its inexpensive land and labor, China has long played a vital role in the arena of international division of labor. China, a synonym of ‘World’s factories’, has accumulated enormous revenues via the booming export, one of the advantages of globalization. But the challenges that globalization brings to China should not be clouded by economic gains associated with it. From perspectives other than GDP growth, the notion of ‘World’s factory’ is a curse rather than a blessing. Due to the lack of technological expertise, only the low-end jobs such as assemblage of parts are outsourced to China’s factories, which only earn a thin slice of the profits. A large portion of profits is shared among brand-name owners and retailers. If manufacturers in China fail to develop their core technology and brand name, they will lose their edge and their businesses will reach a bottle neck. In addition, ageing population and expanding middle classes will make cheap labor and land, current comparative advantages, obsolete and unrealistic. These competitive advantages are not unique to China. The role of ‘World’s factory’ can be easily taken over by other emerging competitors.

Economic growth relying on cheap labor and land is unsustainable. In fact, stunning growth in China has come at a cost. Gains in GDP are at the expense of people’s health and the fragile environment. Due to lax regulations and poor sense of corporate social responsibility, massive pollution related disasters in China are not rare. Health problems associated with severe pollution not only add burden to the health care system but also incur losses of invaluable human capital.

China’s economic growth is mainly powered by strong export. Consumer markets all over the world are flooded with products made in China. The phase ‘made in China’ is the synonym of ‘cheap products’. Thanks to its cheap products, China has long maintained steady trade surpluses with western countries. If the trend continues, it must fray the nerve of labor unions in the West, demanding more protectionist policies in order to safeguard more employment. Policies such as imposing high tariffs and import restriction on China’s products will be voiced and given top priority of the agenda by politicians. Dampening global consumer markets in the aftermath of the financial crisis coupled with soaring sentiment of protectionism will badly hit China’s already ailing export sectors.

Apart from exports, investment also constitutes a significant part of China’s economic growth. Investment in the backdrop of globalization is even riskier than ever. The shockwaves of financial crisis originated by the credit crunch in the U.S. have caused impacts on all major economies. China’s asset markets previously deemed to be ‘decoupled’ from the storm, slumped more than 60% in value last year. China has earned enormous foreign currency through strong export. Mounting trade surpluses impose huge pressure on the appreciation of RMB. To relieve the impact of appreciation on exports, the central government has bought in a lot of U.S. treasury bonds. However, the depreciation of U.S. assets as a result of massive issuing of bonds and printing of greenback eats up most of China’s foreign investments.

Since the joining of WTO for five years, China’s GDP has surged by more than double. Export of products and services has increased by 22%. Imports have increased by 33%. China is the beneficiary of globalization and has become one of the growth engines of the world economy. Despite the benefits of growing international trade, being a membership nation means full compliance with regulations set out by the WTO such as the removal of trade barriers. A substantial reduction in import tariffs puts local enterprises under severe competition. The situation is even worse for the agricultural sector. Can China’s farming industry have an edge over the foreign counterparts, which have long received huge government subsidies? Will the attempt of China’s government to protect local farmers invoke further trade conflicts?

How to resolve the challenges in the wake of globalization is a big question that leaders in China have to answer. The central government should put a lot more resources to improve education both in quantity and quality. Poor literacy of the working population is the major barrier of economic growth. The lack of creative talents makes the transformation of an export-led economy to a knowledge based economy impossible and is a big problem that China has to face today. A politically more inclusive society respecting different voices is more “innovative friendly” than an authoritarian regime. The central government should lax the restriction on media and creative industries and empower people more political rights in order to meet the criteria of a knowledge society.

Granting farmers the freedom and flexibility of using farmlands is the first step of advancing the scale and efficiency of the farming industry, making it more competitive when facing with imported farm products. The current situation that state owned enterprises dominate the economy is unhealthy and unsustainable. Policies favoring the making of level playing field may help small private enterprises to flourish. Given enough room, talents from the private enterprises may one day develop their own brand-names.

To cut down losses in foreign investments, the central government should take the opportunity of the bearish commodity market to build up the reserve of strategically important resources such as oil and metals. More resources should be allocated for the development of green energy technology. This has dual purposes. One is to reduce the future reliance on oil so as to make the economy less vulnerable to oil price fluctuation. The other is to improve the quality of the environment and peoples’ health.

Extreme nationalism and protectionism should be avoided as they narrow our vision and blind us from the best practices and experiences of the West. Integration of the western experiences with our traditional wisdom is a way out for China to compete in a globalized world which is dynamic and beyond prediction.

Financial Tsunami Fuels a New Wave of Protectionism

The shockwaves of financial tsunami, elicited by the credit crunch in the U.S., have incurred various degrees of damage to economies ranging from OECD members to emerging markets. Global economy had just been badly hit by the first wave of the attack. The scope and depth of the scourge are still an uncertainty. However, it is for sure that globalization has aggravated the impact of financial crisis around the globe. In the ‘Lehman Brothers’ incident, risky derivatives, ‘mini bonds’ was packaged and promoted as a ‘low risk’, ‘high return’ product, which was sold in huge volume to laymen investors via commercial banks. Financial institutions absorbed enormous amount of capital from investors all over the world via the sale of these ‘high risk’ derivatives. Lax regulations, flood of capital and ease of capital flow aided by advances in electronic banking systems facilitate the boom of derivative markets, which sets the time bomb of today’s financial crisis.

The collapse of the housing market in the U.S. has triggered off global deleveraging processes. Sufferers are not only confined to those holding the U.S. assets. Emerging markets like China and India also feel the pain. In China, export constitutes a significant portion of the GDP. China has long maintained a trade surplus with the U.S. . Economic downturn in the U.S. will be a blow to China’s export industry. A slump in the demand for export goods will force hundreds of mainland factories to close and mass layoffs will further exacerbate the already grim unemployment situation. Those who believed that China’s economy would be ‘decoupled’ from the impact of the recession in the U.S. had already paid the price.

The devastation of financial crisis has been spread from the ‘virtual’ economy to the ‘real world’ economy. People suffering the pain will have a stronger quest for a tighter regulation on the operation of financial institutions. For the sake of answering the call for stabilizing and regulating the financial market, all major governments will impose more restrictions on the financial institutions and will inevitably limit the development and sale of innovative financial products.

The U.S., being the epic centre of the financial turmoil, will draw the attention of anti-globalization activists. They believe that economic globalization and ideology of neo-liberalism as promulgated by the U.S. are to blame for the current crisis. Economic recession around the globe will lead to mounting political pressure to force the government to adopt more protectionist policies in order to safeguard employment. Waves of employment will certainly seed protectionism in the years to come.

Globalization is a historical process. Whether the trend of economic globalization will proceed or regress depends on whether, protectionists or liberalists, will dominate the political arena of the major economies.

A little egret is looking for a lost fish

Chinese White Dolphins Chasing a Fishing Vessel