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What does globalization mean for China’s Economic Development?

Jianyong Yue - 24th May 2012
What does globalization mean for China’s Economic Development?

The dominant view now-a-days is that China has benefited hugely from globalisation, evident in its high GDP growth. Chinese companies are getting bigger and stronger. As a result, China is rapidly industrialising itself into an economic superpower. I challenge this prevalent view on the ground that globalisation has produced a double effect, not merely positive effects for the Chinese economy. On the one hand, globalisation stimulates an export-driven high GDP by exploiting China’s comparative advantage in cheap labour; but on the other hand, it has impeded China’s industrialisation by locking in Chinese enterprises at the low-end of the global value chain, preventing them from upgrading along the technological ladder.

As we know, China’s accession to the World Trade Organization (WTO) in 2001 was a momentous decision made by the top leadership. It was a big gamble for the Chinese enterprises, because prior to the accession, they were extremely weak in every measure compared with global firms (Nolan 2001; 2004). Furthermore, they were either not consulted or excluded from negotiations). Contrary to the conventional wisdom that China’s deep integration into the global economy is a natural trend of economic development; I would argue that it was not the economic success in the 1990s that naturally led to China’s deep integration, but the predicament in the country’s reforms and industrialisation that forced China to join the WTO at its earliest possible time to keep the economy growing. Premier Zhu Rongji stated it clearly to Stephan Roach, chief economist of Morgan Stanley in March 2002; ‘If China did not join the WTO, it is impossible to restructure and sustain economic growth’.

The globalisation logic is that competition is the panacea. Competition will bail out the inefficient State-owned Enterprises (SOEs) and make them more competitive. The real drive, however, is political. The Chinese leaders made extensive concessions at the negotiation table. The rationale was that economic growth is the only reliable source of legitimacy after the Global 1989, and joining the WTO was understood by them as a strong stimulus for China’s external-oriented economic growth.

Radical liberalisation of trade and investment means that China gave up most of the industrial policies that had been successfully implemented in East Asia in the 1970s and 1980s. This runs counter to the normal practice that industrialisation precedes liberalisation. In Ha Joon-Chang’s words, “virtually all NDCs actively used interventionist industrial, trade and technology (ITT) policies that are aimed at promoting infant industries during their catch-up periods”. Is China an exception?

Indeed, a handful of Chinese firms have grown into giants after the accession. All these, however, are oligopolistic SOEs that the state has spared no effort to sponsor in the past decades. Private businesses were once encouraged in the late 1990s prior to the accession, but they have fallen into an increasingly unfavourable condition ever since. After all, the rise of private capitalists was politically undesirable to the regime. Foreign capitalists in contrast were less dangerous politically because they were more interested in money not politics. Rather, they were allies of the Chinese government in terms of lobbying on the latter’s behalf to separate trade from politics.

These policies significantly restricted the role of private businesses in China’s economic and political development. Wider market access and cheap labour made China the best production site of the multinational companies (MNCs) who relocated core economic activities to China. They are the market leaders and became more competitive by dominating China’s high-tech sectors and international trade. With industrial policies invalidated by the WTO agreements, China maintained extensive intervention in the state sector not for the purpose of making them more competitive but making them bigger in size and enormously profitable through monopoly or oligopoly.

The renewed investment boom driven by the influx of FDI after the WTO accession made China the factory of the world. Thus, as the world’s manufacturing powerhouse, the China of today is in no sense the replica of the Britain of the 19th century which took the lead through industrial innovation. Rather, it is essentially the assembly plant of the world; an extension of the global supply chain.

In face of the MNCs possessing global market, global brand, and global procurement systems, indigenous firms were unable to compete on the global level playing field established on China’s home market. Within the globalised international division of labour, they increasingly depended on the importation of “designs, critical components and manufacturing equipment” from the advanced economies. They reaped only a small portion of the value-added at the final stage of the labour-intensive assembling (the production process of iPhone, for instance). Even if they imported cutting-edge equipment to manufacture new products, given the unrivalled competitive advantage of the foreign-invested enterprises (FIEs), they had little choice but to focus on undifferentiated and standardised products. This sort of so-called commodification production lowered the entry barriers and sharply reduced the profit margins of the indigenous firms as a whole.

Therefore, they were unable to massively invest in research and development (R&D) to upgrade. By year 2005, the increasing market domination by the FIEs and the decline of Chinese manufacturing companies alerted the leadership. They propounded the idea of the innovative-state, pledging that the state will increase R&D outlays and introduce a set of industrial policies to promote indigenous innovation so as to reduce the country’s technological dependence on foreign sources from 50% to 30% by year 2020.

The emphasis of this new initiative is placed on strengthening the absorptive capacity of domestic enterprises on the basis of securing technology transfers from the MNCs through the imposition of “local contents” requirements. Besides, before and after 2005, China enacted the Government Procurement Law in 2004 and Anti-monopoly Law in 2008. These, together with the increasing government subsidies in R&D, constitute China’s industrial policies to promote indigenous innovation.

Yet China’s indigenous innovation project designed to enhance domestic firms’ original innovation capabilities were considered by many MNCs to be a blueprint for technology theft on a scale the world has never seen before. They were particularly sensitive to the imposition of local content requirement by the Chinese government to leverage technology transfer from foreign investors. However, this overstated China’s capacity to catch up with the West simply because without the substantial enhancement of the absorptive capacity of indigenous firms there remained no way to out-innovate the West in long-term; even if China managed to acquire sophisticated technologies of the West through unconventional means. Just think about the example of the former USSR!

In addition, indigenous innovation is in no sense a techno-nationalism, which did not violate China’s WTO commitments. Those industrial policies are legal policy instruments within the WTO framework. For instance, the Trade-related Investment Measures TRIMs agreement that China agreed to honour did prohibit the imposition of local contents requirements in principle, but there remained some grey areas that China could legally utilise to apply the local content stipulation to the very few unopened industrial sectors.

Thus, China is not seeking alternatives to the liberal globalisation approach through its sponsoring of industrialisation. Instead, it is attempting to modernise the country strictly within the bounds of the WTO rules. This can been seen clearly from China’s further liberalisation commitments in the three-round Strategic and Economic Dialogues (S&ED) with the United States of America (2009-2011), in which China agreed to open up “high-end manufacturing, high-tech industries, modern services, new energy, energy savings and environmental protection sectors” to foreign investors, join the WTO’s Agreement on Government Procurement GPA, withdraw local contents requirements, and open up stock index trading. China had to accept these requirements in exchange for the US keeping its door open to Chinese products.

Indigenous innovation has achieved some progress, but it is far from successful partly due to policy incoherence, and partly due to the intensifying liberalisation pressures from China’s main trading partners. As a result, the general trend of market domination by the FIEs did not diminish but intensified after 2005. So far, foreign direct investment (FDI) has controlled over half of China’s international trade and 85% of its total high-tech exports. The official report claimed that until 2009, market control by the FIEs had exceeded the danger level of the country’s industry security.

Chinese firms were institutionally “locked in” at the low end of the global value chain. This vindicated the non-mainstream arguments of authors such as Amsden (2004) that “latecomers may not necessarily industrialise simply by specialising in a low-tech industry”. Without a number of “nationally-owned, professionally managed firms” becoming national champions on domestic and global markets, industrialisation will be hopeless. This is a practical issue not a self-fulfilling prophecy as neoliberals believed. Nor is industrialisation just a matter of time that will naturally be completed with sustained economic growth. Thus, economic growth alone is by no means the hard evidence of China’s rise in any meaningful way. Globalisation did not make China any closer to an emerging industrial power. The prospect of catch-up remains remote.

Amid the present global economic crisis, China as a member of the international community has its responsibility to help rebalance the global economy. But unlike the US who may bring manufacturing back home through implementing some kind of “strategic industrial policy” to double its exports, say in five years, China is different. As argued, upgrading is institutionally hampered by its WTO commitments, which makes the transition from an export-driven growth to innovation-driven growth extremely difficult if not completely impossible.

To conclude, the Chinese model of development in globalisation is far from being a successful model applicable to other developing countries. With special interest groups having grown so powerful as to capture the state, it is now nearly impossible to seek an entire reversal of the current reforms within the confines of the current authoritarian political framework. What’s more, any revision to the global rules China has subscribed to for the purpose of an internal integration-based development will tarnish the image of a “responsible Great Power” that it has carefully crafted in the past decades. Rather, China needs to engage in two reforms at home and abroad. Political reform in the sense of establishing checks and balances, and, to bridge the gap between the rich and poor, the enforcement of the rule of law. However, these reforms alone are not enough. China also needs to actively get involved in the reform of global institutions to make globalisation more favourable to global development. Only by making globalisation better will China be able to keep its economy developing (not just growing in a narrow sense) in a more sustainable way, thereby making the global economy healthier and more stable.

 

Dr Jianyong Yue is a teaching fellow at King’s College London. More information about his work can be found here.

 

Amsden, A. (2004): The Rise of “The Rest” – Challenges to the West from Late-industrialising Economies, Oxford: New York.

Nolan, P. (2001): China and the global economy: national champions, industrial policy and the big business revolution. Houndsmill: Palgrave.

Nolan, P. (2004): Transforming China: globalization, transition and development. London: Anthem.