To protectionists and Sinophobes, the news of China surpassing Germany in 2009 to become the world’s largest exporter heralds a new, unwelcome world order. But, more than a reflection of China’s growing economic might, it is testament to the erosion of economic, political, physical and technological barriers to production.
Beginning with widespread liberalization of trade and investment rules after World War II, barriers have been falling and incomes rising around the world.
China’s opening to the West in 1978; the fall of the Berlin Wall in 1989 and of the Soviet Union two years later; the collapse of communism as a model for developing countries; the advent and proliferation of containerized shipping, GPS technology, just-in-time supply, and other marvels of the information, transport, and communications revolutions have spawned a global division-of-labor-and-production that defies traditional analysis. This makes trade-flow accounting highly misleading.
Global economics is no longer a competition between “Us and Them, between “Our producers and “Their producers. Instead, because of cross-border investment and trans-national production and supply chains, the factory has broken down its walls and now spans borders and oceans. Competition is often between international brands or production and supply chains that defy national identity.
So, what does all of this have to do with China’s status as the world’s biggest exporter?
The vast majority of Chinese exports are hugely dependent on imports from the rest of the world: iron ore from Australia; microchips from Taiwan, South Korea or Singapore; software from teams in Redmond (Washington State) and Bangalore (India); new designs from Cambridge (Massachusetts or England) and Toulouse (France); investments raised from consortiums based in New York City, Sao Paulo or Johannesburg.
China has become the world’s largest exporter primarily because of the global division of labor that has helped reduce poverty and create wealth: China provides lower-value-added production. The components of Apple’s iPods and iPhones are put together in China but their designers in California are worth more to the company’s bottom line. Denmark’s Ecco has shoe factories across Asia but their most valuable footwear is still designed and manufactured in Europe where the quality is guaranteed and the workforce is highly trained – and higher paid.
China has not become a key figure in global trade by accident. It has capitalized on the new reality of global production and supply chains: since 1983, it has unilaterally removed barriers to trade, realizing they were primarily harming China.
True, China’s trade policies remain far from perfect. But they have liberalized quickly and considerably, which helps explain China’s prominent role in global production and supply. This is because of multilateral trade with the rest of the world, despite what the anti-China lobbies in Brussels, New Delhi and Washington argue.
Calculating who earns the biggest amount from exports remains a problem. Intermediate goods are shipped to China from countries such as Japan, Taiwan, Singapore, Australia and America, snapped together (or perhaps a slightly higher value-added operation) in China then exported. As those goods leave the ports of Shanghai, Tianjin or Guangdong for export, simple trade accounting rules attribute the total value of those exports to China, even when the Chinese value embedded in those goods accounts for a small fraction.
That accounting method helps explain why China’s exports have surged over the decades, as the division of labor evolved and manufacturing chains proliferated.
A recent study by economists at the University of California concludes that the Chinese value-added embedded in a 30G Apple iPod accounts for only US$4 of the total $150 cost, yet the entire US$150 is chalked up as a Chinese export. Other recent studies estimate overall Chinese value-added in all products exported from China to average somewhere between 35 and 50%, a big proportion but a lot less than gross export figures imply.
Indeed, if China grows, this pushes the world s economy – and that s good for export-oriented Germany as well, a German Chamber of Industry and Commerce economist, Volker Treier, said recently.
As we consider China’s new status as global export leader, it is important to understand what it means. Those data speak much more convincingly of the virtues of economic interdependence than of China’s stand-alone export prowess: they present opportunities for everyone to join the global economy, not least a strategically-placed nation like Egypt with a long trading history.
Daniel Ikensonis Associate Director of the Cato Institute’s Center for Trade Policy Studies and author of “No Longer Us vs. Them (IPN, 2009). Alec van Gelder is a Project Director at International Policy Network.
