China’s Economic Rise & Its Potential Implications on the World Economic Order as We Know It

Alexander B. HammerLead Economist & Head of China Research

U.S. International Trade Commission

For the National Academy of Public Administration(Oct 16, 2019)

Note: The views expressed in this presentation do not represent those of the USITC or any of its individual Commissioners

Irving WilliamsonFormer Chairman & Commissioner

U.S. International Trade Commission

Agenda

• How Fast is China Growing?• Why Has it Grown so Fast?• Is it a Rival or Partner to the U.S.?• Implications of its Rise on the Global Economic Order• Implications for the Policy Tools the U.S. Traditionally Uses to

Address Unfair Trade Practices

1. How Fast is China Growing?

8

8

8

8

8

2. How Did China Grow So Fast?

2. How Did China Grow So Fast?

• Improved Resource Allocation (ended AG reliance)

• Careful, Experimental, and Nimble Planning-Opposing ideologies ok, “Growing Out of Plan” (Naughton)

• Became Global Manufacturing Hub-Assemble, Export, & Become GVC Glue

• ↑ FDI, “Learned” Technology, Now Leading Innovation?

• Expanded Outwards for Resources & Markets

8

Evolved From Agrarian Society1950 1978 2018

AG (Primary) 50% 28% 7%Industry (Secondary ) 21% 48% 41%Services (Tertiery) 29% 25% 52%

Composition of China's GDP (Production Side)

Data

Select this link and click Refresh/Edit Download to update data and add or remove series

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UnitRMB bnRMB bnRMB bnRMB bnRMB bnRMB bnRMB bnRMB bnRMB bnPrimaySecondaryTirtiary

195234.29014.11019.51067.91050%21%29%100%

195337.80019.16025.48082.44046%23%31%100%

195439.20021.08025.70085.98046%25%30%100%

195542.10022.15026.91091.16046%24%30%100%

195644.39028.04030.640103.07043%27%30%100%

195743.00031.66032.480107.14040%30%30%100%

195844.59048.36038.280131.23034%37%29%100%

195938.38061.68044.690144.75027%43%31%100%

196034.07065.26047.680147.01023%44%32%100%

196144.11039.35039.770123.23036%32%32%100%

196245.31036.39034.510116.21039%31%30%100%

196349.75041.28033.790124.82040%33%27%100%

196455.90051.93039.160146.99038%35%27%100%

196565.11060.85047.440173.40038%35%27%100%

196670.22071.54047.100188.86037%38%25%100%

196771.42060.80047.200179.42040%34%26%100%

196872.63054.26047.520174.41042%31%27%100%

196973.62069.50053.100196.22038%35%27%100%

197079.33091.81083.6308.45056.83010.020227.97035%40%25%100%

197182.630102.99093.6309.66060.06010.840245.68034%42%24%100%

197282.740109.160100.0109.48063.33012.300255.23032%43%25%100%195211.9602.2002.900

197390.750118.040108.29010.10066.83013.100275.62033%43%24%100%195316.3202.9003.500

197494.520119.980109.44010.89068.27013.220282.77033%42%24%100%195418.4502.7003.800

197597.120137.870125.66012.61068.96014.840303.95032%45%23%100%195519.1203.1003.900

197696.710134.600121.68013.31067.55014.710298.86032%45%23%100%195622.5205.6004.600

197794.220151.780138.50013.73079.00016.520325.00029%47%24%100%195727.1604.6004.900

1978101.846175.516162.14813.88690.50818.203367.87028%48%25%100%195841.5906.9107.100

1979125.897192.538178.65314.45691.61019.374410.04531%47%22%100%195954.1307.7209.400

1980135.948220.474201.48519.634102.33621.343458.75830%48%22%100%196057.4208.03010.400

1981154.568226.908206.77220.798112.10722.077493.58331%46%23%100%196136.7702.7006.920

1982176.169239.769218.30322.164121.39724.693537.33533%45%23%100%196233.0903.4105.740

1983196.090266.304239.90627.166139.69827.503602.09233%44%23%100%196337.1704.2305.500

1984229.562312.482281.59031.792185.80733.861727.85032%43%26%100%196446.8105.2705.840

1985254.173388.647347.83341.927267.07442.183909.89528%43%29%100%196555.4205.6007.740

1986276.405451.524400.07752.727309.68649.8961037.61527%44%30%100%196665.6306.1208.510

1987320.446527.397462.12766.749369.61656.8451217.45926%43%30%100%196755.1605.8207.230

1988383.118660.736581.41381.185474.18468.5881518.03925%44%31%100%196849.6904.7307.050

1989422.820730.090652.57079.608565.06481.2901717.97425%42%33%100%196963.3706.3308.490

1990501.722774.429690.47086.170611.136116.7211887.28727%41%32%100%197079.33091.81083.6308.45056.83010.020

1991528.885912.980813.819101.766758.698142.0502200.56324%41%34%100%197182.630102.99093.6309.66060.06010.840

1992580.0281172.5321034.048141.794966.893168.9212719.45321%43%36%100%

1993688.7601647.3081424.879226.9931231.255217.4273567.32319%46%35%100%

1994947.1792245.3111954.690296.8831671.255278.8214863.74519%46%34%100%

19951202.0482867.7462502.390373.3742064.194324.4686133.98920%47%34%100%

19961387.8333382.8132952.977439.2972410.717378.2607181.36319%47%34%100%

19971426.5233754.5993302.353462.8262790.382414.9097971.50418%47%35%100%

19981461.8733901.8533413.486499.3023155.825466.1478519.55117%46%37%100%

19991454.8984108.0933601.541518.0873493.447517.5869056.43816%45%39%100%

20001471.7364566.4854025.972553.4023989.794616.18810028.01415%46%40%100%

20011550.2504966.0664385.556594.5484569.996687.13411086.31214%45%41%100%

20021619.0235410.5484777.626648.2125142.171749.42612171.74213%44%42%100%

20031697.0256269.7385536.379751.0755775.441791.47613742.20312%46%42%100%

20042090.4327428.6906577.682762.8265174.850583.326872.0506664.893930.64616184.01613%46%41%100%

20052180.6728808.4417796.0551031.8246011.799679.4561040.0467742.7771066.87718731.89012%47%41%100%

20062331.70110436.1799223.8361208.2877121.289801.5181245.0109175.9671218.62521943.84711%48%42%100%

20072767.41012663.36411169.3921346.0708746.495960.9221534.80211578.4601460.51027009.23410%47%43%100%

20083246.41014995.65613172.7621962.94310253.949809.1311880.75713682.3901636.75731924.45610%47%43%100%

20093358.38016017.17013809.5471672.60211011.850839.5432268.14715476.2201652.24134851.77010%46%44%100%

20103843.08019162.97716512.6382087.22913028.2531122.1622725.92918205.8601878.36241211.9179%46%44%100%

20114478.14022703.88119514.2852629.60015645.7001239.0003292.65421612.0002184.19748794.0219%47%44%100%

20124908.45024464.32620890.5622509.30016980.6601400.6003689.61224485.2202376.32453857.9969%45%45%100%

20135302.81026195.60722233.7612546.76018186.7801500.2204089.67627797.9102604.26659296.3279%44%47%100%

20145562.63027757.18523385.6372341.71019562.0301481.9004488.04530808.2502850.09364128.0659%43%48%100%

20155777.46028204.02923650.6261910.45020242.0101498.1704662.67034617.8003048.78068599.2898%41%50%100%

20166013.92029654.77024787.7701826.04021428.9301532.8004970.29038337.3903305.88074006.0808%40%52%100%

20176209.95033274.27027832.8202102.55024050.5401679.7205531.38042591.2103717.26082075.4308%41%52%100%

20186473.40036600.09030516.02026482.0406180.80046957.4604055.02090030.9507%41%52%100%

Table

Composition of China's GDP (Production Side)

195019782018

AG (Primary)50%28%7%

Industry (Secondary )21%48%41%

Services (Tertiery)29%25%52%

Ch_1

COMPOSITION OF CHINA'S GDP

Ag193291969420059204242079021155215202188522251226162298123346237122407724442248072517325538259032626826634269992736427729280952846028825291902955629921302863065131017313823174732112324783284333208335733393934304346693503435400357653613036495368613722637591379563832238687390523941739783401484051340878412444160941974423394270543070434350.504932999558238890.458515283842794720.455919981391021190.461825362000877590.430678179877752980.401344035840955790.339785110112017060.265146804835924010.231752941976736240.357948551489085390.389897599173909310.398573946482935430.380297979454384590.375490196078431370.371809806205655010.398060416898896430.416432544005504280.375191112017123680.347984383910163670.336331813741452270.324178192218783080.329257673608591540.334264596668670640.319526237868070440.32359633273104460.289907692307692310.276854178198334360.307032786969508860.296339383575962180.313155812062347940.327857031035217630.325681223834824840.315396955619130670.279343575172623150.266384965307425340.263208996406110340.252376865324238030.24611551959102970.265843081182362880.240340673864157440.213288613754465810.193074684031713660.194742827282163110.195965196102779460.193254855480121330.178952767359584350.171590347601409840.16064788466848010.146762416552996630.13983461352373810.133014877128561050.123489989653686380.129166481669764990.116414956027144590.106257605277687270.102461626550335650.101690376875821649.6361819254982925E-29.3251668819323549E-29.1776407779129182E-29.1136885500978815E-28.9428979891441399E-28.6742520723648672E-28.4220405837161783E-28.1262512485460653E-27.566149820963472E-27.1901940388277588E-2Industry193291969420059204242079021155215202188522251226162298123346237122407724442248072517325538259032626826634269992736427729280952846028825291902955629921302863065131017313823174732112324783284333208335733393934304346693503435400357653613036495368613722637591379563832238687390523941739783401484051340878412444160941974423394270543070434350.207774996318657030.232411450752062130.245173296115375640.242979376919701620.272048122635102310.29550121336568980.368513297264345010.426113989637305680.443915379906128840.319321593767751320.313140005163066840.330716231373177410.353289339410844230.350922722029988480.378799110452186890.338869691227287880.31110601456338510.354194271735806750.402728429179278040.419203842396613460.427692669357050580.428270807633698570.424302436609258430.453594341174535340.450378103459813940.467015384615384610.477114113725848550.469553996813154790.480589719159208340.459715778906981950.446217953861277050.442297902581867960.429321216168819190.427134415673620430.435155580422803830.433194543346053280.435256636702990360.424971289568981060.410339899496239830.414884785359580180.431164462135632860.461777049372637690.461642378381345480.467517368210413950.471054471288245850.471002589269861380.457988093172782770.453610277970967980.455372786448855370.447945705627514290.444517167834309450.45623964421759050.459014016538701440.470237711494888580.475585666676832390.468853124589538980.469723155098890950.45957982094346050.464986299869600490.465300475721042770.454237582690349030.441774526473278810.432839895492359020.411141714335076570.400707212164189750.405410851944363880.40652786625043941Services193291969420059204242079021155215202188522251226162298123346237122407724442248072517325538259032626826634269992736427729280952846028825291902955629921302863065131017313823174732112324783284333208335733393934304346693503435400357653613036495368613722637591379563832238687390523941739783401484051340878412444160941974423394270543070434350.287292004123104130.309073265405143130.298906722493603120.295195261079420790.297273697487144660.303154750793354520.291701592623637870.308739205526770260.324331678117134870.322729854743163180.296962395663023790.270709822143887220.266412681134771010.273587081891580150.249391083342158230.263069891873815630.272461441431110620.270614616247069620.249287186910558430.244464343861934220.248129138424166480.242471518757709890.241432966722070930.22687942095739430.226025563809141380.243076923076923080.246031708075817090.223413216217336310.223070897264829590.227128409030670030.225925015103505350.232020873583307140.255281828212050140.293522009153756420.298459454269770830.303596460247836370.312366497972771610.328913190839989210.323817019321397230.344774540776262350.355546924109901190.345148266595648680.343614794336491340.33651743568680670.335690673231632820.35004464337055430.370421559225807330.385741837360552010.397864796998147920.41221968084874760.422467955037129530.420270366128723090.411819501791533480.413347332477966840.418156728045480370.428685248860125270.428586468025287380.444058359801556610.4417620313110760.442923116499828020.45462553180867210.46879649363527970.48041758378399230.504637879827761650.518030275350349620.518927649846001480.52157019336128296

Careful Planning (Medium-Term)

8

Careful Planning (Long-Term)

8

Growing Out of the Plan

SOE Trade: Down But Not Out

From Hammer and Jones, “SOEs Play a Smaller, But Still Strategic, Role in China’s External Sector” Jan 2018

8

Built a Global Manufacturing Hub

8

Built a Global Manufacturing Hub

Lead Innovation?R&D Expenditures (in % of GDP) Global Patent Applications (in % of Total)

From “The Mysterious Divergence in China’s Productivity and Innovation Patterns” (Bernard and Hammer, Aug 2019)

Expand Outward

3. Is China a Partner or Rival to U.S.?Partner

U.S. Consumer Welfare

Major Investor

Largest Consumer Growth Market

Foreign Invested Enterprises

Manufacturing Offshoring

Global Value Chain Partner

“Stable” Trade Partner

Rival

Unfair Competition in China (e.g. SOEs)

Unfair Trade (e.g., AD, CVD)

IP Infringement & Forced Tech Transfer

Internationalization of FX

Innovation Race

Securing Global Resources

FDI & Soft Power

Ambiguous

Trade Balance

Currency Valuation

Treasury Bonds

Manufacturing: Jobs vs. Productivity/High-Tech Focus

The US-China merchandise trade balance reached $419

bil in 2018 (before real trade war

effects kicked in)

Source: USITC Dataweb 25

…far surpassing other major

trade partners.

Source: USITC Dataweb 26

Source: USITC & China Customs

FIEs are playing an

important role in China’s

exports to the U.S. ….

…FIEs also playing an

important role in China’s imports from the U.S. ….

Source: USITC & China Customs

U.S. firms finding cost

advantages in manufacturing,

selling, and even doing

R&D in China.

40

The majority of workers of U.S. affiliates

in China are in the computer (semiconduct

or) sector.

U.S. imports from Asia remained

fairly flat in past 2

decades…

..but their composition

is totally different.

So companies no longer doing this,

but importing directly from

China

Given lower final assembly costs in China,

companies (e.g., Apple,

Dell computers) are doing more final

assembly in China

China holds over $1

trillion $U.S. reserves

(18.8% of total, and

4th highest after

Japan, Caymen

Islands, UK).

However, selloff

would likely harm

China more (needs

stable investment).

Source: CRS (Morrison), “China-U.S. Trade Issues”, July 30 2018

U.S. Manufacturing Jobs ↓, BUTManufacturing Output & High-Tech Specialization ↑

From “Why Have U.S. Firms Offshored to China?” (Hammer, Jun 2017)

USITC Study “China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy” (May 2011)

IP Infringement from Chinese Entities: Real & Consequential

Innovation Race?R&D Expenditures (in % of GDP) Global Patent Applications (in % of Total)

From “The Mysterious Divergence in China’s Productivity and Innovation Patterns” (Bernard and Hammer, Aug 2019)

4. Implications of China’s Rise on the Global Economic Order as We Know it

8

Most Economists Quibble Over When, Not if, China Will Surpass U.S. (Nominal) GDP

High Tech Manufacturing: Not Just a U.S. Issue

SOE Industrial Output Back on Rise

Other Implications?

5. Implications for the Policy Tools the U.S. Traditionally Uses to Address Unfair Trade

Practices

Share of U.S. Imports Subject to

AD/CVD Orders

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

China

Total

Rest of the World

Bown 2017

Perc

ent o

f U

.S. I

mpo

rts F

rom

China’s represents a major share

(more than 50%) of AD investigations.

Source: USITC

China’s represents a major share

(more than 50%) of CVD

investigations.

Source: USITC

…same is true for IP related

investigations.

Source: USITC

US-China WTO Disputes, 2002-18Case Status Complainant

United States China

WTO Cases 23 15

Settled Early 9 1

Ruling for Complainant 10 4

Ruling for Respond 0 1

Split Decision 0 3Pending 4 6

SECTION 301 OF TRADE ACT OF 1974• Section 301 establishes domestic procedures that allow US companies

and unions to petition USTR to enforce US rights under international trade agreements and eliminate unfair foreign government trade practices that adversely affect US investment and exports of goods and services.

• USTR can self initiate

• USTR required to take appropriate action to remove foreign government policies or practices that violates a bilateral or multilateral trade agreement or are "unreasonable, unjustifiable, or discriminatory" and "burdens or restricts US commerce."

SECTION 301 (continued)

• If foreign unfair practices are not eliminated through successful WTO dispute settlement or negotiations, USTR can retaliate against the foreign country.

• Retaliation can take the form of suspending the benefits of trade concessions previously granted by the United States (i.e., tariffs) or other restrictions or fees on the trade of the offending nation.

Thank you!

China’s Economic Rise & Its Potential Implications on the World Economic Order as We Know ItAgenda1. How Fast is China Growing?�Slide Number 4Slide Number 5Slide Number 6Slide Number 7Slide Number 82. How Did China Grow So Fast?��2. How Did China Grow So Fast?Evolved From Agrarian SocietyCareful Planning (Medium-Term)�Careful Planning (Long-Term)�Growing Out of the PlanSlide Number 15Built a Global Manufacturing HubBuilt a Global Manufacturing HubLead Innovation?Expand Outward3. Is China a Partner or Rival to U.S.?��Slide Number 21Slide Number 22Slide Number 23Slide Number 24Slide Number 25Slide Number 26Slide Number 27Slide Number 28Slide Number 29Slide Number 30Slide Number 31Slide Number 32Slide Number 33Innovation Race?4. Implications of China’s Rise on the Global Economic Order as We Know it�Slide Number 36High Tech Manufacturing: Not Just a U.S. Issue��SOE Industrial Output Back on RiseSlide Number 39Other Implications?5. Implications for the Policy Tools the U.S. Traditionally Uses to Address Unfair Trade Practices��Share of U.S. Imports Subject to �AD/CVD OrdersSlide Number 43Slide Number 44Slide Number 45US-China WTO Disputes, 2002-18 SECTION 301 OF TRADE ACT OF 1974SECTION 301 (continued)Thank you!