chinese threat to the economies of the developing world

7/29/2019 Chinese Threat to the Economies of the Developing World

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EVALUATING THE CHINESE THREAT TO THEECONOMIES OF THE DEVELOPING WORLD

THROUGH THE LIBERAL PERSPECTIVE

I an Tay

Table of Contents

Page

Introduction 1

Conceptual Approach 1-3

Earlier Discussions of the China Issue 3-5

China: Threat or Opportunity?Foreign Direct Investment 5-9

Flow of Goods and Services 9-12

Dependency on Primary Products 12-13

Ensuring Continuous Growth through Co-operation with China 14-16

Future Prospects 16-18

Conclusion 18

References 18-21

Figures

Table 1: Foreign Direct Investments (FDI) in East and Southeast Asian Countries 8

Graph 1: Percentage of FDI Flows into Selected Asian Countries 2002-2006 8

Graph 2: Chinas Top Import Partners in 2006 11

Graph 3: Spot Price for Brent Crude Oil 13


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Introduction

December 11 2001, the day China took seat in the World Trade Organization marks a

historic moment - the entrance of an economic giant that is home to a huge pool of labor and

consumer to the world economy. China today has succeeded in the global market with record

high growth through massive foreign direct investments. The United States deficit with China is

rising day by day and this mere fact has attracted the attention of the international community.

However, there is another important side of the story that should be looked at regarding Chinas

entrance to the global marketis China a threat to developing countries? Before China reformed

its economy in the 1980s, China was seen as an ideological threat to third world countries who

feared the wave of communism would sweep through their countries. However, today, studies on

the China threat to developing countries are taking an economic form. There is no doubt that

Chinas liberalization and entrance to the WTO will threaten other developing countries as it will

add another competitor in the market in terms of foreign direct investment, labor, and

manufacturing. However, the other side to the story has to be investigated; healthy competition

will force other developing countries to improve efficiency, an open China will open up

unprecedented market opportunities for these other developing economies , and Chinas

increasing wealth can help develop other developing countries too. Therefore, it is important for

other developing countries to see Chinas rise as a silver lining in a dark cloud and try to

cooperate with China for the good of the whole.

Conceptual Approach

The purpose of this paper is to evaluate whether Chinese participation in the global

economy will be a threat to the developing world or otherwise. In other words, will Chinas

participation in the global economy affect the development of other developing countries? Will

growth in developing economies other than Chinas slow down or even stagnate due to the fast

rise of the Chinese economy? For example, will Foreign Direct Investment inflow, job creation,

and exports of other developing countries fall causing the standard of living in these countries to

fall because of China? Here, what are referred to as the developing world are countries which

according to the World Bank are low-income and middle-income economies i.e countries

according to their 2006 GNI per capita, calculated using the World Bank Atlas method, earns


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from 0 - $11,115.1 However, even the World Bank acknowledges that the use of the term

developing countries is merely for the purpose of convenience as it is in no way implying that

every member of this group has similar development or that other economies have reached a

preferred or final stage of development. A similar take on this term will be used in this paper

the term developing countries will still be used for the purpose of convenience but the diverse

natures of countries included in this group will be noted.

In the face of China, these developing countries can be categorized into two categories,

countries that have a complementary relationship with China or countries that have a substituting

relationship. Countries that have complementary relationship are often said to be countries that

have commodities and products that China needs, mainly raw material and energy. These are

countries such as Sudan, which produces oil and Brazil, which exports lots of soybeans to China.

Developing countries that are technologically more advanced are also seen as complementary to

China as these countries can provide China with what China herself cannot produce. These

countries benefit greatly from Chinas openness compared to the other group of countries. The

other group of countries, the substitutes, is mainly countries that focus on manufacturing. As

manufacturing is something that China is good at doing and has a huge comparative advantage

over the rest of the world, countries that were previously manufacturing-oriented countries such

as Mexico loses out badly. However, this phenomenon is not as easily explained as this. Both

these groups of countries can actually gain from China in one way or another. There is more to

China and its impact to the developing world than complementary and substituting relationships.

In this paper, the liberal approach at looking at things will be used to prove that Chinas

ascension to the global economy will bring gains to other developing economies as well. In terms

of the economy, international trade with China will bring benefits to both parties this is a

positive-sum game. As China begins to attract more investments, it will trickle down to the

people and create a more affluent society, and thus providing more opportunities for economies

abroad to satisfy the demands of the Chinese people. In addition, towards the end of the paper,

steps taken by governments of developing countries towards enhancing this liberal order by co-

1 See Appendix 1


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operating with China and also efforts to achieve a free trade area with China as a member will be

presented.

Earlier Discussions of the China Issue

As mentioned earlier, there already exists quite a wide array of literature on the China

Issue. Even wider is the amount of literature written about the Chinese threat to the United States

as USs trade deficit with China is getting bigger and bigger every year. However, not all

literature is painting a grim picture. Writings by liberal scholars such as John. G. Ikenberry, has

maintained that China will not be a threat to the current world order and also not bring the end of

the economic and military prowess of the United States.2 However, although there have been

writings about Chinas threat to developing countries, it is not as vast as the former sub-issue.

One of the articles that have been used as the base of this paper is an article written by

Ramesh Adhikari and Yongzheng Yang. In the first part of their article, they tracked Chinas

increasing openness in the international economy since it began its bid to become a WTO

member and also briefly introduced Chinas FTA with ASEAN which is due to be established in

10 years time. Amongst some of commitments that China has agreed to qualify for membership

in the WTO includes eliminating export subsidies, lifting business restrictions to foreign firms,

reducing import tariffs, and removing quotas in various sectors. The part that would be most

relevant to the issue discussed here would be the second part which looks at the implications of

Chinas increasing openness. Although they do not overlook the threats that China will pose to

developing countries such as their products being 20-30% more cost-efficient than that of

ASEAN goods, they continually assert that China will not be a long-term threat contrary to many

prior researches by other observers. For example, the ASEAN-China FTA should be looked at as

being able to push for more exports to China from ASEAN countries, not the other way around

where local production and employment in ASEAN would decrease with a FTA.

According to the two writers, China will move up the production chain and will produce

goods higher on the production chain such as semi-conductors instead of simple consumer

2G. John Ikenberry, The Rise of China and the Future of the West, Foreign Affairs Journal, January/February2008.


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goods. Therefore, poorer Asian countries will be able to benefit from Chinas movement up the

production ladder as they continue to produce very labor-intensive products. For the other

countries, China will undoubtedly prove to be a formidable competitor but did not establish itself

based on a basis of beggar-thy-neighbor policy but on productivity improvement. On FDIs, it is

predicted that although China will pull more foreign investors, these investments will open up

more opportunity for the developing countries to invest in China itself. In addition, China in

actuality does not have absolute advantage versus other Asian developing countries in every

aspects such as in some ASEAN countries where legal institutions are more developed. In

addition, Chinas growth will also increase outward Chinese investments. By the first half of

2001, for example, Chinese companies had set up 6,439 firms in 160 countries and committed to

investing 7.7 billion dollars in projects in trade, natural resources exploration, transportation,

labor services and agriculture.

However, the catch of the their argument is that the key issue for developing countries is

not so much of Chinas increasing competition; rather, it is their domestic policy that is critical to

facilitate structural changes and increase their export competitiveness. 3 For most of these

developing countries, China may look like a threat to them but in actuality, the perceived threat

to China will be a catalyst for them to restructure themselves to be able to compete with China

and face the threats of this liberal economic order. Therefore, they conclude that in any event,

an open and prosperous China is good for the rest of the world.4

The same views will be expressed in paper but with greater detail and with a broader

spectrum. The next section will evaluate whether the arguments that patterns of Foreign Direct

Investment flows, the flow of goods and services and the dependence of primary products

exports from other developing countries to China are threatening is valid. Besides that, the value

of healthy competition will also be brought forward. Then, proactive steps taken by other

developing countries to establish co-operation with China for their continuous growth will be

discussed. Throughout this evaluation, in addition to using the Association of South East Asian

3 Ramesh Adhikari & Yongzheng Yang, Chinas Increasing Openness: Threat or Opportunity? AsianDevelopment Bank, www.adb.org/Documents/Events/2002/Trade_Policy/PRCIO_paper.pdf4 Ibid.


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Nations (ASEAN) countries as an example, developing countries in Africa, Latin America, and

the Caribbean will also be looked at.

China: Threat or Opportun ity?

Foreign Direct Investment

First, many developing countries fear that Chinas openness will pull all foreign direct

investments (FDI) away from these other developing countries to China. There have been

arguments that FDI inflows to China seem to be at some expense of other developing countries

especially the ASEAN countries. In 2003, Dr. Mahathir, Malaysias ex-prime minister said that

China is certainly a threat to the economies of Southeast Asian countries, as it has a cheap but

highly skilled workforce and could therefore attract more foreign investment.5 This is proven by

statistical evidence - out of the $100 billion in FDI flowing into developing countries in 1994,

about 40 percent went to China.6 By contrast, the total going to ASEAN was only about 15

percent.7With Chinas assent into the WTO, China received even more FDIs and became the

worlds largest FDI recipient in 2002. Across the Pacific, in Mexico, foreign direct investment

(FDI) fell from $26.6 billion in 2001 to $11 billion in 2003 and foreign investment in Brazil fell

as well.8 Although there are still inflows of FDI into other developing countries, most of these

FDIs mainly focuses on expansions, mergers, and acquisition while Greenfield Development

can be seen in China. For example, in Malaysia, Dell Inc. which already has a large presence in

the Malaysian state of Penang with 4000 employees, is expanding its operations in Malaysia to

Cyberjaya, the hub for Malaysias Multimedia Super Corridor. On the other hand, in China,

major telecommunications companies are making new investments such as Ericsson chalking up

US$5.1 Billion of new investment in China.9

5Eddie Leung, Southeast Asia-China: Threats, Opportunities,Asia Times Online, August 2 2003,http://www.atimes.com/atimes/China/EH02Ad01.html6 Robert G. Sutter, Chapter 7: China-Southeast Asia Relations, Chinas Rise in Asia: Promises and Perils (USA:Rowman & Littlefield Publishers, 2005), 193.7 Ibid.8 Eduardo Lora, Should Latin America Fear China, Working Paper #531 (May 2005), Inter-AmericanDevelopment Bank, 5.9Ericsson to Chalk up US$5.1 Billion of New Investment in China,Peoples Daily, December 07, 2000,http://english.people.com.cn/english/200012/07/eng20001207_57177.html.


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Another interesting trend that can be seen is South-South investment flows. For example,

ASEAN-Chinese investments are at a net imbalance. ASEAN investments in China are many

times greater than Chinese investment in ASEAN.10 This is mainly contributed by the overseas

Chinese community in countries such as Thailand, Indonesia, Malaysia, and Singapore. The

question that arises here is whether these overseas Chinese communities still feel that they owe

their allegiance to China or to their country of citizenship or is it simply that China offers better

business opportunities. In Malaysia, this concern has also led to other concerns such as how the

rise of China would impact the socio-economic and ethnic balance in this multi-ethnic society.

The Malaysian deputy finance minister said in 1996 that it was Malaysias view that

overzealousness on the part of Malaysian businessmen of Chinese origin could have adverse

repercussions racially in their own country.11 Outside ASEAN, even countries like South Africa

- where ethnicity does not seem to be a factor that spurs investment - face a similar situation. In

late 2002, the ratio was $58 billion to $1.4 billion.12While South African firms such as mining

giant Anglo American and brewer SABMiller have led the charge in investing in China with

some $400 million, China has put only about $130 million into South Africa, mostly in one

chromium mine.13 This means that even citizens of other developing countries are investing a

lot in China at the expense of domestic development but China on the other hand is not

reciprocating.

However, it is important to note that although some complain that China is not investing

as much as it could overseas, China is definitely still a large investor overseas and its outward

FDI flows are expected to grow further.14 Chinese companies had set up 6,439 firms in 160

countries and are committed to investing 7.7 billion dollars in projects in trade, natural resources

exploration, transportation, labor services and agriculture.15 These investments are capable of

developing underdeveloped countries such as those in Sub-Saharan Africa and South Asia. The

growing investment of China together with the Russian Federation in the oil and gas sector of

Uzbekistan could provide a major impetus to economic growth in that country, which could

10 Sutter, 193.11 Ibid., 194.12 Ibid.13South Africa to seek balanced China links,Reuters, June 14 2006,http://asia.news.yahoo.com/060613/3/2lutn.html14 Adhikari & Yang15 Ibid.


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average 5.6 per cent annually in 2006-2007.16In Latin America, a focus on the Middle East and

a rigid U.S. foreign policy toward Latin America has left regional leaders with no option but to

look for other patrons.17 Latin America requires someone that can commit to the development

of infrastructure around this region but the United States does not seem to be able to commit to

this; therefore, this is where China comes in and plays a much better role than merely a

substitute. For example, China has shown great interest in improving railways, highways, ports,

and mountain passes for the Southern Cone.18 In other words, a long-term supporter for such

projects has been found. Even the United Nations Economic Commission for Latin America and

the Caribbean (CEPAL) has concluded that China has contributed to Latin Americas high

growth rate in recent years.19 The Chinese state, sitting comfortably on more than $1000 billion

of foreign exchange reserves, has the financial means to meet its promises to developing

countries.20 The China Development Bank, for instance, is the worlds largest development

institution by assets.21 This institution is not only looking inward to domestic investments and

growth such as financing the Three Gorges Dam but it has also begun to deploy some of its

capital abroad, particularly to help Chinese energy and mineral companies working in

developing countries.22

In addition, although the early years of Chinas open door policy has seen FDI inflow

into China grow rapidly compared to other developing countries especially its regional neighbors,

more recent data has shown that although China is getting the most FDIs compared to other

countries, the rate relative to the others is actually on a downward trend. By adapting data from

the Asian Development Bank for the years of 2002 to 2006, a downward spiral in the percentage

of investments going to China compared to other countries in Southeast Asia and East Asia can

16Economic and Social Survey of Asia and the Pacific 2006, United Nations Economic and Social Commission

for Asia and the Pacific, http://www.unescap.org/17Sam Logan & Ben Bain, Chinas Entrance into Latin America: A Cause for Worry?,International RelationsCenter Americas Program Investigative Article, August 24, 2005, http://americas.irc-online.org/am/389.18 Ibid.19

Jiang Shixue, China's Latin American Perspective,Latin Business Chronicle, August 9 2006,http://www.latinbusinesschronicle.com/app/article.aspx?id=10820Victor Mallet, Huntfor Resources in the Developing World, Special Report: China, Financial Times, December12 2006.21 Ibid.22 Ibid.


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-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2002 2003 2004 2005 2006

Year

P

ercentage

China

Hong Kong

South Korea

Malaysia

Philippines

SingaporeIndonesia

Vietnam

be seen. This data definitely bears a good sign to developing countries as a whole as it proves

that other countries are still very capable of attracting FDI although China is now in the game.

Table 1: Foreign Direct Investments (FDI) in East and Southeast Asian Countries (adapted from Asian Development

Outlook 2007: Growth Amid Change, Asian Development Bank, 2007)

2002 2003 2004 2005 2006

EAST ASIA US$ million% of TotalFDI US$ million

% of TotalFDI US$ million



% of TotalFDI

China 52,743 62.35% 53,505 57.84% 60,630 42.70% 72,406 46.70% 69,468 40.30%

Hong Kong 9,682 11.45% 13,653 14.76% 34,035 23.97% 33,627 21.69% 38,300 22.22%

South Korea 2,392 2.83% 3,526 3.81% 9,246 6.51% 6,309 4.07% 3,645 2.11%

Mongolia 173 0.20% 201 0.22% 236 0.17% 317 0.20% 367 0.21%

Taipei 1,445 1.71% 453 0.49% 1,898 1.34% 1,625 1.05% 7,445 4.32%

66,435 78.53% 71,338 77.12% 106,045 74.68% 114,284 73.71% 119,225 69.17%

SOUTHEAST

ASIA

Cambodia 139 0.16% 74 0.08% 121 0.09% 318 0.21% NA

Indonesia 145 0.17% -597 -0.65% 1,896 1.34% 8,336 5.38% 7,514 4.36%

Laos 415 0.49% 420 0.45% 450 0.32% 500 0.32% 650 0.38%

Malaysia 3,203 3.79% 2,473 2.67% 4,624 3.26% 3,967 2.56% 5,142 2.98%

Myanmar 191 0.23% 128 0.14% 688 0.48% 1,132 0.73% 1,600 0.93%

Philippines 1,542 1.82% 491 0.53% 688 0.48% 1,132 0.73% 1,600 0.93%

Singapore 7,338 8.67% 11,664 12.61% 19,827 13.96% 15,002 9.68% 24,208 14.04%

Thailand 3,164 3.74% 4,614 4.99% 5,786 4.07% 8,405 5.42% 8,337 4.84%

Vietnam 2,023 2.39% 1,894 2.05% 1,878 1.32% 1,972 1.27% 4,100 2.38%

18,160 21.47% 21,161 22.88% 35,958 25.32% 40,764 26.29% 53,151 30.83%

EAST & SE

ASIA 84,595 100.00% 92,499 100.00% 142,003 100.00% 155,048 100.00% 172,376 100.00%

Graph 1: Percentage of FDI Flows into Selected Asian Countries 2002-2006 (adapted from ADB Data)


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Flow of Goods and Services

While FDI keeps flowing into China due to cheap and abundant labor, China can produce

more than enough goods for domestic use and foreign consumption. Therefore, Chinese-made

products and Chinese manufacturers will be able to market their product overseas and definitely

to other developing countries too. In addition, the low Renminbi value in the exchange rate

markets makes Chinese goods even more desirable everywhere in the world. On the other hand,

with this low value, the Chinese people themselves will not look highly to foreign goods because

of its relatively more expensive price causing a huge current account surplus for China and on

the other hand, a huge current account deficit for other countries. Trade imbalances with China

are not only common with developed countries but also with developing countries. In the African

continent, countries such as South Africa are facing trade deficits with China as the Chinese are

not as open to manufactured products imports from Africa. In South East Asia, countries such as

Indonesia, Malaysia and Thailand are running bilateral trade deficit with China at the moment.23

This is a phenomenon that other developing countries feel threatened about. They fear that their

manufacturers will be outrun by their Chinese counterparts. For example, African business

groups complain about poor treatment by Chinese companies and competition from a flood of

low-cost imports.24

With the continuous flow of Chinese goods to other developing markets, there have been

instances in these markets where domestic industries have to lay off workers and to some extent

stop their production as they can no longer compete with these cheap Chinese goods and their

fellow laborers in China that is most cost efficient. Africans may be able to compete on the

basis of wage and production costs with German entrepreneurs, but definitely not with the folks

in Guangdong, Fujian and Hainan.25 Therefore, some African countries have borne the burden

of the Chinese rise in the global market. Young Burkinabes are languishing in

underemployment because their governments import substitution policies have been scuttled by

Chinas rise in the market.26 In South Africa, there is evidence that as many as 25000 local jobs

23 Adhikari & Yang24 China, Africa sign $1.9B US in trade deals,Associated Press, November 5 2006,http://www.cbc.ca/world/story/2006/11/05/china-africa.html

25Bright B. Simmons, China impacts Developing World, OhmyNews, June 10 2006,http://english.ohmynews.com/articleview/article_view.asp?menu=f10600&no=297688&rel_no=126 Ibid.


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have been lost in the industry as a result of cheap imports from China.27 In Mexico, the number

is even bigger - the maquilas, which are factories and assembly plants that import raw materials

and export the final product, have lost 254,000 jobs in the last three years.28 Today, the industrial

sector in Mexico is still complaining about the influx of Chinese goods into the Mexican

economy that is undermining the local economy. Mexico is one of the worst hit nations due to

the similar economic production Mexico and China has especially on textile. Products for these

two countries can substitute each other very easily and therefore, China wins because of its sheer

size and cheaper labor.

However, the rationale here is that although China is a big country, it is not big enough to

be competitive in everything. Therefore, China still requires goods from these other developing

countries. Not all developing countries are homogenous. As mentioned earlier, complementary

economies will benefit most from China. Some of these countries are more advanced than

others and most of them have different commodities and industries. Therefore, with Chinas

increasing production and increasing standard of living, other developing countries have the

potential to provide this rising dragon with the new goods that she requires. For Brazil, there has

been an eightfold increase in exports, mostly deriving from primary good exports such as soya

and iron ore to China during the past five years.29 This has been vital to Brazil as it stabilized its

economy and emerged from a near-meltdown in 2002.30 As can been seen in Graph 2, Brazil is

in the top 10 of Chinas main import partners, besides ASEAN as a whole. This definitely proves

the importance of China to these economies in terms of being a major trade partner.

Chinas expanding economy and increased standard of living creates lots of opportunities

for other developing countries to export their goods and services to. For example, although China

is the worlds largest rice producer, its rice production concentrates in the countrys south, where

low quality rice is dominant.31 Therefore, China imports higher quality rice from Thailand and

27South Africa: Engaging China, bilaterals.org., June 21 2006,http://www.bilaterals.org/article.php3?id_article=5083.28 Lora.29Brazil and China: Falling out of Love, The Economist print edition, Aug 4 2005,http://www.economist.com/world/la/displayStory.cfm?story_id=4249937.30Matt Moffett & Geraldo Samor, Brazil Regrets its China Affair: Asian imports overwhelm dreams of a lucrativepartnership, The Wall Street Journal, 12 October 2005, http://yaleglobal.yale.edu/display.article?id=636131 Ibid.


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Vietnam and this import will continue to increase as the Chinese income continues to grow.32

Chinas demand for some tropical and sub-tropical products is also likely to grow rapidly in the

long run.33 Palm oil, coconut oil, rubber, bananas, and sugar are among a wide range of products

that Southeast Asian developing countries can increase their exports especially to the north of

China.34 Besides rice, China also would import mineral products. China has limited mineral

resources in per capita terms; therefore, in recent years, mineral energy imports have increased

for China as China develops. In this case, oil-producing countries such as Algeria, Angola,

Ecuador, Indonesia, Iran, Iraq, Libya, Nigeria, Venezuela, Algeria, Mexico, Colombia, and

Sudan have the potential to export their mineral energy to China.35 As a country that has a huge

manufacturing industry, China would require raw materials and other intermediate goods to

manufacture the final product. China's huge appetite for raw materials indirectly benefits their

producers in the developing world by raising prices in the commodity markets.36

32 Ibid.33 Adhikari & Yang34 Ibid.35 Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Libya, Nigeria, and Venezuela are OPEC countries while Algeria,Mexico, Colombia, and Sudan are net oil exporters and considered Major Non-OPEC Countriesby the USDepartment of Energy.36 Simmons.

Graph 2: Chinas Top Import Partners in 2006. (Source: Starmass International)

USD in billion

Country


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In addition, as the Chinese people have a higher standard of living and a higher

disposable income, services sector in other developing countries such as tourism will receive a

boost. Chinese citizens are flocking popular destinations all over the world including developing

countries. China, with its 1.3 billion citizens has the potential of being a prime target for the

tourism industry of both developed and developing countries. The impact Chinese tourists can

make to an economy can be seen in a study done in Hong Kong - a study estimates that for every

2.7 jobs created in Hong Kong by inbound tourism from other countries, Chinese inbound

tourism creates 5 jobs because of the "multiplier effect" of the way Chinese tourists spend. 37

Pacific Islands such as Fiji and Vanuatu are applying to the China's National Tourism

Administration Committee for their countries to become approved holiday destinations for

Chinese citizens realizing that the Chinese market is a very lucrative market. In Malaysia, visa

regulations for Chinese visitors are being loosened in its move towards attracting more than one

million Chinese visitors annually.

Dependence on Primary Products

The other problem often cited as a threat to developing countries with Chinas rise in the

global economy is the increasing dependence on primary products exports by developing

countries. This problem is further exacerbated by the reluctance of China to import manufactured

products from other developing countries. Harry G. Broadman, a World Bank economic adviser

on Africa noted that Africa is under-trading manufactured goods with China, but over-trading

oil with China.38 A trade pattern in China's favor is taking shape: China is flooding Africa with

cheap manufactured goods while shipping back oil, timber, copper, diamonds and other raw

materials.39 In 2005, China imported 38.3 million tons of crude oil from Africa, accounting for

30% of its total oil imports. In the short term, yes, this is good for Africa; however, in the long

run the picture might not be so cheery. By looking at the trends of economic development, over

reliance on natural resources is not the best way to develop an economy. Over reliance on

primary products is very risky as it is very vulnerable to any shocks that would exist in nature or

in the market.

37Donald Greenless, The Subtle Power of Chinese Tourists,International Herald Tribune, October 6 2005,http://www.iht.com/articles/2005/10/06/business/tourism.php.38Scott Zhou, China as Africas Angel in White,Asia Times Online, November 3 2006,http://www.atimes.com/atimes/China_Business/HK03Cb04.html39 Ibid.


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The continuous deterioration of the terms of trade of developing countries placessevere constraints on their development efforts. Besides the permanent erosion ofthe purchasing power of their raw materials exports earnings, developingcountries are adversely affected by wide and continuous short-term fluctuation ofraw materials prices, mainly due to speculation, including sale of strategic

reserves by developed counties, lack of financial resources preventing developingcountries from maintaining their own national reserves, consumption boycotting,disorder in international markets, and by depressed raw materials price levels,which sometimes do not cover their production costs and which do not reflecttheir share in the final products values and are not remunerative to producers.40

Nevertheless, it has to be noted that at least for the mean time, the governments of these African

nations have a market to sell their primary goods to. In addition, with the oil prices at an all time

high currently, there will definitely be windfall revenue for net oil producing developing

countries (See Graph 3). This is a good thing. A finding by Jacques Delacroix in the American

Sociological Review in his investigation on whether raw materials dependency would have

adverse effect on the national economy was proven wrong by a scientific cross-national study.

Delacroix found that in the short run, wealth leads to wealth.41 Looking into history, Iceland

tripled in Gross National Product between 1955 and 1970; yet, in 1955, Icelands export

40Raw Materials, G77, http://www.g77.org/Docs/CPA-RM.html.41Jacques Delacroix, The Export of Raw Materials and Economic Growth: A Cross-National Study,AmericanSociological Review, Vol. 42, No. 5. (Oct.1977), 805.


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consisted of lightly processed or unprocessed fish to tune of 85%. 42 On the other hand,

Argentina, whose agricultural export was only 60% of total foodstuff, only doubled in GNP in

the same period.43 Therefore, as China develops economically and consequently lead to a thirst

for more foreign products, these rich in raw material countries will be able to expand their wealth.

Ensur ing Continuous Growth through Co-operation wi th China

In actuality, Chinas liberalization of its economy has benefited other developing

economies in someway or another. Mexico, who traditionally viewed China as a key contributor

to the countrys sub-par economic growth, due in large part to Chinas use of cheap labor to

outmaneuver Mexico in the U.S. exports market, is realizing the importance of China in the

global economy. Two years ago, President Vicente Fox and President Hu Jintao formulated a

Twenty Year Plan for the Future for the establishment of a permanent bilateral committee to

promote the development of improved relations.44 Mexico realizes what China can provide to

their economy and therefore do not want to lose out to the benefits of Chinas increasing wealth.

Other Latin American countries such as Argentina and Brazil had earlier strengthened their ties

with China. Nevertheless, there are criticisms on China from countries such as Argentina and

Brazil today as they still have not seen Chinas commitment to increasing investing materializing

their economy but there is still room to remain optimistic on Chinas promise to ensuring

development in Latin America. There is definitely tons of opportunities for development and

investment in Latin America today and China for sure does not want to give away that

opportunity to another party.

In Africa, Chinas rise in the global economy was embraced with less reluctance. Hu

Jintao promised $5 billion in soft loans and credits for Africa and spoke of doubling Chinese aid

to the continent by 2009.45 A country such as Sudan, which has been shunned by the Western

powers because of their non-conformity with international human rights standards, now has the

42 Ibid.43 Ibid.44Frederick W. Stakelbeck Jr., China and Mexico Bury the Hatchet,FrontPageMagazine.com,http://www.frontpagemag.com/Articles/Printable.asp?ID=19857.45 Mallet.


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support of China.46 As mentioned earlier, China is a great market to export their oil to and China

is actively investing in the development of Sudan today. Besides Sudan, African governments

generally maintain close ties with China because they realize that the partnership between China

and Africa would be an important partnership to further development in the African continent

and also Chinese interest internationally. In 2000, the China-Africa Cooperation Forum (CACF)

was jointly proposed and established by China and some African countries in 2000, on the basis

of equal negotiation, enhancing understanding, increasing consensus, strengthening friendship

and promoting cooperation to conform to the changing international situation, meet the

requirements of economic globalization and seek co-development through negotiation and

cooperation.47 On the 5th of November 2006, a declaration was adopted as a result of the Beijing

Summit proclaiming the establishment of a new type of strategic partnership between China and

Africa.48In this declaration, China reaffirms its support for the African countries in their efforts

to strengthen themselves through unity and independently resolve African problems, supports the

African regional and sub-regional organizations in their efforts to promote economic integration,

and supports the African countries in implementing the New Partnership for Africa's

Development programs.49

Back on the Asian continent, ASEAN and China have reached an agreement that will

lead to the creation of the worlds largest free trade zone of 2 billion people by 2010. 50 Through

the Agreement on Trading in Goods of the Framework Agreement on Comprehensive

Economic Cooperation between ASEAN and China, the establishment of a Free Trade Area

will be completed by 2015. ASEAN countries are actually well positioned to provide China with

competitive manufactured goods while others can become large suppliers of resource-based

commodities to China.51 However, time was given to these ASEAN countries to further improve

their government structure and government to ensure that there would not be an unfair playing

46

Due to this phenomenon too, China has been criticized for undermining IMF led structural adjustment programsand also for the disregard of human right violations of some African regimes.47Creation of the Forum, China Internet Information Center, December 10 2003,http://www.china.org.cn/english/features/China-Africa/82047.htm48China-Africa Beijing Summit Adopts Declaration,Xinhua News Agency, November 5 2006,http://www.china.org.cn/english/features/focac/187798.htm49 Ibid.50China, ASEAN to create trade bloc, World, CNN.com,November 29 2004,http://www.cnn.com/2004/WORLD/asiapcf/11/29/laos.asean/index.html.

51 Adhikari & Yang.


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field. The Free Trade Agreement with the Old ASEAN members which consist of Thailand,

Indonesia, Malaysia, Brunei, Singapore, and the Philippines will be effective in 2010 while the

Free Trade Agreement with other ASEAN members, the New ASEAN which consists of

Myanmar, Vietnam, Laos, and Cambodia will only be effective in 2015, giving time for these

countries to improve the structure of the government and to develop their domestic industries.

When this FTA is realized, it will consist of a combined population of nearly two billion which is

one third of the worlds population and gross domestic product of over $2 trillion.

Future Prospects

Chinas entrance into the global economy means that there is another formidable

competitor for all other economies. As Adam Smith said,

In every profession, the exertion of the greater part of those who exercise it, isalways in proportion to the necessity they are under of making that exertion... and,where competition is free, the rivalship of competitors, who are all endeavouringto justle one another out of employment, obliges every man to endeavour toexecute his work with a certain degree of exactness... Rivalship and emulationrender excellency, even in mean professions, an object of ambition, andfrequently occasion the very greatest exertions.52

This is also relevant on the global scale - healthy competition is good; healthy competition will

improve efficiency; and, improved efficiency will benefit everybody in the long run. As

mentioned earlier, ASEAN countries are losing FDIs to China - structural weaknesses in

ASEAN countries can be attributed for this loss of FDI. This weakness became obvious during

the 1997-98 Asian Financial Crisis that hit countries such as Thailand, Philippines, Indonesia,

and Malaysia. It is therefore not surprising that FDI inflows to China increased since the Asian

Crisis.53In addition, Chinas accession to the WTO 3 years after the crisis boosted Chinas

attractiveness to FDI as it would mean not only greater openness but also increased policy

transparency, better governance, and greater business predictability.54

Due to the competition posed by the Chinese economy, ASEAN leaders had no other

choice but to liberalize their government and improve the structure of their government. They no

52 Adam Smith, The Wealth of Nations, Book V, Chapter I, Part III, Article III. ed. Edwin Cannan, 5 th EditionLondon: Methuen and Co. Ltd., 1904.53 Sutter, 193.54 Ibid.


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longer could get away with their old ways and still attract investors there is another market to

invest in. As mentioned earlier, it was during this time that cases of corruption and other

weaknesses in the structures of the governments in South East Asia were revealed. In Malaysia,

this was the time when the anti-corruption campaigns were reignited to gain back the credibility

of the government. This was done to assure foreign investors that their investment would not go

into the wrong hand. This is an example of the governments of South East Asian nations

redoubled effort to attract foreign investors. In addition, under the advice of the International

Monetary Fund, South East Asian governments liberalized their economy.55 They also discussed

further liberalizing the investment opportunities in ASEAN and endeavored to establish special

economic zones along the lines of those in China. 56 Therefore, over time, the prospects for

developing countries are actually bright, but if and only if they improve on their structural

weaknesses and continue to have a friendly business environment.

Chinas WTO accession will boost her credibility as it would mean not only openness but

also increased transparency, better government, and predictability.57 This will attract even more

capital inflows and due to that, it will result in a stronger Renminbi. It is possible that the real

exchange rate of the Renminbi will appreciate (and the spot exchange rate too given that the

Chinese government does not try to control too much of the exchange rate regime) rather than

depreciate as one would predict from the impact of trade liberalization on Chinas current

account. 58 If the Renminbi appreciates, Chinese goods will be more expensive and other

developing countries may have more chances in competing with Chinese goods as there would

be stronger demand for goods and service from the rest of the world. For China, Chinese imports

would be cheaper and therefore will increase in demand, benefiting other countries.

In addition, recently, more and more FDI inflows to China are focusing on the service

sector and more technologically advanced industries. Even the government is committed towards

55 With the exception of Malaysia as Malaysia did not give in to pressures from the IMF. Malaysia took the oppositeroute and pegged their exchange rate to the US dollar, restricted the flow of the Ringgit overseas, and also closedoffshore stock trading centers.56 Sutter.57 Ibid.58 Ibid.


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opening up Chinas services sector in the next 5 years.59 In addition, if the focus on the services

sector continues, the competitiveness in Chinese manufactured exports will reduce, creating

more benefits for other developing countries. As China moves from low-value-added to a higher

value added industry, this should leave more room for low-income developing countries such as

South Asian countries and poorer ASEAN countries to expand their labor-intensive exports.60

Conclusion

In light of current evidence, it can be clearly discerned that Chinas involvement in the

global economy is not a loss to developing countries. It may look like some developing countries

such as Mexico loses and countries such as Sudan wins; but, in reality, China can benefit all

these countries in this liberal global economy. Therefore, today, there is a very integral need to

promote South-South cooperation in all fields to benefit peace and development all over the

world. The emergence of China might prove to be the solution to the North-South or more

contemporary, the Developed-Developing dilemma. However, there are some steps to be taken

domestically for other developing countries to take before being able to reap the benefits of trade

and cooperation with China. Developing countries will need to make strategic investment in

increasing their export capacity and in building their marketing network in China. Chinas rise

provides unprecedented market opportunities in addition to being another important competitor

in the market. This means that developing countries have to improve themselves to be able to

compete with China to reap the benefits of this order and this is not impossible. I remember

listening to the response of a Chinese advisor in the Permanent Mission of China to the United

Nations, when asked about how developing countries suffer because of China, he said other

developing countries have to work hard to achieve what China has achieved today as what China

has did in the past; they have to improve themselves for them to be successful!

59China official says China to further open service sector, AFX News Limited, May 19 2006, forbes.com,http://www.forbes.com/home/feeds/afx/2006/03/19/afx2605717.html60 But China has huge labor force and vast undeveloped regions in the west, which will continue to exert pressure onits foreign competitors in labor-intensive goods for some time to come. Adhikari & Yang.


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