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From SCDigest's On-Target E-Magazine

March 16 , 2011

Supply Chain News: When the History of the Early 21st Century is Written, Ascent of China Likely to Top the List, with Dramatic Impact on the Global Economy

Relentless Growth is Unprecedented; Pushing Some Developed Economies Back to Commodity Era?

SCDigest Editorial Staff

The astounding growth and role of China in just a decade or so is likely unprecedented in world history, and has had a dramatic effect on the global economy and world trade that has permanently altered the world's economic and political arenas.

China's rise has been strong and swift. Just 10 years ago, according to an article last week in the Wall Street Journal, China was not the largest trading partner for a single country in the so-called "Group of 20" developed economies. Today, it is the top trading partner for six of those 20 nations (Japan, South Korea, Australia, India, Russia and South Africa) and the top export market for a seventh (Brazil), and risen dramatically in importance for every other developed country as well.

SCDigest Says:

When someone writes the history of our time 50 or 100 years from now...It will be about how the world adjusted to the movement of the theater of history towards China.

Lawrence Summers.

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This rise in such a short time is staggering in historical terms, and has changed the face and direction of the world.

In the US, for example, Chinese imports have risen from about $100 billion in 2000 to $364 billion in 2010 - an increase of about 264% in just one decade. In 2010, the US had a trade deficit with China of $273 billion.

In the first two months of this year, China's total exports were up another 21% over 2010 levels (though some say the value of China's exports are overstated in government statistics by undervaluing components imported from developed economies to produce the finished goods). In the past 10 years, China's share of total world exports has grown from under 4% to almost 11%, a rate of export growth that is hard to imagine has ever been achieved before.

The Wall Street Journal quotes Lawrence Summers, Harvard university Professor and former high level government official under Presidents Clinton and Obama, as saying "When someone writes the history of our time 50 or 100 years from now...It will be about how the world adjusted to the movement of the theater of history towards China."

One change is especially profound: China's ascent is pushing some developed economies from a manufacturing focus to one increasingly based on raw materials (e.g., Australia, Canada). Chinese demand for oil and raw materials, for example, has led Brazil to begin construction on a massive new port North of Rio de Janeiro primarily being built to handle extremely large ships and tankers headed to China.

But is isn't only on the import side that China is roiling developed economies. China's potentially vast and rapidly growing market is an allure that most global corporations cannot resist - even in some cases at the price of giving away trade secrets. In 2010, for example, China told electric car makers from the US, Japan and Europe that in order to gain access the China's car market (the world's largest by unit volume) they would have to share their technology with Chinese companies (see Will Western and Japanese Car Makers Capitulate to Proposed Chinese Demand to Turn Over Electric Car Technology?). Japan's Nissan was among a few companies that said Yes nearly on the spot.

The opportunity is China's market can be compelling - and addicting. For example, Komatsu, the Japanese construction equipment giant, had just 2.3% of its sales in China ten years ago; today, the figure is almost 20%, a total that likely will go even higher. More ominous from a US-centric perspective: according to the WSJ, new Komatsu employees are now required to take a crash course on Chinese, instead of the English language classes they once took.

But there are downsides. Many countries welcomed a new trading partner in China to help balance what they perceived was an over-dependence on the US. But is China trade is now pushing some countries in directions they would rather not go.

For example, as the Brazilian economy matured, it planned to become more of a global force in manufacturing. Now, according to the WSJ, 80% of Brazil's exports to China are agricultural or mineral/oil products, while it imports an increasing percentage of the manufactured goods it consumes from its new largest trading partner. Brazil also complains, as do European countries and the US, that China is intentionally undervaluing its Yuan currency to the advantage of its export machine.

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In South Africa, the government there asked China in 2010 to voluntarily limit its textile imports into the country. China said No.

Though China's exports go primarily to developed markets, it is making increasing inroads into developing countries as well, causing them to have similar concerns as those in developed markets about their economies, jobs, and China dependence. The share of China's total exports going to developing countries has increased from 20% to 30% in the last decade, even as the total exports to developed countries skyrocketed.

All this, experts say, is a key factor in slow or non-existent wage growth in the US and other developed countries. While the prevailing wisdom is that trade with lower wage countries depresses jobs and wages in some sectors, in the past there are seen corresponding gains in others that on balance lead to a net plus from global trade.

But across the globe, that proverbial wisdom is starting to be challenged, as there seems something just different in the path China is carving.

Is China's ascendance the story of our era? Are countries smart to move back to commodity-focused economies? What, if anything, could or should be done? Let us know your thoughts at the Feedback button below.

Recent Feedback

2011-03-18

I would like to share a thought, based on how the Chinese do most of their business with foreign enterprises.

I believe that one of the prerequisites for investing in China is that; when you share your technical expertise with them so, they can branch out into other ventures with the knowledge that they gained from foreign companies. Obviously this adds a lot of value to their labour force which then becomes better equipped to perform their tasks elswhere, outside the organizations that provided the initial training sometimes at great expense.

This is a double wham, the Chinese get the investment and a high skilled labour force for allowing foreign firms to invest in their country, it`s a great philosophy, wouldn`t you say.

Now, why can`t the commodity based economies of this World do just about the same, get together and, trash out an agreement with the Chinese whereby, no raw materials will be exported to China, unless they invest in adding value to those commodities in their countries of origin, before being exported.

China`s economy will probably keep on growing for the next 15 to 20 years at this phenomenal average of about 10 to 12% annually.

My question now is; How will these commodity based economies, make the transition to an alternative sort of economy, when China`s economic growth reaches the zenith and comes down to a more reasonable economic growth of around 3 to 4% year on year???

Anibal Barbosa

Joy Global