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Industrialization in China and Its Effects on U.S. Economy

Introduction

In the last few decades, there has been a sort of economic revolution in Asia which has seen the rise of Asian Tigers which include China, Japan, Taiwan, India, and others. In the last decade these Asian Tigers have driven the world economy and their effects might be felt for a longer period. They have flooded the world market with cheap products and have created a stiff competition to the developed economies. According to Lardy (2002), there is fear among the developed nations that the growth of economy in Asia and especially in China is threatening their future role as world-leading economies. Already Japan has been dethroned by China as the World’s third-largest economy.

However, I can argue that this issue is a concern to the developing nations. I agree and disagree that the future of developed world like The United States as the leading world economies is threatened by the rise of industrialization in the Asian Tigers. In this paper I will compare the economic development of China and the The United States to see to bring out the picture of what is causing worries in these developed countries.

Overview of industrialization in China

According to Fong (2007), before 1979, China had kept a relatively low communism-driven economy and its economy had stagnated for most of the time. Like other communist economies of the time and in other countries, the government had kept the economy and all other drivers of the economy under its control. But then it amazed everybody how China was able to turn its economy from a communist economy to a free and the fastest growing economy in the world in a span of 28 years.

From the start of the growth of the economy in 1979 to 2005, China’s economy grew by an annual average growth rate of 9.7% as per the growth of the GDP and at the same time the economy increased by 11 – fold while the real GDP increased and grew over 8 – folds. This period saw China’s ranking in the world rise from position 27 in 1979 to 3rd in 2005. However, while this growth has been positively received in the world, scholars in China are still not convinced if China can maintain the same growth rate over the next years. They still estimate that it will take China 20 years to become an industrialized nation and 30 to 40 years to become a modern state.

China has a vast network of internal waterways which makes transportation cheap and close to many industrial sites. It has stable sources of power and the government is planning to turn China to one of the greatest world producers and user of nuclear energy.

According to the The United Nations report (2005), China has overtaken Japan as the 3rd world largest economy and its GDP as a share of the world GDP is currently standing at 16.3%. Foreign investment in China has reached over $72 billion in 2005 making China the largest destination of investors in the world. Currently China has the largest world mobile network with over 432 million mobile phone users.

It is said that China has been able to achieve this growth due to its policy of integrating physical and human capital input in the manufacturing process. According to Capgemini (2005), China has been able to grow this far due to accumulation of capital and improved productivity resulting from economic reforms.

However the rise of China as an industrial nation has had its effects on other countries of the world both developed and developing. It has seen China make numerous links with the developing nations which still have abundant mineral resources especially energy resources which China needs desperately to drive its industrial needs. China has been criticized by the world for fuelling killings in Darfur region of Sudan where it is claimed that China is supporting the government of Khartoum to fuel the killings in exchange for oil reserves. China has reached all countries in the developing world with a promise of economic assistance and loans in exchange for minerals.

This alone is one aspect of how China has created competition in the world and is seen to destabilize global industrialization in the near future. The developed and industrialized nations are starting to wake up to the realization that they are losing raw materials to China which has resulted in acquiring them through any means

Among regions of the world that have been affected by industrialization in China are the European countries. According to Galgoczi (2006), there has been much shift in industrial investment from the European countries to China and other developing Asian countries. Compared to European countries, China has one large advantage of having a large pool of cheap labor. This is one area that has made investors relocate to China. The effects have seen a great deal of de-industrialization in European countries.

It is to be understood that labor development in European countries has been more developed than in China with high wages paid in European countries than in China. With the liberalization of the market in China which spurred industrialization, many industries flocked to China attracted by the large open market and the cheap labor. The development of China as a free market meant there were more benefits in terms of services supporting industrial growth and also has the advantage of nearness to more markets. Overall, it resulted in cheap operations than which lowered the cost of production than in their mother countries. Many other industries in Europe scaled down their operation and started awarding contracts to industries based in China to manufacture on their behalf.

However, this has come with a price to most of these industries. It is reported that China is the source of 75% of all the world’s pirated goods. Due to the policy of mass production in China, the contracted industry produces in excess in order to have some to cover for any deficit in the order. With most companies making over 5% of the total order to cover for the anticipated production mistake, the rest is sold in the black market that is thriving in China. In the black market there are other companies that make pirated products for the same company and this has adverse effects on the name brand of the company.

The effects of China industrial development to the The United States

In the past years, China has grown to be one to the fastest growing destination of products from the The United States. In 2006, the export to China from The United States increased by 33% and consequently, China was ranked 4th among US export markets. The economic growth of China and its huge market coupled with the spreading wave of globalization seems to become the next major determinant of export trade in the The United States.

The rise of China has helped to raise the purchasing power of US citizens. It is to be reckoned that China produces most of the cheap products of the world and it has risen to be one of the leading exporters of finished goods to the US market. This has helped to restrain the inflation rate in the The United States and has helped US industries to shift to areas in which they are more competent. On the other hand, in the stock market, China has risen to be the second-largest purchaser of the US treasury securities which has given source of funds for the federal budget deficit and maintenance of low-interest rates.

However, these being just the comparative advantage to both countries, Adhikari and Yang (2002), argues that the rise of China has also turned to be seen as a threat to the stability of the United state economically and politically. One major area of concern is that with the industrial shift leaning more on China than the US, China may replace the US as the world’s largest economy and largest exporter which would have a decline effect on the American economy.

It is also feared that, the rise of China and the pool of cheap labor has it a threat to the industrial development in the the United states. This is witnessed by the wave of relocation that has started and the award of contracts to industries in China at the expense of US industries. This is seen as a possible cause of bankruptcy of many industries in the The United States could get worse if China starts producing products that offer direct competition with products from America. It is argued that America is feeling a wave of reprieve now since China is engaged in production of cheap products which does not compete with those produced in the The United States.

China has also been accused by the The United States of using unfair trade practices in order to gain advantage to the The United States product. China has flooded the US market with cheap products including auto products which have started making it difficult for The United States industry to compete effectively with products from China. This can be evidenced by the growing imbalance in trade between China and the The United States.

Trade between the two countries has risen to $343 billion in 2006 with a trade deficit amounting to $232 billion in the same year. China is being accused of using unfair practices such as undervaluing its currency and giving subsidies on domestic produces as policies that are threatening the trade between the two countries. China has also been accused of unfairly acquiring the US treasury security which helps it to acquire most of important industries in the The United States. The rise of industrialization China has also led to strained economic needs of the world. This has led to rise in price of oil and coal which are the main sources of energy for most industries of the world.

Chinese authority has also not regulated its market and this has given rise to many pirated products from China. This has been due to reluctance of the Chinese government to enforce any copyright law. The rise of pirated products in China has been a threat to many industries in the world.

The question in mind of many of scholars and other industrial players is whether China remains a threat or a trade partner with America. With the understanding of above analysis on the trade relations between America and China, the importance of China to the the United state cannot be ignored. With Chinese businesses holding a large equity of the The United States securities, the fall of China economy can only mean disaster to the country’s economy. It has been argued that, it is either The United States embrace China as a friend, and experience economic growth and low-interest rate, or takes China as an enemy and faces the wrath of rising inflation rates and high-priced consumer products.

The fall of China can have its positive aspects since America will go back to the top as the leading country hunting for raw materials all over the world. But can these positive aspects of bulky raw material drive the American economy to a class of that of China? This is a question worth arguing. The World Bank has estimated that if the growth rate of China’s economy slows down by 2 percent, more than 60 percent of China’s bank loans would be non-performing which could have devastating effects on the world economy.

The savings that finance US deficit would be cut which would see rising rates of interest and consumer good prices. The problem that is complicating the industrial situation of China and which has refrained many countries from reacting to cheap imports that are flooding their countries market from China is because every body is affected directly or indirectly by the industrial development of China.

China has been recognized as a developing country that is embracing innovation and development. The collapse of China would have devastating results on the state of world industries since most of them currently are contracting Chinese industries to manufacture for them using their own industry. It amazes everybody how China is able to produce such cheap products and what technology do they use. It has been argued that Chinese industry has embraced innovation and it application in the manufacturing process which makes it a major player in the world technology. The fall of China can then have devastating results to the world industrial state.

Hence we can say that regardless of the worries of the future of the economy of China, the industrial state of China affects not only the The United States but also the whole world in general. However it helps us to understand the situation we are in as The United States and gauges the vulnerability of our economy as compared to that of China. Having understood the effects of possible effects the collapse of China economy will have on the the United state, let us not look at whether there is any possibility that China will overcome the unite state as the world’s largest market.

Will China overtake the the United state as the leading world economy?

Going by the statistics, there is a possibility that the the United state has reason to worry about the future of China taking the position of the world largest economy. The Global Insight Projections have shown that China is expected to achieve an economic growth of an average of 7.1% in the next 20 years. In the same period, it is estimated that the the United state will achieve a growth averaging 3.0%. To go by the statistics China may overtake the The United States as the leading and the world largest economy by the 2013. It further projects that the economy of China will be 59% higher than that of The United States by the year 2025.

However the living standard of the Chinese population may remain far below that of the The United States due to the aspect of per capita income. China has a population 4.4 times bigger than that of The United States which lowers its per capita income. But it is argued that with the birth control measures put in place by the government, by 2025, the population could have gone down and hence its per capita income will have greatly increased.

From this table it can be seen that although the economy of China is expected to grow its per capita income will be expected to remain low. Economists have tried to argue that the well-being of a nation should not be measured using the GDP but rather the per capita income. Countries in the world with the largest per capita income like Norway, Switzerland, and others are hardly known on the global economy circle.

Hence the world should start moving towards creating economies that serve the citizens of a country and not the country itself. Frankel and Romer (1999), argue that the most helpful economic growth of a country is when the per capita income is high since this will stir trade between individuals in a country rather than trade between nations. This creates the confidence to the the United state that even though China takes the mantle as the leading world economy it still has so many hurdles to reach the status of the The United States.

We have seen from the projections that China may actually overtake The United States as the leading economy of the world. But we should look into consideration other factors that will enable or hinder that growth. According to Leaner and Levinsohn (1995), the growth the economy of a nation is dependant on foreign direct investment (FDI) and the direct investments by the citizens and the government.

It is good to understand that the economy of China has been fueled by growing number of foreign direct investments. A large proportion of investment and industries fueling the economic growth of China is state-owned parastatals. It has been revealed that majority of this state-owned corporation is underperforming and has been maintained by public money. This is one risk that the government of China continues to undertake. It is estimated that if the Chinese government does not act on disposing of this corporation (which means embracing capitalism), they may drain the economy soon. For economic development of nation, there must be enabling environment for investment both from the public and from the government. However compared to The United States, China experiences more public unrests based on issues of governance and corruption.

It is reported that in 2005, there was more than 87000 public unrest compare to 53000 in 2003. This indicated a rising case of public unrest. This is a threat to political stability of a nation which can easily turn to threatened economic development of China. It is argued lack of democracy in China will be one of the hindrances of growth in the near future. People are expected to become more conscious of their rights and they will exert more pressure on the authority which is expected to have negative effects on the rate of industrialization.

The situation in China and in the The United States ties when it comes to the issue of pollution. Apparently it has been argued that The United States has refused to ratify the Kyoto protocol fearing the competition from China incase it cuts industrialization output. The situation in China is the same. With the expected pressure from the world for industrialized countries to act on Kyoto protocol, it is estimated that the economies of these countries will slow down.

Another factor that is expected to slow down the economic development of China will be lack of laws in the country. Already it has damaged the image of China in the world due to many counterfeit and substandard goods that are flooding the world from China. Lack of patent laws and lack of industrial regulations are some of the factors that are expected to complicate the situation further and are expected to slow down the rate of economic growth unless the government acts immediately.

After analyzing the above, it can be said that it is true China is a threat to the The United States as the future world largest economy. However we have also seen the hurdles that China is facing in establishing itself as an efficient industrialized nation. It is has some years before being at par with THE U.S. economically.

References

Adhuikari, R. and Yang, Y. (2002): What will WTO Membership mean for China and its trading partners? Finance Development Magazine. Web.

Capgemini, M. L. (2005): The growth of China. World Wealth Report, P. 29.

Fong, H. D. (2007): The post-war industrialization of China. Pacific Affairs, Vol. 15(4): 497-499.

Frankel, J. and Romer, D. (1999): Does Trade Cause Growth? A National Bureau of Economic Research Working Paper No. 5476.

Galgoczi, B. (2006): Relocation of Production in Europe- Challenges for the European Trade Unions. EIAS Conference, Brussels.

Global Insight Projections. (2006). Interim Forecast. EIU Country Data report.

Lardy, R. N. (2002): Integrating China into the Global Economy. Washington: Brookings Institution Press.

Leamer, E. E. and Levinsohn, J. (1995): International Trade Theory: The Evidence. The Handbook of International Economics, Vol. 3; Amsterdam, Holland.

Untied Nations Conference on Trade and Developments. World Development Report 2005.