China vs. the West, Essay Example

According to one source, the BRIC countries should be named the CIRB countries, because that would show the relative size of their economies, from largest to smallest (Economy Watch, 2010). It’s an interesting idea, if only because CIRB is dyslexically close to CRIB, and the four economies are relative infants on the stage of developed nations. Even China, the first in economic power among them, is just getting started to take on the U.S. and Europe.

China’s two biggest competitors are seen to be America and Europe. But those two are not at all the same, and so the questions asked about them in relation to China will often have two different sets of answers. After all, American and Europe compete with each other, as well as with China. And of course there is often three-way competition for the trade of other nations. So to address the issue of how China is challenging the economic hegemony of the U.S. and Europe, and what advantages and disadvantages it has in competing in global trade, I will have to generalize a good deal. First, as I indicated above, China isn’t quite the powerhouse it is often touted up as being in the popular press. By some objective measurements, it is much smaller.

So right away, one advantage China has against both America and Europe is simply that it has a lot of growth left in its development arc. What that means, in its most basic terms, is that China is still remarkably poor, particularly in its rural areas. And that means people will still work for far less money than they will in the U.S. and Europe. Labor costs are so low that they can underprice American and European goods even after factoring in transportation costs. There is some historical irony in this, a matter occasionally discussed by economists and journalists.

When America was itself in its economic infancy during the 19^th century, its urban citizens demanded and got tariffs to protect their domestic manufacturers from cheaper, better-quality goods made in Europe. Some historians argue that it was American’s domestic tariff-policy that eventually caused the Civil War (1861–1865), and that slavery, for all its emotional freight, was a secondary issue. And now again, there are calls for tariffs. Only this time, the economy we need protection from is smaller than ours, not bigger and more advanced.

Another advantage much spoken of is China’s ability to control its currency, the yuan (also known as the Renminbi or RMB). Just like the old Soviet Union used to do, the Chinese government doesn’t allow its currency to be freely traded. That prevents markets from bidding up its value, either as speculation or through sheer demand for the currency for trade purposes. This has allowed the Chinese to “undervalue” its currency — placed a book value on it cheaper than world-wide markets would. And this helps to keep its rate of international trade high because its goods are kept cheap in relation to, say, the dollar or the euro (Keating, 2011). Western critics say that because China exports more and imports less, this keeps its balance-of-payments unfairly on the plus side. But China does “import” money: dollars and euros, which it in turn uses to buy interest-paying American and European bonds, a fact that all three governments like and indeed depend on. However, the fate of the Euro is uncertain. It is known that China was growing increasingly uncomfortable with the U.S. debt-levels and what that portended for the value of the dollar. Some economists projected that the Chinese would substantially increase their foreign-exchange holdings of the euro. That may not happen after all.

A third advantage that China has is that its government, being a kind of hybrid communist/capitalist one, can favor certain industries with subsidies. Of course, all governments do that, especially the U.S. and Europe. But China can target certain industries as a result of an explicit industrial policy far more than Western governments can. This has led to charges of “dumping” of products on Western markets, products that are artificially cheap twice — from currency manipulation and from subsidized prices. The latest example of this, which has led to calls for still more tariffs, is the case of solar panels. China’s policy led to the bankruptcy of Solyndra, an American manufacturer of solar panels that had itself been the recipient of favorable tax policies by the U.S. government. This case provides a kind of capsule lesson in a Chinese trade-policy advantage: it effectively outsubsidized Solyndra because it could.

China’s low labor cost and currency control might be thought of as strategic advantages. There is another factor that might be thought of as tactical. And that is China’s relative lack of the rule of law. By rule of law, I mean something specific: its lack of a clear tradition of private property. China has been a communist country since the 1950s, when it began to collectivize its agriculture. Then there were movements like the Great Leap Forward, which obliterated civil rights through terrorism and famine. This actually provides a tactical advantage in that China can do things in the short run that give it short-term advantages: it can break its own laws. An example is China’s ongoing state tolerance and tacit support of pirate software and copyright violations, as well as its tolerance of tax evasion and unlicensed merchants, a system known to economists as System D (Neuwirth, 2011). Although the U.S. and Europe have their own powerful System D economies, China’s is much larger as a percentage of its overall size, and its use of System D gives it a trade advantage not only with BRI, but with the rest of the undeveloped and developing world, especially Africa. It can try to increase or decrease System D activity to suit the political winds. However, this has another side, one that might be thought of either as a strategic advantage or disadvantage: as China increases its international trade, it encounters governments and private companies that do have a rule of law and a strong sense of private property, civil rights, and transparent accounting practices. Ultimately, if China is to increase such trade, it will have to decide which way it will go: abide by its partner’s business culture, and watch it wick its way into China’s own policies; or turn its back on the world, and turn inward again, back to Tiananmen Square, as it has so often throughout its history.

References

Economy Watch. (2010, June). The BRIC Countries: Brazil, Russia, India, China. Retrieved from: http://www.china-briefing.com/news/category/ business/economy-politics

Keating, R. (2011). China, the U.S., Politics, and the Exchange Rate. The Colorado Springs Business Journal.

Neuwirth, R. (2011). Stealth of Nations: The Global Rise of the Informal Economy. New York, NY: Random House.