Tay 0 EVALUATING THE CHINESE THREAT TO THE ECONOMIES OF THE DEVELOPING WORLD THROUGH THE LIBERAL PERSPECTIVE Ian

Tay

Table of Contents Page Introduction Conceptual Approach Earlier Discussions of the China Issue China: Threat or Opportunity? Foreign Direct Investment Flow of Goods and Services Dependency on Primary Products Ensuring Continuous Growth through Co-operation with China Future Prospects Conclusion References 5-9 9-12 12-13 14-16 16-18 18 18-21 1 1-3 3-5

Figures Table 1: Foreign Direct Investments (FDI) in East and Southeast Asian Countries Graph 1: Percentage of FDI Flows into Selected Asian Countries 2002-2006 Graph 2: Chinas Top Import Partners in 2006 Graph 3: Spot Price for Brent Crude Oil 8 8 11 13

Tay 1 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 market is 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

Tay 2 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-

See Appendix 1

Tay 3 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
2

G. John Ikenberry, The Rise of China and the Future of the West, Foreign Affairs Journal, January/Febru ary 2008.

Tay 4 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

Ramesh Adhikari & Yongzheng Yang, Chinas Increasing Openness: Threat or Opportunity? Asian Development Bank, www.adb.org/Documents/Events/2002/Trade_Policy/PRCIO_paper.pdf 4 Ibid.

Tay 5 Nations (ASEAN) countries as an example, developing countries in Africa, Latin America, and the Caribbean will also be looked at.

China: Threat or Opportunity? 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.7 With 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

Eddie Leung, Southeast Asia-China: Threats, Opportunities, Asia Times Online, August 2 2003, http://www.atimes.com/atimes/China/EH02Ad01.html 6 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-American Development Bank, 5. 9 Ericsson 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.

Tay 6 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.12 While 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 11

Sutter, 193. Ibid., 194. 12 Ibid. 13 South Africa to seek balanced China links, Reuters, June 14 2006, http://asia.news.yahoo.com/060613/3/2lutn.html 14 Adhikari & Yang 15 Ibid.

Tay 7 average 5.6 per cent annually in 2006-2007.16 In 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

16

Economic and Social Survey of Asia and the Pacific 2006, United Nations Economic and Social Commission for Asia and the Pacific, http://www.unescap.org/ 17 Sam Logan & Ben Bain, Chinas Entrance into Latin America: A Cause for Worry?, International Relations Center 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=108 20 Victor Mallet, Hunt for Resources in the Developing World, Special Report: China, Financial Times, December 12 2006. 21 Ibid. 22 Ibid.

Tay 8 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
EAST ASIA US$ million % of Total FDI

2003
US$ million % of Total FDI

2004
US$ million % of Total FDI

2005
US$ million % of Total FDI

2006
US$ million % of Total FDI

China Hong Kong South Korea Mongolia Taipei

52,743 9,682 2,392 173 1,445 66,435

62.35% 11.45% 2.83% 0.20% 1.71% 78.53%

53,505 13,653 3,526 201 453 71,338

57.84% 14.76% 3.81% 0.22% 0.49% 77.12%

60,630 34,035 9,246 236 1,898 106,045

42.70% 23.97% 6.51% 0.17% 1.34% 74.68%

72,406 33,627 6,309 317 1,625 114,284

46.70% 21.69% 4.07% 0.20% 1.05% 73.71%

69,468 38,300 3,645 367 7,445 119,225

40.30% 22.22% 2.11% 0.21% 4.32% 69.17%

SOUTHEAST ASIA Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam EAST & SE ASIA 139 145 415 3,203 191 1,542 7,338 3,164 2,023 18,160 84,595 0.16% 0.17% 0.49% 3.79% 0.23% 1.82% 8.67% 3.74% 2.39% 21.47% 100.00% 74 -597 420 2,473 128 491 11,664 4,614 1,894 21,161 92,499 0.08% -0.65% 0.45% 2.67% 0.14% 0.53% 12.61% 4.99% 2.05% 22.88% 100.00% 121 1,896 450 4,624 688 688 19,827 5,786 1,878 35,958 142,003 0.09% 1.34% 0.32% 3.26% 0.48% 0.48% 13.96% 4.07% 1.32% 25.32% 100.00% 318 8,336 500 3,967 1,132 1,132 15,002 8,405 1,972 40,764 155,048 0.21% 5.38% 0.32% 2.56% 0.73% 0.73% 9.68% 5.42% 1.27% 26.29% 100.00% NA 7,514 650 5,142 1,600 1,600 24,208 8,337 4,100 53,151 172,376 4.36% 0.38% 2.98% 0.93% 0.93% 14.04% 4.84% 2.38% 30.83% 100.00%

Graph 1: Percentage of FDI Flows into Selected Asian Countries 2002-2006 (adapted from ADB Data)
70.00% 60.00% 50.00% China Hong Kong South Korea Malaysia Philippines Singapore Indonesia Vietnam 2002 2003 2004 Year 2005 2006

Percentage

40.00% 30.00% 20.00% 10.00% 0.00% -10.00%

Tay 9 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 24

Adhikari & Yang 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 25 Bright B. Simmons, China impacts Developing World, OhmyNews, June 10 2006, http://english.ohmynews.com/articleview/article_view.asp?menu=f10600&no=297688&rel_no=1 26 Ibid.

Tay 10 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
27

South Africa: Engaging China, bilaterals.org., June 21 2006, http://www.bilaterals.org/article.php3?id_article=5083. 28 Lora. 29 Brazil and China: Falling out of Love, The Economist print edition, Aug 4 2005, http://www.economist.com/world/la/displayStory.cfm?story_id=4249937. 30 Matt Moffett & Geraldo Samor, Brazil Regrets its China Affair: Asian imports overwhelm dreams of a lucrative partnership, The Wall Street Journal, 12 October 2005, http://yaleglobal.yale.edu/display.article?id=6361 31 Ibid.

Tay 11 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

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

USD in billion

Country

32 33

Ibid. Adhikari & Yang 34 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 Countries by the US Department of Energy. 36 Simmons.

Tay 12 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.
37

Donald Greenless, The Subtle Power of Chinese Tourists, International Herald Tribune, October 6 2005, http://www.iht.com/articles/2005/10/06/business/tourism.php. 38 Scott Zhou, China as Africas Angel in White, Asia Times Online, November 3 2006, http://www.atimes.com/atimes/China_Business/HK03Cb04.html 39 Ibid.

Tay 13 The continuous deterioration of the terms of trade of developing countries places severe constraints on their development efforts. Besides the permanent erosion of the purchasing power of their raw materials exports earnings, developing countries are adversely affected by wide and continuous short-term fluctuation of raw materials prices, mainly due to speculation, including sale of strategic reserves by developed counties, lack of financial resources preventing developing countries 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 reflect their 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

40 41

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

Tay 14 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.

Ensuring Continuous Growth through Co-operation with 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 43

Ibid. Ibid. 44 Frederick W. Stakelbeck Jr., China and Mexico Bury the Hatchet, FrontPageMagazine.com, http://www.frontpagemag.com/Articles/Printable.asp?ID=19857. 45 Mallet.

Tay 15 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.48 In 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 programs and also for the disregard of human right violations of some African regimes. 47 Creation of the Forum, China Internet Information Center, December 10 2003, http://www.china.org.cn/english/features/China-Africa/82047.htm 48 China-Africa Beijing Summit Adopts Declaration, Xinhua News Agency, November 5 2006, http://www.china.org.cn/english/features/focac/187798.htm 49 Ibid. 50 China, 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.

Tay 16 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, is always in proportion to the necessity they are under of making that exertion... and, where competition is free, the rivalship of competitors, who are all endeavouring to justle one another out of employment, obliges every man to endeavour to execute his work with a certain degree of exactness... Rivalship and emulation render excellency, even in mean professions, an object of ambition, and frequently 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. 53 In 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, 5th Edition London: Methuen and Co. Ltd., 1904. 53 Sutter, 193. 54 Ibid.

Tay 17 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 opposite route and pegged their exchange rate to the US dollar, restricted the flow of the Ringgit overseas, and also closed offshore stock trading centers. 56 Sutter. 57 Ibid. 58 Ibid.

Tay 18 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!

59

China 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.html 60 But China has huge labor force and vast undeveloped regions in the west, which will continue to exert pressure on its foreign competitors in labor-intensive goods for some time to come. Adhikari & Yang.

Tay 19 References Adhikari, Ramesh & Yongzheng Yang, Chinas Increasing Openness: Threat or Opportunity? Asian Development Bank. www.adb.org/Documents/Events/2002/Trade_Policy/PRCIO_paper.pdf

Asian Development Outlook 2007: Growth Amid Change, Asian Development Bank, 2007 Brazil and China: Falling out of Love. The Economist print edition. Aug 4 2005. http://www.economist.com/world/la/displayStory.cfm?story_id=4249937 China-Africa Beijing Summit Adopts Declaration. Xinhua News Agency, November 5 2006, http://www.china.org.cn/english/features/focac/187798.htm China, ASEAN to create trade bloc. World. CNN.com. November 29 2004. http://www.cnn.com/2004/WORLD/asiapcf/11/29/laos.asean/index.html. China 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.html. 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 Creation of the Forum. China Internet Information Center. December 10 2003. http://www.china.org.cn/english/features/China-Africa/82047.htm. Delacroix, Jacques. The Export of Raw Materials and Economic Growth: A Cross-National Study. American Sociological Review. Vol. 42, No. 5. (Oct.1977). 805. Economic and Social Survey of Asia and the Pacific 2006. United Nations Economic and Social Commission for Asia and the Pacific. http://www.unescap.org/.

Tay 20 Ericsson 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. Financial Flows to Developing Countries: Recent Trends and Near-Term Prospects. Global Development Finance 2005. Greenless, Donald. The Subtle Power of Chinese Tourists. International Herald Tribune. October 6 2005. http://www.iht.com/articles/2005/10/06/business/tourism.php. Ikenberry, G. John Ikenberry. The Rise of China and the Future of the West. Foreign Affairs Journal, January/February 2008. Leung, Eddie. Southeast Asia-China: Threats, Opportunities. Asia Times Online. August 2 2003. http://www.atimes.com/atimes/China/EH02Ad01.html Logan, Sam. Chinas Entrance into Latin America: A Cause for Worry?. International Relations Center Americas Program Investigative Article. August 24 2005. http://americas.irc-online.org/am/389. Lora, Eduardo. Should Latin America Fear China. Working Paper #531 (May 2005). InterAmerican Development Bank. Major Non-OPEN Countries Oil Revenue. Energy Information Administration. US Department of Energy. http://www.eia.doe.gov/cabs/opecnon.html Mallet, Victor. Hunt for Resources in the Developing World. Special Report: China. Financial Times. December 12 2006. Moffett, Matt & Geraldo Samor. Brazil Regrets its China Affair: Asian imports overwhelm dreams of a lucrative partnership. The Wall Street Journal. 12 October 2005. http://yaleglobal.yale.edu/display.article?id=6361

Tay 21

Raw Materials. G77, http://www.g77.org/Docs/CPA-RM.html. Shixue, Jiang. China's Latin American Perspective. Latin Business Chronicle. August 9 2006. http://www.latinbusinesschronicle.com/app/article.aspx?id=108 Simmons, Bright B.. China impacts Developing World. OhmyNews. June 10 2006. http://english.ohmynews.com/articleview/article_view.asp?menu=f10600&no=297688&r el_no=1 Smith, Adam. The Weath of Nations. ed Edwin Cannan. 5th Edition London: Methuen and Co. Ltd., 1904. South Africa to seek balanced China links. Reuters. June 14 2006. http://asia.news.yahoo.com/060613/3/2lutn.html South Africa: Engaging China. bilaterals.org. June 21 2006. http://www.bilaterals.org/article.php3?id_article=5083. Stakelbeck Jr., Frederick W. China and Mexico Bury the Hatchet. FrontPageMagazine.com. http://www.frontpagemag.com/Articles/Printable.asp?ID=19857.

Starmass International. China Imports by Main Countries. http://www.starmass.com/en/china_import_countries.htm Sutter, Robert G.. Chapter 7: China-Southeast Asia Relations. Chinas Rise in Asia: Promises and Perils (USA: Rowman & Littlefield Publishers, 2005). Zhou, Scott. China as Africas Angel in White. Asia Times Online. November 3 2006. http://www.atimes.com/atimes/China_Business/HK03Cb04.html