What are the forces behind China’s growth, now and in the future? There are three, what many call the primary drivers of economic growth: Exporting, foreign direct investment, and domestic market consumption. Of these, trade and investment are the most important at present.
China has built its economy on exports, much as otherAsian tigers or dragons did before it, relying on its mammoth quantities of labor to make it the low-cost leader. Next in importance comes foreign direct investment (FDI). A well-known relationship in international trade is that foreign direct investment usually follows exports and, by this logic, based on the huge amount of FDI coming from the US, a lot of products should have been imported into China from there, too. The theory goes that a company in the United States starts exporting its products to China and eventually decides it would be easier to just make a factory in China and sell directly in the local market, thereby avoiding all the hassle of shipping, customs duties, and so on. In China, though, it may be said that few companies ever succeeded in exporting to China that didn’t set up a major investment of some kind in the country first, rather than later. There are three main reasons why this relationship is the opposite of what we might expect according to standard trade theory.
China has built its economy on exports, much as otherAsian tigers or dragons did before it, relying on its mammoth quantities of labor to make it the low-cost leader. Next in importance comes foreign direct investment (FDI). A well-known relationship in international trade is that foreign direct investment usually follows exports and, by this logic, based on the huge amount of FDI coming from the US, a lot of products should have been imported into China from there, too. The theory goes that a company in the United States starts exporting its products to China and eventually decides it would be easier to just make a factory in China and sell directly in the local market, thereby avoiding all the hassle of shipping, customs duties, and so on. In China, though, it may be said that few companies ever succeeded in exporting to China that didn’t set up a major investment of some kind in the country first, rather than later. There are three main reasons why this relationship is the opposite of what we might expect according to standard trade theory.
First, products built abroad and sold in China as is would probably not be entirely suitable for the Chinese market, and too expensive for much of the population, whose per capita income is far below that of the US even though China’s economy is the fourth largest in the world after the US, Japan and Germany (if PPP (purchasing power parity) is taken into account, China has the second strongest economy in the world today).
Second, it is a rare product that could not be found in China already, or readily copied and sold at a much lower price than the authentic item.
Third, prior to China’s becoming part of theWTO in 2001, many of China’s markets had high tariff and non-tariff barriers to overcome. So, as a result, a foreign company wanting to sell its products to China would usually be better off setting up a company, factory or assembly facility there and importing things for its own use, finishing them in China and then selling them domestically or, often, just re-exporting them.
Second, it is a rare product that could not be found in China already, or readily copied and sold at a much lower price than the authentic item.
Third, prior to China’s becoming part of theWTO in 2001, many of China’s markets had high tariff and non-tariff barriers to overcome. So, as a result, a foreign company wanting to sell its products to China would usually be better off setting up a company, factory or assembly facility there and importing things for its own use, finishing them in China and then selling them domestically or, often, just re-exporting them.
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