• UGI USER
  • Aug 28, 2024
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GLOBAL RESPONSE TO ADDRESS THE ISSUE OF CHINA’S RENEWED EXPORT SURGE

Syllabus:

GS-2: International Relations, Effects of policies and Politics of Countries on India’s Interest

Focus:

Chinese exports have increased significantly in the recent past and products such as electric vehicles and semiconductors, are being seen as the second ‘China shock’ in global trade. This has however resulted in the rising of protectionism across the globe, emphasizing the importance on international cooperation and co-ordination in dealing with balance of trade and economic stability.

Source:theeconomictimes

The Birth of the Second China Shock

  • Renewed Export Surge: This is said to have been caused by a new shock known as the second china shock, apparently resulting from China’s recent quarters boost in its exports.
  • Diverse Export Portfolio: Contrary to the first wave of exports, China exports advanced products such as EVs, Semiconductors, Lithium batteries & photovoltaic cells.
  • Impact on Global Markets: This has expanded not only the low-end industries, but also high-technology exports the country’s economic power in the world economy.
  • Comparison with the First China Shock: The first China shock in the early 2000s was based on low wages and an undervalued currency hence leading to a pinnacle of China’s current account balance.
  • Long-Term Consequences: The first was over US’s premature deindustrialization that raised concerns over the same for other developing countries with China’s drastic economic shift viewed as influential.
Understanding the China Trade Shock:

  • Impact on Employment: Forces contributing to degradation of job prospects in USA included increase in exports from China, which cut manufacturing employment in the United States by 550,000 to 2. 4 million as a result of terrorist activities recorded between the year 2000 and year 2007.
  • Global Effects: Comparable employment reduction was experienced in Norway, Spain and Germany.
  • Local Labour Markets: In the U. S. regions that were competing with Chinese industries , the levels of unemployment rose and labour force participation dropped as well as wages were also reduced.
  • Welfare Gains: A 2023 survey also found net positive welfare externalities for both U.S and China , but the impacts of trade shocks are more complex.
  • End of Shock: The first oil exporter pipeline consumer goods trade shock was largely over by 2006-2007; capital goods effects continued well into 2012 to present in some utilities.

What is China+1 Strategy?

  • Definition: China+1 plan means expanding manufacturing or supply network across countries other than China in order to avoid high risk association with a single country like China.
  • China’s Dominance: For many years, China has been the supply chains’ king and referred to as the world’s factory due to cheap costs of production and viable business.
  • Shift in the 1990s: Leading auto makers of America and Europe relocated operations in the 1990s to China because of cheap labour and large domestic market.
  • Pandemic Disruptions: There were disruptions due to Covid-19 and China’s strict zero Covid policy led to industrial shut downs, unfair competition, and constrained supply chain and constraints of supply of containers.
  • Evolution of Strategy: In return, the global companies have opted for what is referred to as the China + 1 strategy; wherein they sought other manufacturing destinations in countries such as India, Vietnam, Thailand, Bangladesh, and Malaysia.

Reasons for China’s renewed export drive :

  • Failure of Domestic Demand Strategy: Analysing the Chinese experience with the change in the primary growth source from exports to domestic demand, it can be stated that it has not solved the problems.
  • Construction Boom and Bust: The obsession with construction as a way of increasing domestic demand resulted to a bursting of the housing market further straining the economy.
  • Strategic Resilience and Export Dependence: Chinese leadership expected overdependence on domestic demand would cultivate strategic autonomy, but the decelerated performance of economy makes them shift back to export based growth model.
  • Global Economic Pressure: With domestic demand regressing to a non-growth model, Chinese officials are turning to exports to steady the country’s growth pattern.
  • Export Justification: Chinese officials have even explained that the country controls half the world’s high-tech machinery market due to productivity and large-scale production, not subsidies.

Global response against China’s Export Offensiveness :

  • Protectionist Measures: Governments, starting with the American one, have answered with trade retaliations in the form of raising the tariffs of Chinese goods and subsidies for local industries.
  • Ban and Restrictions: Even more have restricted imports from China across various areas especially in risky products .The above practice has seen some nations go to an extent of banning some of the Chinese products.
  • Impact on Global Supply Chains: WTO examines protectionism from the efficiency perspective, and it reports that a lot of protection costs efficiency specifications in a world that is globalized.
  • Geopolitical Tensions: Protectionism also has influences in aspects other than economics such as the geopolitics thus making international relations in trade very complicated.
  • Challenges to Economic Balance: These trade tensions demonstrate the dangers of the destabilized world economy with some countries having current account surpluses as the others have structural deficits.

Historical learnings from Bretton Woods:

  • Bretton Woods Conference: In particular, the resulting Bretton Woods agreement of 1944 can be regarded as a milestone in establishing globalization’s basic model.
  • Key Voices: The two central figures at the conference were, John Maynard Keynes and Harry Dexter White who steered creation of the new world order.
  • Avoiding Past Mistakes: The objective was to avoid such errors of the previous thirty years which saw economic ruin, demand for protectionism and totalitarianism.
  • Four Themes for Cooperation: Some of the current topics of the work of post-Washington Consensus in the field of international relations are: global demand management and the balance of payments, international distribution of development financing needs, and open trade.
  • Relevance Today: So to be continued these themes are crucial for the decision-making process to address current economic problems as today’s renewed trade war with China.

Keynes’ Principles of Economics and Its current Relevance:

  • Current Account Balances: Any large current account surplus as well as any large current account deficit was in Keynes’ opinion a threat for the stability of monetary relations between nations.
  • Burden of Adjustment: He thought that it was equitable for both the surplus and the deficit countries to share the responsibility of making economic adjustments.
  • Fiscal and Exchange Rate Policies: Fiscal and exchange rate are the policies used by Keynes in controlling these imbalances and which is applicable in the present knowledge base.
  • Market-Determined Exchange Rates: The problem with applying the Keynes’ ideas in today’s world is that it is not a world of fixed exchange rates, capital controls and state-determined capital flows that existed in 1944.
  • Industrial Policy as a Response: The use of industrial policy and higher tariffs can to some extent offset China’s aggression, but it entails costs that should be considered.

Challenges:

  • Global Trade Imbalances: Liquidity imbalances that characterise the international investment position where some countries have large trade surpluses and others large trade deficits are undesirable for the health of the global economy.
  • Protectionist Policies: The increase in protectionism mechanisms such as tariffs and ban on imports destabilises global value chains and makes products expensive for consumers and firms.
  • Geopolitical Tensions: Politics rule the economics as nations compete for geopolitical power, leading to tensions around the globe and a challenging trade environment.
  • Economic Inefficiencies: Measures that seek to keep out China’s exports through implementing protectionism and industrial techniques that counter the Chinese exports reformation negatively affect the overall economic globe output.
  • Dependence on Exports: This is because countries such as China, which have boosted their economic growth through export, are prone to change in the global market, resulting in change in their economy.
  • Premature Deindustrialization: It is quite evident that for developing countries, competition from China in manufacturing will lead to premature deindustrialization hence halting the rate of development in the overall economy.
  • Policy Coordination: This makes global economic problems worse also because there are no united policies almost on the international level as for trade surpluses or deficits, or economic fluctuations.

Way Forward:

  • Strengthening Global Cooperation: Countries should come up with partners for balance of payments which should make all countries have equal weights in making sacrifices for balance.
  • Reforming Trade Policies: The current trade policies should be liberalized by reducing protectionism so as to have improved efficiency of the global trading system.
  • Enhancing Multilateral Institutions: Increasing the effectiveness of multilateral organizations such as WTO can act as a mediator in the trade conflict, and protect fairness in the trade.
  • Diversifying Economies: Export-oriented economies should therefore amend their economic structures to ensure that they do not get easily affected by the fluctuations of the global markets.
  • Supporting Developing Economies: Assistance extended to the developing nations assists such countries to industrialise, thus averting early-stage deindustrialisation and contributing positively towards the growth of the global economy.
  • Encouraging Innovation: Innovation and Technological development of local Industries can contribute very much towards matching to china technology driven manufacturing sectors.
  • Implementing Keynesian Principles: Keynesian economic ideas concerning a sound fiscal policy and mutual cooperation in trade imbalances are beneficial to fashion out a more stability global economy.

Conclusion:

Milking such odds posed by the newer China export aggression needs a collective effort of global framework, trade equilibrium and following principles of collective accountability. With these challenges in mind, it is possible to develop more collaboration as well as innovative strategies to help the global economy to become more stable in the future.

Source: Mint

Mains Practice Question:

Explain how China’s renewed export aggression is affecting the international trade and economic systems. What can international relationships and policy changes do with reference to the second “China shock”?