The US, under President
Donald Trump, seems to be withdrawing from its leadership role on global
integration and is turning inward. This is, of late, quite visible from the
policies that the US is undertaking towards the world economy and its exit from
the Trans-Pacific Partnership (TPP). This, somewhat, gives an idea that China
is well placed to take the position. It is the world’s largest exporter and, by
some measures, the world’s largest economy—both the IMF and the World Bank now
rate China as the world’s largest economy based on Purchasing Power Parity
(PPP).
It is time for China to play
a bigger role in setting international rules. China appears ready to take up
the mantle with the meteoric rise of Xi Jinping. China is mentioning all the
right things, explaining the benefits of free trade—from consumer gains to
economic growth—and calling for stronger international rules. Premier Li
Keqiang recently said, “Free trade is the foundation of economic
globalisation.” China is planning to enter into new openness by signing free
trade agreements with several countries, including Mexico.
By reducing transportation
costs, China’s One Belt One Road initiative could be as important as any major
trade agreement. As tariffs have come down, transportation costs have become
the binding constraint to trade, so creating extensive infrastructure by
bridging the infrastructure gap will help integrate isolated countries into the
world economy and could create a new wave of globalisation. China now needs to
take bold action on domestic reform to match its global initiatives. To be
sure, it has made significant progress towards becoming a market economy since
joining the WTO in 2001. It no longer runs an enormous current account
surplus—after hitting 10% of GDP in 2007, its current account surplus fell
below 2% of GDP in 2016. Private and foreign-invested firms now account for
over 80% of exports, up from roughly 50% before China joined the WTO.
In recent years, however,
economic reform has rather slowed. Reform of behemoth state-owned firms in the
field of the energy, heavy machinery, coal and steel sectors has taken the form
of mega-mergers, which has reduced the number of firms without reducing the
share of output coming from the state sector. Of the 1,000 largest firms in the
world by revenue, 136 were Chinese in 2014, as compared with only 41 in 2006,
and 70% of these giants are state-owned. The strategy of creating super-sized
state-owned firms is neither good for growth, nor good for global business.
The problem is particularly
acute in some industries where Chinese state firms have become export
powerhouses and are distorting global markets. Consider steel, where production
grew at double-digit rates in the mid-2000s as China industrialised. As
recently as 2004, China was a net importer of steel. It is now the world’s
largest producer and exporter of steel products. The four largest Chinese steel
companies are all state-owned.
Like steel, civil engineering
and construction is an industry that grew out of the infrastructure boom in
China. The four largest firms in the world in this industry are all Chinese
state-owned firms. As construction has slowed in China, these firms have
started bidding on global roads, bridges and metro systems, making their
foreign competitors anxious. The presence of these large state-owned firms in
construction and steel raise concerns that the real intention of the One Belt
One Road initiative is to export excess capacity. Reforming state-owned
enterprise sectors would be good for China and for the stability of the world
economy. For China, the state firms crowd out financing to more productive
private firms. China would grow faster if the most productive firms also
absorbed the most capital. Indeed, as economic studies have shown, private
firms accounted for most of China’s rapid growth during the 1990s and 2000s.
The large state firms are
also straining the global trade system. Private firms facing competition from
Chinese state-owned firms are justified in believing that there is no
level-playing field. State-owned firms typically are more focused on jobs and
revenues than profitability, and are not subject to the same hard budget
constraints as private firms. Reforming the remaining state-owned firms,
through closures and privatisation, would help China maintain strong growth and
go a long way towards showing the world that it is serious about being a good
global leader. It could be the belief of the US that world trade is currently
unfair, hence it is turning protectionist. But there could be some iota of
truth that China is competing unfairly in steel and a handful of other sectors.
Trade in principle is a win-win situation but economic studies have proved it
is unfair. It is noteworthy to know that China, which was once a harbinger of
inward-looking and protectionism, is defending free trade, and investing in better
global infrastructure and becoming the world’s leader on free trade.
Source: The China Post, China Saturday, 11 November 2017