China's pivotal position for the world economy
 
Philip Bowring IHT
Wednesday, September 24, 2003
Trade and currency
 
HONG KONG China has long hankered after a role in international affairs commensurate with its size. But suddenly it finds itself with an embarrassment of influence. It holds a critically important position on the two most crucial economic issues now facing the world: the future of the World Trade Organization after the debacle at Cancún, and the role of Asian currency valuations in avoiding a trade war.
.
At Cancún, China joined hands with Brazil and India to lead a united front of developing countries that demanded that rich countries commit themselves to removing agricultural export subsidies before being prepared to move, if at all, on the new issues being pushed by Europe and Japan.
.
Many in the developing world rejoiced at the breakdown at Cancún, seeing it as a victory for the poorer nations and a vindication of efforts by antiglobalization forces. Better, they argued, that negotiations break down than allow the developed world once again to sit tight on agriculture while extending the remit of the WTO into nontrade issues such as investment rules. Similar satisfaction was evident among rich-country interests who had been worried that the negotiations might lead to the dismantling of farm subsidy schemes that impoverish efficient farmers elsewhere.
.
But while China certainly agrees with the developing countries' position on agriculture, and would benefit from an end to export subsidies, it has a vital interest in ensuring that the WTO regime is not undermined by rich-poor deadlock. It continues to look to foreign trade and investment to lead economic growth. Trade represents a much higher proportion of gross domestic product than in India, Brazil or other large developing countries. Much of its foreign investment is made on the assumption of ready access to global markets for manufactures.
.
The Beijing government also invested a huge amount of domestic political capital in its efforts to join the WTO, agreeing to conditions that have led to painful reforms causing factory closures and job losses. China may hope that regional trade liberalization might take up some slack should global trade falter, but it is no substitute for further global liberalization. Indeed, China is not opposed to WTO discussion of investment rules that many developing countries reject absolutely.
.
Thus China has a vital interest in trying to get the Doha round of trade negotiations back on track. That may be impossible any time soon because of the approach of the U.S. presidential election, or because Europe and the United States will dig in so adamantly on agriculture that there can be no progress on other issues. But China can provide a lead in encouraging flexibility by developing countries, which other nations dependent on foreign trade and investment, such as Malaysia, will follow. The bottom line is that the developing world has most to lose from continuation of the trade status quo.
.
China would be doubly influential on the trade question if it moved on the other issue: its currency. The unsustainably high U.S. trade deficit is not China's fault. The problem of global trade imbalance involves the whole of East Asia, whose chronic surpluses have financed a U.S. external debt of about $1.5 trillion. Possibly Japan is, unusually, now taking a lead. Reduced dollar buying by the Bank of Japan has allowed the yen to rise by 6 percent against the dollar over the past month. But China is still the key to a general realignment of Asian regional currencies that reflects economic realities.
.
With threats of retaliatory tariffs emanating daily from influential quarters in the United States, there is now a danger of a trade war erupting before nations can begin to heal the wounds of Cancún. A currency move would also improve China's standing among other developing countries who consider their industries are being damaged by Chinese competition.
.
If China can resist playing to a nationalist gallery, it should be able to link the WTO and currency issues in a way that is in its long-term interests and that helps the world move from the brink of trade and currency conflict to a more sustainable balance of trade. To do so it will need help, which may not be forthcoming from an election-year United States, from a Europe divided among itself and from the likes of India and Brazil, for whom trade is not so vital.
.
But it is a measure of how far China has come in international standing as well as economic development that it now occupies this crucial position.

< < Back to Start of Article
  E-mail This Article Print Article Text Larger Text Small Single Column Multi Column