To protectionists and Sinophobes, the news of China surpassing Germany in 2009 to become the world’s largest exporter heralds a new, unwelcome world order. But more than a reflection of China’s growing economic might, it is testament to the erosion of economic, political, physical and technological barriers to production.
China’s success is because of multilateral trade with the rest of the world. So when Indian (or US or European) politicians and businesses complain about China, they forget that Chinese exports include their own exports.
Beginning with the widespread liberalization of trade and investment rules after World War II, barriers have been falling and incomes rising around the world. China’s opening to the West in 1978; the advent and proliferation of containerized shipping, global positioning system technology, just-in-time supply, and other marvels of the information, transport and communications revolutions have all spawned a global division of labour that defies traditional analysis. This makes trade flow accounting highly misleading.
Global economics is no longer a competition between “us and them”, between “our” producers and “their” producers. Instead, because of cross-border supply chains, the factory has broken down its national walls. Competition is often between international brands or production and supply chains that defy national identity.
Indeed, most Chinese exports depend on imports: iron ore from Australia; microchips from Taiwan, South Korea or Singapore; software from teams in Washington and Bangalore; designs from Cambridge (Massachusetts or England); investments from consortiums based in New York, Sao Paulo or Johannesburg.
China has become the world’s largest exporter primarily due to this global division of labour, because it provides lower-value-added production. But that’s not the end of it: The components of Apple’s iPods and iPhones may be put together in China, but their designers in California are worth more to the company’s bottom line.
In this scheme of things, calculating who earns the biggest amount from exports remains a problem. Intermediate goods are shipped to China from other countries, snapped together (or even tooled) in China, and then exported. As those goods leave the ports of Shanghai, Tianjin or Guangdong for export, simple trade accounting rules attribute the total value of those exports to China, even when the Chinese value embedded in those goods accounts for a small fraction. That accounting method helps explain why China’s exports have surged over the decades.
A recent study by economists at the University of California concludes that the Chinese value-added embedded in a 30G Apple iPod accounts for only $4 of the total $150 cost, yet the entire $150 is chalked up as a Chinese export. Other studies estimate overall Chinese value-addition in all products exported from China to average somewhere between 35% and 50%, a big proportion, but a lot less than what gross export figures imply.
The broader point here is that trying to hurt China’s export engine will end up hurting exports in other countries, too. True, China’s trade policies remain far from perfect. But what’s also true is that “if China grows, this pushes the world’s economy—and that’s good for export-oriented Germany as well”, as German Chamber of Industry and Commerce economist Volker Treier said.
Indeed, China’s global export lead speaks much more convincingly of the virtues of economic interdependence than of China’s stand-alone export prowess. It presents opportunities for every other country, including India.
Daniel Ikenson is associate director of the Washington, DC-based Cato Institute’s Center for Trade Policy Studies and author of the International Policy Network (IPN) report No Longer Us vs Them (2009). Alec van Gelder is a project director at the London-based IPN. Comment at firstname.lastname@example.org