[MUSIC] I want to talk now about China as an export power and the theme that I want to raise is really China as a trading state and this draws largely on the work. A professor named Richard Rosecrance who wrote a wonderful book and in that book he argues that since World War II, few states have been able to expand national power through territorial acquisition. Instead they rely on trade, trade surpluses, foreign capital accumulation, foreign direct investment, technology transfer from overseas, their own capital accumulation, enhancing their human capital, making sure that they have more talent through both their education and through trying to have inbound migration of very talented people. Now, the Chinese leadership early on in beginning around 78, 79 already began the kinds of policies that facilitated this trading state and a good friend of mine, Dory Salinger, wrote a book many years ago, where she referred to the shift from lathes to looms, lathes being machine tools, to looms and the idea of textile and light industry. We look at the investments by the state between 1979 and 1982 when a lot of money shifted from heavy industry to light industry which really laid the groundwork, right, for investing in exports and at the same time, the state also moved to invest a lot of money in its five year plans in harbors and roads in the coastal cities. So, that these enterprises, some of which were TVEs by the late 1980s and the early 1990s. They were in a position to then ship their goods to the coast and send that stuff overseas and in fact, no other country in the world has benefited more from free trade as China since the 1970s, largely because they were able to make this important adaptation to export-led growth and the main place that they learned a lot of this from was from the world bank and we have a study done on China's foreign trade, the world bank published it I believe around 1983. Trying to explain to the Chinese leadership how they could get rich and how the country could get rich and I guess more powerful by moving into the export sector. One of the important things that they had to do was really to cut tariffs. Now by tariffs, it means when you import the goods, do you increase taxes on the good to make it more expensive? If you do that, then that good often can't get in. People won't want to import it but what China did was it cut the tariffs. Himself, we have figures showing that almost every time he went overseas in the 1990s, he would decrease tariffs as a way to smooth the road for him to go visit Southeast Asia, things like that, countries like that, regions like that and what it did was it made it much easier to bring in unassembled product into China and that there was much lower taxes on those goods coming into China. And so, in the early transition period, there was a great deal of assembly work that went on in China. China would import the kinds of machinery that was necessary to assemble products that were manufactured in Southeast Asia and the labor, came from agriculture. We had this whole period of workers, rural peasants now, in a position to not be needed so much in agriculture and so they started to flow into the export economy, into the regions, come from the inland areas into the coast areas through the township and village enterprises, predominantly, but into other enterprises as well, other ownership. Some of them private ownership. A lot of this being set up, again in the pro river delta or in the Yangtze River delta. Another big thing that happened was that after 1992, makes his very famous trip to the south of China and he get's the reforms going. The reforms sort of froze after Tiananmen Square in 1989 after the crackdown in Beijing, and for a number of years there were not many new reforms but Dung decides in 1992, I talked about this in the class on policy making, to go south and get the economy going and it's amazing how you can see that because of Dung's trip south the amount of foreign direct investment coming in to China increases dramatically, and I'll show you that just in a second, both in 1993 to '95, and then '97 to 2000, as China prepared to join WTO. China then joins WTO in 2000. Trade booms again and we see the growth of foreign trade going on again through 2000, really shooting up to 207, 208. Foreign trade exports becomes a really driving force of the economy and China even has some success in doing what we call moving up the product cycle. So, the quality of the products, the technical level of the products rather than just being labor intensive products. China really moves up that and that helps improve the quality of its manufacturing. So, let me show you three figures now that go back and will sort of highlight the points that I made. So, here we have the utilization of foreign direct investment in China. This is foreign capital flowing into China and as I mentioned here's Deng Xiaoping's southern trip. Boom. There it goes, right. Starts a little bit earlier but from 1992, 1993 and this is a huge boom. We're talking in terms of billions of US dollars. So, here we're at 20 billion and up to 40 billion and gets to, I guess, here, just at the time of the Asian financial crisis in 1997 China really hits an early peak of about maybe 42, 43, 44 billion US dollars in foreign direct investment and let's put this in the context that a country like India at this point was getting maybe $1 billion. Right, so China was getting 44 times the amount of foreign direction investment that India was getting. So, then we have the Asian financial crisis in 1997 and the countries of southeast Asia don't have very much money. The inflow goes down but still not bad, staying at $40 billion. Then, as China is preparing 1999, 2000 to go into WTO, many foreign enterprises, many foreign multi national companies, they want to get into China before WTO or as soon as WTO happens and so again, here we have this big jump over to over $90 billion over this period of time. This is a huge boom in forgiven direct investment. U.S. dollars coming into China, hit the global financial crisis in 2008, slows down and then again China recovers and is able to now by 2014 to be earning or getting over $120 billion in foreign direct investment. Another good indicator of China as a trading state is the share that the role that exports and imports play In overall GDP. All right? And as we can see, again, back in 78, at the beginning of the reforms, when I said that foreign trade really wasn't a very significant component of the overall national economy, it's only about five percent. Right? So, here's imports and exports and we can see that from 78 and on, the percentage continues to grow year on year and by here we are 20% then it dips for a bit and then as WTO happens, China then goes up again and it peaks around 2004 and 2006 and then starts to decline but still, overall, we're talking about, that's each of these, so we're talking at this point here, we're talking about 47%, maybe 45% of the total GDP. GDP is based on foreign trade, and that's for an economy the size of China, that's a huge amount, and some would argue that it makes China overly dependent, I'll talk about this a little further in a few minutes, but it makes China overly dependent on export and imports for its economy. The third slide I would show you is really to argue that trade has actually improved China's autonomous development. It's ability to manufacture it's own exports. It's own export products rather than retry, rather than rely totally on processing and as I said before, you know when the economy starts to take off in 78, 80, through the 80s a lot of the manufacturing, a lot of the exports are based on processing of goods, right. Bringing in components that are manufactured in Malaysia and Singapore, maybe Japan, the United States, and then just processing them and when you just do the processing or the assembly, you get a small share of the total value of the good itself. So, one point I remember a friend of mine estimating that China was only getting about 6% of the full value of the export that it was sending over seas, it was shipping out, because most of it was it's own labor assembling and all of the other value added. That had gone into the product, had already been done in Singapore, Malaysia, and even when it was shipped out, it got shipped out through Hong Kong, which then took some more of the value added. So, China wasn't getting so much of the value of the product but here we can see in 1998, the share that was based on processing was quite high, and it peaks, in fact in 2002, right? And then, after that, we see a significant decline, right? And so, year on year, the amount of exports based on processing by 1999, we can see that the each year the amount of processing is increasing dramatically. Here, by 2014 compared to 2013, the share has increased only 1.8%, but we can see here That 37 or almost 38% but only 38, compared to 57%, of the goods that are exported by China are actually based on processing. So, China Is producing many, many more of its own goods.
