China and Advanced Economies – A Win-Win Relationship


 John Ross is a senior research fellow at Chongyang Institute for Financial Studies, Renmin University of China. From 2000 to 2008 he was director of economic and business policy in the administration of Mayor of London Ken Livingstone. He previously served as adviser to several major international mining, finance and equipment manufacturing companies.


AS the Organization for Economic Cooperation and Development is the global institution for advanced economies, Chinese Premier Li Keqiang’s recent strategic overview speech at its Paris headquarters focused on relations between China and these countries. The importance of the issues addressed can be clearly judged by current key trends in the global economy.


China is the world’s second largest economy at current exchange rates or the world’s largest economy as measured by parity purchasing powers (PPPs). But by either measure China is by a huge margin the world’s largest developing economy. In 2014, at current exchange rates, China was 440 percent of the size of the next largest developing economy, Brazil, and in PPPs China was 240 percent the size of India – by this criterion the next largest developing economy.


China’s economic size alone would make the most important relationship between advanced and developing economies that with China. But other features make it even more crucial as in certain areas vital to trade and investment China has even overtaken developed economies – in some cases by a considerable margin. According to the latest available data, in 2013, China’s annual total finance available for investment, its savings, was US $4.8 trillion compared to the U.S.’s US $3 trillion. This huge financial strength explains China’s success in multilateral economic initiatives such as the Asian Infrastructure Investment Bank and the BRICS bank. China has also overtaken the U.S. to become both the world’s largest industrial producer and the world’s largest goods trading nation.


Global economic dynamics since the beginning of the international financial crisis, furthermore, give particular significance to relations between advanced economies and China. Between the peak of the last U.S. business cycle, in the fourth quarter of 2007, and the first quarter of 2015 China’s GDP grew by 77.3 percent, the U.S. GDP by 7.9 percent, EU GDP by 0.8 percent, and Japan’s GDP by 0.7 percent – China’s economy thus grew almost 10 times as fast as that of the U.S. and more than 70 times as fast as that of the EU and Japan. Indeed, since 2007 China has achieved the greatest peacetime increase in the relative size of a major international economic center in history.


Such growth necessarily dramatically affects the relative expansion of national markets and trade. Between 2007 and 2014, at current exchange rates, Japan’s GDP increased by US $0.2 trillion, the EU by US $0.8 trillion, the US by US $2.9 trillion, and China by US $6.8 trillion. China contributed 34 percent of the world’s market expansion in this period, the US 14 percent, the EU four percent, and Japan one percent – China’s market growth, therefore, was almost twice as fast as that of the U.S., EU and Japan combined.


These trends should clearly guide any objective discussion on strategy for global trade and investment – as direct trade data confirm that the greatest potential for advanced countries to access growing markets is in China. From 2007 to 2014 annual EU exports to the U.S. rose by US $71 billion but to China by US $129 billion. For the U.S. in the same period exports to China rose by US $89 billion, compared to US $73 billion for the EU and US $14 for Japan.


This rapid trade expansion, the greatest between any major economic centers, corresponds to the long-term mutual interest of both advanced economies and China. Without it neither can maximize their economic development, as neither the advanced economies nor China can develop their industries according to arbitrary choices – their possibilities for economic sectors of relative success and failure are determined by their overall development levels.


Advanced economies cannot compete in industries which require wages lower than their own, and equally, despite its enormous economic achievements, China cannot “jump over” stages of its own development.


This creates on both sides a long-term and stable basis for mutually beneficial partnership. The basis for this is that no economy today can develop individual branches of production in a self-contained way. Modern economies involve extremely complex production chains with multiple divisions of labor. For example, a single car assembly factory is a huge investment, but nevertheless only 15 percent of a car’s value is added in it – components and other inputs contribute 85 percent. The car factory’s efficiency depends on availability of skilled labor, stable power and IT inputs, R&D to meet specific localized needs, developed logistics and innumerable other factors – all known in technical economic terms as “productivity multipliers.”


This is why countries, for example, very rich oil producers who believed they could match the efficiency of advanced economies in other industries even by importing whole factories, inevitably failed. They possessed one part of the production chain but this could not function efficiently without the others. China could only match the overall efficiency of developed economies in the most advanced fields of production if every link in its production chain is as efficient as theirs. This would only be possible if China were not a developing but a developed economy!


While China has great advantages compared to advanced economies in mid-range technology production, major parts of the value chain for a prolonged period will be most efficiently supplied by developed economies. This is true not only in domestic but in third markets. Li Keqiang’s speech  gave a classic example: “During my recent visit to Latin America, I got on-board a China-made ferry that is powered by a diesel electric system purchased from a developed country, instead of a conventional diesel engine, making it largely pollution-free.”


These interrelations are so powerful because they correspond to among the oldest but most powerful laws of economics – Adam Smith’s analysis that division of labor is the greatest force in raising productivity and Ricardo’s that all countries benefit if each specializes in areas in which they have the greatest comparative advantage. No country can escape such fundamental economic realities. This ensures that trade blocs which do not include the world’s largest developing economy China, as with the Trans Pacific Partnership, will not maximize benefits for participants. China’s proposals for partnership with advanced economies, as they correspond to the most powerful global economic forces, will create the greatest benefits for both sides.