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China has had a similar impact on world commodity markets. It is now the biggest
consumer of many commodities in the world, including steel, copper, coal and
cement, and is the world's second-largest oil consumer after the US.
China's rise will lead to more jobs being lost in the manufacturing sector, and other
low-skill sectors of developed economies. However, as these jobs are lost, new
ones will be created as the money that China earns from its exports is spent on
imports from rich economies. This will allow the developed world to specialise more
in higher-value industries, leading to greater specialisation in the global economy.
The other main channel where China will affect the global economy is through
changing relative prices. China is already pushing down the price of most low-value,
labour-intensive products, such as clothing and some basic electrical goods.
Consumers in developed countries, who are net importers of these products, will be
the chief beneficiaries. On the other hand, there is expected to be a rise in the price
of skill-intensive goods that China needs to import; and of raw materials, such as oil,
grain and other agricultural products.
There will, however, be some countries that lose out as a result of China's growing
global economic influence. These are most likely to include countries whose exports
compete with those of China, but supply it with few intermediary products. These
countries will also suffer from higher prices of raw materials. This analysis is
supported by recent economic forecasts from the IMF, which show that by 2020 the
only region that will lose out from China's rise will be South Asia, including countries
such as Bangladesh, whose textile export industries will suffer in the face of cheaper
and more efficient Chinese competition.
Adapted from Asia Monitor, Jan 2005
namely that a key factor behind increased intra-Asian trade was final demand from
the US and EU. In other words, much of intra-Asian trade is intermediate goods that
are assembled as final products in China, not necessarily for the Chinese market,
but for re-export to the Western world.
A third point is that although incomes are rising in China, Chinese private
consumption (i.e. for final products, not components) has been shrinking as a
percentage of GDP to less than 40%. With US consumption comprising 70% of a
US$14 trillion GDP (US$9.8 trillion), and Chinese consumption at 40% of a US$4.0
trillion GDP (US$1.6 trillion), there is no contest which ultimately exerts greater
global weight. In fact, it will probably be decades before Chinese consumers are
able to match their American counterparts.
Adapted from Asia Monitor, Feb 2009
Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner
of the 2008 Nobel economics prize, wrote recently in the New York Times that by
holding down its currency to support exports, China “drains much-needed demand
away from a depressed world economy”. He argued that countries that are victims of
Chinese mercantilism may be right to take protectionist action.
Adapted from The Economist, 7 Jan 2010
f: forecast data
Questions
(a) (i) Compare the change in the share of world exports among United States,
Germany, Japan and China over the period 1986 to 2010. [2]
(ii) ‘Paul Krugman commented that China “drains much-needed demand away
from a depressed world economy” by holding down its currency to support
exports.’
(b) With reference to extract 7 and your own relevant knowledge, explain why
Singapore is forecasted to be the top performing economy in Asia in 2010 but
an average growing economy in 2011. [5]
(c) (i) Assess who are the gainers and losers of China’s impressive growth
performance and continued integration into the global economy. [10]
(ii) As a consultant economist, assess the options that you would recommend
to the governments of the affected countries. [8]
ai Compare the change in the share of world exports among United States, [2]
Germany, Japan and China over the period 1986 to 2010.
aii ‘Paul Krugman commented that China “drains much-needed demand [5]
away from a depressed world economy” by holding down its currency to
support exports.’
Thesis Argument:
Undervalued Yuan
↓Px in terms of foreign currency → More than proportionate rise in
quantity demanded of Chinese exports (Price elastic dd)
→ ↑ exports revenue
However, as Chinese exports gain price competitiveness, the share of
world exports of other economies declined sharply. Thus, leading to a ↓
in AD and draining the much needed demand away from these
economies.
Anti-Thesis Argument:
US Sub-Prime Mortgage Crisis
World-Wide Recession
Sharp fall in world incomes
A rising significant proportion of households switched to cheaper
made-in-China import-substitutes
Thus, further drains the demand away from their economies → ↓ in
AD
b With reference to extract 7 and your own relevant knowledge, explain [5]
why Singapore is forecasted to be the top performing economy in Asia in
2010 but an average growing economy in 2011.
c Assess who are the gainers and losers of China’s impressive growth [10]
performance and continued integration into the global economy.
Gainers Losers
Global Economic Players Global Economic Players
Energy exporting countries eg Rising structural unemployment in
OPEC (Oil), South Africa (Coal) the manufacturing sector of
developed economies as China has
Commodities rich countries, South high comparative and competitive
Africa (Gold),Australia (Uranium) advantage in the production of low-
Also, rising investment from China value, labour-intensive products such
in South Africa Rise in national as textile, basic electrical goods.
incomes & standards of living However, developed countries can
turn this threat into an opportunity by
Increasingly more luxury goods are restructuring their industries and
being demanded by Chinese move into higher-value industries.
consumers Rise in export
revenue of luxury manufacturers in Rise in imported unit COP
the developed world. Rise in price of skills-intensive
goods that China needs to import eg
capital goods
Large proportion of the increase in
commodities prices due to
heightened in demand for raw
materials such as oil from China.
cii As a consultant economist, assess the options that you would [8]
recommend to the governments of the affected countries.