What China’s ‘export machine’ can teach Trump about globalization

Tempo de leitura: 4 minutos

Chinese goods seem to be everywhere these days. Consider this: At the Olympics in Rio this summer, Chinese companies supplied the mascot dolls, much of the sports equipment, the security surveillance system and the uniforms for the volunteers, technical personnel and even the torch-bearers. Do you own a personal computer or air conditioner? Or a pair of shoes or set of plates from Wal-Mart? They all almost certainly bear a “Made in China” label.

Put another way, China has become an “export machine,” manufacturing an increasing share of the world’s products. Its initial success exporting in the 1990s – which surged after it joined the World Trade Organization in 2001 – surprised everyone, including Chinese policymakers. The result was rapid growth of over 9 percent for many years. In 2014, China surpassed the U.S. as the largest economy in the world in terms of purchasing power parity.

How did a country with a national income of just US$155 per capita in the 1970s turn into one of the most economically powerful countries in just 40 years? The answer not only shines light on China’s success story but also offers some important lessons for governments considering a turn inward, such as the incoming Trump administration.

The costs of isolation

 Historically, China has nurtured strong connections to world commerce. From the Han Dynasty (206 B.C. – A.D. 220) until the Ming (A.D. 1371-1433), goods, culture and religion flowed among Central Asia, the Middle East and China via the various overland routes of the Silk Road. Sea exploration began in the Ming Dynasty, when the famous Captain Zheng He took seven voyages to establish trading contacts with Africa, Arabia, India and Southeast Asia. In the early 1900s, Shanghai was nicknamed the “Paris of the Orient” based on its role as a center of trade and finance.

But after Mao Zedong led the communists to victory in 1949, China established a planned economic system, withdrawing from global markets, which the communists deemed capitalist and imperialist. Foreign assets were nationalized and companies left the country. Trade increased with the communist Soviet Union and Eastern Europe during the 1950s, but that was sharply curtailed with the Sino-Soviet split in the early 1960s. The U.S. did not even have official trade links with China between 1950 and the early 1970s.

From Mao’s point of view, China’s goal was to build a strong economy by being self-sufficient in production of all its needs. He believed that self-sufficiency should even extend to each province as well. His “plant grain everywhere” policy, regardless if the geography was ill-suited for it, is an example of how far he implemented this strategy. One consequence was the disastrous Great Leap Forward, in which an estimated 30 million or more died from famine.

This disaster resulted partly from pushing self-reliance in industry in the countryside, as well as setting impossible grain output goals. The idea of specialization of production based on relative efficiency of resources was seen as capitalist and dangerous to communist development. To benefit from specialization, China would need to depend on other countries and deal with competition. As a result of rejecting specialization and trade, China’s economy grew slowly, with poor living conditions based on backward technology and little exchange within the country, let alone between China and the world.

Because China had been closed to foreign investment since the early 1950s and exported primarily to pay for essential imports, the value of China’s exports in 1978 was less than $7 billion – a mere 0.3 percent of their value today. This isolation contributed to China’s low living standard. Its GDP per capita of $155 ranked 131st out of the 133 countries with reported data, just above Guinea-Bissau and Nepal.

Renewed global connections

When Mao died in 1976, a group of leaders, including Deng Xiaoping, believed that market reforms would revive the economy through more efficient production and better technology. China’s so-called “opening up” officially began with the Third Plenum of the Chinese Communist Party Central Committee in December 1978.

As part of the reform strategy, China’s leaders established four special economic zones in southern China near Hong Kong with incentives for foreign companies to invest in production aimed at exporting. The most well-known zone is Shenzhen, located in Guangdong Province.

At the time, U.S., Japanese and European companies were looking for new locations to manufacture their goods cheaply after wages rose in East Asian countries like Hong Kong, South Korea and Taiwan. And few other countries were welcoming to foreign investment. India, for example, remained closed to foreign direct investment for another decade.

In other words, China’s policies changed at a fortuitous time. Companies moved quickly to China, especially across the border from Hong Kong, giving birth to deep manufacturing capacity that became the center of the world’s supply chain. By 2006, foreign companies were generating nearly 60 percent of China’s exports and even today produce close to 43 percent of them.

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