Discuss whether other countries should be fearful of Chinas influence

upon the world economy and environment.

Since the 1990s China has increasingly influenced the worlds economy. Measured in
terms of purchasing power parity (PPP), China has the second largest economy on earth
with GDP levels at $7.043 trillion according to 2007 estimates. In general Chinas
influence on the world economy stems from its ability to influence Aggregate Supply and
Aggregate Demand on a global scale. China is an emerging superpower both politically
and economically speaking. It has the largest land army on the planet and in the next
decade as the data suggests it will overtake Germany within five years to become the
worlds biggest exporter. Many countries, especially the United States are fearful of the
influence that China will have in shaping the future global economic climate. But as the
past decade has shown, there are many benefits as well as disadvantages to Chinas
economic reach.
Chinas main influence on the global economy, arguably, has been the downward
pressure that its economy has exerted on levels of inflation experienced by OECD nations
in recent years. Stable price levels in the UK particularly, can be attributed to the China
Effect, enhanced by the strength of sterling. According to the data China is the
workshop of the world, the key influence on low levels of inflation in the UK being its
low cost manufactured goods. China is able to manufacture vast quantities of goods at a
low cost because of two factors. For one it has a huge supply of low cost labour to draw
on. As article 2 points out China will be able to move about three hundred million people
from the countryside to urban areas, where factories are based. Furthermore it has
invested huge amounts of money in capital and infrastructure. By 2020 China aims to
have 70,000 km of motorway and is investing over $200 billion in expanding and
upgrading its railway network until 2010. The result of this investment, is that it not only
affects the productive capacity of the Chinese economy, but it also increases global levels
of Aggregate supply, causing the price level globally to fall see fig 1:

Price Level

LRAS1

LRAS2

AD
0

Y1

Y2

Real GDP

In the past decade UK consumers have never had it so good as China has been churning
out fridges, shoes and clothes, all at low prices. China has an absolute advantage in its
trade of manufactured goods, due to its pool of low cost, but well educated labour force.
The effect of cheap goods, for UK consumers, from china can be shown below on fig 2:
Fig 2
Price Level

LRAS
SRAS1
SRAS2

P1
P2

AD

Real GDP

Y1

Y2

As shown on fig 2, the flood of cheap goods and services from China, has helped to
reduce Cost push inflationary pressures in the UK over the past few years, causing
prices to fall P1-P2. Many consumer goods on the high street, have been falling in price
thanks to Chinese low cost manufacturing. With textiles such as duvets, it is cheaper to
buy a new one imported from China than it is to get a dirty one dry cleaned! The flood of
low cost goods however, has caused concerns in many countries around the world,
according to the data. Some countries argue that cheap Chinese imports undercut
domestic producers, causing unemployment. There have been growing calls in the United
States to put tariffs on Chinese imports to protect jobs. Members of Congress in the US
have also argued that by keeping the renminbi artificially low against the US$ it is
contravening WTO rules and gaining an unfair advantage in trade. Whist low prices of
Chinese goods have kept inflation of manufactured & consumer goods down, this only

served to mask creeping increases in inflationary pressures in The UK, USA and
Eurozone from increased commodity prices. Chinas insatiable demand for raw materials,
oil in particular is increasing global aggregate demand as shown on fig2. As the data
informs us, China is the worlds largest consumer of Copper Zinc and Wheat for
example. It is the second largest importer of oil and over the past decade its
consumption has doubled. This is starting to stoke inflationary pressures in the west as
oil prices reach $107 a barrel (see fig 3)
Fig 3:
LRAS

Price Level

P2
P1

AD2
AD1

Real GDP

0
Y1

Y2

As shown on fig 3, domestic Chinese Consumption is responsible for much of the growth
in Global aggregate demand in the past decade. Chinas status as an emerging economic
superpower is beneficial to the global economy as it will help to off-set any slowdowns in
the United States Economy. Previously the engine of the worlds economy, the US is
now in recession due to the sub-prime crisis. 30 years ago, this would have dragged the
world into a downturn. Chinese economic growth and strong levels of domestic
consumption are powering the world economy, propping up global GDP as the US faces
difficulty. In fact, this can only be beneficial to Western Countries. Firms there, already
suffering from a slowdown in consumers expenditure in domestic markets and falling
profits can look to China and its rapidly expanding middle class. Western Firms such as
BP and BMW have already exploited this market according to the data. Furthermore
sales of luxury goods such as mobile phones, cars and foreign designer clothes are
rocketing. American firms in particular with strong global brands can only benefit from
expanding in China as the US goes into recession. The same can be said of the UK
financial services system, companies have a chance to serve Chinese demand for banking

services. Article 2 says that FDI in China hit $53 billion in 2004, a sizeable proportion
of which would have been from Western companies.
Fig 4: world oil prices:
Global S1
Global S2

P2

P1
Global D2
Global D1

As seen in figs 3, China has fuelled a surge in global demand for oil along with India. Oil
like other vital economic resources is extremely scarce whilst demand and supply for it
are highly inelastic. As shown, supply has failed to keep up with global demand for this
commodity. The data argues this could lead to a new conflict over oil as the US and
china fight for the scarce remnants of oil. By 2050 the world will not be able to produce
enough oil to meet demand, China will suck in an estimated 200 million barrels. This
would suggest the pattern of oil price increases amounting to a 1000% rise per barrel
since 1994 will keep increasing. This is just one of the downsides of Chinas economic
boom. As the country tries to improve living standards for its 1.4 billion people
comparable to Western nations, the demand for scarce economic resources will only
increase further, the opportunity cost being continual rises in the cost of living for those
in the Western world. This is just one of the reasons why countries should be fearful of
Chinas influence on the world economy, there are downsides to its economic miracle.
In 2005, according to the data, China accounted for 6% of world exports, its ability to
supply the world with low-cost manufactured goods is great for the western consumer
as already discussed, but here in lies a large problem. Chinas huge surplus on the current
account of its balance of payments is responsible in part for the large balance of payments
deficits of the Eurozone, the UK and the USA, all big importers. In 2007 China had a
record $363.3 billion surplus on its current account after exporting what amounted to half
the UKs gross domestic product. The US has a current account deficit of -$747.1 billion!
Of course, Japan, Germany and other leading exporters are responsible for this but, there
have been calls by US politicians as mentioned, to enact protectionist measures against
Chinese imports. People have been encouraged to buy American goods, whilst suspicion
has mounted over the quality of Chinese exports to the US and the rest of the West after a

recent scandal involving Chinese products with high levels of toxic chemicals in them. If
the Chinese government removed exchange rate controls over its currency the renmimbi,
and allowed it to appreciate, this problem may be alleviated somewhat. But this would
amount to more expensive consumer goods in the west, causing more inflation!
Ironically, for all those in Congress who would like to cut off US markets to China it is
the Chinese Government that is funding the US balance of Payments deficit. China has
huge FOREX reserves estimated to be at $1.493 trillion that are supporting the integrity
of the dollar, and allowing the USA to keep sucking in imported goods.
A continent where the full effects of Chinese economic power have been felt is Africa.
According to the data, this has been positive for the continents poor and developing
countries. They have a large market for export, bilateral trade with China has been
soaring according to the data, reaching $18 billion in 2005. All things being equal more
trade with the continent will pull up living standards further. Furthermore Chinese state
funds have been developing infrastructure on the continent. In 2006 700 Chinese
companies were operating in Africa, according to the data, engaging in road
construction Rwanda and railway construction in Angola. Chinese interest in Africa is
hardly altruistic, its real goal is not to further living standards of the average African, but
to exploit it as a cheap, reliable source of raw materials to satisfy an increasingly
overheating economy. According to the data, Chinese companies had interests in
developing Oil supplies and other raw materials in Libya, Nigeria, Congo, Gabon, South
Africa and Burundi. In return for supplying its country with invaluable economic
resources, the Chinese government props up autocratic, repressive regimes whilst arming
them to the hilt. Despite a state of near economic collapse and inflation at 100,000% and
rising, Robert Mugabe remains in power backed by an army with Chinese made weapons.
In Sudan, China has armed government forces that have caused violence displacing over
2 million people in return for most of its oil exports. The result is severe external costs for
the people in Africa, including the devastating effects of war on the environment and
peoples livelihoods.
Finally, other countries should be fearful of Chinese influence on the world economy, due
to its increasing demand for foodstuffs. As the Chinese middle class expands and adapts
to more sophisticated diets and demands more food, food prices will only keep on rising.
The situation is not helped at the moment by record droughts in Australia, one of the
worlds biggest wheat growers. Already China is the biggest meat producer on the planet,
with the worlds largest number of pigs, yet domestic production is not enough. China
will continue to import more food to feed its increasingly wealthy population