The Global Economic Crisis and China's Foreign Trade

Weidong.fm Page 497 Friday, November 13, 2009 4:10 PM

The Global Economic Crisis and China’s Foreign Trade Weidong Liu, Clifton W. Pannell, and Hongguang Liu1

Abstract: Two noted academic specialists on China’s economic geography are joined by a research assistant to examine the impact of the current global economic crisis and recession on China’s trade with the rest of the world. Relying on statistics collected by the country’s customs administration through the first half of 2009, the authors identify and analyze trends in China’s imports and exports (detailing countries of origin and destination) as well as balance of trade. They also develop and present an input-output model in order to gain a more precise understanding of the country’s trade dependence (both before and during the crisis) than afforded by analyses based on conventional statistics, and explore some of the implications of the decline in trade on levels of domestic unemployment. Journal of Economic Literature, Classification Numbers: F100, F140, O530, P330. 7 figures, 4 tables, 26 references. Key words: China, imports, exports, global financial crisis, input-output table, trade surplus, trade dependence, economic stimulus package, unemployment, World Trade Organization.

BACKGROUND he global economic crisis that came to a calamitous head in 2008 had its origins in financial problems of the late 1970s and early 1980s in the United States that resulted from rapidly increasing petroleum prices, high inflation, and severe problems in the savings and loan industry. After these difficulties, a serious effort was launched to develop new and more sophisticated financial instruments that could be used to better manage risk and provide a regulatory framework facilitating accelerated economic growth. In essence this effort involved a loosening of the regulatory framework that enabled financial institutions to accommodate the new risk-management instruments. In brief, these could be described as derivative instruments that allowed investors to hedge against rapid increases or decreases in the prices of commodities, stocks, or other investment vehicles. A good early example was the use of options, which permitted the purchaser to buy a good or an equity (or some other product) at an agreed-upon future price that then allowed the buyer to guarantee that he could purchase or sell at the optioned price. This

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1Respectively, Professor, Institute of Geographical Sciences and Natural Resources Research, and Graduate University, Chinese Academy of Sciences, Beijing 100101 China ([email protected]); Professor and Associate Dean, Emeritus, Department of Geography and Franklin College of Arts and Sciences, University of Georgia, Athens, GA 30602 ([email protected]); and Ph.D. candidate, Institute of Geographical Sciences and Natural Resources Research, and Graduate University, Chinese Academy of Sciences, Beijing 100101 China. The authors acknowledge with thanks the support of the Ministry of Science and Technology of China (2007BAC03A11-04) and the UK ESRC (RES-062-23-1600) in funding the purchase of data used in the paper.

497 Eurasian Geography and Economics, 2009, 50, No. 5, pp. 497–512. DOI: 10.2747/1539-7216.50.5.497 Copyright © 2009 by Bellwether Publishing, Ltd. All rights reserved.


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indeed minimized risk to the investor, but also allowed an element of speculation against what the future price of an equity, a currency, a commodity, or product might be. These new instruments became very popular and an increasing number of variations were introduced. More exotic and complex methods of packaging various forms of risk were devised that attracted increasing amounts of money as investors sought new ways to buy and sell the derivative instruments and to profit from these exchanges. Hedge funds and numerous other sophisticated financial operators sought to trade and profit from these financial products and arrangements, as wealthy investors and investment banks entered the market. Perhaps the most problematic phase began when laws that separated commercial and investment banking functions were rescinded in the 1990s. Banks then began to expand their activities in what were believed to be creative new ways to increase their profits. For example, home mortgages could be bundled and traded in ways that allowed banks to merge strong and weak mortgages in order to minimize the risks of default on mortgage payments. These mortgage loans could be bundled (securitized) and sold to buyers who benefited from the loan payments but who may not have been entirely aware of the risks involved or the share of weak loans in the bundled portfolios they were purchasing. Rating agencies were complicit too, as their profits depended on keeping their clients happy, and they were often less than forthcoming in disclosing the uncertainty or weaknesses in the portfolios they were vetting. All was well as long as the price of real estate continued to rise, for weak borrowers could always be bailed out if they failed to pay and their mortgaged property could be sold for a profit in the event of foreclosure. The banks were making money, and there was great pressure to continue this game owing to the great profits entailed. The U.S. Federal Reserve Bank kept interest rates low in the early 2000s to continue to stimulate borrowing and construction of new housing as a way to advance economic growth. When the housing market began to show signs of slowing as interest rates began to rise, politicians rushed to encourage more housing development and purchases through creative variable (e.g., adjustable-rate) mortgage schemes, even among those who were clearly poor credit risks and had little prospect of being able to make regular mortgage payments. The poor and subprime borrowers increasingly were being brought on board. Their loans were soon bundled with good loans and sold to other buyers so that the lending agent would not assume the risk. These buyers included banks, which purchased large quantities of the securitized loans without knowing the full value of their potential liability, and thus the bubble continued to grow. Prices increased steadily, and vast quantities of money were made. But the process ultimately was not sustainable, and as that realization began to set in, confidence began to erode in tandem with real estate prices. A calamity followed in the United States, which quickly spread to Europe where a number of major banks also had purchased securitized mortgage assets. The crisis became so acute after the failure of one major investment bank (Lehman Brothers) that the U.S. federal government intervened quickly to guarantee stability in the banking system and avert a complete financial breakdown that could have led to a major economic depression. Nevertheless, the crisis was so severe that a serious recession followed, with ramifications throughout the world. Credit tightened in many developed countries, accompanied by rising unemployment and a contraction in economic growth and consumer purchasing. For the first time in a number of years, the personal savings rate in the U.S. increased as consumers cut back sharply on their purchases, and imports from foreign countries, including China, began to shrink.


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EFFECTS OF THE FINANCIAL CRISIS ON GLOBAL TRADE The general effects of the financial crisis have been felt around the world, as this has been the most severe contraction in global economic activity in more than 60 years. While China has been a significant exception, the global financial crisis and ensuing recession have affected advanced and developing economies alike. For example, the U.S., Japan, and a number of European countries have all seen their economic growth decline. Worldwide, the International Labor Organization indicated a decline in employment of more than 14 million in 2008 (Nanto, 2009, p. 5). Trade also has been severely impacted, as exports of goods and services, the main method that countries use to earn foreign exchange to pay for imports and international debt, has declined in advanced economies and emerging markets. In February 2009, for example, exports had declined by an estimated 27 percent globally from a year earlier (Nanto, 2009, p. 5). The decline in developing countries was estimated to be more than one-third. The shrinking of international trade as both exports and imports drop is adding momentum to the contraction in the global economy and is contributing even more unemployment and poverty. The decline in global trade is an extremely serious matter that is impacting the global economy profoundly. A particularly devastating effect is felt in developing countries, where the World Trade Organization (WTO) reported in late 2008 that the impact on trade was especially serious. These countries have suffered mainly from the declining market for trade finance, which has recently deteriorated owing to the reduction in loans to finance cross-border trade.2 Since the 1997 Asian financial crisis, these loans have been acutely sensitive to liquidity contractions such as the one caused by the subprime mortgage squeeze in North America and Europe. Although the World Bank and other institutions are expanding their funding available to finance trade, the amount thus far allocated is not sufficient to compensate for the contraction in credit available from other sources. China and to a lesser extent India have thus far survived the financial crisis in better shape than have many developed countries (e.g., see Fidrmuc and Korhonen, 2009; Sun and Zhang, 2009). In part this can be attributed to less exposure of their banks to the subprime loan problems and the credit default swaps that caused severe problems in North America and Europe, but the economic contractions in those regions have indeed had a negative effect on these two large emerging economies. The most immediate impacts were seen in the rapid drawdown in orders for consumer goods destined for export to Europe and North America and resulting factory slowdowns or closures. North America, for example, was experiencing increasing unemployment and its consumers were buying less. By 2008 these diminishing purchases were being felt globally and exporting nations were tightening their belts in response. EFFECTS OF THE FINANCIAL CRISIS ON CHINA’S TRADE For nearly three decades since the opening and reform in the late 1970s, China registered steady growth in trade, expanding from negligible levels typical of an isolated country to those bespeaking a leading member of the international trade community (Naughton, 1996; 2These trade finance loans, according to the Director-General of the WTO, are a very secure form for financing trade owing to their short maturity, the ease of closure, and the use as collateral of the traded goods (Nanto, 2009, pp. 5–6). They have served as the lifeblood of cross-border trade in many developing countries.


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Fig. 1. Growth of China’s international trade, 1980–2009. Trade in 2009 represents a forecast based on first and second quarter trade performance in 2009. Source: General Customs Administration of China.

Lardy, 2002). In particular, after joining the WTO in December 2001, the country witnessed a skyrocketing of growth in trade (Naughton, 2007; see Fig. 1). In the six years from 2002 to 2008, the total value of China’s imports and exports increased from $US 620.8 billion to $2561.6 billion, an annual growth rate of 26.6 percent. Such rapid trade growth is astonishing, even though China—with an annual growth rate of 15.1 percent in the pre-WTO period 1990–2002—had already surprised the world with the rapidity of the increase in its international trade (World Bank, 2004; Shen, 2008). In 2008, China (mainland) already accounted for nearly 9 percent of the world’s total exports of commodities (SSB, 2009). However, the country’s golden age of global trade was interrupted in mid-2008 when the financial upheaval initiated by the U.S. subprime mortgage crisis began to spread across the world. Figure 2 shows the monthly growth of China’s international trade in 2008 and 2009, based on statistics collected by China’s General Customs Administration.3 In January 2008, the value of China’s total imports and exports was $200 billion, rising to $248 billion in July, an increase of 24.1 percent in seven months. It should be noted that there is generally a monthly decrease in trade each February in China due to the influence of the long Spring Festival (Chinese New Year) holiday, so that data for February should be omitted or given separate consideration when determining a normal trend of growth.4 Evidently, trade has declined sharply since mid-2008, from $243.3 billion in September to $141.9 billion in January 2009, a decrease of 41 percent in four months. Although the slide in monthly trade bottomed in February 2009, the total value of imports and exports in mid-2009 still was 17 percent less than that in mid-2008. Thus, as in many other countries, China’s trade has been quite volatile in 2008 and 2009, and it is difficult to predict whether the country’s recent recovery in trade 3Unless otherwise indicated, all tables and figures appearing in this paper have been compiled by the authors from data secured from China’s General Customs Administration. 4For a detailed discussion of the movement of migrant labor between cities and home villages during the 2009 Spring Festival, see Cai and Chan (2009) in this issue.


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Fig. 2. China’s total exports and imports, month by month, 2008–2009.

volume can continue (Ding, 2009). In particular, recent protectionist measures involving China’s exports to the U.S. and European Union (EU) may add increasing challenges to such a recovery (e.g., see Barboza, 2009; Tsang, 2009). Figure 3A compares China’s monthly exports for 2007, 2008, and 2009, whereas Figure 3B presents the identical comparison for imports. It is apparent that the value of China’s monthly exports in 2009 remains below that during the course of most months in 2007, and much less than in 2008.5 The accumulated export value from January to August 2009 shows a 22 percent decrease when compared to the same period in 2008, and even a 4.6 percent decrease when compared to 2007. The performance of imports in 2009 is slightly better than that of exports. Due to the investment stimulus adopted by the Chinese central government (i.e., the investment plan of RMB four trillion or $586 billion), China’s monthly imports resumed growth in January 2009, and since May 2009 the value of imports has exceeded that of 2007 in that year’s respective months (Fig. 3B). The accumulated import value from January to August 2009, however, is nearly 23 percent below that for the same period in 2008 due to the sharp monthly increase in January 2009 (30 percent). As a result, China’s trade surplus with the rest of the world has been shrinking in 2009 (Fig. 4). The average monthly trade surplus in 2009 has dropped to $15.4 billion, compared to $24.5 billion in 2008 and $21.8 billion in 2007. Even so, it is remarkable that China continues to amass such a large trade surplus given 5The difference in the respective months between 2008 and 2009 is ca. $20 to $30 billion, or about 20 percent of the monthly export value in 2008.


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Fig. 3. Change of China’s monthly export (A) and import values (B) 2007–2009.

the difficult global economic conditions and the related trade situation (The Incredible, 2009).6 6Some Western observers attribute this to relatively increased consumer demand (within the context of declining overall demand) in the U.S. and EU for lower-priced imported goods during the recession, which China can produce and deliver more effectively than its competitors (e.g., Barboza, 2009).


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Fig. 4. China’s monthly trade surplus in 2007, 2008, and 2009.

Table 1. Share of China’s Foreign Trade in 2002 and 2008 by Major Countries (percent) Import Country/region

United States European Union Japan Rest of world

Export

2002

2008

First half 2009

2002

2008

First half 2009

9.23 18.10 18.11 54.56

7.19 11.71 13.30 67.81

8.24 13.31 13.12 65.33

21.48 18.19 14.88 45.45

17.66 20.50 8.13 53.71

18.61 19.85 8.44 53.10

Region/Country Distribution of China’s Trade In the 1990s, China’s trade was heavily dependent on a few countries/regions, such as the United States, Japan, Hong Kong, and the EU.7 The Asian Financial Crisis in 1997–1998, which made China’s export trade stagnant, forced China to diversify its trade partners, so that by 2002, just after China joined the WTO, the U.S., EU, and Japan (hereafter, the Triad) had become China’s three largest export destinations.8 Together they accounted for 54 percent of China’s total exports at that time (Table 1). By 2008, and the emergence of the recent financial crisis, the share of the Triad in China’s exports had fallen further to ca. 46 percent. Because the world economy is still suffering from the financial upheaval, it is difficult to assess the full effect of the global crisis on the diversification of China’s trade partners. 7In

1997, for example, 59 percent of China’s exports went to the U.S., Japan and Hong Kong. trend toward increasing diversification (globalization) of China’s export partners is investigated in greater detail in this issue of Eurasian Geography and Economics by Chou et al. (2009), on the basis of exploratory spatial data analysis techniques. 8 The


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Table 2. Share of China’s Foreign Trade from January to June 2009 by Major Countries Country/region

Total Hong Kong, China Japan Republic of Korea ASEAN European Union United States

Imports and exports

Exports

Imports

Amount, Growth rate US$ billion (percent)



946.1 73.5 99.7 67.6 88.1 160.0 132.1

-23.5 -24.3 -23.1 -26.9 -23.8 -20.9 -16.6

521.5 69.8 44.0 23.8 44.4 103.5 97.1

-21.8 -23.1 -20.3 -33.4 -19.4 -24.5 -16.9

424.6 3.7 55.7 43.8 43.6 56.5 35.0

-25.4 -41.4 -25.1 -22.9 -27.9 -13.2 -15.6

However, based on data in the first half of 2009 (Table 2), it appears that the dependence of China’s exports on U.S. and Japanese markets has in fact risen very slightly. The listing of source countries of China’s imports is more diversified than that of export destinations (Table 1). In 2002, the Triad accounted for 45 percent of China’s total imports by value, and the figure further decreased to 32 percent in 2008. In the first half of 2009, however, the Triad’s share in China’s imports rose slightly to 35 percent (Table 1). Indeed, among all major trade partners of China, the U.S. registered the smallest decrease after the onset of the financial crisis. Although trade between China and the United States in the first half of 2009 fell by over 16 percent, the figure is less severe than that for other major partners, with rates of decline exceeding 20 percent (Table 2). This seems to bolster the so-called “Chimerica” concept that closely links the trading relations of the two giant economies. Commodity Structure of China’s Trade Twenty years ago, China was a low-end product exporter, with textile products and raw materials comprising the major export commodities. In 1990, for example, the category of textiles, apparel, leather, and footwear accounted for roughly one quarter of the value of China’s exports, and raw materials for another 25 percent. However, the 1990s witnessed the country’s rise as a major exporter not only of textiles and apparel but also of machinery, transport equipment, and electronics.9 In 1997, textiles and apparel were the largest export sector, accounting for 29 percent of China’s total export value; however, just three years later (in 2000) machinery, transport equipment, and electronics had become the largest component by value, accounting for 33 percent of the total. At the same time, the share of textiles and apparel declined to just below 25 percent. Table 3 shows China’s imports and exports by major sectors in 2002 and 2008. One can discern from the table that (a) the metallurgical industry and (b) machinery, transport equipment, and electronics are the two sectors that registered the most rapid growth of export value after China joined the WTO. In 2002–2008, the average annual growth rate of the metallurgical industry’s exports was as high as 39 percent, while that of machinery, transport 9For reviews of China’s rise as a producer and exporter of electronics and footwear, respectively, see Wu et al. (2007) and Wei (2009).


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Table 3. China’s Imports and Exports in 2002 and 2008 by Major Sectors, in billion U.S. dollars Exports

Imports

Sector 2002

2008

Agriculture Food products, beverages, and tobacco Textiles Apparel, leather, fur, and footwear Timber processing and furniture manufacturing

11.54 22.85 6.81 18.81 57.85 179.24 22.74 53.94

Paper and paper products, printing, etc. Chemical industry Mining and related products Metallurgical industry Machinery, transport equipment, and electronics Other manufacturing

2.34 10.34 24.64 109.99 16.25 61.56 19.85 146.56

3.57

11.46

136.0

729.1

24.00

84.70

Imports and exports

2002

2008

2002

2008

7.22 3.56 16.99 3.94

36.03 16.89 24.93 8.03

18.75 10.37 74.84 26.68

58.88 35.70 204.17 61.98

4.17

8.07

7.74

19.53

7.37 17.45 44.15 137.68 27.00 268.93 26.73 82.09

9.71 68.79 43.25 46.58

27.79 247.67 330.49 228.65

151.33 524.98 2.71

8.00

287.34 1254.07 26.71

92.70

equipment, and electronics was 32 percent.10 The chemical industry also registered a high growth rate of exports during the same period, namely 28 percent. Although the export of textiles and apparel also grew rapidly (i.e., 19 percent annually), the sector’s share in the total value of China’s exports decreased to 16 percent in 2008. In comparison, the share of the machinery, transport equipment, and electronics sector rose to 51 percent during the course of the same year. The change in the product structure of imports differs from that of exports (Table 3). From 2002 to 2008, the fastest-growing import sectors in China were: (a) mining and related products (e.g., mineral raw materials, ores, and mineral semi-products), (b) agriculture and food products, and (c) beverages and tobacco, with average annual growth rates of 47, 31, and 30 percent, respectively. These numbers point out rather clearly China’s huge demand for raw materials to support its rapid industrial and economic growth. In 2008, the largest import sectors in China were: (a) machinery, transport equipment, and electronics; (b) mining and related products; and (c) the chemical industry, which in aggregate accounted for 82 percent of the total value of the country’s imports. The impact of the recent financial crisis on China’s trade differs by sector. Although almost all sectors registered a decrease of export value, comprehensive systematic data are still not available to permit detailed sector-by-sector analysis. Figure 5 compares exports of selected major products during the period between 2008 and 2009 (January to August, year on year). It is readily apparent that steel registered the sharpest decrease. From January to August 2009, China exported 9.53 million tons of steel, only roughly one-third the quantity 10In 2008, China exported 59.2 million tons of steel and 681 thousand sets of assembled motor vehicles, while the export of these two products was minuscule in 2002.


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Fig. 5. Decrease of China’s exports in selected major product categories, 2008 and 2009 (January–August, year on year).

Fig. 6. China’s trade dependence (GDP/exports + imports), 1985–2008.

during the same period in 2008. In addition to steel, exports of machinery and high-tech products also decreased by 20 percent and 19 percent, respectively. Exports of daily consumable commodities such as apparel, textiles, and food products performed much better, although they also decreased. Regarding imports, it is striking that China’s imports of raw materials during the crisis grew significantly (in volume terms), although their total value decreased in 2009.11 From 11The discrepancy between export volume and value can be readily explained by the much lower commodity prices attending the recession.


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Table 4. Contribution of Exports to China’s GDP by Sector in 2001 and 2007 (percent)a No.

Sector

Share of value-added derived from exports in sectoral value-added

1 Agriculture 2 Food products, beverages, and tobacco 3 Textiles 4 Apparel, leather, fur, and footwear 5 Timber processing and furniture manufacturing 6 Paper and paper products, printing, etc. 7 Chemical industry 8 Mining and related products 9 Metallurgical industry 10 Machinery, transport equipment, and electronics 11 Other manufacturing activities 12 Power and water supply 13 Construction 14 Services All sectors in total (GDP) aComputed

2001

2007

11.97 11.48 74.48 49.17 44.98 28.13 46.97 30.19 47.39 47.17 44.52 24.61 0.95 7.78 20.19

21.19 11.50 69.74 37.59 34.44 34.92 52.30 36.64 53.01 57.35 37.99 36.17 0.94 12.86 26.96

by authors on the basis of non-competitive input-output analysis.

January to August 2009, the country’s volume of crude oil, iron ore, raw copper, and metal waste imports increased by 7, 32, 76, and 89 percent, respectively. Such a rise in raw materials imports against the background of an overall decrease can be attributed to the investment stimulus launched by the Chinese central government, with its emphasis on investments in infrastructure construction. This also confirms the robust nature of China’s continuing economic growth even in the face of very serious global economic contraction. DEPENDENCE OF CHINA’S ECONOMY ON TRADE It has been widely known that China’s economic growth depends heavily on exports, but the crucial issue is the magnitude of this dependence. Figure 6 shows the trade dependence of China from 1985 to 2008. Here, trade dependence is calculated by dividing the country’s GDP by the value of total imports and exports. China’s trade dependence increased quite rapidly after the country’s accession to the WTO in late 2001, namely from 43 percent in 2002 to 66 percent in 2006. Since 2007, trade dependence has begun to decrease, declining to 59 percent in 2008. Although the indicator is meaningful in providing a general picture of GDP’s dependence on trade, it cannot provide a precise indication of the magnitude of that dependence due to the intricate supply linkages among different sectors and different countries/regions. Thus, an input-output analysis is needed to clarify the picture. Input-output analysis is a long-established quantitative technique that enables the researcher to delve into the interdependence of different sectors via input and output linkages. However, the original input-output formulation considers all imported intermediate


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Fig. 7. Contribution of exports to the United States to China’s GDP by sector, 2001 and 2007. The numbers (1–14) positioned along the horizontal axis of the figure correspond to those identifying each different economic sector in Table 4. Source: Computed by authors based on input-output analysis with data from the General Customs Administration of China and the State Statistical Bureau of China.

goods to be “competitive”—i.e., as competing with similar products that are (or can be) produced domestically. However, this assumption does not hold true in many cases—imported intermediate goods may not always be replaced by domestically produced ones. Consequently, a new input-output table was devised in the mid-1990s (Chen, 2001; Lau and Chen, 2007) that treats imported goods as non-competitive (not capable of being produced domestically). Such a “non-competitive” input-output table can be used to analyze more accurately the impacts of exports on domestic economic output (as measured, for example, in value-added or GDP). Table 4 shows the contribution of exports to GDP and to the value-added of different sectors in China, as computed on the basis of non-competitive input-output analysis. Reflecting the years for which national input-output data for China are available, our computations were done for 2001 and 2007. In 2001, the value-added produced by exports accounted for 20 percent of China’s GDP, and increased to 27 percent in 2007; these percentages now can be taken as a precise measure of the degree of dependence of China’s GDP on exports. From Table 4, one can deduce that sectors such as textiles; machinery, transport equipment, and electronics; the metallurgical industry; and the chemical industry are heavily dependent on exports. In 2007, more than half of the value-added of these sectors was derived from


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exports. The sector with the highest degree of dependence on exports was textiles, namely nearly 70 percent. Figure 7 shows the contribution of exports to the U.S. to China’s GDP by sector. In 2007, the overall degree of dependence of China’s GDP on exports to the United States was 5 percent (compared with 4 percent in 2001). In sectors such as (a) apparel, leather, fur, and footwear and (b) other manufacturing activities this dependence had decreased significantly by 2007, whereas in (c) machinery, transport equipment, and electronics, (d) mining and related products; (e) paper and printing; and (f) textiles it rose slightly. As shown in the figure, by 2007 dependence on exports to the U.S. did not account for more than ca. 12 percent of GDP in any of the major sectors. IMPACT OF THE DECLINE IN TRADE ON LABOR SERVICES One of the most significant issues in China’s continuing economic and social development is absorption of large numbers of rural people into the labor force of the secondary and tertiary sectors of the economy (see Cai and Chan, 2009, in this issue). This is crucial both for the ongoing structural shift in China’s economy, as it raises the productivity level of these individuals and the value of their marginal contributions to local, regional, and national economic output, as well as for the social stability of China. Providing meaningful employment for the tens of millions of redundant rural laborers helps relieve the growing pressure for a more equitable distribution of wealth. Such demands also encourage a rational mobility of labor as a factor of production in responding to market forces that have concentrated new opportunities for labor services especially in coastal areas such as Guangdong Province. The decline in exports has had a serious effect, especially on the manufacture of textiles, apparel, and footwear as well as higher value-added products such as machinery and transport equipment. Diminishing exports of those products with a high labor content obviously will have a rapid, negative effect on the need for labor services in those industries where such products are produced. These impacts have been evidenced by the numerous factory closings—for example, in the Pearl River Delta region of Guangdong Province. Growing efforts to restrict trade flows12 have raised serious concerns (e.g., see Tsang, 2009), as they have the potential to impact demand for labor in these industries. China’s continuing efforts to diversify its trading partners and relationships will become more urgent if the country is to continue its emphasis on growth in exports. This is crucial if China is to finance much of its economic development by relying on an export-oriented strategy while also extending the labor-absorptive capacities of domestic industries that provide high-laborcontent products for export. Consequently it is important to look beyond the immediate economic effects and consider the broader social ramifications as well. CONCLUSION China has thus far been largely spared the worst effects of the global financial crisis. Yet it has not escaped from this event unscathed. Nowhere has the effect been more apparent than on China’s exports, which have declined sufficiently to dampen what heretofore had been 12E.g., complaints about Chinese subsidies for steel production and exports and recent U.S. efforts to reduce the imports of tires and other products from China.


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unparalleled success in applying an export-driven strategy of economic growth. This strategy generated not only immense foreign exchange reserves but also created employment growth through the cascading effects of labor absorption in the many factories that produced myriad consumer products as well as higher valued durable goods, transport equipment, and heavy machinery for export sales. Despite the drawdown in exports, China’s economy has recently rebounded, registering a growth rate of 8.9 percent in the third quarter of 2009 (as reported by Jacobs, 2009, based on official government statistics), largely owing to the enormous stimulus package of more than one-half trillion dollars launched by Beijing to galvanize domestic growth largely through construction projects. At the same time, we have learned that even though the decrease in exports has hurt, China continues to amass foreign exchange earnings at a prodigious rate—ca. $10–$15 billion per month on average since March 2009 (Fig. 4). Any other country would be delighted with such a vast accumulation of foreign wealth flowing into its capital coffers (e.g., see Foreign Reserves, 2009). What is unknown is the extent to which economic growth in China will continue after the effects of its massive stimulus package begin to diminish and the extent to which its exports will continue at the current pace, whether they will increase soon, or possibly decrease. These imponderables may also hold the key to the future economic growth strategy China’s policymakers will follow going forward (Zhang, 2009). Will China begin to focus more on domestic consumption to grow its economy and stimulate production (Liu and Wei, 2008)? Will it allow its currency to drift upward toward a more realistic true value, or will it continue to depress the value of the RMB through continued purchase of foreign bonds and thus finance indebtedness and profligate overspending in foreign countries such as the United States (Tong, 2005; Sanger, 2009)? One of the more intriguing findings of this study is the extent of trade dependence of China on certain foreign countries, described above as the Triad (U.S., Japan, and the EU). While it is no surprise that these three and especially the U.S. have been the key markets for China’s manufactured products and exports, it it no doubt in both China’s long-term interest and that of its key trading partners that it broaden both the scope of its export markets and the range of products exported. In this way, the country may lessen its vulnerabilities to events such as the global financial crisis while also reducing the economic and political uncertainties that arise from overdependence on any one source of business or trade. This may also have the salutary effect of improving political relations among trading partners, as potential sources for future friction and tensions are removed or diminished. Finally, we surmise that the ongoing global financial crisis, while bringing much pain and suffering in many parts of the world, may also have some positive outcomes. China’s role in all of this, first to survive the worst of the crisis and to continue its robust economic growth, is a remarkable accomplishment and testimonial to the insight or at least good understanding of its leaders in what policies make the best sense for China and its wellbeing. Now confronted with new realities such as the limited ability of some of its trading partners to maintain their profligate spending, China needs to discover new ways to restructure (in part) its strategy and economic trajectory for future growth (see also Fishman and Wei, 2004). This could well prove to be a most beneficial shift that provides a more sustainable path for the developed countries with whom China trades as well as for the country itself as it assumes a greater leadership position in global finance and the world trading system.


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