Tay 0

EVALUATING THE CHINESE THREAT TO THE

ECONOMIES OF THE DEVELOPING WORLD
THROUGH THE LIBERAL PERSPECTIVE

Ian Tay

Table of Contents

Page

Introduction 1
Conceptual Approach 1-3
Earlier Discussions of the “China Issue” 3-5
China: Threat or Opportunity?
Foreign Direct Investment 5-9
Flow of Goods and Services 9-12
Dependency on Primary Products 12-13
Ensuring Continuous Growth through Co-operation with China 14-16
Future Prospects 16-18
Conclusion 18
References 18-21

Figures
Table 1: Foreign Direct Investments (FDI) in East and Southeast Asian Countries 8
Graph 1: Percentage of FDI Flows into Selected Asian Countries 2002-2006 8
Graph 2: China‟s Top Import Partners in 2006 11
Graph 3: Spot Price for Brent Crude Oil 13
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Introduction

December 11 2001, the day China took seat in the World Trade Organization marks a
historic moment - the entrance of an economic giant that is home to a huge pool of labor and
consumer to the world economy. China today has succeeded in the global market with record
high growth through massive foreign direct investments. The United States deficit with China is
rising day by day and this mere fact has attracted the attention of the international community.
However, there is another important side of the story that should be looked at regarding China‟s
entrance to the global market – is China a threat to developing countries? Before China reformed
its economy in the 1980‟s, China was seen as an ideological threat to third world countries who
feared the wave of communism would sweep through their countries. However, today, studies on
the “China threat” to developing countries are taking an economic form. There is no doubt that
China‟s liberalization and entrance to the WTO will threaten other developing countries as it will
add another competitor in the market in terms of foreign direct investment, labor, and
manufacturing. However, the other side to the story has to be investigated; healthy competition
will force other developing countries to improve efficiency, an open China will open up
unprecedented market opportunities for these other developing economies, and China‟s
increasing wealth can help develop other developing countries too. Therefore, it is important for
other developing countries to see China‟s rise as a silver lining in a dark cloud and try to
cooperate with China for the good of the whole.

Conceptual Approach
The purpose of this paper is to evaluate whether Chinese participation in the global
economy will be a threat to the developing world or otherwise. In other words, will China‟s
participation in the global economy affect the development of other developing countries? Will
growth in developing economies other than China‟s slow down or even stagnate due to the fast
rise of the Chinese economy? For example, will Foreign Direct Investment inflow, job creation,
and exports of other developing countries fall causing the standard of living in these countries to
fall because of China? Here, what are referred to as the developing world are countries which
according to the World Bank are low-income and middle-income economies i.e countries
according to their 2006 GNI per capita, calculated using the World Bank Atlas method, earns
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from 0 - $11,115. 1 However, even the World Bank acknowledges that the use of the term
“developing countries” is merely for the purpose of convenience as it is in no way implying that
every member of this group has similar development or that other economies have reached a
preferred or final stage of development. A similar take on this term will be used in this paper –
the term “developing countries” will still be used for the purpose of convenience but the diverse
natures of countries included in this group will be noted.

In the face of China, these developing countries can be categorized into two categories,
countries that have a complementary relationship with China or countries that have a substituting
relationship. Countries that have complementary relationship are often said to be countries that
have commodities and products that China needs, mainly raw material and energy. These are
countries such as Sudan, which produces oil and Brazil, which exports lots of soybeans to China.
Developing countries that are technologically more advanced are also seen as complementary to
China as these countries can provide China with what China herself cannot produce. These
countries benefit greatly from China‟s openness compared to the other group of countries. The
other group of countries, the “substitutes”, is mainly countries that focus on manufacturing. As
manufacturing is something that China is good at doing and has a huge comparative advantage
over the rest of the world, countries that were previously manufacturing-oriented countries such
as Mexico loses out badly. However, this phenomenon is not as easily explained as this. Both
these groups of countries can actually gain from China in one way or another. There is more to
China and its impact to the developing world than complementary and substituting relationships.

In this paper, the liberal approach at looking at things will be used to prove that China‟s
ascension to the global economy will bring gains to other developing economies as well. In terms
of the economy, international trade with China will bring benefits to both parties – this is a
positive-sum game. As China begins to attract more investments, it will trickle down to the
people and create a more affluent society, and thus providing more opportunities for economies
abroad to satisfy the demands of the Chinese people. In addition, towards the end of the paper,
steps taken by governments of developing countries towards enhancing this liberal order by co-

1
See Appendix 1
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operating with China and also efforts to achieve a free trade area with China as a member will be
presented.

Earlier Discussions of the “China Issue”

As mentioned earlier, there already exists quite a wide array of literature on the China
Issue. Even wider is the amount of literature written about the Chinese threat to the United States
as US‟s trade deficit with China is getting bigger and bigger every year. However, not all
literature is painting a grim picture. Writings by liberal scholars such as John. G. Ikenberry, has
maintained that China will not be a threat to the current world order and also not bring the end of
the economic and military prowess of the United States.2 However, although there have been
writings about China‟s threat to developing countries, it is not as vast as the former sub-issue.

One of the articles that have been used as the base of this paper is an article written by
Ramesh Adhikari and Yongzheng Yang. In the first part of their article, they tracked China‟s
increasing openness in the international economy since it began its bid to become a WTO
member and also briefly introduced China‟s FTA with ASEAN which is due to be established in
10 years time. Amongst some of commitments that China has agreed to qualify for membership
in the WTO includes eliminating export subsidies, lifting business restrictions to foreign firms,
reducing import tariffs, and removing quotas in various sectors. The part that would be most
relevant to the issue discussed here would be the second part which looks at the implications of
China‟s increasing openness. Although they do not overlook the threats that China will pose to
developing countries such as their products being 20-30% more cost-efficient than that of
ASEAN goods, they continually assert that China will not be a long-term threat contrary to many
prior researches by other observers. For example, the ASEAN-China FTA should be looked at as
being able to push for more exports to China from ASEAN countries, not the other way around
where local production and employment in ASEAN would decrease with a FTA.

According to the two writers, China will move up the production chain and will produce
goods higher on the production chain such as semi-conductors instead of simple consumer

2
G. John Ikenberry, “The Rise of China and the Future of the West,” Foreign Affairs Journal, January/February
2008.
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goods. Therefore, poorer Asian countries will be able to benefit from China‟s movement up the
production ladder as they continue to produce very labor-intensive products. For the other
countries, China will undoubtedly prove to be a formidable competitor but did not establish itself
based on a basis of beggar-thy-neighbor policy but on productivity improvement. On FDI‟s, it is
predicted that although China will pull more foreign investors, these investments will open up
more opportunity for the developing countries to invest in China itself. In addition, China in
actuality does not have absolute advantage versus other Asian developing countries in every
aspects such as in some ASEAN countries where legal institutions are more developed. In
addition, China‟s growth will also increase outward Chinese investments. By the first half of
2001, for example, Chinese companies had set up 6,439 firms in 160 countries and committed to
investing 7.7 billion dollars in projects in trade, natural resources exploration, transportation,
labor services and agriculture.

However, the catch of the their argument is that the key issue for developing countries is
not so much of China‟s increasing competition; rather, it is their domestic policy that is critical to
facilitate structural changes and increase their export competitiveness. 3 For most of these
developing countries, China may look like a threat to them but in actuality, the perceived threat
to China will be a catalyst for them to restructure themselves to be able to compete with China
and face the threats of this liberal economic order. Therefore, they conclude that “in any event,
an open and prosperous China is good for the rest of the world”.4

The same views will be expressed in paper but with greater detail and with a broader
spectrum. The next section will evaluate whether the arguments that patterns of Foreign Direct
Investment flows, the flow of goods and services and the dependence of primary products
exports from other developing countries to China are threatening is valid. Besides that, the value
of healthy competition will also be brought forward. Then, proactive steps taken by other
developing countries to establish co-operation with China for their continuous growth will be
discussed. Throughout this evaluation, in addition to using the Association of South East Asian

3
Ramesh Adhikari & Yongzheng Yang, “China‟s Increasing Openness: Threat or Opportunity?” Asian
Development Bank, www.adb.org/Documents/Events/2002/Trade_Policy/PRCIO_paper.pdf
4
Ibid.
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Nations (ASEAN) countries as an example, developing countries in Africa, Latin America, and
the Caribbean will also be looked at.

China: Threat or Opportunity?

Foreign Direct Investment
First, many developing countries fear that China‟s openness will pull all foreign direct
investments (FDI) away from these other developing countries to China. There have been
arguments that FDI inflows to China seem to be at some expense of other developing countries
especially the ASEAN countries. In 2003, Dr. Mahathir, Malaysia‟s ex-prime minister said that
China is “certainly a threat to the economies of Southeast Asian countries, as it has a cheap but
highly skilled workforce and could therefore attract more foreign investment”.5 This is proven by
statistical evidence - out of the $100 billion in FDI flowing into developing countries in 1994,
about 40 percent went to China.6 By contrast, the total going to ASEAN was only about 15
percent.7 With China‟s assent into the WTO, China received even more FDIs and became the
world‟s largest FDI recipient in 2002. Across the Pacific, in Mexico, foreign direct investment
(FDI) fell from $26.6 billion in 2001 to $11 billion in 2003 and foreign investment in Brazil fell
as well.8 Although there are still inflows of FDI into other developing countries, most of these
FDI‟s mainly focuses on expansions, mergers, and acquisition while Greenfield Development
can be seen in China. For example, in Malaysia, Dell Inc. which already has a large presence in
the Malaysian state of Penang with 4000 employees, is expanding its operations in Malaysia to
Cyberjaya, the hub for Malaysia‟s Multimedia Super Corridor. On the other hand, in China,
major telecommunications companies are making new investments such as Ericsson chalking up
US$5.1 Billion of new investment in China.9

5
Eddie Leung, “Southeast Asia-China: Threats, Opportunities,” Asia Times Online, August 2 2003,
http://www.atimes.com/atimes/China/EH02Ad01.html
6
Robert G. Sutter, “Chapter 7: China-Southeast Asia Relations,” China’s Rise in Asia: Promises and Perils (USA:
Rowman & Littlefield Publishers, 2005), 193.
7
Ibid.
8
Eduardo Lora, “Should Latin America Fear China,” Working Paper #531 (May 2005), Inter-American
Development Bank, 5.
9
“Ericsson to Chalk up US$5.1 Billion of New Investment in China,” Peoples Daily, December 07, 2000,
http://english.people.com.cn/english/200012/07/eng20001207_57177.html.
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Another interesting trend that can be seen is South-South investment flows. For example,
ASEAN-Chinese investments are at a net imbalance. ASEAN investments in China are many
times greater than Chinese investment in ASEAN.10 This is mainly contributed by the overseas
Chinese community in countries such as Thailand, Indonesia, Malaysia, and Singapore. The
question that arises here is whether these overseas Chinese communities still feel that they owe
their allegiance to China or to their country of citizenship or is it simply that China offers better
business opportunities. In Malaysia, this concern has also led to other concerns such as how the
rise of China would impact the socio-economic and ethnic balance in this multi-ethnic society.
The Malaysian deputy finance minister said in 1996 that it was Malaysia‟s view that
“overzealousness on the part of Malaysian businessmen of Chinese origin could have adverse
repercussions racially in their own country.”11 Outside ASEAN, even countries like South Africa
- where ethnicity does not seem to be a factor that spurs investment - face a similar situation. In
late 2002, the ratio was $58 billion to $1.4 billion.12 “While South African firms such as mining
giant Anglo American and brewer SABMiller have led the charge in investing in China with
some $400 million, China has put only about $130 million into South Africa, mostly in one
chromium mine.”13 This means that even citizens of other developing countries are investing a
lot in China at the expense of domestic development but China on the other hand is not
reciprocating.

However, it is important to note that although some complain that China is not investing
as much as it could overseas, China is definitely still a large investor overseas and its outward
FDI flows are expected to grow further. 14 Chinese companies had set up 6,439 firms in 160
countries and are committed to investing 7.7 billion dollars in projects in trade, natural resources
exploration, transportation, labor services and agriculture. 15 These investments are capable of
developing underdeveloped countries such as those in Sub-Saharan Africa and South Asia. The
growing investment of China together with the Russian Federation in the oil and gas sector of
Uzbekistan could provide a major impetus to economic growth in that country, which could
10
Sutter, 193.
11
Ibid., 194.
12
Ibid.
13
“South Africa to seek „balanced‟ China links,” Reuters, June 14 2006,
http://asia.news.yahoo.com/060613/3/2lutn.html
14
Adhikari & Yang
15
Ibid.
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average 5.6 per cent annually in 2006-2007.16 In Latin America, “a focus on the Middle East and
a rigid U.S. foreign policy toward Latin America has left regional leaders with no option but to
look for other patrons.”17 Latin America requires someone that can commit to the development
of infrastructure around this region but the United States does not seem to be able to commit to
this; therefore, this is where China comes in and plays a much better role than merely a
substitute. For example, China has shown great interest in improving railways, highways, ports,
and mountain passes for the Southern Cone.18 In other words, a long-term supporter for such
projects has been found. Even the United Nations Economic Commission for Latin America and
the Caribbean (CEPAL) has concluded that China has contributed to Latin America‟s high
growth rate in recent years.19 The Chinese state, sitting comfortably on more than $1000 billion
of foreign exchange reserves, has the financial means to meet its promises to developing
countries. 20 The China Development Bank, for instance, is the world‟s largest development
institution by assets.21 This institution is not only looking inward to domestic investments and
growth such as financing the Three Gorges Dam but it has also begun to deploy some of its
capital abroad, particularly to help Chinese energy and mineral companies working in
developing countries.22

In addition, although the early years of China‟s open door policy has seen FDI inflow
into China grow rapidly compared to other developing countries especially its regional neighbors,
more recent data has shown that although China is getting the most FDI‟s compared to other
countries, the rate relative to the others is actually on a downward trend. By adapting data from
the Asian Development Bank for the years of 2002 to 2006, a downward spiral in the percentage
of investments going to China compared to other countries in Southeast Asia and East Asia can

16
“Economic and Social Survey of Asia and the Pacific 2006,” United Nations Economic and Social Commission
for Asia and the Pacific, http://www.unescap.org/
17
Sam Logan & Ben Bain, “China‟s Entrance into Latin America: A Cause for Worry?,” International Relations
Center Americas Program Investigative Article, August 24, 2005, http://americas.irc-online.org/am/389.
18
Ibid.
19
Jiang Shixue, “China's Latin American Perspective,” Latin Business Chronicle, August 9 2006,
http://www.latinbusinesschronicle.com/app/article.aspx?id=108
20
Victor Mallet, “Hunt for Resources in the Developing World,” Special Report: China, Financial Times, December
12 2006.
21
Ibid.
22
Ibid.
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be seen. This data definitely bears a good sign to developing countries as a whole as it proves
that other countries are still very capable of attracting FDI although China is now in the game.

Table 1: Foreign Direct Investments (FDI) in East and Southeast Asian Countries (adapted from Asian Development
Outlook 2007: Growth Amid Change, Asian Development Bank, 2007)
2002 2003 2004 2005 2006
% of Total % of Total % of Total % of Total % of Total
EAST ASIA US$ million FDI US$ million FDI US$ million FDI US$ million FDI US$ million FDI
China 52,743 62.35% 53,505 57.84% 60,630 42.70% 72,406 46.70% 69,468 40.30%
Hong Kong 9,682 11.45% 13,653 14.76% 34,035 23.97% 33,627 21.69% 38,300 22.22%
South Korea 2,392 2.83% 3,526 3.81% 9,246 6.51% 6,309 4.07% 3,645 2.11%
Mongolia 173 0.20% 201 0.22% 236 0.17% 317 0.20% 367 0.21%
Taipei 1,445 1.71% 453 0.49% 1,898 1.34% 1,625 1.05% 7,445 4.32%
66,435 78.53% 71,338 77.12% 106,045 74.68% 114,284 73.71% 119,225 69.17%
SOUTHEAST
ASIA
Cambodia 139 0.16% 74 0.08% 121 0.09% 318 0.21% NA
Indonesia 145 0.17% -597 -0.65% 1,896 1.34% 8,336 5.38% 7,514 4.36%
Laos 415 0.49% 420 0.45% 450 0.32% 500 0.32% 650 0.38%
Malaysia 3,203 3.79% 2,473 2.67% 4,624 3.26% 3,967 2.56% 5,142 2.98%
Myanmar 191 0.23% 128 0.14% 688 0.48% 1,132 0.73% 1,600 0.93%
Philippines 1,542 1.82% 491 0.53% 688 0.48% 1,132 0.73% 1,600 0.93%
Singapore 7,338 8.67% 11,664 12.61% 19,827 13.96% 15,002 9.68% 24,208 14.04%
Thailand 3,164 3.74% 4,614 4.99% 5,786 4.07% 8,405 5.42% 8,337 4.84%
Vietnam 2,023 2.39% 1,894 2.05% 1,878 1.32% 1,972 1.27% 4,100 2.38%
18,160 21.47% 21,161 22.88% 35,958 25.32% 40,764 26.29% 53,151 30.83%
EAST & SE
ASIA 84,595 100.00% 92,499 100.00% 142,003 100.00% 155,048 100.00% 172,376 100.00%

Graph 1: Percentage of FDI Flows into Selected Asian Countries 2002-2006 (adapted from ADB Data)

70.00%

60.00%
China
50.00%
Hong Kong
Percentage

40.00% South Korea

Malaysia
30.00%
Philippines
20.00% Singapore
Indonesia
10.00%
Vietnam
0.00%
2002 2003 2004 2005 2006
-10.00%
Year
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Flow of Goods and Services

While FDI keeps flowing into China due to cheap and abundant labor, China can produce
more than enough goods for domestic use and foreign consumption. Therefore, Chinese-made
products and Chinese manufacturers will be able to market their product overseas and definitely
to other developing countries too. In addition, the low Renminbi value in the exchange rate
markets makes Chinese goods even more desirable everywhere in the world. On the other hand,
with this low value, the Chinese people themselves will not look highly to foreign goods because
of its relatively more expensive price causing a huge current account surplus for China and on
the other hand, a huge current account deficit for other countries. Trade imbalances with China
are not only common with developed countries but also with developing countries. In the African
continent, countries such as South Africa are facing trade deficits with China as the Chinese are
not as open to manufactured products imports from Africa. In South East Asia, countries such as
Indonesia, Malaysia and Thailand are running bilateral trade deficit with China at the moment.23
This is a phenomenon that other developing countries feel threatened about. They fear that their
manufacturers will be outrun by their Chinese counterparts. For example, African business
groups complain about poor treatment by Chinese companies and competition from a flood of
low-cost imports.24

With the continuous flow of Chinese goods to other developing markets, there have been
instances in these markets where domestic industries have to lay off workers and to some extent
stop their production as they can no longer compete with these cheap Chinese goods and their
fellow laborers in China that is most cost efficient. “Africans may be able to compete on the
basis of wage and production costs with German entrepreneurs, but definitely not with the folks
in Guangdong, Fujian and Hainan.”25 Therefore, some African countries have borne the burden
of the Chinese rise in the global market. “Young Burkinabes are languishing in
underemployment because their government‟s import substitution policies have been scuttled by
China‟s rise in the market.”26 In South Africa, there is evidence that as many as 25000 local jobs

23
Adhikari & Yang
24
“China, Africa sign $1.9B US in trade deals,” Associated Press, November 5 2006,
http://www.cbc.ca/world/story/2006/11/05/china-africa.html
25
Bright B. Simmons, “China impacts Developing World,” OhmyNews, June 10 2006,
http://english.ohmynews.com/articleview/article_view.asp?menu=f10600&no=297688&rel_no=1
26
Ibid.
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have been lost in the industry as a result of cheap imports from China. 27 In Mexico, the number
is even bigger - the maquilas, which are factories and assembly plants that import raw materials
and export the final product, have lost 254,000 jobs in the last three years.28 Today, the industrial
sector in Mexico is still complaining about the influx of Chinese goods into the Mexican
economy that is undermining the local economy. Mexico is one of the worst hit nations due to
the similar economic production Mexico and China has especially on textile. Products for these
two countries can substitute each other very easily and therefore, China wins because of its sheer
size and cheaper labor.

However, the rationale here is that although China is a big country, it is not big enough to
be competitive in everything. Therefore, China still requires goods from these other developing
countries. Not all developing countries are homogenous. As mentioned earlier, “complementary
economies” will benefit most from China. Some of these countries are more advanced than
others and most of them have different commodities and industries. Therefore, with China‟s
increasing production and increasing standard of living, other developing countries have the
potential to provide this rising dragon with the new goods that she requires. For Brazil, there has
been an eightfold increase in exports, mostly deriving from primary good exports such as soya
and iron ore to China during the past five years.29 This has been vital to Brazil as it stabilized its
economy and emerged from a near-meltdown in 2002.30 As can been seen in Graph 2, Brazil is
in the top 10 of China‟s main import partners, besides ASEAN as a whole. This definitely proves
the importance of China to these economies in terms of being a major trade partner.

China‟s expanding economy and increased standard of living creates lots of opportunities
for other developing countries to export their goods and services to. For example, although China
is the world‟s largest rice producer, its rice production concentrates in the country‟s south, where
low quality rice is dominant.31 Therefore, China imports higher quality rice from Thailand and

27
“South Africa: Engaging China,” bilaterals.org., June 21 2006,
http://www.bilaterals.org/article.php3?id_article=5083.
28
Lora.
29
“Brazil and China: Falling out of Love,” The Economist print edition, Aug 4 2005,
http://www.economist.com/world/la/displayStory.cfm?story_id=4249937.
30
Matt Moffett & Geraldo Samor, “Brazil Regrets its China Affair: Asian imports overwhelm dreams of a lucrative
partnership,” The Wall Street Journal, 12 October 2005, http://yaleglobal.yale.edu/display.article?id=6361
31
Ibid.
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Vietnam and this import will continue to increase as the Chinese income continues to grow.32
China‟s demand for some tropical and sub-tropical products is also likely to grow rapidly in the
long run.33 Palm oil, coconut oil, rubber, bananas, and sugar are among a wide range of products
that Southeast Asian developing countries can increase their exports especially to the north of
China.34 Besides rice, China also would import mineral products. China has limited mineral
resources in per capita terms; therefore, in recent years, mineral energy imports have increased
for China as China develops. In this case, oil-producing countries such as Algeria, Angola,
Ecuador, Indonesia, Iran, Iraq, Libya, Nigeria, Venezuela, Algeria, Mexico, Colombia, and
Sudan have the potential to export their mineral energy to China.35 As a country that has a huge
manufacturing industry, China would require raw materials and other intermediate goods to
manufacture the final product. China's huge appetite for raw materials indirectly benefits their
producers in the developing world by raising prices in the commodity markets.36

Graph 2: China’s Top Import Partners in 2006. (Source: Starmass International)

USD in billion

Country

32
Ibid.
33
Adhikari & Yang
34
Ibid.
35
Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Libya, Nigeria, and Venezuela are OPEC countries while Algeria,
Mexico, Colombia, and Sudan are net oil exporters and considered “Major Non-OPEC Countries” by the US
Department of Energy.
36
Simmons.
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In addition, as the Chinese people have a higher standard of living and a higher
disposable income, services sector in other developing countries such as tourism will receive a
boost. Chinese citizens are flocking popular destinations all over the world including developing
countries. China, with its 1.3 billion citizens has the potential of being a prime target for the
tourism industry of both developed and developing countries. The impact Chinese tourists can
make to an economy can be seen in a study done in Hong Kong - a study estimates that for every
2.7 jobs created in Hong Kong by inbound tourism from other countries, Chinese inbound
tourism creates 5 jobs because of the "multiplier effect" of the way Chinese tourists spend. 37
Pacific Islands such as Fiji and Vanuatu are applying to the China's National Tourism
Administration Committee for their countries to become approved holiday destinations for
Chinese citizens realizing that the Chinese market is a very lucrative market. In Malaysia, visa
regulations for Chinese visitors are being loosened in its move towards attracting more than one
million Chinese visitors annually.

Dependence on Primary Products

The other problem often cited as a threat to developing countries with China‟s rise in the
global economy is the increasing dependence on primary products exports by developing
countries. This problem is further exacerbated by the reluctance of China to import manufactured
products from other developing countries. Harry G. Broadman, a World Bank economic adviser
on Africa noted that “Africa is under-trading manufactured goods with China, but over-trading
oil with China.”38 A trade pattern in China's favor is taking shape: China is flooding Africa with
cheap manufactured goods while shipping back oil, timber, copper, diamonds and other raw
materials.39 In 2005, China imported 38.3 million tons of crude oil from Africa, accounting for
30% of its total oil imports. In the short term, yes, this is good for Africa; however, in the long
run the picture might not be so cheery. By looking at the trends of economic development, over
reliance on natural resources is not the best way to develop an economy. Over reliance on
primary products is very risky as it is very vulnerable to any shocks that would exist in nature or
in the market.

37
Donald Greenless, “The Subtle Power of Chinese Tourists,” International Herald Tribune, October 6 2005,
http://www.iht.com/articles/2005/10/06/business/tourism.php.
38
Scott Zhou, “China as Africa‟s Angel in White,” Asia Times Online, November 3 2006,
http://www.atimes.com/atimes/China_Business/HK03Cb04.html
39
Ibid.
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The continuous deterioration of the terms of trade of developing countries places

severe constraints on their development efforts. Besides the permanent erosion of
the purchasing power of their raw materials exports earnings, developing
countries are adversely affected by wide and continuous short-term fluctuation of
raw materials prices, mainly due to speculation, including sale of strategic
reserves by developed counties, lack of financial resources preventing developing
countries from maintaining their own national reserves, consumption boycotting,
disorder in international markets, and by depressed raw materials price levels,
which sometimes do not cover their production costs and which do not reflect
their share in the final products values and are not remunerative to producers.40

Nevertheless, it has to be noted that at least for the mean time, the governments of these African
nations have a market to sell their primary goods to. In addition, with the oil prices at an all time
high currently, there will definitely be windfall revenue for net oil producing developing
countries (See Graph 3). This is a good thing. A finding by Jacques Delacroix in the American
Sociological Review in his investigation on whether raw materials dependency would have
adverse effect on the national economy was proven wrong by a scientific cross-national study.
Delacroix found that in the short run, wealth leads to wealth. 41 Looking into history, Iceland
tripled in Gross National Product between 1955 and 1970; yet, in 1955, Iceland‟s export

40
“Raw Materials,” G77, http://www.g77.org/Docs/CPA-RM.html.
41
Jacques Delacroix, “The Export of Raw Materials and Economic Growth: A Cross-National Study,” American
Sociological Review, Vol. 42, No. 5. (Oct.1977), 805.
 Tay 14

consisted of lightly processed or unprocessed fish to tune of 85%. 42 On the other hand,
Argentina, whose agricultural export was only 60% of total foodstuff, only doubled in GNP in
the same period.43 Therefore, as China develops economically and consequently lead to a thirst
for more foreign products, these rich in raw material countries will be able to expand their wealth.

Ensuring Continuous Growth through Co-operation with China

In actuality, China‟s liberalization of its economy has benefited other developing
economies in someway or another. Mexico, who traditionally viewed China as a key contributor
to the country‟s sub-par economic growth, due in large part to China‟s use of cheap labor to
outmaneuver Mexico in the U.S. exports market, is realizing the importance of China in the
global economy. Two years ago, President Vicente Fox and President Hu Jintao formulated a
“Twenty Year Plan for the Future” for the establishment of a permanent bilateral committee to
promote the development of improved relations.44 Mexico realizes what China can provide to
their economy and therefore do not want to lose out to the benefits of China‟s increasing wealth.
Other Latin American countries such as Argentina and Brazil had earlier strengthened their ties
with China. Nevertheless, there are criticisms on China from countries such as Argentina and
Brazil today as they still have not seen China‟s commitment to increasing investing materializing
their economy but there is still room to remain optimistic on China‟s promise to ensuring
development in Latin America. There is definitely tons of opportunities for development and
investment in Latin America today and China for sure does not want to give away that
opportunity to another party.

In Africa, China‟s rise in the global economy was embraced with less reluctance. Hu
Jintao promised $5 billion in soft loans and credits for Africa and spoke of doubling Chinese aid
to the continent by 2009.45 A country such as Sudan, which has been shunned by the Western
powers because of their non-conformity with international human rights standards, now has the

42
Ibid.
43
Ibid.
44
Frederick W. Stakelbeck Jr., “China and Mexico Bury the Hatchet,” FrontPageMagazine.com,
http://www.frontpagemag.com/Articles/Printable.asp?ID=19857.
45
Mallet.
 Tay 15

support of China.46 As mentioned earlier, China is a great market to export their oil to and China
is actively investing in the development of Sudan today. Besides Sudan, African governments
generally maintain close ties with China because they realize that the partnership between China
and Africa would be an important partnership to further development in the African continent
and also Chinese interest internationally. In 2000, the China-Africa Cooperation Forum (CACF)
was jointly proposed and established by China and some African countries in 2000, on the basis
of “equal negotiation, enhancing understanding, increasing consensus, strengthening friendship
and promoting cooperation to conform to the changing international situation, meet the
requirements of economic globalization and seek co-development through negotiation and
cooperation.”47 On the 5th of November 2006, a declaration was adopted as a result of the Beijing
Summit proclaiming the establishment of a new type of strategic partnership between China and
Africa.48 In this declaration, “China reaffirms its support for the African countries in their efforts
to strengthen themselves through unity and independently resolve African problems, supports the
African regional and sub-regional organizations in their efforts to promote economic integration,
and supports the African countries in implementing the „New Partnership for Africa's
Development‟ programs.”49

Back on the Asian continent, ASEAN and China have reached an agreement that will
lead to the creation of the world‟s largest free trade zone of 2 billion people by 2010. 50 Through
the “Agreement on Trading in Goods of the Framework Agreement on Comprehensive
Economic Cooperation between ASEAN and China”, the establishment of a Free Trade Area
will be completed by 2015. ASEAN countries are actually well positioned to provide China with
competitive manufactured goods while others can become large suppliers of resource-based
commodities to China.51 However, time was given to these ASEAN countries to further improve
their government structure and government to ensure that there would not be an unfair playing

46
Due to this phenomenon too, China has been criticized for undermining IMF led structural adjustment programs
and also for the disregard of human right violations of some African regimes.
47
“Creation of the Forum,” China Internet Information Center, December 10 2003,
http://www.china.org.cn/english/features/China-Africa/82047.htm
48
“China-Africa Beijing Summit Adopts Declaration,” Xinhua News Agency, November 5 2006,
http://www.china.org.cn/english/features/focac/187798.htm
49
Ibid.
50
“China, ASEAN to create trade bloc,” World, CNN.com, November 29 2004,
http://www.cnn.com/2004/WORLD/asiapcf/11/29/laos.asean/index.html.
51
Adhikari & Yang.
 Tay 16

field. The Free Trade Agreement with the Old ASEAN members which consist of Thailand,
Indonesia, Malaysia, Brunei, Singapore, and the Philippines will be effective in 2010 while the
Free Trade Agreement with other ASEAN members, the “New ASEAN” which consists of
Myanmar, Vietnam, Laos, and Cambodia will only be effective in 2015, giving time for these
countries to improve the structure of the government and to develop their domestic industries.
When this FTA is realized, it will consist of a combined population of nearly two billion which is
one third of the world‟s population and gross domestic product of over $2 trillion.

Future Prospects
China‟s entrance into the global economy means that there is another formidable
competitor for all other economies. As Adam Smith said,
In every profession, the exertion of the greater part of those who exercise it, is
always in proportion to the necessity they are under of making that exertion... and,
where competition is free, the rivalship of competitors, who are all endeavouring
to justle one another out of employment, obliges every man to endeavour to
execute his work with a certain degree of exactness... Rivalship and emulation
render excellency, even in mean professions, an object of ambition, and
frequently occasion the very greatest exertions.52

This is also relevant on the global scale - healthy competition is good; healthy competition will
improve efficiency; and, improved efficiency will benefit everybody in the long run. As
mentioned earlier, ASEAN countries are losing FDI‟s to China - structural weaknesses in
ASEAN countries can be attributed for this loss of FDI. This weakness became obvious during
the 1997-98 Asian Financial Crisis that hit countries such as Thailand, Philippines, Indonesia,
and Malaysia. It is therefore not surprising that FDI inflows to China increased since the Asian
Crisis. 53 In addition, China‟s accession to the WTO 3 years after the crisis boosted China‟s
attractiveness to FDI as it would mean not only greater openness but also increased policy
transparency, better governance, and greater business predictability.54

Due to the competition posed by the Chinese economy, ASEAN leaders had no other
choice but to liberalize their government and improve the structure of their government. They no
52
Adam Smith, The Wealth of Nations, Book V, Chapter I, Part III, Article III. ed. Edwin Cannan, 5th Edition
London: Methuen and Co. Ltd., 1904.
53
Sutter, 193.
54
Ibid.
 Tay 17

longer could get away with their old ways and still attract investors – there is another market to
invest in. As mentioned earlier, it was during this time that cases of corruption and other
weaknesses in the structures of the governments in South East Asia were revealed. In Malaysia,
this was the time when the anti-corruption campaigns were reignited to gain back the credibility
of the government. This was done to assure foreign investors that their investment would not go
into the wrong hand. This is an example of the governments of South East Asian nation‟s
redoubled effort to attract foreign investors. In addition, under the advice of the International
Monetary Fund, South East Asian governments liberalized their economy.55 They also discussed
further liberalizing the investment opportunities in ASEAN and endeavored to establish special
economic zones along the lines of those in China. 56 Therefore, over time, the prospects for
developing countries are actually bright, but if and only if they improve on their structural
weaknesses and continue to have a friendly business environment.

China‟s WTO accession will boost her credibility as it would mean not only openness but
also increased transparency, better government, and predictability. 57 This will attract even more
capital inflows and due to that, it will result in a stronger Renminbi. It is possible that the real
exchange rate of the Renminbi will appreciate (and the spot exchange rate too given that the
Chinese government does not try to control too much of the exchange rate regime) rather than
depreciate as one would predict from the impact of trade liberalization on China‟s current
account. 58 If the Renminbi appreciates, Chinese goods will be more expensive and other
developing countries may have more chances in competing with Chinese goods as there would
be stronger demand for goods and service from the rest of the world. For China, Chinese imports
would be cheaper and therefore will increase in demand, benefiting other countries.

In addition, recently, more and more FDI inflows to China are focusing on the service
sector and more technologically advanced industries. Even the government is committed towards

55
With the exception of Malaysia as Malaysia did not give in to pressures from the IMF. Malaysia took the opposite
route and pegged their exchange rate to the US dollar, restricted the flow of the Ringgit overseas, and also closed
offshore stock trading centers.
56
Sutter.
57
Ibid.
58
Ibid.
 Tay 18

opening up China‟s services sector in the next 5 years.59 In addition, if the focus on the services
sector continues, the competitiveness in Chinese manufactured exports will reduce, creating
more benefits for other developing countries. As China moves from low-value-added to a higher
value added industry, this should leave more room for low-income developing countries such as
South Asian countries and poorer ASEAN countries to expand their labor-intensive exports.60

Conclusion
In light of current evidence, it can be clearly discerned that China‟s involvement in the
global economy is not a loss to developing countries. It may look like some developing countries
such as Mexico loses and countries such as Sudan wins; but, in reality, China can benefit all
these countries in this liberal global economy. Therefore, today, there is a very integral need to
promote South-South cooperation in all fields to benefit peace and development all over the
world. The emergence of China might prove to be the solution to the North-South or more
contemporary, the Developed-Developing dilemma. However, there are some steps to be taken
domestically for other developing countries to take before being able to reap the benefits of trade
and cooperation with China. Developing countries will need to make strategic investment in
increasing their export capacity and in building their marketing network in China. China‟s rise
provides unprecedented market opportunities in addition to being another important competitor
in the market. This means that developing countries have to improve themselves to be able to
compete with China to reap the benefits of this order and this is not impossible. I remember
listening to the response of a Chinese advisor in the Permanent Mission of China to the United
Nations, when asked about how developing countries suffer because of China, he said “other
developing countries have to work hard to achieve what China has achieved today as what China
has did in the past; they have to improve themselves for them to be successful!”

59
“China official says China to further open service sector,” AFX News Limited, May 19 2006, forbes.com,
http://www.forbes.com/home/feeds/afx/2006/03/19/afx2605717.html
60
But China has huge labor force and vast undeveloped regions in the west, which will continue to exert pressure on
its foreign competitors in labor-intensive goods for some time to come. Adhikari & Yang.
 Tay 19

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