The Intricacies of China Unseating Germany As the World's Biggest Exporter! (Part 1)

In the January 10, 2010 edition of the news, it wasit.
promulgated that China has overtaken Germany asThe objective of this two part article is to discuss in
the world's biggest exporter even though fullcircumspect the ramifications of the unanswered
confirmation is expected in February 2010 when thequestions and what it means for the world.
final figures for Europe's biggest economy is released.Currency revaluation issue
The assertion from the perspective of the author ofIn the next few months and perhaps years there is
the article is a reflection of the economic stridesexpected to be a growing pressure on China by the
China has made to reach a pinnacle of an economicUnited States, Germany and the other economies of
super power and also a vivid sign of a gradual shiftthe world about the urgent need for China to
of power from the West to the East. According torevaluate its currency the Yuan to correct for and
the article, the total export in 2009 for China wascurtail the growing trade imbalance between China
more than $1.2 trillion as against $1.17 forecasted forand these economies. It is an undisputable fact that
Germany. Sincerely, this is not the first time China hasChina has trade surplus with almost all these countries
overtaken Germany with regards to economy issuesas these economies are drowning in mounting trade
as it is germane and a memento of what happeneddeficit with no end in sight. The fact is China has
in 2007 with regards to the two countries. Recall inbeen through such barrage of criticisms before with
2007, China overtook Germany as the world's thirdregards to the impact of its low valued currency on
biggest economy and obviously that should haveexports. Recall in 2005, China under growing criticism
served as a signal that the country is on course toof the impact of its low valued currency on
unseat Germany as the world's largest exporter. Atinternational trade was compelled to revalue the Yuan
least, the incident should not preposterous to theby a whooping 2% against the dollar. Additionally, a
world considering the fact that the symptoms werepolicy change of pursuing a floating exchange rate
evident enough.system for its currency was effected. The corollary
In my article titled "Another Economic Bubble Burstwas the creation of a currency (the Yuan) whose
Ahead- China, I prognosticated the possibility of Chinavalue was based on a set of major currencies which
becoming the locomotive engine driving the worldcould deviate as much as 0.5% within a day. Yet
economy as it is predestined to lead the world in theagain, the western world in the nearest future may
industrial sector, technology sector and the financialbe agitating for another round of revaluation.
sector. Believe it or not, the attainment of the statusEuropeans and the United States may be perturbed
of the world's largest exporter coupled withbecause competition with China is becoming difficult
technology and strong financial base suggest aprimarily due to the Yuan being relatively low in value
paradigm of the country being the "locomotive"which makes the products from China less expensive
engine driving the world economy. If China continuesfor foreign countries and that of EU and U.S more
to maintain its GDP growth rate of over 8% whilstexpensive. However, criticisms may not be feasible
that of the western world hovers around growththis time. It is likely China may not vouchsafe to the
values of less than 3%, it is likely China will dethronewestern countries led pressure to revalue its
Japan as the world's second biggest economy by thecurrency. Apparently, the world may be forced to
year 2015 and if possible in the years after overtakeseek for other options of dealing with the situation
United States as the world's largest economy. Thiswhich could call for trade tactics such as imposition of
hypothesis is based on the 2008 GDP growthtrade tariffs, quotas e.t.c. on Chinese exports. But
estimates where China recorded 9.6% with Japanone wonders if such option will yield the expected
recording -0.4%, Germany 1% and U.S 1.1%.results as well judging from the fact that an action
Optimists argue that it is not possible for China toplan of this sort may seem more visionary to China
overtake United States as the world's biggestthan pragmatic and results-producing. On the other
economy and they could be partially right. However,hand, China may argue that revaluation of the yuan
the world did not envision China would overtakewill have marginal impact on the exports trend and
United States in Auto sales in 2009. Again, analyst didsubsequently the global imbalance using the
not envisage China overtaking Germany so soon anddevelopments in 2005 as the basis for argument. In
here we are it has happened. Indeed, the momentretrospect, the revaluation of its currency in 2005
may be right and China could be said to be on itsproduced a marginal effect on the attractiveness of
way to the throne. As an analyst, I am of the viewits exports and consequently China may not yield to
that China can overtake Japan but not United States.the exchange rate policies again. Analytically,
There are several factors involved here which will berevaluation may not reduce the competitiveness of
discussed in a later article. But for now, I will touch onChinese products neither would it correct the
one of the factors namely the economic statisticinternational trade imbalance due to the fact that
GDP (purchasing power parity) per CAPITA which isthere are other factors other than exchange rate
only an indicator of the standard of living. Though thispolicies that contribute to the attractiveness of its
is not a true measurement for standard of living itexports. These are factors that are contributing
can be used as a proxy for accessing the standardimmensely to the low priced exports therefore
of living of countries. China has a population of aboutexacerbating the global trade imbalance.
1.3 billion with an estimated growth of 0.655 % (2009Now, the factors other than exchange rate that
estimate) whilst the U.S has a population of aboutmake its exports superior in terms of global demand
307 million and an estimated growth of 0.975 %are government subsidies, expansion of China's trade
(2009 estimate). China has estimated GDP (ppp) perhorizon and piracy problems. Government provides
CAPITA of $2,033 and is ranked 131th out of 207subsidies for exporters which culminate in lower cost
economies in the world in terms of per capita income.of production. These firms and investors receive free
United States value is $44,155 and is ranked 8th alsoloans and some free factors of production such as
out of 207 economies. Hypothetically, the standard ofland which has led to lower cost of production and
living of the people in the United States should belower pricing of exports. There are also cases of
about ten times better than that of China. Doing theother government fiscal inputs such as increased tax
math here, it presupposes that the ability of therebates on exports, increased tax refunds and
citizens to impact the economy (in terms of GDPimproved export credit insurance during the year
growth) through their purchasing power is ten times2009. Let's not forget also the 4 trillion yuan ($586
more for United States. This also means the ability ofbillion) stimulus package injected into the economy by
the United States to maintain its economy sizethe government. All these factors are incentives that
judging from the fact that the U.S economy dependsculminate in a lower cost of production and
much on domestic consumer spending is moresubstantiate lower pricing of its exports in addition to
predictable as against China. If China's economy is tomaking it more competitive. Ultimately, if China should
be dependant on domestic spending in the midst ofrevalue its currency again to make its products
global slump in exports, then the low GDP (ppp) perexpensive, the effect on trade imbalance would be
CAPITA signals a disadvantage compared to Unitedmarginal. But the question that remains is whether
States. China may increase its GDP growth but itthe government will remove these incentives for its
would have to leverage its per capita by bridging theexports to be expensive and to plummet.
wide purchasing power parity gap between its urbanCurrently, China has judiciously widen its trade horizon
and rural population segments. Subsequently, it maywith several countries in the world and should the
call for policies that would increase the standard ofwestern world reduce their imports of Chinese
living of its people across all segments.goods, there is the possibility of China expanding its
How be it, China cannot overtake the U.S in terms oftrade with the East (The Asian block), South America
economy size until this population segment factor and(predominantly Brazil based on BRIC alliance), and
other factors are diligently pursued and completed.Africa where it has made unimaginable strides. This is
Meanwhile, in terms of global competitiveness theyeven against the background that the western world
are ranked nearly the same (U.S is 5.59/134 whilstis the major trading partner of China. Turning their
China is 4.73/134). However, in terms of attractingattention away from the western world will be a
and retaining investors or Foreign Direct Investment,desperate move as the country would want to
U.S is better ranked than China. Reminder is themaintain its superiority in exports. On the other hand,
growing impasse between Google and China aboutpeople in the western world are attracted to China's
the internet security breach prompting threats oflow priced products because of the propensity to
Google leaving China. What is not clear is whethermake some savings in this era of economic hardships.
China would accept the departure of Google. IfSo the situation seems very paradoxical with regards
Google should leave, what effect will it have on theto the export between China and the western world.
credibility of companies or nations doing business withAnother factor that has contributed to reduction in
China? Now, proponents of GDP per CAPITAmarket share for the western world is the lack of
economics may argue that the GDP per CAPITArestrictions on piracy in China. Individuals engage in
statistic is not a good measure for standard of livingfictitious production of products that are similar to
and personal income levels in a country. Nevertheless,those produced by EU or United States firms
all things being equal there is a systematic level ofoperating in China and abroad. For example low-tech
correlation between GDP per CAPITA and standardgoods or electronic gadgets such as CDs and DVDs
of living in most countries. That is to say GDP percan easily be produced by individuals and this is taking
CAPITA decreases as the standard of living decreasemarket share from other countries. The other serious
and vice versa.defect of this problem is the reduction in imports as
Strangely, the news article attributed the feat ofwell for China. The pirated products increase supply
China to its ability to enact policies to deal with theand so lessen proclivity towards more imports. China
world recession. The article emphasized that itsmuch as it exports lots of low-tech goods also
policies were able to cushion the economic shockimports many as well but the imports are likely to be
from the global economic crises whilst other nationsreduced by the pirated products in the system. This
were overwhelmed by the crisis. It must be stressedmeans due to piracy products in the system, there is
here that much as the policies and global recoveryless import demand compared to actually what the
were contributing factors, the real cause of China'simport should have been. This is to the advantage of
survival and stronger emergence is bottled up in itsChina obviously increasing its net exports and GDP as
exchange rate policies and government subsidies andwell.
financial assistance package that is the stimulus. InAll in all, the demand by the world on China to pursue
fact, the combine policy framework of exchangeexchange rate policies to correct the imbalance in
rate manipulation and government subsidies promotestrade may not suffice because of these factors and
low pricing strategy for its exports ultimatelysecondly China would want to maintain its position in
increasing the attractiveness of its products and alsothe world economy. Nevertheless, on a positive note
its market share of the world's export. Unfortunately,the growth of China is good for the world. Like a
the global trade imbalance cannot be completelyGerman analyst recently said, growth in China is good
removed as the Chinese government would want tofor the other economies of the world as the
enact policies and strategies that will give Chinesecountry's demand for capital goods such as
products an edge in exports in addition to promotingmachinery, raw materials, oil and high value products
less import. Now, in the midst of all theseused in its industrial sector also stimulates exports
developments there are two questions that needs tofrom other countries such as Germany and United
be addressed by the world and they areStates. However, what remains to be known is
1. Whether China the current locomotive engine ofwhether future policies will seek to monopolize the
the world economy will bow to anothercurrencyworld economy by promoting vertical integration in
revaluation pressurethe Chinese industrial sector. An action plan of vertical
2. Whether the trade imbalance between China andintegration will ultimately reduce the importation of
the world is a threat in terms of monopolyheavy duty or high valued products by firms in China.
andwhether the world has other options to deal withRead the next segment of this article!