China and the Global Economy...Singapore, Thailand, and Vietnam--+ 3 (China including Hong Kong,...

China and the Global EconomyLawrence J. Lau

Ralph and Claire Landau Professor of Economics, The Chinese University of Hong Kong

And

Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University

The 7th Advanced Programme for Central Bankers and Regulators

The Lau Chor Tak Institute of Global Economics and Finance

The Chinese University of Hong Kong

Hong Kong, 15 March 2019

Tel: +852 3943 1611; Fax: +852 2603 5230

Email: [email protected]; WebPages: www.igef.cuhk.edu.hk/ljl

*All opinions expressed herein are the author’s own and do not necessarily reflect the views of any of the

organisations with which the author is affiliated.

2

Outline Introduction—The Current State of the Chinese Economy

Global Economic Trends

The Future of Economic Globalisation

The China-U.S. Trade War

Projections of the Future

Concluding Remarks

Introduction The Chinese economy has been growing without interruption at an

average annual real rate of almost 10 percent since 1978, even though it has slowed down to an average rate of growth of around 6.5 percent in more recent years. Chinese GDP grew from US$358 billion in 1978 to US$13.1 trillion in 2018 (in 2018 prices and exchange rate), almost 37 times, to become the second largest economy in the world, with two-thirds of the GDP of the largest economy, the United States.

Chinese real GDP per capita grew from US$372 in 1978 to US$9,415 in 2018 (in 2018 prices), at an average annual rate of over 8 percent, without any interruption, achieving a more than 25-fold increase. Even then, China as a country still only ranked below seventieth in terms of real GDP per capita in the world. And its real GDP per capita is still less than one-sixth of the U.S. real GDP per capita, which exceeds US$60,000.

3

Chinese Real GDP and Its Annual Rate of

Growth since 1949 (trillion 2018 US$ & %)

4

-28

-24

-20

-16

-12

-8

-4

0

4

8

12

16

20

24

28

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1949

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

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1965

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1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Percent

US$

tri

llion

s, 2

018

pri

ces

Chinese Real GDP and Its Rates of Growth since 1949

(trillion 2018 US$ and percent)

Rates of Growth of Chinese Real GDP (right scale)

Chinese Real GDP, in 2018 prices

Chinese Real GDP per Capita and Its Annual

Rate of Growth (thousand 2018 US$ & %)

5

-28

-24

-20

-16

-12

-8

-4

0

4

8

12

16

20

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

1949

1950

1951

1952

1953

1954

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1958

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1960

1961

1962

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1964

1965

1966

1967

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1980

1981

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1983

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1989

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1991

1992

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1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Percent

US$

tho

ousa

nds,

201

8 p

rice

s

Chinese Real GDP per Capita and Its Rate of Growth since 1949

(thousand 2018 US$ and percent)

Rates of Growth of Chinese Real GDP per Capita (right

scale)

Chinese Real GDP per capita, in 2018 prices

IntroductionResearchers at the International Monetary Fund (IMF) and

the World Bank have found, on the basis of “purchasing-power-parity (PPP)” calculations, that the Chinese economy overtook the U.S. economy in 2014.

However, PPP comparisons of GDPs between economies are not reliable because they are highly sensitive to the set of so-called “international prices” chosen to evaluate the goods and services produced in the different economies. The choice of prices can affect the resulting estimates of the PPP GDPs greatly, especially because of the valuation of the non-tradable goods and services, the actual prices of which can differ significantly internationally due to differences in natural resource endowments such as land and minerals and in consumer preferences.

6

77

Quarterly Rates of Growth of Chinese Real

GDP, Y-o-Y

-5%

0%

5%

10%

15%

20%

25%

1983q

11983q

31984q

11984q

31985q

11985q

31986q

11986q

31987q

11987q

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11988q

31989q

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31990q

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31991q

11991q

31992q

11992q

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11993q

31994q

11994q

31995q

11995q

31996q

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31997q

11997q

31998q

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31999q

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32000q

12000q

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q1

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32016q

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32017q

12017q

32018q

12018q

3

Per

cen

t p

er a

nn

um

Quarterly Rates of Growth of Chinese Real GDP, Y-o-Y

GDPQ1 GDPQ2

GDPQ3 GDPQ4

Monthly Rates of Growth of Real Value-Added

of the Chinese Industry, Y-o-Y

8

0

5

10

15

20

25

Jan

-95

Ap

r-95

Ju

l-95

Oct

-95

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-00

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r-00

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l-00

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-00

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-01

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r-01

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l-01

Oct

-01

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r-02

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l-02

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r-03

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l-03

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r-04

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r-05

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r-07

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r-08

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r-09

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r-10

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-11

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r-11

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r-12

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-13

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-14

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r-14

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l-14

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-14

Jan

-15

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r-15

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l-15

Oct

-15

Jan

-16

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r-16

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l-16

Oct

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Jan

-17

Ap

r-17

Ju

l-17

Oct

-17

Jan

-18

Ap

r-18

Ju

l-18

Oct

-18

%

Monthly Rates of Growth of Real Value-Added of the Chinese Industry, Year-over-Year

Global Economic TrendsThere are four important developments in the global

economy during the past four decades. They are: (1) The reform and opening of the Chinese economy and its

participation in the world since 1978, enhancing both global supply of and demand for goods and services;

(2) Economic globalisation, increasing international trade, direct investment and portfolio investment around the world;

(3) The fragmentation of production, made possible by advances in information and communication technology, giving rise to widely dispersed international supply chains and international division of labour; and

(4) The rise of the internet economy as a marketplace for both sellers and buyers. 9

Global Economic TrendsThese developments have resulted in: The centre of gravity of the global economy, in terms of both

GDP and international trade, has been gradually shifting from North America and Western Europe to East Asia and South Asia, and within East Asia from Japan to China. The shift is still on-going, with both China and India being currently the fastest-growing economies in the world.

Close to 1 billion people worldwide (740 million in China alone) have been lifted out of poverty as a result of this economic globalisation.

The internet economy augments the variety of choices, increases competition and reduces transaction costs, including search costs.

Each and every economy has benefitted in the aggregate.10

Global Economic TrendsHowever, while each and every economy has benefitted

in the aggregate, this economic globalisation has created

both winners and losers within each economy. But these

losers have not shared in the benefits and have not been

adequately compensated. This is the source of the anger

and frustration in many developed economies around the

world.

Can economic globalisation continue in the future?

Without continuing globalisation, can the currently

developing economies become developed?11

Global Economic Trends: The Shifting Center

of Gravity of the Global Economy In 1970, the United States and Western Europe together

accounted for almost 60% of world GDP. By comparison, East Asia (defined as the 10 Association of Southeast Asian Nations (ASEAN)--Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam--+ 3 (China including Hong Kong, Macau and Taiwan, Japan and the Republic of Korea)) accounted for only approximately 10% of world GDP.

Hong Kong, the Republic of Korea, Singapore and Taiwan are also known collectively as the East Asian “Newly Industrialised Economies (NIEs)”. 12


of Gravity of the Global Economy

By 2017, the share of United States and Western Europe

combined in world GDP has declined to approximately

40% whereas the share of East Asia has risen to around

28%.

The Japanese share of world GDP declined from a peak

of almost 18% in the mid-1990s to 6.0% in 2017 while

the Mainland Chinese share of world GDP rose from

3.1% in 1970 and less than 4% in 2000 to over 15.1% in

2017.

13

The Distribution of World GDP, 1970 and

2017, US$

14

Brunei

0.0%

Cambodia

0.0%

Mainland China

3.1% Hong Kong

0.1%

Indonesia

0.3%

Japan

7.1%

Korea

0.3% Lao

0.00%Macao

0.0%Malaysia

0.1%

Myanmar

0.1%Philippines

0.2%Singapore

0.1%Thailand

0.2%Vietnam

0.1%

Taiwan, China

0.2%

United States

36.4%

Euro Zone

21.7%

Other Economies

29.8%

1970

Brunei

0.0% Cambodia

0.0%

Mainland China

15.1%

Hong Kong

0.4%

Indonesia

1.2%

Japan

6.0%Korea

1.9%Lao

0.02%

Macao

0.1% Malaysia

0.4%

Myanmar

0.1%

Philippines

0.4%

Singapore

0.4%

Thailand

0.6%

Vietnam

0.3%

Taiwan, China

0.7%

United States

23.9%Euro Zone

15.7%

Other Economies

33.0%

2017

The Shares of East Asia, China, Japan and

South Korea in World GDP, 1960-present

150

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

1960

1961

1962

1963

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1966

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1969

1970

1971

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1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Per

cen

t

The Shares of East Asia, China, Japan and South Korea in World GDP, 1960-present

East Asian Economies

Mainland China

Japan

Korea


of Gravity of the Global Economy In 1970, the United States and Western Europe together

accounted for almost 47% of world trade in goods and services. By comparison, East Asia accounted for 9.5% of world trade.

By 2017, the share of United States and Western Europe combined in world trade has declined to 36.5% whereas the share of East Asia has risen to almost 27.8%.

The Mainland Chinese share of world trade rose from 0.6% in 1970 to 10.2% in 2017. The growth in Chinese international trade may be attributed in part to adoption of current-account convertibility of the Renminbi by China in 1994, accompanied by a significant devaluation of the Renminbi, and to Chinese accession to the World Trade Organisation (WTO) in 2001.

Since 2015, Mainland China has also been the largest trading-partner country of the U.S., surpassing Canada.

16

17

The Distribution of International Trade in

Goods and Services, 1970 and 2016

17

Brunei

0.0%

Cambodia

0.1%

China

10.1%

Hong Kong

2.9%Indonesia

0.8%

Japan

3.8%

Korea

2.7%

Lao PDR

0.0%Macao

0.1%

Malaysia

0.9%

Philippines

0.5%

Singapore

2.3%Thailand

1.2%

Vietnam

0.9%

Taiwan, China

1.6%

United States

12.0%

Euro Zone

25.2%

Other Economies

34.8%

2016

Brunei

0.0%

Cambodia

0.0%

China

0.6%

Hong Kong

0.9%

Indonesia

0.4%

Japan

5.5%

Korea

0.4%

Lao PDR

0.0%

Macao

0.0%

Malaysia

0.4%

Philippines

0.4%

Singapore

0.7%

Thailand

0.3%

Vietnam

0.0%Taiwan, China

0.0%

United States

14.6%

Euro Zone

32.4%

Other Economies

43.3%

1970

18

The Rising Share of East Asian Trade in Total

World Trade, 1960-present

6

8

10

12

14

16

18

20

22

24

26

28

30

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Perc

ent

The Rising Share of East Asian Trade in Total World Trade, 1960-present

Share of World Exports

Share of World Imports

Share of Total World Trade

19

The Distribution of the Market Capitalization

of World Stock Exchanges by Region, percent

0

5

10

15

20

25

30

35

40

45

50

55

1990

1991

1992

1993

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1995

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1998

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2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

The Distribution of the Market Capitalization of World Stock Exchanges by Region, percent

East Asian and South Asian Stock Exchanges

U.S. Stock Exchanges

European Stock Exchanges

The Shifting Center of Gravity of the Global

Economy: The Partial De-Coupling Hypothesis Throughout the 2007-2009 global financial crisis, as well as the

subsequent European sovereign debt crisis, the East Asian economies continued to do reasonably well. Mainland China, in particular, has been able to maintain its real rate of growth above 6.5% since 2007, lending credence to the “Partial De-Coupling Hypothesis”, that is, the East Asian economies can continue to grow, albeit at lower rates, even as the U.S. and European economies go into economic recession.

This partial de-coupling can occur because of the shift of the economic centre of gravity of the world from the United States and Western Europe to Asia (including both East Asia and South Asia) over the past four decades.

20

The Shifting Center of Gravity of the Global

Economy: The Partial De-Coupling Hypothesis A particularly interesting development is the rise in intra-East

Asian international trade. The share of East Asian exports destined for East Asia accounts for 50 percent of total East Asian exports at the present time. This is a sea-change compared to 30 years ago when most of the East Asian exports were destined for either the United States or Western Europe.

Similarly, the share of East Asian imports originated from East Asia has also stayed around 50 percent.

21

Lawrence J. Lau, The Chinese University of Hong Kong 22

The Share of East Asian Exports

Destined for East Asia

38

40

42

44

46

48

50

52

54

Jan

/98

Ap

r/98

Jul/9

8O

ct/9

8Ja

n/9

9A

pr/

99Ju

l/99

Oct

/99

Jan

/00

Ap

r/00

Jul/0

0O

ct/0

0Ja

n/0

1A

pr/

01Ju

l/01

Oct

/01

Jan

/02

Ap

r/02

Jul/0

2O

ct/0

2Ja

n/0

3A

pr/

03Ju

l/03

Oct

/03

Jan

/04

Ap

r/04

Jul/0

4O

ct/0

4Ja

n/0

5A

pr/

05Ju

l/05

Oct

/05

Jan

/06

Ap

r/06

Jul/0

6O

ct/0

6Ja

n/0

7A

pr/

07Ju

l/07

Oct

/07

Jan

/08

Ap

r/08

Jul/0

8O

ct/0

8Ja

n/0

9A

pr/

09Ju

l/09

Oct

/09

Jan

/10

Ap

r/10

Jul/1

0O

ct/1

0Ja

n/1

1A

pr/

11Ju

l/11

Oct

/11

Jan

/12

Ap

r/12

Jul/1

2O

ct/1

2Ja

n/1

3A

pr/

13Ju

l/13

Oct

/13

Jan

/14

Ap

r/14

Jul/1

4O

ct/1

4Ja

n/1

5A

pr/

15Ju

l/15

Oct

/15

Jan

/16

Ap

r/16

Jul/1

6O

ct/1

6Ja

n/1

7A

pr/

17Ju

l/17

Oct

/17

Jan

/18

Ap

r/18

%

The Share of East Asian Exports Destined for East Asia

Lawrence J. Lau, The Chinese University of Hong Kong 23

The Share of East Asian Imports

Originated from East Asia

42

44

46

48

50

52

54

56

58

Jan

/98

Ap

r/98

Jul/9

8O

ct/9

8Ja

n/9

9A

pr/

99Ju

l/99

Oct

/99

Jan

/00

Ap

r/00

Jul/0

0O

ct/0

0Ja

n/0

1A

pr/

01Ju

l/01

Oct

/01

Jan

/02

Ap

r/02

Jul/0

2O

ct/0

2Ja

n/0

3A

pr/

03Ju

l/03

Oct

/03

Jan

/04

Ap

r/04

Jul/0

4O

ct/0

4Ja

n/0

5A

pr/

05Ju

l/05

Oct

/05

Jan

/06

Ap

r/06

Jul/0

6O

ct/0

6Ja

n/0

7A

pr/

07Ju

l/07

Oct

/07

Jan

/08

Ap

r/08

Jul/0

8O

ct/0

8Ja

n/0

9A

pr/

09Ju

l/09

Oct

/09

Jan

/10

Ap

r/10

Jul/1

0O

ct/1

0Ja

n/1

1A

pr/

11Ju

l/11

Oct

/11

Jan

/12

Ap

r/12

Jul/1

2O

ct/1

2Ja

n/1

3A

pr/

13Ju

l/13

Oct

/13

Jan

/14

Ap

r/14

Jul/1

4O

ct/1

4Ja

n/1

5A

pr/

15Ju

l/15

Oct

/15

Jan

/16

Ap

r/16

Jul/1

6O

ct/1

6Ja

n/1

7A

pr/

17Ju

l/17

Oct

/17

Jan

/18

Ap

r/18

%

The Share of East Asian Imports Originated from East Asia

The Share of East Asian Exports Destined for E. Asia &

the Share of E. Asian Imports Originated from E. Asia

34

36

38

40

42

44

46

48

50

52

54

56

58

60

Ja

n/9

8A

pr/

98

Ju

l/9

8O

ct/9

8Jan

/99

Ap

r/99

Ju

l/99

Oct

/99

Jan

/00

Ap

r/00

Ju

l/00

Oct

/00

Ja

n/0

1A

pr/

01

Ju

l/0

1O

ct/0

1Jan

/02

Ap

r/02

Ju

l/02

Oct

/02

Jan

/03

Ap

r/03

Ju

l/0

3O

ct/0

3J

an

/04

Ap

r/0

4J

ul/0

4O

ct/0

4Jan

/05

Ap

r/05

Ju

l/05

Oct

/05

Jan

/06

Ap

r/0

6J

ul/0

6O

ct/0

6J

an

/07

Ap

r/0

7Ju

l/07

Oct

/07

Jan

/08

Ap

r/08

Ju

l/08

Oct

/08

Jan

/09

Ap

r/0

9J

ul/0

9O

ct/0

9J

an

/10

Ap

r/1

0Ju

l/10

Oct

/10

Jan

/11

Ap

r/11

Ju

l/11

Oct

/11

Ja

n/1

2A

pr/

12

Ju

l/1

2O

ct/1

2J

an

/13

Ap

r/13

Ju

l/13

Oct

/13

Jan

/14

Ap

r/14

Ju

l/14

Oct

/14

Ja

n/1

5A

pr/

15

Ju

l/1

5O

ct/1

5J

an

/16

Ap

r/16

Ju

l/16

Oct

/16

Jan

/17

Ap

r/17

Ju

l/17

Oct

/17

Ja

n/1

8A

pr/

18

%


and The Share of East Asian Imports Originated from East Asia

The Share of East Asian Imports Originated from East Asia


25

Global Economic Trends: The Slowdown in

the Growth of GDP,Trade & Direct Investment Both total real world trade and total world foreign direct investment

have grown much faster than total real world GDP since 1970.

Between 1970 and 2008, the beginning of the most recent global

financial crisis, total real world GDP grew at an average annual rate of

3.3% while total real world trade grew at an average annual rate of

5.5%.

However, since the global financial crisis that began with the U.S.

sub-prime loan crisis in 2007, the average annual rates of growth of

real world GDP and real world trade have declined to 2.2% and 2.5%

respectively. The recent fall in the nominal value of total world trade

is due in part to the fall in the world price of oil.

2017 turned out to be the best year for the developed economies—the

U.S., the European Union and Japan—in a decade.

26

Real World GDP and Trade in Goods and

Services and Their Growth Rates (2017 prices)

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

-60

-55

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

PercentU

SD t

rilli

ons,

in

2016

pri

ces

World Real GDP and Real Total Trade and Their Growth Rates, in 2017 prices

Rates of Growth of World Total Trade in Goods and Services (right axis)

Rates of Growth of World GDP (right axis)

World Real Total Trade in Goods and Services

World Real GDP


the Growth of GDP,Trade & Direct Investment It is unlikely that the world economy as a whole would resume its

heady rates of growth in GDP and trade that it achieved prior to

the global financial crisis of 2008 in a sustained manner.

Cross-border trade and direct investment are no longer the major

drivers of world economic growth.

Protectionism, isolationism, nationalism and populism are rearing

their heads and the entire world faces the risks of trade wars and

economic de-globalisation.

27


the Growth of GDP,Trade & Direct Investment Total world trade as a percent of total world GDP increased from

26% in 1970 to 62% in 2008, but it has since stalled and has

begun a gradual decline.

The total values of international trade of the United States and

China, the two largest economies and also the two largest trading

economies in the world, have declined in both 2015 and 2016.

However, 2017 saw a rebound in the growth of world trade, but it

was probably due, in part, to the recovery from a low base.

Economic globalisation has reached a turning point. Is it likely to

be reversed in the future?

28

29

Total World Trade in Goods and Services as a

Percentage of World GDP since 1960

20

24

28

32

36

40

44

48

52

56

60

64

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

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1996

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1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Pec

ent

Total World Trade in Goods and Services as a Percentage of World GDP since 1960

Chinese and U.S. International Trade and Their

Respective Rates of Growth since 1970 (US$)

30

-20

-10

0

10

20

30

40

50

60

-2

-1

0

1

2

3

4

5

6

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

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1989

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1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

perc

ent

US$

bill

ion

Chinese and U.S. International Trade (US$) and Their Rates of Growth since 1970

Rate of growth of total Chinese international trade, % (right scale)

Rate of growth of total U.S. international trade, % (right scale)

Total Chinese trade in goods and services (US$ trillions)

Total U.S. trade in goods and services (US$ trillions)

Global Economic Trends:

Foreign Direct Investment (FDI) Falling barriers to as well as incentives for foreign direct investment (FDI)

provided by investee countries have also greatly increased cross-border direct investment. National treatment for foreign direct investment is becoming increasingly standard under the World Trade Organisation (WTO) and similar agreements.

Data from the United Nations Commission for Trade and Development (UNCTAD) show that total world FDI increased at the average annual rate of 14% between 1970 and 2007, the beginning of the global financial crisis. Annual total world FDI may be estimated at approximately US$1.9 trillion in 2007. Since 2007 total world FDI has been declining by 1% per year.

The U.S. and Mainland China are the world’s top two leading recipients of foreign direct investment (FDI) with an annual average of approximately US$100 billion currently. They are also the top two outbound direct investors.

Foreign direct investments (FDI) often follow trade—e.g., to secure long-term supply of raw materials and natural resources; and trade often follows foreign direct investments—e.g., production by captive subsidiaries in foreign markets. A large proportion of world trade consists of intra-industry and intra-firm trade.

International capital flows also include portfolio investment, foreign aid, foreign loans and short-term capital flows such as “hot money”. 31

Total World Foreign Direct Investment (FDI),

US$ since 1970

320

500

1,000

1,500

2,000

2,500

3,000

3,500

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

USD

bill

ions

World Foreign Direct Investment since 1970, Net Inflows, US$ billions

33


The Limits of Monetary Policy The experiences of the quantitative easing policies undertaken by the

U.S. Federal Reserve Board, the Bank of Japan, the European Central Bank (ECB) and other central banks since late 2008 confirm what should have been well known all along—that monetary policy alone cannot turn a depressed economy around. Low interest rates cannot overcome the effects of negative expectations about the future. If expectations about the future of the economy are poor, firms will not make new investments and households will reduce their consumption no matter how low the interest rate becomes, even if it turns negative. Moreover, such expectations can be self-fulfilling.

The U.S., Japan and many of the European countries have been stuck in a classic “liquidity trap”. As the saying goes: “One can pull on a string, but not push on a string”. Monetary policy or quantitative easing is powerless when faced with a low level of confidence about the future of the economy.

34


The Limits of Monetary Policy In addition, zero or negative interest rates create asset price

bubbles, which will eventually burst, with damaging

consequences. They also have serious negative effects on the

income and wealth distribution and impose hardships on the net

savers of the economy--the middle- and lower-income

households, and especially the retired elderly.

The truth is that easy monetary policy has not worked too well to

revive the economies, and should have never been expected to

work by itself alone.

Interest rates worldwide are expected to be normalised in the next

couple of years, led by the U.S. Federal Reserve Board.

35


The World Price of Oil The world price of oil fell between 2014 and 2016. It has rebounded

somewhat since. In real terms it is slightly higher then where it was before its spectacular rise in 2004.

Overall, the fall in the world price of oil has to be regarded as a net positive factor for the world economy as a whole.

The world price of oil is not really determined by world supply and demand alone. The world oil market is an oligopolistic market. The largest producer in the world, Saudi Arabia, has the capacity of producing at least 25 percent more if it chooses to do so.

However, given the advances in shale oil fracturing technology (“fracking”) and the abundant potential supply in the U.S., now the largest oil producer in the world, which can be tapped in a matter of months, it is unlikely that the world price of oil will stay above US$60 a barrel for a long time.

36

The Nominal and Real World Prices of Oil

(2017 prices)

0

10

20

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n-1

9

U.S

. Dol

lars

per

Bar

rel

The Nominal and Real World Prices of Oil

Nominal price of oil

Real price of oil, in 2018M12 price


The Importance of Innovation Innovation is the most important driving force of economic growth

today, especially for mature developed economies with their already-high capital-labor ratios and little, no, or even negative growth in labor-hours.

Sustained investment in intangible capital such as human capital and research and development (R&D) is essential for the occurrence of economic innovation, reflected in measured technical progress or growth in total factor productivity in an economy.

Economic globalisation can create new competitors. Economies must adapt and adjust. Intangible capital enables the creation of new comparative advantages.

The East Asian economic development experience provides an example of created as opposed to natural comparative advantage (human capital and R&D capital can substitute for natural resources).

37


The Importance of Innovation One indicator of the level of human capital in an economy is the

average number of years of schooling per person in the working-

age population. In the following chart, the average number of

years of schooling is compared across selected economies.

By this measure, the United States and Japan are clearly the

global leaders. South Korea and Taiwan have also been catching

up fast. Most of the other East Asian economies also have quite

rapidly increasing levels of human capital but it will take a while

before they can catch up with the levels of human capital in the

developed economies.

R&D expenditure as a percent of GDP also shows similar trends.

38

Average No. of Years of Schooling per Person

in the Working Age Pop., Selected Economies

391

2

3

4

5

6

7

8

9

10

11

12

13

14

15

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1991

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2016

2017

Yea

rs

Average Number of Years of Schooling of the Working-Age Population,

Selected Economies

US JapanHong Kong KoreaSingapore TaiwanIndonesia MalaysiaPhilippines ThailandChina, Mainland

R&D Expenditure as a Percent of GDP: G-7

Countries, 4 East Asian NIES, China & Israel

400.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

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1983

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2010

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2013

2014

2015

2016

2017

R&D Expenditure as a Percent of GDP: G-7 Countries, 4 NIEs, China & Israel

Canada France

W. Germany Germany

Italy Japan

U.K. U.S.

Mainland, China Hong Kong, China

South Korea Singapore

Taiwan, China Israel


The Importance of Innovation One indicator of the potential for technical progress (national

innovative capacity) is the number of patents created each year. In the following chart, the number of patents granted in the United States each year to the nationals of different countries, including the U.S. itself, over time is presented.

The U.S. is the undisputed champion over the past forty years, with 140,969 patents granted in 2015, followed by Japan, with 52,409. (Since these are patents granted in the U.S., the U.S. may have a home advantage; however, for all the other countries and regions, the comparison across them should be fair.)

The number of patents granted to Mainland Chinese applicants each year has increased from the single-digit levels prior to the mid-1980s to 8,166 in 2015.

The economies of South Korea and Taiwan, granted 17,924 and 11,690 U.S. patents respectively in 2015, are still far ahead of Mainland China. In contrast, the number of U.S. patents granted to Hong Kong nationals was only 601 in 2015.

41

Patents Granted in the United States: G-7

Countries, 4 East Asian NIEs, China & Israel

1

10

100

1,000

10,000

100,000

1,000,000

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

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2014

2015

Patents Granted in the United States: G-7 Countries, 4 East Asian NIEs, China & Israel

Canada FranceGermany ItalyJapan United KingdomUnited States ChinaHong Kong, China South KoreaSingapore Taiwan, ChinaIsrael

42

The Importance of Innovation:

Investment in Intangible Capital The R&D capital stock, defined as the cumulative past real

expenditure on R&D less depreciation of 10% per year, is an

useful indicator of innovative capacity. It should quite properly

be treated as capital since R&D efforts generally take years to

yield any results.

It can be shown to have a direct causal relationship to the number

of patents granted (see the following chart, in which the annual

number of U.S. patents granted is plotted against the R&D capital

stock of that year for each economy).

The chart shows clearly that the higher the stock of R&D capital

of an economy, the higher is the number of patents granted to it

by the U.S. 43

U.S. Patents Granted and R&D Capital Stocks:

G-7 Countries, 4 EANIEs, China & Israel

441

10

100

1,000

10,000

100,000

1,000,000

0 1 10 100 1,000 10,000

Nu

mb

er o

f U

.S. P

aten

ts G

ran

ted

R&D Capital Stocks, in 2016 USD billions

U.S. Patents Granted and R&D Capital Stock:

G-7 Countries, 4 East Asian NIEs and China

Canada

France

Germany

Italy

Japan

United Kingdom

United States

China

Hong Kong, China

South Korea

Singapore

Taiwan, China

Israel

45


The Internet Economy Internet commerce has been growing by leaps and bounds.

Amazon and Alibaba have become two of the largest

corporations in the world.

However, internet commerce has also been causing disruptions in

both developed and developing economies.

It has been affecting the financial sector and the retail sector. It

has been making the most progress in economies in which the

financial sector is relatively under-developed, such as China.

WeChat Pay and other similar set-ups relying on QR codes are

sweeping the developing world, especially where personal

checking accounts are either non-existent (e.g., in China) or rare.

They greatly facilitate payments and fund transfers.

The Number of Internet Users as a Percent of

the Population in Selected Economies

46

0

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2017

mill

ion

pers

ons

The Number of Internet Users in Selected Economies, million persons

China

United States

Japan

India

Germany

Korea, Rep.

Taiwan

The Number of Internet Users as a Percent of

the Population in Selected Economies

470

10

20

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2017

Per

cent

The Number of Internet Users as a Percent of the Population in Selected Economies

China

United States

Japan

India

Germany

Korea, Rep.

Taiwan

48


The Belt and Road (B&R) Initiative The “Belt and Road” (B&R) Initiative, consisting of the Silk Road

Economic Belt and the 21st Century Maritime Silk Road, was launched by Chinese President XI Jinping in September 2013. It is a grand, multi-country (72 by last count), multi-decade development plan with the objective of linking and transforming the economies of Asia, Europe, Africa and Oceania.

The Silk Road Economic Belt, as the Old Silk Road, links the continents of Asia, Europe and Africa together. It brings together China, Central Asia, West Asia, Middle East, North Africa, Russia and Europe. In particular, it will encompass new Eurasian Land Bridges.

The 21st-Century Maritime Silk Road is designed to connect China’s coastal regions to Europe through the South China Sea and the Indian Ocean in one route, and through the South China Sea to the South Pacific and Oceania in the other. However, the “Northern Passage”, through the Bering Strait and down to Northern Europe, has also been proposed to be part of the 21st-Century Maritime Silk Road as global warming makes the route navigable year round.

49


The Belt and Road (B&R) Initiative The Belt and Road (B&R) Initiative is a serious long-term

commitment of China that has been written into the Charter of the Communist Party of China.

It has been developed on the basis of the Chinese economic development experience—that connectivity and infrastructure can promote economic development through trade and direct investment.

It aims to create a peaceful and secure environment for joint development by building a trade, investment and infrastructure network connecting all B&R nations.

It emphasizes the nurturing of mutual understanding and trust and the formation of durable relationships through cultural and educational exchanges as well as industrial cooperation.

It promotes open, inclusive, balanced and green economic globalisation through enhanced regional interconnectivity.

But above all, it seeks to stimulate and create sustainable trade and investment exchanges where none exist before, thus benefitting every Belt and Road country and accelerating economic development for all.


The Geo-Political Uncertainties There are currently many major geo-political uncertainties. What

are the real effects of Brexit on the U.K., on the European Union and on the rest of the world? What policies will a new German Government pursue?

The possibility of trade wars with the United States—across the Pacific (China, Japan and the Republic of Korea) and the Atlantic (Germany).

The risks of protectionism, isolationism, nationalism and populism.

And then there is the continuing North Korean crisis. Other potential hot spots include the South China Sea, the East

China Sea, the Middle East, Africa and possibly the Taiwan Straits.

50

The Future of Economic Globalisation:

The Effects of Globalisation Economic globalisation has resulted in the massive growth of world trade and

through world trade world GDP. The growth of international trade led and propelled successively the growth of the

GDPs of Japan, the four Newly Industrialized Economies (Hong Kong, Singapore, South Korea and Taiwan), and Mainland China. They all adopted export-led economic growth policies in the early stages of their economic development.

This has resulted in the centre of gravity of the world economy shifting to East Asia from North America and Europe and within East Asia from Japan to Mainland China.

Economic globalisation has also partially de-coupled the East Asian economies from the U.S. and Western European economics, meaning that they can continue to grow even as the U.S. and Western European economies go into recession, albeit at slower rates.

However, economic globalisation has accelerated factor-price equalization around the world. Jobs for unskilled labor continue to move to lower-wage economies, except for tourism-related jobs. Any job that can be moved away will be moved way.

Economic globalisation has resulted in a more equal distribution of income across countries and regions (but a less equal distribution of income within each country and region).

51

The Future of Economic Globalisation:

The Benefits of Economic Globalisation The creation of winners on a global basis—voluntary

international trade is always win-win for both trading-partner countries.

The more efficient allocation of capital--Investors everywhere are moving their capital around the world to seek the highest rates of return.

The enlargement of markets--The entire world is the potential market and the entire world population have become potential customers.

The huge potential of both technological and market economies of scale can be realized through expansions, mergers, acquisitions, consolidations, and formation of strategic alliances and partnerships.

Economic globalisation enhances the returns to intangible capital.52

The Benefits of Economic Globalisation:

International Trade Economic theory tells us that whenever a new economy joins the

world economy, aggregate economic welfare of the world should increase. Moreover, the aggregate economic welfare of each country that participates in the world economy should also increase.

The basic idea is a simple one: With voluntary international trade, if there is no gain for any of the trading partner countries, no trade will take place. In any such trade, both partner countries must gain. And the gains are sufficient to compensate the potential losers within each trading partner country.

When a previously autarkic economy begins to participate in the world, international trade can only increase, and cannot decrease.

However, the introduction of new international trade transactions will necessitate domestic adjustments in each of the trading partner countries, as some domestic industries will expand while other domestic industries will contract.

53

The Distribution of Gains from Voluntary

International Trade is Indeterminate

However, while voluntary international trade always brings gains

to all trading-partner countries, the distribution of gains from

trade, or the terms of trade, are not uniquely determined by the

principles of comparative advantage alone but depends on the

relative bargaining power of the trading partner countries.

Thus, some economies will benefit more and some economies

will benefit less, even though all economies will benefit.

54

The Future of Economic Globalisation: Both

Winners and Losers are Created Domestically Moreover, imports can potentially disrupt domestic industries

through its competition with domestically produced goods,

changing the relative prices between different goods in the

economy, and displacing workers employed in these domestic

industries. Increased exports can also create losers by bidding

away resources needed by other industries. Losers will be

created in the domestic economy unless appropriate

compensation and redistribution policies are adopted by the

government. The market on its own cannot compensate the

losers from international trade.

55

The Future of Economic Globalisation: Both

Winners and Losers are Created Domestically Economic globalisation has begun to be questioned by the

common people who have not benefitted from it. The “Brexit” vote, the election of President Donald Trump in the U.S., and the rise of isolationists and protectionists in Austria, France, Germany and the Netherlands and Germany, are all testimony that many people in these countries consider themselves to be “losers” from economic globalisation and are venting their anger and frustration by voting against the establishment or the so-called “elite”.

The losers should and must be compensated if globalisation were to continue in a sustainable manner. No one should have to lose as a result of globalisation--everyone can be made better off, because in principle, the gains should more than offset the losses.

56

57

The China-U.S. Trade War: China, as a large continental economy with a huge domestic

market, has a relatively low degree of export dependence, and has

always been relatively immune to external disturbances. During

the past four decades, while the rates of growth of Chinese

exports and imports of goods fluctuate like those of all other

economies, the rate of growth of Chinese real GDP has remained

relatively stable, and in fact has always stayed positive (see the

following charts which display the quarterly rates of growth of

exports, imports and real GDP of selected Asian economies from

1997 to the present).

Exports of Goods and Services as a Share of

GDP in East Asian Economies, India & U.S.

58

0

50

100

150

200

250

Brunei

Daruss

alam

Camb

odia

Chin

a

Hong K

ong

SAR,

Chi

na

Indo

nesi

a

Japa

n

Korea,

Rep.

Lao

PDR

Maca

o SA

R,China

Mala

ysia

Myan

mar

Philip

pines

Sing

apor

e

Thai

land

Vietna

m

Taiw

an

Unit

ed S

tate

s

India

Per

cent

age

Exports of Goods and Services as a share of GDP in East Asian Economies

1980 1990 2017

59

Quarterly Rates of Growth of Exports of

Goods: Selected Asian Economies

-50

-40

-30

-20

-10

0

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An

nu

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nt

per

an

nu

m

Quarterly Rates of Growth of Exports of Goods: Selected East Asian Economies

China,P.R.:Hong Kong India

Indonesia Korea

Malaysia Philippines

Singapore Thailand

China,P.R.: Mainland Japan

Taiwan Prov.of China

60

Quarterly Rates of Growth of Imports of

Goods: Selected Asian Economies

-60

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-10

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An

nu

aliz

ed P

erce

nt

per

an

nu

m

Quarterly Rates of Growth of Imports of Goods : Selected East Asian Economies

China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland Japan

61

Quarterly Rates of Growth of Real GDP, Y-o-

Y: Selected Asian Economies

-18

-15

-12

-9

-6

-3

0

3

6

9

12

15

18

21

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in

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Quarterly Rates of Growth of Real GDP, Year-over-Year: Selected East Asian Economies

China,P.R.:Hong Kong India

Indonesia Korea

Malaysia Philippines

Singapore Thailand

China,P.R.: Mainland Japan

Taiwan Prov.of China

The China-U.S. Trade War:

Immediate Impacts The Chinese stock markets have taken a hit. This is an area where the

psychological factor dominates. As of the end of 2018, the shares on the Shenzhen Stock Exchange had on average lost 30%, Shanghai 20%, and Hong Kong 10%. In contrast, the Standard and Poor 500 Index did not suffer any loss on a whole-year (2018) basis.

At the beginning of 2019, the Chinese stock market continued to fall, until more recently. The Standard and Poor 500 Index also fell but has also begun to recover.

However, the Chinese stock markets are not a good barometer of the state of the Chinese real economy. The majority of Mainland investors are individual retail investors. They are typically short-term traders who tend to leave the market at the first sign of potential trouble. The average holding period of individual Chinese investors is less than 20 trading days. The institutional Chinese investors have a slightly longer average holding period of between 30 and 40 trading days.

It should also be borne in mind that the increase in the rates of interest in the U.S. and elsewhere would also have affected asset prices around the world negatively, so it was not the sole effect of the China-U.S. trade war. 62

The Chinese, Hong Kong and U.S. Stock

Market Indexes, Year to Date

50

60

70

80

90

100

110

120

50

60

70

80

90

100

110

120Stock Price Indices of Various Stock Exchanges, 1 January 2018 = 100

Hong Kong (Overall) Hong Kong (China Enterprise)

Shanghai Shenzhen

MSCI China S&P 500 Index

63


Immediate Impacts The Renminbi exchange rate has also been affected by the trade war.

Relative to the US$, the Renminbi has devalued by approximately 8% since the end of January 2018 (at one time almost 10%). However, the deviation of the Renminbi central parity rate from the CFETS (China Foreign Exchange Trade System) Index, the exchange rate of a Chinese trade-weighted basket of currencies, has remained within the 3% range. Our focus should be on the central parity rate (onshore rate) rather than the offshore rate and on its relation to the CFETS Index.

The Renminbi does not follow the US$ because the U.S. accounts for only slightly more than 20% of Chinese international trade. For the Renminbi to follow the US$ when the US$ rises with respect to other currencies implies that China will raise its price of exports to all her other customers that account for 80% of Chinese exports, which makes very little sense. Similarly, when the US$ falls with respect to other currencies, if the Renminbi follows the US$, it will imply that China lowers its price of exports to all her other customers, which also makes little sense. 64

The Renminbi Central Parity Exchange Rate

and the CFETS Index (31 Dec. 2014 = 100)

65

95

97

99

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103

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107

109

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115

Dec

-201

4Ja

n-20

15F

eb-2

015

Mar

-201

5A

pr-2

015

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-201

5Ju

n-20

15Ju

l-20

15A

ug-2

015

Sep-

2015

Oct

-201

5N

ov-2

015

Dec

-201

5Ja

n-20

16F

eb-2

016

Mar

-201

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pr-2

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-201

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n-20

16Ju

l-20

16A

ug-2

016

Sep-

2016

Oct

-201

6N

ov-2

016

Dec

-201

6Ja

n-20

17F

eb-2

017

Mar

-201

7A

pr-2

017

May

-201

7Ju

n-20

17Ju

l-20

17A

ug-2

017

Sep-

2017

Oct

-201

7N

ov-2

017

Dec

-201

7Ja

n-20

18F

eb-2

018

Mar

-201

8A

pr-2

018

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-201

8Ju

n-20

18Ju

l-20

18A

ug-2

018

Sep-

2018

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-201

8N

ov-2

018

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-201

8Ja

n-20

19F

eb-2

019

Comparison of the Central Parity Rate and CFETS Indexes

12/31/2014 = 100

Index CFETS Currency Basket (Yuan/Currency

Basket)

Index of Central Parity Rate (Yuan/US$)

The Renminbi Central Parity Exchange Rate

and the CFETS Index

66

95

96

97

98

99

100

101

102

103

104

105

106

107

108

29-D

ec-1

7

12-J

an-1

8

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an-1

8

09-F

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8

23-F

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09-M

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8

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8

06-A

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8

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8

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8

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8

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07-S

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05-O

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8

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8

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8

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8

28-D

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8

11-J

an-1

9

25-J

an-1

9

08-F

eb-1

9

22-F

eb-1

9

The Central Parity Rate and the CFETS Index, 29 Dec. 2017 = 100

Index of CFETS Currency Basket (Yuan/Currency Basket)

Index of Central Parity Rate (Yuan/US$)


Immediate Impacts Maintaining the relative stability of the Renminbi exchange rate with respect

to the CFETS (China Foreign Exchange Trade System) Index, the exchange

rate of a Chinese trade-weighted basket of currencies, implies that the

Renminbi exchange rate vis-a-vis the currency of an average trading-partner

country of China will be relatively stable and that the international

purchasing power of the Renminbi will also be relatively stable.

It is in China’s interests to maintain a relatively stable Renminbi exchange

rate. It is the only way for the internationalisation of the Renminbi to

become a reality.

67


Real Impacts Moreover, over the past ten years, Chinese dependence on exports has

been declining over the past decade. The share of exports of goods in

Chinese GDP has fallen from a peak of 35.3% in 2006 to 19.8% in

2017. The share of exports of goods to the U.S. in Chinese GDP has

also fallen by more than half, from a peak of 7.2% in 2006 to 3.4% in

2017. (See the following charts.)

During this same period, the growth of Chinese exports to the world

and to the U.S. has also slowed significantly. Chinese exports to the

world grew at an average annual rate of 22.6% in the decade 1998-

2007, but slowed to only 7.9% in the following decade, 2008-2017.

Similarly, exports to the U.S. grew at 22% per annum in the decade

1998-2007, but slowed to less than 7% per annum in the most recent

decade. Exports is no longer the engine of Chinese economic growth. 68

Chinese Exports of Goods and Services and

Goods Only as a Percent of Chinese GDP

69

Chinese Exports of Goods and Services to the

U.S. as a Percent of Chinese GDP

70

71


Real Impacts U.S. tariffs have been imposed on US$250 billion of U.S.

imports of goods from China (arrival value, approximately equal to US$227 (250 x 10/11) billion of Chinese exports of goods to the U.S., f.o.b. or departure value), equal to approximately half of Chinese exports of goods to the U.S. in 2017.

Thus, a maximum of Chinese exports of goods amounting to approximately 1.7% (3.4%/2) of Chinese GDP will be affected.

The U.S. tariff rates range from 10% to 25% on the value of the imports from China. These rates will be prohibitive for most of the goods imported from China, especially if the 10% tariff rate is raised to 25%, as neither the Chinese exporters nor the U.S. importers have the kind of profit margins that can afford these tariffs.

72


Real Impacts on the Chinese Economy But the direct domestic value-added content of Chinese exports to the

U.S. is less than 25%. Thus, the maximum loss in Chinese GDP, assuming that half of the exports to the U.S. is completely halted, in the first instance, may be estimated at 0.43% (1.7% x 0.25), a tolerable level, especially for an economy growing at an average annual real rate of 6.5 percent and with a per capita GDP of US$9,137 in 2017.

However, the reduction of exports leads to a reduction in the demand for domestic inputs used in their production, which in turn leads to a second-round reduction in the demand for domestic inputs used in the production of the domestic inputs.

With the indirect, that is, second-, third-, fourth- and higher-round effects of the reduction of Chinese exports kicking in, the total domestic value-added content affected will eventually increase to 66 percent cumulatively. This implies ultimately a maximum total loss in Chinese GDP of 1.12% (1.7% x 0.66). In absolute terms, this amounts to US$137 billion in 2017 prices.


Real Impacts on the Chinese Economy A reduction of 1.1% from an expected annual growth rate of 6.5% leaves

5.4%, still a very respectable rate compared to the average of 3.7% for the world in 2018 projected by the International Monetary Fund (IMF). The IMF has recently lowered its projected rates of growth of world GDP for 2019 and 2020 to 3.5% and 3.6% respectively.

There is also the threat of a 25% tariff on the remaining US$267 billion Chinese exports of goods to the U.S. Since a 25% tariff is basically prohibitive, if implemented, it will mean the total cessation of Chinese exports of goods to the U.S. The maximum damage that can be done is 2.24% (3.4% x 0.66) of GDP, which is significant but not intolerable.

However, it seems unlikely that the tariffs on this last batch of Chinese exports to the U.S. will be implemented in full because they consist of products such as the Apple iPhones, garments and shoes and packaged re-exports of semi-conductors. The incidence of the tariffs will be mostly borne by U.S. consumers and producers including Apple Inc. (One incidental beneficiary will be Samsung of South Korea whose Galaxy cellphones compete with the iPhones.)

73

74


Real Impacts on the Chinese Economy In the longer run, if tariffs continue on both sides, the U.S. importers

will begin to replace Chinese imports by imports from other Asian countries such as Vietnam, Cambodia and Bangladesh, and eventually perhaps even North Korea.

But the shift in the sourcing of imports away from China has already been occurring since 2010, because of the rise in labour costs in China and because of the appreciation of the Renminbi. This is similar to the earlier shift of the sources of U.S. imports of apparel from Hong Kong, South Korea and Taiwan to Mainland China (see the following chart). The new U.S. tariffs will accelerate this process.

The ASEAN and South Asian countries may benefit, but it is really hard to predict by how much because the supply chains today are so internationalised. However, it is unlikely, in most cases, that the tariffs will stimulate new domestic production in the U.S.

The Distribution of U.S. Apparel Imports by

Countries of Origin

75


Real Impacts on the U. S. Economy The degree of dependence of the U.S., a large continental

economy, on exports is even lower than that of China’s. U.S. exports of goods and services combined as a share of GDP was 12.12% in 2017. The exports of goods alone as a share of GDP was only 8.01%.

The shares of U.S. exports of goods and services and goods alone to China in GDP was 0.97% and 0.67% (US$130 billion) respectively in 2017, much lower than those of Chinese exports to the U.S. However, the shares of U.S. exports of both goods and services and goods only to China have been rising over time.

At the present time, Chinese tariffs have been imposed on US$110 billion of U.S. exports of goods, with the first US$50 billion at rates up to 25% and the subsequent US$60 billion at rates ranging between 5% and 10%.

76

U.S. Exports of Goods and Services and Goods

Only as Percent of U.S. GDP

770

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Per

cent

Exports of Goods & Services and of Goods as a Percent of the U.S. GDP

Exports of Goods and Services as a Percent of GDP

Exports of Goods Only to the World as a Percent of GDP

U.S. Exports of Goods and Services and Goods

Only to China as Percent of U.S. GDP

780.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Per

cent

U.S. Exports of Goods & Services and Goods Only to China

as Percent of U.S. GDP

Exports of Goods and Services

Exports of Goods


Real Impacts on the U. S. Economy The direct domestic value-added content of U.S. exports of goods to

China may be estimated to be 50.8%. Thus, the maximum loss in the

U.S., assuming that all of the exports to China is completely halted by

the tariffs, may be estimated in the first instance at 0.34% (0.67% x

0.508), less than the initial impact on Chinese GDP of 0.43%.

Moreover, it is unlikely that all of the U.S. exports of goods will be

halted; for example, computer chips will continue to be imported by

China in large quantities in the medium term. (The price elasticity is

low.) Suppose only half of U.S. exports of goods to China is halted, it

would amount to a loss of U.S. GDP of 0.17%. This is not significant

for the U.S. economy, which grew 2.9% in 2018 (2.6% in 2018Q4), as

a whole. U.S. GDP per capita is approximately US$60,000. The U.S.

economy can easily weather a reduction of 0.17% in its rate of growth.79

80


Real Impacts on the U. S. Economy With the indirect, that is, second-, third-, fourth- and higher-

round effects of the reduction of U.S. exports of goods kicking in, the total domestic value-added affected increases to 88.7% cumulatively. This implies ultimately a total loss in U.S. GDP of 0.30% (0.67%/2 x 0.887), assuming that half of U.S. exports to China will be halted.

In absolute terms, this amounts to US$58 billion (0.30 x 19.4 trillion) in 2017 prices, much less than the estimated Chinese loss in terms of GDP of US$137 billion.

However, the U.S. has a significant trade surplus in services with China, estimated to be US$40 billion by the U.S. Government but US$54 billion by the Chinese Government for 2017. This surplus may be in jeopardy if China-U.S. relations deteriorate further.

Projections of the Future: Near-Term Forecasts

by International Organizations

81

2019 2020 2021 2019 2020

World 2.9 2.8 2.8 3.5 3.6

China 6.2 6.2 6 6.2 6.2

the U.S. 2.5 1.7 1.6 2.5 1.8

EU 1.6 1.5 1.3 1.6 1.7

Japan 0.9 0.7 0.6 1.1 0.5

India 7.5 7.5 7.5 7.5 7.7

World Bank IMF

Real GDP Growth Forecasts Real GDP Growth Projections

Projections of the Future: Long-Term Forecasts

of the Chinese and the U.S. Economies It is assumed that the Chinese economy will continue to grow above

6% per annum for a few years, declining gradually to between 5% and 6%, and that the U.S. economy will grow at an average rate of 3% per annum between now and 2050.

In 2018, the Chinese economy grew 6.6%. The 2019 target growth rate for the Chinese economy is between 6% and 6.5%. In 2018, the U.S. economy grew at 3%. But both the U.S. Federal Reserve Board and the U.S. Congressional Budget Office expect 2.3% growth for 2019.

It may be thought that the Chinese economy will be unable to sustain an approximately 6% average annual rate of growth for such a long time. But given the still relatively low level of real GDP per capita in China, such a rate of growth should be possible for at least a couple of decades (see the following chart in which the experiences of China, Japan and the U.S. are compared.)

The projections of Chinses and U.S. real GDP and real GDP per capita between now and 2050 are presented in the following charts.

82

83

Growth Rates vs. Levels of Chinese, U.S. and

Japanese Real GDP (2018 tril. US$)

-30

-20

-10

0

10

20

30

0 10 20 30 40 50 60

Perc

ent

Real GDP per Capita, thousand USD, in 2018 prices

Rate of Growth of Real GDP vs. Real GDP per Capita (in 2018 US dollar)

China USA Japan

Chinese National Saving and Gross Domestic

Investment as Percents of GDP

8410

15

20

25

30

35

40

45

50

55

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

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1975

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1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Per

cent

Chinese National Savings and Gross Domestic Investment as a Percent of GDP since 1952

Savings Rate Investment Rate

85

Projections of the Chinese and the U.S.

Economies In his work report to the Nineteenth National Congress of the

Communist Party of China, President XI Jinping identified several milestones in his speech at the Nineteenth Party Congress at 2020, 2035 and 2050.

The first milestone is to become a moderately well-off society by 2020. Our projections show that by 2020, Chinese real GDP per capita (in 2018 prices) will exceed US$10,582 (compared to US$65,541 for the U.S.).

Our projections also show that by 2033, Chinese real GDP will surpass U.S. real GDP (US$32.7 trillion versus US$31.9 trillion), making China the largest economy in the world. However, in terms of real GDP per capita, China will still lag behind significantly, with US$22,088 compared to US$89,363 for the U.S.

By 2050, Chinese real GDP will reach US$83 trillion compared to US$53 trillion for the U.S. In terms of real GDP per capita, China will reach US$53,408, still below the current (2018) level of U.S real GDP per capita of US$62,609, compared to US$138,693 for the U.S.

86

Actual and Projected Levels and Growth Rates

of Chinese and U.S. Real GDP (2018 tril. US$)

-3

0

3

6

9

12

15

18

21

24

-5

0

5

10

15

20

25

30

35

40

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

Percent

USD

tri

llion

s, 2

018

pri

ces

Actual and Projected Chinese and U.S. Real GDPs and Their Rates of

Growth (trillion 2018 US$)

Rates of Growth of U.S. Real GDP (right scale)


U.S. Real GDP, in 2018 prices


87

Actual and Projected Chinese and U.S. Real GDP/Capita

and Their Annual Rates of Growth (1,000 2018 US$ & %)

-4

-2

0

2

4

6

8

10

12

14

16

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

percentU

SD th

ousa

nd, 2

018

pric

es

Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of

Growth (thousand, 2018 US$)

Rates of Growth of U.S. Real GDP per capita (right scale)

Rates of Growth of Chinese Real GDP per Capita (right scale)

U.S. Real GDP per Capita, in 2018 prices


88

Actual and Projected Levels and Growth Rates

of Chinese and U.S. Real GDP (2018 tril. US$)

-3

0

3

6

9

12

15

18

-20

-10

0

10

20

30

40

50

60

70

80

90

100

110

120

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

Percent

USD

tri

llion

s, 2

018

pri

ces

Actual and Projected Chinese and U.S. Real GDPs and Their Rates of

Growth (trillion 2018 US$) Rates of Growth of U.S. Real GDP (right scale)


U.S. Real GDP, in 2018 prices


89

Actual and Projected Chinese and U.S. Real GDP/

Capita and Their Rates of Growth (1,000 2018 US$)

-4

-2

0

2

4

6

8

10

12

14

16

-40

-20

0

20

40

60

80

100

120

140

160

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

2032

2034

2036

2038

2040

2042

2044

2046

2048

2050

percentU

SD th

ousa

nd, 2

018

pric

es

Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of

Growth (thousand, 2018 US$)

Rates of Growth of U.S. Real GDP per capita (right scale)

Rates of Growth of Chinese Real GDP per Capita (right scale)

U.S. Real GDP per Capita, in 2018 prices


Concluding Remarks The principal problem of economic globalisation is one of the

domestic distribution of the gains within each country and region. (Of course there is also the issue of the distribution of gains among the trading-partner countries, but that is a different problem altogether.) It is the responsibility of each of the domestic governments to try to redistribute part of the gains from the winners to the losers, so that everyone benefits. There should be enough overall net gain to make this possible. However, the free market on its own will not be able to do it. Government intervention is necessary.

This will include the provision of transitional and if necessary long-term income support to the displaced workers and of re-training and re-employment assistance.

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Concluding Remarks Can economic globalisation continue in the future? Without

continuing globalisation, can the currently developing economies

become developed?

If the individual governments can ensure that that every one of

their respective citizens wins under economic globalisation, that

no net losers are created under continuing globalisation, then

there will be popular support for continuing globalisation.

President XI Jinping has said on numerous occasions that China

is committed to supporting economic globalization and an open,

rule-based international trade system. China’s Belt and Road

Initiative does support continuing economic globalisation.

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Concluding Remarks

The centre of gravity of the world economy has been and will

continue to be gradually shifting to East and South Asia. The

centre of gravity of the East Asian economy has been gradually

shifting to China.

The Chinese and East Asian economies have been partially de-

coupled from the United States and Europe.

The Chinese economy will catch up to the U.S. economy in terms

of aggregate GDP some time around 2033, plus or minus a

couple of years. However, it will take the end of the Twenty-

First Century before the Chinese economy can catch up to the

U.S. economy in terms of per capita real GDP.

China and the Global Economy...Singapore, Thailand, and Vietnam--+ 3 (China including Hong Kong,...

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