CHINA COMPARISON TO NAFTA Salah Elatash Tanya D’Amico Melissa McCarthy Nicolas Murcia Stefan Pentchev

CHINA: FACTS AND FIGURES

Introduction Official Name: People’s Republic of China ( 中国 ) Population: 1,321,851,888 (July 2007 est.) Area: 9,596,960 sq km

Official Name: People’s Republic of China ( 中国 )

Population: 1,321,851,888 (July 2007 est.)

Area: 9,596,960 sq km

Brief History 1.0 Imperial Rule: 221 BC – 1911 1911 – 1949: Republic of China Powerless National Government 1937-1945: Sino-Japanese war brought alliance between nationalist and communist forces. 1945: Japan loses World War II but comes out financially drained. 1945 Continuation of Chinese Civil War.

Imperial Rule: 221 BC – 1911

1911 – 1949: Republic of China

Powerless National Government

1937-1945: Sino-Japanese war brought alliance between nationalist and communist forces.

1945: Japan loses World War II but comes out financially drained.

1945 Continuation of Chinese Civil War.

Brief History 2.0 1949: Communist Party, led by Mao Zedong, wins civil war and on October 1 declares People’s Republic of China on mainland. Nationalist forces withdraw to Taiwan. Late 50’s – 60’s: Great Leap Forward and Cultural Revolution. 1978: Deng Xiaoping assumes leadership PRC and begins several reforms, including Chinese Economic Reform and opening China to Global Economy.

1949: Communist Party, led by Mao Zedong, wins civil war and on October 1 declares People’s Republic of China on mainland. Nationalist forces withdraw to Taiwan.

Late 50’s – 60’s: Great Leap Forward and Cultural Revolution.

1978: Deng Xiaoping assumes leadership PRC and begins several reforms, including Chinese Economic Reform and opening China to Global Economy.

Brief History 3.0 1990s: China experiences unprecedented economic growth, with slowdown during Asian Financial Crisis (1998). 1997: Hong Kong returns to mainland China.

1990s: China experiences unprecedented economic growth, with slowdown during Asian Financial Crisis (1998).

1997: Hong Kong returns to mainland China.

HISTORY 4.0 2001: China joins WTO on the following terms: China will provide non-discriminatory treatment to all WTO Members. China will eliminate dual pricing practices price controls will not be used for purposes of affording protection to domestic industries or services providers. the WTO Agreement will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation. Within three years of accession all enterprises will have the right to import and export all goods and trade them throughout the customs territory with limited exceptions. China will not maintain or introduce any export subsidies on agricultural products.

2001: China joins WTO on the following terms:

China will provide non-discriminatory treatment to all WTO Members.

China will eliminate dual pricing practices

price controls will not be used for purposes of affording protection to domestic industries or services providers.

the WTO Agreement will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation.

Within three years of accession all enterprises will have the right to import and export all goods and trade them throughout the customs territory with limited exceptions.

China will not maintain or introduce any export subsidies on agricultural products.

Brief History 4.0

PSYCHOGRAPHICS Business people prefer developing friendships and long term relationships. Hofsted: China high context society High Power Distance Collectivist rather than individualistic. Other cultural differences that must be understood (for example, where building entrance is, marketing material that works, and other cultural details.

Business people prefer developing friendships and long term relationships.

Hofsted:

China high context society

High Power Distance

Collectivist rather than individualistic.

Other cultural differences that must be understood (for example, where building entrance is, marketing material that works, and other cultural details.

COMPETITVE ANALYSIS

How China Compares Column1 Mexico Canada U.S China Institutions 69 21 27 80 Infrastructure 64 13 12 60 Macroeconomy 54 32 69 6 Health and Primary Education 41 2 40 55 Higher Education and Training 71 17 5 77 Market Efficiency 48 7 2 56 Technological Readiness 56 17 8 75 Business Sophistication 52 18 8 65 Innovation 58 13 2 46

INSTITUTIONS INTELLECTUAL PROPERTY RIGHTS SOFTWARE PIRACY PRODUCTION OF KNOCK OFFS CORRUPTION More widespread than US and Canada. Differs from Mexico. Some points arguable on a cultural basis CONTROLLED BANKING SYSTEM Mexico Canada U.S China Institutions 69 21 27 80

INTELLECTUAL PROPERTY RIGHTS

SOFTWARE PIRACY

PRODUCTION OF KNOCK OFFS

CORRUPTION

More widespread than US and Canada.

Differs from Mexico.

Some points arguable on a cultural basis

CONTROLLED BANKING SYSTEM

INFRASTRUCTURE Energy: Both China and the USA are energy dependent, rely mostly on crude oil import. US: 20,730,000 bbl/day CHINA: 6,534,000 bbl/day Mexico Canada U.S China Infrastructure 64 13 12 60

Energy: Both China and the USA are energy dependent, rely mostly on crude oil import.

US: 20,730,000 bbl/day

CHINA: 6,534,000 bbl/day

INFRASTRUCTURE China has spent considerably on improving mass transit. Mexico Canada U.S China Infrastructure 64 13 12 60

INFRASTRUCTURE Telecommunication Services: Annual growth rate of the telephone line per thousand persons was 17.93% from 1978 to 1999; currently about 5% December 2006: signed an agreement with Verizon Business to build the first next-generation optical cable system directly linking the US mainland and China Mexico Canada U.S China Infrastructure 64 13 12 60

Telecommunication Services:

Annual growth rate of the telephone line per thousand persons was 17.93% from 1978 to 1999; currently about 5%

December 2006: signed an agreement with Verizon Business to build the first next-generation optical cable system directly linking the US mainland and China

MACROECONOMIC OVERVIEW Mexico Canada U.S China Macroeconomy 54 32 69 6

MACROECONOMIC OVERVIEW GDP (2006, Nominal): $2.68 Trillion (4th) GDP (2006, PPP): $10.0 Trillion (2nd) GDP per capita (2006, Nominal): $2,034 (105th) GDP per capita (2006, PPP): $7,593 (80th) GDP growth rate (2006): 11.1% GDP by sector: agriculture (12.46%), industry (47.28%), services (40.26%) Inflation rate (2006) 1.5%

GDP (2006, Nominal): $2.68 Trillion (4th)

GDP (2006, PPP): $10.0 Trillion (2nd)

GDP per capita (2006, Nominal): $2,034 (105th)

GDP per capita (2006, PPP): $7,593 (80th)

GDP growth rate (2006): 11.1%

GDP by sector:

agriculture (12.46%),

industry (47.28%),

services (40.26%)

Inflation rate (2006) 1.5%

MACROECONOMIC OVERVIEW INFLATION: 1.5% (2006 est.) GDP - real growth rate: 10.7% GDP - per capita (PPP): $7,700 (2006 est.) GCR Ranking: 13 th (8 th in 2005) GCI: 5.41

INFLATION: 1.5% (2006 est.)

GDP - real growth rate: 10.7%

GDP - per capita (PPP): $7,700 (2006 est.)

GCR Ranking: 13 th (8 th in 2005)

GCI: 5.41

MACROECONOMIC OVERVIEW Revenues: $446.6 billion Expenditures: $489.6 billion Public debt: 22.1 % of GDP Reserves of foreign exchange and gold : $1.034 trillion External Debt: $305.6 billion

Revenues: $446.6 billion

Expenditures: $489.6 billion

Public debt: 22.1 % of GDP

Reserves of foreign exchange and gold : $1.034 trillion

External Debt: $305.6 billion

CURRENT ACCOUNT Current account balance: $179.1 billion Exports: $974 billion f.o.b. Imports: $777.9 billion f.o.b.

Current account balance: $179.1 billion

Exports: $974 billion f.o.b.

Imports: $777.9 billion f.o.b.

Exports

Imports

China Pegs its Currency China pegged its currency to the U.S. dollar between 1995-2005 8.3 Yuan to 1 US$ dollar (allowed to fluctuate within 0.3%). Implemented by the Central Bank of China it was maintained by buying (or selling) as many dollar-denominated assets in exchange for newly printed Yuan as needed. The exchange rate between the Yuan and the dollar basically stayed the same, despite changing economic factors, which could otherwise cause the Yuan to appreciate given high volume of exports. China set the Yuan to float, starting at 8.11 Yuan per dollar, versus the Yuan’s peg of 8.28 per dollar, tying it to a basket of currencies.

China pegged its currency to the U.S. dollar between 1995-2005

8.3 Yuan to 1 US$ dollar (allowed to fluctuate within 0.3%).

Implemented by the Central Bank of China it was maintained by buying (or selling) as many dollar-denominated assets in exchange for newly printed Yuan as needed.

The exchange rate between the Yuan and the dollar basically stayed the same, despite changing economic factors, which could otherwise cause the Yuan to appreciate given high volume of exports.

China set the Yuan to float, starting at 8.11 Yuan per dollar, versus the Yuan’s peg of 8.28 per dollar, tying it to a basket of currencies.

FDI This growth has been driven by dramatic inflows of foreign direct investment. In 2005 alone over 44,000 new foreign invested enterprises were established in China with 7,500 of those being in the financial services sector. Foreign direct investment has risen from USD 38 billion in 1995 to USD 72 billion in 2005. China attracts more FDI than any other developing nation and together with Hong Kong accounted for two thirds of all FDI into Asia in 2005.

This growth has been driven by dramatic inflows of foreign direct investment. In 2005 alone over 44,000 new foreign invested enterprises were established in China with 7,500 of those being in the financial services sector.

Foreign direct investment has risen from USD 38 billion in 1995 to USD 72 billion in 2005.

China attracts more FDI than any other developing nation and together with Hong Kong accounted for two thirds of all FDI into Asia in 2005.

Why is China gaining US market share over Mexico? China has a lower-cost producer overall (labor costs lower, but not transport & tariffs); huge scale economies; coherent and multidimensional upgrading strategy –diversify and add high value activities. use direct foreign investment to promote “fast learning” in new industries use access to its domestic market to attract TNCs and promote knowledge spillovers. .

China has a lower-cost producer overall (labor costs lower, but not transport & tariffs);

huge scale economies;

coherent and multidimensional upgrading strategy –diversify and add high value activities.

use direct foreign investment to promote “fast learning” in new industries

use access to its domestic market to attract TNCs and promote knowledge spillovers.

.

Development Strategies China has a more focused development strategy than Mexico Industrial Policies are being implemented at the sub national level Regional markets supplement national ones, and can reduce the pressures from global competition

China has a more focused development strategy than Mexico

Industrial Policies are being implemented at the sub national level

Regional markets supplement national ones, and can reduce the pressures from global competition

CHALLENGE: GDP Does not Benefit All

CHALLENGE: GDP Does not Benefit All

CASE: US TRADE DEFICIT U.S. Census Bureau listed the US trade balance with China at -$20.105 billion (2006) Annual Trade balance with China = -$146.317 Billion between 1992 and 2000, approximately 760,000 jobs were lost due to production shifted to China. In 2004 U.S. Senators prepared a bill that would have slapped a 27.5 percent tax on Chinese imports if Beijing did not revalue the Yuan.

U.S. Census Bureau listed the US trade balance with China at -$20.105 billion (2006)

Annual Trade balance with China = -$146.317 Billion

between 1992 and 2000, approximately 760,000 jobs were lost due to production shifted to China.

In 2004 U.S. Senators prepared a bill that would have slapped a 27.5 percent tax on Chinese imports if Beijing did not revalue the Yuan.

Diagram 1

CASE: US TRADE DEFICIT Factors that may cause Trade Deficit with US: RMB undervalued by about 40% Manufacturers have to compete with “artificially” low-cost goods from China. Chinese Labor force bigger and cheaper: Chinese Labor Force: 798 million (2006 est.) US Labor Force: 151.4 million

Factors that may cause Trade Deficit with US:

RMB undervalued by about 40%

Manufacturers have to compete with “artificially” low-cost goods from China.

Chinese Labor force bigger and cheaper:

Chinese Labor Force: 798 million (2006 est.)

US Labor Force: 151.4 million

CASE: US TRADE DEFICT Important Issues to Consider: 1- DEPOSIT INVESTMENT MECHANISM The arguments fail to the deposit-investment mechanisms in the US and China. resources saved net what government borrows. This affects the current account balance. US person savings rate ~ 0% China personal savings rate over 30%

Important Issues to Consider:

1- DEPOSIT INVESTMENT MECHANISM

The arguments fail to the deposit-investment mechanisms in the US and China.

resources saved net what government borrows.

This affects the current account balance.

US person savings rate ~ 0%

China personal savings rate over 30%

CASE: US TRADE DEFICT

CASE: US TRADE DEFICIT 2- WHAT TRADE? The US merchandise trade deficit with China is les than ¼ of total US merchandise trade deficit. If counting non-merchandise trade (service, license fees, etc) Chinese GDP = 1/10 US GDP. 3- ARE CURRENT ACCOUNTING METHODS VALID IN A GLOBALIZED WORLD? Exports by Foreign subsidiaries (over 60%) F.O.B. v.s. CIF. Where is value added?

2- WHAT TRADE?

The US merchandise trade deficit with China is les than ¼ of total US merchandise trade deficit.

If counting non-merchandise trade (service, license fees, etc) Chinese GDP = 1/10 US GDP.

3- ARE CURRENT ACCOUNTING METHODS VALID IN A GLOBALIZED WORLD?

Exports by Foreign subsidiaries (over 60%)

F.O.B. v.s. CIF.

Where is value added?

Health and Primary Education life expectancy: china: total population: 72.88 years usa: total population: 78 years literacy: usa: 99% china: 90% 1986: 9 year compulsory enrollment law: primary school enrollment = 98.58% Completion rate = 75% However, challenges remain with over 1 million drop outs per year

life expectancy:

china: total population: 72.88 years

usa: total population: 78 years

literacy:

usa: 99%

china: 90%

1986: 9 year compulsory enrollment law:

primary school enrollment = 98.58%

Completion rate = 75%

However, challenges remain with over 1 million drop outs per year

HIGHER EDUCATION AND TRAINING 1999: Action Plan for Educational Vitalization Facing the 21st Century" to "Invigorate China through Science, Technology and Education“. 20% of the population of college age are enrolled in higher education. Chinese Labor Force: agriculture: 45% (USA 0.7%) industry: 24% (USA 22.9%) services: 31% (USA 76.4%)

1999: Action Plan for Educational Vitalization Facing the 21st Century" to "Invigorate China through Science, Technology and Education“.

20% of the population of college age are enrolled in higher education.

Chinese Labor Force:

agriculture: 45% (USA 0.7%) industry: 24% (USA 22.9%) services: 31% (USA 76.4%)

MARKET EFFICIENCY High level of exports. Highly competitive environment in manufacturing sector aimed at exports. Corruption and bribery Need the right connections to start a business, compete and can get favorable treatment. Anti-trust laws need Large pay disparity between industries and despite laws, work conditions are less than suitable.

High level of exports.

Highly competitive environment in manufacturing sector aimed at exports.

Corruption and bribery

Need the right connections to start a business, compete and can get favorable treatment.

Anti-trust laws need

Large pay disparity between industries and despite laws, work conditions are less than suitable.

TECHNOLOGICAL READINESS Benefits from the technology brought over by foreign companies. However, production machinery and equipment used in local firms tend to be old Information technology uptake in Chinese firms lagging.

Benefits from the technology brought over by foreign companies.

However, production machinery and equipment used in local firms tend to be old

Information technology uptake in Chinese firms lagging.

BUSINESS SOPHISTICATION Despite reforms, China’s business environment is still difficult. Chinese consumers are becoming more sophisticated. Still, China is focused on manufacturing while most crucial strategic decisions by companies are taken overseas.

Despite reforms, China’s business environment is still difficult.

Chinese consumers are becoming more sophisticated.

Still, China is focused on manufacturing while most crucial strategic decisions by companies are taken overseas.

INNOVATION China is still focused on low cost production versus innovation. However, with the increasing number of highly educated Chinese citizens studying abroad and in China, and several government initiatives, in addition the technology being transferred through the high number of foreign subsidiaries, this is bound to change.

China is still focused on low cost production versus innovation.

However, with the increasing number of highly educated Chinese citizens studying abroad and in China, and several government initiatives, in addition the technology being transferred through the high number of foreign subsidiaries, this is bound to change.