Advantages and Disadvantages of International Trade in China

International trade has always been an attractive idea for merchants and businessman since time immemorial. There is always an opportunity to sell more, make more profits, increase the market share, remove seasonality fluctuations of demand and supply, increase in productivity, and of course a business or even a country learns a lot on the product development technologies and strategies from doing business with other countries or regions. Trade also leads to higher GDP, better and more choices of products for consumers, increase in competition in domestic market leads to competitive prices which is good for consumers, competition also leads to better quality in goods and services, and reduces unemployment and poverty. Thus, this leads to growth and maturing of a countries economy as a whole and also the businesses involved.

Trade also leads to some problems that are not that obvious at the onset of trade. Even though trade tends to increase employment in one nation it may lead to job cuts in another. As businesses shift manufacturing for instance from richer nations to third world or developing nations, they take advantage of the cheap labor, weaker labor policies, weaker environmental policies, and support of the governments in these countries. They are able to recruit more and thus produce more for less. But this leads to job cuts in the parent rich nations. Trade also leads to job cuts in the developing and third world countries due to competition with multinationals from developed nations and also due to exposure to automation and modernization. Many businesses cannot put up with high productivity and competitive pricing of stronger businesses from richer nations and thus finally may lead to closing down of weaker businesses and unemployment in the face of competition. But we also have to realize that employment also increases through the new businesses from the richer nations. Overall there is a potential increase in employment. There is a problem of increasing income inequalities in China. As the business houses tend to take advantage of weaker policies in labor and environment, there will be environmental pollution leading to health and environmental complications; further labor discrimination leading to weaker social well-being. Businesses particularly also need to realize that protection of Intellectual property rights may not be recognized or understood or at least weak in some of the nations thus, leading to piracy, copyright violations, patents violations, product copies etc. This may well erode the competitive advantage, and the brand image of businesses.

The above comments on international trade can be closely associated with the international trade involving China. China has become the manufacturing hub of the world. Substantial part of the economy of China depends on international trade. The advantages it gives for other countries to setup manufacturing plants in China is its strong government support for FDIs, Infrastructure development, cheap labor, weak environment and labor laws, new strong market reach which includes China, India, Japan, Russia, Korea, Thailand, Vietnam, Indonesia, Malaysia etc, access to cheap Chinese supplier base, thus larger sales and profits, seasonality of product supply and demand can be managed (one can always sell the product in China and the markets close to it if the demand is lower in North America or Europe). US has profited considerably through trade with China. Sales of products from US have grown in popularity in China boosting US multinationals (Expanded trade with China has, in fact, been a blessing for large U.S. multinationals like Boeing, Caterpillar, and Cargill, which had trumpeted the prospect of a massive Chinese market for American products and services. China is the world’s fastest growing market for commercial aviation, and needs billions of dollars worth of airplanes from Boeing. Its growing infrastructure has been a boon for companies like Caterpillar, which produces tractors and other heavy equipment. And it is importing billions of dollars worth of farm products, a boon to companies like Cargill. Last year, China bought $2.9 billion worth of soybeans – the top U.S. export crop to China. China also has proven to be a growing market for U.S.-made fertilizer and chemicals.). China’s benefits were as follows: its economy has been growing at a very rapid rate (for instance, China’s economy grew at an average rate of 10% per year during the period 1990-2004, the highest growth rate in the world.), the resulting increase in business activity drastically reduced poverty (China has been credited for greatly lowering the percentage of East Asian population living in poverty in a recent World Bank report – from 80% to 18% in a span of 20 years), created employment (Foreign investment remains a strong element in China’s rapid expansion in world trade and has been an important factor in the growth of urban jobs.), saw a large growth in cities (population: 30% urban in 1950, estimated 60% urban in 2030, 19 mega-cities > 10 million, 22 cities with 5 with 10 million, 370 cities with 1 to 5 million, 440 cities with 0.5 to 1 million), increased the technology and business exposure of domestic firms and the countries technological expertise (China has acquired some highly sophisticated production facilities through trade and also has built a number of advanced engineering plants capable of manufacturing an increasing range of sophisticated equipment, including nuclear weapons and satellites.) making the firms and the country more competitive, increased the variety of products available to the consumers, domestic manufacturers matured and increased competition in local market (e.g. Shanghai motors), prices became competitive, Chinese suppliers matured enough to support the big multinationals (e.g. Toyota, GM) in Japan and China, trade has helped Chinese government earn huge revenues due to trade that helps to increase investment in public welfare and social infrastructure, thus increasing the overall well being of China, China is also exporting and importing to and from many countries respectively thus, it is able to manage seasonality in the supply and demand of the products involved by diverting exports (Cheap Chinese goods export to South Asian, and South East Asian markets) and switching sources of imports (Crude oil from African (e.g. Chad and Darfur), South America (e.g. Venezuela) and Middle-east (e.g. Iran) countries) as and when required, in the process China is also able to reduce dependence on any single country. Chinese exports is around $1216 billion (2007) to countries as US 21.0%, EU 18.1%, Hong Kong 17.0%, Japan 12.4%, ASEAN 7.2%, South Korea 4.7% (2004) while its imports is around $953.9 billion (2007) from Japan 16.8%, EU 12.4%, ASEAN 11.2%, South Korea 11.1%, US 7.9%, Russia 2.2% (2004).

However, in spite of the many positives of international trade there have been less obvious problems in the form of labor discrimination (86 percent said discrimination exists in China’s employment market; 51 percent see the discrimination as serious. ; China’s employee market is woefully inefficient and small foreign companies are very well positioned to take advantage of this., even multinationals like Reebok have been found guilty of labor discrimination and of taking unfair advantage of weak labor policies. Even local firms are taking such advantages), environmental problems (State Environmental Protection Administration (SEPA) announced that 130 foreign companies did not comply with current environmental laws. In fact, many multinationals see weak environmental laws as a means for cost reduction and therefore maintain different environmental standards in China than in their home countries. Multinationals can pollute more in China mainly because of an incomplete regulation system and loose supervision with few penalties that lead to a low incentive for keeping to the environmental law.), and legal problems for firms in the areas of protection of Intellectual Property Rights in China (There is little awareness that infringement is a crime in China. Growth of new businesses has outpaced the government’s ability to regulate them). Trade has fired competition which in turn has pushed many of the multinationals and domestic firms to take advantage of limited media rights, weak labor policies and implementation, and weak environmental policies and implementation (90 multinationals that have been found by the environmental protection authorities to have violated water pollution regulations since 2004, Forbes reports. General Motors, Samsung, Unilever, Pepsi and Yum Brands chains Kentucky Fried Chicken and Pizza Hut are just a few of the companies on the list, according to the article.). Both the US and China has suffered job cuts. China is losing millions of manufacturing jobs due to automation and the adoption of new business systems and production techniques, according to The Conference Board in New York. Between 1995 and 2002, 15 million manufacturing jobs were lost in China, or about 15 percent of the total manufacturing workforce, The Conference Board found after working with China’s National Bureau of Statistics. Manufacturing employment in China fell from 98 million in 1995 to 83 million in 2002. By comparison, the United States now has 14.5 million workers in the manufacturing sector, about 3 million less than in 1999.

Trade does have enormous benefits but not without some corrections required and some inevitable losses in the form of job cuts. The job cuts can be corrected though with appropriate training of the unemployed to take up jobs requiring higher skills. Countries belonging to the OECD have attempted methods and policies to reduce the unemployment created through the effect of trade. Denmark for instance cut its unemployment from about 10 percent in the early 1990s to less than 5 percent now. The main ingredient for the Danish success is a system called “flexicurity,” a set of liberal policies for hiring and firing, allowing relatively frictionless adjustment to shocks caused by international trade. A generous system of carefully monitored unemployment benefits and funding for retraining displaced workers complement Denmark’s labor-market flexibility. Governments have a range of policies to expand trade while minimizing the loss of jobs. However, a complete solution to the losses from trade is inconclusive and like always not fully repairable.

Understanding advantages and disadvantages of International Trade – China