CHINACOMPARISON TO

NAFTA

Salah Elatash

Tanya D’Amico

Melissa McCarthy

Nicolas Murcia

Stefan Pentchev

CHINA: FACTS CHINA: FACTS AND FIGURESAND FIGURES

IntroductionIntroduction

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

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

Area:Area: 9,596,960 sq km 9,596,960 sq km

Brief History 1.0Brief 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.

Brief History 2.0Brief 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.

Brief History 3.0Brief History 3.0

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

1997: Hong Kong returns to mainland China.

HISTORY 4.0HISTORY 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.

Brief History 4.0Brief History 4.0

PSYCHOGRAPHICSPSYCHOGRAPHICS

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 COMPETITVE ANALYSISANALYSIS

How China ComparesHow 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

INSTITUTIONSINSTITUTIONS

INTELLECTUAL PROPERTY RIGHTSINTELLECTUAL PROPERTY RIGHTS

SOFTWARE PIRACYSOFTWARE PIRACY

PRODUCTION OF KNOCK OFFSPRODUCTION OF KNOCK OFFS

CORRUPTIONCORRUPTION

More widespread than US and Canada.More widespread than US and Canada.

Differs from Mexico.Differs from Mexico.

Some points arguable on a cultural basisSome points arguable on a cultural basis

CONTROLLED BANKING SYSTEMCONTROLLED BANKING SYSTEM

Mexico Canada U.S China

Institutions 69 21 27 80

INFRASTRUCTUREINFRASTRUCTURE

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

US: 20,730,000 bbl/day US: 20,730,000 bbl/day

CHINA:  6,534,000 bbl/day CHINA:  6,534,000 bbl/day

Mexico Canada U.S China

Infrastructure 64 13 12 60

INFRASTRUCTUREINFRASTRUCTURE

China has spent considerably on improving mass China has spent considerably on improving mass transit.transit.

Mexico Canada U.S China

Infrastructure 64 13 12 60

INFRASTRUCTUREINFRASTRUCTUREMexico Canada U.S China

Infrastructure 64 13 12 60

Telecommunication Services: Telecommunication Services:

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

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

MACROECONOMIC OVERVIEWMACROECONOMIC OVERVIEW

Mexico Canada U.S China

Macroeconomy 54 32 69 6

MACROECONOMIC MACROECONOMIC OVERVIEWOVERVIEW

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 MACROECONOMIC OVERVIEWOVERVIEW

INFLATION: 1.5% (2006 est.)

GDP - real growth rate: 10.7%

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

GCR Ranking: 13th (8th in 2005)

GCI: 5.41

MACROECONOMIC MACROECONOMIC OVERVIEWOVERVIEW

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 ACCOUNTCURRENT ACCOUNT

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

ExportsExports

ImportsImports

China Pegs its CurrencyChina 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.

FDIFDI

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 Why is China gaining US market share over Mexico?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.

.

Development StrategiesDevelopment 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

CHALLENGE: GDP Does not CHALLENGE: GDP Does not Benefit AllBenefit All

CHALLENGE: GDP Does not CHALLENGE: GDP Does not Benefit AllBenefit All

CASE: US TRADE DEFICITCASE: 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.

Diagram 1Diagram 1

CASE: US TRADE DEFICIT 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

CASE: US TRADE DEFICTCASE: 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%

CASE: US TRADE DEFICTCASE: US TRADE DEFICT

CASE: US TRADE DEFICITCASE: 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?

Health and Primary EducationHealth and Primary Education

life expectancy:life expectancy:china: china: total population:total population: 72.88 years 72.88 years

usa: usa: total population:total population: 78 years 78 years

literacy: literacy:

usa: 99%usa: 99%

china: 90%china: 90%

1986: 9 year compulsory enrollment law: 1986: 9 year compulsory enrollment law: primary school enrollment = 98.58%primary school enrollment = 98.58%

Completion rate = 75%Completion rate = 75%

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

HIGHER EDUCATION AND HIGHER EDUCATION AND TRAININGTRAINING

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

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

Chinese Labor Force:Chinese Labor Force:

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

MARKET EFFICIENCYMARKET EFFICIENCY

High level of exports. High level of exports.

Highly competitive environment in manufacturing Highly competitive environment in manufacturing sector aimed at exports.sector aimed at exports.

Corruption and briberyCorruption and bribery

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

Anti-trust laws needAnti-trust laws need

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

TECHNOLOGICAL READINESSTECHNOLOGICAL READINESS

Benefits from the technology brought over by foreign Benefits from the technology brought over by foreign companies.companies.

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

Information technology uptake in Chinese firms lagging. Information technology uptake in Chinese firms lagging.

BUSINESS SOPHISTICATIONBUSINESS SOPHISTICATION

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

Chinese consumers are becoming more sophisticated.Chinese consumers are becoming more sophisticated.

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

INNOVATIONINNOVATION

China is still focused on low cost production versus China is still focused on low cost production versus innovation.innovation.

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