Discuss the extent to which the fast economic growth of China and growth of its manufacturing exports is to Britain's benefit. China is emerging as a major force in the world economy with an average growth rate of approximately 10.4% a year in real GDP and is forecast to be one of the world's biggest economies in 2030. However, until then China has a lot of expanding to carry out, at the moment China has a GDP (PPP) of $10.08 trillion while the USA has a GDP of $14.8 trillion.
For many years now China has occupied a unique niche in the world's political economy, its vast populace with approximately 1.3 Billion people and a Labour force of 820 million alone mark it as a powerful global presence. However to what benefits do the questionable sustained growth in china benefit Britain and her interests? The matter as a whole is indeed a double edged sword so we should ask whether the actual and potential benefits outweigh the possible and ongoing disadvantages.
A rise in a new growing economic power could potentially be beneficial for western countries such as the UK, Europe and the US by lifting the whole global economy and global trade. In addition, as China is primarily based on exports and due to China controversial pegged Yuan which makes it much weaker than that of the Pound or Euro, import prices for Chinese goods are much cheaper for western countries. As well as allowing for relatively cheaper imports, which includes capital equipment. This will lower the UK's and Europe's firm costs, possibly increasing profits. From here, if labour is invested in as well and trained to use the specialist machinery, it may improve output and labour productivity in the long run, allowing for GDP and economic growth to rise.
Moreover, the increased competition from China will force American and European firms to become more efficient, dynamically and productively, in fear of losing market share and having to leave the market outright. This may encourage innovation, as firms will develop new techniques to lower costs and increase output. Also, if these lower costs are passed on to the European and UK consumers, they will benefit from lower prices, better quality goods and services, and an increased variety of products as the domestic products will be more price competitive with the Chinese goods. This will help shift domestic AD to the right as net exports rise, this will lead to Export led growth. This has been the case for the UK during the course of 2011 since the depreciation of the pound in 2008.
With increasing ties in trade between the UK and China, international relations may improve and the fields that we (the UK) specialise in come into play. For example as great as the Chinese work force is, it lacks in financial knowledge and expertise. This is a field in the global market where the UK can prevail through intervention and immediate benefit.
This is the case because a pegged exchange rate would not attract a huge inflow of hot money in an economy as the returns will not be beneficial to those who are seeking out high profits. In addition, with the growth of a western identity and increasing affluence across the landscape of inner city china, purchasing power of the affluent is due to increase as more people have an average higher income therefore given inflation stays the same, more people have more discretionary income. Chinese households earning less that US$6000 per year for example will spend almost 100% of their income on basic necessities.
It is only after the average household income crosses the US$6000 threshold income that their marginal expenditure quickly shift from basic necessities to discretionary items of high quality, a luxury which most Chinese producers do not qualify. It is in this case where demand for western, in particular British goods in China increases as the Chinese will have no choice but to import our goods. This will indeed improve the UK trade balance and create more employment to increase production. Discretionary expenditure is expected to increase by US$120 Billion in 2015.
In contrast, there are many sceptics who believe that the growth of china is nothing bad but news for the developed world, including the UK. Since the de-industrialisation of manufacturing in the UK and the rise of China as an economic powerhouse, there has been widespread loss of economic capability. Hundreds of thousands of people have lost their jobs in the past as a result of manufacturing industries relocating their production to the east in search of lower production costs and a figurative pool of cheap labour, and indeed the aforementioned pegged exchange rate making importing cost-effective.
Instead of the threat of UK firms loosing global market share, they would rather close down and relocate. This is because China has a comparative advantage in the manufacturing industry as they have high allocative effiency with manufacturing infrastructure. Although suffice to say, the UK has healthy supply-side policies in place (especially in education) so the majority of the work force has subsided into the tertiary sector where workers have a high standard of living compared to Chinese workers.