Living with China—Locally and Globally (The Mahbub Ul Haq Memorial Lecture)

This paper considers the impact of the economic rise of Chinaon both firms and competition in middle income countries (locally) andon the world trading system (globally). It examines the size and natureof the shock that China has administered to the world economy, the wayin which firms and export sectors in one middle income country haveaccommodated that rise, some of the frictions and adjustment strainsthat China’s rise pose for the world trading system, and two cases whichI believe to pose threats to the world trading system if the partiesinvolved do not behave with great care. I will argue that integratingChina into the global economy in a way that benefits nearly all presentsperhaps the most important international trade and trade policy issue ofthe present era. The shock that the emergence of China is administeringto the world economy is larger than any seen previously—and by a largemargin. While the huge increase in global production that China hasgenerated brings widespread benefits, there are inevitably stresses andindeed possibly some losers. I start to identify these in two exercisesthat are reported here, both, for reasons of data availability, carriedout on Mexico. One looks at firm adjustment and the other at exportmargins. I then discuss China’s role in the wider trading system—the WTOand in global imbalances—and finally identify two areas in which thepoor handling of the integration of China into the world economy couldderail the world trading system. I mention these latter issues not asinevitable disasters but as issues that are sensitive enough to explodeif not handled delicately. An important role of economists inpolicy-making is to discourage inappropriate policies and descent intotrade war as a result of the competition that China brings wouldcertainly count as ‘inappropriate’. It is as a warning, no more, that Iaddress them in this paper.