The Chinese Dream
- Economics and Business Club NPSi
- Jul 17, 2021
- 3 min read
How China has Effectively Employed Economic Strategy to Become the Number One Low-Cost Producer in the World
Introduction
China is arguably the world's largest producer and exporter of goods and services, and has aptly been titled “the Workshop of the World”. As America once had their namesake ‘Dream’, so does China - except here, it does not promote self-interest or individual fulfilment; instead, it encourages workers to maximise profits in the name of their motherland, to contribute to their society and act as the roots of the great oak tree that China is set to become.
Chinese production is incredibly profitable - the value of their exported merchandise is USD 2.57 trillion, making them the world leaders in exportation, despite having a gargantuan sum of USD 1.58 trillion making up their imported merchandise. Exporting mainly technological goods such as broadcasting equipment (worth USD 208 billion), computers (USD 141 billion), telephones (USD 55 billion), office machine parts (USD 83 billion), and semiconductor devices (USD 35 billion), as well as textiles (making up nearly 40% of the global market), and importing primary goods i.e. raw materials, China makes tens of billions in profits each year, and this is just from the export of tangible final goods (not including services).
Of course, all of China’s profitability depends on their ability to create goods and services at the lowest possible cost. Having set in place foreign policies to ensure the smooth flow of their trade to each and every part of the world, yet simultaneously manipulating strategy to become the producer at the lowest cost, is truly mind-boggling!
So, what exactly are China’s strategies to earn profits from production?
Most people would say the answer is obvious - lower wages in China compared to the United States. However, that answer is only partially true, as labour is just one minimal part of the total cost of production. In several cases, it is as low as 20% of the total cost of production!
As a neo mercantilist country, China has adopted a strategy called "dumping." Neomercantilism is a term used to describe a policy which encourages exports, discourages imports, controls capital movement and centralizes currency decisions in the hands of a central government. The objective of neo-mercantilist policies is to increase the level of foreign reserves held by the government, allowing direct and effective monetary and fiscal policies in any economies
Furthermore, China's national government policies allow their manufacturers to use trade cheats. For example, there are unbalanced tariffs, such as the 2.5% for a car entering America vs. 25% for a car coming into China. Additionally, the Chinese government requires foreign firms to have a Chinese "Partner" company, who maintains the majority interest, takes most of the profits, and has greater general control of the company.
Moreover, to strengthen their hold on the second-largest global producer that is America, China has now implemented regulations on American firms to share their technology and relocate their R&D centers to China in order to have access to Chinese markets, among the largest in the world.
Above all, there is the ever-present currency manipulation, where China undervalues their currency by an estimated 30%-40%. This makes every product that China ships 30-40% cheaper than those of an American competitor. Surprisingly, this economic strategy is absolutely legal! No action has been taken to change this currency manipulation yet, and it is unlikely that such action will be taken against the behemoth that controls the items that we encounter via so many aspects of our daily life.
Bibliography:
Written By: Aarush Singh, Ruta Apte, Sri Samvruta Sridhar
Edited By: Tanuj Waghray, Yashas Ramakrishnan, Aishwarya Anand
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