China's growing economic weight means that it now exerts a substantial influence on the economies of other emerging markets.
Channels of Influence
China's impact on other emerging markets operates through trade and capital flows:
- Its success as an export platform means that for products where it has a comparative advantage--typically but not exclusively labor-intensive manufactured goods--an important element of the country's effect is intensified export market competition.
- For many manufactures China serves as one stage (often final assembly) in regional production chains. Here the China effect is a source of demand for intermediate products.
- China is a major importer of a range of commodities, particularly energy and minerals.
- Chinese exports of manufactured products have served to cap manufactured goods prices for emerging-market consumers; Chinese imports of raw materials have driven up commodity prices. The result for commodity exporters is higher terms of trade and a boost to national income.
China's status as an efficient export platform and huge domestic market make it a powerful competitor for foreign direct investment, and China has recently become a source of outward FDI.
Africa
Since African economies on average are relatively under-represented in global manufacturing trade, the influence of China as a competitor in third markets, or for FDI into the manufacturing sector, means mainly that its presence may close future opportunities for African economies rather than squeeze existing activities.
Latin America
On average Latin America also benefits from the China effect in the form of higher volumes and prices for its exports. The China effect has also been felt in terms of positive FDI inflows attracted to the resource sector. The biggest difference from Africa is that there are a relatively greater number of Latin American economies exposed to China's competitive pressures in the manufacturing sector.
Wider Asia
Comparative advantage would suggest that the China effect should be positive for resource-producing economies in Southeast Asia, but more problematic for manufacturing exporters. In practice the effect is more complex. Commodity exporters in Thailand, Malaysia and Indonesia have done well out of Chinese demand. Although China effectively has replaced regional economies in developed-country markets, these countries now export intermediate goods to China. For India, exports to China are much lower than imports from it, and the resulting large trade deficits are a steady source of irritation to New Delhi.
Developing Story
China's own comparative advantage is changing. For example, strong wage growth is currently being interpreted as indicating that China can no longer rely on an endless supply of cheap labor, and will be forced to move further up the value chain.
This shift will open up space for other producers, such as Indonesia and Vietnam. At the other end of the value chain, the same shift implies increased competitive pressure for regional economies such as South Korea and Taiwan.
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