China in the World Economy (review)

174 China Review International: Vol. 2, No. 1, Spring 1995 Nicholas R. Lardy. China in the World Economy. Washington, D.C.: Institute for International Economics, 1994. xi, 156 pp. Paperback $16.95. The stated purpose of China in the World Economy is "to examine the implications of China's rise as a major player on the international trade and financial scene" (p. 3). In this slim, five-chapter book, a thorough analysis of this important topic is not possible. What Lardy gives us is an overview of China's current economic position in the world and the probable future trends. The strongest thread throughout the book is China's economic relations with the United States. The last chapter lays out specific proposals for the U.S. that are a valuable source of ideas for those who make policy in this arena. Lardy analyzes China's economic rise in the world economy using a balanced and realistic approach. In chapter 1, he summarizes the estimates ofhow large China's economy really is. In terms of gross domestic product at parity prices, these estimates range from .36 trillion dollars to 2.9 trillion dollars. To Lardy, 1.25 trillion dollars seems the most reasonable figure, which would put per capita output at $1,100 (p. 18). In chapters 2 and 3, Lardy explains China's impressive export growth with several variables, although there is no analytical model presented to generate these results. He argues that the main export impetus was petroleum in the first half of the 1980s. By the second half of the 1980s, exports represented a product mix more compatible with China's supposed comparative advantage in labor-intensive manufactured goods. By then, foreign-invested firms were generating nearly all of China's export expansion. Lardy argues that if China is a newly industrializing country (NIC), it is an NIC with important differences. China's reliance on foreign capital, its bankrupt state-owned sector, and its unequal regional income distribution set it apart from the export growth patterns of countries like Taiwan and South Korea. The implication is that while China is a fast-growing economy with great export potential, it is also unlikely to become the world's largest economy by the year 2010, as estimated the Economist (28 November 1992, p.24; Lardy, p. 5). Even if China becomes the largest economy, China's population growth will keep per capita output at modest levels at best. Placing China in a realistic place in terms of growth and export potential sets the background for chapter 4, where Lardy discusses how China's trade will affect the U.S. From the U.S. perspective, bilateral trade has led to a trade deficit. This© 1995 by University deficit is so large that it is expected soon to surpass the U.S. deficit with Japan. ofHawai'i PressLarge trade deficits tend to create pressure for bilateral negotiations to find ways for the trading partner to buy more imports from the U.S. China is no exception to this kind of development. Trade talks are complicated by the fact that China Reviews 175 believes the deficit is much smaller than does the U.S. For example, in 1992 the U.S. reported that its trade deficit with China was almost $19 billion while China 's data showed a small surplus for the U.S. In the most technical part ofthe book, Lardy carefully explains the main reasons for this discrepancy. Lardy estimates that the U.S. Commerce Department overstates the U.S. trade deficit with China by a third largely because ofhow each country treats the trade between China and the U.S. that passes through Hong Kong. Lardy points out that even when Hong Kong returns to China in 1997, this problem will persist because Hong Kong will remain a separate customs area. However, as a result ofnegotiations begun at the Asian Pacific Economic Cooperation meetings in Seattle in late 1993, in 1994 the two governments began an official reconciliation of trade statistics that should narrow the reported differences in the future. Even with adjustments, the U.S-China trade imbalance is large and growing. Lardy briefly discusses two reasons for this...