Pax Sinica: Geopolitics and Economics of China's Ascendance

2: The Emergence of the Greater China Economic Circle

Economic integration is essentially a process of uniÀcation—the means whereby coherence is imposed upon previously separate, even disparate, geographical regions. It may be pursued as a domestic or international goal, although the simultaneous attainment of both may prove elusive. Recent efforts towards the creation of formal transnational, regional economic identities , whether North American (NAFTA), European (EC) or Asian-PaciÀc (APEC), have sometimes been perceived as a threat to the establishment of a truly integrated global economy. By contrast, the remarkable degree of economic integration already achieved between southern China and Hong Kong (and, latterly, Taiwan) might ironically have a Àssiparous effect on China’s domestic economy. From this point of view, there is a danger that increasing economic integration within Greater China1 could threaten China’s national economic identity, or at least compel its redeÀnition. Cultural and linguistic afÀnities have no doubt helped to facilitate the economic integration of China, Hong Kong and Taiwan. But international trade and foreign investment have been its most potent stimuli. The rapid development of trade has generated familiar static and dynamic gains, which have enhanced economic growth within the region. These have been complemented , especially for China, by the beneÀts of rapidly expanding foreign investment. Overcoming their technological backwardness is a cornerstone of developing countries’ growth strategies, and it is no coincidence that the Chinese government has increasingly used foreign investment to encourage * Reprinted with minor adaptation from “Economic integration within Greater China: Trade and investment Áows between Hong Kong, Mainland China and Taiwan” (coauthored with Robert Ash), The China Quarterly (CQ), No. 136 (December 1993), pp. 711–45. 2 The Emergence of the Greater China Economic Circle* 16 Pax Sinica productivity-enhancing technical progress. After all, inÁows of capital promise to obviate resource bottlenecks, especially capital shortages and skill deÀciencies . China’s willingness to accept such overseas participation, including foreign direct investment (FDI), in its domestic economic development is a measure of the real signiÀcance of its post-1978 open-door strategy. The different resource endowments and levels of development of China, Hong Kong and Taiwan suggest how all stand to beneÀt from greater economic integration. Economic growth in Hong Kong and Taiwan has derived overwhelmingly from trade-orientated strategies, characterized by a decline in the export shares of resource-based goods in favour of those of labour-and (later) capital-intensive products. Such developments have been accompanied by worsening shortages of land and labour, which have generated upward pressure on rents and wages. In China too, the export sector, originally dominated by resource-based goods, has shifted towards the production of labour-intensive commodities. But land and labour remain plentiful, and their accessibility has made the extension of Hong Kong and Taiwanese industrial facilities to the Chinese mainland an increasingly attractive proposition. For China, short of capital and technologically immature, such a relationship promises enormous bene Àts. This complementarity has generated an economic symbiosis between the constituent elements of Greater China. Through their effects on resource allocation and their stimulus to technology transfer, the expansion of merchandise trade and investment has had a profound impact on the economies of Hong Kong, Taiwan and southern China. The same forces have generated new employment and production opportunities . They have also been the source of important structural changes, associated with the reallocation of resources.Above all, they have caused accelerated economic growth, in recent times unmatched almost anywhere else in the world. These considerations deÀne the main themes of this article. We seek to assess, through an examination of the pattern and level of trade and investment Áows, the extent to which Greater China has become economically integrated. Another concern of ours is to analyse some of the economic implications of this process. For reasons of convenience, trade and investment are treated separately . The reality is of course more complicated and less cut and dried. Each component encourages and facilitates the other, and it is the combined effects of both which make their stimulus to economic growth so powerful. The Emergence of the Greater China Economic Circle 17 Merchandise trade with greater China Trends and patterns of exports and imports The rapid expansion of China’s foreign trade after 1978 is one of the most remarkable features of the impact of the reform programme (in this case, the open-door strategy). Between 1978 and 1991, China’s merchandise trade grew, on average...