• Democratic Institutions and Politics
• International Relations, Science and Security
• Markets and Methods
• Management and Leadership
• Social Policy

Robert Lawrence on the Chinese Economy

China's rapidly expanding economy is the object of both envy and angst around the world. Some observers are concerned Beijing may be seeking regional economic hegemony, but others note how China has made significant strides toward embracing private enterprise and improving governance. Robert Lawrence is the Albert L. Williams professor of international trade and investment and is affiliated with the Kennedy School's Mossavar-Rahmani Center for Business and Government. His recent Working Paper, 'China and the Multilateral Trading System' examines how China's economic transformation is affecting the global trading system.

Q: What are the most potent concerns about the Chinese economy, and how realistic are they?

Lawrence: China's size gives rise to a lot of fears. It's growing very rapidly and the Chinese are very, very competitive, particularly when it comes to labor-intensive products. So throughout the world, those who compete with China in these product areas are quite naturally concerned about its competitiveness. China is also growing and is a major consumer of primary commodities of various kinds. In particular, the Chinese have a huge need for products like oil and other minerals. They have huge amounts of steel output. Although to be sure, from the standpoint of those producers of primary commodities, this creates great opportunities; from the standpoint of those of us in the rest of the world who also buy those products, this creates concerns. I would say a third aspect that comes from China's size relates to the environment. Because China is growing in a way that does damage to the environment, there is a concern that its very rapid growth could lead to much faster global warming and other kinds of environmental problems.

Q: How has China's entry into the World Trade Organization (WTO) affected its economic and political transformation?

Lawrence: What's very interesting to me is that when China applied to join the WTO, there were a lot of concerns about the trading system. In particular, there were those who said that China had been forced to assume a lot of obligations to change a lot of its domestic policies that it wouldn't be able to implement. This failure, it was feared, would be very disruptive from the standpoint of the trading system. There were also concerns that China, as a powerful developing country, might try to push its weight around.

But what's very interesting is that China by and large has actually met its WTO commitments. It's been very meticulous in carrying out the various policies it agreed to implement. In addition, China has been playing a very responsible role within the organization of the World Trade Organization, both in its day-to-day activities and in the current negotiations in the Doha Round. So I would say that perhaps quite surprisingly, China has become a sort of quintessential status quo power. It has great interest in the multilateral trading system, since China's growth depends on international trade and on open global markets. It has found itself very much at home in the World Trade Organization.

Of course there are some who believe that China should be doing more. They argue that since China benefits so much from the system, despite the fact that it already has made large concessions upon its entry, they would like to see even more Chinese liberalization as its contribution in the next trade round.

Q: There is a theory that as a country becomes more economically transparent, it becomes more political transparent as well. Is that the case in China, or is that the hope that China will go down that road?

Lawrence: I think there are elements whereby China's entry into the World Trade Organization has helped improve the quality of its governance. Basically the WTO requires China to adhere to certain rules. It has to publish those rules, and then it has to enforce them. And one of the great difficulties that the central government in China has is in ensuring that its provinces actually abide by rules in general. So while I wouldn't go as far as to say that this has been a force for democracy, I would say that it has improved the transparency and use of a rule-based system for policy in China. That makes an important contribution to governance.

Q: What role do Free Trade Agreements play in China's growth and in its economic future?

Lawrence: China has been making increasing use of Free Trade Agreements with a whole number of countries. And it uses them for diplomatic reasons - just to be friendly with certain countries, particularly Asian countries, ASEAN countries. It also uses them to secure access to raw materials. It is particularly interested in signing free trade agreements with the Gulf countries that produce oil; with Australia and New Zealand, who are major agricultural producers and iron ore producers; and with Chile, which is a source of copper.

So what we see is that it has chosen partners who can provide it with the inputs that it needs in order to produce products and produce exports, and also to secure markets. One very unqiue and interesting agreement that China has signed is with Hong Kong and Macau. Of course there is a unique relationship between those economies; they are part of China today. It has used them for a variety of purposes - diplomatic, political, economic, and strategic.

Q: Moving forward, what are the most significant factors that will impact China's growing role as global trading partner?

Lawrence: Firstly, China's size. There is an open question about whether or not the world is going to be able to continue to absorb Chinese exports without protectionist responses in the rest of the world. So will markets be open to China's exports?

Secondly, there is a question about implementation domestically within China. China has done well in adhering to its WTO obligations, but there are still many complaints that foreigners have, particularly in the areas of intellectual property protection. They are concerned that the Chinese are not respecting intellectual property rights; and in other areas in which the administration is not extremely transparent.

In addition, I think there is a very knotty question relating to the Chinese exchange rate. Many argue that the renminbi is undervalued, and that China ought to allow it to appreciate. If China does that though, there is a question of whether it might go too far, and if it did, China would no longer feel as competitive as it does today. The argument in my paper is that it is precisely this sense of competitiveness that has made China a very good global citizen when it comes to the trading regime. In an environment in which China felt less competitive, there would also be a danger that it could become more protectionist.