Friday, 1 August 2014

Europe and China: economics is not a zero-sum game

Let's start with the pessimistic view: China'a continuing economic rise is going to destroy European living standards. In 50 years, the European Union, and especially the Eurozone (if it still exists at all) will be a nice museum to visit. At best.

China's ascendancy in the world stage can be best captured by its export performance over the past two decades.....
      Source: WTO

All looking very dramatic, indeed. All surely very disruptive for Europe.

But also all very one-sided. The other side of the story is told by looking at China's imports evolution in 1990-2013.......
      Source: WTO

.....and the EU's and Eurozone's current account balances....
      Source: IMF

Putting words to pictures (all numbers in nominal USD):

Yes, China's exports multiplied by a factor of 36 (thirty six) from 1990 to 2013. China was not among the world's 15 major export nations in 1990. It is the number 1 export nation now.

The other, often overlooked side of the picture shows that China's imports multiplied by a factor of 37 (thirty seven) from 1990 to 2013. China was not among the world's 15 major import nations in 1990. It is the number 2 import nation now (after the US).

More importantly, the EU's current account has been well balanced throughout the whole period. In fact, and to be precise, the current account balance improved between 1990 and 2013: from -0.7% of EU's GDP in 1990 to +1.9% now. An improvement of 2.6% of GDP! Read slowly, please: it i-m-p-r-o-v-e-d while China was amidst its already legendary and seemingly unstoppable economic rise!

On top of it, the Eurozone looks even better than the whole of the European Union: in the seventeen year period from 1997 (2 years before the creation of the Euro) to 2013 it only registered a current account deficit in two years (2000 and 2008) and in both cases accounting for less than 1% of GDP. In 2013, the Eurozone achieved its largest ever current account surplus: 2.9% of GDP.

Now that we have the whole picture, things look everything but dramatic, don't they? As a whole, the European Union - and especially the "ill-and-at-some-point-certain-to-collapse" Eurozone - is and has always been a highly competitive economy. And a massive overall beneficiary from China's economic rise over the past 2 decades.

Is this surprising? It can only be a surprise if we think that economics is a zero-sum game - for one party to win another has to lose by the same amount - focus on economic losses and overlook economic gains as well as history. After the second world war, Germany and Japan were completely destroyed. The US was the world's absolute economic super-power. But surely everyone agrees today that Germany's and Japan's economic rise in post-WWII was good for both countries, for the world in general and for....the US.

Obviously, the German and Japanese economic rise led to disruptions of some US industrial sectors: where is the US automotive industry today vs. 1950? The streets of New York are packed with Mercedes, BMWs, Audis, Toyotas. Where are the Kodak cameras? Overtaken by Canon and Sony digital technology. Oh dear, oh dear. But the rise in German and Japanese living standards also led to massive consumption of US products in both countries. How many Germans don't have Microsoft software installed on their PCs and don't use Google as their search engine? How many Japanese don't have Intel inside their PC's, own some kind of Apple device and watch Hollywood movies?

The regional reallocation of resources between industries among the three countries has made their citizens better off and much wealthier than they were 60 years ago.

Why should it be different for China vs. Europe (and vs. rest of the world)? China started to open up and integrate into the world economy in 1979, in the wake of Deng Xiaoping's reforms. Becoming the largest exporter in the world, as China is now, is the beginning of normality. Abnormal was that the largest country in the world, accounting for 20% of the world's population, was not (even close) among the world's top-3 largest exporters for well over two centuries. Nor (even close) among the world's top-3 importers.

It's not possible to stress it enough: the fact that China is now the world's second largest import nation is absolute normality. And so is as well that it will become the largest global importer over the next 10-15 years: as a country becomes wealthier, it will import more goods and services from abroad. Obviously, to become wealthier China had and has to continue to develop globally competitive industries and companies, which disrupted and will continue to disrupt existing industries and companies in other countries. But other industries and companies from third countries will benefit from the higher demand for their products resulting from Chinese citizens' higher purchasing power. With higher purchasing power, Chinese citizens will buy more Mercedes and BMWs, Burberry, Louis Vuitton and Prada products, Geox and Camper shoes, Parmeggiano and Fuet, travel more abroad. And visit more European museums.

The European Union's problem is everything but overall lack of competitiveness and economic weakness. The problem is the economic asymmetry among its member countries: some produce many goods and services that the Chinese want to have and can't replicate, others produce few. The fact that China helped to expose the asymmetry is painful for the weak countries in the short-term. However, it creates a positive pressure for change that will lead them to have stronger and more well diversified economies in the future. Able to ensure higher living standards for their citizens. And building a more well diversified economy and stronger export basis means something as "simple" as implementing reforms to attract massive amounts of foreign direct investment (FDI). Why shouldn't Siemens, e.g., carry out R&D activities and set up high-tech production facilities in Portugal, Spain or Greece instead of Germany if the conditions are right?

With a well established democratic regime, rule of law and strong institutions, top-quality infrastructure, cultural diversity with a strong common basis, the planet's highest levels and most homogeneous distribution of human capital - not to mention a very often underestimated, overlooked and misperceived solidarity among its member countries to smooth out asymmetrical economic turbulences - the European Union will be much more than a nice museum to visit in 50 years time.

Being currently underestimated and underrated just makes the EU an even more attractive place to be. Opportunities abound. Seize them!

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