The global recession of 2008-2009 tested many of the theoretical principles of international trade and international economics. One such principle is that with recession comes slowed commercial and consumer spending, and slowed spending means fewer imports. The Chinese economy has enjoyed some of the largest trade surpluses in the global economy in recent years, and in the early stages of this recession, it suffered some declining export sales. But, it turns out, only for a while.
Of all the major economies, China’s was the first to show true economic recovery. By late summer 2009, China’s exports, and economy as a whole, was rising once again. The increasing maturity of the Chinese economy was also seen in its resurgence in domestic spending (e.g., the Chinese auto industry) as the famously penurious Chinese consumer relaxed some of the purse strings in order to buy more and more cars in what is now the world’s largest automobile market.
There are a number of forces at work in the rapid turnaround of the Chinese economy. China clearly benefited from the ability of most industrial nations to resist protectionist measures in their recessionary economies. All too often in years past, governments chose to protect their declining business environments against foreign competition when recession hit. The major trading nations today, however, have many more controls, restrictions, and general prohibitions on tariffs and quotas in place. This prevented many governments from knee-jerk reactions to calls for protectionism.
A second factor…
A second factor that has likely contributed to the resilience of the Chinese economy is the depth and breadth of global supply chains. Companies today do not only purchase final products from trading partners, but often an assortment of various intermediate parts and subcomponents. As a result, although specific products or services may seem declining sales and trade, their constituent pieces and parts may live on in a variety of other products that are surviving or even recovering with selected global sales.
A third feature of the Chinese economy’s ability to adapt to the global recession is its ability to aggressively reduce prices– and associated costs– because it possesses probably the most flexible labor market in the world. As many foreign buyers of Chinese exports have demanded price cuts in order to maintain sales in their declining country markets, Chinese manufacturers have reduced wages and employment in many of the production zones that rely on migrant workers (from the inner provinces). The flexibility of their labor markets is far above that seen in most other major industrial markets like Japan, the United States, and the European Union.
The final contributing force is the support of the export sector by the Chinese government itself. Export subsides, major investment in logistics and export infrastructure, and the government’s efforts to keep the Chinese currency undervalued all aid to support and sustenance of what is quickly becoming the engine of growth for the dragging global economy.
Taken from the 8th Edition of International Business by Michael Czinkota, Ilkka Ronkainen and Michael Moffett.
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