To what does China, which stands out amongst globally competing countries, owe its economic success?
The prices determined by the market are the most important balancing mechanism in the free market system. There is the law of one price that states that prices will come to an equilibrium over time when expressed in the same currency between countries. In trade and financial liberalization and open economies, the law on one price is expected to work. In real life, there have been many academic studies on whether or not the law on one price is valid. The said law operates relatively quickly in open economies where foreign trade and finance are free but it cannot function in economies with constraints in these areas.
CHINA FOLLOWS STRATEGIC TRADE POLICY
Some countries did not leave exchange rate fluctuations to free market conditions and tried to gain competitive advantage in the international economy by following strategic trade policy in the long run. China is without doubt on top of these countries. Even if governments in these countries reduce the constraints on foreign trade over time, the financial markets of China remain closed compared to many other countries in the world. In fact, before the term of President Donald Trump, the United States accused China of conducting currency manipulation. In this context, the US even pressured the Chinese Government through G20 meetings to increase the value of its money. This pressure has continued to increase during the term of President Trump. So, at this point where trade wars have led to increasing tariffs, are price discussions over the Yuan exchange rate losing their old importance?
The short-term worthlessness of the money of a state increases the competitive role of that country in foreign trade
IT IS NOT EASY TO KEEP A COUNTRY’S MONEY WORTHLESS
Countries do not want their money to be constantly worthless in the long-term balance. The short-term worthlessness of the money of a state, increases the competitive role of that country in foreign trade. It is also not so easy to keep the money of a country worthless for a long time. For example, even though the TL lost worth in each crisis that has shocked the currency, it did not take long to increase confidence in the country and capital inflows, which led to the currency to gain worth again. Price and financial stability concerns were also among the important reasons that rapidly added value to the TL. Countries that implement market socialism, such as China, have built their exchange rate policies on increasing their ong-term competitiveness. As a matter of fact, China, which opened up to the world markets at the end of the 1970s, has improved its price competitiveness day by day and has become a global market leader in many products as a result of its strategic trade policy.
The US abandoned indirect trade and investment policies during the Trump period and took more direct measures against China
CHINA’S COMPETITORS BECAME THEIR DISTRIBUTORS
With the contribution of the economy of scale, China, which manufactures for the world, is now able to make many products cheaper than its competitors are. Thus, the competitors of production facilities in China have become the distributors of the companies in their countries. For this reason, China, which initially rendered its money worthless for a long time, erased its competitors from the market after a certain period and achieved a superiority in market share. After the competitors left production, China, as world leader, has reduced the need to compete itself by making the Yuan worthless. Chinese companies are now leaders in many sectors and their competitors are other Chinese companies. Considering this today, China is considered the winner of long-term strategic trade policies. This is why the US is pushing the Chinese Government more and more in foreign trade policies.
THE US TAKES DIRECT MEASURES AGAINST CHINA
The US abandoned indirect trade and investment policies during the Trump period and took more direct measures against China. The said measures were carried out on price and in this context, increased tariffs have been started to be applied against products imported from China. This means that the US Government will increase the price of products imported from China, in return for China not adding value to its money. On the other hand, as Chinese companies have pushed their competitors out of the production market, it has made it difficult for firms to become competitive. It is not immediately possible for companies to return to production due to fixed investment and a search for market share. Being aware of this, US policy makers want to diversify the import market of their countries in the labor-intensive sectors while shifting production in the energy intensive sectors against China to the USA. In this context, it is necessary to lay importance on the visit of US Minister of Trade Wilbur Ross’s visit to Turkey and their contact with our country in terms of the $100 billion trade volume subject. While the trade wars evolve into long-term strategic partnerships, short-term international prices are declining and new trends in this war are offering important opportunities for Turkey.
Academician Prof. Dr. Ahmet Faruk Aysan