It’s More than Just Exports

“Factory of the world”, “world export champion”, “global growth engine” – China appears to be one of the clear winners of globalization. Yet a close examination reveals that China is still nowhere near as connected with the rest of the world as western industrialized nations.

World export champion China: globalization is more than just trade

Cross-border trade relations are a key indicator for increasing globalization. A glance at trends for global goods exports since the end of the Second World War reveals that by 2015, China had increased its global market share from less than one percent to almost 14 percent (see Fig. 1). In 2009, China even superseded Germany as world export champion. This would seem to suggest that China is among the countries with the highest degree of globalization. However, drawing such a conclusion would overlook the fact that globalization encompasses much more than the mere cross-border exchange of goods.

Globalization – a conceptual clarification

Globalization is often equated with an increase in the volume of cross-border trade. But this is not an accurate reflection of the term, because globalization is so much more than the expansion of global trade in goods and services. Even if one defines globalization in purely economic terms, it refers not only to the exchange of goods and services, but also to the increasing economic interconnectedness of countries which results from the growing exchange of labor, technologies, knowledge and capital (for example in the form of portfolio investments or foreign direct investment).

In addition, it should be noted that globalization also refers to the interconnectedness of countries on a social and political level.  Examples of these types of globalization are international tourism, availability of foreign newspapers or membership of international organisations such as the International Monetary Fund or the United Nations.

Measuring globalization

There are a range of indices that measure the degree to which an individual country is connected with other nations. Here are two examples:

• The “EY Globalization Index” was most recently calculated for 2012. It encompasses 60 countries. China occupies 44th place on this ranking list.

• The “KOF Index of Globalization 2016” was published in March this year. It measures the degree of globalization in 2013. Of the 192 countries ranked, China came 73rd.

Two years ago, the Bertelsmann Stiftung and Prognos AG published the “Globalization report 2014“. The index used there, which measures the degree to which a country is connected with the rest of the world, is very closely linked to the aforementioned KOF Globalization Index created by the Swiss Federal Institute of Technology in Zurich. In addition to indicators on economic interconnectedness (e.g. data on cross-border trade in goods and services, trade barriers and capital controls), it also includes information on the social aspects of globalization (e.g. international tourism and dissemination of information and ideas), as well as how politically integrated a country is in the world (e.g. data on membership of international organizations and foreign embassies in the country in question). This data enables a globalization index to be drawn up for every country and every year, with scores between 0 and 100. It works as follows: the higher the number of points on the index, the more interconnected that country is with others.

The “Globalization report 2014” covered the period between 1990 and 2011. Out of 42 countries, China only occupied the 39th place in 2011. In the “Globalization report 2016”, which we intend to publish this September, we have expanded the period under examination to the years 1990 – 2014. However, China’s position has remained unchanged. Compared to other countries, China’s global interconnectedness is still very low (see Fig. 2).

Why is China’s level of globalization so low?

Given the high volume of Chinese exports, at first glance the country’s low level of global interconnectedness and its low ranking on the globalization index appear surprising. What is more, China’s low value in the economic globalization sub-index (38th place) is largely responsible for this and not – as one might possibly assume – a poor performance in the other two sub-indices on political (32nd place) and social (35th place) aspects of globalization. This result can be explained as follows.

• For international comparisons, a country’s exports and imports are analysed in relation to its GDP or gross domestic product (export or import quotas). Given the size of the Chinese economy and its domestic market, this puts the country’s trade links with the rest of the world into perspective.  For example, Chinese exports represent just 38 percent of Chinese GDP. This means that China occupies only 35th place in the ranking list.
• The same applies for economic interconnectedness in the form of portfolio investments (9.1 percent in relation to GDP and 42nd place) and foreign direct investment (stock of inward and outward FDI: 18 percent of GDP and 42nd place) as well as trade in services (5 percent in relation to GDP and 41st place).
• Lastly, it should be borne in mind that the reduction of trade barriers and capital controls is also included when calculating a country’s level of economic globalization. Here too, China is found towards the bottom of the list. For example, direct investment flows to and from China are still subject to various restrictions. This is also shown by the OECD’s FDI Restrictiveness Index, in which China comes second from last. For example, non-tariff barriers (e.g. compulsory certification) and informal obstacles (e.g. prioritizing local companies) continue to make trade and investment between China and the rest of the world considerably more difficult.
• In both of the sub-indices on social and political globalization, China actually performed slightly better than it did in terms of economic globalization. The indicators for social globalization include the number of Internet users, telephone traffic and international tourism – three areas that have expanded significantly in China during recent years. In addition, China is a member of a number of international organizations in which it plays an increasingly active role, and increasingly takes part in UN peace operations. Both of these areas are indicators for political globalization.

Economic policy conclusions

China is nowhere near as globalized as we might think. This is because although the country seems to be a heavyweight in the global economy, it still has a relatively low level of globalization compared to other countries. In all three sub-indices – economy, politics and social – it came in the bottom third. China’s worst performance actually came in the field of economic globalization. This shows that a prompt and, above all, more consistent implementation of the economic reforms initiated by the government of Xi Jinping is 2013 is urgently required in order to better integrate China into the global economy and to transform it into a real “global player”. In particular, key strategies for this are the reduction of trade barriers (such as import duties, for example) and capital controls. As we demonstrated in an earlier blog post, both China and the global economy as a whole would benefit.