Introduction
In the recent years, the competition in the global market is becoming intense. In order to offer the product with good quality and competitive price, countries do their best to reduce operation cost to achieve such tendency. The economy in China has grown rapidly in recent years. After participating in the WTO in the late 2001, china appeals several firms’ investments from worldwide. In additional, compared to the neighboring countries, the market of china has its intrinsic advantage. Similarly, the downturn of the global economy has led to decrease in market demands, but a market of china gives incredible presentation, which has captured comprehensive attentions worldwide.
Thesis Statement
The paper evaluates why china is accumulating so much foreign reserves after joining the WTO.
Background information
Under the vicious global competition and risky environment, analysts have transferred their focus from traditional outer industry analysis into distinctive capability inside the industry. According to the theory of foreign direct investment, a firm must employ particular capability and resource advantage before FDI. This is so because the purpose of FDI is to enhance the technical and management capability of a firm to foreign market in favor of its profit-seeking motivation (Feenstra and Taylor, 2008). Therefore, WTO promotes international expansion, which offers a terrific opportunity for multinational enterprises to extend their specific advantages.
Major Point: Sustained Investment
The WTO has helped China to sustain investment. This is so because they helped the new financial support to a branch firm and helped to upgrade the manufacture and equipment in the foreign markets. This has made China enhance the competitive advantage of its foreign branches based on the sustained investment. Similarly, the experience of prior investment in various targeted countries has promoted the chances to continue with its investment. For instance, China is currently the United States’ leading trading partner. Joining the WTO has made China the leading source imports and third-largest export market. China is estimated to be $300 billion market in the United States, therefore many united state firms view participation in China’s market as vital to staying globally competitive. For example, General Motors has invested heavily in China, sold more cars in its market than in the United States between 2010 and 2013 ( Chien, 2007).
Minor Point: Complexities in achieving foreign reserves
However, despite expanding commercial ties, which are enhanced by WTO, the bilateral economic relationship has become complex and mainly marked by tension. From the United States point of view, many of these tensions arise from China’s incomplete transition to the free economy. Although china has managed to liberalize its economic and trade regimes over the past years, it still continues to keep a number of state-directed policies that seems to distort trade and investments flow. One of these policies that distort trade is mixed record on integrating its WTO obligations. Similarly, china uses intensive industrial policies to promote the expansion of industries favored by the government to prevent them from foreign competition. The major threat to the distortion of trade is the China’s policy of maintaining an undervalued currency. Therefore, many analysts argue that these policies harm other partners, especially the United States economic interest, which has contributed to the united state loss of jobs. For instance, research indicates that Chinese IPR infringement cost the United States economy about $240 billion annually (Chien, 2007).
Major Point: Increase in Private Consumptions
China has accumulated foreign reserves after joining WTO because the rate of growth of its private consumptions has been increasing significantly. For instance, its private consumption as a percent of GDP was 36.3% in 2012 compared to 71% of the United States (Hatakeyama 2008). It plans to increase efforts to promote domestic spending has reduced its dependence on exports as a significant acceleration to its economic growth. For instance, in 2008, China started implementation about $586 billion as the economic stimulus, which focused on the infrastructure projects. In additional, its trade balance has increased from a deficit of 1.1 billion in 1978 to a huge surplus of over $ 400 billion, which is due to trade with the United States.
Major Point: Undervalued Foreign Currency
Its foreign exchange reserves have increased dramatically more than 1000 fold expansion, making China the global leading holder of foreign exchange reserves (Hatakeyama, 2008). However, if Chinese household would buy more American goods, this trade surplus can be balanced. This is because the American trade deficit is attributed to undervalued Chinese currency, which makes their goods cheaper relative to the United States products. Therefore, it has been alleged that the Chinese government is responsible for manipulating its currency attain a large trade surplus and excess foreign reserves.
Conclusion
In a recap, the main source of excess foreign reserve after joining WTO is the ability to maintain its currency from international exposures. In additional, China has managed to capture the global market because it is the leading export producer. This has given China sustained growth China, which enhances the competitive advantage of its exports in the foreign market. The WTO has helped China to expand in the commercial ties, which has contributed to trade surplus and excess foreign reserves.
Restate thesis statement
Therefore, these reasons explain why China is accumulating so much foreign reserves after joining the WTO.
References
Chien, S. (2007). Taiwanese Firms' Foreign Direct Investment in China: Traditional Industries vs. Electronic Industries. Journal of American Academy of Business, Cambridge, 6(1), 72-77.
Feenstra, R. C., & Taylor, A. M. (2008). International economics. New York: Worth Publishers.
Hatakeyama, N. (2008). Foreign Exchange Investment Corporation. Economy, Culture & History Japan Spotlight Bimonthly, 27(1), 2-9.
