Since China’s reform and opening up policies began in the late 1970s, the country’s average annual economic growth rate has hovered near 10 percent. Currently, China’s gross domestic product is second only to the United States; it's the world’s largest exporter and importer and the largest holder of foreign exchange reserves. And along with China’s remarkable economic rise has come a significant increase in China’s role in both regional and global development and governance.
With the economies of the United States, the European Union and Japan reeling from weak growth and burdensome debt levels, China has emerged as a key driver of global economic growth, contributing, along with other major emerging economies, nearly two thirds of new global economic output. As Daniel Burstein has argued, a power shift toward Asia is under way, and “China lies at the heart of this Asia shift." According to many projections, China will surpass the United States as the largest economy in the world by 2030. China has benefited greatly from integrating into the world market and participating in the existing international economic system, because this has helped the country reform its old planning system and rapidly assimilate into the global economy. This process is set to continue in the future because China has no reason to reverse a course that has had such positive results. As a newly emerging power, China will naturally become a more important player in helping to shape regional and global development and governance.
To sustain growth in the future, however, China will have to restructure its economy from an investment- and export-led model to one based on innovation and domestic-led demand. It will also have to adopt policies that ensure social safety nets and equitable distribution of wealth. China also needs to establish a new, sustainable economic foundation by implementing a green development strategy and establishing a good governance system that redefines the role of government and enhances the role of the market. With its economy moving into a new phase through steady technological innovation and an explosion of domestic demand, China will surely play a bigger role as a major market and capital resource for regional and global economic growth.
Clearly, though, the global economy is facing many serious challenges. According to a survey released in November by the World Economic Forum, the “confidence deficit” continues worldwide, with international experts remaining pessimistic about the state of the global economy and global governance over the next year. An immediate concern is whether the U.S. economy will continue to move out of the shadow of the financial crisis. Currently, it's marked by low growth, high unemployment and mounting trade and budget deficits. The European Union, meanwhile, is suffering from the contagion effects of its sovereign debt and euro crisis. There are widespread fears that a default by one or more EU member states could well push the EU economy back into recession and plunge global financial markets into uncertainty. The declining demand from these developed markets has a profound impact on emerging economies since most of them depend on developed markets.
In order for the United States to stimulate its vulnerable economy, the administration of President Barack Obama needs to adopt more effective measures — especially ones aimed at stabilizing the dollar and combating trade protectionism. As for the European Union, it's critical to restore market confidence through fiscal consolidation, structural reforms and more effective economic governance. Bolstering the financial sector and strengthening governance of the euro zone is vital for the survival and reinforcement of the common currency. The good news is that EU member states agreed to a treaty that would submit member states to greater budget oversight, agreed to increase the size of the European Financial Stability Facility and decided to provide more assistance to debt-crisis economies. Having said this, fundamental reform of the European Union’s fiscal system is still urgently needed.
The current crisis also shows the weakness of the international system and global governance. The International Monetary Fund needs reform if it is to better represent the interests and concerns of the emerging economies and enable them to play a greater role in global governance. New and effective regulations for governing international financial markets need to be formulated and implemented. In this respect, the Group of 20 nations can play a major role. By bringing major developed and developing economies together in a larger forum with a more important role in global crisis management and macroeconomic co-ordination, the G-20 can make world economic growth more sustainable and balanced. The ongoing agenda for economic restructuring and support for the global multilateral system are critical to the process of restoring confidence.
China’s economy is highly integrated into the global market, so the country should participate actively in initiatives to reform the international system. While a stable and evolutionary reform process is important to China, the desired outcome should see structural changes that produce a new, more effective international system. Some have worried that China may “operate both within and outside the existing international system, seeking to transform that system while at the same time, in effect, sponsoring a new China-centric international system." The fact is, though, that a China-centric system would neither be acceptable to other nations nor in China’s own interest.
China’s leadership believes that the current trade imbalance between China and the United States is largely rooted in irresponsible U.S. fiscal and monetary policies, so the United States should focus on adopting more responsible and credible policies. To be sure, China itself should also make efforts to restructure its export-led growth model and generate stronger internal demand in order to reduce its dependence on external markets and trade surpluses to drive economic growth. The economies of China and the United States are highly interconnected and complementary, which requires them to co-ordinate and co-operate closely as they seek to rebalance and restructure their relationship. A trade war wouldn't only hurt both countries, but also the regional and global economies.