China’s giant hunger is changing the world

The world has never seen a phenomenon like China’s current consumption of resources. Even though the world’s most populous nation is following an ‘ordinary’ trajectory for an industrialising country, it is the very size of its population that shifts it into the ‘extraordinary’. With extraordinary affects on global trade and development, says Anne Terheggen at Science Week 2013

 

China’s population is around 1.3 billion or 20% of the world’s total. Japan and Korea, two other Asian nations that experienced a process of rapid industrialisation, never totalled more than 5% of the total world population when growing. These countries didn’t have much effect on world prices or incomes. But China is different because its population is so large, causing disruptions and changes to ‘business as usual’ globally.

GDP growth rates China etcChina has recorded high growth rates of up to double digits over the last 30 years; growth which is labour-intensive, manufacturing-based and export-oriented. Amongst other stimuli, the Government allowed the ‘release’ of labour from the countryside to the coastal cities to manufacture goods that high-income countries wanted. However, the new five-year plan is more focussed on domestic consumption, a reflection of the global slowdown and the domestic market’s increasing wealth.

Whilst China is catching up with other industrialised countries, it is still at a resource-intensive stage of growth, consuming, for example, about 200 kg of steel per person with still ample room to grow if the 1000 kg per person in South Korea is used as a benchmark. China has lots of resources of its own but in terms of per capita and physical requirements, it is still resource-poor, as reflected in the consumption of steel mentioned above. Thus, the nation needs to import the missing resources and it does so via trade often paired with foreign direct investments and aid. In Africa, we see deals like a soccer stadium for oil or a road for copper.

The graph below shows extraordinary percentage increases of imports of different agricultural and agricultural-raw-material product groups during the period 1992–2012: vegetables and fruits (7000%), coffee/tea/cocoa/spices (1500%), oil seeds/fruits (120 000%), wood (2200%) and fixed vegetable oils/fats (2300%). Increases for industrial materials and products also increased dramatically: manufactured products (1000%), crude metals (2300%) and mineral fuels (3400%). Overall, the country is responsible for much of the world’s growth in demand for resources.

Import volumes China

This huge increase of consumption has ‘brought about a significant redirection of…  [developing countries’ commodity] exports…  away from OECD markets’, according to Goldstein and others, writing in 2006*. China is now the largest consumer of oil seeds and fruits, taking 50% of the total world imports; it takes more than 40% of the total imports of metal ores and textile fibres; and 25% of the world’s imported timber.

This has had an impact on free-market commodity prices. For about 30 years, the price indices hovered around more or less the same rate (though hiding large variances for individual products during that time) but have increased exponentially since the early 2000s as China started to import on a large scale. We are witnessing a very long commodity boom or, as some say, even a commodity price ‘supercycle’.

Free market commodity prices

There have been commodity price booms in the past. For example, during 1951–53, when the Korean War led to inventory build-ups that pushed prices up, and during 1972–75 the price of oil shot through the roof thanks to actions of the cartel formed by the Organization of Petroleum Exporting Countries (OECD) and widespread harvest failures. But from 2004 to the present, China (and India) has driven an explosion in demand for resources in the context of low inventories of supplies that have seen prices rise exponentially.

Terms of trade index

In turn, this has had an impact on the terms of trade, which is the relative price on world markets of a country’s exports compared to its imports. Especially from a developing country’s perspective, the terms of trade are mimicked by dividing commodity prices (its exports) by the prices of manufactured goods (its imports). In the graph above, we see that the price of commodities has risen steeply and the price of manufactured products (expressed through the manufacturing unit value or MUV) is also increasing but isn’t keeping pace with commodities.

Overall, the indicator was falling for decades, meaning that developing countries had to export more and more commodities to import the same unit of manufactured goods. But there has been a clear turnaround of the terms of trade starting in the early 2000s: countries exporting commodities are no longer ‘punished’ for failing to industrialise. Interestingly, the prices of manufactured goods, though rising overall, show declines in those product groups where China is heavily involved in production and export. China is using its large number of relatively cheap migrant labourers to produce at very competitive prices.

But not only wages in China are competitively low (though now rising). As China, India and former Soviet countries started to industrialise, they jointly doubled the global, low-skilled labour force and wages for these jobs fell as a result. When those new, low-skilled workers entered the global job market they did not bring a lot of capital with them, so to speak: it had been destroyed in China during the Mao regime and in Russia the government mostly invested in the military. So there was a fall in the capital-to-labour ratio. Capital needed to increase but this often occurred in countries where labour was cheap, that is, China. This partly explains why jobs shifted from the USA and other high-income countries to China. But even Latin America, which finally succeeded in gaining ground in manufacturing, is now increasingly uncompetitive and losing jobs to China.

China’s growth is also being felt in global value chains. In the era of globalization, production of goods is now undertaken in a series of fragmented steps around the planet, making up long and often complex value chains. So-called ‘lead’ firms (think Nike, BMW, Wal-Mart, Tesco… ) align companies around the world to produce a final product. Formerly, OECD lead firms were the driver of these chains but now China is beginning to taken their place because China is an important manufacturing node or because China is now the final market. China and other large, emerging economies might have added as many as 1.5 billion new middle-income consumers.

OECD lead firms have grown more and more stringent about what they want from their suppliers in developing countries, resulting in raised standards of manufacturing and also agricultural production through training and investment (‘North–South investments’). The general assumption is that if a business is part of a value chain it learns from the others ‘downstream’ of it and upgrades its skills and processes (note that high standards set by OECD market are also often criticised for making it very difficult for producers to join a value chain). But now that China, which has lower standards and indiscriminate demand, is driving the process, what happens to opportunities for upgrading skills and technology?

For example, a study carried out on a cassava value chain in Thailand found that farmers produce the root and then process it into chips and pellets or starch, each representing steps of increasingly higher technology and added value. When the European Union buys cassava products, they want pellets and modified starch, the two most-processed products. Because the pellets are used for pig food in the EU the product is part of the human consumption chain and a range of policies apply. China, however, wants mainly chips and some native, unprocessed starch, which represents a technological downgrade for suppliers. China only sets a starch content but has no additional standards.

Tropical logs, China, Africa, Gabon, Anne Terheggen, World Agroforestry Centre

Trucked tropical logs. Photo: World Agroforestry Centre/Anne Terheggen

A similar process was observed in a parallel study in Gabon, from which China used to buy its largest volumes of African tropical logs, of any species, at previously unheard of volumes. By comparison, OECD buyers had decreased the amount of tropical logs they purchased from Gabon in response to a range of environmental concerns and lower wage rates but increased their purchase of  processed timber products. EU companies in Gabon invested in all aspects of timber processing and in certification, even before the introduction of government processing quotas. Meanwhile, Chinese investors mainly invested in resource extraction and some sawn-wood production (to meet government quotas and comply with a log export ban imposed in 2010). This was because Chinese industries preferred to import tropical logs complete because they are much cheaper to process in China than in Gabon.

While price is very important for both buyers, the EU wants quality and products from sustainable sources; it has a range of standards and certification processes that must be observed by suppliers—as in the case of the Thai cassava—but this isn’t important to the Chinese, who want volume. Chinese buyers interviewed for the study often hadn’t even heard of the Forest Stewardship Council’s standards for sustainable forest management. In some cases, China’s indiscriminate demand drives up the price of logs to the point where they are more expensive than sawn wood and, it has been claimed, also drives the illegal logging and trade of tropical logs.

On the one hand, being part of a ‘Chinese’ value chain is much easier because standards are lower and thus easier to meet by producers and processors in developing countries. On the other hand, higher standards and technology in OECD value chains can provide opportunities for learning from lead firms and thus set local companies on a path of income growth. China’s current status as a low-to-medium technology country may mean that value-chain participants accordingly find themselves with little opportunity for learning from Chinese companies, keeping their standards low.

Still, China could be a huge opportunity for Southern producers in that it has at least another 20 years of relatively strong growth ahead of it and it will continue to create entirely new markets, including for agroforestry products. For example, it is much easier to export durian fruit to China than to the EU because of completely different consumer tastes. The Chinese market might be a chance to export products not easily marketed to high-income countries in the North and it might be a window of opportunity for ‘building up skills’ for those Southern producers that have so far struggled to enter high-income value chains but can export their products and produce to China.

* Goldstein A, Pinaud N, Reisen H, Chen X. 2006. The rise of China and India: what’s in it for Africa? Paris: Development Centre of the Organisation for Economic Co-operation and Development.

 

Edited by Robert Finlayson

 

 

 

 

 

 

 

 

 

 

 

 

Rob Finlayson Rob Finlayson

Robert Finlayson is the Southeast Asia program's regional communications specialist. As well as writing stories for the Centre's website, he devises and supervises strategies for projects and the four countries in the region, including scripting and producing videos, supervising editors and translates and also assisting with resource mobilization.

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China’s giant hunger is changing the world