International Effects of China's Rise and Transition: Neoclassical and Keynesian Perspectives

Opinion over the global implications of China's rise is divided between critics, who see it as having developed at the expense of both investment and employment in the US, Europe and Japan and proponents who emphasise improvements in the terms of trade and reductions to the cost of financing that stem from China's supply of light manufactures, its demand for Western capital and luxury goods and its high saving. The criticism implies Keynesian assumptions while proponents take a neoclassical perspective. In this paper, both are embodied in a simple global, short run, macro model that emphasises bilateral linkages via both trade and investment and so helps clarify the international effects of both China's expansion, its high saving and of the new "inward focus" of its policy regimes. For the US and Europe, China's successful export-oriented growth is shown to offer net benefits, though there are partially offsetting Keynesian effects that have caused considerable distributional stress. It's recent, slower, more consumption focussed growth is shown to be unambiguously beneficial in those regions and in Japan.