China is both a challenge and an opportunity for the world; on balance, the latter outweighs the former.

The challenge for the United States is how to deal with rising world economic powers like China and India. Huge pools of skilled labor that have not been participating in the global economy are now entering it. One reason the average wage of hourly workers in the United States has not risen over the last decade is the increasing competition in labor-intensive goods from China. Some of the most important products where China has had a profound effect on the global economy are textiles (16 percent vs. 4.6 percent in 1980), apparel (23 percent vs. 4.0 percent in 1980), footwear (26 percent vs. 1.9 percent in 1980), and toys (27 percent vs. 2.3 percent in 1980). Much of this represents foreign firms that have moved their manufacturing to China. The global center of the toy industry in the 1960s-70s was Hong Kong, but the entire industry moved to the Chinese mainland the minute China's economy opened. Shoes had been largely made in Taiwan until the 1980s, when Taiwanese firms moved their factories to the mainland. Prices have dropped as China's manufacturing share has increased. Now it's not only toys and footwear, but also laptop computers, an interesting recent example. A handful of Taiwanese companies that dominated the manufacture of laptop computers started moving production to the mainland in 2001. By the end of the third quarter of 2006, the last production line in Taiwan had closed. These Taiwanese companies produce 80 percent of the global output of laptops. So right now, 80 percent of global output is made on China's mainland.

This yields downward price pressure. The same is true for apparel, which has seen downward wage pressure. This is the biggest challenge China's rising poses, and contributes to the rising U.S income inequality.

The opportunity is a market for our high value-added exports like semiconductors and Boeing airplanes. All high value-added parts of the laptop, for instance, are produced outside of China. China is the world's largest importer of semiconductors and microprocessors-of the total global semiconductor output in 2005, about 60 percent was sold to China. Most of these go into cellphones, DVD players, laptops, etc. These products are then shipped back to Europe and U.S. hard disk drives, operating systems, even computer cases are typically imported into China.

China is an important export market for countries and regions like Singapore, Malaysia and Taiwan. It is the largest trading partner for virtually every country in the Asian region, and also a huge importer of agricultural products such as soybeans, giving countries like Brazil huge trade surpluses with China. Over the past five years, China has contributed enormously to the demand for commodities. Its increased consumption of things like nickel, copper, and aluminum over the past five years accounts for 95-100 percent of increased global demand; for petroleum, it's 45 percent, for iron ore, 50 percent.

China is now the fourth largest U.S. export market. U.S. sales to China in 2005 were nine times more than in 1990. Meanwhile, in the second fastest growing U.S. export market, Mexico, exports are only roughly quadruple what they were in 1990, despite the North American Free Trade Agreement. Exports to Japan have been up only 15 percent since 1990, and were lower in 2005 than they were in 1996.

The bottom line is that China has the potential to continue to grow for the next five-10 years, with complicated implications. We need to enforce China's WTO commitments and enhance its role in those international bodies that promote cooperation in international economic policy issues.