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China’s foreign trade faces new conditions

MEI XINYU | 2020-04-28
(Chinese Social Sciences Today)
 
A worker loads packages for cross-border shipments onto a truck at a warehouse in Hekou, Yunnan Province, on March 20. Photo: CNS
 

 

Amid the COVID-19 pandemic, China’s trade in goods and its incoming foreign investment have reached a new crossroads. Since reform and opening up and until recently, what path has China taken in foreign trade? In this new situation, what scenarios does the nation face in foreign trade? How should we size up the current international trade and investment environment? These questions call for deep analysis and discussion. 
 
 
Miracle
Since the beginning of reform and opening up in 1978, China’s foreign trade growth has continuously outpaced economic growth, with its share in global trade rising sharply. In 1981, the share of Chinese exports in global exports exceeded 1% for the first time since 1978, reaching 1.09%. In 2010, the indicator topped 10% for the first time since the late Qing Dynasty, arriving at 10.31%. By 2015, it was 13.76%, its peak in modern times between the years 1840 to 1949. From 2016 to 2019, the indicator fell between 12% and 13%, declining only slightly, still roughly 1.5 times that of the US or Germany, three times that of Japan, and far ahead of any other country.
More notably, these achievements in economic development and foreign trade were made amid slowing global economic and trade growth. China has played an ever larger role in the steady growth of the world economy. 
 
To a great extent, the economic development strategy of China since 1978 can be summarized as complying with its competitive advantages and shifting from import substitution to export orientation. Accordingly, the development of foreign trade has made a multi-dimensional contribution to the “China miracle,” manifesting in the following aspects. 
 
First, trade growth drove industrial and economic development, and it made impressive contributions to China’s macroeconomic stability by fundamentally improving the international balance of payments and enhancing international liquidity. Moreover, trade development is in itself an important organic component of the country’s economic institutional reform and a point of departure for many other institutional reforms. In addition, the growth of trade played an irreplaceable role in creating a good diplomatic environment for China, and it has contributed significantly to its environmental protection measures and sustainable development. 
 
 
Implications
The course of China’s economic opening up against the historical and global background underlines the importance of advancing with the times and innovating constantly. 
 
China couldn’t afford to pay more attention to introducing foreign direct investment (FDI) until the 1980s due to constant pressure from current-account deficits, low foreign exchange reserves and limited international liquidity. Since FDI could bring marketing channels and managerial expertise, it quickly outgrew foreign debt and became the main channel for China to make use of foreign capital after 1978. 
 
In the early stage of reform and opening up, numerous problems loomed large in China’s soft and hard environments, which lagged behind those of developed countries and other economies in East Asia and Southeast Asia. Attracting FDI necessitated strong preferential policies to compensate for various risks in the eyes of foreign investors. 
 
By the beginning of the 21st century, China had become a big nation in terms of FDI stock and flow, and its soft and hard environments had improved substantially. However, the market distortion effect of persistently strong preferential policies gradually presented itself, underscoring the necessity to integrate income taxes for Chinese and foreign enterprises. 
 
Now China’s production factor costs are evidently rising, and its global competitiveness is weakening. Developed countries have beefed up efforts in reindustrialization, and some traditional Chinese industries have moved production out of China. Under such circumstances, China should increase market access, intensify efforts to invite foreign investment and ameliorate the business environment. 
 
 
Open economy in the new era
As a new socialist nation growing out of a backward semi-colonial and semi-feudal agricultural country, the People’s Republic of China had to confront its position of nearly no presence and no equal participation in the international market after it was founded. It was even stripped of opportunities to engage in the mainstream global market by comprehensive trade embargoes successively enforced by Eastern and Western blocs. 
 
With the all-around implementation of reform and opening up, the PRC has created a unique miracle of continuous economic growth in modern world economic history. To develop the open economy in the new era, it is essential to elevate its status in the international market by relying on the domestic market and further opening itself up. 
 
To latecomer developing countries that aspire to climb to the high end of the international labor division system, the relationships between domestic and overseas industries and markets need to go through two stages. 
 
In the first stage, because of low effective demand in the domestic market, opening up the overseas market will help new manufacturing fully exploit its economies of scale and develop rapidly. However, in the condition of lacking advantages in brand, technology and marketing channels, it is a commonly used strategy to set lower prices for exports and subsidize the expansion of the overseas market with profits from the domestic market. Until the export-oriented economy has grown sufficiently and the domestic market has expanded substantially, it is necessary for the country to adopt the strategy of lifting its status in the international market by capitalizing on the domestic market. 
 
To sustainably develop the open economy and realize our goal of becoming a large trader, we should break away from some ideas on open economies, however popular they are. Among other ideas, it is inadvisable to contrast the expansion of domestic demand with the development of an open economy, to downplay the role of exports, to pursue excessive independent production under the banner of economic security, and to reduce the import dependency on strategic products like high-tech products. 
 
Over the past decade, the mainstream opinion at home and abroad calls for China to change its economic growth model that relies too heavily on overseas market demand. The sub-prime crisis and the trend against globalization in recent years have further highlighted the urgency of the change. However, we cannot equate increasing reliance on the home market to high dependency on domestic resources. 
 
Particularly as natural resources are insufficient in China, its large population will be a burden if the overseas market and external resources are not fully utilized. In recent years, population aging and a shortage of blue-collar workers are increasingly prominent problems. Without job opportunities from many modern industries created by the substantial development of the open economy, we would probably be coping with inadequate job opportunities now, rather than discussing the gap in the labor force.
 
 
New conditions amid COVID-19
Needless to say, China’s foreign trade faces major difficulties, such as drastically decreasing export orders amid the COVID-19 pandemic. Moreover, at the beginning of the outbreak, international hegemonic forces attempted to decouple the US, even the entire external market, from “Made in China.”
 
According to media reports, Japan decided to earmark $2.2 billion from its economic stimulus package to fund Japanese enterprises to shift production back to Japan. On April 9, Lawrence Kudlow, director of the White House National Economic Council, openly proposed paying the moving costs of every American company that wants to move back to the US. 
 
All these have provoked widespread worries in Chinese society. Nonetheless, these difficulties and challenges can generally be overcome. Encouraging foreign enterprises to leave China is against the objective laws of economics. 
 
Under the impact of the pandemic, the decoupling between Made in China and the external market might be accelerated, checked or reversed. 
 
Since late February, China has been resuming production in an orderly fashion, while more than 200 countries and regions abroad have continued to suffer from the pandemic. The West, which has been the world’s economic center for two to three centuries, has been dealt the heaviest blow. 
 
In the meantime, COVID-19 has spread to developing nations in Africa, the Middle East, South Asia and Latin America, which feature weak social governance alongside backward medical care and public health systems. Populous developing countries face grim tests. 
 
In this context, the effective check of the decoupling between Made in China and the external market has become a foregone conclusion. Through efforts, the reversal of the trend is also highly probable. In comparison to China’s high efficiency in epidemic control and mobilization for production resumption, most and even all overseas plants of many large Western multinationals have been shut down. Only businesses in China have resumed normal operations. In view of this reality, rational company operators would gear up production in China, instead of leaving the country. 
 
This year, the total volume of global trade in goods is likely to contract, and the extent of contraction might even exceed the peak range during the 2008–2009 subprime crisis. China has accounted for a fair share of global exports, so it is unrealistic to expect no declines in absolute figures of Chinese exports. 
 
Nevertheless, even if declines occur, the share of China in global exports will rise. In 2008, Chinese exports amounted to $1.43 trillion, yet dropped to $1.2 trillion in 2009. However, it was exactly in 2009 that China overtook Germany as the biggest exporter in the world. Ultimately, as in the subprime crisis 10 years ago, the COVID-19 pandemic this year might highlight China’s edge. 
 
Mei Xinyu is a research fellow from the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce. 
 
​edited by CHEN MIRONG