Why trade will continue to power China, even as it tries to look inward
- While the heyday of China’s export-led growth may have passed and the ‘dual circulation’ strategy emphasises giving greater play to domestic growth drivers, the continued impact of trade may not be as bleak as some experts have suggested
Exports have been falling almost continuously as a share of China’s gross domestic product – from a peak of 35 per cent in 2006 to 17 per cent in 2019. This rise and fall is similarly true of imports.
The decline is the result of three structural forces that shaped China as it moved from a low- to upper-middle income economy: graduating from labour-intensive products; onshoring of higher value activities; and rebalancing from investment to consumption and from manufacturing to services.
Taken together, the competitive pressures and opportunities from trade are likely to continue to play a major role in shaping China’s growth process.
Second, as China graduates from these industries, it is simultaneously moving higher value-added portions of the supply chain back home. In prior decades, China was attractive to foreign investors principally as a low-cost base for product assembly and re-export to external markets.
This processing trade, which boomed in the years following China’s 2001 accession to the WTO, relied on imports of electronic parts and components from Japan, South Korea and Taiwan.
As Chinese manufacturers acquired technological know-how, however, they were increasingly able to produce more higher-value components at home, causing processing exports to slip to 5 per cent of China’s GDP by 2019, down from 19 per cent in 2006.
Third, China has been rebalancing gradually away from investment to consumption and from manufacturing to services as its economy matures. Growth in investment peaked a decade ago, driven by the construction boom which has now moderated. Total consumption increased from 49 per cent of GDP in 2010 to 55 per cent in 2018.
Investment is inherently more trade intensive than consumption, given the need for imported capital goods and raw materials. The service sector grew from 34 per cent of Chinese GDP in 1995 to 53 per cent in 2018, replacing industry as the major sector. Industrial activity is more trade intensive than services such as entertainment and education. Together, these structural shifts accentuated the decline in trade in relation to GDP.
From 2004 to 2014, China accounted for a commanding 18 per cent of world export growth, more than double the next largest contribution of 8 per cent by the United States. Graduation, onshoring and rebalancing gradually eroded China’s share, which fell dramatically to around 10 per cent from 2015-2019, and these processes will continue in the future.
Yet even after such a steep decline, incredibly, China still managed to contribute far more to overall export growth than any other economy – Germany’s 7 per cent share put it at a distant second.
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Moreover, those now arguing for increasing consumption to drive China’s growth are mistaken. The concept of consumption-driven growth doesn’t exist in economic theory. Consumption is derived from growth; it does not drive growth.
The only true growth drivers are investment and productivity increases from technological innovation and deepening human capital. And, as highlighted by the World Bank Growth Commission, a strong external orientation is a key characteristic of developing economies that have succeeded in this regard.
Yukon Huang is a senior fellow at the Carnegie Endowment for International Peace. He is author of Cracking the China Conundrum: Why Conventional Economic Wisdom is Wrong. Jeremy Smith is a former junior fellow at the Carnegie Endowment for International Peace