Trade in China: Domestic demand now the driving force of growth

Although China remains an advocate for a relatively open global trading system, it is looking to strengthen international markets primarily through the practical approach of the Belt and Road Initiative, writes Stephanie Honey, New Zealand International Business Forum Associate Director.

This is a challenging period for trade policy and for China’s own place in the global economy.

In the words of one Chinese colleague: “The only certainty is that there is uncertainty.” The old paradigms of post-war stability – a global economic system led by the United States and framed by multilateral trade and financial institutions – seem to be falling away; many countries are facing a populist backlash against globalisation. New business models, including the rise of multi-country global value chains, expanding services trade, cross-border investment and the inexorable wave of global digital transformation, are compounding those geo-strategic uncertainties.

Our discussions in China gave some valuable insights into the evolving Chinese responses to these challenges. It was clear that reforming the domestic economy looms large in current Chinese thinking. Challenges include rationalising large inefficient SOEs, dealing with industrial overcapacity, addressing labour mobility issues and growing the services sector – particularly in the context of both rapid domestic economic change and a slowing rate of GDP growth. The so-called “new normal” for China is growth of 6-7 percent a year, down from 10 percent in 2010; by contrast, the world economy managed only 2.4 percent in 2016.

Equally, even when looking outward, the focus seems to be much more on the visionary, investment-led Belt and Road Initiative (BRI) rather than on trade agreements per se. This may not be altogether surprising for a nation performing so strongly in the existing trade architecture and which is grappling with such large domestic challenges.   

Domestic demand driving China’s growth

The popular view of China is as a dominant trading nation, and it is true China is now the world’s largest exporter and second-largest importer. However, World Bank figures show exports accounted for only around 19 percent of China’s GDP last year, falling from a peak of over 37 percent in 2006 (contrast this with the same figure for New Zealand of around 28 percent in 2015). Overall trade accounted for 37 percent, down from a high of 66 percent in 2006.

In fact, domestic demand is now the driving force behind GDP growth – underpinned by policy settings designed to boost domestic consumption – rather than export-led growth. This is true even for the cutting-edge innovative sectors such as e-commerce and fintech – although the performance of the Chinese private sector in these areas is stunning.

A full schedule of trade negotiations

China has certainly been active in the trade negotiations space, negotiating preferential trade agreements with a range of partners – including, of course, with New Zealand, the first developed country to sign an FTA with China back in 2008. China’s current dance-card for trade negotiations is fairly full, with scheduled “upgrades” for a range of existing bilateral agreements, including the New Zealand FTA and Australia’s 2015 deal, as well as negotiations for new bilateral deals.

China is also a participant in the 16-party ASEAN-led Regional Economic Comprehensive Partnership (RCEP) and supports an eventual region-wide Free Trade Area of the Asia-Pacific (FTAAP). However, China is clearly feeling frustrated at the slow progress in many of these larger negotiations.  RCEP has been underway since 2012 but there is still a wide gulf among participants in terms of trade-liberalising ambition; FTAAP has not yet got out of the starting block; and China’s trilateral negotiation with South Korea and Japan is currently on ice, thanks to broader political tensions.

Nor is China deaf to ferocious critiques from the US about China’s “unfair” trade practices (although there did not seem to be a sense that these were likely to generate concrete retaliatory action from the US in the near term).

Belt and Road Initiative the main priority

There has been much talk in global trade circles about how the US appears to be stepping back from its traditional leadership position in trade policy, and speculation about who might take over that role. Chinese President Xi Jinping has spoken inspirationally about the importance of pressing on with trade liberalisation and resisting protectionism, giving a robust defence of globalisation at this year’s World Economic Forum in Davos. Our contacts in China likewise endorsed the importance of FTAAP as a long-term framework to secure the prosperity of the region.

At this stage, however, China does not seem to be moving to take practical steps to assume the leadership mantle from the US, at least in terms of trade negotiations. Our conversations with Chinese colleagues suggest that although China remains an advocate for a (relatively) open global trading system, it is looking to strengthen international markets primarily through the practical approach of the BRI – bilaterally-oriented capacity-building and infrastructure development – rather than opening up global market opportunities through trade agreements in the short term.

New Zealand International Business Forum Associate Director and trade policy consultant Stephanie Honey took part in the Asia New Zealand Foundation’s Track II visit to Chinese cities Beijing, Harbin, Hangzhou and Shanghai in August. Views expressed in this article are personal to the author.

– Asia Media Centre