Does Poor Trade Performance Spell the End of China’s Export-Oriented Development?
By Sarah Y Tong

Does Poor Trade Performance Spell the End of China’s Export-Oriented Development?

Mar. 21, 2016  |     |  0 comments

According to China’s General Administration of Customs, in 2015, China’s total trade in goods contracted by 8 percent. This is the worst since the country started economic reforms and opening in the late 1970s, with only the exception of 2009 when trade was down by 14 percent. Meanwhile, exports declined by 2.9 percent and imports by 14.2 percent, the latter due in part to slipping commodity prices. As is shown (Figure 1), the downward trend in trade continued this year, as export and import in goods contracted further in January, by 9 percent and 14.9 percent (seasonally adjusted), year on year, respectively.

Figure 1. China’s Monthly Trade Growth (%), Jan 2013-Jan 2016 (Year-on-Year, Seasonally Adjusted)

Source: CEIC Data Manager

Such a disappointing outcome in China’s trade reflects serious weaknesses in external demand, underlined by a feeble world economy. According to the IMF’s latest World Economic Outlook, published in January 2016, the world total output is estimated to have risen by 3.1 percent in 2015, down from 3.4 percent in 2014. Meanwhile, high income countries grew much slower, at 1.9 percent, than emerging market and developing economies, estimated at 4.0 percent for the same year.

As rich countries still account for the large majority of the world economy and overall export demand, their weak recovery not only casts doubt on the strength and the resilience of the world economy, but has also resulted in weak trade performance. Total world trade in goods and services is estimated to have grown by 2.6 percent in 2015, down from 3.4 percent in 2014, according to the IMF.

As such, China’s poor trade performance is understandable, yet worrying. Being the world’s largest trading nation and its largest exporter, China’s effort to further expand its trade naturally faces challenges. In fact, Chinese products are facing growing competition from both the advanced and developing countries.

In addition, Chinese products also face various restrictions imposed by importing countries. Between 1995 and December 2014, a total of 1052 anti-dumping complaints were initiated against Chinese products (22 percent of the world total). These have resulted in 759 anti-dumping measures imposed on Chinese exports, or a quarter of all such measures worldwide. The situation was particularly bad in recent years when the share of Chinese products as targets of anti-dumping measures rose considerably. In the three years from 2012 to 2014, China's trade partners initiated nearly 200 anti-dumping measures, or 27 percent of the world total.

While worsening external conditions constrained China’s export growth, weak domestic demand and declining commodities prices contributed to its sluggish import growth. China’s economic growth decelerated to 6.9 percent in 2015, the slowest since 1990. Meanwhile, the growth of industry and real estate stood at 5.9 percent and 3.8 percent, respectively. This reflects the serious structural problems in the economy. On one hand, investment-driven expansion can hardly continue due in part to overcapacity in several industries, such as steel and cement, and the slump in the housing market. On the other hand, the expansion in consumer consumption is inadequate to serve as a strong new engine for growth. Meanwhile, as a chain reaction, poor demand for China’s exports has affected China's import demand, since a considerable portion of which is used for export processing.

This has prompted serious concerns. Although net exports contribute a relatively small portion of the final demand, ranging between 2 and 9 percent of China’s gross domestic product during the years 2001 to 2014 (Table 1), trade and trade-related activities contribute significantly to the economy through various other channels, such as stimulating investment and generating employment. In recent decades, trade and trade-related foreign investment have cultivated the emergence of key exporting industries and enhanced the over competitiveness of Chinese products. Continued development of these sectors is essential for the country's future growth and employment.

The Chinese government has supported trade and trade-related activities through wide-ranging policies, especially since 2008. Some policies aimed to help reduce trade costs and to facilitate trade. The government also encourages trade-related direct investment, especially outbound direct investment by Chinese firms. It has accelerated bilateral and multilateral free trade talks and negotiations for bilateral investment treaties.

Table 1. China’s Net Export, GDP and Net Export to GDP Ratio, 2001 to 2014 (RMB trillion/%)

Source: China Statistical Abstract 2015

Meanwhile, China is searching for new markets among developing countries, whose importance has already risen in recent years. Indeed, the government's One Belt One Road (OBOR) initiatives aim partly to expand China’s trade linkages with countries in the developing world.

It is important to note that, in recent years, the government’s policy objectives as well as measures have shifted from a relatively narrow approach of supporting exporters and exporting industries toward embracing overall liberalization and facilitating trade and investment. An evident example is the establishment of the China (Shanghai) Pilot Free Trade Zone (or Shanghai FTZ) in September 2013. An experiment in pre-entry national treatment and a negative-list approach towards foreign investment, the Shanghai FTZ adopted various measures to streamline trade and investment administration and trade facilitation. Shortly after, in early 2015, three new Free Trade Zones were opened, in Tianjin, Guangdong, and Fujian, while the Shanghai FTZ was expanded.

Policy initiatives initialed in recent years also seem more market-based, which is consistent with the overall reform agenda promulgated at the Third Plenary Session of the CCP’s 18th Party Congress in November 2013. In the “Decision on Major Issues Concerning Comprehensively Deepening Reforms”, the authority pledged to enable the market to play a “decisive role” in the allocation of resources.

In May 2014, as it became clear that China’s trade was experiencing wide-ranging difficulties, the State Council announced “Several opinions of the State Council on the support of steady growth in foreign trade” (henceforth Opinions). These Opinions were later substantiated by more specific policies and measures formulated by other relevant government agencies including the General Administration of Customs, the People’s Bank of China, and the State Tax Authority.

Besides trade facilitation and liberalization, the country has become more active in pursuing bilateral, regional, and global cooperation.

To support trade growth, the government emphasized the importance of restructuring trade, including enhancing imports; upgrading trade commodities and advancing trade in services; and facilitating trade-promoting outbound direct investment. The government further instituted measures to improve trade financing through improving financial services; enhancing export credit insurance support; improving export tax rebates; and supporting the development of small and micro-sized trading firms.

In the government’s Work Report delivered in March 2015, further opening up is highlighted as a force to boost reform and development. The government pledged to transform and upgrade China’s trade by improving the rules and transparency of charges for imports and exports; implementing policies and measures to enable the development of new competitive edges; facilitating the transformation of processing trade; boosting trade in services; and encouraging the import of advantaged technology, key equipment, and important parts and components.

On March 5, 2016, Premier Li Keqiang delivered the government's latest Work Report, in which economic opening received considerable attention, in part due to China’s poor trade performance in 2015. Regarding trade, the Report stressed that multiple measures are to be used to stop the sliding of China’s imports and exports. These include, first, to improve and implement various existing policies; second, to encourage innovation in business models; third, to upgrade trade structure, such as enhancing service trade, relocating process trade to central and western China, and moving up along the value-trade; fourth, to promote further trade facilitation; and, fifth, to implement more active import policies.

China’s economic miracle owes a large part to its open door policy and export-oriented development strategies. Since 2001, in particular, the country has benefited hugely from its WTO membership and a relatively accommodating external environment. To continue to take advantage of and to contribute to an open world market, China needs to widen its doors to the outside world.

In fact, China has moved towards deeper and more comprehensive opening in its policy formulation. Besides trade facilitation and liberalization, the country has become more active in pursuing bilateral, regional, and global cooperation. In 2015, China signed Free Trade Agreements with Korea and Australia and upgraded its FTA with ASEAN. It aims to help accelerate various negotiations such as those for RCEP, the China-Korea-Japan FTA, and bilateral investment treaties with the United States and the European Union.

As a strategy, China’s export-oriented development has practically ended. The country has in fact already achieved wide-ranging and high-leveled economic opening. Nonetheless, substantial mutual dependence and intense economic integration means two-way trade and investment flows between China and its economic partners will continue to expand, to their shared benefit and to the health of the world economy.

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