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China Yet to Be a Strong Trade Nation

Feb 10 , 2014

2013 is an unordinary year for China. New leaders came in the spotlight; the 3rd Plenary Session of the18th Communist Party of China’s Central Committee proposed an extensive reform plans; by the end of the year it was reported that China became the largest trader in the world.

Yu Xiang

The total value of China’s imports and exports in 2013 was $4.16 trillion, a 7.6 per cent increase from a year earlier on a RMB adjusted basis, according to figures released by the China’s Customs Administration on January 10, 2014. The US has yet to publish its 2013 trade figures (set to be released in February 2014), but its total imports and exports of goods amounted to $3.57 trillion in the first 11 months of 2013, making it a virtual certainty that China is now the world’s biggest trade nation.

The news looks like a new landmark, indicating China’s growing economic engagement with the world has reached a new level after 35 years’ reform and opening-up. Its trade partners also benefit a lot from the process. For example, according to a report issued by Rhodium Group, 2013 was a milestone for employment provided by Chinese firms in US. Chinese-owned companies provided more than 70,000 full-time jobs in US by the end of 2013, a more than 8-fold increase compared to 2007 (around 9,000 jobs). Chinese investment in the US doubled in 2013, lifting the total deal value to a new record high of $14 billion.

More importantly, the fact also shows that China has finished the transition from inward-looking and self-dependent economy to an important stakeholder of world economy relying heavily on international trade. To sustain a more stable and benign world economic surroundings, China is to play a more active role in world affairs.

In history, China was once the world’s largest trading nation from 1644-1912. The Economist on February 16, 2013 commented, “The Qianlong emperor claimed, somewhat optimistically, that his dynasty’s majestic virtue had penetrated every country under heaven. China’s exporters and importers have now accomplished exactly that”. It is a remarkable achievement to be in the number one position, but it is inappropriate to compare current China to the Qing Dynasty. Current China doesn’t have Qing Dynasty’s empire ambition and is well aware of its real position in the world.

China knows well that she is a big trader, but not a strong trader. First, China still lacks indigenous innovation and many core technologies, and thus is still weak in competitiveness. In fact, US innovation has been a critical source of US economic growth and global competitiveness. According to the US Department of Commerce, its IP-intensive industries supported at least 40 million jobs and contributed $5.1 trillion (or 34.8%) to US GDP.

Secondly, China’s trade depends too much on export goods, relying heavily on processing trade. The United States has a big lead over China when it comes to trade in services. China’s trade in services in 2012 was about $471 billion, less than half of the US figure of $1.07 trillion.

The low value added processing trade makes China’s economy more vulnerable. Uncertain global demand, a stronger yuan currency and rising labor costs are taking their toll on Chinese exporters. China has often become a victim of trade protectionism. According to the statistics released by the World Trade Organization, 35 percent of all anti-dumping investigations and 71 percent of all countervailing investigations since 2008 have been targeted at Chinese products.

Thirdly, export-oriented trade policy lets China pay a high environmental premium. According to a 2013 Asian Development Bank report, in the largest 500 cities in China, less than 1% has met the recommended environmental standard set up by World Health Organization. The economic cost of pollution in China every year is equal to 1.2% of GDP if calculated based on the related disease; 3.8% of GDP if calculated based on willingness to pay to avoid mortality risks.

Fourthly, there have been concerns in recent months over the accuracy of the country’s trade data, with speculation that some Chinese companies have overstated their exports to circumvent controls on cross-border transactions and bring more cash into the country. Global Financial Integrity finds that$400 billion flowed illicitly into China from Hong Kong via improper trade invoicing between 2006 and the first quarter of 2013. 

To be a real strong trade nation, the new Chinese leadership introduced initiatives on the 3rd Plenary Session of the 18th Central Committee, aimed at building up an open economy for China. The initiatives, such as speeding up the construction of free trade zones, building the Silk Road economic belt with Central Asian countries and the 21st century Maritime Silk Road with Southeast Asian countries, will deepen China’s cooperation with the world and help spill over its development bonuses to other countries. The rise of China as a responsible trading nation can not only accomplish its own domestic economic reform goals, but also, strengthen China’s economic relations with the world, including the US.

China’s trade growth is an opportunity for the United States. According to the estimations by the US Congress Research Service, China could be a $450 billion market for US business. Many US firms see China’s market as critical for their global competitiveness. China is the largest foreign holder of US Treasury securities ($1.3 trillion as of October 2013). China’s purchases of US government debt help keep US interest rates low. US imports of low-cost goods from China greatly benefit US consumers. US firms that use China as their products’ assembly site, or use Chinese-made spare parts for production in US, are able to lower their costs. China’s goals of modernizing its infrastructure, upgrading its industries, and improving rural living standards could generate substantial demand for foreign goods and services.

2014 is a key year to realize President Obama’s National Export Initiative, doubling US exports within five years. TPP will come to a tipping point and the Obama Administration will push TTIP forward. President Obama has declared in his Trade Policy Agenda for 2013 that the Administration will use every available policy tool and develop new tools to pursue the most efficient and productive pathways for trade liberalization in order to support US greater economic growth and jobs.

There is huge potential for further developing and expanding China-US trade relations to the benefit of both. This is particularly feasible if we are working together in the framework of a new model of major country relations.

Yu Xiang is an Associate Fellow at the China Institutes of Contemporary International Relations.

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