FOREIGN TRADE has had a huge role in China’s economic development.
On the one hand, it boosts GDP. Imports and exports, especially for a developing economy, are extremely important. From 1978 to 2008, China’s total trade value rose from 20.6 bln yuan to 2.56 trln yuan, with an average annual increase of 18%.
Exports have led to a 20% annual increase in private enterprises over the period. During the 1990s, sales of products abroad have contributed to a 1.5 to 2.0 annual percentage point increase in GDP.
Second, foreign trade boosts employment opportunities. Official statistics show that foreign trade generates some 80 mln jobs in the country, and 60% of these are peasants who have found work in the sector.
Third, foreign trade raises the economic competitiveness of the nation’s industries. China already has many industries that, thanks to their international exposure, have produced at least 700 product categories that have global-leading status and prominence.
Fourth, foreign trade helps relieve energy and resource bottlenecks. China imports half of the world’s traded iron ore. Net imports of agricultural products account for a third of domestic farmed acreage.
Fifth, it helps upgrade industrial production. From the early stages of reprocessing and value-added production, China has since seen the outsourcing and then transfer of entire production processes from start to finish to its territory helping to raise domestic manufacturing technology standards, technological levels, and improved all assets of the process. Official statistics show that imports contribute 46% to our productivity.
Sixth, it boosts overall fiscal strength. Last year, foreign trade generated 916.1 bln yuan in tax revenues, contributing 16.9% of the total fiscal revenue over the period. If we include all activity of trading firms and investments at home and abroad associated with foreign trade and investment, then the total contributed to China’s fiscal revenue approaches one third, which undeniably contributes to fiscal well-being.
Seventh, it boosts creativity and innovation in the country and raises practices to world standards. Thanks to foreign trade and especially following China’s accession to the World Trade Organization (WTO), the economic structure of the country has been increasingly linked to the global economy.
So far this year, the national tax rate has fallen to an average 9.8% rate, which is just one quarter of the global average rate. Quotas and many export licenses and the fiscal revenue they generate have largely been eliminated, much of it resulting from the more liberal trading regimes that result form WTO membership.
The financial crisis and its impact on Chinese trade
The current economic downturn has many root causes. The financial regulatory oversight shortfalls and inadequate risk management mechanisms were paramount among them. Amid a very lax monetary regime, the global financial system entered a high-risk operating environment which tolerated looser regulation. This allowed leverage rates to reach highs reaching 30 times.
The global instability reached intolerable and unsustainable levels. US government debt piled up higher and higher while savings rates in most Asian countries continued to climb.
Many economies entered a period of cyclical adjustments in response to the crisis.
The sub-prime mortgage meltdown led to a precipitous drop in investor confidence and led to a palpable tie-up of credit and assets.
The crisis has had many direct impacts on China’s trade activity. The economic downturn led to a substantial softening in external demand for Chinese products.
China has in the first quarter seen a record high number of trade disputes with key trade partners. In 2008 alone, there were only 20 countries that raised import tariffs. Among these, 40% involved antidumping cases and within this number 70% targeted China.
But unlike during the Great Depression, the World Trade Organization has some power in helping curb trade protectionism worldwide.
It must be noted that when national economies decline, protectionism rises, but the rise of protectionism is a natural enemy to smooth market entry for outsiders.
China’s traditional reliance on large-scale FDI to boost growth is becoming a thing of the past and this will also gradually reduce our export growth.
Many currencies around the world are weakening in relative value, and this also makes our exports less price-competitive abroad. Following the onset of the global financial crisis last year, the Chinese yuan has more or less maintained a steady comparative value with the greenback.
But because large-scale investment has recently rushed into the US debt market, the value of the US dollar relative to other currencies has risen recently which has resulted in the yuan also rising.
Results of the crisis and the relatively stronger yuan have led to export slowdowns with no return to strong growth in sight.
Import and export prices have also weakened over the period.
China’s exports to its traditional trading partners as well as developing markets have seen sharp falls over the past year. From November of last year, China’s exports even began to shrink to some markets, and declines reached double-digit figures beginning earlier this year.
Finally, in June of this year, we began to see a rebound of sorts for Chinese exports. But on closer introspection, the main reason seemed to be that workdays in June this year outnumbered those a year ago.
However, the crisis offers some opportunities to global traders.
First, a lot of products and commodities are at very low price levels. This benefits Chinese importers of such products and allows them to cut costs. It also promotes living standards in China and boosts the private sector.
Second, the crisis presents obvious investment opportunities in some depressed markets and produces more affordable assets.
Third, it leads to market restructuring. After the crisis, formerly unaffordable products are now made more accessible to the mass consumer market which helps China have a more unified, vibrant market overall.
Whither China trade?
Over the short term, our foreign trade should show a sub-par performance. This is for the following reasons:
Capacity utilization in China continues to fall, with investor interest in export-oriented enterprises still lackluster. The first half CPI fell some 1.1%.
Global economic sentiment is still very weak. The WTO announced that in a recent three-month stretch, there were 83 acts of protectionism among member countries, three times more than a usual period.
Before individual countries’ economies fully recover, the worldwide trading regime has to first enter a period of moderate resurgence. The collapse in the property bubble has seriously hampered consumer confidence and seized up credit worldwide. Families in North America and Europe are currently preoccupied with servicing their individual debts and have little appetite at present for exuberant consumption behavior.
However, in the medium to long term, China’s growth in trade will return to a rapid-growth phase. This is because:
a) Economic globalization: regional economic development is maturing and showing signs of strength, and international integration is becoming more commonplace.
b) Overseas market demand is showing the early signs of a possible recovery.
c) Developing markets have been hit less hard and should recover earlier.
d) China’s economic competitiveness continues to rise.
e) There is room for further growth in China’s share of global markets.