Why some see China’s integration into the global trading system as a competitive threat but others, including global consumers, see it as a boon
AFTER a long period of isolation, China’s visibility within the international trading system has increased dramatically over the past two decades. Its share of world trade has risen from less than 1 percent in 1979 to 5½ percent in 2003. This dramatic (more than fivefold) increase in its share of world exports over a relatively short period has sparked a number of questions and concerns about China’s trade practices. Particularly shrill concerns about the impact of Chinese exports have been raised in various industrial and developing countries based on perceptions that Chinese goods are flooding local markets, crowding out exports from other countries, and resulting in domestic job losses.
To get behind the often overheated rhetoric about China’s role in world trade, it is useful to examine this topic from a broader set of perspectives. For instance, what are some of the factors that can help explain the sustained growth in China’s exports? How have its trade patterns changed during this period? Is a continued expansion of China’s trade likely? What effects will this have on its main trading partners and on China itself? Such questions have potentially important implications for the global trading system and, in particular, for other Asian economies.
China’s international trade has expanded steadily since the opening of the economy in 1979 (Chart 1). This process began relatively slowly in the 1980s after the relaxation of pervasive and complex import and export controls. The expansion of China’s trade gathered steam in the 1990s with a range of trade reforms, including broad tariff reductions, and was further boosted by China’s accession to the World Trade Organization (WTO) in 2001. Average tariff levels declined from more than 40 percent in the early 1990s to 12 percent by 2002, with further reductions to 10 percent scheduled to be implemented in the near future. In 2002, China’s exports and imports both grew by about 21 percent—faster than in any other major economy—at a time when total global trade was essentially flat. This already remarkable pace of trade growth has strengthened further in 2003, with exports increasing by about 30 percent and imports growing even more rapidly, by over 40 percent.
The recent depreciation of the U.S. dollar, to which the renminbi is linked, has no doubt added temporarily to China’s competitiveness. But it should be kept in mind that China’s low labor costs, supported by a large pool of unskilled as well as skilled labor, have been the primary determinant of China’s external competitiveness, especially in the U.S. market. These low labor costs, in turn, have resulted in strong inflows of foreign direct investment that have boosted labor productivity. Indeed, reflecting these underlying competitive strengths, China’s exports continued to grow rapidly virtually across the board even when the renminbi and the U.S. dollar was appreciating against other major currencies.
The importance of external trade to the Chinese economy has increased concomitantly, with the sum of exports and imports—a traditional measure of a country’s openness to trade—now amounting to more than 50 percent of GDP, compared with 20 percent of GDP in 1989 and less than 10 percent of GDP in 1979. This increasingly outward orientation of the economy, along with the surge in inward flows of foreign direct investment, shows how rapidly China is integrating into the world economy in terms of increased trade and financial links.
Tseng, Wanda, and Markus Rodlauer, eds., 2003, China: Competing in the Global Economy (Washington: International Monetary Fund).