Reshape Global Trade Pattern-China's Opportunities&Challenges

Xiaosong Wang, Professor, School of Economics, Renmin University of China, key member of CMF

Speech at the 5th CMF International Seminar on Macroeconomics (WTO,Geneva,Switzerland）

Number of Texts：2861 words

Viewing Time：38 minutes

In this presentation, I will first give a brief introduction to recent trends of global trade. Next, the rise of China's foreign trade and recent development in China's foreign trade will be discussed. Finally, I will suggest how to stimulate new momentum for China.

Recent Trends of Global Trade

1. The growth of trade has slowed

Since the beginning of the 21st century, global trade volume has shown an upward trend. However, the growth rate has significantly slowed down after the 2008 financial crisis. In the next two years, it is expected that the global trade growth rate will be lower than the historical average, and the trend of trade slowdown is difficult to reverse.

Although there has been a rebound after the pandemic in 2021 and 2022, reaching the peak of $32 trillion in 2022, it is mainly due to the rise in primary product prices, especially energy prices. Subsequently, global trade shifted towards negative growth due to reduced demand from developed countries, poor economic performance in East Asia and Latin America, and declining commodity prices.

In the coming years, although the global supply chain has recovered and the development of service trade will support trade growth, the global trade situation remains uncertain due to multiple unfavorable factors. It is expected that the global economic growth rate in 2024 and 2025 will be lower than the historical average, and the economic weakness will drag down consumer demand and investment, which will have a negative impact on trade.

In addition, geopolitical tensions continue to escalate commodity price volatility, and trade restrictions will also affect global trade levels. Various authoritative institutions predict the growth rate of world trade in 2024 will be lower than the historical average growth rate. Looking ahead, the trend of trade slowdown is difficult to change.

2. The rise of service trade and digital trade

The growth rate of service trade has far exceeded that of goods trade in the past two decades, demonstrating stronger market resilience. The development of digital technology, especially the rise of digital trade, indicates that the trade structure will be more diversified in the future.

It is worth noting that digital trade has become a new driving force for the growth of service trade. From 2000 to 2013, the proportion of service trade in the global trade structure remained around 20%, but with the development of digital technology, some service trade border restrictions have been broken. And in 2019, this proportion increased by nearly 5 percentage points. From 2010 to 2022, the average annual growth rate of global digital delivery service exports was 6.5%, much higher than that of goods trade and other service trade during the same period, contributing nearly 67% to the growth of service trade.

Looking ahead to the future, the global trade structure may become service- oriented and digitized, potentially forming a pattern of "three parts of the trade world" in goods trade, service trade, and digital trade.

3. Developing countries become new engines of trade growth

The trade growth rate of developing countries continues to be higher than that of developed countries, becoming an important driving force for global trade growth. Especially the BRICS countries played a key role in it. From the perspective of trade volume composition, the relative importance of developed countries as international market suppliers has declined.

In terms of goods trade, from 2005 to 2022, the share of developing countries has increased from one-third to nearly half, contributing approximately 54% to the growth of global goods trade. In terms of service trade, although the market is still dominated by developed countries, developing countries have seen strong growth in service trade, with their share increasing from 1/4 to 1/3.

Within developing countries, the BRICS countries are the main drivers of growth, accounting for over one-third of their exports of goods and services and contributing over 40% of the growth.

4. Globalization has been hindered and trade regionalization has developed

The geopolitical tensions and changes in trade policies have led to changes in the global trade landscape. The layout of industrial division of labor tends to be geographically friendly, and global trade tends to be regionalized.

For specific countries, the United States has shifted its trade with China to other economies, with Mexico becoming its largest trading partner. China has strengthened trade relationship with developing countries, and its exports to the Belt and Road related countries exceed those to the United States, Japan and Europe. The EU has reduced its trade relations with Russia.

Research shows that in recent years, major trading economies have shown a trend of "clustering" in their trade, strengthening trade cooperation with economies with close geopolitical stances. Therefore, in the context of hindered globalization, as trade moves closer to geopolitical friendly groups, global trade may tend towards regionalization. The number of regional trade agreements that have come into effect in the past three years has significantly increased, and technological development and trade barriers will increase the possibility of parallel and intersecting regional industrial chains, thereby promoting trade regionalization.

5. The role of carbon tariffs will become increasingly important

In recent years, the growth rate of environmental product trade has exceeded that of overall goods trade, demonstrating enormous development potential. The "carbon tariffs" and green trade barriers promoted by developed countries may become key influencing factors for future international trade.

Meanwhile, the number of trade measures related to the environment has surged. At present, the tariff barriers for environmental products are not high, but developed countries are vigorously promoting "carbon tariffs". The European Union has launched a "carbon border tax" in 2023, with plans to officially impose taxes by 2026, covering high carbon products. The United States is also advancing relevant legislation. Carbon tariffs are essentially "green trade barriers". If more countries or regions establish such a system, it will have an impact on the composition and flow of global trade, and have a greater impact on carbon exporting countries. It may become a key influencing factor in future international trade.

The Rise of China's Foreign Trade

1. Rapid growth in trade volume

In 1950, the total import and export volume of China's goods trade was only 1.1 billion US dollars, accounting for less than 1% of the world's total. Since 1978, especially since joining the World Trade Organization in 2001, China has continuously improved its level of opening up to the outside world, and the scale of goods trade has steadily expanded.

In 2013, China became the world's largest trading nation in goods for the first time. In 2023, China's total import and export volume of goods trade reached 5.9 trillion US dollars, accounting for 12.4% of the world's total, and has remained the world’s first rank for seven consecutive years.

2. Continuous optimization of trade structure

For exports, with the development of science and technology and the increasing progress of productivity, the technological content of China's foreign trade products continues to improve. The proportion of manufactured goods exports in the total export value has increased from less than 20% in the early days of the founding of the People's Republic of China to 95.1% in 2023.

For imports, the ratio of China's manufactured goods imports to primary product imports has decreased from 4.5 times in the 1980s and 1990s to 1.4 times in 2023. China's imported goods have shifted from mainly manufactured goods to the synchronous development of primary and manufactured goods.

In recent years, the export scale of the "new three" products, i.e. photovoltaic products, electric vehicles, and lithium-ion batteries has significantly increased. In the first eight months of this year, the export of mechanical and electrical products accounted for nearly 60% of the total export value, and the advantages of export products such as automobiles and integrated circuits continued to consolidate.

From the "old three products" to the "new three products", from labor-intensive products such as textiles to high value-added products such as mechanical and electrical products, China's export commodities continue to climb to the high-end of the global value chain. High technology, high added value, green and low-carbon have become the new labels on China's exported goods.

3. Significant expansion of trading partners

In the early stages of reform and opening up, China's foreign trade partners expanded to over 40 countries and regions. Since the reform and opening up, especially after joining the World Trade Organization, China has actively adapted to the international market situation, continuously deepened economic and trade exchanges with countries around the world, and diversified its trading partners.

In the new era, China has implemented a more proactive opening-up strategy, continuously promoting opening-up to a larger scope, wider fields, and deeper levels, and strengthening its trade relations with other countries. Nowadays, China's foreign trade partners have expanded to over 230 countries and regions, and have become the main trading partners of more than 140 countries and regions.

The trade volume of China to the countries jointly building the "the Belt and Road" has climbed from 10.1 trillion yuan in 2013 to 19.5 trillion yuan in 2023, with an average annual growth of 6.7%, accounting for 46.6% of the total import and export volume from 39.3%. The proportion of China's import and export volume with Africa and Latin America in the total trade volume has increased from 2.2% and 2.7% in 2000 to 4.7% and 8.2% in 2023, respectively.

4. The rapid development of service trade

In the early stage of reform and opening up, China's service trade mainly focused on traditional services such as transportation and travel. In terms of scale, the total volume of China's service trade in 1982 was 4.69 billion US dollars, ranking 34th in the world. Structurally, in the 1980s, the average proportion of traditional services in China's total service imports and exports exceeded 80%.

From 1983 to 2023, the average annual growth rate of China's total import and export of services was 6.5 percentage points higher than the global average growth rate, and its proportion in the global total trade in services steadily increased. Since 2013, China has actively carried out comprehensive pilot projects to expand the opening up of the service industry, and the scale of service trade has continued to expand, reaching 933.1 billion US dollars in 2023, ranking fourth in the world.

5. The construction of pilot free trade zones is steadily advancing

Since the establishment of the Shanghai Pilot Free Trade Zone in 2013, China has continuously optimized and improved the layout of the pilot free trade zone, forming a reform and opening up innovation pattern that covers the east, west, north, south, and central regions, and coordinates coastal, inland, and border areas.

Over the past 11 years, China has established 22 pilot free trade zones, actively aligning with international rules in trade, investment, finance, and other areas, accumulating rich experience for promoting high-level opening-up to the outside world.

In 2023, the total trade volume of 22 pilot free trade zones was 7.7 trillion yuan, accounting for 18.4% of China's total trade volume, playing an important role in stabilizing foreign trade.

6. The network of free trade agreements continues to expand

In 2002, China and ASEAN signed the Comprehensive Economic Cooperation Framework Agreement between China and ASEAN, initiating the construction process of the China Free Trade Area. As of the end of 2023, China has signed 22 free trade agreements with 29 countries and regions.

Recent Development in China's Foreign Trade

1. “Double First Time” of Trade Volume

In the first three quarters of this year, China’s trade volume reached 32.33 trillion yuan (about 4546 billion USD), a year-on-year increase of 5.3%. Exports amounted to 18.62 trillion yuan, an increase of 6.2%; Imports amounted to 13.71 trillion yuan, an increase of 4.1%.

It exceeded 32 trillion yuan for the first time in the same period of history, with trade volume of 10.15 trillion yuan, 11 trillion yuan, and 11.17 trillion yuan respectively, all exceeding 10 trillion yuan, which is also the first time in the same period of history.

2. Trade structure is upgrading

In the first three quarters of this year, China's export product structure was optimized, and the export of high-end equipment increased by over 40%. The export of electromechanical products reached 11.03 trillion yuan, an increase of 8%, accounting for 59.3% of the total export value.

Among them, the export of high-end equipment increased by 43.4%, while the export of integrated circuits, automobiles, and household appliances increased by 22%, 22.5%, and 15.5% respectively. In addition, the export of traditional labor-intensive products reached 3.13 trillion yuan, an increase of 2.8%.

3. Private enterprises are playing a more important role

In recent years, the private economy has achieved remarkable results, with import and export scales reaching new highs. In the first three quarters of this year, the import and export of private enterprises in China reached 1.778 trillion yuan, an increase of 9.4%, accounting for 55% of the total foreign trade value. Moreover, private enterprises have become the driving force behind innovation and creation, and are the largest import and export entities of high-tech products in China.

4. Market diversification is steadily advancing

In the first three quarters of this year, China's market diversification steadily advanced, achieving growth in trade with more than 160 countries and regions around the world. Trade with countries jointly building the "the Belt and Road" reached 15.21 trillion yuan, up 6.3% year on year, accounting for 47.1%.

Trade volume with other RCEP member countries amounted to 9.63 trillion yuan, an increase of 4.5%, of which trade with ASEAN amounted to 5.09 trillion yuan, an increase of 9.4%. During the same period, imports and exports to the European Union and the United States amounted to 4.18 trillion yuan and 3.59 trillion yuan, respectively, with an increase of 0.9% and 4.2%.

Look forward to the future

Looking ahead, the external environment will become more complex and severe. The latest report from the IMF shows that the global economic growth rate is lower than the average level of the first 20 years of this century.

The sustained growth momentum of major economies is insufficient, and in September, the Federal Reserve and the European Central Bank both lowered their respective economic growth expectations for this year by 0.1 percent. In addition, some countries frequently impose trade restrictions on China’s products.

An important aspect of promoting stable trade operations and achieving high-quality development is to enhance resilience. With the achievement of maintaining resilience, government should continuously stimulate new momentum in foreign trade, and promote China’s trade operations to remain within a reasonable range.

How to stimulate new momentum for China

Firstly, we must do our own things well, continuously improve the level of institutional openness in the trend of globalization, and provide a good ecological environment for the high-quality development of foreign trade. At the same time, it is necessary to benchmark international high standard economic and trade rules, and further improve the connection and optimization of relevant systems.

Secondly, we should continuously optimize the structure, further encourage and guide enterprises to seize the opportunity of the new round of technological revolution and industrial transformation, accelerate the improvement of product quality in their industries, and promote the pace of industrial upgrading, including accelerating the upgrading and transformation of traditional industries.

In addition, based on the current situation of economic and trade connections within the region, it is necessary to further strengthen the implementation of supporting measures to facilitate customs clearance. Following the goal oriented and problem oriented approach, we need further implement and refine the existing “stock policies” and related “incremental policies”, and improve the efficiency of specific policies to stabilize foreign trade.

Moreover, to highlight multilateral trade rules and reshape the position of multilateral trade rules centered around WTO rules in the world trading system. Although regional trade agreements are flourishing and playing an increasingly important role, multilateral trade liberalization is the real liberalization.

In the future, China should still defend the authority of WTO rules, make efforts to maintain the multilateral system, and provide a "Chinese Solution" to promote the healthy development of global trade.

The article is for academic exchange only and does not represent the position of CMF.