The Real Victims of China’s Trade Patterns
Many in the
West, especially US President Donald Trump, have railed against China’s massive
trade surpluses, which emerged after the country’s accession to the World Trade
Organization in December 2001. But China’s developing-country neighbors have
far more reason to be worried.
NEW DELHI –
Much has been written about the consequences of China’s Belt and Road
Initiative (BRI), especially for the developing countries of Asia. Yet another,
equally consequential phenomenon has gone largely unnoticed: China’s upending
of trade relationships with those countries.
Many in the
West, especially US President Donald Trump, have railed against China’s massive
trade surpluses, which emerged after the country’s accession to the World Trade
Organization in December 2001. But China’s developing-country neighbors have
far more reason to be worried.
Since peaking
in 2015 – when the surplus in merchandise trade reached nearly $680
billion – China’s trade imbalance has been
shrinking. But its surpluses remain very large in absolute terms, and in
developing Asia, they continue to grow.
This was not
always the case. For years, trade between China and Asia’s developing economies
was mostly balanced. China was a source of voracious demand for raw materials,
energy, and other intermediate inputs needed to fuel its massive
processing-export sector. Those inputs came largely from developing economies,
especially in Asia.
Chinese
demand was highly beneficial for many of these countries. It drew them into
(China-centered) manufacturing value chains and produced the combination of
larger export volumes and better terms of trade desired by primary-commodity
exporters. Exports to China thus became a powerful engine of these countries’
economic growth.
After 2011,
however, China’s imports from Asia’s developing economies stagnated, while its
exports to them continued to swell, partly offsetting declining demand for
Chinese goods in the advanced economies. In the decade after the global
financial crisis, Asia’s share of China’s total exports doubled, standing at
about 15% last year. In 2012, China’s merchandise trade surpluses with Asia
began swelling as well, reaching some $130 billion in 2015 and $111 billion in
2018.
Within the
last decade, China’s trade balance with the Philippines has swung from persistent
deficits to a substantial surplus, and its longtime surpluses with Indonesia,
Bangladesh, Vietnam, and India have continued to grow. India’s trade deficit
with China has experienced the biggest increase, rising nearly threefold from
2010 to 2018. Among Asia’s major developing economies, China has had persistent
deficits only with Malaysia (from which it generally imports high-tech goods)
and Thailand; but even these declined after 2011.
So while
China reaps growing benefits from its neighbors, most of the rest of Asia faces
a negative net stimulus from the country, as trade deficits drain effective
demand. This trend is likely to deepen.
Chinese
imports from developing Asia have risen since 2016, including last year, but
not by much. And a sudden surge is unlikely, because China has been developing
domestic sources for a range of intermediate inputs – an effort that has
steadily reduced its integration into global value chains over the last decade.
In China –
unlike in most other economies covered by the OECD’s trade in value-added
(TiVA) database –
the foreign content of exports declined by nearly ten percentage points from
2005 (26.3%) to 2016 (16.6%). Meanwhile, China’s contributions to the
value-added in partner countries’ exports increased, especially for developing
Asian economies, several of which showed significantly higher shares of Chinese
value-added in their own exports of manufactures, even those that went to
China.
To some
extent, China’s de-integration from global value chains also goes the other
way: the country is working to decrease its overall reliance on external
demand, by shifting from a manufacturing-focused, export-led growth model to
one driven by services and underpinned by domestic consumption. According to
TiVA data, foreign demand accounted for less than 17% of domestic production in
2015, down from nearly 24% a decade earlier.
But this
trend creates risks for China’s trading partners. It will not stem the growth
of China’s overall trade surpluses with much of developing Asia, because
China’s exports to Asia will increasingly extend beyond manufactured consumer
goods to include the high-tech products that are at the forefront of the country’s
current growth strategy. This will contribute not just to trade imbalances, but
also to growing technological and value-added imbalances.
The pattern
can already be seen in trade with India, which exports mainly raw materials
(like iron ore) and processed agricultural goods to China, but imports from it
manufactured goods (including a growing volume of high-tech items). This
implies increasing returns on activities in China. For India, however, less
technology-intensive exports do not generate dynamic returns to scale.
Taken
together, recent trade trends are the cause of both macroeconomic and sectoral
concerns for China’s trading partners in developing Asia. But these countries’
options for resisting these trends are limited. After all, China has achieved
much faster diversification and productivity growth, especially over the last
decade, giving it a substantial competitive advantage over its trading
partners.
Will China
ensure that BRI projects and other financial flows mitigate the damage these
trade trends imply for developing Asia’s growth? Or will the BRI make matters
worse for China’s neighbors? As Chinese economic and political influence in
Asia continues to grow, questions such as these will become increasingly
urgent.
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Jayati Ghosh
is Professor of Economics at Jawaharlal Nehru University in New Delhi,
Executive Secretary of International Development Economics Associates, and
a member of the Independent Commission for the Reform of International
Corporate Taxation.
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