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What is the Future of Chinese Trade?

2015-05-15

By Long Guoqiang

Research Report Vol.17 No.2, 2015

I. The international and external context of China’s opening up when China entered the new normal

It is essential to study the international and external context of China’s opening up when China entered the new normal, as well as associated opportunities and challenges. As President Xi Jinping pointed out in a speech concerning China’s national economy, China is now confronted with a convergence of economic deceleration, restructuring and the digestion of its previous stimulus package.

First, our external context is characterized by a post-crisis period of recovery and adjustment, which continues and will persist in the foreseeable future. Unlike the past three decades, particularly the prosperous phase before 2007, this period has manifested many new characteristics including shrinking external demand, expanding overcapacity, increasing competition, intensifying trade protectionism and growing trade disputes.

Second, international trade rules are being rewritten. They have been evolving constantly and the world has now entered a period of intesified rule change, with some new developments identified on rule-writing platforms. On one hand, the World Trade Organization (WTO) is still functional as a multilateral mechanism, with some new rules being negotiated. On the other, regional trade organizations may move ahead of their multilateral counterparts. Some new rules may first be negotiated and developed on a regional trade platform such as the Trans-Pacific Partnership (TPP), which aims to create both new regional trade arrangements and a large number of new trade rules. Enforcement of these rules will immediately generate both opportunities and challenges for all countries, including China.

Third, our comparative advantages are now shifting. Low cost has dominated China’s competition worldwide in the past three decades. This low-cost competition was driven by a combination of multiple factors, including, most importantly, our cheap labour. After three decades of development, however, China’s demographics and labour market have changed dramatically in terms of demand and supply.

II. China’s opening strategies in the new normal

To understand China’s opening strategies in the new normal, we first have to know what are the new normal requirements for China’s opening up. At the APEC 2014 Summit, President Xi Jinping elaborated on China’s new normal from three perspectives: first, China’s economy has slowed down from super-high growth to medium and high growth. This may be simply perceived by some as economic deceleration. Actually, this speed remains relatively high at the global level, especially for an economy as large as China. To maintain economic growth at around 7% is a big challenge for China, but a great contribution to the world economy. Second, China is undergoing an economic transition, accelerating economic restructuring, as a response to the new normal in terms of demand, supply and industry. Third, China will transform its economic growth drivers, which means that China will reduce its decade-long dependence on investment, factors of production and scale, and increase its reliance on innovation, quality and brand for economic growth. At the 2014 Central Economic Work Conference, President Xi Jinping also introduced nine trends in relation to the new normal.

I think this topic can be explored on two levels: in terms of economic transition, China should, for its transition and change of growth drivers, address the question of how it can fully leverage the international market and resources through strategy adjustments to accomplish its goal. At the second level, China faces new requirements as an emerging big power. China’s economic slowdown in the new normal is a result of the laws of economics and many catch-up economies once experienced similar situations. What lies behind China’s slowdown is an expanded economy. According to the International Monetary Fund (IMF), China’s economy has already caught up with the US if measured at purchasing power parity (PPP), although people practically use current price for this purpose. As the world’s second largest economy and an emerging big power, China’s rise will surely exert a considerable impact on international politics, governance and trade. If China cannot properly address its relationship with the international community, it may find it difficult to capitalize on external markets and resources to support its economic growth.

China needs to answer the next two questions to develop new opening strategies: How can external markets and resources facilitate China’s transition while China faces the challenge of transition in an expanding economy? And how should China deal with its relationship with the outside world through strategy adjustments to create an enabling environment for its development. Compared with the past three decades, when our major goal in opening up was to increase exports and earn foreign exchange to speed up industrialization, there has been a fundamental change in our current aim.

III. China’s current opening strategy in the new normal

To accomplish its strategic goals, China needs to establish new strategic priorities.

First, China should focus its efforts on creating an enabling environment for international trade. A small economy should seize opportunities and avert risks. As a large economy, China is an “independent variable” in the world economy, which can affect the external environment. A large economy needs to first explore how to create opportunities. It needs to respond to the concerns and expectations of the international community. It is justifiable for the global community to expect a responsible role from China, but what role should an emerging great power play in a changing global governance system? Should we repeat the governance approach dominated by a single country like the UK or the US, or should we create a new governance framework in this increasingly multi-polar and democratic world? How can China balance the interest of its own and other countries while it is involved in global economic governance and the writing of new rules? These questions merit China’s close attention in its effort to open itself wider still.

Second, China should focus on opening the services sector in improving its business environment. There are significant changes in China’s use of foreign investment. The first is that China has shifted its focus of opening from manufacturing to services. The second change has taken place in the administration of foreign investors. The bilateral investment treaty (BIT) being negotiated between China and the US on the basis of pre-established national treatment and a negative list will not only drive changes in approach in government behavior and administration, but is indicates a shifting government mindset.

Third, China should treat overseas investment as a new priority. Overseas investment can deepen China’s cooperation with host countries, which can help Chinese companies better use global resources and become competitive multinationals. However, China will face a herculean challenge, at both the macro and micro levels, in the shifting of its focus from licensing and administration typical of its previous foreign-investor management practice, to a service-oriented approach characterized by in-event and after-event supervision. Companies will also face new challenges in such areas as global operations, global strategy development, international talent, internal management, as well as global corporate citizenship and cultures.

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