What’s Up with China’s Slower Foreign Trade Growth?

Editor's Note:

On July 16th, China’s National Bureau of Statistics released data on the national economy for the first half of this year. In the context of the escalating trade friction between China and the United States, China’s foreign trade data attracted great attention from both domestic and foreign media.

According to the statistics, China’s import and export volume grew by 7.9 percent year-on-year in the first half of the year. Exports rose 4.9 percent, while imports grew 11.5 percent, which resulted in a trade surplus of 901.32 billion yuan, narrowing by 26.7 percent. What does this mean for China’s narrowing trade surplus? With increasing trade frictions between China and the United States, what opportunities and challenges will Chinese foreign trade face in the second half of 2018?

 

What’s Up with China’s Slower Foreign Trade Growth?

Text by Bai Ming

Last year, despite the global economic recovery, China’s foreign trade development was still challenged by the shadow of a possible trade war with the United States.

From a wider perspective, China's foreign trade shrunk in 2015 and 2016. So considering the improvement of the global market, China’s high growth in foreign trade in 2017 is “restorative” to some extent on the basis of low growth rate of the previous years.

Entering the 2018 with “recovery” factors fading, Chinese foreign trade has essentially resumed normal growth. Although the growth rate of China’s foreign trade seemed to slow in the first half of 2018, its performance is still impressive considering the increasing external pressure.

Trade Surplus: Smiles and Grimaces

It should be noted that in the first half of 2018, China’s import growth rate was 6.6 percentage points faster than exports. And even with China’s trade surplus reaching 901.32 billion yuan, it still narrowed by 26.7 percent over the same period last year. In fact, the second quarter of 2018 was the eighth consecutive quarter of China’s trade surplus narrowing. The narrowing trade surplus should be analyzed objectively.

The current trade surplus causes both smiles and worries. As a big global trading power, China needs to capitalize on its comparative advantages in exchanging resources with the other countries and participating in international division of labor. So, if China maintains a large trade surplus with another country for a long time, it means the country is giving more resources to the country and gaining less.

And if the exports of a country grow rapidly for a long time with imports marginalized, its development of foreign trade will become unbalanced and hit a bottleneck. And such a situation prevents the country from becoming a real trading power.

At the Boao forum for Asia in April this year, Chinese President Xi Jinping stressed that China does not seek to preserve its trade surplus. In this sense, the narrowing trade surplus will be a major drive for a balanced growth of foreign trade.

China’s narrowing surplus in foreign trade in the first half of the year is directly linked to improvements in importing. Generally, China’s economy grew smoothly in the first half of this year while optimizing its economic development mode and creating more business opportunities for the international market. China has also issued a series of policies to promote the healthy development of imports, which has played a key role in the rapid growth of imports in the first half of the year.

According to the Section 301 investigation, the United States’ proposal to impose tariffs on imports from China took effect in the second half of the year, but the Trump administration threatened many times in the first half of the year to impose 25 percent tariffs on US$50 billion in Chinese imports, greatly increasing the uncertainty of trade between the two countries.

Apparently, Chinese enterprises involved in exporting to the U.S. are already feeling the pain of trade frictions. Currently, both buyers and sellers in the two countries don’t dare sign long-term agreements and are already more careful in signing short-term deals.

Furthermore, the narrowing trade surplus should be understood in the bigger picture of balance of payments and stabilizing the RMB change rate. Contrasting past decades, the RMB exchange rate has suffered increasing fluctuation in recent years, and foreign exchange reserves have dropped from US$4 trillion at the highest level to about US$3 trillion.

It is easily to see that seeking a balance of foreign trade is quite necessary at present, but doing so requires balanced countermeasures to avoid triggering systemic risk.

Optimizing Development Mode

When observing the development situation of foreign trade in the first half of 2018, we should focus not only on speed but also on level of development.

In the first half of the year, China’s export volume of mechanical and electrical products reached 4.4 trillion yuan, up 7 percent, which is not only higher than the overall growth rate of exports, but also accounts for 58.6 percent of China’s total export value. Within the sector, exports of appliances and electronic products increased by 8 percent and machinery equipment by 9 percent.

Many mechanical and electrical products exported by China aren’t technology intensive and have limited added value. But they still have higher technology contents and more added value than many other commodities. By comparison, exports of Chinese traditional labor-intensive products totaled 1.41 trillion yuan in the first half, down 4.1 percent, accounting for 18.7 percent of the total export value.

 In fact, the drop in exports of labor-intensive products is dragged down not only by increasing costs of factors of production, but also due to labor cost advantages of Vietnam, Indonesia, Cambodia, Bangladesh and other Southeast Asian countries.

Optimizing the development mode of China’s foreign trade requires not only greater efforts in improving the trade structure, but also a reduction of low-end and inefficient trade.

In the first half of this year, China’s solid waste import volume decreased significantly, and the export volume of high energy-consuming and resource products decreased by 8.7 percent. The green development effect of China’s foreign trade is emerging.

In recent years, China had completed globally celebrated advancements and contributions in dealing with global issues such as climate change, which have helped the country with its domestic industrial transformation and upgrading as well as contributing greatly to the sustainable development of the world.

Certainly, trade frictions have created new challenges for China’s foreign trade development. However, it should not be restricted to the traditional market, but gain more access to a more diversified market, especially by carrying out mutually beneficial cooperation with the countries along the Belt and Road.

In the first half of this year, China’s exports and imports to the European Union, the United States and ASEAN increased by 5.3 percent, 5.2 percent and 11 percent respectively, together accounting for 41 percent of the total value of China’s exports and imports.

Over the same period, China’s import and export volume to 16 countries in Central and Eastern Europe increased by 14.7 percent, 6.8 percentage points higher than that of the total import and export volume of the whole country.

In the second half of this year, the China’s foreign trade development will probably become more complicated. As the United States continues to intensify the trade war between the two countries, China’s foreign trade development will encounter more difficulties, and many Chinese enterprises will struggle to survive the challenging development environment.

In such circumstances, relevant authorities should help enterprises strengthen their ability to cope with challenges. Fundamentally, China’s development of foreign trade must focus on fostering emerging advantages in foreign trade competition. More efforts should be made to enhance the quality, technology, service, brands and standards, but great focus must also be placed on other elements such as marketing, management and professionals. 

 

The author is deputy director of the International Market Research Division under the Chinese Academy of International Trade and Economic Cooperation (CAITEC), Chinese Ministry of Commerce.