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New trade pattern benefits China
By John Ross |
March 6, 2012, Tuesday
|
Print Edition
Print Edition
ANY analysis that China's economy is heading for a hard-landing received another nail in the coffin last week with the advance of China's February manufacturing Purchasing Managers' Index to 51.0. It was notable that within this expansionary trend, there was not only strong domestic demand but also export recovery - new export orders rose 4.2 points to 51.1.
This illustrates the way in which the new pattern of China's trade allows it to gain more than other economies from the current modest international trade revival. It also shows why any analysis focusing solely on China's trade relations with developed nations necessarily underestimates the growth potential of its economy and companies.
Developed economies still constitute the majority of world trade. On the latest International Monetary Fund data, developed economies accounted for 63 percent of world imports, compared to 37 percent for developing economies. But developing economies' imports are growing far more rapidly than those of developed economies not only in percentage but also in absolute dollar terms - indeed, imports by developed economies have still not reached their pre-crisis levels, whereas imports by developing economies are well above them. Compared to July 2007, the peak month for world trade prior to the international financial crisis, the latest available IMF data shows imports by developing countries were an annualized US$590 billion above pre-crisis levels, while imports by developed economies were an annualized US$936 billion below their peak.
Developing economies
This explains to an significant degree why China's export performance continues to outperform other economies. China has succeeded in reorienting its trade to developing countries more thoroughly than competitors - the picture of China as totally dependent on exports to the US or the European Union is by now thoroughly out of date.
Go back a decade, to 2001, and China was indeed highly reliant on exports to developed economies - these accounted for 59 percent of China's total exports. Last year, only 50 percent of China's exports went to developed economies - significantly below the world average.
Imports show China being even more integrated into developing economy trade. In 2011, 59 percent of China's imports were from developing economies.
The center of gravity of China's trade is therefore now far more with developing economies than the world average. China is simultaneously more protected than most major economies against a slowdown in trade by the developed economies. Equally, China is better placed to benefit from the increase in trade by developing economies. China, far from being largely dependent on exports to the US and EU, is in reality a powerhouse of trade with developing economies - that is with the most rapidly growing sector of the world economy.
This can be seen clearly in China's trade expansion since the beginning of the international financial crisis. By the end of 2011, compared to its peak pre-financial crisis level, China's exports to developed economies had grown by an annualized US$183 billion, but its exports to developing economies rose by US$289 billion.
This new trade pattern also shows why, despite rhetoric by US politicians, the chance of generalized protectionist clashes between China and other countries is actually low.
China's overall trade surplus has fallen sharply from US$317 billion in 2008 to US$158 billion in 2011. The decline as a percentage of GDP is even more dramatic, to less than two percent. China now runs an overall balance of trade deficit with the rest of the world apart from the US.
Trade frictions
China's share of the imports of both the US and the EU is also declining - in the case of the EU, from 18.7 percent in 2010 to 17.3 percent in 2011, and in the case of the US, from 19.1 percent in 2010 to 18.1 percent in 2011. With the EU, China's trade surplus is also falling slightly, from US$224 billion in 2010 to US$216 billion in 2011, and the EU wants good relations with China in order to deal with the Eurozone debt crisis.
There will likely be trade frictions with individual countries and/or concerning individual products. Political maneuvers in the US will continue, but the risk of any generalized protectionism against China is low.
China is obviously not immune from fluctuations in international trade, but as February's PMI shows China's economic growth will gain more than any other country from upturns in world trade. The summit of BRICS (Brazil, Russia, India, China, and South Africa) later this month will doubtless prioritize expanding trade between the most important developing economies. Similarly last week, 10 Chinese government agencies issued guidelines to further promote trade with developing economies.
The most powerful engine of China's economic growth is expanding domestic demand, but the second most powerful one has become this rapid expansion of trade with developing economies. To understand the potential for China's trade to influence its economic growth, it has become even more important to study its trade relations with developing economies than with the US or EU.
John Ross is currently visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director for economic and business policy.
This illustrates the way in which the new pattern of China's trade allows it to gain more than other economies from the current modest international trade revival. It also shows why any analysis focusing solely on China's trade relations with developed nations necessarily underestimates the growth potential of its economy and companies.
Developed economies still constitute the majority of world trade. On the latest International Monetary Fund data, developed economies accounted for 63 percent of world imports, compared to 37 percent for developing economies. But developing economies' imports are growing far more rapidly than those of developed economies not only in percentage but also in absolute dollar terms - indeed, imports by developed economies have still not reached their pre-crisis levels, whereas imports by developing economies are well above them. Compared to July 2007, the peak month for world trade prior to the international financial crisis, the latest available IMF data shows imports by developing countries were an annualized US$590 billion above pre-crisis levels, while imports by developed economies were an annualized US$936 billion below their peak.
Developing economies
This explains to an significant degree why China's export performance continues to outperform other economies. China has succeeded in reorienting its trade to developing countries more thoroughly than competitors - the picture of China as totally dependent on exports to the US or the European Union is by now thoroughly out of date.
Go back a decade, to 2001, and China was indeed highly reliant on exports to developed economies - these accounted for 59 percent of China's total exports. Last year, only 50 percent of China's exports went to developed economies - significantly below the world average.
Imports show China being even more integrated into developing economy trade. In 2011, 59 percent of China's imports were from developing economies.
The center of gravity of China's trade is therefore now far more with developing economies than the world average. China is simultaneously more protected than most major economies against a slowdown in trade by the developed economies. Equally, China is better placed to benefit from the increase in trade by developing economies. China, far from being largely dependent on exports to the US and EU, is in reality a powerhouse of trade with developing economies - that is with the most rapidly growing sector of the world economy.
This can be seen clearly in China's trade expansion since the beginning of the international financial crisis. By the end of 2011, compared to its peak pre-financial crisis level, China's exports to developed economies had grown by an annualized US$183 billion, but its exports to developing economies rose by US$289 billion.
This new trade pattern also shows why, despite rhetoric by US politicians, the chance of generalized protectionist clashes between China and other countries is actually low.
China's overall trade surplus has fallen sharply from US$317 billion in 2008 to US$158 billion in 2011. The decline as a percentage of GDP is even more dramatic, to less than two percent. China now runs an overall balance of trade deficit with the rest of the world apart from the US.
Trade frictions
China's share of the imports of both the US and the EU is also declining - in the case of the EU, from 18.7 percent in 2010 to 17.3 percent in 2011, and in the case of the US, from 19.1 percent in 2010 to 18.1 percent in 2011. With the EU, China's trade surplus is also falling slightly, from US$224 billion in 2010 to US$216 billion in 2011, and the EU wants good relations with China in order to deal with the Eurozone debt crisis.
There will likely be trade frictions with individual countries and/or concerning individual products. Political maneuvers in the US will continue, but the risk of any generalized protectionism against China is low.
China is obviously not immune from fluctuations in international trade, but as February's PMI shows China's economic growth will gain more than any other country from upturns in world trade. The summit of BRICS (Brazil, Russia, India, China, and South Africa) later this month will doubtless prioritize expanding trade between the most important developing economies. Similarly last week, 10 Chinese government agencies issued guidelines to further promote trade with developing economies.
The most powerful engine of China's economic growth is expanding domestic demand, but the second most powerful one has become this rapid expansion of trade with developing economies. To understand the potential for China's trade to influence its economic growth, it has become even more important to study its trade relations with developing economies than with the US or EU.
John Ross is currently visiting professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director for economic and business policy.
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