China And The New Phase Of Trade Expansion

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by: Otaviano Canuto
Summary

Technological advances and the removal of trade barriers have generated sustained trade expansion over the last three decades. There are signs, however, that these developments have reached a plateau.

China is re-balancing its economy away from exports and towards domestic consumption. At the same time the country is shifting its involvement in global value chains.

The Belt and Road is likely to stimulate a new wave of Chinese exports and investments. Improved infrastructure networks in connected counties will strengthen trade integration among them.

Technological advances and the removal of trade barriers have generated sustained trade expansion over the last three decades. The falling cost of shipping and of managing complex production networks has accelerated fragmentation of manufacturing within global value chains. Companies have harnessed technology to bring into cross-border manufacturing large numbers of lower-wage workers in Asia and eastern Europe.

Countries linked by these global value chains have transformed their economic structures and achieved substantial increases in total factor productivity. Expanded foreign trade has driven these economies' transition from low-value, low-productivity activities towards production of modern tradable goods, with China a special case in speed and magnitude.

There are signs, however, that these developments have reached a plateau. The elasticity of global trade relative to global GDP has diminished by more than predicted by analysis of post-financial crisis trade-damping factors. Prevailing advanced manufacturing technology may not be conducive to further fragmentation of production processes. The scope for export-led hyper-growth has narrowed, not least because, in a more risk-averse climate, importing countries are no longer able to run large current account deficits on a pre-crisis levels.

Chinese rebalancing

Changes in aggregate demand in advanced economies point to the growing importance of local availability of goods and services compared with lower labor costs. The customization of products is making proximity to markets more relevant than low production costs. Domestic consumption in advanced economies reflects the 'dematerialization' of products - fewer materials are used to deliver goods - and increasing demand for sophisticated services. This partial reversal of offshoring and weaker demand for the typical exports of emerging markets will have a marked impact on these economies.

China is rebalancing its economy away from exports and towards domestic consumption. At the same time the country is shifting involvement in global value chains so that it can develop more value-added functions. If China discards more low-skill, labor-intensive manufacturing activities, opportunities may increase for countries with cheap and abundant labor. China's transition has been taking place from a starting point of low consumption ratios, low wages, low levels of public social spending and high household savings. The rebalancing process is proceeding slowly, for fear that domestic growth rates might fall significantly.

Governments and central banks around the world adopted countercyclical policies to ward of economic collapse after the 2008 crisis. In China, quantitative easing generated increased shadow banking activities and capital expenditure on housing and infrastructure, with state-owned enterprises playing a key role. Overcapacity in some sectors and reliance on high debt levels have been used to meet official growth targets. Beijing has announced its intent to inhibit such measures before they can develop into more material risks to the domestic economy.

In 2013 Chinese President Xi Jinping announced the Belt and Road plan, China's international infrastructure initiative. Investments through the Belt and Road, as well as the acquisition of foreign assets around the world, appears to be a way for China to diversify partially its large foreign exchange reserves out of low interest-bearing government bonds.

The Belt and Road will open new markets for Chinese companies, especially for the country's vast excess capacity in cement, steel and other metals. In addition to connections throughout Asia, Africa and Europe, Xi has offered Latin American countries access to the Belt and Road. The Regional Comprehensive Economic Partnership, a proposed China-led free trade agreement, will likewise solidify regional networks.

Parallel globalization

Barack Obama, as US president up to the beginning of 2017, deliberately promoted the adoption of ambitious multilateral agreements - dealing with goods and services trade, investment and intellectual property rights - like the Trans-Pacific Partnership and Transatlantic Trade and Investment Partnership. By sidelining China from both, the US intended to pressure Beijing into adapting Chinese policy in line with a new international regulatory framework. In spite of President Donald Trump's rebuttal of the TPP, the 11 remaining countries involved agreed in November to the central elements of a new and still far-reaching agreement.

Meanwhile, the Belt and Road is likely to stimulate a new wave of Chinese exports and investments. Improved infrastructure networks in connected counties, most of them emerging markets, will strengthen trade integration. Prerequisites in terms of policy and regulatory harmonization would not be as high as the ones embedded in the TPP or TTIP.

Both globalization processes will evolve in parallel, and might even reinforce each other. Much will depend on the extent to which anti-globalization sentiment rises or falls in key markets. Progress on trade deals like the new TPP and the wide reach of the Belt and Road should engender some confidence that international economic cooperation has not reached a nadir under President Trump - but can strike out in new and positive directions.

First appeared at the OMFIF Bulletin of December 2017

Otaviano Canuto is an Executive Director at the World Bank. All opinions expressed here are his own and do not represent those of the World Bank or of those governments Mr. Canuto represents at its Board.

Follow Otaviano Canuto on @ocanuto

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.