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Globalisation isn’t losing steam in China

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Tesla China-made Model 3 vehicles are seen during a delivery event at its factory in Shanghai, China, 7 January 2020 (Photo: Reuters/Aly Song).

In Brief

Why is China continuing to liberalise trade and investment as doubts and opposition to globalisation rise? While the opposite may be true in some developed countries, globalisation optimises China's economic structure and improves efficiency. China's opening-up and development is also contributing significantly to Asian regional integration.

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China has sought further liberalisation in investment and trade over the past few years, even during the COVID-19 pandemic and through the US–China trade war. During the Trump administration, China removed ownership, regional and minimum benchmark restrictions on foreign direct investment (FDI) in the financial sector, leading to a boom in foreign investment. China continued to reduce the length of its negative investment list — which designates sectors where foreign investment is prohibited or restricted — from over 100 items to 33 items. It also unilaterally reduced its tariff rate from 9.8 per cent to 7.5 per cent.

In 2020, China signed the Regional Comprehensive Economic Partnership trade agreement with 15 countries and the Comprehensive Agreement on Investment with the European Union. More FTAs are on the horizon. According to Beijing’s latest Five-Year Plan and its Long-Range Objectives Through the Year 2035 proposal, China will actively pursue the trilateral free trade area negotiation with South Korea and Japan; apply to join the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership; and continue to vigorously promote Belt and Road Initiative (BRI) construction projects. So far, China has signed 205 cooperation agreements with 171 countries and international organisations through the BRI.

Globalisation in some developed countries, especially the United States and the United Kingdom, is said to have gone too far and led to losses of efficiency. If only trade is liberalised efficiency will improve, and benefits flow to all. But if investment liberalisation is carried out at the same time, certain industries with comparative advantages will move out, and that can lead to a loss of high value-added products, services and high-income jobs. These and other consequences, if not attended to, include uneven income distribution and losses of welfare. This may be called a globalisation trap that needs national policy attention.

On the other hand, if a developing country actively attracts foreign investment, it may form a ‘super mix’ — that is, a mix of foreign factors such as advanced foreign technology, capital and open international markets, together with domestic factors such as cheap workers, facilities and networks. This ‘super mix’ creates new comparative advantages and can also set up a globally competitive industry in a very short period of time. It can reshape international competition patterns in almost every sector and market.

This is exactly what happened in China over the past 40 years. The country’s first superstar exporters were engaged in labour-intensive goods manufacturing. Most of them belonged to the processing trade with components imported, and were actively involved with foreign-invested firms in the 1980s and 1990s. Domestic private firms then grew quickly and became the major players in Chinese exporting. In 2020, these firms accounted for just over 54 per cent of China’s exports, compared with about 36 per cent from foreign-invested firms.

Recently, superstar exporters have targeted intermediate and high-tech goods. Although a lot of these export products are designed by foreign firms, the manufacturing or assembly lines are in China. This provides Chinese enterprises with a chance to catch up and potentially replace foreign firms.

In recent years, some industries in China have been moved out to nearby countries like Vietnam, Bangladesh and Cambodia. These moves represent efficiency-enhancing upgrades, providing opportunities for China to enter more efficient industries as inefficient industries and lower-level jobs move out.

This phenomenon is a source of Chinese export competitiveness. It could be argued that the stellar performance of Chinese exports is not the result of unfair practices or theft of intellectual property rights. Rather, in addition to the mix of factors mentioned above, China also has other advantages such as a huge domestic market, high-quality labour, extensive production-supply networks and substantial research and development investment.

China’s continued opening-up will reshape worldwide trade and economic patterns in three ways.

First, China will transfer more labour-intensive industries to neighbouring and nearby countries, which will drive regional economic development and promote the expansion of regional integration in Asia. Investment in manufacturing will also deepen BRI cooperation with many of these countries.

Second, China is trying to attract more foreign investment in high-tech industries, which will deepen and expand Asian regional production networks. In 2020, China became the largest FDI destination in the world, with most new investment going into services.

Third, China provides a huge market for development and integration in other Asian countries. In decades past, East Asian economies such as Japan, South Korea, Taiwan, Singapore and Hong Kong adopted export-oriented strategies and were highly dependent on the US market. Trade volumes from East Asian economies account for about one-third of the US market, which makes East Asian integration vulnerable with limited intra-regional trade flows.

With China’s economic rise, other markets in Asia will expand and the proportion of intra-regional trade will increase. Meanwhile, dependence on external markets will decline. These factors will enable Asia to become an even larger production and consumption centre and further accelerate the eastward shift of the world’s economy.

Song Hong is Professor, Senior Fellow and Deputy Director-General at the Institute of American Studies, Chinese Academy of Social Sciences (CASS).

An extended version of this article appears in the most recent edition of East Asia Forum Quarterly, ‘Reinventing global trade’, Vol. 13, No 2.

 

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