27 April 2021
By Alessandro Nicita and Carlos Razo, UNCTAD
China is perhaps one of the most unprecedented stories of economic development in recent history. In the last 25 years, the country’s economy rapidly expanded, lifting more people out of poverty than anywhere else in the world.
But all this wouldn’t have been possible without another outstanding story: the emergence of China from the periphery of world trade to becoming a global trade titan.
Genesis of a trade transformation
While the rise of China as an export powerhouse became evident at the beginning of this century, the story began earlier. Towards the end of the 1970s, China began a set of reforms to upgrade its economy and open up to the world. At that time, its share of global trade stood at less than 1%.
In 1986, to enhance and secure access to foreign markets for its growing exports, China applied to join the General Agreement on Tariffs and Trade (GATT).
However, the accession process was derailed, and 15 years passed before China could formally connect to the multilateral trading system. During these years, its share of global trade gradually increased but China’s participation in the global economy remained well below its potential.
By the turn of the century, two intertwined events put China on the path towards becoming the manufacturing powerhouse of today: the emergence of global value chains (GVCs) and China’s accession to the World Trade Organization (WTO).
In the mid-1990s, advancements in transport logistics and information and communication technologies enabled the fragmentation of production across the globe. Soon thereafter, GVCs scoured the globe seeking reliable low-cost partners to allow them to scale up operations, but with mixed consequences on labour conditions and carbon dioxide emissions.
At the same time, the newly formed WTO – founded in 1995 – provided a more structured regulatory environment for international trade, an international dispute settlement mechanism, as well as lower cross-border transaction costs resulting from lower tariffs and restraints on the use of some non-tariff barriers.
China’s accession to the WTO in 2001 allowed GVCs to reliably tap into the country’s potential as a manufacturing powerhouse, enabling it to dramatically expand its exports to the rest of the world. From then on, history was written fast. By 2010, China was already the world’s undisputed export champion.
Meteoric rise both admired and questioned
The rise of this trade titan has been both admired and questioned. Concerns on the use of state subsidies, quotas, export measures, intellectual property rights and the management of its exchange rate have been a bone of contention.
In fact, many of these concerns form the bulk of complaints brought to the WTO and are behind the ongoing trade disagreements between the United States and China.
Nevertheless, China’s exports proved to be resilient not only to this constant stream of complaints but also to the trade tensions with the United States and souring relationship with the European Union – in March 2021 the EU issued its first sanctions against China since 1989.
Indeed, China’s importance to global production in most sectors, from precision instruments and industrial machinery to computers and smartphones, has constantly increased during the last two decades.
The COVID-19 pandemic has further demonstrated the keystone role that China plays in the global economy. In early 2020, when COVID-19 infections were gathering pace across the country, production processes across the globe stalled or slowed because of disruptions faced by Chinese suppliers.
Moreover, high levels of export resilience have afforded China not only a swift export recovery from the pandemic, but also allowed for further gains across a variety of export sectors, even when those sectors have experienced overall decline. As a result, China’s share of global trade increased further during 2020, to nearly 15%.
In 2021, China’s trade recovery from the crisis has been impressive. In the first quarter of this year, its exports surged by almost 50% year-over-year, to about $710 billion.
Although such a large increase is partly due to the low base of last year, the result of the first quarter is still 27% higher (about $150 billion) than the first quarter of 2019, before COVID-19 hit China and then the global economy.
What’s next for China as the global export powerhouse?
Overall, China is likely to remain the world’s leading exporter for the near future. However, its exports dominance in the global economy may be approaching its peak. There are a number of reasons for this.
First, China’s economy is maturing to be more reliant on domestic rather than foreign demand, as the prominence of exports in the Chinese economy has been rapidly declining in recent years. For global trade, this implies that Chinese imports are likely to increase faster than exports, thus eroding China’s exports’ share in the global economy.
Second, increasing labour costs in China are eroding its global competitiveness, especially in labour-intensive production processes. This will eventually result in the relocation of global production to lower-cost countries. Highly competitive economies like Viet Nam will likely chip away trade from China.
Moreover, advancements in labour-saving technologies, such as automation and robotics, as well as fiscal incentives like incentives to firms and tax credits for local employment, are improving the financial attractiveness of reshoring some manufacturing processes closer to consumers in developed countries.
Finally, headwinds hitting the globalized economy are strengthening. Current geopolitical tensions and national policy shifts, which are increasingly considering social and environmental aspects of development, may reverse the hyperglobalization process of the past more than 20 years.
A further escalation of tensions and a lack of global action to address social and environmental concerns could lead to a deglobalization process that will likely have stronger-than-average implications for major exporters such as China.