Illustration: Peter C. Espina/GT
At this year’s annual conference of the Boao Forum for Asia, the question of whether economic globalization has hit the bottom drew a lot of attention.
Over the past 30 years, economies around the globe have been heavily relying on trade and globalization, and the growth rate of trade has generally been double that of the GDP. But at present, trade growth barely equals GDP growth. In Asia, trade growth is even lower than GDP growth. This shows that the role of trade as an engine of global growth is diminishing, which has been a major factor behind the global economic gloom.
As to the reasons behind the decline in the role of trade as a growth engine, people believe it’s mainly due to a drop in manufacturing outsourcing from the US, which has led the US to reshoring manufacturing and caused a decline in contracts for other countries.
Certainly, more underlying causes need to be explored. I tend to believe that world trade is undergoing structural changes, which significantly impacts the Asian economy. In the past 20 years, the global value chain was the most important driver of Asia’s miraculous growth, but now there are uncertainties associated to the global value chain, with growth facing structural slowdown, and trade losing its momentum.
Meanwhile, since Asian economies’ efforts to shift their growth model from over-dependence on external demand to one driven by domestic demand hasn’t been very successful, they are now actively exploring new markets as well. China’s economic statistics are also in line with this observation. China’s GDP grew by 6.9 percent year-on-year in 2015, and the total value of China’s imports and exports for the same year declined by 7.0 percent year-on-year. A key component, processing trade, which in the past swiftly moved forward China’s trade growth – where components brought to China are assembled and re-exported – is vanishing.
People may wonder what was the secret of China’s continuous expansion of trade in the past 30 years, despite the country’s import protection. The answer would be processing trade. With China’s import protection, the costs of imports of raw materials and exports of finished products will both be high. But processing trade has allowed imports of raw materials that are processed domestically but not sold in the domestic market to enjoy favorable policies, and this practice has benefited China enormously. The highest proportion of the value of processing trade in China’s total trade value has been 50 percent.
But times have changed. The value of processing trade in China’s foreign trade continues to shrink. At the crossroads of global structural changes, the way forward for China’s foreign trade lies in further opening-up.
To make that happen, the first task is to stimulate imports through reducing import tariffs, such as imposing zero tariffs on all imports of intermediate mechanical and electrical products like in Canada, and turning China into a free trade zone.
Second, China should head toward reducing administrative barriers that don’t allow products of processing trade to be sold domestically, changing differentiated policies, and attracting foreign investors to produce and sell locally. This approach doesn’t go against Chinese firms’ strategy of reducing excess capacity, because it fosters competition, and only by doing so can Chinese firms truly establish larger and stronger presence.
And lastly, we should raise awareness about the tough international environment, in particular with the growing sentiment of anti-globalization in Western economies. It requires us to make early preparations and deepen opening-up.
The author is vice president of the University of International Business and Economics. bizopinion@globaltimes.com.cn
