China’s recently announced “dual circulation” strategy– in which its traditional emphasis on growth through exports will be bolstered by a renewed focus on spurring domestic demand – is a recognition of a simple reality: the highly conducive international trade environment that fuelled China’s supercharged growth for decades is breaking down.
The prevailing presumption since at least the 1990s, across both developed and developing nations, has been the more trade, the better. The efficiencies and hoped-for geostrategic benefits of deep economic integration were seen as far outweighing any dislocations that might occur.
Whether by happenstance or design, China’s timing during this period was impeccable. It revved up its export engine at the precise moment the large markets of the West were most hospitable, both philosophically and fiscally, to absorbing Chinese imports and investing heavily in China.Today, the old assumptions are fading away and a new era is emerging in which more trade and deeper integration– with China in particular – is no longer considered an unalloyed good and the presumed benefits no longer taken as a given.This new era is being driven by the confluence of three factors. First, there is a growing belief in the West that it gravely underestimated the deleterious effects that accompanied China’s integration into the global trade system.
Second, there is a greater willingness on the part of not only the United States but also the European Union, Australia and Japan to confront China and attempt to reset the terms of the trade relationship.
Third, the Covid-19 pandemic highlights the risks and vulnerabilities inherent in deep trade integration, spurring countries and companies to reduce reliance on other economies.
The world is not turning its back on trade or globalisation, but these factors are driving us towards a more nuanced approach than the previous “more is better” mindset. The trade landscape China will have to navigate henceforth will be considerably less benign than the one it has traversed for the past two decades.
The May announcement, reinforced in subsequent public comments by President Xi Jinping, that China would adopt a dual circulation strategy was a signal that China’s leadership comprehends and is prepared to respond to these new realities.
The circulations referred to are “external circulation” – production for exports – and “internal circulation”, or production for domestic consumption.
While China’s focus for the better part of the past three decades has been on external circulation, the dual circulation strategy will place a heightened emphasis on internal circulation while not forsaking the export goose that has laid the golden eggs.Although details on the new strategy have been sparse, China is essentially seeking to maintain its ability to engage globally in trade, finance and technology where and when it suits China’s interest.At the same time, it wants to strengthen domestic demand, production and technological capabilities to create a hedge against disruptions in the global marketplace. Under this policy, the rest of the world will no longer be the leading sector of the Chinese economy. China will become more self-reliant.
The fact that this strategy is being discussed at such high levels in the lead-up to the expected October release of China’s 14th five-year plan suggests it will be a cornerstone of economic policy for years to come. It remains to be seen, however, how successful dual circulation will ultimately be.
There are contradictions and challenges. The steps necessary to spur domestic demand, such as by raising wages, will also undercut China’s export competitiveness. While the export growth model has delivered success so far, the challenge now is to develop domestic demand for the next stage. But this will require a large and complex rebalancing that will necessarily spill over into the trade realm.
The effort to reduce China’s external reliance, especially in the technology, energy and agricultural sectors, is sensible. China relies on US$300 billion worth of imported semiconductors to meet more than 85 per cent of its domestic market demand, and the tightening of US export restrictions shows just how precarious that source of supply has become.
China’s desire to develop its own technological capability to overcome its dependence on US and other foreign chips is nothing new – it has been part of its economic plans for years. Until now at least, the United States has managed to stay one step ahead.
The emergence of this new era in trade will inevitably bring a certain amount of turbulence in the short term. Relations will be frayed, barriers and restrictions will rise and inefficiencies and costs will be imposed. However, there is no way to escape the simple fact that the existing framework for trade has become unsustainable.
To be sustainable, trade needs to be conducted on mutually acceptable terms which balance economic gains with a broader basket of considerations, including the need to avoid overreliance on a single trade partner, a recognition of the inevitable intermingling of trade and geopolitics, and a greater accounting for the wide range of trade-related social and environmental issues which profoundly affect the lives of average citizens.
It would be hard to look at our current trade system and conclude that we have struck an acceptable and sustainable balance across these considerations.
China’s dual circulation strategy reflects its desire to rebalance in light of new realities. The US, EU, Japan, India, Australia and other leading trade nations are also, to one degree or another, making similar adjustments.Expect the process to be messy. To the extent the current period of turmoil can ultimately produce a recalibrated approach to trade which reflects a more realistic balance, though, we will have taken a positive step towards a more sustainable trade system.
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