China emergence as the largest trade Nation

China has become the largest trading nation in world surpassing US for the first time in 2013.China’s annual trade in goods surpassed the $4tn mark of the first time last year according to official data.

Please see Video in the link provided below:

http://www.youtube.com/watch?v=uBmHPekd96M

 

It is surge in exports to the tune of 4.16tn dollars ($2.21 trillion in exports plus $1.95trillion in imports).Although the full year trade data isn’t available. The increase in imports for China is notable as it implies greater opening of the Chinese markets .There is however an interesting twist in this tale the bulk of Chinese trade is in goods and not in services Trade is services according to official sources is estimated to be around $1 trillion. Even with its relatively closed markets, China has grown its trade sector at brisk rate. Export-orientation was one of the main policy targets of market-oriented reform in 1978.China sought to connect the global production supply chains by opening up special economic zones that are basically export oriented industrial goods manufacturing zones.

China’s Trade patterns suggest that China’s trade pattern can be explained on the basis of Heckscher-Ohlin model which suggest that China has factor endowment in the terms of abundant skilled labor while the its other trade partner such as US, Eurozone, Japan, Asean (Singapore, Thailand, Malaysia and Philippines primarily) and Korea has factor endowments in the form of abundant capital. Although, it is bit of over-simplifying the trade model of China here but still if we look at the overall trade pattern we can still find that most of the exports of China are labor-intensive such as manufacturing and assembly of electronic products and goods such as mobile phones, laptops and desktops and telecommunication equipment’s, electrical equipment, mining and manufacturing equipment. Most of the exports of China are basically labor intensive or even if it require capital investments it also require large scale labor investments.

One of the important policies that China used is to attract foreign direct investment into these zones to utilizes it cheap and abundant labor. This policy helped China to protect its domestic market while gaining export expertise. This also led to the origination of the imbalance between imports and exports in China as imports were restricted into the import markets while exports were promoted. Another import piece in this tail is that most of the imports in China were intermediate goods such as energy and raw materials, and not consumer goods, which were only 5% of the imports.

By 1992, China’s open door policy just took off .Excited by the early success of the special economic zone across the country.it led to an era where exports grow on roughly 17% over the years. The increase in trade was even faster after China joined for the WTO in 2001 which made China the part of multilateral trade body that accounts for nearly all of the world trade.China rose from having a share of global goods exports to the tune of less than 3% to more than 10% within a decade. The US and Germany each have a share that is just smaller than that of China, while Japan accounts for around another 5%. So, altogether, these four countries account for roughly over one-third of global goods trade.

There are certain reports in Media that export figures in China have been inflated by the use of faked invoices to disguise capital flows and evade controls .But even if the China has not surpassed US as the largest trading nation, eventually it will, given its size of the population.

This will mark another emergence of China as the largest trading nation in the world. This milestone that China achieved over a period of time has been due to the focus in trade reforms they have adopted from 1978-2012 under the leadership of their leader Deng Xiaoping .As far as the Size of the Chinese economy is concerned; it is the world’s second biggest economy, world’s biggest energy user, world’s biggest new car market and has the world’s largest foreign currency reserves.

The main reason for Chinese success in trade arena is the fact that significant portion of China’s trade involves importing raw materials and parts to be assembled into finished products and re-exported any activity that an activity that provides only a modest value. According to the world trade organization secretariat China’s foreign trade volume reached $4.16 trillion, making it the country with largest trade volume in the world. China has diversified its trade partners over this time such as Europe and US slowing while the interactions with the Asean countries and other emerging markets continuing to rise. China has relied long on mass quantities at low prices but its products lacked competitiveness, quality, recognizable brands and effective channels. In 2013, even though China share of High tech exports and electro-mechanical exports reached 57.3% and 30%, effectively most of technology for the high tech industry still remains in the hands of companies of foreign origin. In terms of services exports, China service exports of $539.6 billion is still half of what the US services exports. As more and more countries are becoming more competitive as low cost manufacturing hub for companies around the globe providing good infrastructure and high quality cheap skills, it is putting extra added pressure on China to move away from “High Quantity, low price model “and bring in more intelligent and higher value in goods manufacturing .China must therefore shift its strength from quantity of products to quality of products and improve on its value of work. This will ultimately help in China to derive greater value in the production chain. Another area of concern for China especially in the high tech sector is the concerns for the improvement in the protection of the Intellectual property and optimization of resource allocation for research and development.

As for the trade in services, the structural reforms in the service industry, encouraging innovation and a level playing field , and further opening up the will help bridge the gap between China and US in service exports. To become a stable pioneer nation in trade with respect to Eurozone and US in the long run China’s overall competitiveness in the long run, home-grown multi-national companies need to lead the way by looking to advance form cheap labor-arbitrage to intelligence and value based arbitrage model in the service and manufacturing exports industry ,make more powerful intellectual property and patent protection regimes to foster innovation and capture the fear psychosis among the foreign multinationals ,foster research and technology capabilities ,take a stance in international brand  positioning and build international sales channel.

 

References:

http://www.econ.ucdavis.edu/faculty/woo/Woo.US-China%20statement.1Feb04.pdf

http://www.bbc.com/news/business-25682149

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20140303000004&cid=1202

http://www.economist.com/news/europe/21600166-how-china-affecting-europes-position-world-trading-places

 

 

 

 

 

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