How is China’s Economic Transition Contributing to World Trade Volatility?

China’s economy transition is one of major factors that slow world trade down, according to World Bank’s new published paper Global Trade Watch: Trade Development in 2015. This paper attributes global trade volatility in 2015 to emerging markets, along with persistently weak demand and globally cyclical changes. “If China’s imports had not fallen in 2015, world merchandise import volume growth would have been 2.1 percent instead of the actual 1.7 percent,” based on what’s written in the paper.

The mechanism in which China’s transition has induced world trade volatility is subtle yet significant. China has been striving to restructure its aggregate demand from investment-driven to consumption-driven; furthermore, in terms of trade structure, less export-reliance is desirable since they are looking into higher demand for domestic consumption. However, the level of domestic consumption as percentage of GDP is about 37%, compared to around 70% in the US, is still far lower than a level that can support a sustainable economy growth. China’s transition has been slow, and GDP growth is sacrificed now for longer term development. Therefore, the loss of GDP growth is more directly linked to the changes in trade balance of China.

图片 1

Imports to China contracted in 2015, as shown in Table 1, the contraction accounts for nearly one fourth of the world’s total imports. The change in imports can be traced back to lower GDP growth. On the supply side, manufacturing sector is the main drag of GDP growth, while it relies most on imported raw materials, so imports slow down accordingly. On the demand side, investment imports, which contributes nearly 60% of total imports, started to decline. The shrink in industrial sector and foreign investment has jointly influence international supply chain and global trade.

Effects of imports can be easily observed, but how exports pattern has been affected is trickier to think about, as it also concerns how other countries demand has changed around China. To start with, slowing down production definitely lead to lower exports. For example, steel production growth has slowed to almost zero, and residential construction is not as heated as was before. Besides, the economic contraction in Russia and Japan accounts for almost one fourth of exports decline, as a result of weak international demand, as shown in Table 2.

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When both trade volumes depressed in China, other countries around the world will suffer, because China has been playing an irreplaceable role in global trade. As estimated by IMF, “a one percentage point slowdown in Chinese growth translates into a 0.3 percentage point decline for other Asian countries”, and “recent experience suggests that spillovers to China’s neighbors in Asia might have become even larger lately”.

Although the paper stated that world trade rebounded during the latter half of 2015, the short-term outlook of global trade may not be so good. The spillover effect is magnifying the commodity price downturn and self-reinforcing, so I believe the probable recover will not come until later. Nonetheless, if it were to become reality, China’s rebalancing from investment to consumption will in the long run create opportunities world widely. Higher consumption will inevitably draw higher exports for goods and services. In addition, the rising wages in China once it becomes well-developed will benefit countries that stands for lower labor costs.

References:

Cristina Constantinescu, Aaditya Mattoo, and Michele Ruta. “Global trade watch: trade developments in 2015”. World Bank Group. March 9, 2016.

http://www.worldbank.org/en/news/press-release/2016/03/09/emerging-economies-drive-global-trade-volatility-in-2015

Managing China’s Economic Transition

 

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One Response to How is China’s Economic Transition Contributing to World Trade Volatility?

  1. When I first saw the blog title, my intuition was that China’s transition will encourage domestic consumption and reduce import, therefore causing trade volatility. But apparently it is more than that, because China’s transition is slow, and the consumption rate is still extremely low. So I think it is a clever idea to link China’s economy transition to world trade volatility through China’s GDP growth, instead of directly seeking relationship between those two.
    As far as I am concerned, the greatest driver of China’s economy slow down is the fact that the reduction of government expenditure is faster than the growth of consumer demand. The lack of government expenditure also reduces the level of net export, if taking balance of payment into account. This is a factor that you failed to mention in your blog, but I just figured that it could also be an alternative way of answering your question.
    In the face of large global economies slowing down, including China, world trade can hardly remain active. China, as a very big global trader, and external countries are mutually influencing each other. And the influence of China economy slowing down over world trade activities is inevitable. But I agree with your conclusion that in the long run, if China’s economy transition is successful, world trade will also benefit from it.

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