Exports diversification as a key point of China’s trade strategy

Размещено на http://www.allbest.ru/

Размещено на http://www.allbest.ru/

Exports diversification as a key point of China's trade strategy

Shalupayeva Natallia

Abstract

Nowadays, economic diversification remains a key challenge for most developing countries. The world trading system is developing from universal liberalization to increased protectionism which imposes additional difficulties in countries' exports development and puts export diversification at the heart of a strategy for economic diversification.

China's foreign trade is also in a critical period of rapid development and transformation at present. China is building a new pattern of integration into the world economic system, but its economic transformation is not smooth and faces problems. Taking into account China's high reliance on exports, one of the most important threat to China's economic development - the susceptibility to fluctuations in global economy - is largely due to a low level of Chinese exports diversification. In order to achieve a more sustainable long-term economic growth and hedge against the impact of external shocks China needs to diversify its exports markets, range of exported products and trade methods.

Purpose. The purpose of the article is the research of practical aspects of exports diversification in China, identification of features and problems of China's exports product and market diversification, diversification of trade methods and high-tech products exports diversification.

Methodology. The methodological basis of the study is presented by the theories of foreign trade and industrial policy, as well as by the researches realized in the field of exports diversification. The information basis of the study are the databases of UNCTAD, WTO and National Bureau of Statistics of China. General scientific methods, systematic approach, economic-statistical methods are used in the research.

Findings. An analysis of China's exports diversification was realized in the article, including revealing of features and problems of China's exports product and market diversification, diversification of trade methods and high-tech products exports diversification, as well as identification of some driving effects of China's exports diversification on its economic development and substantiation of the significance to improve its export diversification strategy in order to reduce economic risks and promote the sustainable development of foreign trade.

Keywords: economic diversification, export diversification, product diversification of exports, market diversification of exports, diversification of trade methods, high-tech products exports, People's Republic of China.

Анотація

Диверсифікація експорту як ключова складова зовнішньоторговельної стратегії Китаю

Шалупаєва Н.С.

Ключові слова: диверсифікація економіки, диверсифікація експорту, товарна диверсифікація експорту, географічна диверсифікація експорту, диверсифікація методів торгівлі, експорт високотехнологічноїпродукції, Китайська Народна Республіка.

Аннотация

Диверсификация экспорта как ключевая составляющая внешнеторговой стратегии Китая

Шалупаева Н.С.

В настоящее время экономическая диверсификация остается ключевой проблемой для большинства развивающихся стран. Мировая торговая система развивается от всеобщей либерализации к усилению протекционизма, что создает дополнительные трудности для развития экспорта стран и ставит диверсификацию экспорта в центр стратегии экономической диверсификации.

Внешняя торговля Китая в настоящее время также переживает критический период быстрого развития и трансформации. Китай выстраивает новую модель интеграции в мировую экономическую систему, но экономическая трансформация не проходит гладко и сталкивается с рядом проблем. Принимая во внимание высокую зависимость Китая от экспорта, одна из наиболее серьезных угроз для экономического развития Китая - высокая подверженность колебаниям в мировой экономике - в значительной степени обусловлена низким уровнем диверсификации экспорта страны. Для достижения более устойчивого долгосрочного экономического роста и защиты от воздействия внешних шоков Китаю необходимо диверсифицировать свои экспортные рынки, ассортимент экспортируемой продукции и методы торговли.

Цель статьи. Целью статьи является исследование практических аспектов диверсификации экспорта Китая, выявление особенностей и проблем товарной и рыночной диверсификации китайского экспорта, диверсификации методов торговли и экспорта высокотехнологичной продукции.

Методология. Методологическую основу исследования составляют теории внешней торговли и промышленной политики, а также исследования, проведенные в области диверсификации экспорта. Информационной основой исследования являются базы данных ЮНКТАД, ВТО и Национального статистического бюро Китая. В исследовании использованы общенаучные методы, системный подход, экономико-статистические методы.

Выводы. В статье был проведен анализ диверсификации экспорта Китая, в том числе выявлены особенности и проблемы товарной и рыночной диверсификации экспорта Китая, диверсификации методов торговли и экспорта высокотехнологичной продукции, а также выявлен ряд эффектов диверсификации китайского экспорта на экономическое развитие страны и обоснована необходимость совершенствования стратегии диверсификации экспорта Китая для снижения экономических рисков и содействия устойчивому развитию внешней торговли.

Ключевые слова: диверсификация экономики, диверсификация экспорта, товарная диверсификация экспорта, географическая диверсификация экспорта, диверсификация методов торговли, экспорт высокотехнологичной продукции, Китайская Народная Республика.

Main part

Introduction. Nowadays, economic diversification remains a key challenge for most developing countries. The challenge of diversification is greatest for countries with the lowest incomes and for countries whose economies are dominated by commodities or minerals. For these countries, economic diversification is inextricably linked with the structural transformation of their economies and achievement of higher levels of productivity. The current global downturn in trade poses a particular challenge for countries and regions with a very narrow industrial base. But more broadly, stagnating global growth and the imperative in many developing countries to increase the number and quality of jobs in the face of a rapidly rising working population, call for effective strategies to diversify trade and production to support countries to regain economic growth, raise productivity, and curb volatility.

Export diversification, closely associated with a broader range of production activities and competitiveness agenda, is at the heart of a strategy for economic diversification. Export diversification is a crucial determinant of economic growth for low-income countries (LICs) [IMF, 2014]. The effect is not only statistically significant but also economically important: a one standard deviation increase in export diversification is shown to increase the average annual growth rate by 0.8 percentage points for LICs [IMF, 2014]. At the same time in modern conditions the world trading system is developing from universal liberalization to increased protectionism which imposes additional difficulties in countries' exports development. So, export diversification should be an important growth policy target not only for LICs, but for most of countries, especially developing economies and economies in transition.

China has transformed from a poor rural country into one of the main economic powers as a result of the economic reforms initiated in the late 1970s. The sources of the success of China's economy can be found first and foremost in the effective use of foreign capital to modernize the national economy and the use of the comparative advantage in the form of unlimited cheap labour resources.

China's opening to the outside world began with the 1979 law on joint ventures and the creation of special economic zones in 1980. Prior to 1978, China's foreign trade sector was subject to strict central planning. So, the Ministry of Foreign Trade limited trading rights to a few large foreign trade corporations, imports and exports were fixed in physical terms, and the exchange rate was deliberately overvalued to subsidize imports and discourage exports. Under such an autarkic regime, China's share of world trade was only 0.6% by 1977. After 1978, China decentralized the foreign trade sector, increased trading rights, liberalized prices, reduced tariff and nontariff barriers, devalued the RMB (which fell by more than 70% in real terms between 1980 and 1995), allowed convertibility for current-account transactions, and encouraged foreign investment and processing trade by foreign-funded firms. Private trading companies were authorized in 1998, and already by 2000 more than 1,000 private enterprises had acquired the right to import and export, along with more than 150,000 foreign-funded firms. Prior to joining the WTO, China already had significantly reduced its tariff and nontariff barriers and increased trading rights. After China's accession to the WTO the foreign trade system has continued to be more open, stable, transparent and in line with market economic rules. So, China revised and issued new «Foreign Trade Law», «Regulations on Administration of Import and Export of Goods» and related departmental regulations in accordance with WTO rules. Those and other reforms helped link China to the world price system, allowed firms to specialize according to their comparative cost advantage, and helped consumers realize the gains from trade.

From the beginning of its 1978 reforms, much of China's development planning had focused on modernizing its industrial base. To accomplish this objective, its government provided strong financial incentives to attract FDI, encouraged multinationals to offshore their lower-value stages of production processes to China, and pursued export - oriented growth strategies that often came at the expense of domestic importation and consumption. By around 2006, however, this strategy transformed into one that increasingly prioritized the development of homegrown technology. Data from China's National Bureau of Statistics suggest that this policy shift was significant, given a noticeable drop in China's imported technology expenditures to GDP ratios that started in that year. It also set the stage for the ambitious «Made in China 2025» initiative and innovation objectives set out in China's 13th and 14-th Five-Year Plans.

Within the last four decades FDI inflows into China have played a significant role in the economic growth, because they provided the Chinese economy with access to finances, advanced technologies or modern management methods. For many years, the Chinese export-oriented model of development based on FDI and the exports of labor-intensive goods with low added value has been effective. China has become the world's largest exporter and holder of foreign exchange reserves as well as one of the largest importers and exporters of foreign capital in the form of FDI. Moreover, it has developed at an impressive rate which was unattainable for the world's largest economies [Kostecka-Tomaszewska, 2018].

However, the influx of cheap labour-seeking FDI perpetuates the current development model. Thus, the hitherto model of development, based on low labour costs and access to cheap resources is disadvantageous in the long run and cannot be the basis of permanent economic security and prosperity, and can even strand China in the middle income trap. The adopted model of development is also burdened with high risk, because the increase in wages reduces competitiveness and attractiveness of the market for foreign capital. Therefore, low wages and cost-based competition have become an essential structural problem for the Chinese economy and it requires immediate in-depth reforms, the lack of which is going to prevent China from joining the group of the highly developed economies.

So, nowadays Chinese economy faces with serious structural problems, and at present China's foreign trade and trade policy are in a critical period of transformation. The economic growth mechanism, which relies on the availability of cheap labour and low production costs, exporting labour-intensive products of low added value, artificial undervaluation of the yuan, foreign direct investment, foreign technologies and intense inward investment loses its effectiveness and cannot guarantee a sustainable growth of the economy in the long term [Kostecka-Tomaszewska, 2018].

To face new challenges China is radically changing its economic and trade strategy. Faced with the new COVID - 19 pandemic that has revealed the extreme fragility of global market structures, Beijing decided to adopt an economic internalization plan, seeking to create measures to prioritize the domestic consumer market and strengthen its economy from inside. In May 2020, Chinese president Xi Jinping proposed a new economic model - the «dual circulation strategy» (DCS) at a Politburo meeting. China's dual circulation strategy seeks to spur China's domestic demand on one hand and simultaneously develop conditions to facilitate foreign investment and boost production for exports on the other [Zhang Zoey, 2020]. Thus, the two-pronged strategy refers to the parallel emphasis on an `internal circulation' and an `international circulation' and a shift towards becoming a demand and innovation-driven economy.

Chinese experts call also this strategy a «double inversion» and believe that it will be the key to transform the Chinese consumer market in the most important part of national GDP. Although the strategy was officially launched recently, some measures were already being taken previously and contributed to the Chinese choice for this change. For example, in 2020, the share of exports in Chinese GDP fell to 17%. On the other hand, domestic consumption had a significant increase and last year reached 58% of the national GDP.

In fact, China's DCS is not only a quick and passive response to the unpredictability in global markets, but the dual circulation strategy follows China's long-held goal of rebalancing its economy. In the 1980s, China's former leader Deng Xiaoping first adopted the `reform and opening-up policy' and began implementing an export-oriented development strategy. The 2008 global financial crisis exposed the Chinese fast-growing economy to the fragility of the export-led economic model, prompting Chinese policymakers to rebalance growth towards cultivating and supplying domestic demand. In addition, there was an important reason - the export-oriented trade pattern where Chinese businesses import raw materials to process and then export to foreign markets had locked China into the middle order of the global value chain.

To achieve sustainable growth and move beyond the limitations holding back its economic expansion, China began rolling out consistent economic reforms over the past decade, including supply-side structural reform in 2015 and Made in China 2025 announced in 2018. The ultimate goal has been to shift itself from being an «export and investment-led» economy to a «demand and innovation-driven» economy. As a result, from 2006 to 2019, the trade - to-GDP ratio of China slid from 64.5 to 35.7%, and the portion of domestic private consumption marginally arose, stabilizing at 38.8% of GDP in 2019 - barely higher than a decade earlier [Zhang Zoey, 2020].

However, this does not mean that exports will no longer be important in the Chinese economy. The «dual circulation» strategy (DCS) is a two-pronged development strategy that seeks to spur China's domestic demand in addition to catering to export markets and will create conditions that allow domestic and foreign markets to boost each other.

So, at present, China's foreign trade is in a critical period of rapid development and transformation. China is building a new pattern of integration into the world economic system and opening-up policy. China's economic transformation is not smooth and faces many problems. Recent dramatic changes in the global trade environment, promoting economic nationalism over a free market economy, has made the issue of exports development and diversification more urgent for China. The ongoing COVID-19 pandemic has additionally provoked global concerns on supply chain dependency, as different countries have been forced to rethink their reliance on other countries (especially in strategic industries, such as medical supplies and access to pharmaceutical raw ingredients), which will likely accelerate supply chain shifts out of China. In addition, the widening rift with the US, that poses additional challenges for China's exports development. In order to achieve a more sustainable long-term economic growth and hedge against the impact of external shocks China needs to diversify its exports markets, range of exported products and trade methods, that determines the significance and the relevance of the topic of the article.

Theoretical framework.

Discussion on export diversification in the literature mainly concentrates either on the effects of export diversification or on policy response regarding the diversification process.

There are two possible explanations for the effects of export diversification. The first is its impact on export growth. There are no many researches on the relationship between export diversification and export growth. More recently, however, several scholars have begun to investigate such issues. Evenett and Venables (2002) showed that an export expansion along the extensive margin plays a significant role for export growth in developing countries. They showed that about one third of the export growth of developing countries between 1970 and 1997 were due to exports of old goods to new markets. Shepherd (2008) reinforced the idea as stated, in that the trade growth of developing countries can take place through the creation of trading relationships with new partners. The second possible explanations for the effects of export diversification is its impact on export instability. In contrast with the first case, many scholars have made significant efforts regarding this issue. Massell (1964) came up with several interesting findings by concluding that there is a significant positive relationship between instability of export earnings and concentration of exports. Another cross sectional analysis conducted by Soutar (1977) concluded that geographic concentration is one of the significant variables in explaining the instability in less developed countries (LDCs) from 1957 to 1969. As a systematic approach, Love (1979) developed a model based on Markowitz's portfolio model to explain the relationship between a commodity concentration and export fluctuations. Recently, Samen (2006) stated that countries specializing in a narrow group of export products expose themselves to instability of export earnings [Jung Joo La, 2011].

As the majority of studies find that export diversification increases economic growth, the expected question is what determines export diversification. However, this issue is still relatively unexplored in the existing literature. The lack of a systematic theoretical framework could serve as a possible explanation for the scarcity of empirical investigation.

A few studies give evidence about a set of diversification determinates, estimated either from wide panel of countries all over the world (Parteka and Tambieri, 2011; Dennins and Shepherd, 2011; Agosin et al, 2011) a specific region (Cabral, 2010) or specific country (Lim, 2010). Parteka and Tambieri (2011) provide a two-stage analysis: first, they investigate the relation between export diversification, on one hand, and the level of development and country fixed effects on the other. Agosin et al. (201 1) focus on the process of reforms (such as trade and financial liberalisation), structural and macroeconomic factors (factor endowments and economic distance, exchange rate and exchange rate volatility). In the case of one single country, which is Chile, Gutierrez de Pineres and Ferrantino (1997) find that process of export diversification is enhanced by exchange rate depreciation and trade reforms. Recent empirical literature relies on heterogeneous trade models in order to identify factors that influence export diversification [Balavac, 2012].

Discussion

Overall, despite significantly rising domestic and international risks and challenges, China's foreign trade scored both steady growth in quantity and continuous improvement in quality. Trade has become an increasingly important part of China's overall economy, and it has been a significant tool used for economic modernization. As reported by WTO in 2020, exports of goods in 2019 were USD 2,499.4 billion and imports USD 2,078.4 billion, while exports and imports of services in 2019 reached USD 281.6 billion and USD 497 billion respectively. According to the World Bank data of 2019, China's trade surplus for goods stood at USD 425.2 billion, an increase from USD 395.1 billion in 2018. The overall trade balance (including services) was USD 164.1 billion in 2019, from 103 billion the previous year (table 1).

Table 1. China's foreign trade main indicators in 2015-2019