China's Foreign Trade: A “New Normal”

• Published date: 01 March 2017
• Author: Francoise Lemoine,Deniz Unal
• Date: 01 March 2017
• DOI: http://doi.org/10.1111/cwe.12191

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China & World Economy / 1–21, Vol. 25, No. 2, 2017

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China’s Foreign Trade: A “New Normal”

Francoise Lemoine, Deniz Unal*

Abstract

Since the global financial crisis of 2007/2008, China’s foreign trade has continued

to grow faster than international trade, but its drivers are now different from those

prevailing before. The participation of the Chinese economy in the global production

chains through processing activities is no longer the main driver of its trade

performance. The new driving force of change is ordinary trade, based mainly on local

inputs and domestic demand. China, which played a major role in the globalization

process as an export base for multinational companies, is now shifting to having a

“normal” foreign trade system, which is more closely integrated into the domestic

economy.

Key words: China, domestic market growth model, foreign direct investment, foreign

trade

JEL codes: F1, F2, F15, F23, 053

I. Introduction

Since 2008, the global economy has been marked by slow growth, slow trade and

concerns over the future of globalization. The external conditions that favored China’s

extraordinary rise in world trade for two decades are in the process of disappearing. At

the same time, the structural changes taking place in China’s domestic economy are also

prompting China to alter the way in which it interacts with the rest of the world.

China’s foreign trade has continued to increase at a signifi cantly faster rate than that

of international trade. Between 2007 and 2015, China’s share in global exports increased

from 9 to 14 percent and its share in global imports from 6.5 to 9 percent. Since 2013,

China has been the leading global trade power.

However, China’s trade has slowed, and the economy is no longer driven by

external demand. The elasticity of trade to revenue has declined sharply since the global

fi nancial crisis. The proportion of foreign trade in China’s GDP has dwindled and is now

*Francoise Lemoine and Deniz Unal are economists from the Centre d'Etudes Prospectives et d'Informations

Internationales, France. Their email addresses are, respectively, francoise.lemoine@cepii.fr and deniz.unal@

cepii.fr.

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China’s Foreign Trade: A “New Normal”

Francoise Lemoine, Deniz Unal / 1–21, Vol. 25, No. 2, 2017

©2017 Institute of World Economics and Politics, Chinese Academy of Social Sciences

comparable to that observed in other large emerging countries. The economic growth

regime that prevailed in the mid-2000s in which international demand played a leading

role is no longer in place.

This article examines the ongoing changes in the foreign trade of the world’s

leading commercial power through the analysis of the two major customs regimes that

structure the Chinese foreign trade: processing trade and ordinary trade. Processing trade

covers imports (mainly comprising parts and components [P&C]), which are exempt

from customs duties as they are exclusively intended for re-export after processing or

assembly, and the corresponding exports. These processing activities reflect China’s

contribution to the global production chains and are directly connected to international

demand. Ordinary trade covers trade that is subject to normal customs duties. Exports

and imports are not directly related. Ordinary exports are mainly produced with local

inputs. Ordinary imports are primarily intended to be marketed or used domestically.

Foreign-funded firms account for the bulk of processing trade and Chinese firms

dominate ordinary trade.

This dichotomy helps to explain the structural changes taking place in China’s

foreign trade. Following several research works (Koopman et al., 2008; Liang, 2008;

Amiti and Freund, 2010; Wang and Yu, 2012), the present paper demonstrates that

processing trade has lost steam and it adds an original contribution to the existing

literature by emphasizing the dynamics of China’s ordinary trade, which has proved

resilient. We examine the consequences on the geographic and sectoral patterns of trade

fl ows.

The drivers of China’s foreign trade are now different from those that prevailed

before the crisis. China’s involvement in the global production chains, which was the

engine of its commercial ascent, has declined. The domestic demand and indigenous

capabilities are now the major factors infl uencing the evolution of foreign trade. The

“workshop of the world” model is being replaced by a “new normal” trade pattern.

This transition to a new normal has consequences for the geographic orientation of

China’s exports and imports. The dominance of high-income countries in China’s trade

has been reduced as trade has been rebalanced towards the developing economies.

Our analysis uses the statistics collected by Chinese customs, which include detailed

data by product, by partner country, by type of fi rm and by customs regime during the

period 1997–2012. For the most recent years (2013–2015) we used data published in the

monthly bulletin of China’s Customs Statistics.

We review the literature examining the determinants of the global trade slowdown

and the “China factor” in Section II. In Section III, we recap the key elements of

Chinese foreign trade from the late 1990s to the mid-2000s and discuss the changes