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China’s Technological Metamorphosis and Global Trade

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What sort of erosive effect might the latest technological advances have on global value chains?

Preliminary data available at the time of writing indicate that in 2015, the nominal value of world trade in goods contracted by 11.9%.[1] This drop is the first recorded since 2009, when international trade flows were seriously affected by the global financial crisis and fell by 23.9%. The 2015 downturn is entirely due to drops in prices, which are down an average 13.1%, heavily influenced by the deflationary pressures in markets such as petroleum and other commodities. However, it is perhaps even more important to underline that the increase in volumes of trade (+1.4%) was not only slight but also below the already low average growth rate for this variable between 2012 and 2014 (+2.2%).[2]

The 2015 outcome should be interpreted in the context of the last four years, during which global trade seems to have entered a low-growth regime that stands in stark contrast to the levels reached in the period immediately before the financial crisis. This phenomenon is the subject of increasing interest on the part of academic and institutional analysts, and a debate has opened up between two alternative interpretations that describe the slowdown as being either “cyclical” or “structural.”[3] Proponents of the former essentially explain low growth rates as being a consequence of the slow, unusual recovery of the global economy following the 2008–2009 crisis, noting that this still has not returned to a “true state of normality.” They argue that this affects trade, which will return to a healthier growth path once we have overcome the macroeconomic obstacles that are hindering growth at similar rates to the past.[4] Supporters of the second approach draw attention to changes in certain profound characteristics of global trade that functioned as driving forces for the huge boom of the 1990s. They argue that this acceleration was associated with unique events that led to “structural” modifications: for example, the large-scale liberalization of tariffs, the incorporation of Eastern European countries into the global economy, and China’s opening-up, all changes that eliminated restrictions and created new sources of trade.

One particular aspect which is connected to one of these changes is the fact that China has become the heart of a network of global manufacturing value chains (GMVCs). This mode of production has led to the sudden creation of new trade flows, especially between developing countries in Asia and developed countries. Exploiting the advantages of specialization in the GMVC model is one of the pillars that have been holding up the expansion of global trade since the 1990s.

That said, how far was the emergence of these GMVCs a “unique event” whose role as a driving force for trade has gradually waned? More specifically, does China’s technological metamorphosis as it slowly leaves behind a profile based on low-complexity technologies signal an erosion of the strength of its demand for manufactures within GMVCs? Will the gradual spread and consolidation of its production capacities tend to reduce the dynamism of its imports? Could this be one of the factors behind the lower rates of growth that global trade has experienced in the postcrisis years?

This article addresses certain aspects of these questions using preliminary information that is not exhaustive. In particular, it analyzes the pattern of China’s trade in manufactures and the consequences of this on the country’s role as a source of supply and demand in markets for manufactures.

The Beginnings of a Downturn in China’s Role as the Driving Force for Global Trade?

First, it would be useful to establish an aggregate overview of the evolution of global trade and China’s share in these flows (Figure 1). It is clear that the stagnation of international trade that began in 2011 was not initially matched by China’s external demand (Figure 1).

 

Figure 1. Evolution of Global Trade and China’s Imports, 1996–2015

(In current US$, indexes 2010=100 and percentages).

Capture

Source: Prepared in-house with data from the Netherlands Bureau for Economic Policy Analysis (CPB) and China Customs.

Up to 2003, China’s total imports grew much faster than the global aggregate.[5] The share of these purchases reached a maximum of 11.4% before dropping in 2014 and 2015. If this change becomes consolidated, it will represent an important shift in the pattern of one of the strongest driving forces for global trade in recent decades. Not even the 2008–2009 crisis halted the rise of China’s relative importance as a market for the rest of the world. But in 2015, the estimated contraction of its imports (-14.4%) was 2.5 percentage points above that of global trade. Although it is hard to assess how this variable will develop over time, the signal that appeared in 2014–2015 clearly merits our attention.

 

Figure 2. Contribution of China’s Imports to the Rate of Change in Global Trade, 1997–2015

(Coefficients calculated on the basis of current prices)

(Coefficients)

 

Notes:

  1. The relative contribution is the ratio between the annual rate of change in China’s imports and the absolute value of the corresponding annual rate of change in global trade.
  2. The red bars indicate years in which the rate of change in global trade was negative.

Source: Prepared in-house with data from the CPB and China Customs.

The year 2015 can also be seen as an anomaly as nearly 14% of the reduction in global trade is explained by the drop in Chinese imports (Figure 2). This is the third year since the second half of the 1990s in which China’s demand has had a negative effect on trade. The previous two critical periods were 1998 and 2009. In 2001, China was a driving force for trade even when global flows contracted. Furthermore, in 2015, Chinese imports curbed global flows much more than during the two previous episodes. On the other hand, last year’s negative impact followed a five-year period of exceptionally high contributions on China’s part (2010–2014). These explain, on average, 35% of the positive change in global trade, although during the 2003–2008 boom, this contribution averaged 12%. This is due to the fact that, in a context of weak demand from other economies, China’s imports had been holding up the growth of total flows almost on their own. That support system broke down in 2015. It is clear that a large part of the 14.4% contraction in China’s imports is linked to the drop in commodity prices. But what is striking this time is that its demand for manufactures dropped by 6.0%, which is higher than the 5.3% fall in total imports.[6] In 2009, in contrast, China’s imports of manufactures contracted by 8.8%, while total global imports of manufactures dropped by 21.7%. In 2015, unlike what happened in 2009, China did not compensate for the global downturn. The net result is a decrease in the relative share of its purchases in the global total. As we will show in the following sections, this could be in line with changes in the manufacture demand pattern in the global market. Changes in the Technology Content of China’s Foreign Trade in Manufactures Since it became part of the global market, China has had a trade deficit in commodities and commodity derivatives and a surplus in manufactures. If manufactures are classified by technology content (Lall, 2000)[7] into low-technology, medium-technology, and high-technology goods, very similar export levels for low- and high-technology goods are revealed, and slightly lower ones for medium-technology goods, especially after 2011 (Figure 3). China has a trade surplus in all three, although this is greatest in the low-technology category, where its surplus is much higher due to its very low import levels.

 

Figure 3. Evolution of China’s Trade in Manufactures, by Technology Content, 1996–2015 (in billions of US$).

EXPORTS

 

IMPORTS

Source: Prepared in-house using COMTRADE data.

China’s gradual technological metamorphosis, which is reflected in the consolidation of its manufacturing sector, can be seen in changes to the composition of the surplus of trade in these activities.[8] The phenomenon is visible if we compare the structure of this balance of trade between two periods: 1996–2008, 13 years during which China consolidated its position as a major player in global trade and which culminated in the global financial crisis; and 2011–2015, a period which was characterized (as mentioned above) by the low growth of international trade.

 

Figure 4. Structure of China’s Balance of Trade in Manufactures, by Technology Content, 1996–2008 and 2011–2015(in percentages).

Source: Prepared in-house using COMTRADE data. The most significant change is the drop in the share of low-technology goods, which fell from 81% to 58% of the surplus.

In contrast, the importance of medium-technology goods increased, as did that of high-technology goods, but to a lesser extent. This change reveals two things. First, despite the ongoing transformation in the manufacturing sector that this data points to, it is significant that three-fifths of China’s trade surplus is in low-technology goods; in other words, the data reveals a certain “backwardness” on China’s part. Second, the relative expansion of the balance of trade originating in goods with greater technology content took place during a period in which exporting to the global market has been more difficult. This reveals that China’s production capacities have effectively matured and it may point to an increase in the number of production stages that can be carried out within the country’s borders. In any case, this would characterize the emergence of an intermediate skill profile. This overview is compatible with evidence that shows that the predominant type of technical change in China is of the “incremental, modular, and product architecture” type, while those forms traditionally classified as “technological innovation,” which give rise to disruptive change, are less significant (Warner, 2016). In any case, although the net improvement in high-technology goods (which now represent 26% of the balance of trade) may largely indicate exports linked to the more labor-intensive stages of those products, there is greater potential technological spillover in these activities than in those for low-technology goods. Integrated circuits are a noteworthy example. In 2005, China’s exports and imports represented, respectively, 6% and 24% of global trade; by 2015, these values had leaped upwards, reaching 21% and 39% of the global totals for these flows. However, China’s balance of trade was a deficit, with export levels representing around 35% of imports. It is clear that reducing these gaps is a matter of concern within Chinese public policy-making, given the importance that the 13th Five-Year Plan places on scientific and technological innovation, including the development of “intelligent manufacturing” and the use of robots (Tang, 2016). In short, in the postcrisis years, China’s trade in manufactures has been underpinned to a greater extent by activities of higher technological complexity. This is evidence that the of the gradual metamorphosis of the structure of the country’s comparative advantages, which are nudging it toward a state of intermediate technological mastery. However, what consequences has this relative progress had on its role as a source of demand in global trade? China’s Trade and the Dynamics of Global Manufacturing Value Chains As we argued in the first section, China’s integration into global trade has partly come about through the creation of GMVCs. The breaking down of goods production processes into different phases and the relocation of these to different countries have been driving factors for the import and export flows of the different economies that take part in GMVCs. This is a particular type of intra-industrial trade, one dominated by flows of intermediate goods. In dynamic terms, the stable growth of this type of chain requires a certain balance between the flows of inputs (imports) and outputs (exports) from the countries involved. A downturn in the growth of imports from one country in relation to an increase in its exports would make the international production chain less stable, which would lead the country in question to start to cover production stages that had previously been located elsewhere. This would have a negative impact on demand for the other countries that form part of the chain, in contrast to a state of balanced growth. The ongoing modification of China’s trade pattern that we described above shows early signs of this type of dynamic (Figure 5).

 

Figure 5. Growth in China’s Imports and Exports of Manufactures, by Technology

(Average annual rate of change, in percentages)

1997–2008 

 

2012–2015

 Note: The rate of change corresponds to the geometric average, taking 1996 and 2012 as benchmark years.

Source: Prepared in-house using COMTRADE data.

In the run-up to the financial crisis, China’s imports and exports of manufactures grew at solid rates of 21.7% and 15.7% per year, respectively, taking into account the three aforementioned technology-related manufacturing segments. It is worth pointing out that during this period, the lowest relative dynamism was recorded in China’s demand for low-technology goods, a signal of its budding capacity to cover a greater number of production stages without having to obtain inputs from abroad. In parallel with the stagnation of global trade, there was a noteworthy deceleration of growth in total imports and exports of manufactures (5.0% and 0.8% per year), which involved all three categories. It is worth analyzing the difference in the disparity in growth rates for the two types of flows between the two periods, that is, for the factor that guarantees the stability of GMVCs. One indicator to synthetically measure this disparity by product type and for the total could be defined as: , where gx and gm are, respectively, the average rate of change in exports and imports (Figure 6). The coefficient is zero in the event of the two rates being equal, and it increases when exports grow faster than imports, as is the case for China.

 

Figure 6. Coefficient of the Disparity between the Growth in China’s Exports and Imports of Manufactures, by Technology Content, 1997–2008 and 2012–2015

(Average annual rate of change, in percentages)

Note: The rate of change corresponds to the geometric average, taking 1996 and 2012 as benchmark years.

Source: Prepared in-house using COMTRADE data.

 

This measure shows that, during the period of accelerated growth in global trade and the expansion of GMVCs (1997–2008), this imbalance remained limited even though China’s exports grew at faster rates than its imports. In contrast, following the crisis, China’s contribution as an export supplier is notably higher than its contribution as an importer. In disaggregated terms, the significant exception to this is high-technology products, which have maintained a balanced dynamic of growth for both flows. In other words, in this sector alone, China’s growth as a market for suppliers outside its borders has tended to balance out its own contribution as a supplier. The remaining categories reveal an incipient erosion of the GMVCs which China takes part in: the growth in its exports tends to far exceed that of its imports. In other words, these activities are tending toward concentration within China, to the detriment of the international disintegration of the different stages in GMVCs. Additional evidence in this direction appears in a subsegment of China’s trade in manufactures that is made up of products that are related to production processes, including both capital goods and inputs (Figure 7).[9] These industrial manufactures (IMs) are linked to the typical trade in GMVCs themselves, excluding consumer goods and commodities.

 

Figure 7. Proportion of China’s Imports and Exports of Industrial Manufactures in Comparison to Global Trade Flows and Balance of Trade, 1996–2014

(in percentages and billions of US$)

Capture

Note: Industrial manufactures include headings 2.2, 4, and 5 of the BEC classification.

Source: Prepared in-house using COMTRADE data.

 

China’s share of global trade in IMs has grown very unequally for imports and exports. Up to 2003, both flows represented similar, increasing shares of the total global flows under this heading. However, since 2004, the share of Chinese exports has steadily continued to increase, reaching 17.2% in 2014. It is worth noting that the curve does not show any signs of having been affected by the large-scale cyclical disturbance that resulted from the 2008–2009 crisis. In contrast, China’s share of the global total of imports under these headings initially stabilized at about 8%, before moving up a step to 10%. This disparity is reflected in the growing surplus of China’s trade under this heading. The consolidation of these trends would point to a weakening of trade in manufactures, and they may be compounded by other incipient phenomena, such as the replacement of labor-intensive processes carried out in developing countries by automation and robots in developed countries (Shotter and Whipp, 2016; O’Connor, 2016).

 

Conclusions

In the postcrisis context of weak global trade, in 2015, China’s share in total imports fell for the first time since its dramatic entry into the global market. The ongoing changes in China’s international integration profile, which currently place it at an intermediate technological skill level, and the gradual lengthening of its own production chains may be having a negative impact on the strength of its external demand. This phenomenon centers on trade in manufactures and may partly explain the lower growth rates currently experienced by global trade.

 

References

Constantinescu, C.; Mattoo, A.; and Ruta, M. 2014. “Slow Trade.” Finance & Development 51 (4), December. Constantinescu, C.; Mattoo, A.; and Ruta, M. 2016. “Trade Developments in 2015.” Global Trade Watch, World Bank Group. ECB. 2015. “Understanding the Weakness in World Trade.” Economic Bulletin 3: 33–42. Giordano, P., coordinator. 2014. “Facing Headwinds. Policies to Support a Trade Recovery in the Postcrisis Era.” Trade and Integration Monitor. Washington, DC: Inter-American Development Bank. Giordano, P., coordinator. 2015. “Double-Dip: Latin America and the Caribbean Facing the Contraction of World Trade.” Trade and Integration Monitor. Washington, DC: Inter-American Development Bank. Hoekman, B., editor. 2015. The Global Trade Slowdown: A New Normal? A VoxEU.org eBook. London, UK: CEPR Press. IMF. 2016. “Dissecting the Global Trade Slowdown.” World Economic Outlook (April): 54–56. Lall, S. 2000. “The Technological Structure and Performance of Developing Country Manufactured Exports, 1985–1998.” QEH Working Papers Series No. 44. Oxford. O’Connor, S. 2016. “Robots May Cut off the Path to Prosperity in the Developing World.” Financial Times, June 21. Shotter, J. and Whipp, L. 2016. “Robot Revolution Helps Adidas Bring Shoemaking Back to Germany.” Financial Times, June 8. Tang, S. 2016. “Nueva visión de China en el próximo lustro [New vision of China in the next five years].” China.org.cn. Available at: http://spanish.china.org.cn/txt/2016-03/14/content_38020673.htm (link in Spanish). Warner, E. 2016. “Intangible Innovation as an Engine of Development.” Integration and Trade 40 (Made in Chi-Lat): 282–297.

[1]According to data from the Netherlands Bureau for Economic Policy Analysis (CPB).

[2]Between 2003 and 2008, volumes of trade grew at an average annual rate of 6.2%.

[3]For Latin America and the Caribbean, see: Giordano (2014 and 2015); on the global phenomenon, see, among others: Constantinescu et al. (2014 and 2016); ECB (2015); IMF (2016); and Hoekman (2016).

[4]Macroeconomic factors have undoubtedly played a part in the current low growth rates of trade. The fact that the world’s main economies are recovering at different paces has not created positive feedback effects through external demand. Furthermore, the US dollar’s ongoing tendency to appreciate (which is due both to the fact that the US economy is performing relatively well and to the marked sense of uncertainty at the global level) is a deflationary factor for nominal flows, given that this is the currency that global trade is measured in. When the US dollar appreciates, a given price set in a local currency is then expressed as a lower number of dollars within the global trading system.

[5]According to data from the CPB and China Customs.

[6] Both rates were estimated on the basis of preliminary data with an available sample of 91 countries which accounts for nearly 94% of global exports in 2015.

[7] This tool does not allow the different production stages for goods to be rigorously separated, in particular for high-technology goods which may include components from labor-intensive phases, and does not necessarily reflect mastery of innovation capacities.

[8] Taking 2009 as a benchmark year, China’s surplus balance of trade in manufactures grew at an average annual rate of 14.6% but experienced a sudden slowdown in 2015, when it grew by only 1.2%.

[9] These are Broad Economic Categories (BEC) 2.2 (processed industrial supplies), 4 (capital goods, except transport equipment, and parts and accessories thereof), and 5 (transport equipment and parts and accessories thereof). The figures for this subset were taken from the total analyzed using the classification by technology content.

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