Eighteenth-century English merchants invented triangular trade, but China has carried their advancement to new heights. The export leg of the Chinese triangle is dominated by shipments of consumer merchandise to the US, Europe and Japan, collectively accounting for more than half of Chinese exports. The import leg draws vast quantities of raw materials and semi-finished components from the Middle East, Latin America and Asia. The result is a pattern of huge bilateral deficits and surpluses.
Unless politics intervenes – led by US trade protection – bilateral imbalances are certain to expand over the next decade, no matter what happens to the Chinese currency, the renminbi (RMB), and China’s global current account surplus. In 2005, China’s bilateral surplus with the US was around $200 billion, while its bilateral deficit with natural resource countries and semi-finished suppliers exceeded $100 billion.
Future expansion of triangular trade promises both great benefits for the world economy and acute friction with mercantilist preconceptions. The political challenge is to change the preconceptions, not the trade patterns.
Export changes
Equally predictable is the growing sophistication of Chinese exports. China has no interest in confining its export menu to labour-intensive manufactures. Textiles and clothing represented only 15% of Chinese exports in 2005. What’s taking their place? Electronics today; autos and aeroplane parts tomorrow. Today, sophisticated Chinese exports are assembled from imported inputs, but Chinese firms are integrating backwards and enlarging their offerings. Industrial firms abroad are right to worry about Chinese competition; and they are right to insist on better access to the Chinese market.
Behind the triangular pattern of trade and the growing sophistication of exports lies China’s unprecedented success in attracting investment by the world’s leading corporations. China and Hong Kong now host 8% of the world’s FDI stock, sharply up from 1990. This share can only grow, as more industrial firms conclude that they must produce in China to survive. Like England in the 19th century and America in the 20th, China is destined to become the world’s manufacturing centre in the 21st century.
China’s share in global exports will surely rise, but how fast? Between 1990 and 2005, Chinese exports expanded from under 2% to nearly 7% of the world total. This trajectory reflects two forces: China’s spectacular GDP growth, averaging around 9% annually, and the astounding rise in the Chinese trade ratio (merchandise imports plus exports) as a percentage of GDP, up from 37% in 1990 to 60% today. (For comparison, trade ratios are now 25% for Brazil, 21% for India, and 19% for the US.)
Since China is already top of the class, further rises in its trade ratio will likely be moderate. But if China’s economy grows at 15% annually in nominal terms (allowing for inflation and RMB appreciation), while world trade continues to grow at 8% annually, China could account for 12% of world exports in a decade.
Ten years on
Within a decade too, China will broadly challenge the US, Europe and Japan in a wide range of export markets. But China’s import prowess could prove equally potent for trade relations – if China cobbles together its own network of bilateral and regional trade agreements with willing partners in South-east Asia, and raw material suppliers in all quarters of the globe.
Chinese trade expansion will inevitably translate into a larger role in the Bretton Woods family. China has a derisory quota of just 3% in the IMF, and Chinese ministers are practically invisible at WTO meetings. This profile is bound to change.
Probably least predictable are China’s policies towards its current account surplus (nearly 7% of GDP in 2005) and foreign exchange reserves (approaching $1 trillion). To the consternation of the White House and congress, Chinese leaders are fundamentally unwilling to abandon the comforting stability of a currency anchor: Beijing has grudgingly appreciated the RMB against the dollar by only 4% since July 2005.
Economic and political forces guarantee a much larger appreciation of the RMB. What’s missing in today’s IMF debate is agreement about the appropriate magnitude of foreign exchange reserves, the corresponding path of current account balances, and the desirable trajectory of exchange rates – not only for China but also for the other large economies.
What are China’s aspirations? To displace Japan as Asia’s financial centre? To establish an Asian Monetary Fund? Until such questions are answered, it remains a mystery whether China’s payments surpluses are merely an accidental by-product of economic triumph, or an essential ingredient of China’s long-term financial strategy.
Gary Clyde Hufbauer is Reginald Jones senior fellow at the Institute for International Economics in Washington DC