10 December 2021

Michael Gasiorek is Professor of Economics and Director of the UK Trade Policy Observatory at the University of Sussex and L. Alan Winters is Professor of Economics and Founding Director of UKTPO

China acceded to the World Trade Organisation twenty years ago. Yet despite being a member of the international trading club for two decades, China’s ‘role’ in the trading system continues to generate controversy  across a range of areas such as the alleged support to state-owned enterprises boosting their international competitiveness, restrictions on foreign direct investment in China and the ineffective intellectual property protection in China. In addition, and sometimes conflated with trade, there are technology-related security concerns and human rights abuses, notably with regard to the Uyghurs. The Covid-19 pandemic has also raised worries in some quarters about the vulnerability of supply chains, including over-reliance on particular suppliers such as China in critical sectors.

We do not discuss these issues specifically but rather seek to place them in context. First, China’s importance in the world economy: in 2002, China’s share in world GDP was 4.2% and in world exports just under 6%; by 2019 its share in both had risen to over 16%.[1]  In contrast the share of the US in world GDP in 2002 was over 31% and it had fallen to 24.5% by 2019. Important too is that real GDP per head in China has grown fourfold over this time period, whereas in comparison, in the UK, it has only grown by 40%. Hence while GDP per head in China in 2002 was only about 1/15th of that in the UK, by 2019 it had risen to over 1/5th. The world has never seen growth like this from such a large economy before. Moreover, it has never seen such a massive reduction in poverty as China has achieved.

Over that time period, the pattern of China’s exports has also changed significantly. If we compare the similarity of China’s export bundle in 2002 with its export bundle in 2019, the degree of overlap is of the order of 58%. In contrast, for the UK, the corresponding measure is 70%. The top three exported products (out of over 5,000) to the world by China in 2019 accounted for nearly 15% of Chinese exports, and were radio-telephony equipment (7.0%), integrated circuits (3.1%), and portable digital data processing machines (3.9%). These same products only accounted for a little over 3% in 2002.

The growth and the resultant changes go a long way towards explaining the concerns about some of China’s policies. Despite the rhetoric, the issues are not so much points of principle but rather about competitiveness and economic heft. China’s actions can now have a substantial impact on firms, industries and households in other countries. Indeed, there has been a lot of academic research on what is known as the ‘China shock’ in particular on employment and wages in the United States (for a recent view see here). Not surprisingly the story is quite nuanced. The evidence is that, while increased imports from China have adversely affected manufacturing jobs and wages, other factors such as changes in technology have had much greater effects, and that taking the economy overall, trade with China boosted US incomes and employment. However, that in certain industries, and in the regions / localities with high concentrations of those industries growing Chinese competition has had a negative impact.

Not only has Chinese economic growth lifted millions of Chinese people out of poverty, it has also had a substantial positive impact on the rest of the world as consumers and firms benefit from the variety and lower prices of imports from China. As a member of the WTO, China has been a ‘good’ member, for example with regard to its use of and responding to disputes, and has continued to liberalise its tariffs. In 2001, China’s average tariff was over 14%; by 2019 it was 2.5%. The concerns about Chinese policy have mostly been on areas where WTO rules have little to say rather than that China has broken the rules.

On the other hand, there is clearly some legitimacy behind the concerns regarding the degree of support given to Chinese firms and state-owned enterprises, the difficulties with regard to foreign direct investment, intellectual property protection or, indeed, with regard to the western view of human rights. 

The challenge for Western policymakers going forward is how to manage the relationship with China, which involves not just managing the economic relationship but also the existence of two quite different political systems and traditions. China’s economic influence will continue to grow, and, as in the Department of International Trade’s recent Trade Policy Outlook argues, China is likely to be the world’s largest economy by 2030.

The answer to this is not likely to lie in being more protectionist with regard to China (à la Donald Trump), but in a constructive engagement to try to devise a mutually acceptable set of rules, which will involve compromise on both sides. The rest of the world has to accept that China is different and that it has its own aspirations for how the world economy should look. Nevertheless, there is a need to uphold minimum standards with regard to human rights, safeguard legitimate security interests and to protecting investment. This takes us back to the WTO. There is much criticism of the WTO, some of which is no doubt justified. However, it does provide and should continue to provide a rules-based system precisely to help manage how countries deal with disruptions and economic change. The WTO is not a solution in and of itself, but is an important part of the jigsaw of managing complex political and economic relations.

Footnotes

[1] GDP data is from the World Bank’s World Development Indicators (in current dollars), and the trade data from UN Comtrade.

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