Introduction
China represents the second largest economy in the world, after the United States of America, in terms of absolute GDP. China’s economy has been growing rapidly over the years. This has made Chinese trade to expand at a breakneck pace. China is a socialist republic government that is run by the Communist Party. The country has favorable domestic policies that have significantly helped to channel government and foreign direct investment into expanding the country’s production capabilities. The good business environment facilitated by the favorable policies has helped to enhance the growth of industries in China. Some of the factors that have propelled China’s economy include technological advances, competitive shipping and a strong international demand for China (Peng et al., 2008). As such, China’s wealth provides it with significant influence within the international system. China is better equipped to wield market access and economic sanctions as effective tools for influencing others due to its wealth. Moreover, China’s economic muscle attracts other countries to enter mutually beneficial economic agreements. Therefore, the Chinese government can effectively leverage the size and reach of its economy to influence other states as well as the global economic order. Trade provides China its economic strength in the global environment. The features present in the Chinese economy have shaped its approach to international trade. Chinese emphasis on international partnerships, promotion and diversification of exports, and its commitment to trade facilitation represent its approach to international trade.
International Partnerships
To cement its position in the international business, China has been aggressive in pursuing its free trade agreements (FTAs) with countries and trading blocks around the world. One of the most significant multilateral free trade agreements involving China is the ASEAN. The policy allows dutiable and tax reduction on particular products and services. This has helped China to become one of the world’s manufacturing hubs. The signing of the China-ASEAN free trade agreement will continue to have a significant impact on China’s development in global sourcing.
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China has over ten Free Trade Agreements in operations with various others under negotiation and consideration. The Free Trade Agreements offers China new platforms to open up to the outside and speed up domestic reforms (Antkiewicz & Whalley, 2005). Therefore, the agreements serve to facilitate China’s integration into the global economy and strengthen its economic cooperation with other economies around the world. The Free Trade Agreements have seen China deeply integrated into the global economy, particularly following its accession to the World Trade Organization. China has removed trade barriers and has concluded several Free Trade Agreements with neighboring countries and key trading partners. The recent trends strongly suggest that China considers Free Trade Agreements as vital to achieving its political, economic and strategic interests in the global context.
China is very keen to conclude more Free Trade Agreements with its major trade partners to lower tariffs as well as gain market access. This will enable China to boost the competitiveness of its exports. The provisions of Free Trade Agreements that effectively clarify rules of origin and further simplify customs procedures have played a significant role in facilitating trade between China and its trading partners. Tariff reductions along with China’s tax exemption on imported raw materials and other inputs used in the manufacture of export goods are have played a crucial role in in the Country’s rise as a global production network hub. As a result, several multinational enterprises such as Apple have set up businesses in China hence helping it to integrate into global production networks. The significance of Free Trade Agreements in bolstering the status of China within production networks presents a vital incentive for it to pursue more trade deals with more countries around the globe.
The Free Trade Agreements signed by China are of great significance to its foreign policy. China is capable of maintaining friendly and cooperative relations with many countries while strengthening economic ties with its trade partners. For instance, most of the Free Trade Agreements include some provisions calling for dialogue and cooperation among the respective trade pact parties. As such, the Free Trade Agreements serve to effectively stabilize the development and maintenance of peaceful relations with neighbors. Therefore, the Free Trade Agreements are a useful card for China to play in the process of strengthening bilateral ties around the globe.
China is fortunate to have one of the busiest Free Trade Agreements in Asia. The agreements in place include Free Trade Agreements with countries such as New Zealand, Costa Rica, Switzerland and Chile. Moreover, there are some Free Trade Agreements in the pipeline that will considerably boost China’s economic integration with Japan, Australia, Norway, and the Republic of Korea as well as the Gulf Cooperation Council countries of Oman, Qatar, Kuwait, Saudi Arabia, Bahrain and the United Arab Emirates. Furthermore, there are a number of initiatives that are underway to effectively liberalize trade and facilitate investment within the region such as the Regional Comprehensive Economic Partnership (RCEP), which incorporates a range of Asia-Pacific countries such as ASEAN, India, China, Japan, Australia, and New Zealand.
China has considerably widened its focus in Free Trade Agreements with New Zealand and Singapore in the recent past. In addition to trade liberalization in goods, the negotiations began to consider other areas. For instance, China put more emphasis on the negotiation of services. Consequently, the coverage of services and liberalization steps were particularly more vigorous. Various Singapore issues, particularly trade facilitation were part of the agenda of the negotiations. Additionally, China currently takes a more comprehensive approach to Free Trade Agreements. In particular, agreements with Switzerland and Iceland provided a wider coverage in goods, services as well as investments. It is, therefore, clear that China demonstrates a greater determination to engage in a higher degree of liberalization as well as to integrate with its trade partners.
Promotion and Diversification of Exports
The Chinese government has endeavored to promote exports by various means including the establishment of Special Economic Zones, duty drawbacks, tax and financial benefits, exchange rate management, and export insurances. The exports of foreign invested enterprises have increased significantly over a period due to the friendly export conditions offered by China. The increase in exports has effectively contributed to the rapid economic growth witnessed in the country’s economy. Following its membership to the World Trade Organization, China has tried to make its export promotion policies consistent with the regulations of the World Trade Organization. The country applies the export promotion measures that are permitted in the World Trade Organization system such as the export insurance schemes and duty drawbacks.
The export insurance schemes serve to reduce the risks faced by exporters hence increasing the production of goods for export. This strategy helps to increase a number of exports from the country hence facilitating a favorable Balance of Payment. Import duties are normally applied to imported goods and services. However, in China, a manufacturing entity that re-exports all or a portion of its finished product is eligible to apply for a duty drawback. This has the effect of lowering the cost of manufacturing products for exports in China. Consequently, the manufacturing entities dealing in exports are motivated to produce more exports hence boosting China’s capacity to produce commodities for export in the global context. The duty drawback provides a refund of a portion of the original duty payment. China has also pursued currency devaluation initiatives with the aim of promoting exports and limit imports. Currency devaluation has the effect of making exports cheaper and imports more expensive.
While the country’s stellar export performance is a well-established fact, China has also promoted export diversification. Much of the products that China exported majorly were labor intensive. The products consisted primarily of textiles, footwear, toys, clothing, sporting goods and travel goods. However, China diversified its export basket by getting involved in the assembly of technology-intensive products such as computers and telecommunication equipment during the early 2000s. Additionally, the country has recently experienced substantial export expansions in the form of more sophisticated electronics such as automated data processing equipment and office machines as well as other industry supplies (Dennis & Shepherd, 2011). Therefore, the shift for products that are technology intensive contributed to the rising shares of exports of transport and machinery equipment including electronics peaking at 43 percent in 2003.
The items in China’s export basket can be segregated based on a mix of five factors including skills, the scale of production, resource, technology content and stage of production. The skill factor attempts to group industries in the country depending on their requirement of skilled or unskilled manpower. The scale of production factor classifies industries in terms of whether they are large, medium or small. The resources factor of segregation attempts to differentiate the more capital intensive industries from less capital intensive industries or even more labor intensive industries from the industries that are less labor intensive. The technology content factor is primarily used for the purpose of assessing the quality of the exports in the high, medium or low technology segments by simply accounting for the direct and indirect technology content of the particular exports. The stage of production factor attempts to distinguish the export items on the basis of their use of finished items, semi-finished items or raw materials.
The share of high-tech export products is at approximately 32 percent of China’s total exports. This is because a lot of components of high-tech products are assembled in China to be exported as high-tech products. On the other hand, the share of the low and medium technology intensive exports is approximately 15 percent of the total exports. The unskilled labor intensive export products in China account for approximately 26 percent of China’s total exports. The share of China’s low and medium human capital intensive export products is approximately 12 percent of the total exports. Furthermore, China has significantly increased and diversified its export basket by facilitating the export of more technology intensive products as well as human capital intensive products. It is observable that China has made a conscious effort to export high-tech commodities to its major trading partners to enhance the variety of its exports as well as to increase foreign exchange earnings (Child & Tse, 2001). It is also evident that the skill content of China’s exports has significantly increased. However, such an observation does not necessarily mean that China has experienced a skill upgrading in its production techniques. In a real sense, China imports intermediate goods with high skilled content and then assemble them for exports them. It is, therefore, demonstrable that China practices export promotion and diversification in the context international trade.
Commitment to Trade Facilitation
The current global environment is characterized by surging trade protectionism, a weak economy, and mounting challenges. As a result, seeking shared development and strengthening cooperation have become shared global goals. In particular, the promotion of trade facilitation has become a significant issue for national governments and business sectors. The World Trade Organization Doha round-negotiations have injected new vitality into the global trade. As an important emerging economy, China has made significant contributions in terms of trade facilitation by safeguarding a multilateral trade system as well as promoting the liberalization of global trade.
Through the China Council for the Promotion of International Trade, China has made significant innovative and reform efforts. China has developed an international trade single window platform that is widely utilized in Shanghai, Tianjin, Guangdong as well as other major trading areas in the country. The country has also established an integrated custom clearance system that will increase the efficiency of international transactions (Ahn et al., 2011). Additionally, the country has in place a collective duty collection system and a paperless declaration that is implemented nation-wide. To improve trade efficiency, lower trade costs, and shorten processing times, China has promoted the mutual exchange of information, mutual ratification of supervision and mutual assistance of enforcement between and among related agencies, particularly between customs and AQSIQ. Therefore, China is instrumental in facilitating international business hence promoting efficiency in the context of international trade.
China’s Trade Investment
There are high levels of foreign direct investments (FDI) flowing into China. However, China lags behind other economic leaders in terms of outbound foreign direct investment (OFDI). Outbound foreign direct investments are an important source of economic influence, but China has not emphasized them in it foreign trade agenda. Although China is the world’s number one exporter and number two exporter, it has the twelfth largest total outbound foreign direct investments stock in the world. This is relatively low compared to other advanced economies. It is also worth pointing out that China’s annual outbound foreign direct investment has grown considerably over the last few years.
In 2015, China was the second largest source of foreign direct investment in the world, at $145.7 billion. China's outbound foreign direct investments are intertwined with political interests. For instance, China sent $600 million to Cambodia in developmental aid. This was provided after Cambodia blocked ASEAN from criticizing China and endorsed China’s position on resolving its South China Sea claims through bilateral means. China’s investment in ASEAN in 2015 was $8.155 billion whereas that of the United States was $12.191 billion. Additionally, only 7 percent of China’s total trade investments went into East and South East Asia. This may be due to lack of natural resource opportunities in the region compared to other parts of the globe such as Africa. Between 2015 and 2016, China’s trade investment in Africa increased by more than five-fold (Child & Tse, 2001). Moreover, a significant portion of Chinese outbound foreign direct investments flows into financial safe havens such as the British Grand Cayman Islands and the Virgin Islands, instead of supporting traditional overseas investment projects.
The historically low outflows of China were largely due to capital controls that restricted most types of investment. As such, most of the outflows were mostly dominated by large state-owned Chinese businesses. Additionally, some of the outflows went to investing in or acquiring foreign firms or to natural resources, particularly in the Latin America and the Caribbean. If the Chinese financial system adopts greater liberalization, capital controls may considerably loosen, leading to additional outflows as Chinese investors seek to diversify abroad.
Conclusion
In conclusion, is evident that the Chinese economy relies heavily on international trade. The country has emphasized the export of manufactured goods to its trade partners. China has utilized its wealth to influence the global market by signing trade agreements between regional trading pacts and individual states. The country has also promoted exports as well as diversification of exports. It is also clear that China has played a significant role in the facilitation of international trade in line with the WTO regulations.
References
Peng, M. W., Wang, D. Y., & Jiang, Y. (2008). An institution-based view of international business strategy: A focus on emerging economies. Journal of international business studies , 39 (5), 920-936.
Child, J., & Tse, D. K. (2001). China's transition and its implications for international business. Journal of international business studies , 32 (1), 5-21.
Cantwell, J., Dunning, J. H., & Lundan, S. M. (2010). An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment. Journal of International Business Studies , 41 (4), 567-586.
Child, J., & Tse, D. K. (2001). China's transition and its implications for international business. Journal of international business studies , 32 (1), 5-21.
Ahn, J., Khandelwal, A. K., & Wei, S. J. (2011). The role of intermediaries in facilitating trade. Journal of International Economics , 84 (1), 73-85.
Antkiewicz, A., & Whalley, J. (2005). China's new regional trade agreements. The World Economy , 28 (10), 1539-1557.
Dennis, A., & Shepherd, B. (2011). Trade facilitation and export diversification. The World Economy , 34 (1), 101-122.
