Cautious Optimism on China's Foreign Trade

China has seen some encouraging signs in foreign trade this year，as a recovering global economy and improved domestic demand buoy imports and exports. But there are numerous uncertainties on the horizon and the main one is the rise of opposition to globalization in key market economies.  At the same time，China is grappling with the thorny problem of reducing leverage in the domestic economy and the need to reduce financial risk.  

In the first half of 2017，China's combined imports and exports reversed a six-year downturn. In the future，in the face of major uncertainties，globalization needs to be actively promoted alongside of a deepening of structural，supply side reforms to enhance the competitiveness of the foreign trade sector. China must also push ahead with its efforts to prevent systemic financial risks.

China's foreign trade grew a year-on-year 19.6% in the first half of 2017，reaching its highest level since 2011. Imports and exports had rebounded since the second half of 2016，reflecting the improvement in the domestic economy and an upturn in external demand. A number of policies were put in effect to stimulate domestic demand and promote steady trade growth，among them the "Belt and Road" initiative，a program that will benefit trade over the longer term. In the first half of this year，domestic fixed asset investment grew 8.6% year-on-year and total retail sales climbed 11%. Against this background，the global economy is expected to improve over the next two years.  On the external side，the European and Japanese economies continued to recover steadily in the first half of the year while emerging markets maintained high growth.

At the same time，the structure of the nation's trade is improving. In the first half of 2017，exports of high value-added mechanical and electrical products showed strong momentum，and imports of some high value equipment and key components gained pace. China's combined imports and exports with the countries covered under the ¡°Belt and Road¡± program grew 23.4% in the first half of the year，while total trade with Africa jumped 28.3%，outpacing the overall growth in foreign trade in the same period. This kind of demand from emerging markets is consistent with China's strategic trade and its opening to the outside world.

However，it is too soon to conclude that the foreign trade situation has stabilized as there were other factors contributing to the growth in import and exports this year.

First，there is the base factor.  China's combined imports and exports declined over the 2015-2016 period，and a high growth rate over a low base does not reflect a true recovery. In June alone，China's trade volume was 2.40 trillion yuan，still below the 2.44 trillion yuan recorded in September 2014 and 7.0% below the peak of 2.59 trillion yuan reached in December 2016. Although the monthly data are affected by seasonal factors，it is clear that China's trade has not yet fully recovered.

Second，prices are also an important factor. China's import and export price index in 2015 and 2016 trended lower，although there was a reversal in 2017，with the import and export price indices rising 13.5% and 5.6% respectively in the first four months of the year. Just as price factors enlarged the foreign trade decline of the previous two years，they contributed to the upturn this year.

Meanwhile，the renminbi also gained ground this year，reversing the depreciation seen over the previous two years.  If the trade totals are adjusted for the impact of exchange rates and price factors，import and export growth in the first half was far below the nominal growth rate for the period. In the first four months of 2017，the import volumes rose 8.2% and exports were up 13.4%.

On the whole，there is room for cautious optimism on the foreign trade outlook without being misled by the higher growth rate. Even so，there are still some severe challenges on both the domestic and external fronts.

Internal and External Challenges

One such challenge is the adoption of more protectionist policies by a number of developed countries. Over the past year or so，the counterattacks against globalization，partly reflected in the Brexit referendum in the United Kingdom and the "America first" agenda of US President Donald Trump，it is clear there are significant forces trying to change the multilateral global trading system. Although Brexit does not mean that Britain will become isolationist，and President Trump may not disavow all forms of global economic cooperation，the attempts at remodeling world trade rules will certainly weaken the momentum of trade growth. The European Commission's latest Trade and Investment Barrier Report shows that the number of foreign trade barriers reported by European Union exporters increased by 10% in 2016，and the total of trade barriers in more than 50 export markets around the world reached 372 as of the year-end. In the US，President Trump ordered an investigation into steel imports，which sparked global concern that the US was firing the first shot in a global trade war. According to forecasts of the International Monetary Fund，the World Trade Organization and other international organizations，the annual growth of world trade over the next five years will be around 3% to 4%. It will be extremely difficult to regain the high growth levels of the last three decades which reached an average of about 6%.

Reduced Competitiveness

The competitiveness of China's manufacturing sector has also lost ground. As reflected in global market share，China's trade competitiveness stagnated in 2015 and 2016 after more than a decade of improvement. In 2016，the US overtook China in total trade. Rising labor，financing and environmental protection costs have significantly affected China's foreign trade competitiveness. China also was affected by the vigorous efforts of major developed countries to recover lost manufacturing and reconstitute their competitive