Stability and Change in China's Foreign Trade

In July of this year，China unveiled its policy outline for the stable development of foreign trade. Given the major changes taking place at home and abroad，how can the nation's foreign trade make needed adjustments while maintaining a stable performance with good momentum for growth?

At present，China's foreign trade environment is extremely complex and subject to abrupt changes. Since the outbreak of the global financial crisis in 2008，the growth rate of China's foreign trade has continued to slow，slipping below the double-digit levels of the previous two decades. In 2009，the total import and export volume actually showed negative growth for the first time. In 2010 and 2011，growth recovered though from a low base of comparison. Between 2012 and 2014，trade growth was less than expected and in 2015 and 2016，growth turned negative once again. Since 2017，there has been good growth momentum，but this rebound needs to be consolidated.

The role of foreign trade in China's economic growth has been weakening. In 2009，for the first time，trade income elasticity showed a negative value of -1.95. Exports were a drag on economic growth. Trade income elasticity recovered in 2010 and 2011，with readings of 2.88 and 1.60，respectively. However，since 2012，export growth has lagged behind growth in gross domestic product. In 2015 and in 2016 there was negative growth in trade income elasticity of -0.28. Although foreign trade has resumed growth since 2017，it has had a limited effect on economic growth. In the first half of 2018，net exports contributed a negative -0.7% to GDP growth. In short，the pace of foreign trade growth has fallen much faster than expected. This is an important factor in China's economy entering a new normal of downward pressure.

Five Factors

China is confronted by five concurrent factors in the domestic and international environment.

First is the shift in growth momentum. The rising cost of labor，land and resources has undermined China's traditional comparative advantages. Some labor-intensive industries have already moved offshore as China's international competitiveness declines. At the same time，with capital accumulation becoming an important comparative advantage，capital-intensive products have gradually taken on an ever more important role in the China's product mix.  Foreign trade has shifted from a reliance on price advantage to a comprehensive competitive advantage. The search for new growth points is therefore critical.

Second is the restructuring of the domestic economy. Since China entered the post-industrial stage，the service sector has begun to eclipse manufacturing in terms of its contribution to economic growth. In 2010 the nation's industrial value added component reached 42.7% of the economy in nominal terms. The trend suggests a turning point in China's foreign trade development. This does not necessarily mean that the share of China's foreign trade in the world market will drop immediately，but it will certainly have a major impact on the medium and long-term growth rate of the nation's foreign trade and its economic structure.

Third is the restructuring of the global value chain. In the past two to three decades，the powerhouse for the development of global trade has been the formation and development of global value chains. Since the global crisis in 2008，global value chains have declined in total volume amid reorganization along regional lines. Global value chain restructuring has become a core variable affecting global trade development. According to various calculations，China's participation in the global value chain index has fallen year by year after reaching a peak in 2011. The processing sector's role in foreign trade has fallen sharply，and this inevitably will have an impact on the structure of China's foreign trade development.

Fourth is the uncertainty of external demand. The world economy has made a weak recovery，with a growing divergence between developed and emerging economies. At the same time，there are mounting risks from protectionism. In particular，the US has made use of its Section 301 trade mechanism to protect domestic industry ¡ª and China has retaliated. As a result，China is facing huge uncertainties in its exports to that critical market.

Fifth is a transition in foreign trade policy. With the rapid growth of foreign trade and a surplus in China's international balance of payments，the nation's foreign exchange reserves have hit record highs. China has adjusted its policy objectives in foreign trade，with the trade balance at the center of its calculations.  In 2004，China proposed moderate growth in foreign trade，and in 2005，it proposed a basic balance in its international payments. In 2007，it proposed an objective of reducing an excessive trade surplus. During the global crisis of 2008 and 2009，it still set targets of stabilizing foreign trade and reducing the trade surplus. As the growth rate of foreign trade has fallen from double digits to single digit and even negative growth，the goal of reaching balanced trade remains.

Maintaining Stability Amid Changes

Amid these major changes in the domestic and international environment，the role of foreign trade in China's economic development has remained a central question. Should China vigorously expand exports? Policy makers have had to grapple with this important issue. At the end of July 2018 China's central government put forward its policy proposals for maintaining stable foreign trade. What remains to be determined is how to promote change while ensuring stability and striving to implement short-term polici