China stands at the top - or does it?

2014/02/12

The country will have succeeded when it is recognized as an advanced, high-end, global trading power


Though China has overtaken the United States as the world's biggest trader in goods, it still needs to find answers to several pressing problems to sustain the achievement.


Though the answer to some questions such as, "Is China an export-oriented economy?" or "Is the government pursuing a mercantilist policy" is no, there are others such as "Should China continue to increase its trade?" for which the answer is yes.


With a huge population of 1.36 billion and trade volume of over $4 trillion in 2013, China's per capita trade volume stood at only $3,059. In contrast, with an estimated total trade volume of $3.92 trillion, the US had a per capita trade volume of $12,366, nearly four times more than China's.


According to WTO statistics, the combined world total of goods imported and exported was $36.5 trillion in 2012, or about $5,000 per capita worldwide. Thus, China's per capita trade volume in 2013 was still lower than the world average. Based on WTO estimates for global trade growth at 2.5 percent, the total world trade volume for 2013 may have been $37.4 trillion. China's share in this was 11.1 percent, lower than its share in the world GDP (12 percent).


If China's per capita trade volume reaches the world average, its total trade volume would have been about $6.8 trillion. Since China is increasingly relying on domestic demand for sustainable economic growth, further growth in its overall trade seems more than justified.


The above-mentioned trade data and rankings are all based on Customs statistics, or the volume of goods leaving or entering the national border. This concept, known as "country of origin" has been used since the 19th century, but is slowly becoming obsolete. Experts say such a measure does not represent the real picture of the globalized economy and trade in the 21st century.


Global value chain, a new method that measures the trade volume in value-added terms, is slowly gaining ground. It was first suggested by Pascal Lamy, former director-general of the WTO and has been backed by global investment agencies such as the Organization for Economic Cooperation and Development and the Japan External Trade Organization. The proposal got more support when it was backed by the G20 nations during their 2013 summit in Saint Petersburg, Russia.


It is only a matter of time before the rest of the world also replaces the current "country of origin" measurement. According to the new measurement, a nation's export trade volume only includes the real added value in the country, and excludes the imported contents.


There is hardly any product that is really made in a single economy now. Rather, products are generally "made in the world".


Boeing aircraft, for instance, can hardly call itself a "made in the US" product. Its wing boxes are made in Japan, wing ice protection in the UK, vertical stabilizers in the US, horizontal stabilizers in Italy, raked wing tips in South Korea, cargo doors in Sweden, power doors in France, real fuselages in the US, central fuselages in Italy, tools/software and wiring in France, engines in the US and UK, landing gear and electric brakes in France, and vertical tail wings and cabin doors partially made in China. Only the final assembly of the aircraft is done in the US.


Most of Apple's iPad models, known as "made in China", have a wholesale price of $299 in the US. Out of this, Apple gets $163 for its patent, design and marketing, while Japan, Taiwan and the Philippines together account for $133 worth of components. That leaves only $4 for Foxconn, the final product assembler on the Chinese mainland as value added income.


However, if the same were measured by the current "country of origin" approach, $150 would be the Chinese mainland's share from export of very iPad unit.


Robert Koopman, chief economist of the United States International Trade Commission, a quasi-judicial federal agency, estimates that China's total export volume to the US is only 45 percent of the current official data.


While China's actual total trade volume based on the global value chain approach is still subject to accurate calculation, it is more or less certain that it will be smaller than that of the US, owing to the much higher domestic added value rate in the latter. In other words, based on the new GVC criteria, China is not yet the world's top trading power.


The fundamental factors governing the different global value chain ratios in various economies are the current global vertical division of labor between the US, the EU and Japan on the one hand, and China and other emerging economies on the other.


China can become a genuine world leader in trade if it can enhance its domestic value added ratio significantly. This calls for a significant upgrading of the trade structure, moving up the ladder of global division of labor and succeeding in the global horizontal competition of high value added, own brand products.


China has been moving fast in this direction. Its share of processing trade in total trade fell to 32.6 percent in 2013 from almost 50 percent before the global financial crisis. In this sense, China's achievement of being the top trading power by traditional, out-dated methods is just a new start to strive ahead, or work toward being an advanced, high-end, leading trading power.


The author is co-director of the China-US/EU Study Center under the China Association of International Trade in Beijing.


(Source: China Daily)