China’s dual circulation strategy is a step towards sustainable trade
- The world is not turning its back on trade or globalisation, but it is being driven towards a more nuanced approach with a more realistic balance than the previous ‘more is better’ mindset
- The US, EU, Japan, India, Australia and other leading trade nations are also, to one degree or another, making similar adjustments. Expect the process to be messy
The prevailing presumption since at least the 1990s, across both developed and developing nations, has been the more trade, the better. The efficiencies and hoped-for geostrategic benefits of deep economic integration were seen as far outweighing any dislocations that might occur.
Whether by happenstance or design, China’s timing during this period was impeccable. It revved up its export engine at the precise moment the large markets of the West were most hospitable, both philosophically and fiscally, to absorbing Chinese imports and investing heavily in China.
This new era is being driven by the confluence of three factors. First, there is a growing belief in the West that it gravely underestimated the deleterious effects that accompanied China’s integration into the global trade system.
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Third, the Covid-19 pandemic highlights the risks and vulnerabilities inherent in deep trade integration, spurring countries and companies to reduce reliance on other economies.
The world is not turning its back on trade or globalisation, but these factors are driving us towards a more nuanced approach than the previous “more is better” mindset. The trade landscape China will have to navigate henceforth will be considerably less benign than the one it has traversed for the past two decades.
The circulations referred to are “external circulation” – production for exports – and “internal circulation”, or production for domestic consumption.
While China’s focus for the better part of the past three decades has been on external circulation, the dual circulation strategy will place a heightened emphasis on internal circulation while not forsaking the export goose that has laid the golden eggs.
Although details on the new strategy have been sparse, China is essentially seeking to maintain its ability to engage globally in trade, finance and technology where and when it suits China’s interest.
Is China’s ‘dual circulation’ strategy just rehashing an old economic idea?
There are contradictions and challenges. The steps necessary to spur domestic demand, such as by raising wages, will also undercut China’s export competitiveness. While the export growth model has delivered success so far, the challenge now is to develop domestic demand for the next stage. But this will require a large and complex rebalancing that will necessarily spill over into the trade realm.
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The emergence of this new era in trade will inevitably bring a certain amount of turbulence in the short term. Relations will be frayed, barriers and restrictions will rise and inefficiencies and costs will be imposed. However, there is no way to escape the simple fact that the existing framework for trade has become unsustainable.
To be sustainable, trade needs to be conducted on mutually acceptable terms which balance economic gains with a broader basket of considerations, including the need to avoid overreliance on a single trade partner, a recognition of the inevitable intermingling of trade and geopolitics, and a greater accounting for the wide range of trade-related social and environmental issues which profoundly affect the lives of average citizens.
It would be hard to look at our current trade system and conclude that we have struck an acceptable and sustainable balance across these considerations.
China’s dual circulation strategy reflects its desire to rebalance in light of new realities. The US, EU, Japan, India, Australia and other leading trade nations are also, to one degree or another, making similar adjustments.
Expect the process to be messy. To the extent the current period of turmoil can ultimately produce a recalibrated approach to trade which reflects a more realistic balance, though, we will have taken a positive step towards a more sustainable trade system.
Stephen Olson is a research fellow at the Hinrich Foundation