Tuesday 22 Aug 2017 | 21:26 | SYDNEY
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Chinese Trade

Overview

China is the largest trading partner of over 100 countries globally. For the past 30 years this trend has been driven by cheap manufactured goods being exported to countries all over the globe. But as China has grown to become the world’s second largest economy, it has also become a massive market in its own right.

Resource-rich countries such as Australia have significant trade surpluses with China, fuelled by skyrocketing Chinese demand for minerals and hydrocarbons. This is particularly pronounced in resource-rich developing countries in Asia, 89 percent of Mongolian and 70 percent of Turkmenistan’s exports go to China.  Likewise countries that produce high-end manufactured goods such as South Korea and Japan tend have a strong export reliance on China.

At the same time China’s traditional strength of low-cost manufacturing is being eroded by substantial wage increases in China’s manufacturing sector. It is unlikely that one country will be able to replace China simply because no other country besides India has the workforce to sustain such a manufacturing operation. Global supplies chains are more integrated than they have ever been and a product will generally have components from numerous countries, meaning that parts of China’s supply chains (as to whole product cycle) are flowing offshore.

Access to the Chinese market is a hotly contested space. Many governments are seeking free trade agreements and investment treaties with China. From an Australian perspective, the New Zealand-China arrangement provides a good model. New Zealand agricultural business have benefitted greatly from reduced tariffs. This is something Australia is seeking to emulate in negotiations with China. 

China’s major trading partners

China’s largest country-to-country trading relationship is with the United States. Unlike resource-rich countries, the United States still has a sizeable trade deficit with China. The deficit has stabilised in recent years. Trade statistics also don’t account for the fact that many products are part of multi-country supply chains. Products exported from China often have components manufactured in other countries.     

As a bloc, the EU is China’s largest trading partner and China is the EU’s second-largest (after the United States). One of the less developed trading relationships is India-China. Beijing and Delhi have set ambitious targets to increase bilateral trade.

Australia-China Free Trade Agreement

Under the leadership of Tony Abbott and Xi Jinping, new life has been breathed into negotiations for a free trade agreement between the two countries. During Tony Abbott’s April 2014 visit to Beijing, there were encouraging signs that an agreement could be reached before the end of 2014. This would be a break from nine years of fruitless negotiations. Roadblocks still exist such as Chinese agricultural tariffs for Australian companies and investment rules for state-owned enterprises in Australia. It remains to be seen if both sides can navigate these, but there is more political momentum in an Australia-China FTA than in the recent past.

Multilateral trade frameworks

The United States and China are pursuing different multilateral trade frameworks that currently exclude each other.

The Trans-Pacific Partnership (TPP), which is the brainchild of the United States, is an ambitious plan for an FTA being negotiated between a dozen countries which, if successful, will account for two-fifths of world trade. The twelve countries are the United States, Japan, Brunei, Malaysia, Vietnam, Singapore, Australia, New Zealand, Canada, Mexico, Chile and Peru. China’s absence from negotiations is notable, although US officials have indicated that China could be included later.

The Regional Comprehensive Economic Partnership (RCEP) is a Chinese-driven proposed FTA between the ten member states of the Association of Southeast Asian Nations (ASEAN) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, Korea and New Zealand). The RCEP would also account for approximately two-fifths of world trade.

Both sets of negotiations still face difficulties to get their proposals established. Multilateral trade negotiations tend to progress slowly by nature. In the meantime China has also shown a propensity to pursue bilateral FTA negotiations. 

What the Lowy Institute does

The Lowy Institute has numerous trade and country specialists that provide analysis of China’s trade, economy and the political calculations around China’s trading power. East Asia Program Director Dr Merriden Varrall and Nonresident Fellow Ms Linda Jakobson and others provide regular commentary on China issues. Non-resident Fellow Dr Stephen Grenville also frequently examines China’s trade and economy.