A3 - Trade for development: the case of China

Summary

Thirty years ago, China was virtually absent from international trade. Thirty years later, a rare yet broad consensus around the world, one shared by both Americans and Chinese, is that ‘China depends too much on exports’. Indeed, exports are now almost 70% over the GDP (not of the GDP, please note)! And during this thirty-year period, China has enjoyed an average annual growth rate of about 9.6%.

China does have a problem of ‘too much trade, too little consumption’. Household consumption only accounts for about 35% of GDP, versus 51% of GDP held as national savings in 2007. There are various factors, including certain institutional deficiencies, which have kept household disposable income low as a proportion of national income. These factors have resulted in a relatively narrow domestic consumer goods market. But even were we to assume China's domestic consumer market to be normal (in terms of the common standard of East Asian economies at similar stages of development), say up to 60 per cent of GDP consumed by the household and government sectors (a proxy to the situation in China during much of the 1980s and 1990s), Chinese purchasing power for consumption would still be very small given the fact that China's per capita income is today still less than US$3,000. And companies, either local or multinational, would still try to export as much as possible because external markets, especially markets in developed countries, are far bigger with considerably more purchasing power.