What does China’s declining trade dependence mean?
Superiority stemming from market size and industrial concentration, and the consequences of this

China has been a key factor in the so-called “great trade collapse” and “slow trade.” The rapid rise in China’s dependence on trade was caused by its emergence as the “world’s factory” and the proliferation of “Made in China” goods following its accession to the WTO, while the subsequent decline in dependence has been caused by the market shares of “Made in China” goods hitting a ceiling and by the growth of internal manufacturing.

The advance of internal manufacturing in China can also be seen in the increase in value added domestically as a percentage of exports (domestic value added ratio). This rise has been fueled by the fact that the electrical and electronics industry has replaced the textile industry as the leading export sector.

The decline in China’s trade dependence caused by irreversible factors other than the financial crisis, namely internal manufacturing. That is attributable to the size of its economy and expectations of its growth potential, as well as China’s unique advantage in terms of depth of industrial concentration. The financial crisis then hastened internal manufacturing.

Although China’s economic growth is expected to slow in the medium term, the “slow trade” issue will not be easily resolved, as the country’s dependence on trade is expected to continue to gradually decline. As China builds its presence as a “global market,” companies will likely ramp up internal manufacturing.

More than ever before, firms that rely on global value chains (GVCs) are finding themselves at the mercy of supply chain disruptions originating in China. A short-term risk that is a cause for concern is that the Omicron strain or another new COVID variant could start spreading in Guangdong, Jiangsu, or other provinces with industrial production and export facilities, leading to frequent lockdowns.

China’s declining dependence on trade means that its export industries are maintaining high levels of competitiveness due to internal manufacturing, which will stall the economic development of less developed countries (LDCs) that are following China (least-industrialized countries), i.e., stand in the way of Asia’s “flying geese” model of development.

From a GVC perspective, it is unlikely that China will move aggressively toward dividing the world into isolated economic blocs. China has emerged as an exporter of intermediate goods as well as finished goods, and has become an indispensable presence in GVCs. This means not only increased technological capabilities, but also greater dependence on developed country markets. China is also the world’s largest importer of intermediate goods. The world’s manufacturing industry cannot exist without China, but China’s manufacturing industry cannot survive without the rest of the world, either.

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