World Gross Domestic Product (GDP) and trade suffered significantly as a result of the 2008 global financial crisis. There was some recovery during 2009-2012 but the world's export orientation has been declining gradually over the past few years. Several studies suggest that a 'new normal' is emerging, with trade growth unlikely to regain its pre-crisis strength. The World Bank (2015) has analysed the dynamics of the trade and income relationship and suggests that several factors have contributed to the declining long-run response of trade to income, including changes in the composition of world trade, particularly the relative importance of goods and service trade; changes in the structure of trade associated with the international fragmentation of production; changes in the composition of GDP, particularly the share of investment in aggregate demand in large developing countries like China; and changes in trade regimes, especially a rise in protectionism. In addition, several cyclical and structural factors have contributed to the persistence of the Commonwealth trade slowdown since 2012. Among the structural factors, the most prominent is China's settling onto a lower economic growth path.
As Figure-1 shows, over the three decades between 1980 and 2010, Chinese economy grew at an average rate of 10.05 per cent. This high growth rate of Chinese real GDP has slowed continuously since 2011. Between 2011 and 2018, the average rate of economic expansion in China has not reached the long-term economic growth rate of 10 per cent, achieving instead a modest 7.4 per cent per year (2.65 percentage points less than long-term GDP growth). In 2018, economic growth in China registered its lowest rate (6.6 per cent) since 1991. GDP growth further dropped to only 6 per cent in the fourth quarter of 2019, according to the National Bureau of Statistics of China. If the IMF's prediction turns out to be correct, economic growth in China will slow further over the next five years, and the rate of growth will be 5.7 per cent per year between 2020 and 2024.
The Chinese economy has been in an even more precarious situation since January 2020 as a result of the outbreak of the novel Coronavirus. Even though it is still too early to comment on the possible impacts of the Coronavirus outbreak, there is strong consensus regarding the huge economic loss that will be brought forth for the Chinese economy as well as for world trade. During the first two months of 2020, retail sales and industrial output plunged 20.5 per cent and 13.5 per cent, respectively, compared with the same period in 2019. China's US$14 trillion economies may contract by as much as 6 per cent in the first quarter of 2020 year on year. According to other estimates, GDP growth in the first quarter of 2020 has slowed to only 1.2 per cent year on year. The economic fallout induced by the epidemic may include recessions in the USA, the Eurozone and Japan, with a total loss of world GDP of as much as US$2.7 trillion. Earlier predictions suggested a slowed economy for China but the epidemic will make the situation much worse. China's economy may experience a significant shrinkage starting from 2020, potentially the worst in almost 50 years. The impacts of the Coronavirus outbreak in China could affect the global economy on both the demand and the supply side.
In the aftermath of the 2008 crisis, the global economic slowdown and the adverse consequences on Chinese exports, along with the China-USA trade war, made the pre-2010 double-digit growth rate unsustainable. Acknowledging this, the Chinese government in its 12th Five-Year Plan (2011-2015) focused on the domestic market, emphasising domestic consumer demand, addressing income inequality and other sustainable practices. In addition, the government is now attempting to regulate investment to avoid slumps in key sectors of the economy. Hence, since 2011, the Chinese economy has shifted its focus from import-intensive investment demand for manufacturing production towards consumption of services and domestic value-added manufacturing production.
Our finding suggests a declining contribution of investment in the economic growth of China. During the three decades beginning in the 1980s, the contribution of investment to GDP growth in China increased, from 3.1 per cent to 3.9 per cent to 5.7 per cent, respectively. However, between 2011 and 2016, this contribution dropped to 3.6 per cent. More recently, during 2017-2018, investment contributed only 2.3 per cent of the 6.7 per cent GDP growth in China. During 2001-2010, owing to its significant investment-based economy, China was one of the world's largest consumers of commodity products (since 2000), such as copper, lead, petroleum, zinc and iron. A large number of commodity-based economies had benefited from this substantial import demand.
COMMONWEALTH TRADE & CHINESE GROWTH: The sluggish economic growth of China since 2011 has affected different regions of the world in different ways depending on their exposure to China's economy. The reduction in China's investment demand resulting from the rebalancing of the Chinese economy led to a weakened import demand for exports of many Commonwealth nations. The most affected group of Commonwealth countries comprised the Commonwealth SSA countries, which are also among the largest trading partners of China in Africa.
Even though the Africa-China relationship dates back many decades, the economic relationship has surged since 2000. China's Going Global Strategy, announced in 2001, gave rise to and strengthened this, encouraging foreign trade and outward foreign direct investment (FDI) from China. Even though this strategy was not targeted at African countries, a large portion of China's FDI went to the continent for resource exploration projects. There were three main channels of economic interaction between Sub-Saharan Africa (SSA) and China: trade, FDI and aid (economic cooperation). In terms of the trade interaction, this was concentrated largely in a few countries and product groups. In 2012, natural resources accounted for 66 per cent of Africa's exports to China, with the highest contribution from Commonwealth member countries such as South Africa and Zambia.
China continues to be the largest trade partner of SSA but Africa-USA trade has dipped in recent years. Along with the reasons mentioned above, several factors have had adverse impacts on many trading partners, and these include SSA's trade relationship with China in recent years. Five factors are mentioned in the literature as an important determinant of China-SSA trade during 2001-2010: the comparative advantage of China in labour- and capital-intensive production; abundant natural resources in Africa; China's rapid economic growth; its emphasis on building new infrastructure in China and Africa; and the economics of scale in its light manufacturing sectors. Other Commonwealth regions - Small and Vulnerable Economies (SVEs), Least Developed Countries (LDCs) and Small Island Developing States (SIDS) - also have a substantial trade relationship with China. Some of the major export-oriented countries, in particular, have benefited from China's investment-induced increased demand for commodities and raw materials since 2000.
Between 2000 and 2016, total trade of the Commonwealth with China expanded 8.4-fold, whereas that with the rest of the world grew only by 1.1 times (UNCTADstat 2020). As well as Commonwealth SSA countries, Australia, Singapore, the UK and several other member countries have strong export reliance on China. However, China's recent unprecedented economic slowdown means that the Commonwealth countries' combined export decline is an estimated at US$450 billion. Nearly 54 per cent of this decline is attributed to the advanced economies of Australia, Canada and the UK. Among developing Commonwealth countries, India and Nigeria have contributed about 21 per cent. While many developing member countries account for a relatively low share of global trade, the economically and socially damaging effects of any trade slowdown are amplified within the context of highly concentrated export baskets.
Figure-2 illustrates the different regions' share of Commonwealth exports to China. The largest share is contributed by SIDS economies, followed by SSA, LDCs and SVEs. During 2001-2011, while SSA and LDCs experienced an increasing share, SVEs and SIDS saw a decline. SSA's increasing share shows a slight decline from 2012. The shares of LDCs, SIDS and SSA during 2011 were 1.7 per cent, 20 per cent and 8.4 per cent, respectively; in 2018, these had dropped to 1.6 per cent, 19.9 per cent and 6.4 per cent. Despite this declining trend, export shares to China of SVEs and SIDS have been increasing consistently over the past decade (2011-2018).
Statistics show that the Chinese economy registered a remarkable rate of growth from 2001 followed by a temporary disruption during the global financial crisis, a quick recovery and then a deceleration (for several structural reasons, as explained earlier). Hand-in-hand with this, Commonwealth exports experienced a boom during the 2001-2011 time period, then faltered during the 2008 global economic crisis. Despite a modest recovery from the crisis, merchandise and export trade then experienced a contraction until 2016 just like China's economic performance. However, during 2017-2018, Commonwealth trade showed signs of a recovery despite the continual decline in China's economic growth. Thus, there is a strong association between China's economic performance and the Commonwealth trade expansion for the past two decades(Figure-2). Nevertheless, starting from 2011, and more specifically in the recent years of 2017-2018, this long-term relationship has weakened. Since 2017, we can observe Commonwealth economies' exports increasing despite China's sluggish economic growth.
Statistics also shows that during China's double-digit growth years, the export volume of all Commonwealth regions increased, backed primarily up by the revamped investment and manufacturing sector of the Chinese economy. However, from 2011, all regions other than LDCs experienced either a contraction (SSA, SVEs) or stagnancy (SIDS) of their respective merchandise and services exports. During this time period, SSA and SVEs' export volume reduced by about US$100 billion and US$14 billion, respectively. The years of contraction were followed by a modest recovery registered for all Commonwealth areas during 2017-2018. Since 2011, the association of China's GDP with SSA and SVE weakened only slightly; however, such a long-term relationship has waned substantially for SIDS and LDCs. The recent recovery of Commonwealth regions since 2017 implies that, even though Chinese GDP growth continues to decline, the strength of adverse effects on Commonwealth trade is declining. Findings obtained from this analysis imply that, despite the sluggish economic growth of the Chinese economy, Commonwealth SSA and SVEs continue to have a modest relationship with the economy of China.
Dr. Syed Mortuza Asif Ehsan, Assistant Professor, Department of Economics, North South University, Dhaka, [email protected]
Dr. Salamat Ali, Economic Adviser-Trade Economist, Trade, Oceans and Natural Resource Directorate at the Commonwealth Secretariat.
[The article is based on International Trade Working Paper-20202/04, published by the Commonwealth Secretariat]