Trade
Stoking the engines of China’s next growth wave
Authors: Ligang Song, ANU, Yixiao Zhou, ANU, and Luke Hurst, Asialink Business
The highly publicised meeting between US President Donald Trump and Chinese President Xi Jinping at the recent G20 Osaka summit signals a temporary truce in the trade war between the world’s two largest economies. While the return of China and the United States to the negotiating table may give international markets some breathing space, big questions about global growth remain.
Central to this is whether a rising China will continue to grow and transition into a high-income economy, or whether trade tensions — and other complex domestic headwinds — will derail this growth.
Over the past four decades, China has experienced three growth surges — the initial ‘reform and opening up’ from the late 1970s, taxation reform in the 1990s, and accession to the World Trade Organization in 2001. This incremental approach to reform transformed China into the largest contributor to global economic growth. Its economy averaged annual growth of more than 9 per cent from 1978 to 2018 with per capita income reaching US$9723 and total foreign trade reaching US$4.6 trillion in 2018.
China’s current growth is still robust but has slowed considerably since 2010. Buffeted by an ongoing drop in domestic productivity, an ageing population and a decline in domestic savings, China finds itself at an economic crossroads where tough choices are required to enable future growth.
There is still great scope for further reforms to unleash a new round of high-quality growth in China.
For China to achieve this transition to a high-income economy, it will be essential to stoke the fires of three growth engines. These are not newly-found sources of growth but are areas that have long been identified as critical, yet still have great room for reform and improvement.
The first growth engine will be fuelled by deep institutional reform to drive improvements in the business and regulatory environment and deepen integration with global markets.
In the latest World Bank Ease of Doing Business index, China ranked only 46 out of 190 — for comparison Hong Kong ranked 4th, Australia 18th, and Kosovo was 44th.
Deepening institutional reform will require China and its trading partners to uphold the multilateral trading system, while exploring how that system can be reformed to accommodate new trade and investment flows. This is both pressing and confronting given the current trend of ‘deglobalisation’, rising protectionism, and the global ‘rules based economic disorder’.
Although uncertainty around the future of globalisation is high, the temporary truce between the United States and China could provide a boost to growth prospects for both sides as well as the wider global economy.
To improve the business environment and encourage investment, the Chinese government has lowered value-added tax from 16 to 13 per cent. Even though the policy saw a fall in tax revenue in the first half of this year, it is expected that the policy will enhance growth from the second half of 2019. The impact of this significant change in fiscal policy can be further enhanced by possible cuts in official interest rates, following similar attempts by a number of economies including Australia, to boost economic growth.
The second engine of growth will be stoked by continuing to open the door to global innovation and foreign investment.
China’s goods, capital and labour markets have all been liberalised to varying degrees over the past four decades. But China needs to continue to lower barriers to market entry if it is to encourage global collaboration on research, innovation and business. There are a number of promising moves in this direction — for example, China’s new Foreign Investment Law adds the principle of ‘non-interference’ to the FDI approval process and increases financial penalties for those who infringe trademark rights. In financial services, caps on foreign ownership of local banks were removed and foreign insurance companies were allowed to establish businesses.
These policies are helping China to increase its attractiveness as a destination for FDI. But significant potential remains to grow the total share of FDI in China’s overall investment. This will become increasingly important as domestic savings fall and new FDI is required to sustain growth.
The third engine will be powered by China’s capacity to realise its human capital potential and contribute to the global talent pool. Significant education and skills gaps need to be addressed to…
Trade
Self-Reliance and Openness: Core Principles of China’s Third Plenary Session
The Third Plenum communique from the CCP indicates a prioritization of stability and compromise in response to China’s economic challenges. It highlights the concept of Chinese-style modernization and establishes political guidelines for balancing regulation and market forces.
The CCP’s Third Plenum communique signals a focus on stability and compromise in the face of China’s economic challenges. It emphasises Chinese-style modernisation and sets political directions for balancing regulation and market forces. While not as groundbreaking as previous plenums, it acknowledges the importance of market mechanisms and technological self-reliance, aiming to address issues like high youth unemployment and private sector uncertainty. The communique seeks to navigate the complexities of global competition and domestic innovation, potentially reshaping global supply chains and trade dynamics. Overall, it presents a pragmatic blueprint for China’s economic future.
Source : Self-reliance and openness central pillars of China’s Third Plenum | East Asia Forum
Trade
Trade Prevails Over Political Persuasions in China-Germany Relations
China and Germany maintain a strong bilateral relationship, rooted in economic cooperation despite ideological differences. Recent visits and agreements focus on expanding trade and addressing mutual concerns, navigating challenges while nurturing ties.
Evolving Bilateral Ties
China and Germany share a strong bilateral relationship, rooted in history since 1972. This connection has seen moments of cooperation intertwined with periods of tension. German Chancellor Olaf Scholz’s April 2024 visit underscores Germany’s commitment to fostering this partnership, reflecting a mutual interest in maintaining economic ties despite ideological differences.
Economic Pragmatism
As the second and third largest global economies, China and Germany’s economic interdependence is crucial. Germany emerged as China’s primary trading partner in 2023, with trade values reaching €254.4 billion (US$280 billion). In response to global scrutiny, Germany has taken a balanced approach, emphasizing economic stability over political discord. This was evident during Scholz’s prior visit in November 2022, where his diplomatic tone contrasted with broader EU sentiments.
Facing Challenges Together
Despite increasing public skepticism in Germany regarding China’s global influence and human rights issues, both nations continue to seek common ground. Their October 2023 Joint Statement highlights intentions to pursue cooperation in areas like carbon neutrality and open markets. To navigate these complex terrains, Germany can utilize its institutional frameworks to enhance dialogue, while also considering supply chain diversification to reduce dependency on China. The intertwining nature of their economies suggests that, despite challenges, both countries will continue to prioritize their substantial trade relations.
Source : Trade trumps political persuasions in China–Germany relations
Trade
Fixing fragmentation in the settlement of international trade disputes
Fragmentation in global trade due to the lack of development in multilateral trade rules at the WTO has led to an increase in FTAs. The Appellate Body impasse has further exacerbated fragmentation, requiring a multilateral approach for reform.
Fragmentation in Global Trade
Fragmentation in global trade is not new. With the slow development of multilateral trade rules at the World Trade Organization (WTO), governments have turned to free trade agreements (FTAs). As of 2023, almost 600 bilateral and regional trade agreements have been notified to the WTO, leading to growing fragmentation in trade rules, business activities, and international relations. But until recently, trade dispute settlements have predominantly remained within the WTO.
Challenges with WTO Dispute Settlement
The demise of the Appellate Body increased fragmentation in both the interpretation and enforcement of trade law. A small number of WTO Members created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) as a temporary solution, but in its current form, it cannot properly address fragmentation. Since its creation in 2020, the MPIA has only attracted 26 parties, and its rulings have not been consistent with previous decisions made by the Appellate Body, rendering WTO case law increasingly fragmented.
The Path Forward for Global Trade
Maintaining the integrity and predictability of the global trading system while reducing fragmentation requires restoring the WTO’s authority. At the 12th WTO Ministerial Conference in 2022, governments agreed to re-establish a functional dispute settlement system by 2024. Reaching a consensus will be difficult, and negotiations will take time. A critical mass-based, open plurilateral approach provides a viable alternative way to reform the appellate mechanism, as WTO Members are committed to reforming the dispute settlement system.
Source : Fixing fragmentation in the settlement of international trade disputes
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