Mid-July 2024 saw two major events on China’s economic and trade sectors, the first with the Third Party Plenum (TPP) in Beijing, and the second with the World Trade Organisation’s (WTO) ninth biannual review of China’s trade policy. Countries around the world, including Australia, are deeply interested in how China’s economic trajectory will forge international trade relations into the future.

The 2024 WTO trade policy review of China

The WTO conducts periodic reviews of member countries to monitor their trade policies. Since joining in 2021, the WTO has conducted nine reviews of China, the most recent in July 17-19, 2024. The review consists of a 170-page report by the WTO, a report by China, and remarks from the Chairperson based on 72 interventions and 1,500 questions from member states. Statements from the US, the EU, and the UK are publicly available.

All reports highlight the burgeoning role of China in the global economy since the last review in 2021 and China’s active participation in the multilateral trading system and trade agreements. On many other issues, however, stark differences arise between the positions of China and other parties.

Problems of China’s domestic economic imbalance—the topic of Part 1 of this series—permeate the Secretariat’s report. It notes China’s high savings rate, that consumption could be boosted by increased social services, and the halt in the economic transition from industry to the services sector. China’s report only briefly mentions increased consumption in 2023 (post-COVID) and central-local government tax reform.

The Secretariat notes areas where China has liberalised the economy, which is the dominant theme of China’s report, while the Chair encourages China to address economic challenges through further liberalisation. The Secretariat notes the increased numbers of State-Owned Enterprises (SOEs) in key industries that can act as instruments of government policy, while China outlines measures to reform SOEs and support the private sector.

China’s industry policy is another prominent theme of the review. The WTO Secretariat notes a lack of transparency in China’s declaration of government support for industry, while the Chair noted concerns about industrial over-capacity. China argues its industry support is market-conforming.

A review of imports and exports

The review is underpinned by the trends and structures in China’s trade flows, both exports and imports. These are disaggregated in Figure 1 by a two-way classification of goods. It shows a massive long-term increase in the net balance (exports minus imports) of manufactured products, which account for 95 percent of China’s total exports. The WTO Secretariat notes China’s growing surplus in merchandise trade, and higher growth in intermediate goods, reflecting deeper value chain integration.

China’s trade balance for manufactures and primary products, 1992-23.

Source: UNComtrade, categorised by two-digit HS codes.

China’s imports are dominated by primary products (minerals, fuels, agricultural products). While total import values for all products have plateaued over the review period, China’s report notes that it has been the world’s second largest importer for 15 years in a row.

The balance of all products is shown in the green line, in the form of escalating net trade surpluses from the beginning of the 2000s. There is consensus that the magnitude of China’s trade and current account surpluses are unsustainable and undesirable. Explanations for the persistent surpluses in the literature vary from the role of the State in the economy to domestic imbalances, although explanations based on the savings-investment gap have long been questioned in China.

The discontent of importers from China

In submissions to the WTO review, most were concerned that China’s excessive exports of manufactured goods cause de-industrialisation. For example, the US writes that “The PRC has doubled down on its state-led, non-market approach to the economy, to the detriment of workers and businesses in the United States and other countries.”

The US has challenged China’s imports through complaints to the WTO, Section 301 tariffs on China’s imports in the Trump-Pence administration that escalated into a “trade war,” and a series of industry policies and export controls under the Biden-Harris administration. US barriers to the import of Chinese products such as steel and electric vehicles are shadowed by barriers from other developed countries, most recently the EU and Canada.

While statements to the WTO review have not been made public, there has also been an escalation in anti-dumping and anti-subsidy cases against China from developing countries. Cases come from India, South Africa, and a range of Latin American and Southeast Asian countries for products that include steel, metal sheets, chemicals, tyres, towers for wind turbines, and textiles. Adverse effects on industrialisation in developing countries threaten gains made in global development and China’s relations with the global South.

The discontents of exporters to China

A different set of issues arise in relation to China’s imports. Both the WTO Secretariat and China’s report note minor changes or improvements in import policies (tariffs, customs clearance rates and VAT). The Chair, however, raises concerns from members about import controls through Sanitary and Phyto-Sanitary measures, technical regulations that don’t align with international standards, and the role of State-Trading Enterprises in the import of key agricultural and mineral imports. The EU points out that these and other measures are used to pursue the objectives of import substitution, self-sufficiency, and economic coercion.

On a broader level, China’s representatives refute claims of over-capacity and economic coercion, and claim that China fulfils its WTO commitments. The Third Plenum Resolution claims that “external efforts to suppress and contain China are continuously escalating,” which, in a self-reinforcing loop, requires “systems for enhancing the resilience and security of industrial and supply chains.”  The “intensifying international competition” poses serious implications for open trading economies like Australia.

Australia’s trade position with China

In the statement by Australia to the WTO Trade Review, about one-third was dedicated to China’s positive role in the WTO, one-third on distortions in China’s exports, and about one-third to China’s trade barriers on imports.

Australia has launched dozens of cases against imported products from China. As a large net exporter to China, however, Australia has a particular interest in China’s economic and trade settings that effect Australian exports.

Australian merchandise trade exports to China by sector and proportion of world exports, 2006-23. Trade statistical pivot tables | DFAT

In 2023, Australia’s merchandise exports to China were AUD$204 billion, based overwhelmingly on primary products (minerals, fuels and agriculture products) which accounted for 37 percent of Australia’s total world exports. With imports of $100 billion, this leaves a trade surplus of $100 billion with China. Based on bilateral trade complementarities with China that are among the highest in the world, Australia has among the highest market concentrations in the world.

The high concentration suggests that the Australian economy is highly exposed to developments in China’s economic and trade sectors, although this is not borne out in formal economic modeling due to the composition, competitiveness, and agility of the Australian export sector.

One set of scenarios is the effect of a gradual or rapid downturn in China’s economy. The gradual slowing of China’s annual growth from 10.6 percent in 2010 to 5.2 percent in 2023 might be expected to reduce demand for Australian imports. However, export values grew over the period roughly in line with the aggregate size of China’s economy.

To illustrate the effects of a more abrupt shock, the RBA modelled a five percent contraction in China’s growth and the effects on the Australian economy over three years. It found that direct effects (trade and prices) and amplifier effects (equity markets and consumer confidence) would have a significant negative effect on the Australian economy (decline in GDP of 2.5 percent), but that shock absorbers (exchange rates, cash rates, and inflation) “could offset much of the negative consequences of the slowdown.”

Politically-motivated barriers on Australian imports in 2020 also raised widespread concerns of the costs to the Australian economy. To the contrary, the Productivity Commission found that import barriers on five commodities (cotton, seafood, coal, wine, and logs) decreased Australian GDP by just 0.01 percent, although industry-specific costs were significant for some commodities.

Several studies have modelled the sectoral effects of economic rebalancing globally and in Australia, the latter through a 15 percent reduction in investment in real estate and infrastructure. As could be expected, this leads to a decline in Australian mining exports (iron ore and coking coal) that is only partly offset by higher investment in manufacturing (machines and cars) and consumption (food and services), leading to an overall decline in exports to China. The relative importance of the Chinese market may also change. For example, growth in global food consumption is forecast to switch from China to Southeast Asia and India.

Lessons for Australia

The path-dependent nature of China’s development trajectory and heightened trade tensions would appear to increase the risks of exposure to China, which could be expressed in unpredictable ways. Australian exporters could be expected to offset the risks by reducing exposure to China, including through diversification. However, another lesson that could be drawn from recent experience is that trends and shocks from China have low costs, in which case re-exposure may be the rational response (see Figure 2). The risk-return calculus will change with structural developments in China’s economy and global trade relationships. It will also vary by the positions of individual Australian industries and firms, and their understanding of and appetite for risk.

Under mainstream economic principles, however, the collective decisions of individual firms may lead to broader social and economic risks, in which case government intervention may be justified. In a minimalist form, this would include the increased provision of public good services like information and market access. The other policy implication to emerge from recent experience is that the low costs of China’s politically-motivated import barriers provides agency to Australian organisations when formulating their broader policies toward China.

This article is part two of a two-part series addressing China’s economic trajectory and implication for trade, especially Australia. The authors would like to acknowledge funding for the research from the National Foundation for Australia-China Relations.

Dr Scott Waldron wrote these articles as a Principal Research Fellow at The University of Queensland, and does not represent the views of the Australian Government or its agencies. His X handle is @ScottAWaldo 

Dr Zhang Jing is a Research Fellow at the University of Queensland.

This article is published under a Creative Commons License and may be republished with attribution.