Made in China or Made for China?
With the economic reforms launched in the late 1970s, China evolved from a rural, agrarian economy to an urban, industrial export-oriented economy, which led the Asian giant to become the "world’s factory.” The reforms helped advance a formidable economic transformation, which lifted more than 800 million people out of poverty and destitution in a relatively short period of time.
This shift has also had tremendous repercussions on the global economy, especially in trade flows and relative prices. But this development model, which was based on an accumulation of capital and cheap labor, has run its course and has ushered in a second wave of major economic transformations.
These changes have been applied along two axes. First, as a result of the emergence of an increasingly rich and demanding middle class, which will soon surpass the one-billion mark, domestic consumption is gaining ground as a driving force of economic growth. Secondly, the services and knowledge sector is playing a leading role in the production matrix, which is changing the economic structure. These transformations are radically altering how China integrates into the global economy. The OECD publishes databases that provide evidence of such changes (Trade in Value Added, TiVA ). The share of exports in the domestic economy, the labor market and economic growth have all declined and are likely to continue to dwindle in the coming years, while the share of domestic consumption has risen.
There is a tendency of replacing the share of imported raw materials with domestic production, relying partially on increased national capacities, including science and technology, and technological updating. TiVA data also show that while China relies on and participates relatively less in global value chains, it is increasingly integrating with Asia’s regional value chains. These chains are gaining ground in the production and export of goods to other regions and in supplying the Chinese consumer market. In addition, data show that China is becoming the economic axis of the region. The sharp increase in China’s direct investment, together with Belt and Road Initiative projects, which aim to provide logistics and connectivity to supply chains and the movement of cargo and people in the region, are clear signs of this change.
Despite the downward trend in trade share in Chinese GDP, the combination of strong economic growth and the size of the domestic market ensures that China will continue to expand its influence on the global economy. Estimates suggest that by 2019, China’s trade flow will exceed USD 5.1 trillion and the number of countries with China as its largest or one of its major export destinations will continue to grow.
The influence of the Chinese economy will continue to increase through foreign direct investment, both as source and destination. By 2018, according to UNCTAD, foreign direct investment stock in China stood at $1.6 trillion and Chinese investment abroad was USD 2 trillion. These numbers almost double if we add Hong Kong and Macao data.
But in the near future, China will experience a third wave of profound changes. Consolidating consumption as the main source of dynamism and growth will turn China into a gigantic driver of demand but on a scale than much larger than that of the United States at its equivalent moment of economic transformation. The room for consumption growth is huge, not only because it accounts for only 54% of GDP, but also because of the size of the middle class. As a result, we will witness a shift from “made in China” to “made for China,” which will have an even greater impact on the global economy than previous transformations.
This shift will require enormous capacities to supply goods, services, commodities and water resources, which will create unprecedented trade and investment opportunities far beyond Asia. We will also see significant changes in financial and capital markets, currencies and means of payment, and the technical and regulatory standards associated with such trade and investment.
Latin America could benefit greatly from this new wave of change. But the benefits will be greater insofar as the region prepares to optimize and capitalize on these opportunities, including policies that favor industrialization of comparative advantages and productive diversification. With this approach, knowledge, financing, trade, investment and infrastructure, and especially regional integration and drivers of competitiveness and productivity, should be on the region’s China agenda.
