China's "dual circulation" will bring more sustainable trade

China’s recently announced “dual circulation” strategy – in which its traditional emphasis on growth through exports will be bolstered by a renewed focus on spurring domestic demand – is a prudent recognition of a simple reality: the highly conducive international trade environment which fueled China’s super-charged growth for decades is now breaking down. 

The prevailing presumption, since at least the 1990s, across both developed and developing nations has been – the more trade, the better. The efficiencies and hoped-for geostrategic benefits of deep economic integration were seen as far outweighing any dislocations that might occur. 

Whether by happenstance or design, China’s timing during this period was impeccable. It revved up its export engine at the precise moment the large markets of the West were most hospitable, both philosophically and fiscally, to absorbing Chinese imports and investing heavily in China.

But today, the old assumptions are fading away and a new era is emerging in which more trade and deeper integration – with China in particular – is no longer considered to be an unalloyed good and the presumed benefits are no longer taken as a given. 

A new era in trade

This new era is being driven by the confluence of three factors:

1. A growing belief in the West that it gravely underestimated the deleterious impacts which accompanied China’s integration into the global trade system;
2. A greater willingness (certainly on the part of the US, but increasingly also the European Union, Australia, and Japan) to confront China and attempt to reset the terms of the trade relationship, and
3. The Covid-19 pandemic highlighting the risks and vulnerabilities inherent in deep trade integration, spurring countries and companies to reduce reliance on other economies.

The world is not turning its back on trade or globalization, but these factors are driving us towards a far more nuanced approach than the previous “more is better” mindset. The trade landscape China will have to navigate henceforth will be considerably less benign than the one it traversed for the past two decades.

The effort to reduce China’s external reliance, especially in the technology, energy, and agricultural sectors, is sensible. China relies on US$300 billion worth of imported semiconductors to meet over 85% of its domestic market demand, and the progressive tightening of US export restrictions demonstrates just how precarious that source of supply has become.

But China’s desire to develop its own technological capability to overcome its dependence on US and other foreign chips is certainly nothing new – it has been a centerpiece of economic plans for years. Until now at least, the US has managed to stay one step ahead.

In order to be sustainable, trade needs to be conducted on mutually acceptable terms which balances economic gains with a broader basket of considerations, including the need to avoid overreliance on a single trade partner, a recognition of the inevitable intermingling of trade and geo-politics, and a greater accounting for the wide range of trade-related social and environmental issues which profoundly affect the lives of average citizens. It would be hard to look at our current trade system and conclude that we have struck an acceptable and sustainable balance across these considerations.

China’s dual circulation strategy reflects its desire to rebalance in light of new realities. The US, the EU, Japan, India, Australia and other leading trade nations are also, to one degree or another, making similar adjustments. Expect the process to be messy. But to the extent the current period of turmoil can ultimately produce a recalibrated approach to trade which reflects a more realistic balance, we will have taken a positive step towards a more sustainable trade system.