Trade and Investment

5 things to know about China’s approach to free trade

Products are placed at a port in Lianyungang, Jiangsu Province, China, May 22, 2016. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. EDITORIAL USE ONLY. CHINA OUT. NO COMMERCIAL OR EDITORIAL SALES IN CHINA.   - RTSGHTH

Trading places ... can China replace America on the global stage? Image: Reuters

Oliver Cann
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Watch the China’s Pivot to World Markets session from the World Economic Forum's Annual Meeting 2017 here.

Widely held expectations that US President-Elect Donald Trump will set the US on a path away from international trade have inevitably led many commentators to question China’s capability and appetite for becoming the world’s de facto free-trade champion. But while China’s commitment to international trade remains clear and the US’s less certain, while the world waits to see the future Trump administration’s policies in practice, new research from the World Economic Forum’s Global Enabling Trade Report provides us with a timely opportunity to assess how good at trade China actually is.

The Global Enabling Trade Report measures 136 countries on their capacity to facilitate the flow of goods over borders and to their destination. This is a much broader measurement than simply assessing tariffs and relative openness to imports and exports, as it takes into account things like the efficiency of border administration, infrastructure, transport services, use of technology and the wider operating environment. This is important because businesses in too many parts of the world still find it too hard to generate revenue and growth as a result of unnecessary delays and barriers.

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With the Enabling Trade Index published every two years, here are some of the key takeaways that we learn about China’s record at enabling trade in 2016:

1. China ranks 61 in our Enabling Trade Index. This is a slight improvement on 2014 when it ranked 63. At this measurement, we can see that the country performs well in comparison with other large emerging markets. For example, it is the only one among the world’s 10 most populous countries to feature in the top half of the index. However, it still ranks some way behind the best nations in East Asia and the Pacific – Singapore (first), Hong Kong (third) and Japan (16th) – as well as the United States, which this year holds still at 22nd.

2. China’s infrastructure is a great asset. Of the seven pillars we measure, the country performs best in our transport infrastructure category, where it ranks 12th globally. This is important given the major investments the country has made in this area. It invests more than the US and Europe combined. By comparison, infrastructure spending in many G20 markets is currently declining. The focus for China now must be to ensure that similar investments remain targeted, generating value alongside wider economic stimulus.

3. China remains relatively closed to exports from other countries. From the above table, we can see that China, which is the largest economy according to purchasing power parity, has some way to go before it can rank among the world’s most open economies. According to our index, with average applied tariffs of 11.1%, the country ranks 121st out of 136 countries for domestic market access. There are signs that this is changing, with the country committing to open up duty free and quota-free access to its markets for least developed countries. This, of course, in turn helps China’s own economic development, as lower-priced inputs for its manufacturing sector for commodity-exporting countries help enhance its own competitiveness. At the same time, it should also be mentioned that Chinese goods exports also face relatively high tariffs, at around 4.5% of the value of the goods sold.

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4. Business leaders value China’s commitment to trade facilitation, relatively speaking. According to our Executive Opinion Survey, business leaders rate China 48th in the world for the time predictability of import procedures. Improving this score will be important as the country becomes increasingly integrated into the global economy as an importer as well as an exporter. However one area for improvement is the overall cost of compliance with trade procedures, especially for imports where the cost is around $950 per container. With China among the earliest signatories to the World Trade Organization’s Trade Facilitation Agreement, which will likely come into effect in 2017, further simplification and harmonization of documents, as well as coordination with the various border agencies, might be expected.

5. Asia’s role in world trade is likely to increase. According to the Global Enabling Trade Report, ASEAN is now more open than both the EU and the US, and this has implications for China’s own role as a trading nation. Increasingly, the country’s future prosperity will be determined by its ability to provide higher value goods and services for its increasingly educated workforce. Building an enabling environment to support a more efficient exchange of goods across borders will also be crucial. From the chart above, we can see that China’s progression over the past two years has been relatively positive, although it has narrowly reverted in terms of operating environment.

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