Trade boost can help beat middle-income trap

By Onat Kibaroglu Source:Global Times Published: 2017/10/24 22:23:40

Illustration: Peter C. Espina/GT

The 19th National Congress of the Communist Party of China, the country's most important political gathering, has just concluded. Given that foreign trade regulations are set to get a major revamp and as there are still many questions to be addressed regarding economic reforms, it would be beneficial to draw out the key issues for those involved and interested in the Chinese business scene.

A closely watched figure is China's economic growth target. Observers were keen to see how the Chinese government plans to balance two competing priorities: its ambition to pivot away from unsustainable, debt-fueled expansion while addressing the need to navigate a sluggish global trading environment.

If you are seeking to understand the basic nature of China's economy, it is worth examining regional GDP growth projections and, ideally, digging even deeper from there to the city level. There is a tremendous range of economic strength across China's cities - the northeastern city of Shenyang, where many European automobile manufacturers base their production, reached GDP growth of just 3 percent in 2016, while the more services and trade-oriented Chongqing recorded growth of 10.7 percent last year.

The diversity within the Chinese economy is even greater than that of the EU (where growth rates vary between 0 percent and a maximum of 4 percent) or the US (where the whole country is mostly focused on the services sector). Given that China's widely varying regions produce, trade and consume very different commodities and services, it is imperative to move beyond the headlines and reach industry- and region-specific economic reports.

The most sustainable and value added method to achieve a balance between growth and debt levels would be to boost foreign trade, ideally in China's favor. New policies are being implemented as part of an apparent "unprecedented opening-up to the outside world." Foreign firms will now be able to get listed on Chinese stock markets and issue bonds while being allowed to participate in national science and technology projects.

Another issue that could have an impact on international businesses is the amendments to the competition laws. The new legislation is meant to tackle unfair competition through adding protection for trademarks and intellectual property. Also, the Chinese authorities have gone ahead with many tax reductions across the board to remain globally competitive.

Regarding regulations, Premier Li Keqiang has declared that China will extend the processing of international trade through a single window, which enables cross-border traders to submit regulatory documents at a single location, thus improving efficiency. The authorities also aim to achieve a nationwide integration of customs clearance procedures this year.

How the government plans to control a slowdown in growth leveraging all these measures while avoiding the infamous middle-income trap is the key underlying issue to watch. One particular measure that could be seen as a relevant move regarding this issue is the decision to treat foreign multinational enterprises the same as domestic firms in license applications, standard setting and government procurement. Such a switch will also let these enterprises enjoy the same preferential policies under the "Made in China 2025" initiative, and it could increase partnerships and integration with local technology-oriented firms. This particular scheme is intended to upgrade the value and quality mechanisms in the manufacturing sector, making it more competitive within the foreign trade realm, with the grand objective of raising the value of the overall Chinese brand in the world.

The significance of this objective cannot be stressed enough. Over the last three decades, China has done an extraordinary job in lifting its population of more than 1 billion people out of poverty. The next challenge is to become an affluent nation that churns out highly valued brands and products that will enable it to avoid the middle-income trap. The demographic advantage window is narrowing as the population is growing older, but China has proved time and time again that it can overcome any challenge it sets its mind to.

The author is a PhD candidate at the National University of Singapore.

Posted in: INSIDER'S EYE

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