China's exports surge in 2020: Good news for the economy but not without concerns ahead
China’s economic recovery in H2 2020 featured a surprising surge in trade but much more so for exports (Chart 1). At a time when most countries are still hit by Covid-19 and the deglobalization trends are still a threat, how long will China’s exports strength last?
To investigate this important question, we first check the breakdown of China’s exports with its trading partners (Chart 2). Our analysis show that exports to the US and the EU-28 markets have been a key driving force for the export increase in 2020, as they both grew by more than 8% in 2020, significantly exceeding the previous growth rates in 2019 (which was less than 4% for the EU-28 and even negative for the US). In total, the two regions contributed to two-third of China’s total rise in exports in 2020. On the other hand, however, China’s export to ASEAN countries increased by less than 7% in 2020, which was a sharp slowdown from nearly 12% growth in 2019.
The shift of focus towards the US and the EU could cause worries in the recipient countries based on previous actions. The previous US administration launched a trade war against China partly because of the increased trade deficit, and China promised to import more from the US in their negotiated Phase 1 deal. Even if Chinese imports from US have increased rapidly, the bilateral trade deficit became even larger in 2020 based on China’s statistics. Compared with the US, the EU-28 experienced very small growth in exporting to China in 2020, which could entice more concerns at a time when the EU needs to ratify its investment deal with China.
In addition to the international concerns, China’s domestic structural transformation also plays a key role for the sustainability of its exporting capacity. In 2020, China relied on two major traded goods, namely, textiles products and mechanical & electric products, which constituted 34% and 86% of the increase in total exports respectively (Chart 3). The former, which relates to the production of some medical supplies such as masks, is really a labor-intensive sector for which China is losing its comparative advantage due to the fast increase in wages especially since 2011. For the latter, Chinese production is dependent on the global supply chain such as the imports of semiconductors.
All in all, the rise in exports in 2020 was undoubtedly good news for China’s economic recovery, but it also brought back some key concerns. There are many uncertainties which are difficult to predict at this stage, but given that the international environment is not likely to turn favorable in the near term and China is already on the path of population aging, the key for China to maintain exporting strength will be whether it can lift productivity to offer high-quality goods to the global market. Also, achieving technological independence seems crucial to avoid unexpected external shocks to the supply chain.