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Diversify Foreign Trade Channels
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Mei Xinyu


China's foreign trade has been hyperactive over the past year. Trade volume grew by 23.2 percent year-on-year the fourth consecutive year with a growth rate exceeding 20 percent.


The trade surplus amounted to US$101.9 billion 2.3 times that of the previous year. Such a performance is rare among all of the world's major economies.


But as a traditional Chinese saying goes, prosperity often leads to peril. China has faced mounting pressure as its trade surplus has grown, although it is not China's fault.


Exports of Chinese-made shoes, for example, could be blocked from entering the European Union as two-thirds of EU member states have expressed their hope that anti-dumping levies will be imposed on Chinese products. Chinese trade officials have negotiated with the EU on this matter. Some other countries are considering following suit to restrict their imports from China.


It will be a long time before domestic demand can be substantially increased so as to allow a diminished role for foreign trade in maintaining the momentum of economic growth. China still needs support from foreign trade to bolster its vigorous economy. In other words, we will not expect foreign trade volume to drop significantly in the near future. Solutions should be found in view of this precondition.


To ease the pressure on Chinese foreign trade and ultimately solve the problem, we need to figure out where the pressure is being exerted before hammering out solutions.


Analysis of the sources of China's trade surplus and deficit shows the country's colossal amounts of trade surplus are rooted in the competitive edge of made-in-China products and services. But the severe trade friction as a result of the surplus is, on the other hand, also partly caused by China's unbalanced trade landscape.


For years, the sources of both China's trade surplus and deficit have become relatively stable. China suffers from a huge deficit in trade with East Asian countries and regions (excluding Hong Kong) and major energy and raw materials producers. Taiwan Province, the Republic of Korea (ROK) and Japan have remained the top three sources of the Chinese mainland's trade deficits for many years. Meanwhile, China has enjoyed great trade surpluses with the United States, the EU and some non-oil exporters.


Although there are various reasons for the significant trade gap between China and other countries and regions, and China should not be seen as a scapegoat, the US and the EU will definitely make use of the surplus to exert pressure on Beijing. They are the most powerful lobbyists in the world, and it is not wise for China to concentrate its trade surplus on these countries.


The mainland's unbalanced trade landscape is a result of the shift of investment by investors from Taiwan Province, the ROK and Japan.


Unlike Malaysia, Thailand and other countries and regions, which export mainly primary products to China, Taiwan Province, the ROK and Japan sell mainly semi-finished products to the mainland, where they are supplied to enterprises from the three economies.


In terms of actually used foreign investment, Japan, the ROK and Taiwan Province took third, fourth and sixth place respectively among the top source countries and regions of overseas investment on the mainland in 2003 and 2004.


The rapid growth in their direct investment in the mainland has led to the latter's increased trade deficit with those economies. In the first 10 months of last year, for example, the mainland's trade deficit with Taiwan increased by 9.5 per cent year-on-year. In the same period, the growth rate of China's deficit with the ROK grew by 17 per cent.


As those economies shift their exports to the Chinese mainland through investment, their previous trade friction with the US and the EU has been eased. The mainland has begun to bear the brunt of trade pressure.


To ease the pressure, China should accelerate its trade multi-polarization process and find proper channels to share the pressure.


The author is a research fellow at the Chinese Academy of International Trade and Economic Cooperation attached to the Ministry of Commerce.


(China Daily January 23, 2006)


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