Seven in ten European businesses expect their exports to grow next year, a welcome boost to revenues at a time of rising costs, according to a new survey.

At a time of economic uncertainty and rampant inflation, just under four in five survey respondents said exports have relieved pressure on their businesses by diversifying revenues.

Four in five European businesses are already exporting, and 70% expect their exports to increase next year, e-commerce giant Alibaba Group’s latest research revealed. The report was based on a survey of over 9,000 European businesses across nine markets between 21 February and 2 March 2023.

Over a quarter of respondents export to other countries in the European Union, 21% to North America and 19% to China, the survey showed. Italy has the highest proportion of businesses that export at a whopping 91%. Belgium and Denmark follow closely behind both at 90%.

On average, business owners surveyed said they had derived just over half of their annual revenue from exports during the past 12 months, highlighting the importance of open trade. Business owners also reported exporting had fueled innovation across their operations, increased headcount and encouraged broader product ranges.

The briefing, called the Export Opportunity Report, showed 79% of companies found that exporting had strengthened businesses in several meaningful ways.

“These findings reveal that businesses that export are more resilient, innovative, can attract and retain top talent and, critically, they are achieving growth in the currently challenging business climate,” said Michael Evans, Director and President of Alibaba Group, which supports thousands of European businesses to export globally with technology, expertise and logistics infrastructure.

Exporters face challenges

While larger businesses are forging ahead with exports, small and medium-sized enterprises (SMEs) are lagging behind. Currently, 23% of SMEs do not export at all. For policymakers, this is both a challenge and an opportunity, as SMEs are the backbone of economies globally.

World Bank data shows SMEs represent about 90% of businesses and more than half of employment worldwide. Formal SMEs contribute up to 40% of national income in emerging economies. These numbers are significantly higher when informal SMEs are included.

Alibaba commissioned Censuswide to poll businesses with two or more employees and a revenue of over £1 million ($1.24 million) or over €1 million ($1.1 million) based in the UK, Germany, Italy, Netherlands, Spain, Denmark, Sweden, Belgium and France.

Businesses that export are more resilient, innovative, can attract and retain top talent and, critically, they are achieving growth in the currently challenging business climate – Michael Evans, Director and President of Alibaba Group

Despite the clear benefits of exporting, there remain hurdles, particularly for SMEs trading internationally.

Supply chain and logistics challenges are cited as the biggest barriers to export (20%), followed by a lack of cultural awareness/familiarity with overseas markets (19%), increased paperwork and red tape (18%), price competition (18%) and inadequacies in production capacity (18%).

Businesses in the UK and France list supply chain and logistics challenges as their biggest barriers to export (22%). In comparison, German companies ranked a lack of cultural awareness/familiarity with the overseas market as their greatest challenge (22%). For businesses in Sweden, increased paperwork and red tape were one of the main hurdles to exporting (22%).

Alibaba said it sees a business opportunity in helping more SMEs export. A small Spanish jewellery brand called PDPAOLA launched on Tmall Global, China’s largest cross-border online marketplace, in August last year. Today, it has about 130,000 customers in China.

The role of online marketplaces

Globally, commerce, marketing and trade shows are migrating online, increasing efficiencies but also potentially involving a hefty investment in time and resources. Finding a trusted export partner also ranked high on the list of barriers to international trade.

Enter online marketplaces.

Digitalisation and online marketplaces are seen by businesses as a key way to expand into new markets. Overall, 61% of companies work with online marketplaces to boost exports and minimise the upfront investment of building out a footprint overseas.

“This report underscores the vital importance for small businesses of having an export strategy and a digital strategy. Both are essential for businesses to support long-term, sustainable growth,” said Alibaba’s Evans. Around a quarter of the businesses surveyed had started working with online marketplaces during the pandemic, with the highest proportion in Belgium (38%) and the UK (30%).

When French ballet shoe brand Repetto opened an online flagship store on Tmall in February last year, the platform provided them with immediate access to a billion consumers, many of whom weren’t covered by its physical stores in China’s first and second tier cities. Repetto also leveraged Tmall’s customer engagement tools to boost consumer interaction and build their brand.

Overall, 80% of businesses agree that exporting has driven their digital transformation, and 76% agree that digital transformation has accelerated their business since the pandemic.

Nearly a third of businesses working with online marketplaces say they supported expansion into new markets worldwide with improved inventory planning, had better access to technology and communication tools, and enhanced competitor and market insights.

Cosnova, a German cosmetics company, launched on Tmall Global in April 2019 and reached a wider audience in China by leveraging Alibaba’s engagement tools.

Of the companies that have digitalised, 76% said it has helped make their business more efficient and reduced costs. Companies also said investments in digital processes have yielded insights that have increased the quality of products and/or customer service (77%).

Digital tools that businesses are most aware of are social media (25%), smart marketing (24%), digital advertising (23%), data analytics (23%) and digital custom clearance (22%).

China Consumer 2023

This article was produced as part of a series for China Consumer 2023.

Learn more about CBBC’s flagship consumer event of 2023 here.

This article was originally published by our content partner Alizila as “European businesses see exports rising next year; challenges remain: Alibaba survey”

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Parts of the UK saw a strong recovery in trade with China in the second quarter of 2022 as its economy recovered from severe lockdowns earlier in the year, new analysis from the China-Britain Business Council shows.

Although Chinese exports and imports valued in US dollars grew only 2.1% year-on-year in April – the slowest increase since the height of the pandemic in June 2020 – there were still some signs of success.

Figures show significant year-on-year increases in UK export values for medicinal and pharmaceutical products (up 19% from £275 million to £329 million), professional, scientific and controlling instruments (up 25% from £153 million to £192 million) and manufacture of metal (up 61% from £34 million to £55 million), which all performed better year on year in Q2 2022.

“The UK and China have a long history of trade and diplomatic ties going back over 400 years. With the right guardrails in place, we can enjoy a pragmatic trading relationship that works for the national interest, while standing up for our values,” said Andrew Seaton, CBBC Chief Executive, adding: “This is vital for supporting British jobs and our economy, particularly as we face some of the toughest challenges in a generation.”

While exports to China fell across most regions of the UK, Yorkshire and the Humber saw goods exports increase 41% year-on-year – the biggest rise in the country – fuelled primarily by surging petroleum exports, up nearly 680%.

Other parts of the country, including the wider North of England, also proved relatively resilient, with rises in export values from the North East (+1.4% YoY), the North West (+3.9%) as well as the East Midlands (+3.7%).

Wales – which saw the strongest growth in goods exports to China out of any UK region in Q1 – continued to benefit from Chinese demand for power-generating machinery and specialised machinery, improving its goods exports in Q2 by 36% year-on-year.

The report comes as the spotlight once again turns to UK-China relations, with Prime Minister Rishi Sunak using his recent speech at the Lord Mayor’s Banquet to outline his vision for foreign policy, saying he would focus on “standing up to our competitors, not with grand rhetoric but with robust pragmatism”. The UK would be “stronger in defending our values”, he said, while avoiding “simplistic Cold War rhetoric”.

The day before, Minister for the Indo-Pacific Anne-Marie Trevelyan told Australia’s National Press Club, “We cannot afford to do anything other than focus on this region…In short, this region is critical to the UK – to our economy, our security and to the international rules-based system, that both our countries cherish.”

UK goods exports to China have grown a staggering 495% over the past 15 years, making China the UK’s third largest goods trading partner.

With the UK facing tough economic times, we must use every tool at our disposal to create growth. China presents an extraordinary opportunity in this regard — Andrew Seaton, CBBC Chief Executive

The China Trade Tracker was launched by CBBC in October 2021. Produced every quarter, it acts as an ‘always-on’ reference tool providing the facts and figures about UK-China trade and the impact on the UK economy, including at the regional level, of trade with the world’s second-biggest economy.

Each issue of the China Trade Tracker provides an overview of the impact of Chinese trade and a detailed analysis of each region across the whole of the UK. It draws on Government, HMT, DIT and ONS data, compiled by CBBC’s specialist analysts.

Click here to read Issue 6 of the China Trade Tracker

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In 2021, China was the UK’s third largest trading partner, after the US and Germany. It was the UK’s sixth largest export market for goods and the single largest source of imports. Indeed, the UK’s links to China via goods trade, tourism and education support an estimated 114,000 to 129,000 jobs across the country, according to a 2020 report by Cambridge Econometrics.

Perhaps unsurprisingly, the first quarter of 2022 saw UK goods exports to China decrease 12.8% compared to the same period a year earlier. They were also down 11% lower compared to the last quarter of 2021, according to HMRC data. That said, the data leaves no doubt about the continued importance of the Chinese market to the UK, with some individual regions and sectors performing particularly strongly.

“While the past few months have been challenging, it’s encouraging to see our trading relationship going from strength to strength, with most UK regions reporting record export levels,” said Andrew Seaton, Chief Executive of China-Britain Business Council. “UK exports to China are proving resilient and generate employment and prosperity across the UK. Making sure that UK businesses are getting their fair share of the China market opportunity – including its dynamic consumer market, driven by its large and growing middle class – is more essential than ever to the UK’s recovery and future growth.”

Apart from the seasonal effect of Chinese New Year – which means a general decline of Chinese demand during the first months of the year – the biggest reason for weaker exports were a decline in key British exports of road vehicles (down 14% from £940 million to £807 million), petroleum (down 29% from £651 million to £462 million) and medicinal & pharmaceutical products (down 46% from £482 million to £261 million) compared to the first quarter last year. Together, these exports constituted 70% of all British goods exports to China in Q1 2021 versus 58% in Q1 2022.

On the positive side, exports of professional, scientific & controlling instruments (up 16% from £143 million to £165 million), power generating machinery (up 10% from £180 million to £198 million) and non-ferrous metals, e.g. platinum (up 8% from £185 million to £200 million) all witnessed higher Chinese demand in the first three months of 2022 than in the same period in the previous year. Their overall share of China-bound exports increased from 17% to 21% between the first quarters of 2021 and 2022. 

My advice to British businesses looking to expand, is to tap into the dynamic Chinese market – it is unrivalled in terms of its sheer size and potential for growth — Andrew Seaton, Chief Executive of China-Britain Business Council

Among the UK regions, Wales retained the strongest growth in goods exports to China, seeing an increase of nearly 23% year-on-year in the first quarter of 2022 compared to the same period last year. The success in Wales is mainly due to growing demand for specialised machinery – especially in the semiconductor business – with the Principality’s exports of this product category surging by 121% year on year (YoY) in the first three months of 2022.

Besides Wales, the North East (+10% YoY), the East Midlands (+2% YoY) and the South West (+2% YoY) also experienced positive growth in goods exports to China in that period.

By contrast, Scotland (-59% YoY), London (-14% YoY), and the West Midlands (-26% YoY) were impacted by the slump in exports of road vehicles and petroleum, even though most of their remaining exports maintained stable levels with few changes compared to the previous year.

Overall, the Q1 2022 data shows that China remains an important growth market for high-quality and high-value adding UK manufacturers and businesses, even though the large export share of a few items (road vehicles and petroleum) can lead to stark fluctuations in overall export figures.

The China Trade Tracker was launched by CBBC in October 2021. Produced every quarter, it acts as an ‘always-on’ reference tool providing the facts and figures about UK-China trade and the impact on the UK economy, including at the regional level, of trade with the world’s second-biggest economy.

Each issue of the China Trade Tracker provides an overview of the impact of Chinese trade in the first quarter of 2022 and detailed analysis of each region across the whole of the UK. It draws on Government, HMT, DIT and ONS data, compiled by CBBC’s specialist analysts.

Click here to read issue 5 of the China Trade Tracker

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Surprisingly, when the pandemic first hit the UK in March 2020, shipping companies did not immediately follow the increase in airfreight charges with their own. Airfreight rates quadrupled nearly overnight, whereas initially, there was no significant movement in rates on ocean freight until some nine months later at the end of 2020.

When the price increase did come, it was explained by the shipping lines as an “imbalance of equipment.” At the time this made perfect sense, as the pandemic hit China’s major export markets — the USA, the UK and Europe — with countries in these regions seeing very strict lockdowns. In turn, this meant that when containers arrived at their destination they would be met with major delays due to shortages of drivers to remove goods from the ports, deliver to end users and ultimately, slow turnaround times in returning empty containers back to ports. With many importers having to work from home, there was a backlog at both manufacturing hubs and ports, and vessels were returning to China relatively empty and with very few exports. This is when the export price from China began to rise to accommodate the cost of vessels returning with empty containers. Since then, rates have remained at all-time highs. Industry insiders could see that increases were inevitable. However, the level of increase could be said to be slightly overinflated.

Importers and forwarders alike, however, could not have foreseen the rate levels that have been imposed by shipping lines. Within three months from November 2020 to January 2021, rates rose by 500%. Ocean rates peaked in December 2021 to a staggering 850% above pre-pandemic rates.

This has of course had an adverse impact on businesses, not only in the UK but in all of Europe and North America, leading to the unprecedented rises in inflation that we see being reported today.

And this situation could be exacerbated by the Covid-19 lockdowns that have hit Shanghai since late March. While the world’s busiest container port has remained open (thanks to a ‘closed loop’ management system that keeps workers isolated at the port site), an estimated 30% of the global backlog of container ships are thought to be sitting in traffic jams outside ports in China. There have also been problems getting cargo to and from the port due to the strict rules on truck drivers entering and exiting the city.

During this time, many companies have decided that shipping is just not a viable option anymore, certainly until rates return to a more feasible level. Rates may never return to pre-pandemic levels, but there is still hope that common sense will prevail and that shipping lines will continue with the downward trend and find a reasonable level, where shipping lines can make a profit, and at the same time allowing businesses to start shipping once again.

The UK has suffered a little more than most EU countries, with higher rates being imposed on the UK market. This is due to the big imbalance in imports and exports containers, forcing shipping companies to return to Asia with many empty containers on board.

The export market has also suffered, but not to the same degree as imports. Pre-pandemic, ocean export rates from the UK to China sat at anywhere between $500-600 (£389-467). This peaked during the pandemic and averaged at $1,850 (£1,441), although there has recently been a 20% decline in rates. The availability of equipment and space has eased and it seems that apart from the rate still being a lot higher than pre-pandemic, there does seem to be light at the end of the tunnel. In more positive news, there are signs of some sense of normality returning to the shipping industry and rate levels are on the decline in both the import and export market.

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The October 2021 edition of the report brings together official HM Treasure and the Office for National Statistics data with CBBC expert analysis to highlight key trends and themes of the UK’s trading relationship with China – nationally, across regions and key sectors.

At a time when many UK companies are facing tough trading conditions at home and internationally, the China opportunity is more important than ever for UK businesses and jobs, especially in relation to the UK’s post-Covid recovery. The report highlights the benefits to the UK economy of a healthy trade and investment relationship with China, which is expected to be the world’s largest economy by 2030.

Exports to China grew 3.2% last year – despite the Covid-19 pandemic – while exports to Europe and the US fell. The emergence of China’s middle-class is a primary driver behind a recovery in exports. Looking ahead, China will account for two-thirds of the growth in the global middle class in the next decade, equivalent to around 400 million people, according to recent findings from the DIT. As Andrew Seaton, Chief Executive of CBBC, noted, “It is vital for the health of the UK economy that UK business does not miss out on this.”

The report illustrates a shift in key exports over recent years, highlighting the emergence of new export markets which have shown significant growth since 2015, including consumer goods and trade in services and financial products.

For example, food and drink producers have benefitted from rising demand in China. In the second quarter of 2021, sales of animal fats and vegetable oils to China tripled compared to the same period in 2020. Oils and fats have witnessed an astounding increase in demand from China, with exports rising 7,225% between 2015 and 2020. Animal fats and vegetable oils are generally used for cooking and food processing – two industries which have particularly profited from China’s growing middle class.

It has never been more important to recognise the importance of the trading relationship with China in supporting British businesses,  jobs and livelihoods across all sectors and regions of the UK.
— Andrew Seaton, CBBC Chief Executive

Nevertheless, the growth in oils and fats exports also highlights some important risks for consumer-focused UK-China trade. Food industries, like meat and other animal products, are easily vulnerable to disruptions, be it due to problems in the cool chain or – more frequently – hygienic problems such as animal diseases. Trade is, therefore, more vulnerable and will require increased levels of mutual trust and cooperation at both the business and the government level to ensure that temporary setbacks do not reverse the positive trends of the coming years.

Looking at the top 10 exports for each region, examples include a growth of over 650% of metals in the North East, with a value of over £180 million; and an increase of over 840% of meat and meat preparations in Yorkshire and the Humber, worth almost £68 million.

Click here to read the full report

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Imports also increased 33.1% to £170.5 billion, up from the previous month’s 28.7%. In RMB terms, imports from the UK grew 19.8%, while exports to Britain saw an increase of 18.7% in the first eight months of 2021 compared to the same period last year.

These figures came despite ongoing disruptions caused by the spread of the coronavirus’s delta variant. This recently led to China’s worst coronavirus outbreak, sparking city-wide lockdowns, flight cancellations, and even a week-long shutdown of Ningbo-Zhongshan port, which caused shipping delays that rippled around the world. The outbreak has now been brought under control.

One big beneficiary of this trend is the British food and drink sector. UK F&B exports to China in the first half of 2021 were up by more than 27% compared to the same period in 2020, according to the Food & Drink Exporters Association, with a total value of £436.4 million. The UK’s top food and drink exports include whisky, salmon, and chocolate.

In the first six months of 2021, British food & drink producers sold more to Chinese consumers than to German buyers. This is consistent with overall trends of increased trade with China that show it outstripping Germany to become the UK’s largest single import market.

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Once the administration of Order No.248 (hereinafter referred to as the “administration”) comes into effect, the former provisions on the Administration of Registration of Overseas Enterprises Producing Imported Food, announced in 2012, will no longer be effective.

The new administration has been issued to implement provisions of the Food Safety Law on the registration of overseas food production enterprises that import food into China. It:

• Expands the registration scope of food production enterprises.
• Stipulates the methods of assessment and censorship on the imported food manufacturers’ registration, including paper audits, video assessments, on-site inspections, etc.
• Stipulates that some special types of food producers need to be recommended by their national (regional) authorities to the GACC for registration.
• Outlines that registration validity and renewal of registration will be extended to 5 years, which is the same as the validity of domestic food production licenses.

On the same day, GACC also released another new regulation worth noting among food suppliers overseas, the Administrative Measures on Import and Export Food Safety as GACC Decree 249.

The new policy will also come into effect on 1 January 2022, replacing many previous regulations, including Quarantine (AQSIQ) Decree 144, General Administration of Quality Supervision, Inspection, and the AQSIQ decrees related to the regulation of the import and export of dairy, meat, honey and aquatic products.

What does this mean for overseas brands in the food industry?

It is therefore necessary for overseas brands in the food industry to fully comprehend the impact of the new policy if they want a seat at the table when it comes to the imported food market in China. The main adjustments from the new policy include:

• The introduction of the concept of “conformity assessments of food imports.”
• The sales packages of imported health food and foods for certain dietary purposes must be equipped with printed Chinese labels instead of only affixed ones
• Imported fresh and frozen meat and aquatic food products require instructions on both the inner and outer packaging
• Manufacturers and operators of imported and exported food products are held responsible for issues related to their products

Foreign brands importing into China should pay particular attention to the section in the new policy regarding packaging regulations for certain types of products. Compared to the previous regulations for imported food introduced in 2013, the range of products that require printed Chinese labels on their sales packages has been extended to include sports nutrition, infant supplementary food, supplementary food for pregnant women and nursing mothers, formula products for medical use, and imported health foods.

Foreign brands importing into China should pay particular attention to the section in the new policy regarding packaging regulations for certain types of products.

The impact of the new regulations for overseas exporters and operators within the food industry in the Chinese market cannot be ignored. In order to meet the requirements of the policy changes for imported product packaging, overseas food brands will need to make adjustments to their packaging and ready these new designs within the next six months, before the regulation comes into effect. This will lead to a series of questions:

• Is there enough time for overseas food brands to get ready? Especially when taking into account various considerations such as budget reallocation, production coordination and marketing replanning
• Will these processes make financial sense for the brand?

Selling through cross-border e-commerce channels (CBEC) might be a worthwhile alternative, as it allows overseas food exporters to sell to Chinese consumers while they get ready for future export under the general trade model.

Selling products through CBEC channels such as Tmall Global offers overseas food brands a number of benefits:

• The CBEC platforms where the brands list their products can provide additional confidence to Chinese consumers as they trust the platform. This is especially true for brands that have limited recognition and presence in the market.
• The stores on the CBEC platforms will be owned by the brand instead of local distributors, which offers brands more control over in-market branding and ROI.
• The new regulation on imported food product packaging does not apply to CBEC, which suggests that brands, if unable to take action in time to be compliant, can still sell the stock that had originally been planned for general import through CBEC channels instead.

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Chinese exports grew 32.2% year on year in June, exceeding some forecasts by nearly 10%. The increase was driven by strong demand for both materials and consumer goods as many countries around the world, including the UK, ease Covid-19 lockdown measures as they reach adequate levels of vaccination.

The export surge was eclipsed by delays at ports in southern China caused by a series of coronavirus outbreaks in Guangdong province in May and June. Guangzhou alone reported more than 150 locally transmitted cases between May 21 and June 17, although the outbreaks have since been brought under control.

Chinese exports to the UK have exhibited strong performance in 2021, driven by demand for PPE and electronic devices. This is part of a longer-term trend that has made China the UK’s largest single import market. Goods imported from China reached £16.9 billion in Q1 2021.

China’s imports also grew by 36.7% year on year. Imports of soybeans, corn and natural gas all rose, while crude oil imports fell 3%. UK exports to China have also increased in 2021, up 6.2% from 2020 at £3.9 billion in Q1 2021, led by manufactured goods such as machinery and transport equipment.

Import growth was down from 51.1% in May, in line with suggestions that trade may begin to slow down in the second half of the year as retailers rebuild their inventories and consumption patterns normalise. The spread of the highly transmissible Delta variant has also caused uncertainty about how long the global economic recovery in 2021 will continue.

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On a surface level, it’s a well-known story: over the last quarter century, China has emerged as the world’s largest exporting nation with more than £1.4 trillion GBP of exports annually. But now we have enough case studies and data to dig deeper. In his new book, Decoding China’s Export Miracle, Yuqing Xing, of the National Graduate Institute for Policy Studies (GRIPS) in Tokyo, uses China’s involvement with global value chains (GVCs) to analyse this export miracle.

The book explains how China’s deep integration with GVCs has been a decisive factor in the country’s emergence as the world’s number one exporting nation and the champion of high-technology exports. It uses a range of case studies including Apple, Uniqlo, Dyson, Samsung and others that use China to become ‘factoryless manufacturers.’

In this interview, Paul French catches up with Yuxing Qing to find out why China and GVCs are so important.

To understand your book and its arguments we need to first talk about global value chains (GVCs). What are they and why have they been so important to China’s rise as the world’s major exporter nation?

Global value chains are a new model of manufacturing and trading goods internationally. A typical GVC involves firms from various nations. Those firms coordinately perform a series of tasks necessary for the delivery of products to end-users in the global market. These tasks include research and development, product design, the manufacture of parts and components, assembly, distribution and retailing. Chinese firms participating in GVCs mainly perform manufacturing tasks, such as assembly. Most manufactured goods exported by China, which account for more than 90% of total Chinese exports, are, in fact, produced and traded along GVCs, which have systematically eliminated conventional entry barriers to international markets for made/assembled in China products. This has greatly facilitated the massive penetration of Chinese goods into the markets of both developed and developing countries – powering China’s export miracle.

You also argue that China has been able to take advantage of the ‘spillover effects from GVCs.’ What are these? And how was China able to take advantage?

GVCs offer positive spillover effects to non-leading firms, particularly firms from developing countries. One spillover effect comes from brands owned by lead firms. By plugging into value chains as contract manufacturers, Chinese firms have sold their products under internationally recognised brands, which clearly enhances the appeal of made in China products to foreign consumers and has strengthened their international competitiveness. 

The second spillover effect is the technology and product innovation of lead firms. The production of any high-tech products requires not only core technological components but also low-tech and standard parts and labour-intensive services (like assembly). By manufacturing those low-tech parts and providing assembly services, Chinese firms have been able to join the value creation processes of high-tech products and take advantage of the fast-growing worldwide demand for high-tech products such as laptops and mobile phones. For example, China’s export of iPhones is attributed to its participation in the iPhone value chain as an assembler.

The third spillover effect of GVCs is related to the distribution and retail networks established by GVC lead firms. As suppliers of foreign MNCs, Chinese products are sold through the global distribution and retail networks established GVC lead firms. The continuous expansion of those networks automatically increases the access of made in China products and thus boosts China’s exports. This is actually how 50,000 Walmart suppliers in China have entered international markets and raised their sales abroad.

You also argue that Chinese firms participating in GVCs offered an alternative path by which China could achieve industrialisation, a kind of turbocharging of the economic learning curve. How did this work?

GVCs are based on production fragmentation. With the extensive fragmentation of the manufacturing industry resulting from modularisation, it is no longer necessary for a country to build production capacities for an entire industry in order to produce finished products. By participating in GVCs, Chinese firms have developed and expanded their production capacities where they have a comparative advantage, and they have been growing together with the lead firms of GVCs through the aforementioned three spillover effects. 

In addition, GVCs give Chinese firms a unique channel through which to access new knowledge and production know-how. The learning opportunities within GVCs include face-to-face interaction, knowledge transfer from lead firms, pressure to adopt international standards, and training of the local workforce by lead firms. That learning facilitates Chinese firms’ industrial upgrading and innovation activities, such as adding value to products, moving up from pure assembly to design work, and increasing production process efficiency. For example, all of Apple’s suppliers need to meet high standards set by Apple and engage intensive communication with Apple, all of which facilitate the innovation and productivity growth of non-lead firms. Those unique features constitute a new path of industrialisation.

GVCs give Chinese firms a unique channel through which to access new knowledge and production know-how.

I think it is also interesting that you argue Chinese firms have managed to achieve ‘nonlinear upgrading’ through their participation in GVCs. What do you mean by this exactly?

Specialising in low value-added tasks has opened a door for Chinese firms to integrate themselves into GVCs. It is the beginning of the long march from entry into GVCs to participation in higher value-added segments, to capturing more added value, and ultimately evolving into a GVC lead firm. Upgrading along GVCs from low value-added to high value-added tasks constitutes a linear model of innovation. For example, a firm starts from assembling mobile phones, then enters the manufacturing of components, and eventually produces mobile phones under its own brand. This is a sequential upgrading along value chains, I call it a linear path of innovation.

On the other hand, before developing core technology capacities such as operating systems design and mobile chipset production, Chinese original brand manufacturers such as Huawei, Xiaomi and Oppo leapt forward to brand development by sourcing core technology from foreign suppliers like Google, Qualcomm, Samsung and Sony. This is non-linear innovation. Sourced foreign technologies enable Chinese brand mobile phones to compete with the likes of Samsung and Apple. Taking advantage of the availability of standardised technology platforms, those Chinese firms have concentrated on incremental innovations and marketing, and successfully broken the monopoly of foreign rivals in both domestic and international markets.  The nonlinear innovation path reflects the flexibility of the GVC strategy for catch-up by developing countries.

How does China’s integration within GVCs affect delicate trade negotiations, especially where, as with the US, Australia and EU, they have become quite problematic?

China’s huge trade surplus with a few trading partners has given rise to trade friction. I think China should further lower tariff and non-tariff barriers to increase the access of foreign goods and services to its domestic market and encourage Chinese consumers to embrace products made beyond China.

Having said that, I would like to emphasise that current trade statistics are incompatible with value chain trade. China’s trade surplus has been exaggerated, because (1) foreign value-added has been counted as China’s value-added, and (2) trade statistics cannot trace actual exports of factory-less manufacturers, such as Apple, Nike, Dyson, and H&M to China. The first reason causes the inflation of China’s exports to those countries, while the second underestimates those countries’ exports to China. I explain how trade statistics distort the bilateral trade balance between China and the US in detail in chapter 4 of the book.

China is deeply integrated with GVCs organised by MNCs from the US, Japan, and the EU. This is why I use the term “China-centred” GVCs in the book: Any tariff and non-tariff measures imposed on made/assembled in China goods would harm not only Chinese firms, but also MNCs who outsource billions of dollars of goods from China. Trade wars or sanctions are a double-edged sword. Communications, negotiations and compromises are the right approaches to work out any trade frictions and reach win-win solutions. I think China’s trade friction with Australia is purely a result of geopolitical tensions. As an economist, I do not think it is wise to use trade policies to serve non-economic objectives.

We’ve heard so much in recent years about China’s economic rebalancing – away from exports and towards domestic consumption. What is the future for China’s export sectors in the next, say, 5-10 years?

Rebalancing has been a buzzword since the global financial crisis. China’s rebalancing from an exports-driven to domestic consumption-driven model has been expected. Firstly, the contribution of export growth to the growth of the Chinese economy has fallen substantially. Secondly, China’s imports increased from $1.1 to 2.1 trillion, almost doubling from 2008 to 2018. We have to realise that this transition is easier said than done. It requires a structural change on the supply side of the Chinese economy, which is more difficult than a simplistic macroeconomic analysis on the rebalancing, as it requires thousands of Chinese firms producing shoes, apparel, toys, mobile phones or laptop computers to either scale down their outputs or producing something else that is in demand from Chinese consumers. Again, many MNCs from the US, EU and Japan do not export products manufactured in their home countries to China. Instead, they sell products either assembled/made in China or third countries, which produce either in-China or third-country sales in China. Those sales are not counted as exports to China, thus underestimating China’s actual imports from those nations.

The ongoing US-China trade war, and the possible technological decoupling between the two nations, has been reshaping GVCs involvement, which may undermine China’s export capacity, particularly when it comes to serving the US market. As a result of the Covid-19 pandemic, some politicians in the US, EU and Japan have called for improving self-sufficiency in essential medical supplies. This may limit the growth potential of Chinese exports. However, for a nation with $2.5 trillion annual exports, internal circulation is impossible. The entrenched exported-economic structure implies that international markets will remain a critical source of income and employment and the Chinese government will continue to support its firms to expand in the global market through trade negotiations.

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US President Joe Biden has achieved his first major legislative success, after signing a huge USD 1.9 trillion stimulus package into law on 11 March. The bill includes direct payments of up to USD 1,400 to American households, giving a big boost to their disposable income. The Biden Administration has since also published a USD 2 trillion infrastructure programme, which – if passed – would further pump the US economy.

For China, this US spending spree is generally positive, but it also poses new challenges. On the plus side, Chinese exporters will benefit from increasing demand from US customers. Last year’s CARES Act, which injected USD 2.3 trillion into the US economy, also helped boost imports from China. Despite punitive tariffs now imposed on over 66% of Chinese imports, goods shipments from China into the US were 20% higher in the last quarter of 2020 than in the same period in 2019. China remains the US’s largest source of foreign products, with nearly 19% of all goods imports coming from the country.

Yet while a booming US economy will likely drive Chinese imports higher again this year, it will also put upward pressure on the dollar. This could increase capital costs for Chinese businesses and make dollar-denominated imports – especially commodities – more expensive.

The knock-on effect of the US stimulus will in turn pose broader questions about China’s economic reform strategy. A persistently strong export sector coupled with more expensive imports could force Chinese leaders into a rethink of their plan to shift the economy towards a consumption-driven growth model. It could also force China’s central bank, the People’s Bank of China, to speed up the liberalisation of the renminbi.

Read the full analysis here.

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