China challenges Western economies with changing trade dynamics

China's export sector is booming, driven by weak domestic demand, expanding production capacity, and state-directed credit to manufacturing. Despite falling export prices, particularly for products like solar panels, the volume of Chinese exports has surged, growing faster than the dollar value of those exports.

Chinese export volumes are up by 12% year-over-year, significantly outpacing the 3% growth in global trade. As an article published by the Council on Foreign Relations (CFR) points out, this has become apparent by data issued by the General Administration of Customs of China (GACC) and the Dutch CPB, an independent government agency that generates global economic analyses and forecasts.

At the same time, Chinese import volumes have collapsed, which highlights a significant shift in China's trade dynamics. The disparity between Chinese exports and imports is notable: export volumes have increased by 13% year-over-year, while import volumes are up only 2%, resulting in a net export contribution of roughly 2% to China’s GDP. However, China's GDP reporting lacks transparency, as real output levels are not disclosed, making precise economic analysis challenging. Nonetheless, the trend is clear: China is heavily reliant on export-led growth, with exports accounting for about 20% of its GDP.

Trade war with the West

Comparatively, U.S. export volumes have grown in line with global trade, while EU exports have lagged behind, with China's growth seemingly coming at Europe’s expense. This trend raises concerns for Germany, as the article warns that it’s economy risks losing global competitiveness, especially in sectors like electric vehicles (EVs) where Chinese companies  are dominating. German policymakers need to reassess strategies to safeguard their industries from becoming overly reliant on Chinese production and design.

China's policy responses to domestic economic weaknesses remain modest. Although the People’s Bank of China (PBOC) has eased monetary policy, fiscal stimulus remains limited. Measures such as increased bank lending to support equity markets and aid for indebted local governments have fallen short of significantly boosting household demand. Rumored plans to raise the central government deficit from 3% to 4% of GDP are insufficient to shift China’s trajectory toward more balanced growth.

An important shift in global trade dynamics is evident. While China continues to export aggressively, it is not importing at comparable levels. This contrasts with historical trends where strong export growth typically led to higher imports of components. China now dominates entire supply chains in key sectors like EVs, EV batteries, and related chemicals, reducing its need for foreign inputs. Over the last three months, Chinese import volumes have declined year-over-year, underscoring this shift.

In the broader context of global trade, China’s large goods surplus contrasts with deficits in the U.S. and UK, which are driving global demand. This dynamic challenges the narrative of decoupling between major economies and highlights the interconnectedness of global trade patterns.

Yuan vs. US Dollar

China’s competitive edge in global manufacturing has been further bolstered by currency movements. While the yuan has depreciated in real terms by about 15% since 2021, this decline has enhanced China’s export competitiveness. Combined with advances in automation and diversification into new sectors like EVs, China continues to gain market share in global manufacturing. Critics argue that the International Monetary Fund (IMF) has underestimated these dynamics, with flawed Chinese data painting an overly optimistic picture of reduced global trade imbalances.

The CFR believes that the real depreciation of the yuan and the dollar’s strength have contributed to a widening U.S. trade deficit and an expanding Chinese surplus, reflecting deeper structural shifts in global trade. China’s current trajectory, characterized by export-led growth and reduced import reliance, underscores its dominant role in reshaping global trade dynamics.

By Nazrin Sadigova