Home >Opinion >Columns >International trade with China is set to muddle along

China’s muscle-flexing on the global stage, its belligerence on the Indian border, its silent invasion of Australian politics, its attempt at a modern form of ‘colonization’ through its Belt and Road Initiative and its assertiveness in the South China Sea have caused a lot of anxiety in the US, Europe, South-East Asia, Australia and India. Combine this with domestic politics that has taken a decidedly nationalistic turn in most countries, and the future of trade relationships with China looks bleak for these enormous economies.

It was not always so. China has been a major beneficiary of ascension to the World Trade Organization (WTO) in 2001. China has enjoyed explosive export growth since then and its share of global trade has steadily increased. China’s total annual foreign trade is now in excess of $5 trillion, third only to the EU’s and the US’s. Its major trading partners are the US, EU and Japan for exports and additionally South Korea and Taiwan for its imports. Among other countries, it runs a large trade surplus with the US, EU and India, and a deficit with only a few countries, like Japan, South Korea (for electronics and components) and Saudi Arabia, Australia, and Brazil (for commodities). China is the largest trading partner of several countries, including Australia and Japan, and the numbers look set to grow. However, the hope that China would become a responsible participant in the existing global order has given way to the belief in major world capitals that Beijing seeks global dominance rather than co-existence.

China was the world’s only major economy to record positive economic growth in the pandemic year 2020. Consequently, Chinese trade share has not declined, despite a fall in global trade of nearly 8% in 2020. Many of China’s trading partners have initiated a review of one sort or another on their strategic and trade relationship, with mixed results. Take the case of Australia. Beijing had imposed restrictions on Australian exports because of Canberra’s call in the pandemic’s early days to investigate China’s role in the covid outbreak. In particular, Chinese tariffs, bans and restrictions have impacted Australian barley, beef, wine, coal and cotton. Australia has found alternative destinations now for these goods worth an annual $25 billion or so. Australian coal, for instance, is rapidly gaining share in India.

If this is a new ‘cold war’, it looks and feels a lot different from the US-Soviet one. This is mostly because of the deep interlinkages of trade and capital between China and the rest of the world. On the margin, these linkages are being disrupted, as in the case of Australia. It is also true that some supply chains and products are being placed in a ‘strategic basket’ and diverted from China. The supply of personal protective equipment (PPE), ventilators and rare earths, for example, is slowly becoming more diversified and/or being sourced from within sovereign borders. At the same time, protectionist tariffs put up by the US have produced no real improvement in its underlying trade balance, while China’s trade surplus with the US has actually increased and its export markets have got more diversified.

China is preparing for what it calls a ‘dual-circulation’ strategy (DCS), recognizing that trade may not play the same role in its development over the next two decades as it did in the past two. This strategy posits a multi-modal world where various regional trade integration efforts across the Asian, European and American continents will form links among themselves. This implies a greater focus on domestic consumption in China, but the technology and innovation components of this shift will still need global contribution.

This dual circulation strategy is Chinese-speak for the recognition that China still needs the world for its economy to make the transition from low to high technology. The success of Beijing’s DCS is by no means a given. China has tried unsuccessfully for many years to increase the share of domestic consumption in its gross domestic product. Its ‘go to’ strategy after covid still remains fixed asset-led growth, but it aspires to an economy less dependent on foreign trade.

At the same time, the world still needs China. Too many countries are addicted to the goods provided by it today and no amount of supply-chain diversification is going to take that away. There seems little systematic thinking among policymakers about how the gaps created by saying ‘no’ to Chinese products will be filled domestically or regionally. China’s cost and logistical advantages have been built over the years and it will take a long time to replace.

And so, this uneasy dance will likely continue. On one hand China will seek to corner the advantages of high technology for its domestic and military consumption, and on the other, the world will seek to wean itself away (albeit slowly) from its reliance on cheap Chinese products. At an overall level, global trade will grow, but probably at a slower rate than before and possibly among more proximate partners in close-knit trade blocs. There will also be some geo-strategic adjustments in supply chains that relate to military hardware, rare earths, healthcare supplies and other sectors defined as strategic.

India will need to chart a careful path and thread the needle between saying ‘yes’ to trade and ‘no’ to capital (in strategic industries) and trade in certain high technology goods.

P.S: “If you do not change direction, you may end up where you are heading," said Lao Tzu.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at

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