Tu Xinquan on China's foreign trade and outward investment
China's leading expert on WTO summarizes opportunities and challenges amid significant changes.
Tu Xinquan, Professor and Dean of the China Institute for WTO Studies, University of International Business and Economics, recently wrote in Peking University’s PKU Financial Review about the new changes in China’s foreign trade and outward investment. He highlights the "new trio" — electric vehicles, lithium batteries, and photovoltaics — as an embodiment of China's industrial upgrade to the technology-intensive sectors as well as a new comparative advantage in global competition.
Acknowledging that China's lithium battery capacity exceeds domestic market demand, Tu underscores the opportunities for these "new quality productive forces" beyond just global sales. "The overseas expansion of EV enterprises now involves not just exporting products but also exporting manufacturing plants. This process enables the diffusion of Chinese technology abroad, converting low-value-added production capacity into high-value-added capacity," Tu explains.
However, Tu also recognizes the challenges posed by the complex geopolitical environment and the shortcomings of Chinese enterprises, such as reliance on imported core components, lack of globally influential firms, inadequate collaboration among large, medium, and small enterprises, insufficient supply chain management, and lack of industry standards that align with global practices.
The article was originally published in the 19th issue of the PKU Financial Review in May and is available on the HSBC Financial Research Institute at Peking University's official website and WeChat blog.
我国外资外贸发展新变化
New Changes in China's Foreign Investment and Trade Development
Today, the structure of China’s outward investment and foreign trade is undergoing significant changes:
In terms of trade structure, new competitive advantages have emerged for Chinese enterprises, represented by new energy vehicles (NEVs), lithium batteries, and photovoltaics, collectively referred to as the "new trio." In 2023, the export scale of this "new trio" surpassed one trillion yuan [137.5 billion U.S. dollars], growing by nearly 30%. China leads the world in power battery shipments, maintains a growing trajectory in photovoltaic exports, and witnesses the overseas expansion of NEVs far surpassing that of traditional fossil-fuel vehicles.
The export position of the "old trio," consisting of clothing, furniture, and home appliances, remains stable. China continues to hold the top global position in the production and export of furniture and home appliances. However, these exports have evolved beyond standardized, mass-market goods to become high-tech, personalized, high-end, and intelligent upgraded versions of the "old trio," which are increasingly favored by overseas consumers.
Regarding the structure of foreign investment, driven by the strategic adjustments of multinational corporations and China's favorable foreign investment policies, China's foreign investment structure is trending towards higher-end development. In 2023, 53,766 new foreign-invested enterprises were established nationwide, a year-on-year increase of 39.7%. Of these, high-tech industries accounted for 37.3% of the total investments, up 1.2 percentage points year-on-year, marking a historical high. The actual use of foreign capital in high-tech manufacturing continues to grow, with significant potential shown in mid-to-high-end manufacturing sectors such as electronic industrial equipment and instruments. In the high-tech services sector, the scale of investment in e-commerce services and technology transfer services has demonstrated remarkable growth.
New features of China's foreign investment and trade development
Booming technology-intensive industries
The optimization of China's foreign trade structure is essentially the external manifestation of the country's industrial upgrading. The "new trio," represented by new energy vehicles (NEVs), has integrated China's existing industrial resources, improved resource allocation efficiency, and injected new momentum into economic growth. Specifically, on the one hand, by virtue of the high added value and long production chains of the new energy and solar energy industries, their production processes can drive the value growth of upstream and downstream industries, with significant industrial pull and related spillover effects. This is beneficial for the optimization and upgrading of China's advantageous industries. On the other hand, because emerging industries require high precision in production and operations, they often need supporting services such as intelligent technology and digital management. This enables the integration of related industrial resources, forming advanced manufacturing clusters, driving continuous upgrades of innovative technologies such as autonomous driving and lithium batteries, and assisting in the formation of new quality productive forces in China.
In the past, the traditional "old trio" consisted of labor-intensive industries that primarily relied on China's labor force and other factor endowments to achieve rapid development through cost advantages. However, China has now entered a phase of transforming its comparative advantages. Leveraging the large domestic market and information technology advantages, The emergence of the technology-intensive "new trio" reflects the robust development of technology-intensive industries in China. These products exhibit new features of digitalization, high-end quality, and sustainability.
Previously, traditional manufacturing products such as electrical appliances were initially invented by developed countries. During the "standardized product" phase of their product lifecycle, they entered China through industrial transfer, with China often playing the role of industrial receiver. Nowadays, the "new trio" has become key industries where China proactively seizes the new round of technological revolution opportunities, captures industrial advantages, and leads the energy transition, upgrading its role in industrial competition.
For instance, China is the world's largest photovoltaic market, with the largest photovoltaic product production base globally. Domestically, it has a complete industry value chain and possesses mature production and service systems in various stages, including raw material production, equipment assembly, product design, and installation. With self-developed technology and large-scale production, China is a global leader in photovoltaics. The "new trio" is becoming a new advantage for China in participating in international industrial competition thanks to the combination of a mature and complete industry value chain with the large-scale domestic market demand.
Enterprises "going global": transition from product export to industry value chain expansion
Currently, China's domestic industry value chain for lithium batteries is nearly complete, with capacity exceeding domestic market demand. Leading enterprises such as CATL and Tianqi Lithium are accelerating their overseas industry value chain expansion. CATL has already signed cooperation agreements with Ford in the United States and Arun Plus in Thailand to establish battery factories abroad.
The global production building for the NEV industry is still in its early stages, and China is in a period of long-term planning and brand-building opportunities. On one hand, the rise and expansion of the "new trio" have attracted more established foreign enterprises to invest in China and seek cooperation. For example, many overseas car companies like Tesla and Nissan have set up R&D centers and manufacturing plants in China.
On the other hand, Chinese NEVs are becoming a significant force in reshaping the global automotive production network. Currently, Chinese automobile and parts manufacturers have started to "team up" to lay out production chains globally, with increasing participation in overseas infrastructure construction. For instance, SAIC Motor has established four vehicle manufacturing bases in Thailand, Indonesia, India, and Pakistan. Changan Automobile has set up a division and three local companies in Southeast Asia, forming a localized operations team. Changan's manufacturing base in Thailand is expected to commence production in 2025, with a designed annual capacity of 100,000 vehicles in the first phase. BYD has expanded its overseas export markets from Oceania, Europe, and Southeast Asia to South Asia, Central Asia, West Asia, and Africa, transferring technological achievements such as motors and batteries to upstream enterprises and providing high-quality services to downstream overseas consumers.
The overseas expansion of NEV enterprises now involves not just exporting products but also exporting manufacturing plants. This process enables the diffusion of Chinese technology abroad, converting low-value-added production capacity into high-value-added capacity. It benefits Chinese enterprises by establishing a global automotive industry value chain, fostering deep cooperation with overseas automotive industries, and ultimately achieving mutual benefits and win-win outcomes.
Digital technology: a platform for businesses going global
China's digital economy remains the second largest in the world. Digital technology not only upgrades and drives production intelligence, laying the foundation for the transition from "Made in China" to "Created in China," but also opens up new business development spaces for Chinese outbound enterprises, offering efficient solutions throughout the entire process of "going global". Digital technology platforms directly connect the supply side and the demand side, achieving precise alignment between firm production and client needs.
Through digital platforms, outbound enterprises can replicate domestic online sales models in the international market and provide technical support and consulting services to global partners. With the support of digital technology, China's outbound enterprises have shifted from a single-product export model to a multi-layered approach that includes products, technology, and industry value chains. The use of online platforms such as Alibaba International Station and artificial intelligence tools like smart coding has created favorable conditions for Chinese cross-border e-commerce companies to analyze overseas market trends and enhance service quality.
Digital technology service platforms play a crucial role in economic cooperation between China and the Belt and Road Initiative (BRI) countries. In addition to the European and American markets that account for a significant share of Chinese exports, demand from BRI countries has been increasing annually, creating opportunities for expanding export markets and building industry value chains. In 2023, China's exports to BRI countries reached 10.73 trillion yuan [1.48 U.S. dollars], a year-on-year increase of 6.9%, with trade with BRI countries accounting for over 34% of China's total foreign trade.
With the support of digital technology, China has created numerous job opportunities locally through cross-border e-commerce cooperation with local governments. Deep cooperation between Chinese companies such as Ant Group, JD.com, and Baidu with local enterprises in financial services, artificial intelligence, and online education has promoted the development of related industries. By supporting local internet infrastructure, smart logistics, and smart city construction, China not only injects new economic momentum into BRI countries but also builds a platform for expanding overseas business, facilitating factor mobility, and participating in industry rule-making.
Financial policies are a key support for foreign trade structure transformation
Unlike the "old trio," the "new trio" has longer investment cycles and higher technological complexity, necessitating more stringent financing standards and risk control measures. The "Opinions on Stabilizing the Scale and Optimizing the Structure of Foreign Trade," issued by the General Office of the State Council in April 2024, suggest fostering export strengths in the automobile industry, innovating financial products and services for the automobile sector, and enhancing the role of export credit insurance in supporting the development of key areas such as NEVs and photovoltaics. This aims to ensure the success of the international expansion of the "new trio."
The People's Bank of China (PBOC) has implemented multiple financial measures, which have significantly reduced the financing costs for the real economy. Through targeted innovation of financial products, the PBOC has increased financing support for small and micro enterprises and private outbound companies in key industries. The "domestic loans + cross-border financing + export credit insurance" financial combination under the "government-bank-insurance" mechanism has helped small and micro enterprises cope with supply and demand and exchange rate fluctuations in overseas markets. Financial innovation has promoted diversified corporate financing, and the continuous upgrades of cross-border payments and receipts have facilitated smooth funding flows for cross-border e-commerce, enhancing the efficiency of enterprises' international expansion.
Additionally, China continues to optimize the cross-border trade settlement environment and improve trade facilitation levels. Cross-border financial settlement platforms established by various provinces have effectively attracted many financial institutions, improving the efficiency of corporate payments and receipts, expanding investment and financing channels, and advancing the internationalization of RMB.
Companies "going global" still face multiple internal and external challenges
Complex external trade environment
Firstly, the intricacies of international trade, global competition, geopolitical situations, and the uncertainty of the international environment pose numerous challenges for Chinese industries expanding overseas.Overseas intellectual property and technological barriers have continued to strengthen, alongside heightened legal compliance requirements, increasing the risk of encountering antitrust investigations and other restrictive measures during international expansion. Additionally, force majeure factors such as pandemics, floods, and earthquakes have intensified the risk of global supply chain disruptions, leading to higher cross-border management costs in production, inventory, and logistics.
For "new trio" companies, lithium battery enterprises face challenges of trade protectionism and the restictions on lithium resources during their international expansion. For instance, The U.S. Inflation Reduction Act and the EU Regulation on Batteries and Waste Batteries impose new requirements on raw materials and environmental policies. The requirements of localizing industry value chains in the U.S. Protecting American Advanced Manufacturing Act may exclude and restrict China's overseas production lines, presenting greater legal challenges for international ventures. Although the electric vehicle plans in Europe and the U.S. were postponed due to the pandemic, which created new export opportunities for Chinese NEVs, local market certification laws represent the very first barrier to exports. Abiding by environmental policies, market regulation, tax regulation, and safety standards can result in high compliance costs for companies entering new markets.
Secondly, consumer demand is shifting towards high-end, personalized, green, and intelligent products, with increasing expectations for product experience and service quality. For companies expanding internationally, the difficulty of producing localized products, promptly identifying changes in consumer preferences, and adjusting operational plans has significantly increased. To meet the diverse demands of overseas consumers and enhance the quality of logistics, warehousing, and after-sales services, companies need to implement detailed management strategies through localized marketing, employee training in overseas warehouses, and other measures. This inevitably raises supply chain operating costs for international businesses, making it challenging to balance business expansion with cost control.
Overseas production and operating costs are crucial considerations for the international expansion of NEV companies. In terms of exported vehicles, the complexity and inefficiency of cross-border logistics processes, coupled with slow and costly after-sales maintenance abroad, result in high initial logistics and warehousing costs, and ongoing after-sales service costs. For vehicle assembly, establishing strategic partnerships with local automobile companies is one of the ways to enhance supply chains and promote product localization. However, the lengthy negotiation cycles and insufficient brand recognition of Chinese brands make it challenging to secure long-term component suppliers, complicating the smooth execution of production plans and timely adjustments to production scales.
Chinese industry value chains lack resilience, management levels, and industry standards
Firstly, supply chain resilience is inadequate. Core components continue to rely on imports, globally top-tier enterprises are scarce, and the industry has yet to establish effective collaboration among large, medium, and small enterprises. In the “new trio” industry value chain, lithium batteries, a crucial component of NEVs, are currently monopolized by economies such as the United States in terms of key technologies and R&D patents. Consequently, China remains in the low-value-added manufacturing and production stage. Furthermore, China's lithium reserves account for only about 5% of the global total, with critical minerals and core components of automobile power systems heavily dependent on imports, such as nickel, cobalt, and chips, which have import rates exceeding 90%.
Additionally, China lacks a leading enterprise in the NEV sector comparable to Tesla in terms of international influence and product discourse power. Chinese large enterprises tend to collaborate with foreign or other large enterprises, concentrating industry resources among leading companies, while small and medium-sized enterprises struggle to survive in a highly competitive market. This hampers the formation of an environment conducive to efficient resource utilization across the entire industry value chain through collaboration among enterprises of all sizes, adversely affecting the overall development of the industry.
Secondly, Chinese enterprises have yet to establish a comprehensive supply chain management mechanism. The supply chains of the "new trio" industries are highly complex. Although China's NEV market primarily relies on its advanced vehicle manufacturing capabilities, there remains a significant gap compared to leading global car manufacturers in cross-functional and cross-departmental management capabilities, such as logistics systems and resource coordination.
The supply chain logistics system is no longer merely a connection of upstream and downstream products; it now involves an organizational network that encompasses strategic cooperation and integrated relationships, demanding high standards for both supply chain management hardware and software. The new energy industry supply chain comprises numerous key enterprises and a variety of component products. Effectively managing the competitive and cooperative relationships among enterprises is crucial for enhancing supply chain efficiency and fostering collaborative innovation.
Currently, China lacks an efficient and mature supply chain logistics management platform that integrates procurement management, distribution management, quality management, and collaborative management functions. Additionally, there is a shortage of application-oriented talent proficient in basic supply chain management tools and optimization methods. Therefore, enterprises need to continue optimizing the supply chain management system to accurately identify supply chain information and make informed management decisions.
Thirdly, Chinese enterprises lack unified standards that align with global practices. Low-carbon sustainability is currently a key criterion for overseas companies when selecting suppliers and importing products. However, China has yet to establish a green certification mechanism that aligns with international standards. This results in potential restrictions due to carbon tariffs on exports of photovoltaic and new energy products. Additionally, many of China's manufacturing industry standards are not fully aligned with international standards.
In the context of the new energy industry, although significant progress has been made in standardizing China's NEV sector, compatibility with international standards remains insufficient. The construction of a unified standard system across different regions within China is incomplete, and industry regulations concerning technical standards, certification systems, product testing, and environmental impact assessments are not sufficiently developed. This lack of uniform standards exacerbates the restrictive risks faced by Chinese enterprises when integrating into the international industry value chain.
Consolidating China’s foreign investment and trade advantages and proactively addressing overseas supply chain risks
Supported by China's well-established supply chain and immense market demand, the "new trio" has become a highlight of Chinese exports and an embodiment of the country’s industrial competitiveness. In the future, it is essential to seize the market window of opportunities and the development transition period and adopt various measures to consolidate China's foreign investment and trade development advantages.
Firstly, it is imperative to accelerate technological breakthroughs to promote the coordinated development of independent innovation and the utilization of foreign investment. China's substantial initial investments in R&D for emerging industries such as photovoltaics and new energy have laid a solid foundation for industrial development and cultivated many leading domestic enterprises, significantly enhancing China's international competitiveness. In the future, efforts should continue to intensify R&D in key technologies such as batteries, motors, and electronic controls, nurturing strong leading enterprises.
At the same time, it is essential to continuously improve domestic and international industry value chains, expedite progress in independent R&D in key technologies such as green energy-efficient technologies, and attract more high-end, high-quality multinational enterprises for collaboration in China. This approach aims to fully leverage the role of foreign investment in promoting industrial upgrading and continuously strengthening the resilience of China's industry value chains.