Yao Yang on China's trade links and companies going abroad
The Professor at Peking University sums up the confidence of a country in economic transition.
I had the pleasure of meeting Yao Yang, Professor and Director of the China Center for Economic Research and until this year Dean of the prestigious National School of Development at Peking University for 12 years, at the University of Pennsylvania in Philadephia last week.
Yao recently gave a speech that caught a lot of domestic elite attention at the Global Smart Logistics Summit, held in the Hangzhou headquarters of Alibaba-launched logistics company Cainiao, on September 10. The transcript is available on Guancha, a Chinese domestic news platform. Below is a translation. - Zichen
姚洋:我们总是喜欢检讨“大而不强”,其实大本身就是强
Yao Yang: We Often Criticize Our Economy for Being ‘Large but Not Strong,’ But in Reality, Being Large Is Strength in Itself”
I'm very pleased to share some thoughts with you today.
The first thing I'd like to say is that the world is not decoupling from China. In reality, China's share of global trade has not only remained stable over the past few years but has also seen considerable growth.
China's GDP represents around 17% of the global total and its trade accounts for more than 14% of global trade. In contrast, U.S. trade makes up only about 10% of the global total. And despite last year's decline in world trade volume, which impacted China as well, Chinese exports have rebounded this year. Why do Chinese exports remain so popular? A key factor is China's cost advantages.
China's cost advantages are the result of long-term accumulation, primarily derived from the scale and comprehensiveness of its vast manufacturing sector. The Chinese are often self-critical, saying that while their industries are large, they lack strength. However, size itself is a strength. A system must be sufficiently large and complete to effectively reduce costs. Of course, technology also plays a critical role in this process. For example, the continuous reduction in logistics costs in China can be attributed to advancements in AI technology.
How big is China's manufacturing sector? In terms of value added, China contributes 30% of the world's total manufacturing. From 2010 to 2020, China's share grew by 11 percentage points. This did not come at the expense of the U.S., but rather Japan and European countries.
By the way, there's no need to be concerned about India surpassing China. China's exports total $2.8 trillion, while India's are only around $600 to $700 billion—just a fraction of China's. Moreover, India faces a trade deficit with China amounting to $200 billion.
People often compare China today to Japan in the 1990s, citing similar demographic challenges in the long term and insufficient demand in the short term. However, I believe this analogy is flawed. A more accurate comparison would be with Japan in the late 1970s. What Japan experienced then is what China is currently going through. Although it's often said that China's growth has unique Chinese characteristics, from an economic development standpoint, China is not exceptional. It is essentially following the same path Japan took after World War II.
In the 1970s and 1980s, Japan underwent a significant transformation. On the one hand, the country shifted from external demand to domestic demand. On the other hand, it transitioned to an innovation-driven economy. Those of us old enough to remember the 1980s and the early 1990s will recall that almost all new products, except perhaps for personal computers, originated from Japan.
In fact, many of China's industries are global leaders. Electric vehicles and renewable energy products are clear champions. Even in AI, China stands at the forefront. China lacks the absolute cutting-edge in certain high-end sectors, but from an application perspective, it is far ahead of the rest of the world.
The Chinese need to have confidence in themselves. In real terms, the U.S. reliance on China has not diminished. Although direct trade between the two countries seems to have decreased, China's share of the U.S. trade deficit remains steady at around 40%. While international tensions may arise, I believe that as long as there is no war, economic logic will continue to prevail.
Next, I want to discuss the trend of Chinese enterprises going overseas.
Undoubtedly, Chinese enterprises going overseas has become a clear trend. Just as the U.S. and Japan built economic empires through their overseas investments, China must also follow a similar path. This means that China still has a long way to go in its global economic journey.
In fact, Chinese companies going global create a win-win situation. Take China's evolving relationship with ASEAN as an example. In the past, China imported raw materials from some countries and intermediate goods from developed Asian economies, assembling them for export to Europe and America. However, with industrial upgrading, many of China's labor-intensive industries have shifted to Southeast Asia, transforming China's export structure to include more advanced intermediate goods. This complementary relationship with Southeast Asia is a clear win-win scenario.
Chinese people often complain about excessive competition in China, but this issue is not unique to the country. In the late 1970s, Japan also experienced overcapacity. Why did Japan aggressively expand overseas? It was because the domestic market had become saturated, while investment remained abundant, leading to a shift towards international markets.
In my view, the root cause of the intense competition among Chinese enterprises is the excess of capital. However, there is currently insufficient support for innovation. More funds need to be directed towards venture capital to better utilize this capital, which could help alleviate the issue of overcompetition.
The world is currently focused on energy transition. For developing countries to grow, they must avoid the old model of relying on fossil fuels. In this context, China's higher-quality capacity can support other countries, particularly developing ones, in their energy transitions and contribute to global emissions reductions.
Both the U.S. and Europe are aiming for re-industrialization, but the U.S. is attempting to achieve this solely through its own efforts, which is nearly impossible. Therefore, for Europe and America to successfully re-industrialize, they must open their doors to investment from China. In fact, China not only possesses vast production capacity but has also surpassed many developed nations in several technological areas, a reality that developed countries must adapt to.
In summary, China is a champion of free trade, and the Third Plenary Session of the 20th Central Committee has made new commitments to further expand institutional opening up. China has removed all restrictions on foreign investment in the manufacturing sector, demonstrating its commitment to the world. China also hopes that other countries will preserve the achievements of globalization and maintain the existing frameworks for free trade and investment.