Wei Jianguo: How Will the Pandemic Change the Global Trade Pattern?

Every major crisis in history will have a profound impact on reshaping international trade.

The global financial crisis in 2008 changed the US-led globalization process and the roles of “surplus countries” and “deficit countries”. The status of developing countries in world trade has increased rapidly.

11 years later, the impact of the coronavirus pandemic is once again transmitted to international trade. How will the pandemic affect the role of China and other countries in international trade? To answer these questions, a reporter from “Global magazine” interviewed Wei Jianguo, the former Vice Minister of Commerce and the Vice Chairman of the China Center for International Economic Exchanges(CCIEE).

Global magazine: The World Trade Organization (WTO) predicted on April 8 that global trade will plummet by between 13% to 32% this year because of the coronavirus pandemic. Some WTO economists believe that this number is likely to exceed the trade recession brought by the 2008 global financial crisis. How do you assess the global trade this year?

Wei Jianguo: The spread of the pandemic has had a significant impact on the three most important trade circles in the world, namely, the North American trade circle, the EU trade circle, and the Northeast Asia trade circle. The sharp reduction in consumer demand for commodities and services such as agricultural products will undoubtedly affect the global trade in the first half of 2020.

However, the impact of this pandemic on foreign trade is different from the previous economic depression and financial crises. The causes are different. The 2008 global financial crisis was triggered by the deterioration of basic assets and the high leverage of entities, which involved systematic risk. The current economic downturn is mainly caused by coronavirus pandemic, which is a temporary crisis.

In the first four months of 2003, China’s imports maintained a high growth but began to fall in April when the SARS broke out. Guangdong was hit first because the SARS first appeared there. In 2003, Guangdong’s exports lost about $500 million and the impact on GDP growth was about 0.5 percent. After the SARS was put under control, China’s foreign trade returned to normal.

In response to the coronavirus pandemic, all the affected countries and regions have not only adopted strict prevention and control measures, but also launched active monetary and fiscal policies for the post-pandemic economic recovery. Therefore, I believe that global foreign trade will start to pick up in the second half of 2020.

Global magazine: What are your expectations for China’s foreign trade this year?

Wei Jianguo: China’s foreign trade will continue to rise steadily in 2020 for the following three reasons.

First of all, China is the only country in the world that ranks among the top three in terms of the volume of general trade, processing trade, and cross-border e-commerce. In 2019, the structure of China’s trade was further optimized. The imports and exports of general trade were 18.61 trillion yuan, an increase of 5.6%, accounting for 59% of China’s total foreign trade value. The new models of foreign trade such as cross-border e-commerce will continue to develop vigorously. Imports and exports completed through the cross-border e-commerce management platform of China’s customs reached 186.21 billion yuan, an increase of 38.3%. This is the reason why China’s foreign trade is growing against the trend. The three types of trade complement each other. For example, if the general trade and processing trade are severely affected by the pandemic, cross-border e-commerce will play a better role in securing orders and stabilizing domestic foreign trade.

Secondly, the pandemic has mainly restricted the flow of people and logistics, which may cause great loss to machinery manufacturing such as aircraft, automobiles, ships and other related manufacturing industries. However, the demand for consumer goods has not disappeared, such as food, clothing, luggage and so forth. After every major emergency in history, including the economic depression, financial crisis and public health emergency, the demand for consumer products will rebound quickly. Once the pandemic is over, spending on investment goods and consumer goods will quickly return to the previous level.

Last but not least, China is the only country in the world that has all the industrial categories listed in the UN Industry Classification. For about 220 of the 400 major industrial products in the world, China has the world’s biggest output. Nearly 80% of the world’s toys and child safety seats are produced in China. China is also a major mask producer and exporter and more than 70% of its production capacity is exported each year. The perfect industrial category and manufacturing base has not only provided strong support for the development of China’s foreign trade, but also made China an irreplaceable player in global trade.

Global magazine: How will the pandemic affect the share and influence of each country in international trade and the market?

Wei Jianguo: The pandemic will hit some export-oriented countries hard, such as the United States, Germany, Russia and Japan. The global industry chain and the cluster will undergo great changes. In the past, global trade was equally shared by the three largest trade circles in North America, the European Union and Northeast Asia. In the future, however, the Northeast Asia trade circle will form a new trade pattern.

The global supply chain will also shift from the west to the east, which I summarized as four “eastward moves”.

High-end industries will move to the east. The economies of China, Japan, South Korea and other countries in Northeast Asia will recover faster than many other countries. Thus, high-end industries such as cloud computing, robots, big data, smart manufacturing and new materials will move to Northeast Asia. According to economic laws, the development of global industries will move closer to areas with the biggest consumption growth. China has a huge consumer market and it might become the world’s largest consumer market this year.

Technology and capital will move to the east. The move of the global industrial chain to the Northeast Asian economic circle has also brought China world-class technology and a large amount of international capital. The implementation of the Chinese Foreign Investment Law this year will further enhance the business environment and bring more foreign investment. China has adjusted its economic structure through supply-side structural reforms to further improve the quality of China’s economic development and attract global high-tech companies to invest in China.

High-end services will move to the east. The pandemic will prompt China’s consumption upgrading as high-end consumer products and medical care moves eastward. China’s high-quality economic development requires a higher level of service. The pandemic has a great impact on the catering industry. In 2019, the consumption of the catering industry was 467.21 billion yuan, accounting for 9.4% of the country’s consumer goods. After the pandemic, the consumption upgrading in the catering industry will also promote a service upgrading, which will attract more high-end service companies worldwide to enter the Chinese market.

Highly-skilled professionals will move to the east. The global industrial transfer will inevitably bring highly-skilled professionals eastward, including China. The establishment of the first innovation center outside the United States by MIT in Hong Kong indicates the development opportunities created by the Guangdong-Hong Kong-Macao Greater Bay Area. In order to attract foreign investment, various regions of the country provide policy subsidies for high-end talents.

As can be seen, the eastward movement of the global supply, industry and service chain cannot be stopped. Northeast Asia will become the engine of global economic development. This will not happen in Europe, nor will it happen in the United States. As the CEO of Apple Inc. said, Apple will not be able to move its production back to the United States because it cannot even find a supplier of screws there. As the global supply chain moves eastward, high-end manufacturing in the United States, Germany and France may also move eastwards, which will lay a good industrial foundation for the steady growth of the Chinese economy after the pandemic.

Global magazine: The ranking of China’s major trading partners changed in 2019 and ASEAN replaced the United States as China’s second-largest trading partner. Will the pandemic change the structure of China’s trading partner again?

Wei Jianguo: A long time ago, I thought that ASEAN will replace the United States as China’s second-largest trading partner, but I just didn’t expect that it happened so fast.

From a macro perspective, China’s trading partners can be divided into four groups according to the total trading value. The first group is the countries and regions with a trade volume of about $600 billion, such as Europe, ASEAN, and the United States; the second group is about $300 billion, such as Japan and South Korea; and the third group is about $200 billion, including Africa; and the last group is about $100 billion, such as Russia, Australia, Brazil, India and so on.

Among all the affected countries and regions, ASEAN countries are relatively less affected by the pandemic and they are expected to continue to grow in 2020. From January to February 2020, China’s exports to ASEAN fell by 3.6%, to the EU fell by 17.1%, to the United States fell by 26.5%, and to Japan fell by 23.3%. ASEAN is likely to become the main growth point of China’s exports in 2020.

In addition, Africa is a market with great potential. Africa has a population of 700 million. According to the IMF’s recent predictions, sub-Saharan Africa has become one of the regions with the fastest GDP growth. The 2018 China-Africa Cooperation Forum Beijing Summit opened the new era of China-Africa economic and trade cooperation and they will reach more economic and trade cooperation.

Global magazine: How should China seize the opportunities of trade moving eastward?

Wei Jianguo: The top priority is to create an open, stable and safe industrial and supply chain.

First of all, all the countries should continue to open up, give play to their comparative strengths and exchange resources through trade, such as the rice from Thailand, iron ore from Australia, fruit from Vietnam, luxury goods from Europe and America. We must create an open supply chain.

Over the past 40 years of reform and opening-up, China has created ten industrial clusters but their geographical advantages have not been fully realized, and there is a lack of coordination between the upstream and downstream industrial chain. There should be a horizontal division of labor, vertical integration, and collaborative innovation among industrial clusters. At the same time, China’s industrial chain and supply chain are not well connected with the international industry, we need to work on that.

The reason for the current situation is that China has not paid enough attention to the transformation and upgrading of traditional industries in the past, and there was a repeated construction of strategic emerging industries in some places and regions. For example, China’s industrial design capacity has increased to 120 billion yuan per day in 2018, an increase of 68.4% over 2015; the e-commerce transaction volume was 31.63 trillion yuan, more than any other country. However, there are several problems in these two industries, such as a low degree of marketization, high entry barriers, excessive regulations, inadequate competition, poor services and lack of standardization. Therefore, priorities should be given in making improvements in these areas.

The second issue is stability. China is the only country in the world that has all the industrial categories listed in the UN industry classification, which is our great advantage. However, we should not give up all low-end manufacturing industries. For example, mask production may be a low-end manufacturing industry but it played an irreplaceable role during the pandemic period.

Finally, it is about the safety of the industrial and supply chains. For example, Wuhan, as the Chinese automobile hub, has a large-scale industrial cluster in the field of automobiles and parts. It is also home to the headquarters of Dongfeng Motor Group, the second-largest automaker and state-owned company in China, as well as General Motors, Renault, Peugeot, Honda and Nissan. The over-concentration of the industrial cluster caused great damage to the global auto industry when the pandemic broke out. Perhaps, some of the industries in Wuhan can be transferred to the central and western regions to enhance the resilience of the industrial chain.

In addition, we must strengthen R&D and innovation, especially in the area of core components such as high-end chips, CNC machine tools and intelligent manufacturing.  Although the R&D expenditures in the manufacturing industry have increased, more investment in R&D is still needed. Especially, we need to expand the application of digital design. In advanced countries, the ration between R&D investment of industrial enterprises and their operating incomes is between 2.5% and 4%, higher than China. According to the “Derwent Top 100 Global Innovator 2020”, three Chinese companies are on the list, namely, Huawei, Tencent and Xiaomi. In 2018, the contribution rate of China’s science and technology was only 58.85%, implying great room for improvement.

Global magazine: What are your suggestions for foreign trade-oriented companies amid the pandemic?

Wei Jianguo: I have contacted many foreign trade-oriented enterprises in Jiangsu, Fujian, Guangdong and other places by telephone and email. At first, orders were subject to the problems in the resumption of production in China, but now they are also subject to the pandemic outbreak in other countries, small and micro companies are afraid of taking orders.

For export-oriented enterprises, orders are their lifeblood and therefore, they should do whatever they can to take orders. What they can do is to cooperate with other small companies to go through the difficult times.

Enterprises should also actively explore the path of transformation. I am not saying that all enterprises must turn to mask production, disinfectant and other pandemic prevention products. Let me give you an example. There is a factory in Shenzhen that used to produce high-power motors. It lost all its oversea orders because of the pandemic but it did not give up. Instead, it started to produce small motors for electric curtains and the transformation has become very successful.

Another key is that the government and intermediary institutions (chambers of commerce, associations) should gather more information about the resources of small and micro enterprises, build a platform to help small and micro enterprises to cooperate and complete orders together.