xi jinping president of portugal Horacio Villalobos - Corbis/Corbis via Getty Images

Could China Turn Inward?

Notwithstanding the 90-day trade truce on which US President Donald Trump and Chinese President Xi Jinping recently agreed, tensions between the world's two largest economies remain high. But while both countries may be tempted to turn inward, there are five reasons why they would be wise not to.

SHANGHAI – On the face of it, China and the United States both look as though they would be relatively insulated if trade tensions continue to escalate. China’s exports to the US account for only 4% of its GDP, and its imports from the US amount to just 1% of GDP. In the US, with its large, domestically driven economy, the equivalent figures are 1% and 3%. But putting aside these headline numbers, a retreat from globalization by the world’s two largest economies would nonetheless entail significant costs.

True, China has been rebalancing away from exports: domestic consumption contributed to more than 60% of its GDP growth in ten of the 15 quarters since 2015, and up to 80% in the first half of 2018. In many consumer categories, China is now the world’s largest market. In the first quarter of 2018, it overtook the US as the world’s top box office. And it also now accounts for 30% of global auto sales (and 43% of unit sales of electric vehicles) and 42% of global retail e-commerce transaction value.  

Moreover, the McKinsey Global Institute finds that while the world’s exposure to China in terms of trade, technology, and capital increased from 2000 to 2017, China’s exposure to the world peaked in 2007, and has declined ever since. As recently as 2008, China’s net trade surplus accounted for 8% of its GDP; by 2017, it had fallen to 1.7%. That is less than either Germany or South Korea, where net exports generate 5-8% of GDP.

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