China’s sputtering engine of growth leads its imports to downshift
China’s efforts to export its way out an economic downturn have attracted the ire of many foreign governments concerned about protecting their own manufacturing base. But on the other side of the trade ledger a less-noticed slowdown in imports is also reverberating across the globe.
Despite a sharp increase in Chinese purchases of sophisticated foreign-made electronics and a buildup of strategic stockpiles of commodities, sales to China in 2023 fell by about $150 billion, or 6 percent, and so far this year have only rebounded marginally. That slowdown accompanied a deceleration of export growth from record levels reached during the Covid-19 pandemic and its aftermath, although exports have shown greater resilience this year.
China’s tepid economic growth has been the key driver of falling import demand. But there are other factors at work. Beijing is emphasizing import substitution as US-China tensions rise. Foreign direct investment in China is declining, and Chinese companies are increasing outbound investment. In addition, China is providing state subsidies for money-losing manufacturers, whose failures in a market economy would be part of a country’s ascent of the value-added ladder.
All this has economic and geopolitical implications in a world that has grown increasingly reliant on China’s engine of growth and increasingly concerned about its trade practices. Foreign governments are grappling with—and building defenses against—escalating Chinese exports, as my colleague Mrugank Bhusari recently explored in Sinographs. And some countries that have crossed Beijing—notably Australia and South Korea—have faced coercive Chinese trade retaliation. China’s economic partners soon could be crying foul if their sales to China don’t recover and trade surpluses continue to balloon.
Important economies—including the United States, Japan, South Korea, Taiwan, and the members of the Association of Southeast Asian Nations (ASEAN)—have experienced weakening demand for non-electronics manufactured goods. US exports to China fell sharply last year and through July of this year despite burgeoning orders for sophisticated electronics not yet subject to Biden administration export controls. Other countries experienced more significant declines. For example, South Korea’s exports to China dropped 20 percent last year.
As a result, since late 2023 the more vibrant US economy has eclipsed China as the largest export market for most major Asian exporters. Beginning in December 2023, South Korea’s shipments to the US overtook exports to China for the first time in 20 years, while for Taiwan that occurred beginning in March after 21 years as exports to the US have soared. And the same phenomenon has occurred for ASEAN’s major economies this year. This turn of events could present an opportunity for Washington to strengthen economic ties with Asian partners at China’s expense. However, if former President Donald Trump returns to the White House in 2025 and calls for tariffs on all imports to the United States, that opportunity would be squandered.
China’s seemingly endless demand for imports hit an all-time high of $3.137 trillion in 2022 as the global economy rebounded from the COVID-19 pandemic. But the collapse of the country’s real estate bubble, weak corporate investment, and evaporating consumer confidence dampened the appetite for everything from timber to cosmetics. Real estate development may not revive for years and Beijing’s efforts to spur domestic demand have so far fallen flat. If the Chinese engine of growth remains in low gear, the ripple effects will continue to be felt around the world.
Even if China’s economy revives, there are other changes underway that will likely limit its import demand. Most important are China’s heightened concerns about national security, especially amid increasingly fraught relations with the United States. Since the Trump administration stepped up restrictions on technology sales to China Beijing has accelerated its efforts to limit the use of foreign inputs in its priority supply chains.
The highest priorities are semiconductors and the equipment and materials needed to make them. With the United States orchestrating a multinational effort to block China’s access to these technologies, Beijing has undertaken a massive initiative to import as much as it can before the barriers are raised even higher. Meanwhile, it is spending hundreds of billions of dollars to reproduce that technology in its own factories, while localizing its sources of materials and other inputs. But the real impact on imports is largely still to come. For example, Taiwanese producers of less-sophisticated “legacy” chips will likely see Chinese orders dry up as more mainland semiconductor factories come online.
But import substitution is already affecting demand in less-advanced industries. Petrochemical companies around the Pacific Rim that have supplied China throughout its economic rise are seeing orders disappear as Chinese producers have invested heavily in expanding capacity in recent years. Since 2019, China’s imports of petrochemical feedstocks have dropped drastically.
Meanwhile, China’s emergence as a major producer of components and other intermediate goods means that exports of inputs to Chinese assembly plants have stagnated. South Korea and Taiwan still ship sophisticated parts, especially those containing semiconductors, but many other industries have been affected, especially among ASEAN countries.
That problem has become more severe for developing countries, which ship much less sophisticated products produced by labor-intensive industries. In June, the Rhodium Group reported that Chinese provincial and local governments have sought to stave off rising unemployment in the current economic downturn by subsidizing production at “low-end” factories that no longer can compete with goods produced more cheaply in other countries. That means, according to the Rhodium Group report, that “China provides fewer opportunities as an export market for emerging countries while competing head-on with them in the low-tech and mid-tech space.” That could have serious implications for economies that seek to duplicate China’s success in building manufacturing capabilities from the ground up.
Another factor contributing to declining imports is falling foreign direct investment into China—which is down more than 28 percent in the first five months of 2024—and the move of some foreign companies out of China altogether. Some of this is explained by manufacturers seeking cost advantages in other countries, including to avoid US tariffs. But it is also the result of strategic business decisions to de-risk exposure to China amid geopolitical tensions, and a response to the increasingly unattractive climate for doing business in China. Former South Korean Trade Minister Han-Koo Yeo wrote earlier this year that Chinese retaliation against Korean companies for deploying a US-made anti-missile system in 2016 “shattered Korean business confidence in China as a reliable business partner, accelerating diversification by Korean business as a hedging strategy.”
Many Chinese manufacturers are mirroring their foreign counterparts by shifting factories abroad, a trend reflected in record Chinese outbound investment numbers. Taken together, this rising tide of departures will have an impact on exports to China as non-Chinese suppliers follow their customers to other countries. And ironically, it may also show up in Beijing’s trade statistics as a faster decline in imports because of an official practice of listing as “imports” the goods that foreign companies produce in China for sale in China.
Many Chinese suppliers are building factories abroad as their customers shift to new production bases outside China. And that means that non-Chinese competitors will remain on the outside looking in, even in their own countries. Of course, China sees the situation differently. As the Global Times, one of Beijing’s mouthpieces, insisted ambiguously in January: While imports of Chinese intermediate goods by Southeast Asia “mean more trade deficits,” they bring “opportunities for industrialization, rather than substitutes for manufacturing products in the local market.”
After electronics, China’s two most important categories of imports are oil and ores, which together represented nearly 30 percent of its overseas purchases last year. Along with grains and any number of raw materials, these commodities help fuel China’s economy, and countries from Russia to Brazil to Malaysia to Zambia profit from this trade. In recent years, China has stockpiled commodities to ensure a steady supply: It has acquired some 90 percent of the world’s known copper stockpiles, nearly 25 percent of crude oil reserves, and over half of the world’s wheat and corn.
However, those purchases have slowed over the past year, and many countries are seeing prices fall along with Chinese demand. Some of Africa’s most important commodity producers are especially feeling the pinch. Total African exports to China in 2023, which are overwhelmingly from extractive industries, fell 6.7 percent. The Democratic Republic of the Congo—a major source of cobalt and copper—saw its sales tumble nearly 14 percent. To make matters worse, China has been shifting its purchases of crude oil from Africa to Persian Gulf and Southeast Asian suppliers. As a result, Nigeria’s oil exports to the Chinese market last year plummeted 61 percent and Angola’s were down by one-fifth. Both of those countries rely on oil revenue to help repay foreign debts, including to China.
The bottom line: China’s economic rise has been accompanied by a profound deepening of economic and political ties across the globe, based first and foremost on trade. But those ties are bound to fray—as is beginning to occur in response to the latest jump in Chinese exports—if countries continue to see diminishing sales to China.
Jeremy Mark is a senior fellow with the Atlantic Council’s GeoEconomics Center. He previously worked for the International Monetary Fund and the Asian Wall Street Journal. Follow him on X: @JedMark888.
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