Foreword
Embracing the Future with Greater Openness: China’s Strategy in Defense of Globalization
At this moment, the world is braving seismic changes. Unilateralism and protectionism have fueled a surge of anti-globalization, and the Covid-19 pandemic has added to the instability and uncertainty of the world economy. The international community, now at a crossroads, must choose between multilateralism and unilateralism, openness and isolation, cooperation and confrontation. In this context, China remains committed to furthering reform and opening up in all respects and establishing an economic system of greater openness. The country will unswervingly promote an open global economy characterized by mutually beneficial cooperation and shared governance.
The high level of openness to which China has committed has some distinctive features. It pursues a double development dynamic and facilitates free trade. It prioritizes trade in services and nurtures new pacesetters of opening up. It leverages institutional designs to ensure a high-standard socialist market economy.
I. Boosting domestic demand for high-level opening up
1. The immense demand of 1.4 billion Chinese people is a cornerstone for developing a strong domestic market.
The next 5 to 10 years will be critical for China’s economic transformation if the tremendous potential of domestic demand is unlocked. Expenditure on services, which accounted for 45.9% of total consumer spending in 2019, is estimated to reach 52% by 2025 as the country transitions to a service economy. Its service sector, which contributed 53.9%of GDP in 2019, is projected to grow to around 60% by 2025. Some researchers believe that the digital economy in China is expected to exceed RMB60 trillion, which will contribute about 55% of GDP. Thanks to urbanization and expanding city clusters, urban permanent residents will account for 66% of the total population by 2025. During the 14th Five-year Plan period (2021-2025), the vast domestic market will continue to stimulate innovation and drive long-term sustainable economic growth.
2. China expands domestic demand to advance opening up.
At this new stage of development, the landscape for opening up has changed. The new features of further opening up dictate a greater role of expanded domestic demand. To begin with, a market of 1.4 billion people provides basic conditions and a unique impetus for higher-level opening up. By 2030, imports into China are estimated to top US$22 trillion. Meanwhile, to better integrate into the world economy and tap into domestic demand, China needs to increase international engagement with greater openness. For example, China’s high-tech sector is still heavily reliant on imports, buying 95% of high-end chips, over 70% of intelligent terminals, and most memory chips from foreign companies.
In other words, creating a double development dynamic with the domestic economy and international engagement reinforcing each other, and the former as the mainstay is a strategy based on China’s large domestic market. High-level opening up will leverage expanded domestic demand to realize the synergy of internal and external markets and the sharing of factor resources for a double development dynamic with greater openness.
3. China’s large domestic market is open and accessible to the whole world.
Once fully unlocked, China’s domestic market potential will inject new vitality into economic globalization and create greater room for achieving high-quality development in China. According to a preliminary estimation, trillion-dollar domestic demand will help China achieve economic growth of 4-5% in the next 5 to 15 years.
China has been the biggest contributor to global economic growth for 14 consecutive years. In 2019, its contribution exceeded 30%. In the next 5 to 10 years, it is expected to contribute around 25-30% of global economic growth. That is to say, the double development dynamic is not a growth loop behind closed doors, but rather a strategic move in response to the complex and changing domestic and international environment. It is not a stopgap solution, but a medium-to-long-term initiative that serves the nation’s economic transformation and upgrade.
II. Spurring the market through institutional openness and reform
1. China accelerates the pace of opening up in the service industry.
The key to unleashing the consumption potential of the 1.4 billion Chinese people is to encourage service consumption.
As economic globalization continues, trade in services has become a pillar of global free trade. From 2010 to 2019, global trade in services has grown from US$7.8 trillion to US$11.9 trillion, with an average annual nominal growth rate of 4.8%, twice the rate of trade in goods. Trade in services increased from 20.3% to 23.8% of total trade and is expected to rise to 50% by 2040.
For China, trade in services is becoming the primary driver of positive economic transformation. From 2014 to 2019, its trade in services grew at an average annual rate of 7.8%, 2.2 times the rate of trade in goods and 1.9 times the overall growth rate of foreign trade. In pursuing high-quality development, upgrading the industrial structure entails more demand in R&D and design, among other kinds of trade in producer services. Structural upgrades in consumption and urban-rural development will increase demand for services in education, medical care, health, tourism, culture and information.
To adapt to the general trend of globalization and the needs of domestic economic transformation, and to build a strong domestic market and a robust trader in a concerted manner, it is crucial to strengthen prominent weak points in the service sector. During the 14th Five-year Plan period, to increase the proportion of trade in services in total foreign trade from the current 14.6% to over 20% by 2025, China should further open its consumer and producer services. At the same time, to build a country of innovation, China should significantly increase the proportion of the knowledge-intensive services industry. International competitiveness should be boosted in terms of consumer services such as tourism, culture, health and education, and producer services such as R&D, design and finance.
2. China will advance institutional reform with greater openness.
Openness is the driving force for institutional reform. Promoting institutional openness, which is manifested in rules, regulations, standards, and management models, is a prerequisite for developing a high level of opening up focused on trade in services. It will usher in institutional changes in the service sector.
To build a high-standard open economy during the 14th Five-year Plan period, it is necessary to make major institutional breakthroughs in the service industry. On the one hand, it is imperative to conform to international practices when it comes to rules, regulations, and standards of the service sector. For example, adopting advanced international management standards in high-demand industries such as health care and education, should top the agenda. Meanwhile, China should combat trade protectionism within its borders, moving faster to tear down administrative barriers and break market monopolies in the service sector. An open and level playing field will unleash the potential of private enterprises and create more investment opportunities for foreign enterprises.
3. China will further reform to promote market-based allocation of production factors.
High-level opening up also hinges on a high-standard market system. The latter calls for a market-based allocation of production factors, a system where the market plays the decisive role in the allocation of resources. For example, market-based reform will establish a unified urban and rural land market. The human resource management reform and the people-centered incentive mechanism for scientific and technological innovation will better tap the talent tool, especially sci-tech researchers. Stronger protection of property rights will inspire the entrepreneurs, who are important players in resource allocation. Committed to forging an enabling business environment that is based on market principles, governed by law, and aligned with international standards, the government should refrain from unnecessary administrative interventions, but should enhance institutional arrangements in intellectual property rights protection, environmental compliance, market transparency and competitive neutrality.
III. Promoting global free trade with a strong domestic market
1. China’s open and strong domestic market will make it an important force in championing free trade.
China’s growing service industry will not only satisfy domestic service demand, but will also create a huge market for win-win cooperation with other countries and regions, making the nation a major engine for bilateral and multilateral free trade. Taking China-EU economic cooperation as an example, if the share of the service industry in total trade between China and the EU (excluding the UK) were to increase from 12.6% in 2018 to a global average of 23.8%, then China-EU service industry trade would reach US$167.8 billion. Taking China-Japan health care cooperation as another example, the growing health care market in China is a huge niche for the two countries to cooperate.
2. China will break new ground in facilitating free trade.
The Shenzhen Special Economic Zone, the Guangdong-Hong Kong-Macao Greater Bay Area, the free trade ports, and the pilot free trade zones are the testing ground for a higher level of openness. With the mission of opening up service trade and market, such projects should be granted greater autonomy. They will be the first to test the waters in some critical areas such as market access, management standards, regulatory rules, transparency, and intellectual property protection.
The Hainan Free Trade Port project, which has benchmarked the Chinese tropical island against the highest international standards for free trade ports, aims for liberalizing and facilitating trade and investment. The policies and institutional systems designed for Hainan will make the island a flagship on the forefront of China’s further opening up in the new era.
The Guangdong-Hong Kong-Macao Greater Bay Area, with a focus on integrating service industry trade, will push forward with mutually recognized and compatible management standards and personnel qualification requirements in the three locales. It will promote in-depth cooperation in the service sector, the integration of market systems, and synergy of service systems in all manners.
The Shanghai Pilot Free Trade Zone, a Chinese answer to the world’s high-caliber free trade industrial parks, will encourage openness in service industry trade category by category.
3. China sets promoting global free trade as its strategic goal.
It is the responsibility of all countries to promote an open global economy characterized by mutually beneficial cooperation and shared governance. Economic globalization is still prevailing, and openness and cooperation will continue to be the mainstream operational strategy of the international community. Any attempts to reverse these trends will be futile.
China is committed to opening up on a higher level and takes the initiative to promote bilateral and multilateral free trade. For example, it actively engaged in the talks of the Regional Comprehensive Economic Partnership Agreement (RCEP) and the China-EU Comprehensive Agreement on Investment (CAI), and has worked to accelerate free trade negotiations with Japan and the Republic of Korea. China’s unwavering efforts to promote its own opening up, global free trade, and reform of global economic governance will inject more positive energy into the international community.
As an open economy with a large population, China welcomes the world with open arms to its domestic market. When it presses ahead with high-level openness, its enormous domestic demand from a gigantic market of 1.4 billion people will deliver benefits to the world. Such immeasurable market potential, if released, will be conducive to promoting high-quality development in China and to stimulating recovery of the faltering global economy due to the Covid-19 pandemic. It will herald profound market-based reform in China and benefit the world with dividends from China’s comprehensive reform and opening up.
Chi Fulin