Françoise Lemoine

Rise of China and India in International Trade： From Textiles to New Technology

China and India are two demographic giants that have become big developing economic powers. They have maintained their specialization in textiles and developed outward-oriented sectors linked to new technologies, taking advantage of offshoring and outsourcing. Their increasing contribution to international trade is changing the world supply and demand of manufactured goods, primary goods and services. They are new leaders in the international division of labor, but beyond technological catch-up, their challenge is quality upgrading. Both countries are increasingly contributing to global economic growth, but they cannot yet trigger the growth of the rest of the world by themselves.

Past Successes and New Challenges: China's Foreign Trade at a Turning Point

Since 1979, China has recorded a remarkable trade performance, which has been driven by international processing and the offshoring strategies of foreign firms. The diversification of Chinese exports and their technological upgrading have been phenomenal. However, there is also inertia, illustrated by the persistent dualism of the trade sector, the unrelenting specialization in downmarket products and the deteriorating terms of trade. These weaknesses have helped its partners to adjust to the rise of this new trade power. In the past decade, Chinas economy has faced the adverse effects of an export-led growth and the global crisis has revealed its vulnerability. China is now forced to rebalance its economy. This will imply major changes in foreign trade, in favor of ordinary trade and away from processing. In the foreseeable future, China is unlikely to become the driver of international demand but will remain the engine of Asian economic integration.

China’s Specialization in East Asian Production Sharing

Since 1980, China’s economy has grown at the rate of 9 percent a year and its foreign trade has expanded at the pace of almost 15 percent a year. Its share of world trade rose from less than 1 percent to about 5 percent in 2002.1 The emergence of China as a great economic and trade power is bringing far-reaching changes in the world economy and in international economic relations. China now holds a large share of the world market in traditional industries (accounting for about one-third of world exports in leather and shoes and one-fifth in clothing), but is also rapidly enlarging its shares in electrical and electronic exports, the fastest growing segments of world trade. In 2002 China recorded one-fifth of world exports of consumer electronics and of domestic appliances. For East Asian countries, China has become a major partner, often their first partner in the region. In 2003, China was Japan’s second-largest export market, behind the US, and its first-largest supplier. For South Korea, China was the largest export market and its second-largest supplier behind the US. In 2003 and 2004, the accelerated increase of China’s import demand (+40 percent and 37 percent respectively) has been the engine of economic growth in East Asia.