Development in dual circulation

[Shi Yu/China Daily]

While focusing on domestic circulation for growth, China will further open up its economy to achieve technological excellence and deepen global cooperation

While formulating the 14th Five-Year Plan (2021-25), policymakers and economists analyzed China's status in the global economy, and have laid out a "dual circulation" development paradigm for the future.

Since dual circulation, being centered on internal circulation (the domestic market), is aimed at further integrating the internal circulation and external circulation (the global economy) together to develop new advantages for China in global cooperation and competition, the country should consider all the pros and cons so it can avoid the pitfalls on the road to future development.

First, the economic and trade relations China has developed with the rest of the world after joining the World Trade Organization about two decades ago have worked in its favor. According to a 2019 McKinsey report, China's economic dependency on the rest of the world has reduced while the world's reliance on China has increased. This shows China's growing clout and relevance as a market and manufacturer, and an important exporter of capital.

Although some countries, including the United States, have wrongly accused China of not playing by the rules and initiated moves to isolate it from the global industrial linkages and supply chains, they cannot change the basic structure of the global economy, as it is made up of the highly intertwined industrial networks and supply chains of different countries.

While a UK think tank, in its report this year, has suggested that the US decouple itself from China's supply chains, the so-called Five Eyes (the UK, the US, Australia, New Zealand and Canada), because of the impact of COVID-19, seem to believe they have become too dependent on China over the past few decades.

In a recently published study, we used the OECD Statistics on Trade in Value Added to calculate the extent of the Five Eyes' added value in China's manufacturing exports to the US, and not surprisingly found that the US itself accounts for about 10 percent of the added value involved in China's manufactured exports to the US,－the highest among not only the Five Eyes but also G7 countries. Chinese exports to the US are not 100 percent Chinese, because they contain a lot of components and parts from developed countries including the US.

In other words, US enterprises have become very important contributors to China's position in global supply chains. In fact, enterprises in both developed and developing countries contribute to, as well as benefit from, China's industrial rise in global supply chains.

Given these facts and the way the global economy functions, is it possible for any country to decouple itself from China? The answer is no.

Second, we must have a better understanding of dual circulation, in order to avoid any economic complexities and regression. True, a large economy that is highly self-sufficient is in an advantageous position. But history tells us that such economies usually enjoy slow technological progress in the long run when they close doors to the world economy.

Since China has a massive domestic market, some seem to believe it can flourish in isolation. The fact is, an economy isolated from the global system may be able to sustain itself but may lose the incentive to innovate. There have been periods in history when China did well as an insulated society but then it gradually lost steam and ceased to make further progress.

It may be easy for a large economy to sustain itself, but not for a small open economy because of its comparatively small domestic market. Yet self-sufficiency has both pros and cons, as Deepak Lal says in his book The Hindu Equilibrium. As a big country with a large population, India did sustain itself despite being in relative isolation for years, but it could not become a developed economy.

A large economy must be more open than its smaller counterparts. If a large country isolates itself, its economic and other interactions with the outside world will stop and, as a result, its economy will become stagnant and fragmented.

When it comes to dual circulation, we must understand why the domestic and global economies should reinforce each other and why the Chinese leadership has emphasized that the country cannot close its door to the outside world and instead will further open up its economy. China will not isolate itself from the rest of the world－even though its domestic market has become an important source of growth－in order to improve the quality of economic development and build an advanced country.

Finally, a country that believes it has become self-sufficient in technology may cease to make any progress in the field. China is not yet a very advanced country in terms of technology, although it has made rapid progress in technology through open trade and receiving foreign direct investment in the past four decades.

China's annual progress on the technology frontier measured by total-factor productivity is over 3 percent－more than 2.5 percent in the past decade－while the number is more modest for developed countries (for instance, 1 percent for the US). That's because they have already achieved excellence in technology, while China still has ample room for growth and can learn through collaboration, investment and trade.

If China turns inward by closing doors, despite substantially lagging advanced economies, its technological progress will slow down considerably.

The author is dean and professor of economics at Fudan University and deputy director of Fudan Development Institute. The author contributed this article to China Watch, a think tank powered by China Daily. 

The views don't necessarily reflect those of Qiushi Journal.