At a time when the world economy is reeling under the Covid-19 crisis, China has embarked on a new development paradigm to re-establish its position as a global economic power. This is evident in its 14th Five-Year Plan (2021-25) announced by the government in July 2020 which is enshrined with novel concept called ‘dual circulation.’

This development paradigm is centered on domestic circulation with a “dual circulation” model in which domestic circulation and international circulation promote each other. China adopted since 1979 an ambitious export driven model by making full use of domestic and international markets and resources. As the new model is emphasising on domestic circulation, many key China watchers have started pondering whether China plans to transition from export driven growth model to a domestically consumption driven economy.

China has been a major player in global trade. So its shift from export orientation to domestic driven model, will hamper world trade, other nations as well as itself. Then why has China proposed to carry out domestic circulation?

China’s exports were hit hard during global financial crisis (2007-2012), and it did turn to domestic consumption to promote growth, but around 2013-14 it had again become export oriented.

‘Homeward’ bound

Given how the pandemic is playing havoc with the world economy, China is perhaps looking inwards again.

With the advent of Covid-19, the WTO in April 2020 had predicted world trade to shrink by 13 to 32 per cent and most likely in the current situation closer to 32 per cent. With the spread of Covid-19, many countries have slowed reopening, and some are reinstating partial lockdowns to protect susceptible populations.

The rising US-China trade friction in the last few years has hit Chinese exports hard forcing the country to turn to domestic demand and encourage ‘domestic circulation’.

This in turn takes care of the unemployment problem and ensures social cohesion. However, a more analytical perspective suggests that China experienced its peak of exports during 2006 and accounted for 35.4 per cent of GDP which in April 2020 came down to 17.7 per cent ( . This means in 2006 a little more than a third of its products were sold to foreign countries.

To put it differently, by 2020, 82.3 per cent of China’s production had been domestically absorbed and circulated before the proposal for new paradigm was framed. So, what accounts for the change? Basic laws of economics suggests that in case of a large economy like China, a higher percentage of its products were absorbed in domestic circulation. In addition, a proportionally larger service sector, and higher non-tradeables, points to a higher percentage of its GDP (53.3 per cent) in domestic circulation in China.

China’s advantage is that it has attained large economies of scale making its manufacturing sector more modern and productive. Smaller economies with lower domestic absorption will have to necessarily rely on imports to develop their industrial sector.

A bigger economy means a bigger capacity for domestic absorption. In 2019, Singapore’s exports accounted for 104.9 per cent of its GDP while for Taiwan’s exports were 53.9 per cent. In contrast China’s exports were merely 35.4 per cent during its peak in 2006, reflecting its economic size. As the world’s second largest economy now, China has much more capacity for domestic absorption. Looking from this perspective, it makes eminent sense for China to adopt the new development paradigm.

Around 2008-09, exports accounted for only 11.1 per cent and 12.6 per cent of the GDP of the US and Japan respectively (Statista). This increased to 11.7 per cent for the US and 18.5 per cent for Japan in 2019 ( . Hence in both these major economies domestic consumption plays a major part in absorbing production.

Another important factor is that the services sector accounts for 70-80 per cent of the GDP in the US and Japan, whereas the corresponding figure for China is only 53.6 per cent.

Since the services sector is largely non-tradable in nature, most of it is utilised in the domestic market. This means a higher percentage of the service sector in an economy means a lower percentage of exports in its GDP. Currently China’s exports to GDP are 17.65 per cent (Statista) which may go down to 11 per cent soon. So in the current context there is a clear case for the Chinese government and policymakers to adopt ‘Dual Circulation’ as the new development paradigm .

The writer is former senior faculty, IIFT, and currently Professor, Lal Bahadur Shastri Institute of Management, Delhi