In terms of trade openness, China and Russia are more exposed to international trade, but also stand to benefit more in terms of medium-term economic growth and wealth generation, than Brazil and India. China is undoubtedly the BRIC economy most vulnerable in terms of trade protectionism and access to strategically important commodities, its strong international financial position notwithstanding. Maintaining an open trading system and creating a level playing field as regards foreign direct investment will remain a central plank of Chinese economic diplomacy.
Trade openness benefits economies in terms of medium-term economic growth and wealth generation, even if, admittedly, the empirical evidence on this score is somewhat mixed; it also benefits less advanced economies relatively more than advanced ones. On the flipside, greater trade openness exposes economies to greater economic volatility and potentially resulting social instability. More open, less advanced economies are typically more sensitive than less open, more advanced economies. Due to the greater opportunity costs of trade closure and protectionism, it also renders the former more vulnerable to protectionist threats, especially by the latter.
In terms of trade openness, China and Russia are more exposed to international trade than Brazil and India. In terms of social stability, China and India are, ceteris paribus, more exposed than Brazil and Russia. Lower per capita incomes and the relatively greater labour intensity of their exports tend to magnify the impact of trade shocks on social stability. In this very simple framework, China would be the most, and Brazil the least vulnerable BRIC economy – the latter’s non-negligible dependence on volatile commodity exports notwithstanding. This may appear somewhat counter-intuitive given China’s recent economic performance, but one must not forget that economic growth did slow down dramatically in the last quarter of 2008 before the authorities launched a massive stimulus programme.
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| Source: World Bank |
Greater openness in China and Russia also translates into higher “opportunity costs” of trade closure, and thus a higher susceptibility to protectionist threats, especially from large, less open, developed countries. This susceptibility, however, is mitigated or enhanced by a country’s trade structure. For instance, Russia is less susceptible due to the EU’s dependence on Russian energy imports, while China’s significant dependence on commodity imports increases its susceptibility. While both China and Russia are significant net importers of agro-products, China’s dependence on fuel and mining imports is very substantial.
More arguably, China’s export profile does not give it a great deal of leverage vis-a-vis other countries, while the geo-graphic concentration – almost 40% of exports go to the US and the EU alone – render it more vulnerable, not least because the EU and the US are significantly less dependent on Chinese imports than China is on exports to the EU and the US. Export processing trade notwithstanding, China is the country most vulnerable among the BRIC countries to trade disruptions (or the threat thereof) on account of trade openness, its labour-intensive export sector and its trade structure.
China’s potential vulnerability is further enhanced by the fact that it, like Russia but unlike Brazil and India, has a more “complicated” relationship with its main trading partners (esp. the US). For now, Beijing and Washington are neither “strategic partners” nor “strategic competitors”. Beijing is therefore mindful as regards the potential risks stemming from foreign trade protectionism and commodity dependence. The sense of potential vulnerability is compounded by China’s pursuit of a commodity- and energy-intensive investment- and export-led growth strategy that is highly dependent on commodity imports. Manifest concerns about potential social instability in the event of a trade (disruption) induced economic slowdown will further exacerbate this vulnerability in the eyes of the Chinese government.
Beijing’s significant financial resources may help mitigate somewhat its concerns about economic security, including vis-à-vis Washington. Not surprisingly, however, Beijing is seeking to mitigate commodity supply risk by establishing long-term supply relationships (e.g. loan-oil deals with Brazil and Russia), by supporting the acquisition of natural resource assets by domestic companies (e.g. “going global”) and, more generally, by fostering friendly diplomatic relations with commodity-rich countries (e.g. Africa, Asia). The recent wrangling over iron ore prices and foreign opposition to the acquisition of natural resource assets by Chinese companies will have done nothing to alleviate Beijing’s concerns about economic security. Beijing is fully aware that if push ever came to shove (e.g. Taiwan), China’s trade dependence would be an important source of economic, political and strategic vulnerability, especially vis-à-vis advanced, relatively closed economies (read: the US).
All said, China is the BRIC economy that benefits the most from international trade; but it is also the one most vulnerable in terms of trade protectionism and access to strategically important commodities, its strong international financial position notwithstanding. More so than any other BRIC country, China has an interest in fostering free trade and opposing protectionism. At the same time, Beijing also faces far greater incentives to mitigate and pro-actively manage its trade dependence, especially as regards access to strategically vital natural resources. Maintaining an open trading system and creating a level playing field as regards foreign direct investment will remain a central plank of Chinese economic diplomacy.