HKUST Business School Magazine

Comparative Advantage Rebound Hegemony Cold War Export Biz@HKUST Biz@HKUST 14 15 // Cover // Thought Leader A Backlash Against Global Trade? According to Lin, the reason that the US buys from China is not because it cannot produce the products that they need, but because China can produce them at a much lower cost. That is how the Comparative Advantage -driven international trade works. To restrict trade with China and to hurt China, the US will have to pay a price. While the US might be willing to pay the cost of maintaining its Hegemony , if other countries join the US and restrict trade with China, they will be risking their own growth and jobs. China is the largest trading partner of more than 120 countries and is the second largest trading partner to more than 70 countries. Lin does not believe that other countries will be willing to sacrifice themselves for the sake of maintaining the US’s hegemony. As long as China remains open, the world is unlikely to fall back into a ‘Cold War’. circulation” model highlighted in the New Development Paradigm last year. While domestic circulation continues to be the mainstay, the model says that domestic circulation and international circulation should promote each other. Since the start of the pandemic, all eyes have been on China and how it intends to move forward in terms of this paradigm. “China is the largest trading nation in the world. If it shifts its development model from export-oriented to domestically oriented, it will affect other countries in addition to itself,” Lin points out. “That’s why domestic and foreign media have been focusing on this topic.” Lin further explains why China is proposing to treat domestic circulation as the main circulation. Obviously COVID-19 had a major impact on the world economy. International trade is predicted to shrink dramatically so as the world’s largest trading nation, China cannot rely on exports as the main driver of growth. “This means that its domestically made products will have to be increasingly absorbed domestically via domestic circulation,” Lin explains. China’s tensions with the US will become another factor which affects the country’s exports. “If its exports decline, its production will have to be absorbed domestically,” Lin says. This is where China has a comparative advantage, as its population is four times that of the US. Based on the laws of economies, Lin believes that China can support a circular economy because it has much more capacity for domestic absorption compared to small economies. “The modern manufacturer has a large economy of scale. If a country is a small economy with insufficient capacity for domestic absorption, it must rely on bigger foreign markets,” he explains. “A bigger economy means a bigger capacity for domestic absorption, and as the world’s second largest economy, China can rely on a domestic economy.” Unleashing the power of the service sector Another reason for China’s reliance on domestic circulation is that its service sector is only about 53.6 percent. Since a big part of the service sector is non-tradeable, there is a lower percentage of exports in its GDP. China’s domestic absorption has already exceeded 80 percent. With a rise in China’s income, the size of the Chinese economy and service sector will continue to expand. As a result, Lin believes that it will continue to move towards 90 percent in the future. He says that a new statement on domestic circulation is a “clear-headed judgement of the trend in the present development stage and aims to change the general perception that China is an export-oriented economy.” That said, Lin stressed that unless it is an autarchic economy, every country actually has dual-circulation in its economy. Outlook Lin believes that if China carries on down this path, it will continue to be the main driver of growth in the world, as 30 percent of the world’s market expansion has come from China since 2008. China will have to stay calm, pursue smart forward-looking policies with continuous reform, and open up, if it wants to tap into its potential, maintain stability, and grow dynamically. Lin says the US can choose to work with China and exploit the Chinese market for the sake of its own growth. The two economies have no reason not to live in peace for common development. Even though trade is a win-win situation for both trading partners, the smaller one tends to benefit more than the larger one. So, when the economic size of China is twice as large as that of the US, maintaining good relations and trade with China will be important for the US’ growth and the generation of jobs. “A growing China will be beneficial not only to itself but to the rest of the world,” Lin says.