China has successfully positioned itself as a key part of the global supply chain over the past three decades. Its share of global merchandise exports was just 4% before its accession to the World Trade Organization in 2001, but it quickly became the world’s largest goods exporter, expanding its market share to 14% by the end of 2015. Despite a subsequent modest decline in its global share, its exports picked up sharply during the COVID-19 pandemic. China’s successful containment measures for the virus allowed production there to recover even as it was being curtailed elsewhere; and Beijing also benefited from its dominance in the manufacture of medical equipment and electronic goods used to work from home.
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Using Fathom’s proprietary RiCArdo dataset, we can identify the sectors in which China shows a revealed comparative advantage (RCA). This measures a country’s exports in a particular sector as a share of that country’s total exports, relative to the same calculation for the rest of the world. If a country has an RCA greater than 1, that sector holds a greater importance to that country’s exports compared to the world average, and hence, the country can be said to specialise in that field. These industry sectors have been painstakingly categorised and grouped from over 1000 different export products, allowing us to better reflect the composition of select industries, including those targeted by President Xi’s Made In China 2025 plan.
Using this framework and dataset, we can see that China’s greatest specialism continues to be in manufactured goods, particularly in clothing and accessories and in machinery, as relatively low manufacturing costs, a large domestic market and well-established supply chains all continue to provide China with significant competitive advantages. That being said, China’s edge in the clothing and accessories sector has dwindled since 2010, with its RCA falling from 3.5 to 2.8. Countries such as Bangladesh and Vietnam have benefited from the movement of lower cost production out of China. Interestingly, China appears to have increased its RCA in construction services. This is likely to be linked to its flagship Belt and Road Initiative (BRI) which delivers construction and investment projects in 140 countries.[1] Its share of global exports in construction services roughly doubled over the past decade, though not all of those projects can be considered a success.
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Another policy impacting China’s trade specialisms is its flagship Made in China 2025 (MIC 2025) initiative. Announced in 2015, and a central part of the thirteenth and fourteenth five-year plans, MIC 2025’s stated ambition is to develop new specialisms in nine high-tech industries. China has become the largest exporter of goods in those MIC 2025 industries, taking market share from other advanced economies. However, those gains were largely made prior to the introduction of MIC 2025, with China’s share of global high-tech exports virtually the same in 2020 as it was in 2015.
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Looking at the breakdown of growth in China’s MIC 2025 exports in recent years, it has recorded consistent gains in only a handful of areas, including the new energy, medical and IT sectors. Of these, only in the new energy sector has progress outstripped other countries since 2015, as evidenced by a rising RCA in the chart below. As a result, China now holds a revealed comparative advantage in new energy. Progress in this area should prove helpful for China in meeting its target of net zero emissions by 2060 (a target Fathom believes will have to be increased if the Paris goals are to be met), as it will need to change its energy mix and reduce its reliance on coal.
To achieve carbon neutrality by 2060, China began a major transition to the use of nuclear power and renewables for electricity, which is supported by grid flexibility, energy system reform, and carbon pricing. In 2020, China’s renewables capacity increased by 136 GW (NEA), more than ever before. That made China responsible for nearly 50% of global renewable capacity additions (280 GW, IEA). Furthermore, CCUS technology, which has not been implemented at scale, will be promoted in coal plants (7% in 2060, Tsinghua University) . Nuclear power will ultimately comprise a large share of the total energy mix (13%, Tsinghua University) for power generation and it will also have to explore decarbonization and broaden the adoption and efficacy of CCUS technology.
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But in most sectors, for example aerospace and the medical industry, progress in China’s RCA has stalled since the introduction of MIC 2025. This may be due to international pressures. Led by the US, a number of advanced economies have responded to President Xi’s plan with more restrictive trade policies and a greater focus on developing their own high-tech sectors.
Going forward, the more restrictive international environment for Chinese exports and investment will continue to inhibit President Xi’s goals for the high-tech industries. At the same time, the increasingly interventionist stance of the Chinese government at home, demonstrated by the recent crackdown on various technology companies, also risks stifling domestic private sector innovation.
To find out more about Fathom’s RiCArdo tool and how it could help you, or to subscribe to the database which is available for a wider set of countries, please contact us: enquiries@fathom-consulting.com.
[1] As of January 2021
