Dual Circulation - A New Development Paradigm in China | Anil Kumar Kanungo

by Anil Kumar Kanungo*

China is a great innovator of things that goes without saying. At a time when the world economy is hit by a tsunami of health crisis-Covid-19, it embarks on a new development paradigm to re-establish its position as a true 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 a novel concept called ‘dual circulation.’

This development paradigm centered on domestic circulation with a “dual circulation” model in which domestic circulation and international circulation promote each other. It is widely accepted and proven that 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 emphasizing on domestic circulation, many key China watchers have started pondering whether China has all plans to transition from export-driven growth model to a domestically consumption-driven economy.

China has been one of the conspicuous trading nations in the world. If it decides to shift from export orientation to domestic driven model, it will hamper world trade, other nations as well as itself. Then why has China proposed to carry out domestic circulation as the main circulation?

Plausible answer to this could be that China’s exports were hit hard during global financial crisis(2007-2012), hence China did turn to domestic consumption as a key medium to promote growth, but around 2013 and 14 it had again become export oriented. Now it is possible to think that current Covid-19 pandemic is having a huge negative impact on the global economy and will continue to have as no end to covid-19 is in sight. Hence such an idea perhaps has been mooted.

As the economy shrinks on the weight of Covid, income wanes and demand will understandably fall with considerable impact on international trade. With the advent of Covid-19, WTO then in April 2020 had predicted world trade to shrink by 13 to 32% (WTO: https://www.wto.org/english/news_e/pres20_e/pr855_e.htm) and most likely in the current situation closer to 32%. With the spread of Covid-19, many countries have slowed reopening, and some are reinstating partial lockdowns to protect susceptible populations.

Another reason is with the US-China friction heightened in last three years, China’s exports were derailed that means they needed to be domestically absorbed meaning encouraging domestic circulation. This in turn takes care of unemployment problem and social cohesion. This justification may be working well with such new development paradigm. However, a more analytical perspective suggests that China experienced its peak of exports during 2006 and accounted for 35.4% of GDP which in April 2020 came down to 17.7% (https://www.statista.com/aboutus/our-research-commitment).This means in 2006 a little more than 1/3rd of its products were sold to foreign countries. To put it differently, 82.3% of China’s domestic 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 higher service sector in a country points to a higher percentage of its GDP (53.3) in domestic circulation in China.

Advantage of China is that it has attained large economies of scale and therefore able to make its manufacturing sector more modern and productive, where lies its forte. But if the economy is small and insufficient for domestic absorption, then it has to rely on foreign market for import to develop modern manufacturing sector. A bigger economy means a bigger capacity for domestic absorption. Some specific statistics in 2019 suggest interesting results such as Singapore’s exports accounted for 104.9% of its GDP while for Taiwan’s exports were 53.9%. As argued before, China’s exports were merely 35.4% during its peak in 2006, which was due to its economic size. As the world’s second largest economy now, China has much more capacity for domestic absorption than small economies. Therefore, this argument holds the ground for China to adopt new development paradigm.

Secondly, if we look at a few statistics from the US and Japan it is observed that around the same time 2008 and 2009 exports of US accounted for 11.1% of its GDP, which means 89% of its domestically made products were absorbed domestically, while Japan, another advanced economy registered about 12.6% in 2008(Statista). This means about 87.4% of its GDP were absorbed domestically. US and Japan registered about 11.7% and 18.5 % of exports to GDP in 2019 respectively (https://data.worldbank.org/indicator/).

Why do these two countries, the world’s first and third largest economy respectively have lower percentage than China, the world’s second largest economy? It is mainly because they belong to high-income countries where the service sector accounts for a higher proportion of GDP. About 80% and 70% of GDP respectively in the US and Japan come from services sector. Whereas for China, it is 53.6%. Then it leads us to ask the question why it is so. That is because the characteristics of the services sector is largely non-tradable in nature, hence most of it are utilised in domestic market and thus goes for domestic absorption. 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% (Statista) which may go down to 11 per cent soon.

Such a case in current context builds up a clear judgement for the Chinese government and policymakers to adopt a new development paradigm known as ‘Dual Circulation’

* (The author is former senior faculty member, IIFT and currently Professor, LBSIM, Delhi. )