In recent times there has been a lot of talk on how big
China’s digital trade actually is and to what extent it poses a threat to the
global economy. China is big and appears successful in digital trade, and
therefore the logic goes that China is leading
the field. Others are more careful
in cheering China’s digital success. The truth, however, is that there are two
versions to the story. One is centred around the fact that China is indeed big.
The other focuses on the extent to which China is actually competitive. The two
stories are connected, yet extremely different.
Both narratives are respectively illustrated in panels A and
Panel A shows what I call the political story. This story
reflects the fear of China becoming the biggest digital trader in the world. The
panel shows digital services exports on the vertical axis (in USD log scale to
compile the pattern) while showing the level of development (in USD PPP) on the
horizontal axis for the year 2017. I take digital services and not digital
goods for two reasons: One is that services reflect the future of digital
trade; two is that the pattern for digital services and goods is the same, so
analysing both would merely be repetitive. (There is one big difference between
digital services and goods which I will address later).
First things first though, an upward sloping line appears on
the vertical and horizontal axes in Panel A. It means that countries that
progressively become richer also become more successful digital services exporters.
How that works doesn’t matter for now. What matters is that the two indicators
are tightly connected. Countries such as the US and the UK are much more
developed and have greater levels of digital services exports; unlike Cambodia (KHM)
or Mauritius (MRT).
Panel A: China is big and will continue to grow bigger in
digital services trade…
Panel B: But China is uncompetitive and is likely to remain
so in digital services trade.
Source: Author's; WB Development Indicators.
The remarkable thing about China, is that it has been a big
digital trader throughout history, and is likely to remain so. That can be seen
by the red dots which denote China from 1990 till 2017. At any year, China was
a far bigger digital exporter than any country with a similar level of
development. For instance, in 2000 China’s level of development was equal to
Cambodia’s level of development today, i.e. in 2017. Yet China’s export in
digital services were already bigger back then, than Cambodia’s is right now.
What’s more remarkable, however, is that China has caught up
incredibly quickly with the world’s biggest digital traders. Panel A shows that
since the 1990s China has steadily approached the EU, US and UK. All three are
richer and have also historically shown a high level of digital services
exports. But China, standing at a lower level of development, has managed to
increase its export capacity in digital services, to a level in 2017 where it
reached a par with the UK. The EU and US are still bigger digital traders, but
it will only take about another 10 years before China reaches an equal footing
with these two trade giants.
That has repercussions in the political sphere, particularly
when negotiating trade deals. Bigger countries naturally have more weight in
trade negotiations. However, they do not always naturally have a bigger trade
basket, as they have bigger domestic markets which they can rely on. China’s
case is different, as it has traditionally used trade as a successful strategy
for economic development. Today the EU is still the biggest exporter of digital
services, ahead of the US and China. It therefore currently has the biggest heft
when negotiating digital services trade issues; far bigger for instance than the
UK will ever have.
In short, the political economy discourse about the “fear”
of China’s digital trade success, which one can read daily in the popular media,
stems in great part from the sheer size of the country. Don’t get me wrong,
size does matter, and it certainly makes a difference on how successfully countries
like Guatemala or China can negotiate in trade negotiations. For instance,
China has been a big trader in the past of ICT or high-technology goods. Indeed,
at all levels, it has been a bigger trader in digital goods than all other
countries, including the EU and US (Panel C). As such, China has influence on
international digital trade negotiations.
However, there is another perspective on the matter, which I
call the economic story. That story is reflected in Panel B. Economists have
always been sceptical of the idea of using plain magnitudes expressed in nominal
or absolute numbers. Rather, economists tend to transmit their messages in “normalized”
numbers, so that any form of size, quantity or volumes are instead computed as
ratios, weights or proportions. The big reason for doing so is that otherwise
numbers may be biased in favour of other characteristics, such as in our case the
huge size of a country. After all, China may be big, but that may not tell us
anything about its true economic success.
Panel B investigates how competitive China is once we
disregard its sheer size. Note that I again analyse digital services trade, as
my view is that this is where the future of trade is heading. Interestingly, using similar metrics as in Panel A, the
story gets reversed. To correct for China’s size when using its nominal numbers
of digital service exports, I divide this variable by its population.
that way I obtain a more neutral representation of the true extent of China’s
export success, which economists typically call the per capita exports. It’s a
much fairer way of comparing China with other countries, as smaller countries
trade a much smaller amount. Once we divide the absolute size of digital
services exports by the number of people in each country who potentially trade,
an undistorted picture of the true strengths of digital trade exports is
presented. In other words, it shows the real digital export competitiveness.
Looking at Panel B, it becomes clear that China’s real
digital trade competitiveness is actually much lower compared to using non-normalized
trade figures. In fact, the red dots that denote China’s development over time,
are all placed below the dashed fitted values line, which represents the
“average” trend between how rich countries are at a certain level and their per
capita digital services exports. Compared to other countries, China is less
competitive in digital services exports than can reasonably be expected based
on its level of wealth.
That was true in the past and is true in the present. For
instance, back in 2000, when China shared a similar level of development as
Cambodia today, the latter exported more digital services when the size of the
market was accounted for. Similarly, in 2017, Guatemala was able to export more
digital services on a per capita basis than China did in 2007; when the two
countries shared a similar level of economic development. Today, China is as
rich as Serbia or Costa Rica, but the two latter countries are far more
competitive regarding digital services trade, given their rate of economic
What’s more, there are little signs that China’s
competitiveness position is approaching any average midpoint value (dashed
line), based on what could be expected when taking into account the level of
development of all other countries in the sample. Nor does China approach the
competitiveness position of the EU, the UK or the US. (Note that the US suffers
from a relatively low level digital services export competitiveness, meaning
that for whatever reason the country is performing below its potential given
its already massive success.) In fact, the EU is in a pretty good shape as it
is placed above the fitted values line – although several other countries are
doing much better still.
So, what should the conclusion be when putting these two
panels together? Well first, one big message from this exercise is to show that
one shouldn’t conflate size with “real” size. Yes, China may be big, and the
economic size of China may disturb us from time to time, but it’s another thing
to claim that because of its size the country is going to be a giant success in
all manners of our digital life, and take over the digital world economy. Sure,
China has success in some parts, and perhaps many parts of the digital economy,
but not in all parts. In goods, the country is a major success, and so too it
seems in digital goods (compare panels C and D in the annex). However, for
digital services the story is a different one.
Second, the fact that China is precisely less competitive in
services has implications for future trade. The world economy is increasingly
shifting into an invisible one in which services, data, technology ideas and
know-how are replacing goods, commodities and other physical inputs. In this
intangible world, China appears to be far less successful compared to other big
trade giants. Moreover, China is also very restrictive
when it comes to digital trade, data and internet technologies. Different
digital standards and restrictive digital policies, such as China has today,
are harmful for its digital services trade and eventually real export
and van der Marel, 2018).
Therefore, it remains to be seen whether China’s isolated
stand regarding data and the internet will prove to be beneficial for improving
its export competitiveness the long run.
Panel C: China is big and will continue to grow to be the
biggest in digital goods trade…
Panel D: And China is competitive and is likely to remain so
in digital goods trade.
Source: Author's; WB Development Indicators.