Have we reached peak integration between China and the world?
![Workers make stuffed toys for export inside a factory in Linyi, Shandong province, China June 26, 2018. REUTERS/Stringer ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. CHINA OUT. TPX IMAGES OF THE DAY - RC1122D32660](https://assets.weforum.org/article/image/large_iFLHrfP4ldiLxdv_OLfV77gP3eFJDq8LrQZyjVoR6MM.jpg)
Workers make stuffed toys for export inside a factory in Linyi, Shandong province, China June 26, 2018. Image: REUTERS
![A hand holding a looking glass by a lake](/uplink.jpg)
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:
China
In the past 30 years, China’s opening and reforms have powered its growth, vaulting the economy to its status as the world’s largest in purchasing-power-parity terms. On many dimensions, China is a global power. In economic terms, China and the world are deeply connected with each other. However, amid trade tensions and rising protectionism in many countries, we appear to be at a turning point. Will we see a new Chinese “Opening to the Outside World” or have we reached peak integration between China and the world?
It is hard to anticipate what comes next, but there are observable changes in the dynamics of the relationship between China and the rest of the world. McKinsey Global Institute research finds that China’s exposure to the world in trade, technology, and capital has fallen in relative terms. This reflects the re-balancing of the economy toward domestic consumption, and the deepening of domestic supply chains. In 11 of the 16 quarters since 2015, consumption contributed more than 60 percent of China’s total GDP growth. It also reflects the fact that China’s economy is still not as open to the world as others. Despite declining since China joined the World Trade Organization, its tariffs are still considerably above those of the US and European Union on average. In services, barriers measured by the OECD’s FDI Regulatory Restrictiveness Index have come down, but, are higher than the OECD average.
Conversely, the world’s exposure to China has increased, reflecting China’s increasing importance as a market, supplier and provider of capital. China accounts for 35 percent of global manufacturing output and more than 20 percent of global consumption in 17 out of 20 manufacturing categories. China is the largest market in the world in many categories including automobiles, luxury goods, mobile phones, accounting for 30 percent (or more) of global consumption.
The fact that relative exposure is falling for China but rising for the rest of the world signals a changing relationship. And there are significant economic and strategic choices to be made on all sides—engage more or less? Depending on these choices, a great deal of value could be gained or lost. We simulated this value at stake in five areas: 1) growth as an import destination; (2) liberalization of services; (3) globalization of financial markets; (4) collaboration on global public goods; and (5) flows of technology and innovation.
More or less engagement between China and the rest of the world could potentially drive economic value for the world of $22 trillion to $37 trillion by 2040—equivalent to 15 to 26 percent of GDP.
Less engagement could mean higher tariffs, more limited trade and technology flows, and continuing gaps in addressing key global challenges. More engagement could see China importing more from the rest of the world, greater two-way flows of technology, and a more competitive Chinese services sector; reaching solutions to global issues would be more likely.
Although China’s growth is increasingly powered by domestic consumption—and Chinese companies are rising in scale and innovation—there is still considerable scope for deeper global engagement. China has 11 percent of global goods trade, but only 6 percent of trade in services. Its banking, securities, and bond markets rank in the global top three in size, but international players have limited presence with less than 6 percent foreign ownership. Although China has 110 Global Fortune 500 companies, less than 20 percent of their revenue is earned overseas, compared with 44 percent for S&P 500 firms. China is second in the world for spending on R&D, but still imports six times the intellectual property than it exports.
![A cleaner drives a sweeper-scrubber past a flower installation for the World Economic Forum AMNC meeting in Dalian, China June 11, 2019.](https://assets.weforum.org/editor/XTjECiLZdQDP19bzoemsaCAQaqPThjvZ1XNkyQAl5GE.jpg)
China and the world are now highly integrated with, and depend on, each other in many respects. Technology—arguably at the center of the changing relationship—is a case in point. Today, domestic Chinese producers provide up to 80 percent of technologies studied, but China still uses inputs from foreign multinationals for the rest. For instance, China relies on critical components such as reduction gears in robotics and power electronics for electric vehicles. At the same time, China has become an impressive innovator, and the rest of the world needs Chinese technology—5G, artificial intelligence, and quantum computing are three examples where China is setting the pace.
China’s consumer sector has long been open to the world—goods more than services. The penetration of foreign multinationals in Chinese consumer markets is 40 percent compared with 26 percent in the US market. Competition between foreign and domestic players is intensifying as Chinese consumer-facing companies build scale and raise quality. Foreign multinationals have lost share in 11 of 30 categories studied. But there are still plenty of opportunities on the table. Incomes are rising, Chinese shoppers are keen on trading up, and increasingly demanding more choice and higher quality. Both foreign and domestic players can tap into these trends.
Actions and reactions in China and beyond will determine what value is gained or lost. Reforming the global trading system to make it more effective at resolving disputes and more inclusive so that benefits from any further opening up of its economy by China and greater flows among nations can be captured and shared broadly is a collective task. So is tackling climate change and filling global infrastructure gaps.
Continued integration of China and the world can deliver benefits for both, but only if both redouble their efforts to encourage more economic collaboration rather than less.
Don't miss any update on this topic
Create a free account and access your personalized content collection with our latest publications and analyses.
License and Republishing
World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.
The views expressed in this article are those of the author alone and not the World Economic Forum.
The Agenda Weekly
A weekly update of the most important issues driving the global agenda
You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.
More on Geographies in DepthSee all
Sarah Rickwood, Sue Bailey and Daniel Mora-Brito
August 13, 2024
Mthuli Ncube
August 13, 2024
John Letzing
August 12, 2024
Mohamed Elshabik
August 9, 2024
Camilo Tellez-Merchan and Gisela Davico
August 7, 2024
Pamposh Raina
August 6, 2024