The ultimate rise of China: The interplay between trade and technology

Rising global trade tensions clearly indicate China’s rise in global trade. However, current Chinese bilateral trade relations are fundamentally different from the old days when China was mainly producing and exporting labour-intensive products. Instead, China is gradually climbing up the technology ladder. China’s involvement in a variety of products and services with an intensive technology content has become obvious. Moreover, the new Made in China 2025 policy signals China’s clear commitment to further technological advances. This strategy will boost China’s technological export possibilities, while increasing competition on global markets in technology-intensive products and services. This strategy triggers concerns in western economies that fear Chinese competition regarding products based on their traditional comparative advantages. This paper empirically studies the evolution and determinants of China’s bilateral trade relationship with the Organization for Economic Cooperation and Development (OECD) countries. To this end, detailed product-level trade data gathered from the United Nations Conference on Trade and Development (UNCTAD) are analyzed using panel data econometrics. It assesses the impact of China’s prominent role in global trade networks, while outlining both opportunities and challenges to future trade relationships. Results point to substantial heterogeneity in the bilateral trade relationships between China and western economies. It further indicates how recent trade-impeding defensive policies fail to reach their goal to limit China’s intensive trade and investment connections. Rather, increasing barriers to trade risks substantial negative welfare effects for all trading partners involved. The results call for a more active, but also cooperative trade policy between China and western trading partners. Moreover, as the border between trade and technology becomes very vague, more attention should be paid to intellectual property protection in multilateral and bilateral trade agreements.