China has grown at an unprecedented pace to become a leader in global trade over the past four decades. Its rapid rise has met with mixed reactions from the rest of the world, from excited embrace of opportunity, to concern, to confrontation. China’s deepening integration into the global economy has unlocked massive consumption power and brought about efficiency in global supply chains, making it an attractive market for international business and a magnet for foreign investment. Meanwhile, due in large part to China’s fundamentally distinct political and economic systems, its rise has also presented new challenges to other economic powers, contributing to continuous tensions with them. This friction has intensified over the past few years amid growing protectionism and populism globally and escalating geopolitical disagreements between China and Western countries. As a consequence, China’s trade policies and practices have regularly made headlines and generated heated rhetoric around the world, shaping public and business sentiment.

To cut through the noise and inform critical decision-making, The Economist Intelligence Unit, sponsored by the Charles Koch Institute, has conducted an up-to-date, evidence-based assessment of China’s trade policies and practices as well as the medium-term outlook. Particular focus was placed on some of the most contentious issues, including industrial subsidies, forced technology transfer, foreign ownership restrictions, intellectual property (IP) theft and currency manipulation, among others. Through a closer examination of five select industries (agriculture, steel, semiconductors, biopharmaceuticals and financial services), this study also showcases the broad scale and complexity of the impacts of China’s trade positioning thanks to its central role in global trade today.

Key findings

• China’s current trade policies and practices are driven by four overarching priorities: pushing for indigenous innovation, driving self-sufficiency, enhancing national security, and market reform and opening. These priorities manifest in the mix of sustained state efforts to bolster domestic industries and the government’s elevated commitment to cultivating a level playing field for foreign companies. They are likely to continue to shape China’s trade positioning in the short to medium term. However, as China’s relations with the US and its allies deteriorate, links between national security and economic and industrial policy will grow. As a result, the focus on national security will overshadow the likelihood of radical market reform.
   
• The Chinese government has followed a top-down, state-driven strategy to further its competitiveness in global trade, most evident in its pursuit of high tech ambitions, and it is unlikely to shift from this approach anytime soon. The government regards numerous high-tech areas as strategic emerging industries (SEIs) and provides support for domestic industries in various financial and non-financial forms. Some measures, such as government-backed investment funds and industrial subsidies, have continuously drawn criticism from trading partners for distorting the market or disadvantaging foreign companies. Despite such criticism, this strategy and associated measures will continue. For example, during the escalation of trade disputes with the US, China deemphasized its Made in China 2025 blueprint targeting advanced manufacturing, while continuing to implement it on a large scale, mostly under the umbrella of SEIs.
   
• Chinese authorities have nevertheless taken substantive steps—particularly at the legislative level—to address some key contentious issues in recent years, but to what extent these will be effectively implemented remains questionable. Major reforms include abolishing foreign ownership limits in financial services, curbing excess capacity in steelmaking, instituting explicit prohibition of forced technology transfer in the new Foreign Investment Law (FIL), and amending major laws to strengthen IP rights protection. These steps were not simply concessions to external pressure, but rather driven by domestic interests to sustain foreign investment inflows, upgrade industrial structures and incentivize indigenous innovations. However, as inadequate enforcement has historically been a barrier to policy efficacy in China, it remains to be seen whether these reforms will deliver.
   
• While market opening reforms—such as lifting foreign ownership restrictions—are an important step to increase market accessibility for foreign companies, licensing schemes and other regulatory barriers continue to hinder foreign entry and expansion into the Chinese market, and many areas regarded as critical to national security and the rule of the Chinese Communist Party (CCP) remain closed. For example, foreign insurers looking to offer services in just a third of the country would need at least a decade to acquire the necessary license approvals, and a lack of transparency and delays in the approval process have been reported as a key challenge. In the financial services industry more broadly, growing regulations on cybersecurity and data transfer also pose greater operational risks and costs for foreign financial institutions, deterring market entry. In addition, although the Chinese government has continued to reduce the number of sectors where foreign investment is prohibited or limited, industries including rare earth mining, postal services and news agencies remain closed to foreign investors, and equity restrictions continue in industries such as telecommunications and air transport.
   
• Given China’s massive economic and market size, its trade policies and practices have inevitably had widereaching, albeit distinct, impacts on its trade partners depending on their positioning in global trade and supply chains. As China plays catch-up to global leaders and advances its high-tech sectors, it will erode the market shares of incumbent players, beginning with lower-value segments and its own domestic market. In biopharmaceuticals, Chinese companies are seeking to challenge the market position of international drug makers by developing generic biologics. In the semiconductors industry, China has expanded its share in the global market at the expense of traditional suppliers in Europe, the US and Japan, initially in less-advanced chips due to ongoing technology gaps. Chinese expansion in these industries has raised concerns among foreign counterparts about growing risk of overcapacity. Meanwhile, China’s aggressive investment in semiconductor manufacturing has also been a boon for upstream industries, such as suppliers of specialized machinery, which have seen surging demand from the Chinese market. In biopharmaceuticals, China has established a robust industrial foundation that enables it to offer lower-cost outsourcing research and manufacturing services for foreign drug developers.
   
• As China undergoes a slowdown in domestic economic and productivity growth while facing increasingly unfavourable geopolitical environments, its trade policymaking will become more complex, posing greater uncertainty and risk to foreign companies. The Chinese government will continue with, or even potentially increase, the use of industrial policy to bolster domestic strategic industries. In the meantime, it is likely to more frequently use the pretext of national security concerns to justify protectionist trade and investment policies. China’s new FIL already outlines grounds for reciprocal actions in the event that Chinese firms are “discriminated” against in overseas markets. Its amended Export Control Law (effective December 2020) also explicitly permits China to take reciprocal actions against countries judged to have “abused export controls” to harm national security interests. Large foreign companies will be particularly at risk. In addition, Chinese authorities are increasingly likely to leverage trade in geopolitical relations, shifting away from countries with which it has tensions while doubling down to secure diverse import sources, as already observed in the agriculture industry.