China's trade with the Global South is growing significantly, driven on the one hand by the China Plus One strategy and on the other by the development of new markets. But many challenges remain.
The need for China to expand its economic presence in the Global South has never been greater, amid the triple challenges of a weak domestic market, more trade-restrictive regulations from the West, and overcapacity in some sectors. We will examine the extent to which the deep commitment to this strategy has manifested itself in trade. Due to the lack of a unified definition of the Global South, this paper focuses on Chinese exports to BRICS Plus and ASEAN, and the major emerging economies in each region.
Expanding Global South’s Market
Over the past five years, China has significantly ramped up its exports to BRICS Plus and ASEAN. In 2023, Chinese exports (Value/USD) to these markets almost matched its exports to the EU and the US combined (Figure 1), with a 56% increase compared to 2019.
Figure 1 - Data Source: China Customs[1]
To make sense of the development, we categorized these countries into two types based on the primary purpose of Chinese exports.
- A first group of countries serving the current "China Plus One" trend, including Vietnam, Thailand, Malaysia, and India.
This accounted for 43% of Chinese exports to the surveyed 20 countries and contributed 42% of the export growth between 2019 and 2023. Their imports from China are concentrated in intermediate goods for further assembly for final exports to Western markets[1]. For example, recent research finds a synchronicity between the growth of Vietnamese exports to the US and the increase of Chinese exports to Vietnam.
Figure 2 - Data Source: UN Comtrade
- Another group less directly involved in supply chain diversification, Chinese exports primarily serving the local or regional markets.
Some typical examples are Russia, Brazil, UAE, and Saudi Arabia, and noticeable strides have been made by China in their expansion into these markets (Figure 2). Certainly, China-Russia trade has been stimulated by a specific geopolitical event, namely the Russian-Ukrainian conflict. Apart from Russia, the other three countries also illustrate the emergence of new markets for Chinese finished products. Growth persisted here even when Chinese exports of goods declined overall in 2023. Furthermore, their imported Chinese finished goods have shifted from conventional consumer products such as apparel and home décor to more value-added products including passenger vehicles and/or capital goods, demonstrating the attractiveness of these countries as Chinese export markets.
When comparing China's trade with the two types of countries, on the one hand, we see that the demands that drive its exports to the Global South still stem heavily from the Western market. The rapid expansion of Chinese exports to ASEAN and BRICS Plus does not necessarily reduce Chinese reliance on the West, but simply manifests in a different format. On the other hand, China has also made some progress in expanding into new markets. Furthermore, the healthy share of intermediate goods of Brazilian, UAE, and Saudi Arabian imports from China may also reveal China's role evolving from being a product supplier to a supplier of industrial and technological transition in the Global South.
Outlook
The United States and the European Union will introduce more customs regulations targeting Chinese products in 2024, which could affect the changing political and economic dynamics of China's trade with these emerging markets. Here we look at Chinese exports to the two categories of countries we have previously identified, using the examples of Vietnam, India, Brazil, and the United Arab Emirates.
- Vietnam and India
Vietnam and India are typical "China Plus One" countries, with around 70% of their imports from China being intermediate goods. In the first semester of 2024, the resumed demand in Europe and the US, coupled with disruptions in the Red Sea, contributed to a rebound of Chinese exports to Vietnam and India. For example, Indian and Vietnamese imports of Chinese semi-conductors (critical intermediate goods for consumer electronics) grew by 21% and 55% respectively[2], surpassing their overall growth in imports from China. However, as many analysts have pointed out, the current hike in ocean freight rates has been more of an outcome of the logistics abnormality rather than solid end-market demand, resulting in an earlier peak season. Without consistent solid demand at the end market, the current rush seen in main trade lanes may not last, hindering Chinese outflow to Vietnam and India.
Besides the hectic global trade climate, Chinese exports to these two countries are not immune from various trade-restrictive measures.
The expanding US scrutiny of Chinese investments in production in ASEAN affects the supply of intermediate goods to Vietnam and other Southeast Asian countries. A typical case is solar panel-related supply chains. China's solar panel exports (Value/USD) to Vietnam plunged moderately, roughly by 2% in the first five months of 2024. However, a 24% global decrease in this category was recorded in ASEAN's imports from China[3]. Furthermore, given the US bipartisan consensus on China, more regulations on China-sourced products are likely, regardless of who the next US president will be.
For India, it is more the India’s own trade-restrictive measures rather than the EU and US regulations that hinder Chinese exports (Figures 3&4). Driven by geopolitical concerns, especially the unresolved China-India border clash, India is strongly motivated to reduce its reliance on Chinese supply. On the one hand, China's share in Indian intermediate goods jumped to 26% in 2023 from the pre-pandemic 19% (2019)[4]. On the other hand, long term prospects are hampered not only by the trade-restrictive measures, but also by the protected Indian market, which is not conducive to attracting foreign direct investment into India, an essential force for the Indian manufacturing sector.
Figure 3 - Data Source: Global Trade Alert.
In the long run, these emerging countries' dynamic economic prospects may translate into market potential for finished products. Southeast Asia has undoubtedly been a critical market for Chinese products, especially EVs and e-commerce, but it is more concentrated in Thailand, Malaysia, and Singapore than in Vietnam. In fact, Vietnam was second-to-last for Chinese EV exports (number of units) in the first semester of 2024, according to China Customs.
Chinese companies have strong interests in the Indian market, but face significant regulative barriers. Besides the inflated tariffs on Chinese products, India has also introduced regulations for investments from countries sharing land borders following the China-India border clash in 2020. As a result, China made no greenfield investments with a project value of over 100 million USD in India between 2020 and 2023[5]. Likewise, although companies investing in the Indian auto sector can obtain an import quota for EVs with lower tariffs, Chinese EVs can hardly benefit from this facilitation due to the investment restrictions and continue to face higher tariffs. In some other cases, some companies, such as SHEIN, are using joint ventures as a lever to (re)enter the Indian market.
- Brazil and UAE
Chinese products are gaining some momentum in Brazil and the UAE. Here, we elaborate on the case of Chinese EVs.
Unlike Chinese EVs in the EU, which are still waiting for market recognition, Chinese EVs already have clear first-mover advantages in emerging markets. Some Chinese models are best sellers in Brazil, UAE, and Thailand, paving the way for further expansion. In the first half of 2024, Chinese exports of EVs (number of units) to Brazil were multiplied by 22, making Brazil the third largest Chinese EV export market, behind Belgium and the UK (Figure 4). Likewise, the UAE's imports of Chinese EVs have grown by 160%, making it the largest destination in the Middle East for Chinese EVs. The success is particularly significant considering that Chinese EV development in key overseas markets (namely EU and ASEAN, especially Thailand) has been slowing down.
Figure 4 - Data Source: China Customs[6]
However, one inherent risk is the fierce competition among Chinese EV producers in overseas markets, which could eventually curtail the consumer demand. For example, the swing in EV prices in Thailand amid a price war has been counter-productive. The uncertainty of the price development has incited consumers to take a wait-and-see attitude. Despite being the most prominent Chinese EV market in Southeast Asia, Thailand was one of only three ASEAN member states with decreased imports of EVs (number of units) from China in 2024. The other two, Vietnam and Brunei, were the two ASEAN countries that imported the least Chinese EVs during the same period.
Although they are less involved in the current “China Plus One” strategy, Brazil's and the UAE's trade with China is still affected by changing Western regulations on China but in different ways.
For Brazil, the recent Chinese anti-dumping investigation on EU pork and byproducts could create additional Chinese demand from Brazil, which is already China's largest pork supplier[7]. For the UAE, its tight economic relationship with China reportedly prevented it from accessing American firms' more advanced AI chips. So far, the direct impact on the UAE’s imports from China has been marginal, but the pressure from the US could add uncertainty to the China-UAE trade.
Apart from the regulations from Western countries, the rapid growth in imports from China has also generated concerns from local manufacturers. For example, Brazil has filed three anti-dumping investigations on Chinese products. But the heavy reliance on China may restrict a tangible implementation of trade-restrictive measures.
The Paradox Between Localization and Exports
The ongoing global supply chain diversification transforms trade between China and the Global South. China's exports to the Global South are expected to continue, driven by both indirect reliance on the Western market and the expansion of new markets.
In the current context of the de-risking of the retail market in the EU and the US and its sluggish recovery, the contribution of Western countries to the growth in flows could slip modestly in the long term. As far as new markets are concerned, several questions remain unanswered. Chinese companies are also localizing part of their production in these emerging countries. When new factories enter production in two to three years, demand for finished products directly out of China could have slowed down by then. Of course, the market is also growing, but will it grow at the same pace as the capacity? Following the Covid-19 pandemic, companies, and not just Chinese companies, have been building capacity to get closer to consumer markets. However, if global demand keeps moving in slow motion, we should prepare ourselves for more trade tensions in the upcoming years.
[1] The finished goods here include capital goods (BEC code 41), vehicles (code 51), and consumer products (61, 62, 63). Intermediate goods refer to BEC codes 21, 22, 42, and 53. Without further notification, the Data Source for the intermediate and finished goods all come from UN Comtrade.
[2] Here, we used the data HS code 8542. Many products under this code are used for cellphone manufacturing, a crucial sector for Vietnam and India. The data Source is from China Customs.
[3] Here, we used the data from HS code 8541. Many goods under this code are used for solar panels. Data Source: China Customs.
[4] Data Source: UN Comtrade.
[5] This is based on the data issued by China Global Investment Tracker, American Enterprise Institute, which tracks Chinese investment with a value of over 100 million USD.
[6] This is based on the HS code 87038000.
[7] This is based on the data generated under HS code 0203 from UN Comtrade.
