For those countries not intrinsically intertwined in the North Asian value chain and not blessed with an excess of ores and oil, the export opportunity set is therefore much reduced – closer to US$1.6 trillion rather than US$2.5 trillion. These imports might be thought of as consisting of “retained discretionary imports.”

The future of China’s GDP growth trajectory is, of course, unknown. However, it is evident from the demographic structure of China, that over the next twenty years, China’s working-age population will shrink by about 15%-20%. It is also possible that, given the very high level of current overall participation in the work force, an aging population will require some workers to drop-out to look after elderly family members. Demographics therefore pose a sever challenge to future growth as the absolute level of employment will shrink considerably. In addition, China’s capital stock has grown at a faster pace than the economy, and China’s capital stock growth is now slowing from a bloated level. A slower rate of capital formation and a shrinking work force suggest that in the absence of a big improvement in total factor productivity, China’s economic growth will become very pedestrian in the coming years: 2% real growth may well be a good outcome. Furthermore, with a real effective exchange rate that has appreciated 94% since January 1994, nominal dollar growth may be even lower than the real growth.

Policy makers are currently in a conundrum over how best to engage economically with China. Underlying much of the debate is the assumption that China is a huge and rapidly growing market. While that has historically been true, the reality of the export opportunity for most countries is far smaller than the headlines suggest, and the future growth prospects are by no means assured. Lower future growth and low import intensity should perhaps moderate policy makers’ enthusiasm for compromising on issues of national security and values when trying to arrive at a suitable policy for economic engagement with China.

(1) All economic data comes from the World Bank open database.