Amid the escalating trade conflict between the United States and China, which has negatively affected US-China trade, China’s trade with other partners has been growing. By the end of August this year, China’s bilateral trade with the United States had declined by 9% since the beginning of the trade conflict and accounted for only 12% of China’s total trade. As a result of this decline, the United States fell from first to third place among China’s largest trading partners. At the same time, trade with the European Union increased by 9.6% to 15.6% of the total, while trade with ASEAN grew by almost 12% year-on-year to 13.6%.

This is linked to China’s further opening to the rest of the world, which has helped increase trade with its partners and attract global companies to invest additional resources in the country. Companies such as Tesla, UBS, BMW, Costco and Johnson & Johnson have taken advantage of this opportunity and are expanding their presence in China. [There will be a separate post with details on the companies.]

Since the official start of the trade conflict on March 22, 2018, when US President Trump introduced the first package of tariffs, China has reduced tariffs, improved regulation, opened new industries to investment, expanded free trade zones and removed a number of joint venture requirements.

1) Lower Tariffs
On July 1, 2018, China reduced tariffs on imported goods from India, Bangladesh, South Korea, Sri Lanka and Laos under the Asia-Pacific Trade Agreement (APTA). China reduced or eliminated tariffs on 8,549 products, including chemicals, agricultural and medical products, soybeans, clothing, steel and aluminum. Many of these goods could replace imports from the United States.

In response, other countries also reduced their tariffs to stimulate trade with China. India, for example, reduced tariffs on 3,142 items from China.
At the same time, China reduced import tariffs on automobiles and cut tariffs on 1,449 other consumer goods, including agricultural and fish products, cosmetics, clothing and household appliances, for all of its “priority” trading partners.

From November 1, 2018, China reduced tariffs on an additional 1,585 items. The average tariff rate was lowered from 10.5% to 7.8% across sectors including textiles, ceramics, steel, machinery and certain raw materials, mainly processed materials.

Overall, China reduced its average import tariff rates for all countries except the United States, from 8% to 6.7%. By July 2019, average tariffs on exports from the United States had increased to 21%, compared with the initial 8%.
While the rest of the world benefited from this, US companies faced additional restrictions.

2) Improved Regulation
In the World Bank’s Doing Business 2020 ranking, China rose 15 places from 46th to 31st among 190 countries. This represented a record rise of 47 places, from 78th to 31st, over the previous two years.

The Ease of Doing Business Index ranks countries according to how favorable their regulatory environment is for doing business and protecting property rights. According to the report, doing business in China was now easier than in France (32nd), Switzerland (36th), the Netherlands (42nd) or Italy (58th).

3) New Industries Open to Investment
China has also opened new industries to foreign investment. Since the start of the trade conflict, the country has updated its negative lists twice. These lists specify industries in which foreign investment is prohibited or restricted. China has two negative lists.

One applies to free trade zones (FTZs), while the other is the national list for the rest of the country.

On July 28, 2018, China reduced the number of items on the FTZ list from 95 to 45, and on the national list from 63 to 48.

On June 30, 2019, China updated the lists again. The 2019 FTZ Negative List was reduced further from 45 to 37 items, while the list for the rest of the country was reduced from 48 to 40 items.

The 2019 National Negative List opened access to services, agriculture, mining and manufacturing for foreign investment.

In the World Bank’s Doing Business 2020 ranking, China rose 15 places from 46th to 31st among 190 countries. This represented a record rise of 47 places, from 78th to 31st, over the previous two years.

4) More Free Trade Zones
In 2013, China launched the pilot Shanghai Free Trade Zone, which became the country’s first free trade zone. By 2017, China already had 11 FTZs.

In early 2019, China established a new FTZ on Hainan Island, bringing the total number to 12. The Shanghai FTZ was also expanded to the new Lingang area.

By August 2019, China had announced the expansion of pilot free trade zones to six new provinces and regions across the country. These included Jiangsu, Shandong, Hebei, Heilongjiang, Guangxi, Yunnan and others. As a result, the total number of free trade zones reached 18.

The purpose of these new zones is to strengthen China’s trade and economic ties with neighboring countries and support local economies. The zones are located along the coast or near borders with major trading partners and are intended to serve as gateways for trade and investment flows with Russia, Japan, South Korea and Vietnam.

5) Removal of Joint Venture RequirementsChina removed joint venture requirements and allowed Western companies to take control of joint ventures with Chinese companies.

In 2018, China removed joint venture requirements for new energy vehicles (NEVs) and special-purpose vehicles. This allowed Tesla to register a wholly foreign-owned enterprise in China before building its factory in Shanghai.
Restrictions on investment in the automotive sector as a whole were expected to be removed by 2022. Against this backdrop, German company BMW agreed to acquire a larger stake in its joint venture with Brilliance Auto. It increased its stake to 75% in a deal worth EUR 3.6 billion.

South Korea’s Hyundai Motor finalized plans to acquire all shares held by its Chinese partner in a joint venture in Sichuan Province by the following year.
China also took steps to open its financial sector. Foreign banks were allowed to conduct investment banking, asset management and capital market operations.

By the end of 2018, UBS became the first bank to receive approval for a controlling stake in a Chinese joint venture. Other banks subsequently took advantage of this opportunity.

In early 2019, Credit Suisse received approval to increase its stake. Goldman Sachs and Morgan Stanley were at that time awaiting decisions on their applications.