‘Dual circulation’ is the coexistence of ‘inner’ and ‘outer’ circulation.
‘Inner’ circulation refers to China’s goals to realize greater domestic economic potential by boosting consumption, improving innovation, and developing urban clusters. ‘Outer’ circulation refers to China’s trade and investment relationships with foreign countries.
Party leaders argue that inner and outer circulation should complement and reinforce one another.
Reorienting the economy away from exports towards domestic services and innovation has been a longstanding policy priority for China’s leaders. In this sense, dual circulation is not a radically new direction for China’s economic policy, but a bundling of policies under a single – and more urgent – banner.
Expressing these policies as ‘dual circulation’, however, allows leaders to convey its importance and mobilize lower level government officials to take action in China’s top-down political system.
Why is ‘dual circulation’ important to China’s future development?
China’s central leadership developed the ‘dual circulation’ economic strategy to boost domestic consumption and innovation in coordination with international trade towards development goals.
Authorities first announced the strategy at the Chinese Communist Party’s Politburo meeting on May 14, 2020. At the meeting, China’s leaders said that dual circulation would “fully bring out the advantage of its superlarge market scale and the potential of domestic demand to establish a new development pattern featuring domestic and international dual circulations that complement each other.”
Who will benefit from China’s ‘dual circulation’ policy?
‘Dual circulation’ calls for greater self-sufficiency by developing an economy built on domestic consumption and innovation that is supported by international trade and investment.
At the Fifth Plenum held in late October, the Party’s Central Committee stated that China will “Make technological self-sufficiency a strategic pillar of national development” over the next 15 years.
This suggests that dual circulation will contribute to this objective and be a significant part of the 14th Five Year Plan for the 2021-25 period.
Some observers fear that this drive for self-sufficiency will increase market access barriers, making it more difficult for foreign businesses to operate in China. Made in China 2025, for example, favors domestic companies through subsidies, public procurement directives, and hidden investment barriers.
Why is China trying to become self-sufficient through ‘dual circulation’?
China’s ‘dual circulation’ policy aims to leverage the size of the country’s domestic market to increase consumption and innovation, with foreign trade relationships complementing this goal.
Besides economic development, however, dual circulation includes a national security element – most notably relating to China’s reliance on foreign technology and overseas markets for consumption.
Dual circulation became a policy priority amid US-China trade tensions and the severe economic and supply chain disruptions of the COVID-19 pandemic, which increased the urgency for China’s leaders to cut reliance on foreign countries.
How did tensions from US-China trade war influence the ‘dual circulation’ policy?
China’s ‘dual circulation’ policy is just the latest in a string of policies advocated by President Xi Jinping that advocates self-sufficiency, the most notable of which is the controversial Made in China 2025 industrial policy.
In addition to tariffs emanating from the US-China trade war, the US has restricted the ability of Chinese tech giant Huawei to buy US technology, while countries such as Australia, the UK, Italy, and others have prevented Chinese telecom companies from participating in 5G infrastructure.
China’s leadership fears that as China becomes more powerful, geopolitical tensions with the US will only increase, resulting in more trade and technology conflicts.
Becoming cut off from foreign technology will not only hamper China’s efforts to escape the “middle income trap”, but complicate its plans to become a standard-setting technology superpower.
Reducing reliance on potential adversaries for strategically important technology is as much a national security priority as it is an economic one.
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Key Takeaway
While China is not closing the door to foreign trade and investment, China’s leaders hope, in the long run, to have their own championsdominate the domestic market in strategically important industries. Nevertheless, the shift to a consumption-driven economy would benefit many foreign businesses.
In order to stimulate consumption, China will likely continue to reduce tariffs on foreign consumer products, which it has been doing at an accelerated pace since trade tensions with the US came to the fore. Moreover, to boost incomes and productivity, hukou labor restrictions may be eased, which would increase demand for foreign products and offer China-based businesses more flexible labor options.
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