How did exports and foreign direct investment (FDI) contribute to China's economic growth?

China's economic growth was significantly fueled by exports and foreign direct investment (FDI). This approach mirrored the strategies of Japan and the Asian Tigers, establishing China as a leader in export-oriented growth. However, global economic events have prompted questions about the sustainability of this model and the need for a shift towards domestic consumption.

What are the traditional methods used to measure the impact of external demand on China's economy, and what are their limitations?

Traditional measures like net exports-over-GDP and exports-over-GDP are used to assess the impact of external demand. However, net exports-over-GDP can underestimate the contribution of external demand by assuming all imports are directly linked to exports, ignoring those used for domestic consumption. Conversely, exports-over-GDP may overestimate external demand because it assumes all value-added is domestic, failing to account for imported components in exports.

How does the exports-over-GDP measure overestimate the contribution of external demand in a country like China?

The exports-over-GDP measure assumes that all value-added and inputs for a country's exports are produced domestically. This fails to account for the foreign content of exports, especially in countries heavily involved in global supply chains like China. The result is an overestimation of external demand's contribution to the economy. Alternative measures are needed to precisely gauge China's vulnerability to global economic shifts.

What is the current state of China's economic trajectory, and what alternative measures are needed to assess it accurately?

China is in a state of economic transformation, needing to balance external demand (exports and FDI) with domestic drivers. Traditional economic metrics offer a limited perspective on this. Alternative measures are needed to provide a more accurate assessment of China's vulnerability to global economic shifts. Recognizing the evolving roles of exports and FDI is crucial for informed policymaking and sustainable growth, as China works toward a more balanced, domestic-led economy.

Chinese dragon intertwined with global trade routes symbolizes the balance between external demand and domestic consumption in China's economy.

Decoding China's Economic Puzzle: Are Exports and FDI Still the Key?

Q: Why might relying solely on net exports as a proxy for external demand lead to an underestimation of its true impact?

Relying on net exports as a measure of external demand assumes that all imports are directly linked to exports. This overlooks the fact that a portion of imports is used for domestic consumption and investment. Consequently, it underestimates the true contribution of external demand to economic growth, while potentially exaggerating the role of domestic consumption and investment.

Beau Callahan in Business & Economy August 2025 • 5 min read.

"Uncover the evolving role of exports and foreign investment in China's growth story. Is China still reliant on external demand, or is a domestic rebalancing underway?"

China's remarkable economic ascent over the past three decades has transformed the global landscape. Averaging around 10% annual growth, China became the world's second-largest economy in 2010, surpassing Japan. Exports and foreign direct investment (FDI) have played a pivotal role in this rapid expansion, positioning China as the leading example of export-led growth, following in the footsteps of Japan and the Asian Tigers.

However, the global financial crisis and subsequent economic slowdowns have raised concerns about the sustainability of China's growth model. The core question revolves around China's reliance on external demand and the need to rebalance its economy towards domestic consumption. A vast body of research examines the intricate relationship between exports, FDI, and economic growth in China, often concluding that the nation's economic prosperity is heavily dependent on external factors.

Amid these debates, accurately quantifying the contribution of external demand to China's economic growth remains a challenge. Understanding this contribution is essential for assessing the urgency of rebalancing efforts and the complexities of structural reforms. Traditional measures, such as net exports-over-GDP and exports-over-GDP, are often used but can be misleading. This analysis explores the shortcomings of these conventional methods and proposes alternative approaches for a more precise assessment.

The Flaws in Traditional Measures: Why Net Exports and Exports-Over-GDP Fall Short

Chinese dragon intertwined with global trade routes symbolizes the balance between external demand and domestic consumption in China's economy.

Standard national accounts typically use two primary measures to gauge the impact of external demand: the share of net exports in GDP (the difference between exports and imports) and the share of exports in GDP. Both measures serve as proxies for evaluating external demand's contribution to the economy. However, these measures can either underestimate or overestimate the true impact, leading to skewed interpretations.

Relying solely on net exports as a proxy for external demand operates under the assumption that all imports are directly linked to exports. This doesn't account for imports used for domestic consumption and investment. Consequently, this approach ascribes all economic leakages through foreign goods and services to exports, overlooking leakages through domestic consumption and investment. As a result, it underestimates the contribution of external demand to economic growth while exaggerating the role of consumption and investment.

Underestimation: Net exports subtract imports from exports, meaning that if a country imports a lot of components to build exported goods, the 'net' figure looks smaller, even if the export activity is substantial.
Ignores Domestic Demand: This measure doesn't reflect how much of a country's imports are actually used to satisfy internal consumption and investment needs.
Misleading Conclusions: Can lead to the inaccurate conclusion that external demand is less important than it truly is, especially in economies heavily involved in global supply chains.

The exports-over-GDP measure presents the opposite problem. It assumes that all value-added and inputs for a country's exports are produced domestically. Modern international trade functions through complex global supply chains, where companies in various nations contribute to manufacturing a single product. Gross exports often include the value of parts and components imported from other countries, failing to account for the foreign content of exports. This leads to an overestimation of external demand's contribution, particularly critical for countries like China, which plays a central role in the East Asian production network.

Rebalancing Act: China's Ongoing Economic Transformation

Assessing China's economic trajectory requires a nuanced understanding of the interplay between external demand (exports and FDI) and domestic drivers. While traditional metrics offer a limited perspective, alternative measures provide a more accurate assessment of China's vulnerability to global economic shifts. As China navigates its economic transformation, recognizing the evolving roles of exports and FDI is crucial for informed policymaking and sustainable growth. The path towards a more balanced, domestic-led economy remains a work in progress, demanding continuous monitoring and strategic adjustments.