Editor’s note: He Weiwen is a senior fellow at Chongyang Institute for Financial Studies, Renmin University of China and former economic and commercial counselor of Chinese consulates in San Francisco and New York. The article reflects the author’s opinions, and not necessarily the views of CGTN.

President Xi Jinping has called on the national efforts to develop a new economic pattern in China known as “dual circulation” – domestic and international, promoting each other, with domestic circulation as the main body.

This points to a strategic orientation in China’s immediate and long-term development, under the turbulent changes in the world economic environment.

Law in general but significance in particular

Dual circulation, covering domestic and international, is a general economic development law in the contemporary world. Karl Marx developed the theory on social reproduction circulation. It covers production, distribution, exchange and consumption, then back to production, constituting a whole cycle. Ever since the Great Geographic Discovery and the formation of the world market, the circulation covers both home and international markets. The Chinese economy has been in dual circulation for many years.

However, dual circulation put forward at this crucial juncture has its particular significance today. The focus of dual circulation is to make domestic circulation the main body. This pattern is based on the changes of the international environment.

First, the COVID-19 pandemic tells us that the public disasters facing the human world and their consequences to the world economic order will most likely become enduring and normal. The turbulence in international relations, highlighted by the drastic deterioration in China-U.S. relations, the challenges on China’s technology advances, and the international trade and investment will all exist over time.

Under these circumstances, we must rely on ourselves and make the vast domestic resources and markets as the mainstay.

On the supply side, we must develop with our own efforts world leading technologies including semiconductors, big data, AI, aerospace, IoTs, industrial robots, etc. And on the demand side, we must develop the ever-growing huge domestic markets to sustain long-term economic growth.

Main body of domestic circulation not because of service sector

There are a few interpretations on dual circulation that are worth discussing.

The first one says that dual circulation with domestic circulation as the main body is nothing new, as many developed countries share the same pattern. It also says that China’s export accounted for only 17.4 percent of GDP in 2019 (as compared to 35.4 percent in 2006), with the remaining 82.6 percent produced at home. The reason lies in the growth of the service sector in modern society, accounting for the largest share by far in total GDP, leaving less for export as services are non-tradable. The same is witnessed in the U.S. and Japan.

This interpretation is, however, questionable.

First, growth of the service sector is not the reason for a low export share in GDP. According to the Word Bank, goods and services exported as a share of GDP was 18.4 percent in China in 2019, while the UK had 31.5 percent, France had 31.8 percent and Germany had an alarming 47.0 percent. All the three countries have a much higher service share than China. Hence, the share in exports is not related to the service sector, because service is also tradable, but related to the size of the domestic market.

Second, net home production is not total home production minus export, because export is delivered by home production. Instead, net home production should deduct imports. However, imports are also a part of gross domestic economy. The import of raw materials, components and equipment are indispensable to home production. Even service sectors such as retail also depend on import supplies. Hence, total production minus export does not mean anything.

Thirdly, the calculation on GDP minus export is incorrect. Export is measured by total value, while GDP is measured by added value. The two are in different categories and thus incomparable; assuming that all exported Chinese goods are industrial products. In 2019, total industrial added value was 31.71 trillion yuan, with its total value at 116.74 trillion yuan. The export delivery was 12.42 trillion yuan, accounting for 10.7 percent of the total production value.

The above discussion also shows that domestic circulation is closely related to international circulation as its production, distribution, exchange and consumption involves foreign factors extensively. That’s why dual circulation is an integral whole, promoting each other.

Todays policy not based on criticism of the past

There is also a repeated argument blaming a strategy in the 1980s, which put both ends of the production process (the supply of raw materials and the marketing of products) on the world market, making it the reason for domestic circulation as the main body. This is also not fact-based.

The pattern was promoted by the State Council on conditions over 30 years ago, and applied to coastal areas only, not the whole country. Now 30 years later, this is no longer applicable in most coastal areas. Even Shenzhen, the historical example, is completely different. Instead, it has been a shining vanguard of high-tech driven innovation society for many years. Also as mentioned above, export delivery accounted for only 10.7 percent of total industrial production in the whole country. Hence, it is inappropriate to base today’s policy on the criticism of the past policy.

Further opening-up of equal importance

Having elaborated the above, we should put equal importance on further opening-up.

On the supply side, we should open our door wide to attract the world’s best R&D and technology resources as well as world investments in high-tech sectors. Foreign R&D centers, manufacturing plants and service facilities, once invested and registered in China, will be treated as domestic entities and part of China’s own resources, and will join in China’s domestic circulation.

China is still far behind the world average in foreign direct investment (FDI) inflows. According to the data provided in UNCTAD World Investment Report 2020 and the World Bank, we can find out that in 2019, the world average per capita FDI inflow stock was $4,752.43, while China had only $1,263.92, just over one fourth of the world average. There is no room for complacency.

On the demand side, we should spare no efforts to keep and expand sales overseas and compete with the most advanced technologies and products with world leading players. If Chinese technologies and products are only supplied in the domestic market and cannot compete in the world market, it will be difficult for China to move up the ladder of world supply chain and become a developed economy.

On the contrary, if our products and services meet not only the ever-increasing domestic market demand, but also succeed in overseas sales, international circulation will be a good extension of domestic circulation.

In conclusion, dual circulation is an integral whole, with domestic as the main body, international circulation as indispensable additional inputs and extension, both promoting each other. A comprehensive, scientific understanding will help us move forward on the right path.

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