Circling around China’s Dual Circulation Policy, part I-Ins and Outs

In May 2020, China’s two-track “dual circulation” strategy (DSC) came to light. An internal circulation track—the “mainstay”—encompasses domestic consumption and production. An external circulation track entails more opportunities for foreign direct investment (FDI) and efforts to expand China’s external connections. China will use the former to support growth and its move up the value-added chain. China will exploit the latter to obtain capital, technology, and increased access to foreign markets and goods. Squeezing more out of Chinese production suggests domestic firms will focus more on the internal market; China will expand measures for technological indigenization; and China will liberalize domestic flows. Deriving more out of domestic consumption suggest government programs to boost incomes and reduce inequalities. There is universal agreement the DCS represents China’s response to “an increasingly unstable and hostile outside world.” This threatening world includes frictions with Washington, slowing growth around the globe, and intensifying protectionist sentiments and securities anxieties in many countries. Many are worried about China’s DCS. One reason is that Beijing has not offered any specifics. A second reason is that the DCS has been associated with “import substitution,” “the creation of fully domestic supply chains,” and “‘gaining advantages in international economic … competition.’” A third reason is that the DCS intensifies China’s ongoing drive for technological self-sufficiency. China has been at pains to defuse worries. For instance, during his opening address at the 3rd China International Import Expo, Chinese President Xi Jinping stressed the DCS “is not a development loop behind closed doors, but more open domestic and international circulations.” While many DCS aspects are not new, the exigencies of the time, Xi’s support for it, and other factors may give it greater import than previous schemes. Future blogs will contemplate the specific implications of the DCS for IFDI and Chinese OFDI.