More than one-third of China’s $18.3 trillion economy is generated by its foreign trade.

Although that is well below the world average of 59% of GDP, China’s exports and imports still present a policy challenge because their dynamics are mainly determined by external demand and price fluctuations on world markets for goods and services.

The difficulty in managing that large segment of the economy is also compounded by the fragmentation of trade flows along the global security fault lines.

In spite of all that, China’s foreign trade increased 4.8% last year. Exports rose 6% and served as an important growth driver. That also showed expanding world market shares for Chinese products and services. Imports, by contrast, grew only 1.1%, reflecting a weak domestic demand and an apparent focus of foreign companies operating in China on serving markets from their local production facilities.

Asia last year took half of China’s trade, with the Republic of Korea, Japan, Malaysia, Indonesia and India being Beijing’s largest Asian trade partners in that order of importance. China’s total trade with Asia increased 5.4% on a strong 7% growth of exports and a somewhat slower 3.7% advance of imports.

Asia looms large in China trades

Over the same period, the European Union accounted for one-fifth of China’s foreign trade. The bilateral trade stagnated to a 1.3% growth and Chinese imports from the trading bloc declined 2.1%. China, however, still managed to increase nearly 4% its sales to the E.U.

The U.S. remained China’s third largest trade partner in 2024, taking 11% of Beijing’s overseas business transactions. The trade volume grew 3.7% in a pattern of decades’ old imbalances as exports to U.S. increased 5% while imports from the U.S. marked virtually no growth.

On current evidence, that geographical distribution of Chinese foreign trade seems set to continue in the years ahead.

Free trade regimes within Asia are widening, and China’s business dealings with (North and South) Koreas, Japan, Indonesia and India are expanding rapidly.

Despite intractable political tensons, Japan is likely to remain China’s important regional customer. This year started on a high note, with exports to Japan soaring 8.4% as Japanese business and political delegations visiting Beijing pledged to maintain strong economic ties. Last Saturday (March 22, 2025), the two countries held their sixth China-Japan High-Level Economic Dialogue in Tokyo, agreeing to increase business dealings in 20 areas of their bilateral relations.

The outcome of that usual flurry of Japanese business contacts with China will depend on the U.S.-China relations in the coming months. Politically, Japan is tied to (a) U.S. positions on Taiwan as a self-governed entity, (2) it administers islands in East China Sea (Diaoyu/Senkaku) claimed by China and (c) refuses to accept China’s maritime borders.

Those are the reddest of China’s red lines Japan must work around. As a result, Japan’s space to expand China trade is very limited because the Trump administration is unlikely to yield on contested issues China considers as matters of its sovereignty and territorial integrity.

China’s focus on domestic demand

The Republic of Korea, China’s largest Asian trade partner in 2024, is in a similar situation. Last year, total trade with China increased 5.6%, with Chinese imports of high-tech products from Korea surging 12.4%.

This year, however, Korea’s trade with China in the first two months was down 1.2%, with China’s exports falling 3%, and virtually no change in Chinese imports from Korea.

Indonesia and India look like China’s best prospective Asian markets. BRICS fellow members and fast-growing economies, these countries have development complementarities that favor their broad trade partnership with China.

China’s bright prospects for Asian trade are in a sharp contrast with its dimming outlook for U.S. and E.U. trade and investment transactions. Washington and Brussels want to cut Chinese trade surpluses. More fundamentally, they want to “de-risk” business dealings with China – a country they consider a “strategic and systemic competitor.”

Such a trans-Atlantic policy will negatively affect one-fourth of China’s foreign trade.

Beijing is fully aware of that risk, continues to negotiate with U.S. and E.U., pleads for free trade and a “win-win cooperation,” but realizes that only a stronger domestic demand can protect economic growth by offsetting declining net incomes on transborder business transactions.

China’s sound fundamentals and huge internal markets make such a policy possible and necessary. With a slight deflationary bias, sound public sector finances, a high savings rate (43% of GDP), trade surpluses, and a large (17% of GDP) net international creditor position China has plenty of room for a strong support to a potential and noninflationary economic growth of 5%.