International Trade of China

1
International Trade of China

• Lecturer Zhigang Li

2
Questions

• How has China opened up?
• What are the impact of opening on Chinese
  economy?
• Technology and learning
• Competition
• Institutional change

3
Trade of China before 1978

• One of the most closed economies in the world.
• Chinas total trade/GDP ratio had been lower than
  10 before 1978.
• Most of the trade was with the Soviet bloc.
• Main imports industrial materials and machinery,
  food and light consumer products.

4
Trade of China Now

• The third largest trading nation (after the US
  and Germany) in 2005.
• Total goods trade (exports plus imports) amounted
  to 64 of GDP in 2005.
• The ratio is around 20 for US, Japan, India, and
  Brazil.

5
How was China Kept Closed?

• Double air lock
• On the flow of goods Centrally controlled
  foreign-trade monopoly. Only authorized goods
  were allowed to be imported or exported.
• On the flow of money Chinese currency was not
  convertible and exchange-rate was set by the
  government.
• Domestic prices were insulated from the influence
  of world prices.

6
The Process of Trade Reform

• Initial reform (early 1980s)
• Allow export-processing contracts (textile) to
  Hong Kong business
• Four Special Economic Zones (SEZs) created in
  Guangdong and Fujian.
• Liberalizing the Foreign-Trade System (mid-1980s)
• Devaluation
• Demonopolization
• Entering WTO

7
Devaluation

• China maintained an overvalued currency before
  the reform.
• 1980 Yuan/US1.5/1
• 1986 Yuan/US3.5/1
• The real value of reminbi is maintained till 2005
• Dual-exchange-rate regime
• Exporters outside the plan could sell their
  foreign exchange earnings on a lightly regulated
  secondary market.

8
Demonopolization of Foreign-Trade Regime

• The number of companies authorized to engage in
  foreign trade expand dramatically.
• Before reform, there were twelve foreign trade
  companies
• By 1988 there were 5,000 FTCs, all state owned.
• Direct export and import rights were also granted
  to some 10,000 manufacturing firms.
• Exports were liberalized more rapidly than
  imports.

9
Dualistic Trade Regime

• Relatively liberal rules on export-processing
  trade while still protecting domestic markets.
• EP (export-promotion trade) regime
• Only for coastal provinces
• Exemption of duties on imported inputs FIEs were
  allowed to sidestep the complex traditional trade
  control system.
• EP trade reached 56 of total exports in 1996.
  FIEs accounted for 63 of incremental exports
  between 1992 and 2005.
• OT (ordinary trade) regime

10
Entering WTO

• China formally join WTO on December 11, 2001.

11
Impact of Entering WTO

• Reforms taken to prepare for WTO accession
• Reduce the degree of dualism and open up the OT
  regime.
• Foreign-trade law introduced in 2004, eliminating
  restriction on trade right.
• Commitment to lower tariffs.
• Shifting of tax system to reliance on Value-added
  Tax (in 1994) because the WTO permit exporters to
  rebate VAT on exports.

12
Trade Structure

• From its low point in 1997-1998, OT imports have
  surged as a share of GDP from less than 5 to 13
  in 2004.
• Structure of imported goods have not dramatically
  changed.
• Structure of exported goods have shifted from
  natural-resource-based products to
  labor-intensive commodities.
• Chinas export of electronics goods (e.g. laptop
  computers) have rapidly increased. However, this
  happens only because China is at the end of the
  production chain assembling, which is labor
  intensive. FIEs accounted for 88 of hi-tech
  exports.

13
Forecasting the Overall Impact of WTO on Chinese
Economy (Ianchovichina, 2004)

• Method
• Computable general equilibrium model
• The analysis focuses only on tariff
  liberalization, but not including changes of
  nontariffs.
• Experimental design
• Baseline The economies of the world grow with
  some projected paths.
• Assumptions Full employment, perfect labor
  mobility within nonagricultural and agricultural
  sectors.

14
Model Setup Migration

• LNF/LFa(WNF/WF)d
• LNF The number of nonfarm unskilled workers
• LF The number of farm unskilled workers
• WNF The wage of nonfarm unskilled workers
• WF The wage of farm unskilled workers
• d is estimated to be 1.32

15
Changes in Chinas Trade Policy

• During the 1990s China made substantial progress
  in reducing the coverage of nontariff barriers,
  lowering tariffs, and abolishing the trade
  distortions due to the exchange rate system.
• The coverage of nontariff barriers in China fell
  from 33 in 1996 to 22 in 2001.
• Coverage of import licensing and quotas fell from
  19 in 1996 to 13 in 2001.
• A key change is the abolition of agricultural
  export subsidies. (Before that there was a 32
  export subsidy on feedgrains and 10 on cotton.)
• Six million people will leave farm.

16
Impacts on China

• Output in textile and apparel sectors rises by
  16 and employment 56. That in turn stimulates
  the production of cotton by 16.
• For most merchandise goods, real wholesale prices
  fall as a result of trade liberalization after
  accession. Retail prices reflect a uniform
  consumption tax increase of about 1.9 levied to
  compensate for the loss of tariff revenue.
• Real farm wages fall by .7. Real rental price of
  land falls 5.5.

17
Welfare Gains

• Chinas total welfare gain from WTO accession is
  estimated at 41 billion per year (in 1997
  dollars), or 2.2 of per capita real income.
• Among Chinas trading partners the largest gains
  accrue to North America and the Western Europe,
  with close to half of the gains coming from more
  imports of textiles and clothing.
• Taiwans welfare gain is estimated at 3 billion
  per year.
• Developing economies that compete with China in
  third markets may lose. The losses will be
  largest for Vietnam (a 1.4 drop in per capita
  income)

18
Regional Distribution of Trade (Table 16.3)

• 1978 1994-98 2005
• Southeast 16 46 36
• Lower Yangtze 34 21 38
• North 39 23 19
• Rest of China 11 10 7
• Southeast Guangdong, Fujian, and Hainan
• Lower Yangtze Shanghai, Jiangsu, and Zhejiang

19
Notes

• The value added in the export sector is quite
  small relative to the value of the trade flows.
• The trade/GDP ratio is an index of openness, not
  a measure of the size of the traded-goods sector.

20
Assembly Trade and Technology Transfer (Lemoine
et al., 2004)

• Chinas foreign trade expanded by almost 15 per
  year on average during 1980-2001.
• Industrial exports rose by 20 per year with
  rapid diversification.
• During the 1980s, Chinas export were driven by
  textile products, and during the 1990s by
  electric and electronic products.
• Trade of processed products accounts for around
  50 of all trade.

21
(No Transcript)
22
(No Transcript)
23
(No Transcript)
24
Conclusion

• The local content of processed exports and the
  evolution of domestic exports tend to indicate
  that there are limited linkages between the
  outward-oriented sector and the rest of the
  economy.
• The assembly trade has driven the technological
  upgrading of Chinas foreign trade, but has not
  helped the upgrading of the traditional exporting
  sector, which are based on domestic outputs.

25
(No Transcript)
26
Productivity Gain Ownership or Competition?
(Zhang et al., 2001)

• Data
• From the State Statistic Bureau of China
• From mandatory annual reports of all government
  and business organizations in China
• 2,000 firms in 26 industries 1996-98
• Measuring competition
• International competition is measured by X/A the
  ratio of a firms export revenue to its total
  assets.
• Domestic competition is measured by the
  Herfindahl index, which is higher when
  competition is less.

27
(No Transcript)
28
Findings

• Strong ownership effect on efficiency
• Foreign-owned enterprises are the most efficient
• SOEs are the least efficient
• Competition
• Relationship between competition and efficiency
  is positive in export markets but negative in
  domestic markets.
• Consistent with local protectionism