International Trade: Institutions, Policies, and Performance - China's Trade Strategy

The Role of Trade in China’s Growth

• From the mid-1980s, China’s growth has been significantly fuelled by opportunities offered by the global market.
• The share of exports in GDP rose remarkably:
  • Virtually nothing in the 1960s.
  • Close to 30% by 2003.

Global Integration and Influence

• China’s successful integration into the global economy leads to questions about the lessons other nations can learn from China’s trade strategy.

Overview of China’s Trade Performances

• Steady and steep growth in trade since 2001, with another surge in 2008.
• Advanced economies are the primary trading partners, but trade with developing countries is growing faster.
• Top 5 trading countries: US, Hong Kong, South Korea, Japan, and Taiwan.

Re-Export Role of Hong Kong:

• A significant share of China's exports to Hong Kong is re-exported to other countries (e.g., U.S., EU, ASEAN) rather than consumed locally.
• Hong Kong serves as an intermediary, managing customs, logistics, and financing for international shipments.

China as a Trade Surplus

• China has experienced a trade surplus since the mid-1990s.
• The trade surplus peaked in 2007, reaching approximately 10% of GDP.
• The trade surplus is mainly with developed countries, particularly the United States.

International Concerns Over Trade Surplus and Global Imbalances

• The EU and developed countries have proposed WTO negotiations to limit trade surpluses to no more than 3% of GDP for any country.
• China has been the primary target due to its substantial trading position.
• A challenge is that China has a large labor force (estimated at 200 million workers), making it difficult for global markets to accommodate its export-oriented development path.

China's Merchandise Trade

• The graph shows China's merchandise trade in current US$ million.
• Merchandise exports total, merchandise exports to high-income economies, merchandise exports to low and middle-income economies, merchandise imports total, merchandise imports from high-income economies, merchandise imports from low and middle-income economies

China’s Trade Balances with Major Trading Partners in 2023 (in billion USD)

• United States:
  • Exports: $524.7$
  • Imports: $163.6$
  • Trade Balance: $361.1$
• Hong Kong:
  • Exports: $288.8$
  • Imports: $8.7$
  • Trade Balance: $280.1$
• South Korea:
  • Exports: $146.4$
  • Imports: $181.7$
  • Trade Balance: $-35.3$
• Japan:
  • Exports: $152.0$
  • Imports: $156.3$
  • Trade Balance: $-4.3$
• Taiwan:
  • Exports: $75.2$
  • Imports: $217.8$
  • Trade Balance: $-142.6$
• Vietnam:
  • Exports: $161.9$
  • Imports: $98.8$
  • Trade Balance: $63.1$
• Russia:
  • Exports: $115.5$
  • Imports: $129.3$
  • Trade Balance: $-13.8$

Early Days of China's Trade (1949–1960)

• Trade with the Soviet Union dominated, accounting for more than two-thirds of China's trade from 1952–1960, with 48% exclusively with the Soviet Union.
• China imported industrial materials like steel and diesel fuel, and machinery (including complete industrial plants), critical for China’s First Five-Year Plan (1953–1957), with Soviet financial and technical support.
• Exports included textiles and processed foods.
• Trade played a driving force in China’s economic transformation, with total trade reaching 12% of GDP in 1955.

Economic Isolationism (1960–1978)

• The break with the Soviet Union in 1960 ended trade relations with China’s largest trade partner.

Stagnation in Trade (1959–1970)

• No growth in trade, with exports in 1970 remaining at 1959 levels ($2.26$ billion).
• Trade (imports and exports) accounted for just 5% of GDP in 1970–1971.

Self-Reliance Policies

• Inward-substitution industrialization (ISI) was adopted.
• The pre-reform foreign trade and economic development was characterized by import substitution.
• Industrialization Prioritized in heavy industries such as steel, machinery, and chemicals.
• Foreign trade focused on importing foreign technology, with exports driven by the need to serve such imports (The Ministry of Foreign Trade stated in 1955: ‘export is for import, and import is for socialist industrialisation.’).
• Comparative advantage defied in ISI.
• Barriers such as tariffs and subsidies against industrial imports protected heavy industries from developed countries competition.

Socialist Industrialization

• Channel rural surplus to industries through low agricultural prices and high industrial prices, funnelling profits into industrial sectors in favor of industrialization.
• Low Agricultural Prices:
  • The state set artificially low prices for agricultural goods.
  • Farmers sold crops at low, fixed prices, ensuring cheap food and raw materials for cities.
• High Industrial Prices:
  • The state set high prices for industrial goods (e.g., machinery, steel).
  • This ensured state-owned industries made high profits, which were reinvested into industrial development.
• Neglect of Light Industry lead to limited choice in consumer market.

The Pre-Reform Regime and Performance

• Foreign trade regime characterized by almost total state monopoly.

Centrally Controlled Foreign-Trade Monopoly

• 12 national Foreign-Trade Companies (FTCs) monopolized imports and exports.
• Export procurement prices and import volumes were both set by state plan, thus resulting in the insulation of producers of exports and users of imports from the world market.

Foreign-Exchange System

• All foreign exchange earnings had to be delivered to the state and allocated administratively to users for import needs via the Bank of China.
• The official exchange rate was mostly set at levels that overvalued the yuan relative to demand and supply, effectively subsidising imports by exports, to prioritise import needs.

The Actual Performance

• Advantages:
  • Focused investment in key industries using foreign exchange reserves to develop priority sectors (like heavy industry).
  • Technology Imports for Industrialization:
    • 1950s: Imported Soviet technology under the First Five-Year Plan.
    • 1970s: Imported Western technology to upgrade industries.
  • These efforts helped China’s industrial growth despite limited global trade participation.
• Drawbacks:
  • Missed Opportunities for Trade Benefits: China did not fully use comparative advantage, meaning it sacrificed potential gains from specializing in what it produced best.
  • Limited Incentives for Export Enterprises:
    • Lack of competition meant factories had little motivation to improve efficiency or upgrade technology.
    • Slow adaptation to global markets made Chinese exports less competitive.
  • Foreign Exchange Depletion:
    • In 1978–1979, China rapidly increased technology imports, draining its already small foreign-exchange reserves.
  • Foreign Trade Was Minimal:
    • Overall, trade was only a small fraction of GDP.

China’s Trade Liberalization

• Overview
  • In 1978–1979, China took innovative steps to open trade channels in Guangdong and Fujian provinces.
  • Aimed to leverage proximity to Hong Kong and Taiwan.
• Export-Processing (EP) Contracts
  • First step in 1978: Hong Kong businesses signed EP contracts with Chinese firms in the Pearl River Delta.
  • Example: Hong Kong firms shipped fabric to Chinese rural firms to sew into shirts.
  • Chinese firms earned a processing fee while goods bypassed the foreign-trade system.
  • Enabled the Hong Kong export network to expand into China while protecting Chinese industries from import competition.
• Special Economic Zones (SEZs)
  • Four SEZs established in Guangdong and Fujian.
  • Duty-free imports allowed for export production within the zones.
  • SEZ policies selectively promoted exports while maintaining a system of import-substitution industrialization.
  • SEZs functioned as enclaves to protect domestic industries.
• Devaluation
  • Before reform, China's currency (RMB) was overvalued (1.5 RMB/USD in 1980), making exports unprofitable and creating huge import demand.
• Demonopolization of the Foreign-Trade Regime
  • Expansion of Trade Companies:
    • Number of authorized foreign-trade companies (FTCs) grew to 5,000 by 1988, all state-owned.
    • 10,000 manufacturing enterprises granted direct export and import rights.

Tariffs and Nontariff Barriers (NTBs)

• High Tariffs:
  • Unweighted mean tariff: 43.10%; trade-weighted mean: 32% (World Bank, 1994).
• Nontariff Barriers:
  • 51% of imports subject to NTBs (e.g., quotas, administrative controls).

Foreign-Invested Enterprises (FIEs)

• Played a central role in export growth:
  • Accounted for 63% of incremental exports (1992–2005).
• Share of total exports:
  • 1% in 1985
  • 58% by 2005
  • Maintained through 2010.
• FIEs benefited from:
  • Automatic access to EP system.
  • Special tax concessions.

China’s Trade Liberalization after WTO

• China will provide non-discriminatory treatment to all WTO members.
• China will eliminate dual pricing practices.
• China will not use price controls for purposes of affording protection to domestic industries or services providers.
• China will implement the WTO Agreement in an effective and uniform manner.
• Within three years of accession, all enterprises will have the right to import and export all goods and trade them throughout the customs territory with limited exceptions.
• China will not maintain or introduce any export subsidies on agricultural products.

The trend of evolution of the structure of foreign trade

• Expanding Share of Manufactured Goods
  • Manufactured goods' share in exports increased from 50% (1980) to 90% (2001).
  • Manufactured goods' share in imports increased from 65% (1980) to 81% (2001).
• Labour-Intensive Export Growth
  • Light and textile industrial products (MM) and miscellaneous products (MA):
    • Combined share of total exports increased from 38% (1980) to 49% (2001).
    • Reflects a path of labour-intensive, export-oriented industrialization.
• Fastest Expansion in Machinery and Transport Equipment (MT)
  • Share in total exports grew from 5% (1980) to 36% (2001).
    • Most growth occurred in the 1990s (just 10% in 1991).
  • Machinery and transport equipment are capital- and technology-intensive industries.
• Significant growth in electronic and high-tech products:
  • Electronic products accounted for 20% of exports (2001).
  • High-tech products accounted for 14% of exports (2001).

China’s Export Content Top Export Categories, 2023 (Billions of US$)

• Machines: Computers, broadcasting equipment, telephones
  • 43%
• Textiles: Women’s sweaters, suits, etc.
  • 12%
• Metals: Steel bars, iron structures, etc.
  • 7.3%
• Chemical Products: Pesticides, fertilizers, antibiotics, etc.
  • 4.6%
• Transportation: Vehicle parts, passenger and cargo ships, motorcycles, etc.
  • 4.5%
• Plastics and Rubbers: Rubber tires, plastic housewares, etc.
  • 3.9%

Interpretation and Assessment

• China’s Export Basket is More Advanced than Expected
  • Typically, developing countries export low-cost, labour-intensive goods (e.g., textiles, footwear).
  • However, China exports a mix of both labour-intensive and high-tech, capital-intensive products.
• Breaks Traditional Economic Expectations:
  • Standard comparative advantage theory suggests countries should specialize based on their factor endowments (labour vs. capital).
  • But China defies this model by exporting both labour-intensive and high-tech goods.
• Implication for the Global Economy
  • China’s export sophistication challenges other developing economies, as it dominates both low-end and high-end manufacturing.
  • It also means China competes with developed nations in high-tech industries.

Export to Growth?

• Global Market Competition:
  • When a country exports, its firms compete with international businesses, forcing them to improve efficiency, quality, and innovation.
  • This leads to an overall rise in productivity and competitiveness in domestic industries.
• Technology Spillover: Learning from Global Trade
  • Access to Advanced Technologies:
    • Exporting firms engage with foreign buyers, investors, and suppliers, allowing them to adopt advanced technology, production techniques, and management practices.
    • Example: Many Chinese electronics manufacturers improved efficiency by working with global companies like Apple and Samsung.
• Learning by Doing: Gaining Efficiency Over Time
  • Experience Leads to Efficiency:
    • As firms produce more for exports, they become more skilled, reducing costs and improving productivity.
    • Workers also gain technical expertise, increasing overall economic efficiency.
  • Spillover Effects to Other Industries:
    • As industries become more advanced, their knowledge and efficiency spread to related sectors (e.g., machinery, logistics, finance).

Further Issues

• Demand-Side Considerations: Dependence?
  • How dependent is China on external demand for its exports?
  • Key questions:
    • Are export markets diversified enough to reduce vulnerability?
    • What role do domestic policies play in managing external demand risks?
• Trade Partners: Advanced Economies
  • Market-Economy Status:
    • The question of recognition and its impact on trade relations.
    • How does this influence access to markets in the EU and U.S.?
• Trade Partners: Developing Economies
  • World-Scale Restructuring:
    • China’s role in global value chains in relation to developing nations.
    • How does China’s trade strategy impact other developing economies?