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China's Transformation into a Global Economy: Trade, Reforms, and WTO Accession - Prof. Y., Study notes of Economics

University of California - BerkeleyEconomics
Prof. Y. Qian

An in-depth analysis of china's transformation from an isolated economy to an integrated part of the global economy. It covers the growth of china's foreign trade, trade regimes, and the impact of wto accession. Key topics include export and import trends, the role of foreign investment, and the challenges faced during the negotiation process.

Typology: Study notes

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Uploaded on 10/01/2009

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Foreign Trade and WTO
• In 26 years, from one of the most isolated economies in the
world to an integrated part of the global economy
• By 2005, China is the third largest in foreign trade after the
U.S. and Germany
• Major features
– Both export and import grew fast
– Trade and FDI are inter-related
• Export to GDP ratio
– 1978: < 5%
– now: > 30%
• Caution: Export is gross value, not value added
– If value added is 30% of gross value, then true contribution of
export to GDP is pe rhaps 10%
Trend of China’s Foreign Trade
0
25
50
75
100
125
150
175
200
225
250
275
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01P
Billion US Dollars
Exports
Imports
Growth of China Trade vs. World Trade
0
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
2100
2200
2300
2400
2500
2600
2700
2800
2900
3000
3100
3200
3300
3400
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
1977=100
China Merchandise Trade World Total Trade
Trade Regimes
• Two way relationship between domestic reform
and opening up
– Domestic reform helps foreign trade and investment
– Foreign trade and investment push for more reform
• Trade regimes
– Pre-Reform: central planning
– Post-reform and pre-WTO: dual trade regime
– Post-WTO: uniform, international standard
The Pre-Reform Trading Patterns
• 1950s
– Major trading partners were other centrally planned economies
– 1/2 of foreign trade was with the Soviet Union
– Trading pattern: import machinery, export food and textile
products
• 1960s and 1970s
– Became isolated from both capitalist and socialist worlds
– “Self-reliance” development strategy
– But major trading partners were Western countries of Europe and
Japan in the 1970 s
– Trading pattern: import grain and machinery (fertilizer plants and
steel mills), export textiles and light industrial goods
The Pre-Reform Trade Regime
• Foreign trade regime is part of central planning
• 12 foreign trade companies, monopoly in each market
(e.g., grain, machinery, textiles)
• Foreign exchanges strictly controlled, serve the purpose of
trade plan
• Import
– Ease severe domestic shortages (food, materials)
– Overcome bottlenecks in domestic production (capital equipment)
• Export
– For the purpose of earning hard currency to finance import
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Download China's Transformation into a Global Economy: Trade, Reforms, and WTO Accession - Prof. Y. and more Study notes Economics in PDF only on Docsity!

Foreign Trade and WTO

  • In 26 years, from one of the most isolated economies in the world to an integrated part of the global economy
  • By 2005, China is the third largest in foreign trade after the U.S. and Germany
  • Major features
    • Both export and import grew fast
    • Trade and FDI are inter-related
  • Export to GDP ratio
    • 1978: < 5%
    • now: > 30%
  • Caution: Export is gross value, not value added
    • If value added is 30% of gross value, then true contribution of export to GDP is perhaps 10%

Trend of China’s Foreign Trade

0

25

50

75

100

125

150

175

200

225

250

275

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01P

Billion US Dollars

Exports

Imports

Growth of China Trade vs. World Trade

(^1000) 200300400

500600

700800

(^1000900) 11001200

13001400

15001600

17001800

19002000

21002200

230024002500

26002700

28002900

30003100

32003300

3400

197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000

1977=

China Merchandise Trade World Total Trade

Trade Regimes

  • Two way relationship between domestic reform

and opening up

  • Domestic reform helps foreign trade and investment
  • Foreign trade and investment push for more reform
  • Trade regimes
  • Pre-Reform: central planning
  • Post-reform and pre-WTO: dual trade regime
  • Post-WTO: uniform, international standard

The Pre-Reform Trading Patterns

  • 1950s
    • Major trading partners were other centrally planned economies
    • 1/2 of foreign trade was with the Soviet Union
    • Trading pattern: import machinery, export food and textile products
  • 1960s and 1970s
    • Became isolated from both capitalist and socialist worlds
    • “Self-reliance” development strategy
    • But major trading partners were Western countries of Europe and Japan in the 1970s
    • Trading pattern: import grain and machinery (fertilizer plants and steel mills), export textiles and light industrial goods

The Pre-Reform Trade Regime

  • Foreign trade regime is part of central planning
  • 12 foreign trade companies, monopoly in each market (e.g., grain, machinery, textiles)
  • Foreign exchanges strictly controlled, serve the purpose of trade plan
  • Import
    • Ease severe domestic shortages (food, materials)
    • Overcome bottlenecks in domestic production (capital equipment)
  • Export
    • For the purpose of earning hard currency to finance import

Dual Track in Foreign Exchange Market

  • Devaluation of currency: from US$ 1=1.4 yuan to

US$ 1 = 8.7 yuan in 1994, to US$ 1 = 8.27 yuan

in 2003, before appreciated to US$ 1 = 7.73 yuan

in 2007

  • 1986-93: Dual track foreign exchange regime
    • Official exchange rate (Foreign Exchange Certificate, FECs)
    • “Swap market” rate at Foreign Exchange Adjustment Centers
  • Exporters were allowed to keep a proportion of

foreign exchanges and use the swap market

  • Provide incentives for exporters
  • More efficient allocation of foreign exchange

Dual Track in Foreign Exchange Market

  • 1994: The two rates were unified at the swap

market rate

  • 1996: current account convertibility
    • Meaning: any authorized importer of goods and services can purchase foreign exchange upon presentation of proofs
  • China’s official foreign reserve
    • Over US$ 1 trillion by the end of 2006
    • More than 1 year’s import value

Dual Foreign Exchange Rates

0

2

4

6

8

10

1986 1988 1990 1992 1994 1996

official exchange rate swap market rate

The Dual Track in Foreign Trade

  • Two sectors
    • One sector, the old sector, mainly import substitution (“ordinary trade”)
    • Another sector, the new sector, mainly export oriented (“processing trade”)
  • Advantage of the dual track
    • A free market is introduced without disrupting effects on the existing old sector
    • The old sector is not hurt, the new sector benefits

The Dual Track in Foreign Trade

  • The export oriented sector (processing trade)
    • Many foreign invested firms
    • Many located in Special Economic Zones, but not all
    • Duty free: imports for export processing purposes are duty free
    • Tax benefits: corporate income tax holidays for three years
    • Minimum administrative interference: market oriented
    • Have to commit to export
  • Examples in other countries: export processing

zone in Mauritius, an island in Indian Ocean

Processing Trade

0

10

20

30

40

50

60

1987198819891990199119921993199419951996199719981999 Processing export as total export Processing import as total import

Some Features of Structure Change

  • Production displacement
    • China’s increased market share in export is matched by the declining shares of Hong Kong and Taiwan
    • A natural process and Hong Kong and Taiwan firms benefit too

Sources of U.S. Footwear Import

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

percent (%)

China South Korea & Taiwan

Sources of U.S. Imports of Toys, Games and

Sporting Goods

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

percent (%)

China Hong Kong, South Korea, Taiwan

China’s Motivation to Enter WTO

  • Trade and growth
    • China’s trade integration with the world remains shallow
    • Growth slow down after Asian financial crises calls for more foreign investment
  • Reform and restructuring
    • Use WTO as an anchor to push for further reform
    • Introducing international competition
  • Joining the international club
    • Being part of the civilized world
    • More weight in international affairs
    • China is an exception among developing countries to enthusiastically and unconditionally embrace globalization

Difficulties of Negotiation

  • 15 years of negotiation (July 1986-Dec. 2001)
    • China’s economy is not a complete market economy
    • China’s economy is a developing economy
    • China’s economy is large and growing fast
  • Forces against China’s accession to WTO
    • Domestic
      • Short term costs
      • Long term nationalist interests
    • Abroad
      • Non-economic reasons
      • Economic reasons

Terms of China’s Accession to WTO:

Market Access

  • Tariff reduction
    • Average of 14.5% by 2004
    • Average of 9.4% by 2005
  • Removing non-tariff barriers
    • Eliminate most licensing, quotas, other quantitative restrictions by 2005
    • Eliminate some quotas or increase the quotas upon accession

Terms of China’s Accession to WTO:

Market Access

  • Services:
    • Telecommunications (internet content and service provider)
    • Financial services (banking, insurance, securities)
    • Audiovisual (media)
    • Professional services (accounting, consultant, legal)
    • Wholesale and retail trade (including after-sale service, repair, maintenance, and transportation)
  • In some cases, up to 49% or 50% of ownership

share (e.g., telecommunication)

Terms of China’s Accession to WTO:

Market Access

  • Agriculture
    • Reduction of tariff from 22% to 17.5%
    • Adopt “tariff-rate quota” (TRQ) system: low tariff within the quota, higher tariff out-of-quota
    • The purpose of tariff-rate quota is to assure minimum market access
    • Example: wheat
      • Quota tariff: 1%
      • Initial quota: 7.3 million ton
      • Ultimate quota: 9.3 million ton
      • 1998 import: 1.5 million ton
    • Ending state monopoly of grain trading by granting import quotas to private traders

Terms of China’s Accession to WTO:

Protocol Issues

  • Some are universal terms
    • Transparency in trade administration (laws, regulations)
    • Judiciary review
    • Trade-Related Investment Measures
      • No local content requirements
      • No forced technology transfer and no offsets arrangements
    • Government procurement
      • whenever a government body or authority procures goods or services from foreign suppliers, it must provide all potential foreign suppliers with an equal opportunity to compete for the business via bidding or other similar process

Terms of China’s Accession to WTO:

Protocol Issues

  • Some are not
    • China has accepted terms far beyond those by other countries (e.g., eliminating agriculture subsidies)
    • Some are even in violation of the WTO principle (e.g., discriminatory treatment in safeguard and anti-dumping)

Terms of China’s Accession to WTO:

Protocol Issues

  • Safeguards
    • A country may impose quantitative restrictions on imported goods provided certain conditions are met, which are unusually strict
    • But relatively easy for a country to impose quantitative restrictions for goods from China for 12 years
    • Example: the injury standard in the product-specific safeguard
      • market disruption standard
      • serious injury standard
    • Exception to the nondiscriminatory principle: restrictions may apply only on goods originating in China
    • China’s retaliation is more restricted
    • Textile and apparel quotas continue until 2008, after general expiration of quotas in 2005

Terms of China’s Accession to WTO:

Protocol Issues

  • Antidumping
    • WTO allows countries to impose countervailing duties on imports when a firm is selling a product abroad at less than its “normal value”
    • Normal value is the price at which the good is sold in the home country or in a third country or the cost of producing the product, plus reasonable amounts for administration, selling and other costs, and profit
    • China is treated as “no-market economy”
      • Domestic production costs cannot be used
      • Disadvantage to China’s labor intensive products