Lecture 14 Opening China’s Doors--International Trade

8/6/2019 Lecture 14 Opening Chinas Doors--International Trade

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Opening Chinas Doors

Lecture 14-b


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Trade in the Socialist Period

Closed to foreign investment after

Soviets left in 1960, walk on two legs

Actually about 5%

of GDP in 1971

It is 45% of

GDP now!


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XVI: 1 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

USD

ollars

Exports

I ports

20062009

-20%


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What trigger trade reforms?

1. Devaluation (3:1 in 1980; 8.2 in 1995;6.8:1 now)

Even more versus Japanese Yen; Korean

Won and Taiwans NT$What does that mean? (makes exports

cheaper and imports more expensive)

Sets up the preconditions for the China circle

2. Currency convertibility

From plan to market


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3. Demonpolize State Trading

In 1980, only 8

companies imported

goods for China

all State TradingFirms all by plan!

Growth of profit-

oriented Foreign

Trade Companies

Reform by entry-

driven competition0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

NumberofForei

TradeCompa

ni

1980 1988 1995

AfterWTO, China is supposed to

allow Foreign Firms the right to import

8


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4. lli riff N

-20

0

20

40

60

80

100

78-79 80-84 85-89 90-94 95-97 98-99

Rice Wheat Maize Soybean

Huang, 2001

Difference between Chinas

prices and those of the ROW

e.g., agriculture


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Tabl 2. anges in inasaveragestatutory tariff rates (%)

All products Primary products Manufactures

Simple Weighted Simple Weighted Simple Weighted

1992 42.9 40.6 36.2 22.3 44.9 46.5

1993 39.9 38.4 33.3 20.9 41.8 44.0

1994 36.3 35.5 32.1 19.6 37.6 40.6

1996 23.6 22.6 25.4 20.0 23.1 23.2

1997 17.6 18.2 17.9 20.0 17.5 17.8

1998 17.5 18.7 17.9 20.0 17.4 18.5

1999 17.2 14.2 21.8 21.8 16.8 13.4

2000 17.0 14.1 22.4 19.5 16.6 13.3

2001 16.6 12.0 21.6 17.7 16.2 13.0

Post-

Accession 9.8 6.8 13.2 3.6 9.5 6.9One of most liberalized nations in the world!


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Creation of a Dualistic Trade

Regime Two types of regimes each acts very

different

Each plays a different role in Chinasdevelopment

Export Promotion (EP) Regime Traditional (Import Substitution) Regime


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Export Promotion

The China Circle: Taiwan / Hong Kong / SEA

Japanese and Korean Investment

Characteristics:

Firms open up manufacturing facilities in China

Import many components

Export final product Much of import and export value are tax free!

Relatively Little Value added (only LABOR)


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Dominance of Export Promotion

Part of Chinas Trade Export processing in

early 1980s: ZERO

With Rise of Export

Processing Zone (seeprevious ppt)

exports rose

Now more than half

TraditionalExports (44%)

Exports from Export

Promotion Regime

(56%)[95% of Foreign IndustrialEnterprise Exports are this type ofEP exports / FIE account for 56% ofall processed exports)]


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XVI 2 ina'sExports: oreign-Investedand omestic irms

0

50

100

150

200

250

88 89 90 91 92 93 94 95 96 97 98 99 00

Billion

olla

rs

Foreign-Invested Firms

Domestic Firms

Who is to

blame for

rising

exports

and trade

deficit?

FIE: From

1% in mid-

1980s to

48% in2000!


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Traditional Import Substitution

Trade Regime Acts Differently Still some of the original State Trading Firm: Sinochem (monopoly oil importer: largest trading

company in the world)

COFCO (monopoly food importer: second largest

trading company in the world)

Also new FTCs are participating in imports but more incentive to export (low currency value?;

export rebates for some products; etc.)

Disincentives to import: HIGH tarrifs (around 50%even in mid-1990s

If China could gain from trade, why would they evererect barriers?


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a

Production under Autarky (no trade)

Characteristic of autarky:

Consumption = production

Produce F1 food and

consume F1 food

AND

Produce T1 textiles andconsume T1 textiles

Autos

Textiles

T1

F1


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a

Growth from Trade and MarketLiberalization/Commercialization?

Autos

Textiles

mc

Difference between

optimal solution under

autarky and optimal

solution under trade:

Under trade: production is

NOT equal toconsumption

Specialize in production

(mp)

Trade and consume at mc

Growth: Umc > Ua

mp

THIS IS NOTCHINA IN MOSTSECTORS IN1980s and

1990s China

is NOT importingautos


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So why would country ever not

want free trade? Most common argument is: infant industry

argument

If left to initial comparative advantage, then

Developing Countries would be left to exporting

agricultural goods and natural resources (low-

priced textiles), while Developed Countries

would export industrial goods and high

technology products one leads to growth

the other leads to stagnation


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a

Growth from Trade and MarketLiberalization/Commercialization?

Autos

Food

mc

Why would a country do

this?

Growth is less at least

in short run (a to Pc; not

a to mc)

Why would a country want

to sacrifice this growth?

mp

Point of

productionunder

protection price

(Pp)

New price line with higher price

for cars

New point of consumption (Pc)


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a

Growth from Protectionism

Autos

Food

mc

Because we auto prices

high induced more

investment in high-

potential growth sector;

After learning how to build

cars, get boost from:

new investment

new technology adoption

learning effects

mp

In long run,

moreinvestment

and new

technology

induces

outward shift

of PPF and more

growth!What are the

dangers?


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Case Study: Automobiles

Build through FDI or import?

Shows how China played the importsubstitution game

Protect; increase capacity; now liberalize


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1953-65: Self-reliance Policy

Roughly 60,000 vehicles produced per year .

Relied on Soviet technologies.No other international contacts.Provincial governments set up production units.

By 1960 16 auto producers and 28 assembly companies.

1966-80: Security Oriented

Government invested heavily in western regions (Sichuan, Shanxi and Hubei).

Remote locations caused severe problems and over capacity.Focus was on heavy vehicles for military purposes.Car demand increased rapidly and capacities were expanded to 160,000 units/year.

By 1980 58 carmakers, 192 assembly companies and 2000 spare parts producers.

1981-98: Initial Fruits of Open-door Policy

Open-door policy in 1978 kick-started industry.From 83 85 noumber of companies almost doubled from 65 to 114 units.By 1998 roughly 2500 production units.Provincial governments further regionalized production.

Major international firms began to invest and then towards end quite rapidly.VW had already started in 1978.

These JVs accounted for about 60% of production in period

1999-??: Opening Up and Beyond

Major investments by foreign companies.All major Japanese companies in China.All major Germany producers in China.French and Italian producers nominally present.

US producers also nominally present.Currently rapid expansion. Capacity now near 2.5 mill. units.Growing capacity developed in costal areas

History


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1995 1996 1997 1998 1999 2000 2001 2002

*

Number of

plants > 25,000

3 4 5 5 5 8 9 11

Number of

plants > 50,000

2 2 2 3 3 4 7 8

Number ofplants > 100,000

1 1 1 2 2 1 2 3

Automobile Plants


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PostWTO and Autos

Tariffs way down

Many imported autos

But, price now has dropped on cars madein Chinas own plants

China has designs on exporting

Now major exporter of auto parts (butmostly as part of Export PromotionRegime)


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current rates final rates

finishedmotor vehicles 70.50% 25%

motor vehicleparts 23.40% 10%

electronicparts 12.00% 10%

AVERAGE vehicles andparts 34.70% 15%

Source:China WTO accession schedule, GTAP data, andOffice of the US

Trade Representative.

Tariffs on Automobiles

Rates before

WTO

Rates after

WTO


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Other highly protected industries

Computers

Cameras / Electronics

Fertilizer / Pesticides / Chemical industry

Building products (plate glass) Wheat / corn

Who benefits?

Who gets hurt? How has China managed the incentives?

Dropped tariffs sharply over time


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US Trade Deficit

China plays a

major role in

the trade deficit

with the rest ofthe world

But it is

shrinking over

time!0

100

200

300

400

500

600

1997

1998

1999

2000

2001

2002

2003

BillionsUS

Doll

With China

With Rest of

World

50%

25%,

since

2000


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1-digit SITC Commodity Exportsto China Importsfrom China

(0) Food and Live

Animals810.84 2,000.72

(1) Beverages and

Tobacco12.45 34.90

(2) Crude Materials,

Inedible, Except Fuels6,859.86 773.40

(4) Animal and VegetableOils, Fats and Waxes

102.96 9.04

(5) Chemicals and

Related Products, N.E.S.3,622.25 3,025.51

(6) Manufactured Goods

Classified Chiefly by

Material

2,005.40 16,217.46

(7) Machinery and

Transport Equipment12,546.27 60,848.34

(8) Miscellaneous

Manufactured Articles2,057.07 67,210.33

TOTAL 28,418.49 152,379.24

Composition of US-China Trade


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US Trade with Hong Kong andTaiwan

Trade balancewith the other

Chinas

however hasimproved (or at

least not got

worse)

-14

-12

-10

-8

-6

-4

-20

2

4

6

BillionsUSD

oll

1990 2003 1990 2003

Hong Kong

Taiwan


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a

Does China Only Have One-time

Growth from Trade?

Airplanes

Textiles

mc

Depends on what they are

importing?

Technology?

Products that eliminate

bottlenecks?

May allow for faster

growth of own industries

and growth of economy

beyond specialization

and traditional gains fromtrade!

mp

Documents

Lecture 14 Opening China’s Doors--International Trade