Chapter 12

The ruins of an ancient watchtower, located in Dunhuang, Gansu province (Copyright © The Real Bear, January 27, 2008)

12. International Economic Engagement

12.1 Historical background

12.2 Toward an open economy

12.3 Foreign trade

12.4 Understanding China’s trade performance

Keywords:

• open-door policy,

• outward development strategy,

• special economic zone (SEZ),

• coastal economic development zone,

• World Trade Organization (WTO),

• foreign trade,

• currency convertibility,

• trade surplus

12.1 Historical background

12.1.1 How autarkic was China?

12.1.2 External influences

Haijin (ban on maritime voyages):

• The export of cereals and five metals (gold, silver, copper, iron and tin) were strictly prohibited;

• private trade and contacts between Chinese and foreign businessmen were illegal;

• ‘At most ten foreigners may take a walk together near their hotel on the 8th, 18th and 28th days a month’, ‘Overseas businessmen should not stay in Guangdong in winter’, and ‘Women from foreign countries are prohibited to enter this country’;

• Chinese businessmen going abroad were subject to the conditions that ‘At most one liter of rice may be carried by a seaman a day’ and ‘At most two guns may be installed in a ship’;

• Manufacture of seagoing vessels of more than 500 dan (hectoliters) in weight and eight meters in height was prohibited.

China’s frontier and boundary conditions:

• Gansu (with Mongolia, 65 km) • Guangxi (with Vietnam, 1,020 km) • Heilongjiang (with Russia, 3,045 km) • Inner Mongolia (with Mongolia, 3,640 km; and Russia,

560 km) • Jilin (with North Korea, 870 km; and Russia, 560 km) • Liaoning (with North Korea, 546 km) • Tibet (with India, 1,906 km; Nepal, 1,236 km; Bhutan,

470 km; and Myanmar, 188 km) • Xinjiang (with Russia, 40 km; Mongolia, 968 km;

Pakistan, 523 km; Kazakhstan, 1,533 km; Kyrgyzstan, 858 km; Tajikistan, 540 km; Afghanistan, 76 km; and India, 1,474 km)

• Yunnan (with Myanmar, 1,997 km; Laos, 710 km; and Vietnam, 1,353 km)

12.2 Toward an open economy

12.2.1 An overview

12.2.2 WTO membership

12.2.3 Tariff and non-tariff barriers

12.2.4 Currency convertibility

China’s commitments:• China will provide non-discriminatory treatment to all WTO

Members. • China will eliminate dual pricing practices as well as

differences in treatment accorded to goods produced for sale in China in comparison to those produced for export.

• price controls will not be used for purposes of affording protection to domestic industries or services providers.

• the WTO Agreement will be implemented by China in an effective and uniform manner by revising its existing domestic laws and enacting new legislation fully in compliance with the WTO Agreement.

• 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.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0 19

80

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

¥/U

S$

Year

Source: NBS, various years.Figure 12.1 China’s RMB exchange rates (1980 – 2011)

Year Unweighted average

Weighted average

Dispersion (SD)

Max

1982 55.6 ... ... ...1985 43.3 ... ... ...1988 43.7 ... ... ...1991 44.1 ... ... ...1992 42.9 40.6 ... 220.01993 39.9 38.4 29.9 220.01994 36.3 35.5 27.9 ...1995 35.2 26.8 ... 220.01996 23.6 22.6 17.4 121.61997 17.6 16.0 13.0 121.61998 17.5 15.7 13.0 121.62000 16.4 ... ... ...2001 15.3 9.1 12.1 121.62002 12.3 6.4 9.1 71.0Source: Rumbaugh and Blancher (2004)

Table 12.1 China’s declining tariffs (%), 1982–2002

12.3 Foreign trade

12.3.1 Foreign trade regime in transition

12.3.2 China’s trade performance

13.3.3 Structural changes

Source: NBS, various years.Figure 12.2 China’s foreign trade as percentage of GDP, 1950-2010

Notes: (1) Data are as of 2008. (2) Hong Kong’s share includes re-exports.Source: NBS, various years.Figure 12.3 China’s major trading partners

Source: NBS, various years.Figure 12.4 Foreign trade surplus (deficit) as percentage of total trade

Notes: (1) Data on “ratio of trade to GDP” are based on NBS (2002). (2) Data on “distance to nearest coastal port” are estimated by the author based on the locations of China’s 31 provincial capitals.(a) Foreign trade versus distance in China

(b) Which countries match the exports of Chinese provinces?

Figure 12.5 The spatial pattern of foreign trade in China

Notes to Figure 12.5 (b):

(1)The equivalents include: Austria=Shanghai, Bahrain=S ichuan, Belize=Tibet, Benin=Ningxia, Bosnia and Herzegovina=Shaanxi, Botswana=Jilin, Colombia=Tianjin, Congo=Hunan, Costa Rica=Henan, El Salvador=Inner Mongolia, Gabon=Guangxi, Greece=Hebei, Hungary= Shandong, Jordan=Heilongjiang, Latvia=Jiangxi, Lebanon =Chongqing, Libya=Liaoning, Mongolia=Hainan, Namibia =Yunnan, Nepal=Gansu, Nigeria=Fujian; North Korea =Guizhou, Oman=Beijing, Panama=Macau, Rwanda= Qinghai, Serbia=Anhui, Shanxi=Iceland, South Korea= Guangdong, Sri Lanka=Hong Kong, Taiwan=Jiangsu, Thailand=Zhejiang, Trinidad and Tobago=Hubei, and Uzbekistan=Xinjiang. (2)Figures are in US dollars and as of 2010. (3)The data of Hong Kong and Macau exclude re-exports.

Source: NBS, various years.Figure 12.6 Shares of manufactured commodity imports and exports (%)

1960 1970 1980 1990 2000 2010

China ... ... 1.0 1.9 3.9 10.4

USA 19.4 15.3 12.0 11.6 12.1 8.4

Germany 10.7 12.1 10.5 12.1 8.6 8.3

Japan 3.7 6.7 7.1 8.5 7.5 5.1

Sources: Rumbaugh and Blancher (2004) and WTO (2011).

Table 12.2 Shares in world exports of major economies (%), 1960 – 2010

Origin 1990 1997 2005 2006 2008 2010

Middle East 39.0 48.0 46.0 44.0 46.0 46.0

Russia/Central Asia - - 11.0 11.0 10.0 10.0

Atlantic basin - - 23.0 5.0 3.0 3.0

Asia Pacific 60.0 26.2 8.0 4.0 - -

Africa 0.0 16.7 - 32.0 23.0 22.0

Others 0.0 9.6 12.0 4.0 18.0 19.0

Total 100.0 100.0 100.0 100.0 100.0 100.0Notes: (1) Atlantic Basin in 2010 is from Brazil. (2) The data are compiled from different sources: China General Administration of Customs (2005), U.S. Energy Information Agency (IEA) and FACTS Global Energy (2008).Source: Zhang (2011).

Table 12.3 China's crude oil imports by origin (%)

12.4 Understanding China’s trade performance

12.4.1 Methodology

12.4.2 Estimated results

This section is only prepared for graduate students. See Annex for details about the methodology. A more comprehensive research paper (Chapter D) is available at the companion site: http://www.elsevierdirect.com/companions/9780123978264

Explanatory variableEast Asia China

1985 1995 1985 1995

Constant-17.282(1.666a)

-29.303(1.225a)

-2.122(7.664)

-15.220(2.823a)

ln(GDPiGDPj)1.162

(0.032a)1.236

(0.027a)1.418

(0.166a)1.081

(0.065a)

ln(GDPPCiGDPPCj)0.722

(0.059a)0.868

(0.047a)-0.689

(0.330b)0.145

(0.117)

ln(DISTANCEij)-1.440

(0.147a)-0.648

(0.103a)-1.364

(0.631b)-0.423

(0.218b)

LANGAUGEij-9.048

(2.096a)2.860

(0.862a)14.375(4.432a)

2.600(1.017a)

RELIGIONij0.192

(0.410)1.242

(0.330a)-26.770

(11.358b)5.919

(4.069)R square 0.570 0.633 0.489 0.770F-statistic 425.917 841.41 22.737 98.54Number of observations 1612 2446 124 152

Notes: All regressions are based on ordinary least squares (OLS). Dependent variable is the natural log of bilateral trade (sum of exports and imports) in 1984 (since many East Asian economies suffered from bad recessions in 1985). Figures within parentheses are standard errors. “a” and “b” denote statistically significant at the 1% and 5% levels, respectively. Source: Guo (2007) for “East Asia” and estimated by the author for “China”.

Table 12.4 Determinants of foreign trade, China and East Asia

Explanatory variableIntra-regional trade Inter-regional trade

1985 1995 1985 1995

Constant-46.816(4.716a)

-39.547(3.079a)

-12.519(2.232a)

-33.077(1.833a)

ln(GDPiGDPj)1.147

(0.126a)1.107

(0.079a)1.148

(0.034a)1.260

(0.029a)

ln(GDPPCiGDPPCj)1.313

(0.219a)1.093

(0.169a)0.642

(0.063a)0.742

(0.053a)

ln(DISTANCEij)1.069

(0.288a)0.601

(0.210a)-1.795

(0.217a)-0.112(0.178)

RELIGIONij2.697

(1.659)2.332

(0.901b)-0.206(0.419)

0.454(0.360)

BAHASA1.893

(1.036c)1.478

(0.753b)Excl. Excl.

CHINESE0.056

(0.694)1.755

(0.483a)0.529

(0.641)1.012

(0.383a)

ENGLISH1.734

(0.710b)-0.419(0.527)

0.258(0.218)

0.679(0.159a)

KHMER6.806

(2.277a)5.922

(1.191a)Excl. Excl.

THAI-3.406(4.114)

-1.211(1.137)

Excl. Excl.

R square 0.565 0.641 0.569 0.625F-statistic 19.341 48.71 322.188 605.96Number of observations 143 255 1468 2190Notes: All regressions are based on ordinary least squares (OLS). Dependent variable is the natural log of bilateral trade (sum of exports and imports) in 1984 (for 1985’s regressions) and 1995 (for 1995’s regressions). Hong Kong is excluded from regressions in 1985. Figures within parentheses are standard errors. ‘Excl.’ denotes the left-hand variable is deleted from the analysis since it has missing correlation. “a”, “b” and “c” denote statistically significant at the 1%, 5% and 10% levels, respectively. Source: Guo (2007).

Table 12.5 The growing role of ‘Chinese’ in foreign trade

Chapter conclusion:

The Chinese economy has been transforming from the autarkic to an outward-oriented pattern. The open-door policy was first implemented in the coastal area in the early 1980s, resulting in a rapid economic growth for China and the eastern belt in particular. In the early 1990s, China embarked on another outward-looking policy to promote the cross-border trade and economic development of the inland frontier area. China has been industrializing and is becoming a major exporter of manufactured goods. China’s efforts on economic internationalization have greatly benefited every sphere of Chinese life. The Chinese government has attempted to adjust further its economic policies so as to meet gradually the needs of the multilateral trading system. Since China joined in the WTO, the Chinese economy has become freer and more internationalized. But many pressing issues still exist.

Suggested readingChen, Feng (2010). “Trade Unions and the Quadripartite Interactions in

Strike Settlement in China,” The China Quarterly, Volume 202, pp. 104 - 124.

Devadason, Evelyn S. (2011). “Reorganization of Intra-ASEAN 5 Trade Flows: The ‘China Factor’,” Asian Economic Journal, Volume 25, Issue 2, pp. 129–149.

Feenstra, Robert, C (1999). “Discrepancies in International Data: An Application to China-Hong Kong Entrepot Trade,” American Economic Review, Volume 89, Issue 2, May.

Gochoco-Bautista, Maria Socorro and Dennis S. Mapa (2010). “Linkages between Trade and Financial Integration and Output Growth in East Asia,” Asian Economic Journal, Volume 24, Issue 1, pp. 1–22.

Goldstein, M., and Lardy, N. (2006). “China's Exchange Rate Policy Dilemma,” American Economic Review, Volume 96, pp. 422-26. .

Goldstein, Morris and Nicholas Lardy (2006). “China's Exchange Rate Policy Dilemma,” American Economic Review, Volume 96, Issue 2.

Suggested readingGuo, Rongxing (2007). “Linguistic and Religious Influences on

Foreign Trade: Evidence from East Asia,” Asian Economic Journal, Volume 21, Issue 1, pp. 101–121.

He, Yin (2007). “Who is Better Off from Trade Liberalization? An Experience from Urban China,” Asian Economic Journal, Volume 21, Issue 3, pp. 283–299.

Kim, Joon-Kyung, Yangseon Kim and Chung H. Lee (2006). “Trade, Investment and Economic Interdependence between South Korea and China,” Asian Economic Journal, Volume 20, Issue 4, pp. 379–392.

Lardy, N.R. (2005). “Exchange Rate and Monetary Policy in China,” The CATO Journal, Volume 25, pp. 41-47.

McKinnon, Ronald (2006). China's Exchange Rate Trap: Japan Redux?” American Economic Review, Volume 96, Issue 2.

Mehrotra, Aaron N. (2007). “Exchange and interest rate channels during a deflationary era—Evidence from Japan, Hong Kong and China,” Journal of Comparative Economics, Volume 35, Issue 1, pp. 188-210.

Suggested readingPalley, T. (2004). External Contradictions of the Chinese Development

Model: Why China Must Abandon Export-led Growth or Risk a Global Economic Contraction. Working paper, University of Massachusetts.

Qin, Julia Ya (2007). “Trade, Investment and Beyond: The Impact of WTO Accession on China's Legal System,” The China Quarterly, Volume 191, pp. 720 - 741.

Rauch, J.E. and V. Trindade (2002). “Ethnic Chinese Networks in International Trade,” Review of Economics and Statistics, Volume 84, Issue 1, pp. 116-30.

Rodrik, Dani (2010). “Making Room for China in the World Economy,” American Economic Review, Volume 100, Issue 2.Wang, Tao (2005). ”Sources of real exchange rate fluctuations in China,” Journal of Comparative Economics, Volume 33, Issue 4, pp. 753-771.

Yu, Wusheng and Søren E. Frandsen (2005). “China's WTO Commitments in Agriculture and Impacts of Potential OECD Agricultural Trade Liberalizations,” Asian Economic Journal, Volume 19, Issue 1, pp. 1–28.