Lecture 6

Chinas Foreign Trade

Professor Changqi Wu
()

Changqi Wu

India-China Trade

Changqi Wu

Topics to be Covered
To learn about Chinas foreign trade regime and
Chinas foreign trade policy.
To understand why China trades with other
nations and why China trades what it does.
To evaluate the impact of Chinas accession to
the WTO.
The future of regional econjomic integration
TPP versus RCEP

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Globalization and China

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Impact of China on Globalization

It is Chinas reform that makes the sense of the latest
wave of globalization. Subsequently, the landslide
change in the Eastern Europe and the former Soviet
Union took place.
Chinas open-door policy has played a similar role as
the Soviet revolution in 1918 that put the last round
of globalization into a halt.

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Measurement of Globalization
International trade
International investment
Immigration
Technology transfers
Others

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Chinas foreign trade regime

and foreign trade policies

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1. Characteristics of Chinas Foreign Trade

Rapid growth of international trade
annual growth rate of over 15.26 percent since 1978.
Measured by the export to GDP ratio of 20.9%, China is
considered one of the most open continental economies in
the world.

Gradual decline of import tariff

It falls well below 9.8 % 14 years after Chinas accession to
WTO.

Trade patterns increasingly reflect Chinas

comparative advantages.
China becomes a link in a global value chain.

From 1978 to 2015

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Chinas International Trade

100 million RMB

300000
250000
200000
150000

120423

104492

113161

114801

121037

107023

123241

129359

137131

143912

141357

2010

2011

2012

2013

2014

2015

94700

100000
50000
0

exports

imports

Figure1 Total goods export and import value of China2010-2015

Source From: Ministry of Commerce,People Republic of China.
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Structure of Chinas Foreign Trade

Destinations of Chinas export
Sources of Chinas import
Composition of Chinas export and import
Role of foreign invested enterprises

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Mainlands Major Trade Partners 2015

Countries and
Regions

Export
100M.US
Dollars

Growth
%

Import
100M.US Dollars

Growth
%

EU

3558.8

-4.0

2088.8

-14.5

USA

4095.4

3.4

1487.4

-6.5

ASEAN

2774.9

2.1

1946.8

-6.5

Hong Kong

3308.4

-8.9

127.7

-1.0

Japan

1356.7

-9.2

1429.9

-12.3

S. Korea

1013.0

0.9

1745.2

-8.2

Taiwan

449.0

-3.0

1433.1

-5.7

Russia

347.8

-35.2

332.8

-20.1

Australia

403.2

3.0

736.4

-24.7

Source From: Ministry of Commerce,People Republic of China.

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Dualistic Trade Regime

OT (ordinary trade) regime
EP (export-promotion trade) regime
Only for coastal provinces
Chongqings experiment
Exemption of duties on imported inputs; FIEs were
allowed to sidestep the complex traditional trade control
system.

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Structure of Export

Structure of China's Exports, 1980-2015

Year

1980
1990
2000
2010
2015
Amount( Percentage Amount Percentage Amount Percentage Amount Percentage Amount Percentage
100
(100
(100
(100
(100
million,
million,
million,
million,
million,
US
US dollars)
US
US
US dollars)
dollars)
dollars)
dollars)

Total Exports
Primary Products
Industrial
Products
Chemicals
Products
Classified by Raw
Materials
Machinery and
Transport
Equipment

181.2
91.1
90.1

100.0
50.3
49.7

620.9
158.9
461.8

100.0
25.6
74.4

2492.1
254.6
2237.5

100.0
10.2
89.8

15777.5
817.2
14962.2

100.0
5.2
94.8

22749
1039.8
21709.7

100.0
4.6
94.5

11.2
40.0

6.2
22.1

37.3
125.8

6.0
20.3

121.0
425.5

4.9
17.1

875.9
2491.5

5.6
15.8

1296.0
3913.1

5.7
17.2

8.4

4.7

55.9

9.0

826.0

33.1

7803.3

49.5

10594.5

46.6

Miscellaneous
Others
Mechanical &
Electrical
Products
Hi-tech Products

28.4
2.1
13.9

15.7
1.2
7.7

126.9
116.3
110.9

20.4
18.7
17.9

862.8
2.2
1053.1

34.6
0.1
42.3

3776.8
14.7
9334.3

23.9
0.1
59.2

5881.5
24.6
13107.1

25.9
0.1
57.7

370.4

14.9

4924.1

31.2

6552.1

28.8

Source: Customs of the Peoples Republic of China

There is overlap between Mechanical & Electrical Products and Hi-tech Products
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Total Values and Growth Rates of

Export and Import of Goods 2015
Unit: US$ Billion
Indicators

Value

Growth Rate %

3,956

-8

2274.9

-14.1

1,217

1.2

797.8

-9.8

1,311.9

0.1

655.2

-0.8

242.4

-5.5

FIEs

1,004.7

-6.5

Others

1,029.5

1.8

1681.9

-2.8

among: Ordinary trade

923.2

-16.8

among: electric and electronic products

806.1

-2.6

548.1

-0.6

407.8

-16.93

FIEs

829.9

-8.7

Others

444.2
593.0

-8.3

Total goods export and import value

Export value
among: Ordinary trade
Processing trade
among: electric and electronic products
High-tech products
among: SOEs

Import value

High-tech products
among: SOEs

Difference between export and import

Source From: Ministry of Commerce,People Republic of China.

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International Trade and Growth

Gain from utilizing comparative advantage
Labor
Gain from technology spillover
Gain from intensity of competition

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2. Chinas Foreign Trade System

Administrative structure
Agencies
Reforms in foreign trade sector
Instruments of Chinas foreign trade policy

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Trade System before 1978

China was among the most closed economies in
the world.
Chinas total trade/GDP ratio remained less than 10%
before 1978.
Most of the trade was with the Soviet bloc.

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Foreign Trade Reforms

Transition from a state monopoly to an open
foreign trade system
increase in the number of foreign trading companies
export rights to foreign invested enterprises
export rights to large domestic enterprises

Import substitution
domestic sales ratio restriction

Export promotion
foreign exchange retention system
export credit availability
tax rebate

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Trade of China Now

Total goods trade (exports plus imports) amounted
to USD3.9536 trillion, 37.9% of GDP in 2015.
The ratio is around 24.7% for US, Japan, India, and
Brazil.

China becomes the largest exporting nation and

the second largest importing nation in the world
(after the US) in good trade.

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How did China Open Up?

Reducing tariff (1982, 56%; 2001, 15%, 2015, 9.8%)
Reducing non-tariff barriers (quotas and licenses;
1990, 50%; 2001, 8.45%)
Exchange rate (1981, RMB1.5; 1994-2005, RMB8.7;
2012, RMB6.28; 2015, RMB 6.35)
Authorized domestic traders (1978, 12; 2001, 35000,
free trading rights)
Chinas full membership of the WTO
Free Trade Zones
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Import Tariff/Total Import

0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Figure2Tariff revenues as a fraction of import value1978-2015

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1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Exchange Rate of RMB

1

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

Figure3Exchange Rate of RMB1981-2015

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Chinas Entry into the WTO

China formally joint the WTO on December 11, 2001.
A 5 year grace period

Reforms taken to prepare for WTO accession:

Establishing a formal tax system in 1994, which relies on
value-added tax (the WTO only permits the rebate of VAT to
exporters).

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Welfare Gains
Chinas total welfare gain from WTO accession is
estimated as $41 billion per year (in 1997 dollars), or
2.2% of per capita real income.
Among Chinas trade partners the largest gains accrue
to North America and West 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 may
lose. The losses is largest for Vietnam (a 1.4% drop in
per capita income)
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3. Does China Practice Mercantilism?

Based on the statistics released by the Department
of Commerce of the US, China exported to the US
US$287.8 billion worth of goods and imported from
the US$ 72.3 billion in the year of 2010, the US run
a trade deficit with China of US$299.6 billion.
The Ministry of Commerce of China announced that
Chinas exported to the US was US$ 283.3 billion
worth of goods and import from the US was US$
102 billion, the US run a trade deficit with China of
US$181.3 billion in the same period.
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Myth of US-China Trade Deficit

For every dollar of export to China, US bought more than $5 of goods

Every American spent $800 on goods made in China

without selling any thing to China!

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The Facts

US runs a large trade deficit of GOODs with China

USs trade deficit figure was greatly exaggerated
because
Re-export to the US of goods made in China through HK was
partially accounted in Chinas trade data, but re-export of goods
to the mainland China made in US through HK was not included
in US export figures
Export mark-ups by Hong Kong traders were not included in the
calculation
Trade in services was not counted
Trade statistics reported in FOB and CIF create discrepancies

Greater China effect

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The Greater China Effect

What is the Greater China?
Hong Kong/Macau + Taiwan + Southern China
Hong Kong + Chinese Mainland + Taiwan +
Overseas Chinese

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Restructuring Within Greater China

The Greater China: Mainland China, Hong Kong,
and Taiwan
Restructuring
The industrial labor force of Guangdong and Fujian has
increased from 6 million in 1985 to 28 million by 2013.
The Hong Kong manufacturing labor force peaked just
below one million and had declined to 130,000 by 2014.
The manufacturing labor force of Taiwan reached 2.8
million in 1987 but leveled off and was at 3.0 million at the
end of 2014.

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Figure 4:Trade displacement in footwear (Source:US Department of Commerce)

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Share of World Exports

%
26
24

% of total world exports

22
20
18
16
14
12
10
8
6
4
2
0
1980

1985

1990

1995

Developing Asia excluding China

2000

2005

China,Mainland

Figure 5:The Share of World Exports,1980-2015

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2010

Japan

2015

What Drives the Regional

Economic Integration?
Complementarities of endowments, skills and
assets
Incomplete legal framework in the mainland
Imperfect information

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The Role of Hong Kong

Trading center
over 40 % of mainland Chinas export passed through HK

Business center
Reprocess and redirection of Chinas exported goods

Finance Center
Transactions of China trade was in Hong Kong

But HK was also at the center of the US-China

trade disputes

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Intermediates in Entrepot Trade

Robert Feenstra and Gordon Hanson study HKs
re-export of goods made in the Mainland of
China.
They find the mark-up is high and persistent in
particular for the trade with the US.

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Why Re-Export Markup Were High?

Market information
Ability to negotiate a better deal
Up-grading the quality of the goods re-exported
Why was the high re-export markup persistent?
graft
a means of capital outflow and capital round-tripping
transfer pricing

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Transfer Pricing
What is transfer pricing?
Transfer pricing refers to a practice in which a
corporation sets the price of the goods transferred
between different business units located in different
countries.

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Transfer Pricing in Practice

Suppose: A Hong Kong company operates in both Hong
Kong and Shenzhen.
production cost in Shenzhen = $100
packaging cost in Shenzhen = $10
market price in HK = 200
income before tax = (200-110) = $90
HKs tax rate = 16%
Mainland Chinas corporate tax rate = 25 %
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Option One
If the firm sets the transfer price of good exported at
$110
The profit of its Shenzhen Division = $0
The profit of its HK Division = $90
The after tax profit= 90x(1-16%)=$75.6

Total profit of the firm = $ 75.6

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Option Two
If the transfer price is set at arms length as $200
The net profit of its Shenzhen Division =
90x(1-25%) = $67.5
Net profit of HK division = $0
Total profit of the firm = $ 67.5

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Advantages of Transfer Pricing

Transfer pricing creates an opportunity to transfer
the profits to a jurisdiction that has a lower
corporate tax rate.
Thus, there is a gain to be made by setting
transfer pricing wisely!

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Questions
If packaging costs in HK = $20, does the firm have
incentives to package the goods in HK?
What happens if mainland China offer tax holidays?

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4. Chinas Foreign Trade Policy

Import tariffs
Weighted average tariff rate of 9.8 percent
Effective tariff rate was roughly 2 percent

Import quotas
Voluntary export restraints and export quotas
Export duties and licenses
VAT tax rebates
Export process zone

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18.0

140.0

16.0

120.0

14.0
12.0

100.0

10.0

80.0

8.0

60.0

6.0

40.0

4.0

20.0

2.0

0.0

0.0

Import

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tariff

Tariff Rate

tariff rate

160.0

19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97

import, $billion

China's import tariff

Anti-Dumping
A practice in which a firm charges a lower price for
exported goods than it does for the same goods
sold domestically
International price discrimination
imperfect competition
segmented markets

It sometimes makes sense for a firm to set its

export price below its marginal cost

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China Price
In the US furniture
market, the bed
made in China costs
$829 a piece while
the same bed made
in the US costs
$1,800.

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China Price: Piano

Steinway versus
Zhujiang River
For the US firms, it
must choose
between losing the
customers or cutting
price by 30%.

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Business in Action
European firms accused two Hong Kong
producers dump disposable lighters in the
European market
Japan accused Chinese steel producers dumping
in Japanese market
US accuses Chinese furniture producers dumping
in US

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Why Antidumping?
Dumping in many countries is regarded as an
unfair competitive practice.
predatory pricing practiced in a foreign market

Anti-dumping is an acceptable practice under WTO

rule if the following two conditions are met
foreign goods are sold cheaper than that at home
domestic producers are harmed by dumping

Rising number of antidumping cases is partly due

to the uneven pace at which countries have opened
up their markets.
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Anti-Dumping in Practice
Domestic firms complain about unfair practice of
imported goods
Administration starts investigation on dumping
If confirmed, hefty anti-dumping duty will be levied
on the imported goods, average 29% in Europe
and 57% in the US, for a number of years.

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How to Resolve the Dumping Issue?

Voluntary export restrictions
by voluntarily limiting the quantity of export, the exporting
countries can sustain a high market price in import
countries

Export quotas and licenses

Export tariff
Reciprocal actions
Form alliances
OFDI

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Winners and Losers

Losers:
domestic consumers
local importers and users
foreign producers

Winners
domestic producers
workers in the protected industries

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Key Learning Points

Chinas foreign trade has experienced rapid
increases and reflects more and more its
comparative advantages.
Chinas foreign trade regimes are complex and
should be reformed further.
Chinas foreign trade policy has become more
transparent and complied to the WTO rules.

Changqi Wu

3. Observation: Outsourcing
Remarkable changes in the nature of trade and FDI
Trade in intermediate inputs, within and across the
boundaries of the firms (intrafirm vs. arms length
trade)
The growth of international vertical specialization and
fragmentation of production

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Empirical Findings
A systematic relationship exists between the
characteristics of business firms and their
participation in foreign trade and investment
Only a small fraction of firms export, they are larger
and more productive than firms that serve only the
domestic market
A small fraction of firms engage in FDI, they are
larger and more productive than exporting firms

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New Trade Theories

New theories have been developed to explain
these changes
Neoclassical trade theory: Comparative advantage for
international trade and FDI flows
New trade theory: Imperfect competition for intraindustry trade
New-New trade theory: The choices of individual firms,
for the newly observed pattern of trade, FDI and
outsourcing

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International Entry Decision

Firm heterogeneity: in new trade theory and
new-new trade theory
New firm-level data available
Within the same industry, some exports, some take FDI
and some serve the domestic market only
Productivity difference, size difference

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Other Applications of the Model

Turnover
Trade liberalization
Technology adoption
Complex integration strategies
Variable markups
Factor proportions
Gravity equation of trade flows
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4. New Research Frontiers

One firm does both exporting as well as
domestic sales.
Why?
Multimarket operations
A new-new-new Trade Theory?

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Diasporas

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Kinship Matters

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Networks and International Trade

Vertical integration and international
trade network
Networks and international trade
Role of trading companies
Social networks in international trade

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Social Networks in International Trade

Why nations appear to trade too much domestically
and too little internationally?
Mystery of the missing trade
Information
Network and opportunities
Network and market structure
Keiretsu
Chaebol-Korean business groups
Overseas Chinese

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Ethnic Chinese Network in International Trade

Informal barriers to trade is high
Ethnic Chinese network plays an important role in
bilateral trade for differentiated products.
Diminishing returns to network size
For differentiated products trade between countries with
ethnic Chinese population shares at the levels prevailing in
Southeast Asia, the smallest of our estimates (for the
conservative aggregation in 1990) is that ethnic Chinese
networks increase bilateral trade by nearly 60%. (James
Rauch 2002, RES)

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Chinas WTO Accession

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1. What is the WTO?

The World Trade Organization (WTO) is an
institution set up to monitor and enforce
international trade rules negotiated under the
General Agreement of Tariffs and Trade (GATT).

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Why the WTO?

Prevention of occasional trade warfare by
establishing a mechanism to find negotiated
solutions
a mechanism to resolve the prisoners dilemma type
of problem in international trade

Multilateral agreement has advantages over

bilateral negotiation
It induces the positive externalities on other nations
Trade flows may involve several countries.

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Trade Warfare
Freer trade
Freer trade

China

10 (U.S.)

Protection

-10 (U.S.)

10 (China)

U.S.
20 (U.S.)

20 (China)
-5 (U.S.)

Protection
-10 (China)

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-5 (China)

Implications of Chinas Accession to WTO

Direct consequence
Impact on manufacturing sectors
Impact on services
Opportunities to MNEs

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Direct Consequences
Trade barriers come down.
Exports from China have a better and
smoother access to its major export markets.
Restrictions on FDI are lifted and reduced.
Better opportunity for Chinas investment
abroad.

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Impact on Manufacturing
Implications for MNEs depend on
MNEs competitive advantages
factor endowment differences, technological
and managerial differences, remaining trade
barriers, and transportation costs
competitive position of Chinese enterprises in the
sector
market structure and protection before WTO
the long-term prospect of Chinas economic
growth

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Changes in Chinas Industry in the Post WTO Era

Internet services

Chemicals

Dramatic

Distribution,
retailing

Insurance

Moderat
e

Autos

Pharmaceuticals

Negligible Electronic

Agriculture and
agribusiness

Energy

Securities

Processed goods
consumer goods

equipment,
electronics

Low

Medium
High
Current degree of protectionism
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Banking

Telecom
services

Winners and Losers

Firms that export to China benefit.
Firms that produce in China may suffer,
depending on their ability to withstand reduction
in protective measures
automobile producers may lose if they cannot adapt
fast

Substitution between foreign direct investment

and export may occur.

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Short-Term Effect and Long-Term

Implications on Chinas Industries
Highly protected domestic heavy industries
may suffer in the short-term because of
competitive pressure
Mounting competitive pressure may improve
efficiency of domestic firms through
restructuring

Changqi Wu

Impact on Services Sector

The extent of China to open its services
sector should balance the benefits of
increased competition and the risks of market
disruption
China prefers a step by step approach
Real sources of differences in
competitiveness
Technology, know-how, business strategy and
managerial effectiveness

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Services Opened to MNEs

banking
insurance
telecommunications
retailing and distributions
business services

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WTO Accession
and Productivity
David D. Li and Changqi Wu

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I. Motivations
WTO accession is a big push for integration
with the world economy. It typically requires:
1) Tariff reduction;
2) More market access to foreign investors;
3) Institutional changes.

What is the impact of WTO accession on the

domestic economy of accession economies?
This is an interesting testing case of the impact
of globalization.
This is apparently relevant to all economies
that have not yet joint the WTO.

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Existing Theories and Opinions

On international trade: (competing theories)
Trade volume will increase after WTO due to tariff
reduction.
It may not be the case, WTO may not increase trade.

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Existing Theories and Opinions (cont.)

On investment: (competing theories)
FDI will decrease, since FDI and import are substitutes
(the tariff-hopping hypothesis);
FDI will increase since FDI and exports are
complements; when export grows, FDI goes with it.
FDI will increase due to more market access
(liberalization).

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Existing Theories and Opinions (cont.)

On economic growth (competing opinions)
GDP growth will increase, due to efficiency
improvement;
Backward countries benefit more
GDP growth may go Down in the short-run, due to
adjustment costs (J-curve theory);
GDP growth may Not change, since integration into
the world economy cannot substitute for a
development strategy. (Rodriguez and Rodrik, June
2000)

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No Systematic Studies
This is surprising, given the existence of
1) widely different theories/wisdoms/ opinions on these
issues;
2) extensive observations of the events of WTO (GATT)
accession;
3) controversy on openness and globalization.

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II. Methodology and Dataset

This paper is an event study in nature.
It documents all the events of all GATT/WTO
accessions around the world from 1960 to 1998.
It studies the impact of GATT/WTO accession on
import, export, FDI, and GDP growth.
It studies the impact of GATT/WTO accession on
total factor productivity.

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The Data Set

A panel data set of 118 countries that joined
the WTO (GATT) in the period of 1960-98.
It contains variables 5 years before and 10
years after the WTO (GATT) accession.
Data sources

IMF International Financial Statistics

World Bank: World Development Indicators
UNCTAD (World Investment Report)
WTO

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III. Findings
Summary of the accession economies.
Impact of GATT/WTO accession on international
trade, investment and growth of accession
economies.
Impact of GATT/WTO accession on TFP of
accession economies

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3.1. Summary of Accession

Economies
Most of the economies were developing economies
at the time of accession with low or medium level
per capital income.
We put all economies into 2 groups: GDP per capita below or
at US$3,000 and over US$3,000

Many economies are small in terms of population

13 economies with population under 1 million at the time of
accession

Countries differ in their social economic institutions

Common law legal system
Continental law system
Socialist system

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3.2 Impact on Accession Economies

On growth rate
High income counties experience statistically
significant increase in growth rate of GDP before and
after accession.
Low income countries experiences statistically
significant increase in growth rate of GDP before but
not after accession.

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Impact on Accession Economies

On capital stock
High income countries enjoy a high and longer period
of increases in growth rate of their gross capital stock.
British legal system countries experience more
increase in growth rate of gross capital stock
Domestic or FDI?

On import and export

High income counties experience statistically
significant increases in both export and import growth
rate.

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Impact on the Total Factor Productivity

WTO Accession improves the TFP of high
income countries, but not so much for low
income countries.

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Conclusions
Among the developing countries, the relatively
well-off countries benefit more from GATT/WTO
accession.
Countries with different economic institutions also
benefit differently from WTO accession.
Import and export grew faster after the accession
particularly for high income developing countries.
The GDP growth of the accession economies
came from a faster total factor productivity
increase rather than the FDI inflow or domestic
capital formation.
Changqi Wu

Development: TPP and RCEP

Trans-Pacific Partnership
12 nation trading block
Implications for global trading system
Implications for Chinas international competitiveness

RCEP
10+6, Regional Comprehensive Economic
Partnership

FTAAP

Changqi Wu

Key Takeaways
The open-door policy is one of two pillars of Chinas
economic policy in the last 35 years.
China benefits enormously from this process and
also brings huge benefits to its major trading
partners.
The trade patterns of China increasingly reflects
Chinas comparative advantage.
Chinas trade system reform, including Chinas effort
to join the WTO, leads to increased productivity
gains of Chinas industries.

Changqi Wu