Chapter 8

The Evolution of Chinas International

Trade Policy: Development through
Protection and Liberalization
Jiangyu Wang*

I. INTRODUCTION

The rapid rise of China is quickly reshaping the world economy. With an annual
growth rate of 9.6 per cent during the period 19792005 and a double-digit trade
growth rate, China is integrating itself into the world trading system and marching
toward becoming an economic superpower. Indeed, it was already the fourth larg-
est economy and the third largest trading nation in 2006.1 As Eichengreen and
Tong notes, Chinas importance as an assembly platform for exports of manu-
factures, a destination for foreign investment, and a consumer of imported tech-
nology, raw materials and industrial goods is not a one-time shock; rather, it is an
ongoing process continually reshaping the balance of global supply and demand.2

* Associate Professor, School of Law, The Chinese University of Hong Kong; S.J.D. and LL.M.
(U.Penn); M.Jur (Oxon); LL.M.(Beijing); LL.B.(China University of Political Science and Law).
Email: jywang@cuhk.edu.hk.
1. Malory Greene, Nora Hihel, Przemyslaw Kowalski and Douglas Lippoldt, Chinas Trade and
Growth, OECD Trade Policy Working Paper No. 44 (November 2006), p. 5.
2. Barry Eichengreen and Hui Tong, How China is Reorganizing the World Economy, (2006)
1 Asian Economic Policy Review 74.

Y.S. Lee, Economic Development through World Trade, pp. 191213.

# 2007, Kluwer Law International BV, The Netherlands.

Electronic copy available at: http://ssrn.com/abstract=1126206

192 Jiangyu Wang

From the perspectives of trade and development, what explains Chinas

remarkable growth? With respect to the nature and impact of its trade and
investment policy, China remains a puzzle to many observers and continues to
be a topic for heated debates. Given the volume of its foreign trade and investment,
it goes without saying that China is already an open economy.3 Chinas economic
success has also been attributed to its openness. Not surprisingly, Pascal Lamy, the
World Trade Organizations Director-General, observes that China was strong
when it opened to the world. When the Middle Kingdom closed its door, it fell
behind. An OECD working paper indicates that Chinas economy has a good
potential to become the worlds top exporter by the beginning of next decade
owing to attractiveness to FDI, a high domestic saying rate, improvement in pro-
ductivity spurred by reduced internal and external barriers to trade, and a signif-
icant surplus of labor (emphasis added).
For others, Chinas achievements were not resulted from trade and investment
liberalization. Rather, it reflects the delicate use of protection tools.4 For example,
the U.S.-China Economic and Security Review Commission (USCC) observes, in
its 2006 report to U.S. congress that China has a centralized industrial policy that
employs a wide variety of tools to promote favoured industries. In particular, China
has used a range of subsidies to encourage the manufacture of goods meant for
export over the manufacture of goods meant for domestic consumption, and to
secure foreign investment in the manufacturing sector.5
The primary purpose of this chapter is to provide an analysis of the evolution
of Chinas foreign trade policy from a trade and development perspective.
Examining some of the key developments in Chinas trade policy and regime, it
argues that neither free trade nor protection is the complete answer to development;
in Chinas experience, a pragmatic trade policy requires a delicate balance
between liberalization and use of industrial policy to support selected economic
sectors.

II. A BRIEF HISTORY OF CHINAS PRE-REFORM

FOREIGN TRADE SYSTEM

Chinas international economic stance has shifted dramatically several times since
1949, experiencing periods such as dependence on the Soviet Union, absolute
isolation, and opening doors to the West. Today, although China is well on the

3. Pascal Lamy, China was strong when it opened to the world, WTO Director General Pascal
Lamys Speech in Shanghai (September 6, 2006).
4. See e.g., Terence P. Stewart, Chinas Compliance with World Trade Organization Obligations:
A Report for the U.S.-China Economic and Security Review Commission, March 19, 2004, at
<www.uscc.gov/researchpapers/2004/stewartpaper/04_04_15stewart.php> (last visited April 30,
2007); USCC (U.S.-China Economic and Securities Review Commission), 2006 Report to Con-
gress (November 2006), p. 25, at <www.uscc.gov> (last visited April 30, 2007). The USCC
observes, in its 2006 report to the U.S. Congress that China has a centralized industrial policy
that employs a wide variety of tools to promote favored industries.
5. Ibid.

Electronic copy available at: http://ssrn.com/abstract=1126206

The Evolution of Chinas International Trade Policy 193

way to becoming a market economy, the institutional structure of its economic

system, including the foreign trade regime, still exhibits some continuity with the
previous periods before the reform and open door policy. An inspection of
Chinas trade policy history could help form a better understanding on how the
country has been transformed from a clumsy, isolated economy to a relatively open
society which is poised to undertake broader and tougher market-opening mea-
sures than most other WTO members.
The decade following the establishment of the Peoples Republic of China
(PRC) saw a trade pattern of dependency upon the Soviet Union. Faced in 1949
with an American coastal blockade and shortages of food in urban areas, leadership
of the new communist republic decided to lean to one side, allowing the Soviet
alliance to dominate both the political and economic agenda.6 This position was
prompted by both ideological and practical considerations. On the ideological side,
strong alliance with the USSR demonstrated political correctness and solid
devotion to communism. Practically, the infant Peoples Republic needed
Soviet aid and protection to build the nation and forestall Western intervention.
Trade in this decade was mainly conducted with the USSR and other socialist
countries. The countrys imports consisted mainly of capital goods such as
machines and equipment during the 1950s, while it exported primary raw materials
including agricultural and mineral products.7
The 1960s was a period of isolation and emerging of pragmatism in Chinas
international economic relations. China ceased ties with the Soviet Union and
naturally with the Soviet-controlled East European countries mainly due to
ideological disagreement. The open split on what was the right course of socialism
also buried Chinas trade and economic relations with those nations. From 1958,
Chairman Mao Zedong, long uncomfortable with Soviet attempts to dictate
Chinas direction, took initiatives to turn the country economically inward and
maintained a relatively autarkic approach to development in the next 12 years. In
fact, in most of this decade Chinas international economic agreement and inter-
action with the rest of the world were at their lowest levels in the PRCs history,
while its commitment to communist revolutionary ideas and ties with the Third
World were at their peak.8 In Maos great leap forward strategy based on self-
reliance, foreign trade was only assigned a minor role. China did, however, import
great amounts of grain and other basic consumption goods in early 1960s because
its own agricultural and industrial performance plummeted due to three consecu-
tive years of natural disasters combined with misguided policies like the Great
Leap Forward.9

6. In 1949 Chairman Mao Zedong unequivocally announced this policy: The Chinese people must
lean either to the side of imperialism or to the side of socialism. There can be no exception. There
can be no sitting on the fence; there is no third path. See Hsu (2000), infra note 9, p. 661.
7. Madelyn C. Ross, Chinas International Economic Behaviour, in Thomas W. Robinson and
David Shambaugh (eds.), Chinese Foreign Policy: Theory and Practice (Oxford, Clarendon
Press, 1994), p. 439.
8. Ibid.
9. The First Five Year Plan (from 19531957), an economic development model inherited from the
Soviet Union, achieved enormous success. This made Mao Zedong believe that China was able to

Electronic copy available at: http://ssrn.com/abstract=1126206

194 Jiangyu Wang

The 1960s also saw the turning of Chinas foreign trade policy from ideology
base to a certain degree of pragmatism, as the country started to diversify its trading
partners. In 1960, Zhou Enlai, Chinas then Prime Minister, allowed trade with
Japan, and Japan rose to become Chinas top trading partner by 1965. Trade with
Europe also increased dramatically as China shifted its purchases of industrial
equipment from USSR to Western suppliers. In the same time, trade with the
British colony Hong Kong continued to expand.10
In the 1970s, Chinas domestic political and economic situation was still in a
mess as the Cultural Revolution continued, but the countrys relations with the
West eased as Maos internationalism steadily grew. Between 1970 and 1972
relations were normalized with Canada, West Germany and Japan. President
Nixon visited the red land in 1972 and China gained entry into the United
Nations in the same year. As political conditions eased, trade expanded dramat-
ically: U.S.- China trade alone jumped from 5 million US dollars (USD) in 1971 to
more than USD 800 million in 1973. From then on, the West, mainly including
Japan, United States, Western Europe, together with Hong Kong and Singapore,
would find themselves Chinas top trading partners in the following three
decades.11
At most of the time of the pre-reform era, the Chinese foreign trade system
demonstrated three major features:
First, in the organization of foreign trade, the system was completely monop-
olized by the state through the central government. A legacy of the Nationalist
government, there were about 4600 private companies controlling one-third of
Chinas total trade in 1950. But after a few years of socialist restructuring, in
1955, only a handful of state-owned trading corporations managed about 99 per
cent of foreign trade.12 Beginning in the 1950s, the government created over ten
(the number varied between ten and 16 at different times) specialized foreign trade
corporations, controlled by the Ministry of Foreign Trade, to deal with trade in

gan mei chao ying (catch up with the United States and surpass the British) in about 1520
years. In 1958, Mao had the National Peoples Congress announce the Great Leap Forward
Movement for the next three years, calling for an almost 20 per cent of increase of steel,
electricity and coal production. The production targets, however, were repeatedly revised
upward in hopes of achieving an unprecedented rate of growth. Instead of following any eco-
nomically reasonable policies, Mao launched a mass political campaign to achieve this goal, and
as a result hundreds of millions of individuals and social units regardless of their professional
background as peasant, student, professor, workers, government officials, etc. were mobilized
to participate in industrial production. This movement was soon proved to be a failure and a
disaster to the Chinese economy. In addition, from 1959 to 1951, China suffered three consec-
utive years of natural disasters, which furthermore deteriorated the economy and caused
millions of deaths in the early 1960s. See Immanuel C.Y. HSU, The Rise of Modern China
(New York, Oxford University Press, 2000), pp. 655658.
10. Ross, supra note 7, p. 209.
11. Hsu, supra note 9, pp. 442443.
12. Robert Kleinberg, Chinas Opening to the Outside World: The Experiment with Foreign Capi-
talism (Boulder, Westview, 1990), p. 105.
The Evolution of Chinas International Trade Policy 195

defined product areas. The organization of these trading companies paralleled that
of Chinas government ministries handing production of certain products. For
example, only the China National Chemicals Import and Export Corporation han-
dled goods produced by state-owned factories controlled by the Ministry of
Chemical Industry; the China National Cereals, Oils, and Foodstuffs Import and
Export Corporation dealt with goods produced by farms and factories supervised
by the Ministry of Agriculture, and so forth.13
The second feature of the pre-reform system was the strategy of import
substitution and trade planning. Before the late 1970s, Chinas foreign trade
pattern could be characterized as an extreme example of import substitutionism.
As stated by a Chinese trade official in 1955, the purpose of importing more
industrial equipment from the Soviet Union is to lay the foundation of Chinas
industrial independence, so that in the future China can make all of the producer
goods it needs and will not have to rely on imports from the outside.14 During the
pre-reform period, Chinas foreign trade was determined almost entirely by eco-
nomic planning. The State Planning Commission designed trade plans covering
more than 90 per cent of all imports, as well as almost all exports. Under the
planning system, demand of import was planned mainly to increase the supplies
of machinery and equipment, industrial raw materials, and intermediate goods that
were in short supply and needed to meet physical production targets for high-
priority final goods. Exports were not used to gain wealth from international
markets, but instead were perceived mainly as a means of financing imports.
Once demands of imports were determined, exports sufficient to pay these imports
were then identified. Goods for which domestic supplies exceeded planned
demands were the most obvious potential exports. But if these were still not suffi-
cient to finance planned imports, certainly goods for final consumption (especially
consumer goods) would be cut back to free up more goods for exports.15
The third feature, resulting from the second one, was that the exchange rate and
relative prices, which usually constitute the essence of the foreign trade system of a
market economy, were unimportant in determining the magnitude and commodity
composition of Chinas foreign trade.16 First, prices of all domestic products were
officially fixed. Although export prices had to be the international market prices,
export products were sold to those state-owned foreign trade corporations at offi-
cially established domestic prices. The difference between international markets
and domestic markets thus played little or no role in determining the pattern of
exports. As export product producers did not share the profits and loss (denominated
in foreign exchange), they had little incentive (except for the spirit of socialist
patriotism) to expand production of goods for which there was strong international

13. Nicholas Lardy, Foreign Trade and Economic Reform in China (Cambridge, Cambridge
University Press, 1990), pp. 1617 (hereinafter Lardy 1990).
14. Ross, supra note 9, p. 438.
15. Lardy 1990, supra note 13, p. 17.
16. Nicholas Lardy, Integrating China into the Global Economy (Brookings Institution Press,
2002), p. 30 (hereinafter Lardy 2002).
196 Jiangyu Wang

demand. Similarly, import prices had no direct relationship with the prices used to
sell the imported products in domestic markets. Domestic prices of imported goods
were determined according to those of domestic like products, with adjustment
upward or downward allowed to reflect quality differences. Because imports
were made only to supplement domestic productions, also because the imports
were sold at non competitive prices, they presented no threats or even competition
to domestic producers. In short, in such a system, inefficient domestic producers
were protected. At the same time, the law of comparative advantage made no sense
in the economics of Chinas foreign trade system.

III. CHINA AND TRADE LIBERALIZATION

A. TRADE REFORM FROM 19782001

There is little doubt that, since 1978, China has conducted trade and investment
liberalization on a scale which is almost unparalleled in world history. The Chinese
economy has also benefited tremendously from integrating into the global trade
system.
After Maos death, Deng Xiaoping quickly ended the countrys isolation from
the rest of the world and abandoned most of the ideological measures and policies
in economic areas. The Chinese Communist Party (CCP) Congress of December
1978 (Third Plenum of the Eleventh Central Committee) was a major landmark in
the political and economic life of the post-Mao era, marking the initiation of the
reform and open door policy. Foreign trade became a major part of this policy.
Policy-makers became more receptive to the teaching of international specializa-
tion, and determined to advance Chinas comparative advantages in world markets.
Accordingly, China started to trade with as many countries as it could and the
foreign trade system was significantly reformed. The system of foreign trade
planning was gradually dismantled in the 1980s, and the framework of a decen-
tralized, market-oriented system was gradually established.
One of the most significant reform measures was the diversification of trading
rights. During the pre-reform period trading rights were exclusively limited to
those ten to sixteen specialized foreign trade corporations. In the 1980s and
1990s, this system was partially transformed as a great number of other companies
were authorized to conduct foreign trade. First, with the enactment of Chinas
foreign investment regulations in the 1980s, all foreign-invested companies auto-
matically had the right to trade. With respect to domestic companies, the Ministry
of Foreign Trade approved the creation of more than 800 separate corporations
authorized to engage in foreign trade, albeit most of them were state-owned. The
number of domestic companies authorized to trade increased dramatically every
year, and by 2001 over 35,000 companies obtained foreign trade licenses.17 In

17. The number was 1,200 in 1986, 5,000 in 1988, 12,000 in 1996, 15,000 in 1997, 23,000 in 1998,
29,258 in 1999, 31,000 in 2000 and 35,000 in 2001.
The Evolution of Chinas International Trade Policy 197

addition, the number of commodities for which trading rights were limited to the
specialized foreign trade corporations18 was greatly reduced. Most importantly,
most trading activities of the newly approved trading companies are no longer
subject to state planning.
With respect to the import regime, import planning was gradually replaced by
the introduction of tariffs and complicated non-tariff barriers, which are basically
the fundamental tools of market economy to control foreign trade.
Before reform, tariff had little effect on the pattern of imports. Beginning in
the early 1980s, as the state reduced the scope of import planning, tariffs on many
products were set to block the flood of foreign goods into Chinese markets. The
initial tariff rates were very high (an average of 56 per cent in 1982).19 In the
following two decades, China launched massive tariff cuts at least ten times,
reducing average MFN tariff rate to 15 per cent in 2001.20
A broad array of non-tariff barriers, of which the most important ones were
licenses and quotas, were used to control foreign trade in the early 1980s. As noted
by Nicholas Lardy, although these measures are normally viewed as restrictions on
free trade, in the Chinese context their introduction reflected liberalization of
foreign trade. As market-based, less trade-restrictive measures, they were used
to replace the direct planning system of all trade. Furthermore, though quotas
and license on imports reached their peak in the late 1980s, trade reform in the
following decade dramatically reduced the scope of these measures. By the late
1980s, 53 categories of commodities were subject to licensing requirement, con-
stituting 46 per cent of the shares of all imports. By the end of the 1990s, however,
products subject to licensing restrictions accounted for only 8.45 per cent of all
imports.21 In the same period, the import substitution system was repealed.22
During this period of reform, China also created a variety of legal tools in
foreign trade law, including antidumping, countervailing duties, and safeguard
rules, all of which are widely employed by most market economies to regulate
foreign trade. Significantly, this represents Chinas movement from administrative
governance to legal governance in the area of foreign trade.

B. WTO ACCESSION AND COMMITMENTS

The process of Chinas accession to the WTO left a unique legacy in the history of
the organization. Indeed, as observed by an international trade law specialist, The
story itself is an epic saga, and no country currently seeking WTO Membership
Saudi Arabia, Iran, and Russia, for example could possibly create a more

18. See supra note 13 and the accompanying texts.

19. Lardy 2002, supra note 16, p. 33.
20. Ibid.
21. Ibid, pp. 3941.
22. Ibid, pp. 4143. In early 1992 Tong Zhiguang, Vice Minister of Foreign Trade, announced to the
GATTs Working Party on Chinas Accession in Geneva that the Chinese government had
decided to abolish the import substitution list and replace it primarily with the tariff measures.
198 Jiangyu Wang

complex array of issues than has the Peoples Republic of China.23 Though the
sheer size of Chinas population and territory, its political influence, its giant
economy scale, as well as its status as a top global trader, brought an expectation
that Chinas accession to the WTO will help strengthen and improve the multi-
lateral trade system, promote world economic and trade development, and estab-
lish a new, open, and just international economic order.24 Nonetheless, China
spent 15 years convincing other members of the WTO that it was an acceptable
partner, longer than any WTO member had experienced. The reason appeared to be
complex, intertwined with both political will and commercial considerations such
as the U.S.-China relationship and Chinas demand to enjoy developing
countries status. In the end, in 2001 China swallowed a set of obligations
which was much stricter than it was originally prepared to accept, and joined
the WTO neither as a developing country nor a developed country but as something
in between.
In its accession instruments,25 China commits to the WTO that it will provide
non-discriminatory treatment to all WTO Members. All foreign individuals and
enterprises, regardless of whether they have invested or registered in China or not,
will be accorded treatment no less favourable than that accorded to Chinese enter-
prises with respect to foreign trade rights. China will eliminate dual pricing
practices price control will not be used for the purpose of affording protection
to domestic industries or services providers and will make no different treatment
between goods produced for export and those for sale at home. China will not
maintain or introduce any export subsides on agricultural products. In addition,
China agrees to implement WTO Agreement in an effective and uniform manner
by revising its existing domestic laws and enacting new legislation fully in com-
pliance with the WTO Agreement. China pledges to administer all its laws in a
uniform, impartial and reasonable manner,26 and ensure transparency in its legal
system. What China achieved by giving up so much is a returned promise by WTO
members that they will phase out existing WTO-inconsistent restrictions on
Chinese exports, mostly within four years though Mexico has won a six-year
transition period.
One of the most distinguished and very unfair obligations China was forced
to undertake is that Chinas accession agreement incorporates a unique, China-
specific safeguard mechanism entitled Transitional Product-Specific Safeguard
Mechanism. It allows other WTO members to impose restraints on any type of
Chinese exports (embracing industrial goods including textiles and apparel, and
agricultural goods) if a surge causes or threatens market disruption to domestic

23. Raj Bhala, International Trade Law: Theory and Practice (New York, Lexis Publishing, 2001),
p. 143.
24. Huang, Xingwei, PRC, British Deputy Prime Ministers Hold Talks (World News Connec-
tion, January 20, 2000, Westlaw no. WL10331994).
25. World Trade Organization, Accession of the Peoples Republic of China, WT/L/432.
November 23, 2001. All Chinas WTO accession instruments can be found at <www.wto.org/
english/thewto_e/countries_e/china_e.htm>.
26. Ibid., Protocol on the Accession of the Peoples Republic of China, Part 2(A).
The Evolution of Chinas International Trade Policy 199

producers, the threshold lower than that required by ordinary safeguard measures
under the WTO rule, and will be available for twelve years after Chinas
accession.27
Specifically, the key points of Chinas WTO accession agreement are as
follows:
Tariffs The central market access provisions of Chinas WTO accession
agreements aim to open Chinese markets to foreign exports. China has
bound all tariffs for imported merchandises. By no later than 2010, the
average bound rate for industrial goods must go down to 8.9 per cent,
with a range from 0 to 47 per cent, and with the highest rates applied to
photographic film and automobiles and related products. For agricultural
products the agreed average rate by 2010 is 15 per cent, with a maximum of
65 per cent for cereal imports. China also acceded to the Information Tech-
nology Agreement (ITA), and as such committed to eliminate all tariffs on
products covered by ITA. Tariffs on three-fourths of the ITA products are
committed to be eliminated by January 1, 2003, and tariffs on all the
remaining products were to be eliminated by January 1, 2005. Duties on
cars were committed to fall to 25 per cent by mid-2006.
Textiles After the date of accession China became a party to the Agreement
on Textiles and Clothing and was subject to its rights and obligations.
WTOs members quotas on Chinese textile exports would end by Decem-
ber 31, 2004, but there will be a special safeguard mechanism in place
which will allow WTO members to impose restrictions in the event of
market disruptions caused by Chinese exports of textile products to the
end of 2008.
Agriculture China has renounced the use of export subsidies for farm pro-
duce. Subsidies for agricultural production will be limited to 8.5 per cent of
the value of farm output (per Article 6.4 of the WTO Agreement on Agri-
culture), rather than the 10 per cent normally granted to developing
countries. By January 2004 duties on agricultural products should fall
from 22 per cent to 17 per cent and on U.S. priority products from an
average 31 per cent to 14 per cent.
Trading and Distributional Rights While China will reserve the right of
exclusive state trading for products such as cereals, tobacco, fuels, all
enterprises (foreign or domestic) will have the right to trade in all other
goods throughout the customs territory of China. With respect to domestic
distribution and retail, while some restriction will be still in place, China
will phase out restrictions on distribution services for most products within
three years after the accession. China agrees to lift joint-venture restrictions
on large department stores and virtually all chain stores, and to scrap space

27. Y.S. Lee, Specific Safeguard Mechanism in the Protocol on Chinas Accession to the WTO
A Serious Step Backward from the Achievement of the Uruguay Round (2002) 5 Journal of
World Intellectual Property 219231.
200 Jiangyu Wang

restrictions on foreign-owned stores. Foreign firms will be able to conduct

their own distribution networks with no Chinese middlemen needed.
Import/export Licensing and Quota China will maintain a transparent,
predictable, uniform, fair and non-discriminatory system and fair procedure
for trade licensing and quotas that would provide effective trade opportu-
nities, and publish and report stipulated information to the public as well as
to relevant WTO agencies. China also agrees to issue import licenses for a
minimum duration of validity of six months, except in exceptional circum-
stances. And, foreigners should be accorded treatment no less favourable
than that accorded to Chinese nationals in the process.
Subsidies and Countervailing Practices; China has agreed to eliminate all
subsidy programs falling within the scope of Article 3 of the WTO
Subsidies and Countervailing Measures (SCM Agreement) by the
time of accession, such as export subsidies (subsidies contingent
upon export performance) and import substitution subsidies (subsidies
contingent upon the use of domestic over imported goods). China also
agrees that, in identifying and measuring the amount of certain subsidies
provided to Chinese enterprises, WTO members may turn to foreign or
other market-based criteria if there are special difficulties in applying
the SCM Agreement (i.e., when internal Chinese benchmarks are deemed
inappropriate). Moreover, when actionability of subsidies is considered in
both WTO enforcement proceedings and national countervailing duty
proceedings, China is subject to a special method in which subsidies
that is provided predominately or in disproportionately large amounts
to state-owned enterprises will be considered specific, even if such
enterprises represent a broad and diverse cross-section of Chinese indus-
tries. As opposed to this, under standard WTO rules, a subsidy is action-
able only when it is provided to a specific enterprise or industry or
group of enterprises or industries within the jurisdiction of the subsidizing
authority.
Antidumping and Chinas Market Economy Status In antidumping cases,
China will not be regarded as a market economy for as long as 15 years,
unless China can establish that it is a market economy under the national
law of the importing WTO member, or that market economy conditions
prevail in a particular industry or sector. As such, China has agreed that the
United States and other WTO members can continue to apply its non-
market economy methodology for measuring dumping in antidumping
investigations again China. With respect to its own antidumping regime,
China has agreed to bring its antidumping rules into compliance with the
WTO Agreement. Furthermore, China commits itself to a standard that is
higher than any other WTO member had agreed: to initiate sunset reviews
for all outstanding anti-dumping measures no later than five years from the
date of their imposition. This effectively obliges China to launch sunset
reviews immediately upon its WTO accession for antidumping measures
which had been existing for five years. Under standard WTO rules, a
The Evolution of Chinas International Trade Policy 201

member is only obligated to initiate such sunset reviews five years after its
accession to the organization.28
Telecommunications and Internet On accession, foreign service suppliers
will be allowed to establish joint ventures, without quantitative restrictions,
and provide services in several specified cities. Foreign operators will be
able to take 25 per cent in joint ventures in those cities, rising to 35 per cent
after one year and 49 per cent after three years. Geographic restrictions will
be scrapped in five years after accession. In Internet, paging and other
value-added services, foreign firms may immediately take 30 per cent
share in Chinese companies in Beijing, Shanghai and Guangzhou, rising
to 50 per cent in two years, when geographical constrains are limited. For
fixed line and long-distance services, foreign firms will be allowed 25 per
cent stakes after three years of accession and 49 per cent after six years.
Tariffs on high-tech products in telecom equipment will be phased out and
eliminated by 2005.
Banking China has agreed to issue licenses solely on the basis of prudential
criteria, with no economic needs test or quantitative limits on licenses.
Upon accession, foreign financial institutions will be permitted to conduct
foreign currency business in China without client restrictions. They will be
able to provide local currency services to Chinese enterprises within two
years of accession, and to all Chinese clients in five years, when geographic
restrictions will be lifted.
Insurance Again, licenses will be issued on the basis of prudential criteria.
Foreign life insurers may establish a joint venture with 50 per cent foreign
ownership and a Chinese partner of their choice, permitting effective
management control. Foreign non-life insures will be permitted to estab-
lish branches or joint ventures with 51 per cent ownership on accession and
wholly-owned subsidiaries within two years. For large-scale commercial
risks, reinsurance and international marine, aviation and transport insurance
and reinsurance, 50 per cent foreign ownership in joint ventures was agreed
on accession, rising to 51 per cent in three years and 100 per cent in five
years. In addition, geographic restrictions will be phased out within three
years after accession.
Securities With regard to their commercial presence in China, foreign secu-
rities may establish joint ventures, with a maximum foreign investment of
33 per cent. However, minority foreign-owned joint ventures can participate
in fund management on the same terms as Chinese firms. Three years after
accession, foreign firms will be allowed 49 per cent stakes in joint ventures.
Professional Services For legal services, foreign law firms could only estab-
lish a commercial presence in China in the form of a representative office.
Representative offices may engage in for-profit activities including various

28. According to Article 18.3.2 of the WTO Anti-dumping Agreement, for the purpose of initiating
sunset reviews, all existing anti-dumping measures shall be deemed to be imposed on a date
not later than the date of entry into force for a Member of the WTO Agreement.
202 Jiangyu Wang

legal services, but may not engage in Chinese law practice. Also, according
to Chinas service schedule, the representative office may not employ
Chinese national registered lawyers outside of China.29 For accounting,
management consulting, and taxation services, foreign service suppliers
may provide management consulting and taxation services through joint
ventures, with foreign majority ownership permitted (after December 11,
2007, wholly foreign-owned subsidiaries are allowed). Foreign accounting
firms may establish wholly foreign-owned subsidiaries, and may also
affiliate with Chinese firms. Foreigners can take Chinas national CPA
examination and acquire license. Suppliers of accounting, auditing, and
bookkeeping services as well as taxation services and management consult-
ing services will be accorded national treatment. For architectural, engi-
neering, integrated engineering, and urban planning services, foreign
presence should be in the form of joint ventures for five years after
accession, with foreign majority ownership permitted. For medical and
dental services, foreigners are permitted to establish joint venture hospitals
or clinics with Chinese partners, with foreign majority ownership permitted,
but, the majority of doctors and medical personnel of the personnel of the
joint venture hospital and clinic shall be of Chinese nationality.
Computer Services Foreign service suppliers can establish joint venture to
provide software implementation services (including systems and software
consulting, system analysis, system design, programming, and systems
maintenance services) and data processing (including input preparation
service), with foreign majority ownership permitted. National treatment
is accorded to foreign services suppliers providing consultancy services
related to the installation of computer hardware, as well as data processing
and tabulation services and time-sharing services.
Intellectual Property Rights China has agreed to adhere to the TRIPs agree-
ment upon the date of accession to WTO and to comply with internationally
accepted norms for protecting and enforcing intellectual property rights of
U.S. and other foreign enterprises and individuals in China.

C. CHINAS COMPLIANCE WITH WTO OBLIGATIONS

Views are mixed with respect to Chinas compliance with the WTO. In its report
to the WTO Trade Policy Review Body, the Chinese government stated that
Ever since WTO accession China has abided by WTO rules, lived up to the
extensive commitments made in the accession and made comprehensive adjust-
ment of its trade regime and trade policy (WTO 2006, p.12).30 Leaving aside the

29. It is not entirely clear what the negotiators meant by this expression. In practice, Chinese law
bars foreign law firms in China from hiring licensed Chinese lawyers, unless they agree to give
up their licenses during their employment with the representative offices of foreign law firms.
30. World Trade Organization, Trade Policy Review: Report by the Secretariat (Peoples Republic
of China), WT/TPR/G/161 (February 28, 2006).
The Evolution of Chinas International Trade Policy 203

self-praising sentiment, the statement was generally supported by voices from the
WTO. Pascal Lamy, the WTOs Director-General, indicated that he would give
China an A for its WTO compliance performance when interviewed by China
media.31 Specifically, he notes:32
In June [2006] the WTO conducted the first review of Chinas trade policy.
The overall appreciation is a positive one. Even if there are still areas that need
some improvements, the political commitments and determination showed by
the Chinese government is serious and responsible and all members have
acknowledged it.
The Chinese implementation of WTO commitments in many areas has set
a good example. Chinas agricultural tariffs are today lower than most devel-
oping countries; they are even lower than some developed countries such as
the European and Japan. China also provides less trade distorting subsidies
than that of the United States or the EU. Or on industrial tariffs which are today
the lowest in developing countries.
Needless to say, not everyone is satisfied. The Office of the United States
Trade Representative (USTR), in its 2006 report to U.S. Congress on Chinas WTO
compliance, states that
Developments . . . over the past year make clear that China has not yet fully
institutionalized market mechanisms, and that some Chinese government
agencies and officials have not yet fully embraced the key WTO principles
of market access, non-discrimination, national treatment and transparency.33
One of the major allegations of the USTR is that
China has continued to use industrial policies that limit market access for
non-Chinese origin goods and foreign services providers, and that provide
substantial government resources to support Chinese industries and increase
exports.34

IV. INDUSTRIAL POLICY AND CONTROLLED

LIBERALIZATION AS TOOLS FOR DEVELOPMENT
IN CHINAS TRADE REFORM

Standing among the most significant contributors as well as beneficiaries of trade

liberalization, Chinas economic reform experience can be, at best, characterized

31. China enters new era of opening up, Xinhua wired news, December 12, 2006, available at
<www.chinadaily.com.cn/bizchina/2006-12/12/content_757107.htm> (last visited February
20, 2007).
32. Lamy, supra note 3.
33. USTR (Office of the United States Trade Representative), 2006 Report to Congress on Chinas
WTO Compliance, (December 11, 2006), p. 4.
34. Ibid., p. 7.
204 Jiangyu Wang

as experimental gradualism which features selected adaptation and controlled

liberalization as noted by some commentators.35

A. SELECTIVE ADAPTATION

Pitman Potter observes that the recent record of Chinas open door policy has
included ongoing tensions between local and international norms and practices of
economic regulation and the extent to which globalized norms of economic
regulation can influence practices in China will depend on the dynamic of selective
adaptation.36 Selective adaptation is described as a process by which foreign
ideas are received and assimilated into local conditions.37 It is noted that the
element of selectivity depends on factors such as perception (which determines
understanding about foreign and local norms and their origins and implications),
complementarity (whereby contradictory priorities are combined for new effect so
that both global challenges are addressed and local values are retained), and legit-
imacy (which defines the extent to which members of local communities endorse
the particular adaptation efforts).38
Although the concept of selective adaptation was used by Potter to describe
Chinas legal reform, it could also be used as a conceptual framework to under-
stand Chinas trade reform, especially with respect to the balancing of trade-related
international norms and institutions with local concerns. For instance, with the
influence of the Confucius tradition, Chinas regulatory culture had long been
featured with opaqueness. Confucius emperors and officials believe that promul-
gation of law sends wrong messages to the subjects so that they, knowing the
bottom line of the discipline, would not pursue li the virtue.39 Even for a long
period in the reform era (from 1979 to present), it is unlawful to publish state
statutes in the absence of permission from the government. Further, for a long

35. For selective adaptation see Pitman B. Potter, Globalization and Economic Regulation in
China: Selective Adaptation of Globalized Norms and Practices, (2003) 2 Washington
University Global Studies Law Review, 119150. For controlled liberalization see e.g., Jian-
gyu Wang, Financial Liberalization and Regulation in East Asia: Lessons from Financial
Crises and the Chinese Experience of Controlled Liberalization (2007) 41(1) Journal of
World Trade 211241.
36. Potter, Ibid., p. 119.
37. Ibid.
38. Ibid, pp. 12021.
39. Shu Xiang, a proto-Confucian (circa 536 B.C.) once criticized the publication of the criminal
code of the State Zheng as follows: Anciently, the early kings conducted their administration
by deliberating on matters [as they arose]; they did not put their punishments and penalties (into
writing), fearing that this would create a contentiousness among the people which could not be
checked. Therefore they used the principle of social rightness (yi) to keep the people in bound,
held them together through their administrative procedure . . . activated for them the accepted
ways of behavior (li) . . . . See Zuozhuan: Zhaogong Liunian and Zhusu, translated and cited in
Derk Boddle and Clarence Morris, Law in Imperial China (Cambridge, Harvard University
Press, 1967), p. 16.
The Evolution of Chinas International Trade Policy 205

period, Chinas trade regulation was overwhelmed with enormous amount of

neibu guiding (meaning internal documents) to which no one outside the
relevant ministry or department could have access.40 Although it is difficult to
argue that this secrecy is designed to safeguard the Confucius virtues, the secret
bureaucratic practice, which, treating citizens as the ruled, tends to hide infor-
mation from the public.
From the perspective of the rule of law, transparency is one of the key ele-
ments of a legal system, encompassing mainly its key principle of promulgation
but also relevant to the principles of clarity, stability, and prospectivity.
Transparency is also one of the pillar principles of the WTO, underpinning all
the substantive areas of the world trading system. It is also a legal obligation
embedded in GATT Article X, GATS Article III and TRIPS Article 63. All the
three legal provisions require that all laws, regulations, judicial decisions and
administrative decisions relating to trade (and probably all economic activities)
of a Member should be made public. Chinas WTO accession documents, reflect-
ing WTO members concern of implementing rule of law in China, requiring China
to make public all relevant laws before they are enforced, to establish an official
journal to publish all relevant laws, and to establish an entry point where published
laws can be obtained (WTO 2001).41
Years before Chinas WTO entry, the government had taken steps to enhance
transparency in the trade system. WTO accession has certainly accelerated this
process. As early as 1989 and 1987 the National Peoples Congress (NPC) and the
State Council promulgated rules to require laws passed at the level of the NPC and
the State Council level be published.42 The Legislation Law of 2000, the
Regulation on the Procedure for Formulating Administrative Regulations of
2001 and the Regulation on the Procedures for Formulating Administrative
Rules of 2001 now mandate that laws, regulations and administrative decisions
at all levels of the government to be published.43
The disturbing neibu guiding had been gradually eliminated since the early
1990s. From 1993 the Ministry of Foreign Trade and Economic Co-operation
(MOFTEC), now the Minstry of Commerce (MOFCOM), has been publishing a
periodical journal entitled the Gazette of the Ministry of Foreign Trade and
Economic Cooperation of the Peoples Republic of China, disclosing to Chinese
and foreigners all laws, administrative regulations and decrees including those
which were previously internal documents related to foreign trade and
investment. In the meantime, thousands of previously undisclosed internal

40. See Jiangyu Wang, The Rule of Law in China: A Realistic View of the Jurisprudence, the
Impact of the WTO, and the Prospects for Future Development, [2004] Singapore Journal of
Legal Studies 381.
41. Protocol on the Accession of the Peoples Republic of China, supra note 26.
42. Sarah Biddulph, Chinas Accession to the WTO: Legal System Transparency and Adminis-
trative Reform, in Alan Alexandroff et al., China and the Long March To Global Trade
(London, Routledge, 2002), p. 164.
43. See e.g., Articles 23, 41, 52, 53, 62, 70 and 77 of the Legislation Law of 2000, Articles 28 and 29
of the Regulation on the Procedure for Formulating Administrative Regulations of 2001.
206 Jiangyu Wang

documents were repealed and the decisions for repealing were also published in the
Gazette. On January 1, 2002, twenty days after Chinas accession to the WTO, the
MOFTEC issued a circular establishing the WTO Information and Inquiry Bureau
as the single inquiry point where WTO Members, foreign and Chinese busi-
nesses or individuals can request information regarding Chinese laws, regulations,
judicial decisions or other rules.44 The circular provides that the Chinese govern-
ment will render authoritative views on the application or interpretation of its laws
to WTO members and accurate information to business and individuals.
In spite of the improved visibility of Chinas trade institutions, it is premature
to say that transparency has gained foot in the regulatory system. Most signifi-
cantly, at both central and local level, citizens virtually have to access the govern-
ments decision-making process. Discussions in the Politburo of CCP, which is
the highest decision-making institution of the country, are always classified as
top state secrecy and have never been disclosed to public, except in an extremely
small number of cases.45 Similarly, meetings, debates, and discussions in the State
Council and various local level government administrations, as well as in various
legislatures from the National Peoples Congress (NPC) to local legislative body,
are largely closed to the public and the media. Except in limited occasions, such as
the annual conference of the National Peoples Congress for which a limited
number of journalists were chosen to attend and only a small faction of them
were allowed to watch the whole process, the public and media could not cover
even the legislative debates, not to mention the meetings and discussions in the
administrative branch of any level.
Whether this type of opaqueness is good or bad for China is an open question.
Certainly, an alternative is larger public participation through democratic institu-
tions. To accept this, one also has to take it for granted that democracy serves China
better with respect at least to economic development through world trade, assum-
ing expansion of trade is conductive to economic growth. However, as
Peerenboom states, Democratization at low levels could lead to political insta-
bility, chaos and state repression, and hence an increase in personal integrity
violations, as it has in so may other countries.46 He notes that democratic account-
ability tends to come rather late in the developmental sequence in East Asian
countries, and China can hardly be an exception. In fact, the soft-authoritarian

44. Zhongguo Zhengfu Shimao Zuzhi Tongbao Zixun Ju Zixun Banfa (Circular on the Method
of Requesting for Information from the WTO Information Bureau in the Peoples Republic
of China), January 1, 2002, Chinese text online: <sms.mofcom.gov.cn/article/200209/
20020900039080_1.xml>.
45. For instance, after Chairman Mao Zedongs death, some politburo debates involving the Gang
of Four were purposely disclosed to the public in an attempt to prove the evilness of those
people. Recognizably this was part of Deng Xiaopings strategy in his pursuit of political
dominance in the late 1970s and early 1980s. Ever since that, as the top leadership level resumed
stability, no politburo discussion record has ever officially been presented to the public
population.
46. Randy Peerenboom, China Modernize: Threat to the West or Model for the Rest? (Oxford,
Oxford University Press, 2007).
The Evolution of Chinas International Trade Policy 207

regime of China, despite its ruthlessness to political dissents, has been very
efficient in facilitating economic development. For one example, after the 1989
Tiananmen tragedy, despite strong opposition from the conservatives who wished
to bring China back to socialist plan economy, Chinas former paramount leader
Deng Xiaoping almost single-handedly revived market-oriented reform and
substituted market economy for plan economy in the Partys ideology, using
mainly his political authority which mandated no debate on public policies.47

B. GOVERNMENT INVOLVEMENT AND THE USE OF INDUSTRIAL POLICY

Rodrik observes that China has benefited both from good fundamentals ... and
from a determined government effort to acquire domestic capabilities and to build
a modern industry.48 To him, the success of Chinas exports are rooted in con-
sumer electronics, which however is not a result of the orthodox assumption that
Chinas export capability is merely supported by cheap labor, but it is based on
Chinas ability to make a productivity jump. As Rodrik notes,49
[In terms of fostering domestic capabilities while still opening door to foreign
investors,] China has used several policies to ensure that technology transfer
would take place and strong domestic players would emerge. Early, reliance
was placed predominately on state-owned national champions. Later, the gov-
ernment used a variety of carrots and sticks. Foreign investors were required to
enter into joint ventures with domestic firms (in mobile phones and in com-
puters). Domestic markets were protected to attract market-seeking investors,
in addition to those that looked for cost saving. Localities were given
substantial freedom to fashion their own policies of stimulation and support,
which led to the creation of industrial clusters in particular areas of the
country. Huchet characterizes Chinas policies as of the mid-1990s thus:
Chinas technological acquisition strategy is clear: It allows foreign firms
access to the domestic market in exchange for technology transfer through
joint production or joint ventures.
In response to the counter-argument that many government-sponsored
Chinese companies ended up with failures, Rodrik makes two further points.50
First, although accounts of industrial policy in China have led to the low produc-
tivity and low technology absorption of many state-owned enterprises, on the
whole government attitudes have been pragmatic and open to trying new

47. See e.g., Joseph Fewsmith, Reaction, Resurgence, and Succession: Chinese Politics since
Tiananmen, in Roderick MacFarquhar (ed.), The Politics of China: The Era of Mao and
Deng (Cambridge, Cambridge University Press, 1993).
48. Dani Rodrik, Whats So Special about Chinas Export? (2006) 14(5) China and World
Economy 13.
49. Ibid., pp. 1314.
50. Ibid., p. 15.
208 Jiangyu Wang

approaches when old ones fail. Hence, after the proved failure of the TV industry
at the early stage of reform due to fragmentation of productions (caused by the
large number of firms), national and local governments took efforts to consolidate
the industry through forced mergers and joint ventures with foreign firms, which
helped turn the industry into a profitable, export-oriented one. Secondly, the sig-
nificance of the weakness of the Chinese bureaucratic model might have been
exaggerated:51
The essence of self-discovery model of economic development is that you
need only a few successes: once a small number of high-productivity activities
are identified, they act as the lever for economic convergence by pulling
resources in from lower productivity activities. Without state support and
publicly funded R&D, a company like Lenovo (previously known as Legend),
which recently became large and profitable enough to purchase IBMs
personal computer business, would never have come into being. Better to
experiment and to identify these higher-end activities than not try at all.
Lack of coordination can be an advantage in these circumstances, as it allows
different things to be tried and for successes in one region to be copied else-
where. Somewhat paradoxically, the hesitant, gradual, often conflicting man-
ner in which policies have been formulated and implemented in China might
have presented a more suitable environment for entrepreneurial experimen-
tation and cost discovery than one that is centralized, top-down and overly
coordinated.

C. PACE AND SEQUENCING OF LIBERALIZATION

Chinas trade reform also suggests that the pace and sequence of liberalization
should be carefully designed and that appropriate regulatory and development
space should be preserved for the national government involved.
The pace (or speed) of reform refers to the time elapsed from the initiation of
the reforming measures to the point that they are made operational and accepted in
general. The sequencing of reforms means the order in which either macroeco-
nomic policy actions or specific reforms are introduced.52 With respect to the pace
of reform, there are two suggested strategies: shock therapy (or big bang) and
gradualism (or incrementalism). In the literature economists have been remarkably
divided on which is the better strategy.53 As an IMF study notes, [t]here are cases
where fast and gradual reformers have succeeded and where they have failed.54

51. Ibid.
52. S.M. Nsouli, M.R. Rached and F. Norbert, The Speed of Adjustment and the Sequencing of
Economic Reforms: Issues and Guidelines for Policymakers, Working Paper No. 02/132 IMF
(August 2002), p. 4.
53. A. Feltenstein and Nsouli, S.M., Big Bang Versus Gradualism in Economic Reforms: An
Intertemporal Analysis with an Application to China, Working Paper No. WP/01/98 IMF
(August 2001), pp. 34.
54. Ibid., p. 4.
The Evolution of Chinas International Trade Policy 209

The choice of a particular strategy might very much depend on the initial conditions
as well as the development stage of a country, together with other factors. However,
in carrying on capital account liberalization East Asian countries generally followed
the gradualist approach, albeit some countries moved faster with painful cost
suffered during the financial crisis than the others.
The sequencing of reforms is never an easy job. There are two important
reasons for sequencing. First, there are limitations on any governments time,
focus and resources and thus priority must be decided. Secondly, maximized eco-
nomic and social benefits as well as minimum economic and social risks relating to
the liberalization of one area can only be achieved after the liberalization in another
area was completed. Appropriate sequencing of reforms can be realized without
necessarily indulging the gradualism versus shock therapy debate. However, inap-
propriate sequencing can be very damaging to the economy.
China provides a good example of gradualism and, arguably, appropriate
sequencing. As Stiglitz observes:55
Historically, the Chinese were not immune to the Bolshevik mentality [of
radical shock therapy change], but they seem to have gotten it out of their
system in the Great Leap Forward and the Cultural Revolution. They learned
the hard way where that mentality would lead. In choosing a path to a market
economy, they opted for the path of incrementalism (crossing the river by
groping for stones) and nonideological pragmatism (the question is not
whether the cat is black or white but whether it catches mice). Chinese
policymakers had the wisdom to know that they did not know what they
were doing, so they did not jump off a cliff after being assured by experts
that they would clear the chasm in just one more great leap forward.
Noting Chinas success in managing external liberalization, Zhao (2006)s
empirical study of Chinas foreign exchange system suggests a few lessons
drawn from this success, of which two are related to pace and sequencing.56
One is timing strategically the liberalization to smooth capital flows. Using foreign
exchange policy as a tool, China accelerated the liberalization of inward foreign
exchange flows and enhanced controls over capital outflows when overall balance
of payments surplus shrank or turned deficit, and enhanced controls over inward
exchange flows and liberalizes exchange outflows when there was excessive
external surplus. Resultantly, this tactic might have helped maintain a stable
economic growth.57 Further, Chinas external liberalization process reveals a
clear sequence.58 Liberalization of FDI in manufacturing industry in costal

55. Joseph Stiglitz, Whither Reform? Ten Years of the Transition in B Pleskovic and J Stiglitz
(eds.) Annual World Bank Conference on Development Economics 1999 (Washington D.C.,
World Bank, 2000), p. 48.
56. Zhao Min. External Liberalization and the Evolution of Chinas Exchange System: an Empir-
ical Approach, World Bank China Office Research Paper No. 4 (June 2006).
57. Ibid., p. 23.
58. Ibid., p. 24.
210 Jiangyu Wang

regions was carried out at the earliest stage. When market infrastructure and
modern corporate governance was roughly established, FDI liberalization was
then extended to inland regions and to more industries. Financial liberalization
was started only after China built a comprehensive banking system and accumu-
lated relatively large foreign exchange reserve to fend off reversal of capital
flows.59

V. CONCLUDING REMARKS

Chinas transition from a closed to open economy went through some unique
experiences. As UNCTAD summarizes, the process of Chinas economic trans-
formation over the past 30 years may be characterized as experimental gradual-
ism, with the use of heterodox policies in a creative and often innovative
manner.60
China clearly has embarked on the road of trade liberalization for decades
since 1978, when the Chinese government began to reduce tariffs, expand trading
rights, reform the pricing of traded goods, and adopt market-oriented exchange rate
policies. Chinas WTO accession, representing a new milestone in its trade reform,
produced liberalization commitments, which on market access and on rules-
based issues, far surpass those made by the founding members of the [WTO]
and, in some cases, go beyond those made by countries that have joined the
organization since its founding in 1995.61
A unique feature of Chinas transformation, though accompanied by the
above-mentioned liberalization measures, involves active state intervention in
the economy. The Chinese government played a vital role in Chinas economic
development through setting economic and industrial policy to grant privileges to
exporting firms, guiding foreign investment, designing the pace and sequencing of
liberalization, and balancing the development of state-owned sector and the private
sector, among others. The existence of a strong state is probably necessary at
Chinas current development stage, as it can more effectively mitigate the adverse
effects of globalization on domestic economy.
This is of course very contrary to the neo-liberal prescriptions for economic
development, which emphasize free markets and enterprises. However, as Rodrik
responses,62
The usual criticism of industrial policy is that government cannot pick winners
and, therefore, should not try. However, this is not the right way to think about
industrial policy. In environment that are rife with uncertainty and with

59. Ibid.
60. UNCTAD (United Nations Conferences on Trade and Development), Trade and Development
Report 2006, at 187.
61. Lardy 2002, supra note 16, p. 104.
62. Rodrik, supra note 51, p. 17.
The Evolution of Chinas International Trade Policy 211

technological and informational spillovers, markets under-provide investment

in non-traditional products. The appropriate role for industrial policy is to fill
in this market incompleteness by subsidizing investment in new products. It is
a given that not all of these additional investments will prove to be socially
profitable. Good industrial policy is not that only winners should be picked
(an impossible task) but that losers should be let go (a much less demanding
and more doable task).
Having made the above propositions, it is essential to point out that industrial
policy supporting domestic economic sectors should not be turned into permanent
protectionism. The government providing support to domestic industries should be
wise enough to know at which point the protection should be terminated, although
it is not always easy. This occurs at two junctures: either the domestic enterprises
are strong enough to face ordinary, market-based competition, or the ventures
under government support seem to underperform. Especially in the latter case,
the government must let it go. This is particularly relevant in Chinas context.
After almost three decades of reform and integration into world economy, many
domestic enterprises and industries should be ready to stand normal competition in
both domestic and international markets. Further, with the end of Chinas WTO
transition period, China is obliged to phase out most of the elements of its present
industrial policy, including infant industry protection measures, preferential tax
treatment to exporting companies, and some forms of direct financial contribution
to industries. With this challenge, China should probably act promptly to revise its
development strategy.

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