China’s industrial and foreign trade policies: what are they and how successful have they been?

    Figure 4  

    China high-tech merchandise trade, 2002 and 2005  

    Source: Ministry of Commerce

    Figure 5  

    Trade balance composition, 1990-2005 

    From an economic point of view there is nothing terribly wrong with this. Because of its unique cost and scale advantages, China will be able to generate enormous increases in employment and incomes simply by commoditizing an ever wider range of technologies invented elsewhere. As Figure 5 demonstrates, this widening of China’s industrial base – represented by China’s trade balance in five major goods categories – is proceeding rapidly. In 2005 China was a large net exporter of machinery (to the tune of US$60 billion) and industrial intermediates (US$45 billion), both categories in which as recently as three years earlier it was a net importer. In the long run, these large concentrations of manufacturing capacity, and the development of a richer and more demanding domestic consumer market, are bound to prompt domestic technological innovation.

    Yet from the point of view of Chinese planners who define success in terms of maximizing “comprehensive national power” and would like to create local versions of Toyota and Sony, the picture is distressing. When Chinese planners talk of “internationally competitive” they do not simply mean companies that can compete effectively in international markets, which as we have noted many Chinese firms are already able to do. Rather, they mean companies that have globally recognized brand names; intellectual property rights from which they can reap price premiums, royalties and license fees; and control of distribution channels in foreign markets. In other words, Chinese planners explicitly reject the Taiwanese model of small, nimble manufacturing firms that operate mainly on a contract basis with the owners of brands and distribution channels in developed-country markets. Instead they favor the creation of Japanese-style multinational firms.

    Common themes of government pronouncements now is the undesirability of China remaining “locked into low-value assembly production,” and the desirability of developing indigenous intellectual property so that Chinese firms can collect rather than pay royalties and license fees. This concern has spawned a number of strategies, including incentive packages for technology industries, the promotion of domestic technology standards, and government procurement rules mandating purchase of domestic hardware and software. The most prominent example of the first was State Council Document 18, published in 2000, which provided a wide range of tax and other benefits for domestic producers of semiconductors and software. These were attacked by US semiconductor makers as an illegal subsidy and were rescinded in April 2005.

    The problem with these sorts of policy measures is that by constantly trying to create explicit or implicit discrimination between foreign-owned and domestic enterprises, the government converts what ought to be industrial policy into a trade issue. The two things most required for domestic innovation to flourish and for Chinese multinationals to grow are a) an improvement in the rewards system for innovation (including improved intellectual property protection and more flexible capital markets) and b) and consolidation of industry so that the most efficient players can focus on research and development and well thought-out international expansion, rather than fighting vicious price wars at home in order to maintain market share.

    A final consideration is to what extent China’s growth has enabled it to gain power in the international trading system. To the extent that it is now the world’s third largest trading nation, China obviously wields influence over the trade policies of many of its partners. Yet as a new entrant into the WTO it does not as yet gained a significant role in setting the rules of international trade; and insofar as it is perceived as a heel-dragger in meeting its WTO obligations, its impact on further adjustments in the WTO regime is likely to be limited, except in a negative sense (i.e. blocking WTO rules on matters that Beijing sees as helpful protectionist tools, such as government procurement policies). This relatively low level of influence does not yet seem to be an issue of great concern in Beijing, where policy makers are far more engrossed in domestic reform issues than they are in securing a favorable operating environment for Chinese firms abroad. China’s interest in taking a more active role in WTO rule-setting will presumably grow in tandem with the presence of Chinese multinationals in international markets. It is likely, however, that such international concerns will continue to take a back seat to domestic considerations for many years to come. 

    Hard-won achievements of China's foreign economic and trade cooperation in 1998.

    The aggregate trade value basically reached the same level of the previous year with continued growth of our export. According to the Custom's statistics, national import and export value totaled 323.93 billion US dollars, down 0.4%. In a breakdown, export stood at 183.76 billion US dollars, up 0.5%; import amounted to 140.17 billion, down 1.5%. Trade surplus in the whole year accumulated to 43.59 billion US dollars, increasing by 7.9%. The commodity structure of our imports and exports further improved as the export value of mechanical and electronic products increased by 12.2% to 66.54 billion US dollars, taking up a larger percentage of 36.2% in total export.

    The newly-signed contractual foreign investment realized recovery growth and the actually paid-in capital maintained to grow. Last year, the number of newly approved foreign-invested enterprises nationwide was 19846, down 5.7% from the previous year; the newly-signed contractual foreign investment witnessed a growth of 2.21% and a total of 52.132 billion US dollars, realizing growth rebound after decline by large margin for two years in a row in 1996 and 1997. And the actually utilized foreign capital grew up by 0.67% to 45.582 billion US dollars. Features of utilizing foreign investment in 1998 could be summed up as follows: foreign investment in China sourcing from Europe, America and some free ports made headway continuously; the industrial structure of foreign investment further improved; the average amount of utilized foreign capital for a project increased to some extent; and the mid-western part of China increased the attraction of foreign investment by an obviously larger scale when compared to the eastern region. By the end of 1998, China has accumulatively approved over 320,000 foreign-invested enterprises with 572.5 billion US dollars of contractual foreign capital and 267.45 billion of paid-in foreign capital.

    Foreign project-contracting and labor services cooperation have made relatively large progress. The newly-signed contractual volume of foreign project-contracting, labor service cooperation and designing consultation involves 11.77 billion US dollars, moving up 3.7%. The accomplished turnover reached 10.13 billion US dollars, up 20.9%. At the end of the year, over 350,000 Chinese were providing labor services abroad.

    Foreign assistance further progressed with the reform of its modalities advancing steadily. China signed agreements on financial assistance with a number of countries last year. Substantive progress has been made in foreign assistance and reform on its modalities.

    Overseas investment witnessed initial development. By the end of 1998, enterprises investing abroad who had been approved by or registered at MOFTEC totalled 5,666 with an overall contractual Chinese capital of 6.33 billion US dollars.

    Reform on the administration system of foreign trade and economic cooperation made active progress. We further opened up the right to import and export. For the 1,000 State-owned Enterprises with which the State emphatically contacted, we enforced the system of registration for record on the foreign trade right and extended the coverage of this system to more than 6,800 large-scale industrial enterprises nationwide as of January this year. We promulgated the Interim Regulations on Endowing the Right to Import and Export to Private Manufacturing Enterprises and Scientific Research Institutes which had been approved by the State Council. The Regulations came into official enforcement as of January 1, 1999 and 20 private manufacturing enterprises have obtained the right to trade as the first group pursuant to the approval. We also relaxed the approving criteria for provincial and municipal trading companies to establish subsidiaries in Pudong New District of Shanghai. And we have scored new achievements in restructuring export commodities management system.

    Multilateral and bilateral economic and trade relations kept developing. China strengthened its negotiations with US and other WTO members, actively participated in the activities of Asia-Pacific Economic Cooperation and played an important role in it. China frequently exchanged high-profile visits with the United States, European Union, Russia and Japan, which have laid solid foundation for bilateral economic and trade ties and pushed forward bilateral collaboration in these aspects. Due to the adverse impact of Asian Financial Crisis, our export to Asia plummeted last year. Meanwhile, our export to other regions increased to varied extent. To be more specific, our export to US was 37.98 billion US dollars, up 16.1%; export value to Europe was 28.15 billion US dollars, up 18.1%; to Africa, 4.06 billion US dollars, up 26.5%; and to Latin America, 5.32 billion with 15.5% of increment. The economic and trade relations between mainland and Hong Kong became even closer. Our economic and trade ties with Macao also developed smoothly which has created favorable conditions for the successful reunification of Macao this year. And the economic and trade relations between the mainland and Taiwan continued developing.

    All the achievements were made under the circumstances of deepening impact of Asian Financial Crisis, severe economic recessions, drastic devaluation and general declines of imports and exports in many neighboring countries, and against the backdrop of serious flooding within China and non-devaluation of Chinese Renminbi. The achievements are therefore by no means easy. Such achievements of China's foreign trade and economy sector under those difficult circumstances should be attributed to: first, the great importance the Central Party Committee and the State Council have attached to the cause of foreign trade and economic cooperation and their timely, correct policies; second, the strong supports and active cooperation from all localities and departments; third, the precious spirit of hard struggle as demonstrated by people of all sectors involved in foreign trade and economic cooperation.

    Of course, while posing difficulties for the development of China's foreign trade and economic affairs, the Asian financial Crisis has hardened the adaptability of our foreign trade enterprises and heightened the urgency of strengthening the two fundamental transformations and risk prevention.

     The situation and major tasks for the development of foreign trade and economic cooperation of China this year.

    The situation faced by China's foreign trade and economic sector this year could be even harder and more complicated. The situation remains harsh. The impact of Asian financial crisis is deepening, and the world is entering a period of adjustment with weakening growth momentum. International demands are sliding drastically. Trade protectionism is gaining ground, resulting in heightened trade frictions. Besides, the scientific and technological advantages of developed nations and the price comparative advantages of certain Southeastern Asian nations due to devaluation of their currencies could become even more prominent factors. With the slowdown of the aggregate growth of global transnational direct investments, the inflows of international capital into the developing nations this year may continue to decline; The crisis-stricken countries are formulating one after another more favorable policies to lure foreign investment and this could have a negative impact on China's absorption of foreign investment.

    At the ongoing national conference on foreign trade and economic cooperation in Beijing, Minister Shi Guangsheng pointed out that this year our work faces a harsh situation, but we still possess quite a number of favorable conditions. Internationally speaking, the general environment and China's relations with its major trade partners remain fine, and the world economy and trade sustains growth. Since China accounts for a low share of world trade, there is still potential for growth. Internally, first, the sustained high speed healthy growth of our national economy provides a forceful material guarantee and institutional condition for the development of foreign trade and economy; second, the pattern of diversified operators of foreign trade and economy has taken initial shape, which represents an unprecedented incentive to all types of foreign trade and economic enterprises; third, the State has introduced and is working on more policies and measures to expand exports and attract foreign investment, such as the significant move of further raising tax rebate rates for exports in accordance with international practice; fourth, our country enjoys political and monetary stability, and our market has a huge potential, and it is still a fairly attractive investment site.

    The major tasks of China's foreign trade and economic cooperation this year are: to strive to expand exports and try to achieve growth of certain extent, and to appropriately increase imports; to utilize more foreign investments in a better way, and maintain the sizeable scale of foreign investment, raising the quality and level of foreign capital utilization; work hard to develop overseas project contracting and labor cooperation; to actively promote the reform of foreign aid; to do a good job in bilateral and multilateral trade and economic relations so as to create international environment for the development of foreign trade and economic relations; to fully fulfill the various tasks of foreign trade and economic relations in order to contribute to the sustained high-speed healthy development of the national economy.

     Comprehensively implement the spirit of the Central Economic Work Meeting and properly handle the relationship between expanding domestic demand and developing foreign trade and economic cooperation.

    This year, the Central Government has determined that China will pursue its active fiscal policies to enhance domestic demand so that stable economic growth could be maintained. This is a very correct decision, the implementation of which will contribute to the lessening of negative impact imposed on China's economy by the Asian financial crisis, and to the adjustment of China's economic structure and its long-term development. However, stressing the expansion of domestic demand doesn't mean that foreign economic and trade cooperation is insignificant. We will consistently adhere to the fundamental state policy of opening-up, which is proved to be a piece of successful experience of China's rapid economic development since the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China. Economic development should rely on both domestic and foreign markets. We should give full consideration of the difficulties China might meet in this year's export, yet that could never be paraphrased as neglecting or even abandoning foreign market. Instead, we shall leave no stone unturned in expanding export.

    Foreign economic and trade cooperation enjoys a vital position in China's national economy, next only to active fiscal policy. Foreign economic and trade development will be conducive to the promotion of speedy national economic growth. Export occupies considerable proportion of China's GDP and foreign investment absorption also makes a certain ratio of the social fixed assets investment. Therefore, the maintenance of stable growth in export and foreign investment utilization will surly help realize the expected growth target of the national economy.

    Foreign economic and trade development will contribute to the restructuring and upgrading of China's industry. Through utilizing foreign investment, enlarging export and encouraging overseas investment of Chinese enterprises with comparative advantages, China will be in a better position to optimize its industrial structure and raise the products' competitiveness in international market.

    Foreign economic and trade development is also beneficial to balance international payment and to stabilize the exchange rate of Chinese currency, which can bring about a favorable external environment for the expansion of domestic demand.

    Foreign economic and trade development will be incremental to sustain and increase employment, and to maintain basic stability of domestic demand as well as social stability.