The Role of International Trade in Chinas Economic Growth - Research Paper Example

The Role of International Trade in China’s Economic Growth INTRODUCTION China’s economic growth in the past twenty years have been considered as remarkable and even to some “miraculous” (Sachs & Woo 1993) as its open-door policy has been initiated only during the late seventies. But now we see that China, the slumbering dragon of Asia, has awakened and has taken the world market by storm. In fact, the strong performance of China in the global market has stirred the interests of both the academicians and businesspersons. The academicians focusing on theoretical elucidations and frameworks which may explain the phenomenon while businesspersons for new opportunities. Being such, it is not surprising that numerous studies have been undertaken and is being undertaken in order to learn from the China experience of economic growth. Currently, studies have shown that the experience of China’s economic growth in the past twenty years is a result of multi-factors coming together creating the proper ambiance for economic progress and development. However, according to studies, China’s economic policy of opening its door to international trade is appreciated as one the strongest and clearly perceptible decisive impetus that has paved and hastened China’s economic growth. (Yao 2006; Chen & Feng 2000; Fukasaka & Soligna Lecomte 1996; Liu et al 2002) The primordial importance of international trade to China’s current economic status has roused the researcher’s interests to look deeper into the phenomenon. Being such, this paper will primarily address the query “What is the impact and role of international trade to China’s economic growth in the last twenty years?” As such, the aims of this research are: to know and understand the theory or theories that underlie the China’s experience of growth, to look deeper into the relation between international trade and China’s economic growth and to learn from China’s experience of economic growth In tackling this query, the electronic database EConlit, and EBSCO were searched the following key terms were used: economic trade, China, China’s economic growth, international trade and economic theories. Moreover, as the question of this research primarily deals with the relation of international trade with China’s economic growth, other factors which contributes to the economic growth like domestic structural reforms will not be discussed in the paper. This is not to downplay nor discount its significance but to stay within the scope and limit of this paper as the researcher tries to address the paper’s research question. THE THEORY The integration of China in the world market and its abandonment of its isolationist policy or mercantilist leanings were considerably new. New, in the sense, that they opened their doors to international trade only during the late seventies. Prior to that, China’s foreign trade system “exhibited three predominant features: monopoly, central planning and centralized accounting” (Guizon & Schramm 2003, p 249) and the entire economy was bombarded with the Maoist rhetoric of self-reliance, self-sufficiency in all aspects of China’s economy. (Fan 1995) China’s closed door policy had worked for sometime (Fan 1995) but it was not enough to change the material condition of the Chinese people. The recognition of the failure of the closed door policy had prompted the great leader Deng Xiaoping to initiate changes that were necessary to break China from the isolationist policy of the past and to start implementing China’s open-door policy in international trade. (The researcher notes the importance of the history before the open-door policy of China to highlight the fact that China can be considered as a new player in the world market and yet they have already created a niche in the global community.) Responding to the demand of the time, China has gradually opened her doors to the global community. Although there is a standing debate among the scholars whether China’s open door policy is gradual or big bang (Woo 1999), what is significant is that the open –door policy of China is bolstered by Western economic value or theory of liberalism. Economic liberalism is basically derived from the classical view of liberalism which gives primordial importance to the notions of individual liberty, limited governmental power or rule and the rule of law. These concepts, in turn, embody the basic principles of free market, profit, private property and economic initiative. (Malanczuk 1997) As the influence of classical liberalism is still perceptible in the contemporary understanding, what is notable is the transformation of economic liberalism into pragmatic neo-liberalism we now know is much influenced by “treaties of friendship, liberal national legislation, bilateral trade /commerce and less and less government intervention in the market.” (Killion 2003 p5) With liberalism as the economic theory which supports the open-door policies of China, what can be impugned from this shift are: first, free-trade. The idea of free trade lumps together several ideas regarding the concept of free market. Under the ideal of free trade countries can enter into an agreement with the presupposition that a bilateral agreement will redound to a comparative advantage to the parties involved. (Burbidge 1978). And the agreement necessarily entails lowering or elimination of tariffs and other forms of economic barriers. Thus, the idea of free trade in lay man’s term is free access to another country’s market. The second change that has transpired is less governmental intervention or a more limited role for the state in domestic affairs. ( Helleiner 2003) This is basically a big leaped for China in the sense that in China State monopoly in all facets of governmental functions is practised. The third change that has been undertaken in lieu of free trade is decentralization. This is technically allowing ‘power’ to pass from one group of people to another. (Segal 1994) The very idea of decentralization stipulates that power and its discharge is not concentrated in the hands of the few. But that authority itself is transferred from one person or group. Of course, the idea of decentralization is tied up with less and less governmental intervention in the sphere of business and market economy. The fourth direct implication of China’s open door policy is foreign direct investment (FDI). Foreign direct investment is the concrete evidence of China’s liberalism and one of the strongest driver of economic growth in China today. (Lau & Bruton 2008) Figure 1 FDI in China, 1984 -2007 *as cited in Lau & Bruton 2008 Figure 1 shows how in just the span of twenty – three years China has become one of the favourite local country of foreign investors. The researcher believes that Figure 1 concretely presents the consequence of the application of the economic theory of pragmatic neo-liberalism in China’s open-door policy. Pragmatic Neo-liberalism as the buttress of China’s open-door policy in international trade entails numerous shift in ideology which redounds to changes in policies which have propelled and fuelled China’s economic growth. LITERATURE REVIEW As China’s phenomenal economic growth spurt interest to further comprehend the economic phenomenon, scholars have embarked on numerous studies and researches. The studies that have been undertaken and are being undertaken are of considerable value as results from these researches can served as the framework with which developing countries may learn and even pattern their own development. Perhaps, we can say, this is one of the benefits that can be derived from globalization. As such, we now turn to what the scholars are saying regarding the relation of international trade with China’s economic growth in the past twenty years. Fukasaku & Solignac Lecomte (1996) in their study has shown that China’s rapid economic growth can be attributed to the policies of trade liberalisation and decentralisation which China adopted by late seventies. In their study they have presented that the incontestable economic drive is coming from the remarkable increase in the export-labour intensive goods. They further claim that China’s economic growth can be attributed to two factors, namely, “One is the decline of mandatory planning in China’s foreign trade. On the export side, mandatory planning sets out specific targets in physical quantities for individual export producers and supplies them with the necessary inputs under the materials allocation system.” (p 14) However, as they highlight the positive aspects of Chinese policies regarding international trade, they have also cautioned China that if China is serious in sustainable growth they should ease on tariff. Since, according to Fukasaku & Solignac Lecomte (1996) China’s import policy is protectionist, “China’s import regime is one of the most protective in Asia” (p 22) and as such her sincerity is being doubted. They have concluded their study by claiming that although China has significantly opened her market to world economy, her incomplete inclusion to world economy may slowdown her rate of progress and development. S. Yao (2006) affirms the “miraculous economic growth of China.” (p 339) she further stress that this remarkable economic growth is multi-dimensional but she asserts that “The empirical results show that both exports and FDI have made a positive and significant contribution to economic growth in the Chinese regions… They suggest that economic development, exports and FDI appear to be mutually reinforcing under the open-door policy.” (p 339,340) and as such, she claims that FDI and exports together bolster the success of Chinese economy. She emphasizes that the steady growth in the economy is made possible by the efforts of the government to attract foreign direct investors. She maintains that as the government continuous to support the open door policy in trade and threshes out an external environment conducive for free trade (stable foreign exchange, export-push and FDI) there will be a continuous influx of foreign investors in China and thus attain sustainable growth. Haddad (2007) in her study again affirmed the integral role of international trade in the economy of China as she attributed the bulk of China’s success and growth from China’s ability in creating the appropriate external environment that catches the attention of foreign investors. In her report she showed that “China is now the sixth largest economy in the world and the third largest in trade (behind the United States and Germany). Its exports have grown even more rapidly than its economy, at rates exceeding 20 percent per year. As a result, China’s share of world trade has increased from less than 1 percent two decades ago to 6 percent today. Between 1990 and 2002, its market shares more than tripled in Japan (from 5 percent to 18 percent) and rose from 3 percent to 11 percent in the United States and from 2 percent to 7 percent in the European Union.” (p 18) However, she cautions that that as China’s development may greatly surpass those of her neighbouring countries and as such have a negative effect on other countries. Likewise, Gilbert & Wahl, also have come up with the conclusion that there is s direct link between economic growth and international trade in China. Using their term, “they confirm” (p 720) the undeniable economic growth that China has experienced as a result of opening her market to international trade. But they have also cautioned other players regarding the possible negative effect of China’s fast track rise to world trade in relation with other developing East Asian and Asian countries. Thus, they have claimed that although,“There is the potential benefit of reinforcing market orientation of the Chinese economy, and the potential for increased trade with the world’s most rapidly growing economy. However, there is also fear of China as a competitor. Among developing economies in particular, there is concern that accession will increase pressure in the textile and apparel markets.” (p698 – 699) They have also presented that although there are numerous studies regarding China’s progress as a key player in the world market, they stress that there is a further need to delve deeper into China’s domestic policies. Lemoine (2000) claims that the “increasing integration of China into the world economy has been driven by the rapid expansion of its international trade and by large foreign direct investment inflows. These two trends appear closely interrelated. FDI has been a major determinant of the opening up of China’s economy: it has strongly contributed to promote competition in the domestic market and determined the evolution of foreign trade” (p 14). He also claims that China’s accession to WTO is China’s way of keeping itself at pace with the global developments in market economy. This is very significant as this may point to the possibility of reading China’s action as a definitive perspective or response for liberalism. This particular observation is also shared by Liu et al (2002). In their study they have shown that there is a direct co-relation between economic growth, foreign direct investment and trade as seen in China. They claim that the fact China until now continues to attract foreign investors is in itself an evidence of the strong link or causal relation among GDP, FDI and exports. However, at the end of their article they have also cautioned that although there is a ‘seeming’ causal relation between FDI and growth, this concept of causal relation between the two should be approach with caution as there is not enough substantial evidence that will merit such an inference. Being such, they concluded that China’s economic growth in the past twenty years is directly attributed to the macroeconomic open door policy in the international trade and that the influx of foreign investors manifests the effectiveness of the open door policy of China. The researcher is basically wondering at the reticence of the authors to assert the close link between FDI and economic growth. Quantitative evidence may not be enough to attest to the direct link but a qualitative approach may, perhaps, provide a better outlook. Thomas Rumbaugh and Nicolas Blancher (2004) in their report also attest to the fact that China’s economic growth in the past twenty has been unprecedented and that China’s growth has become the source of inspiration to other developing countries not only in the Asian region but in the entire world. The integration of China in the global market is seen as a welcome addition to the global market system in general and in Asia in particular. What distinguishes this article from the other articles is that it addresses the ‘question of hesitation of some countries’ regarding China’s entrance into the global market economy. As noted earlier, in Fukasaku & Solignac Lecomte (1996) some countries are questioning the sincerity of China’s integration to the global market even if China has opened her doors for international trade. This ambivalence stems from the fact that although China has an export-push policy, her tariffs are considered as one of the highest in Asia. Rumbaugh and Blancher (2004) claim that the accession of China to WTO already ascertains that China will be lowering her tariff as part of the compliance requirement from a country member, “On January 1, 2004, China lowered its average tariff rate by 0.6 percentage points to 10.4 percent. The overall trade regime will be increasingly tariff based as China agreed to eliminate import quotas, licenses, designated trading practices and other non-tariff barriers. The substitution of import quotas with tariff-rate quotas (TRQs) for some agricultural commodities should also help strengthen the transparency of the trade regime.” (p 7) Thus, China’s accession in WTO assuaged the fear of some countries regarding China’s sincerity. Although, there is still a debate on how the socialist market which China represents can fully acclimatized in a liberal market. Medeiros and Fravel (2003) article discusses China’s foreign policy as not just being limited to transactions in the global market. They claim that China’s foreign policy is shaping China’s stake or role in the international arena per se. China has taken actions that would foster peace and a more harmonious co-existence with other Asian countries. Furthermore, China’s open door policy has also changed the way Chinese diplomats are handling international issues, global concerns. In the era of open international trade, Chinese diplomats have started to become more open and accommodating which is far removed from their attitude during the isolationist past. Likewise, global issues are now being tackled locally which is definitely something new in China. For, in the past there is a complete governmental monopoly in the handling of issues. As such, this particular article presents to us the other dimension of the open door policy of China. China’s protection of her interests in the global market is tapered down by her increasing active participation in the international arena in the pursuit of global peace. Woo’s article (1999) dealt with the on-going debate regarding how to interpret the rapid progress and development that China is now experiencing. According to Woo, there are two opposing camps E-school vs C-school, their difference lays on the following: Table 2: Experimentalism versus Convergence E-school C-school Speed of reform Sequential trial-and-error Rapid and comprehensive liberalization of agriculture, and of international trade in coastal provinces; slow deregulation of SOEs and of international trade in interior provinces Reasons for gradualism Economic experimentation Political compromise; ideological (incrementalism) commitment to state ownership Sources of rapid growth Unintended virtuous cycle, and few Existence of surplus agriculture labor; East Asia pattern of laborintensive export-led growth dislocations f rom large shifts in policies Outcomes in the SOEs Substantial improvements in Little technical progress; of SOE personnel and over-investment that weaken the fiscal situation production efficiency Interpretation of the TVEs Adaptations to China's economic Continuing legal restrictions on conditions of still-developing private ownership markets Future directions and pace of Policies will change to reflect Policies will push China toward a normal private market economy evolution in material conditions and lessons from continuing with characteristics similar to other East Asia countries *as cited in Woo 1999 This enumeration of differences between the E-school and the C-school is significant in scope as it is claim that depending on what is the ideological leaning of the people in the government is, it is the track of international trade policy that they, people in the government, will be implementing. Woo’s article already cautions the reader on the idea that beyond the material conditions that prompt leaders to change their perspective on international trade, is the ideological underpinnings that prompts them to undertake a particular course of action. This sentiment is also evinced by Rawski (nd). According in his article, Rawski (nd) hold that beyond the interrelation of international trade and China’s economic growth, the real reason behind this tremendous economic growth is the change in the mental attitude of the people of China. By embracing the economic principles of liberalism and decentralisation, China is not only implementing economic policies but is also changing the attitude and manner with which Chinese perceive and appreciate their own material condition. Thus, Rawski (nd) is claiming that behind the huge success of China is a slow process of overhauling on the emotions, ideology and analysis of what, how and why such a remarkable growth in economy has been attained by China in such a short time at such a fast rate. ANALYSIS China’s economic growth in the past twenty years is a result of several factors that have been put into place in order to respond to demands of change. One of the most important factors that have contributed immensely to China’s phenomenal economic success is their open door policy on international trade, which, has been adopted only during the late seventies. The open door policy of China serves as the new paradigm with which China will be undertaking her role in international global market has provided China with the venue with which she can integrate herself into the global market. The shift in policy – from isolationist or closed door policy to open door policy- is supported by the principle of pragmatic neo-liberalism. The principle of neo-liberalism is liken to sitting on a round square – a contradiction. This is so, since China is socialist whereas liberalism connotes free trade. As such, there are some qualms regarding China’s true intention. But if we look at the statistics, we will see that as Chinese economy employs openness, there is an observable increase in the GDP. Table 2 supports the claim that the open door policy of China has contributed greatly to the increase in GDP. Notice that during 1970 until 1977 there is minimal percentage for world trade of GDP. But after China has implemented ‘openness’ ,slowly ,there is a continuous increase in the Chinese total trade. Table 3. Openness of the Chinese Economy, 1970-1994 Chinese Total Trade* Year Percent of World Trade Percent of GDP at current US$ 1970 1.16 - 1975 1.37 - 1977 1.01 - 1978 1.22 4.73 1980 1.43 6.10 1982 1.78 7.17 1984 2.08 8.25 1986 2.58 12.70 1988 2.13 13.00 1990 2.49 14.81 1992 3.09 17.28 1993 3.69 17.03 1994 3.85 22.13 Sources: IMF; Statistical Survey of China * (Exports + Imports)/2 as cited in Fukasaka & Solignac Lecomte (2002) In the same way, in Chinese FDI and exports structure we will see that there is a consistent considerable increase from the period of 1978 to 2001. This table clearly shows that the interests of foreign investors to China are not waning but in fact is consistent if not even increasing. This table clearly illustrates that the trend for FDI in the future for China is sustainable. As long as the important external conditions - stable foreign exchange, export push and FDI- are maintained, then there is no doubt that foreign investments in China will be sustained. Table 4. Chinese FDI and exports structure, 1978–2001 Actual Total Exports of Manufactured foreign FDI Exports Invested firms Exports as Year ($billion) ($billion) as % of total % of total 1980 0.4_ 18. 2 0.0 49.7 1985 1.7 27. 4 1.1 49.4 1986 2.0 30.9 1.6 63.6 1987 2.4 39.4 3.0 66.5 1988 2.8 47.5 5.2 69.7 1989 3.1 52.5 8.3 71.3 1990 3.5 62.1 12.5 74.4 1991 4.4 71.8 16.8 77.5 1992 11.0 85.0 20.4 79.9 1993 27.5 91.8 27.5 81.8 1994 33.8 121.0 28.7 83.7 1995 37.5 148.8 31.7 85.6 1996 41.7 151.1 40.7 85.5 1997 45.3 182.7 41.0 86.9 1998 45.5 183.7 44.1 88.8 1999 40.3 194.9 45.5 89.8 2000 40.7 249.2 47.9 89.9 2001 46.9 266.2 49.0 90.2 *as cited in S. Yao Applied Economics 2006 As we have mentioned earlier, the open- door policy of China entails shifts or changes in the control of authority. Decentralisation, one of liberalisms mantra, demands that authority should not be concentrated in one. And Table 5 shows us the gradual change or the gradual decrease of the state- owned enterprises and the drastic increase of individual firms. This table signify the actual and concrete consequence of China’s open door policy – a shift from governmental control of the market to private enterprises. Table 5- Contribution of Categories of Ownership to Industrial Output and Growth (in %) Industrial output, all firms Structure of Ownership Contribution to Growth 1985 1993 1997 1985-1993 1993-1997 Total 100 100 100 100 100 SOEs 64.9 47.0 25.5 42.5 9.6 Collectively-owned firms 32.1 34.0 38.1 34.5 41.1 Individual firms 1.8 8.0 17.9 9.5 25.3 Other economic forms 1.2 11.1 18.4 13.5 23.9 Source: China Statistical Yearbook , various issues. As cited in Lemoine (2000) Moreover, in table 6 we can see the protectionists stance of China in terms of tariff. From 1982 to 1992 we can see that there is a percentage rate. And this is the reason why, as we have been claiming earlier that some countries are uncertain regarding China’s sincerity in integrating in the global economy. However, at the start of 1985 down to 2002, we can see the consistent reduction on tariff. This trend should be seen as a sign of China’s willingness and interests for a full inclusion and stake in the world market. Table 6. China: Tariffs, 1982–2002 Year Unweighted Average Weighted Average Max Dispersion (SD) 1982 55.6 ... ... ... 1985 43.3 ... ... ... 1988 43.7 ... ... ... 1991 44.1 ... ... ... 1992 42.9 40.6 ... 220.0 1993 39.9 38.4 29.9 220.0 1994 36.3 35.5 27.9 ... 1995 35.2 26.8 ... 220.0 1996 23.6 22.6 17.4 121.6 1997 17.6 16.0 13.0 121.6 1998 17.5 15.7 13.0 121.6 2000 16.4 ... ... ... 2001 15.3 9.1 12.1 121.6 2002 12.3 6.4 9.1 71.0 Sources: Chinese authorities; United Nations Conference on Trade and Development; World Bank; World Trade Organization; and IMF staff estimates.*as cited in Rambaugh and Blancher (2004) Finally, the last table shows us the increasing share of FDI in China’s economy. The consistency of the interests of foreign investors to go to China is not diminishing. It is there to stay maybe (for a while) and be sustained by China’s initiatives. Table 7 FDI in China, 1984 -2007 *as cited in Lau & Bruton 2008 International trade in China has become one of the strong drivers for success and growth in the economy. We are not to claim that it is the major cause of the economic success. I will still maintain that it is the coming together of numerous factors, threshed out together in order to create the suitable ambiance, the appropriate external conditions and environment that will sustain FDI. POLICY DISCUSSION China is a huge market. But beyond that is larger will design to make China move from a large developing country to a large developed country. China’s open door policy, a move away from the isolationist policy of the past, has created the venue that catapulted China in the global market. By embracing free trade, by providing an export – push, by slow and gradually decentralising and slowly moving from socialist to market economy, China has been reaping the consequences of that decision. Kerr & Hobbs (2001) claimed that the awakening of the dragon as shown by the influx of foreign investors, the movement of capital and people and better living condition for the people has created a change in WTO itself. At the same time, it cannot be denied that although China has opened her doors to foreign investments, has established structures that will pave the way for decentralisation; some still think that China will continue to operate under the market socialist paradigm. There are various political underpinnings that China has to hurdle in order to be fully integrated and trusted in the global market. And one is the scepticism of the onlookers. In the same line, open door policy of China has implemented the “shift from joint ventures towards wholly owned foreign enterprises.” (George 2004, p37) And as this move encourage foreign investors, “65% of new FDI are in China” (George 2004, p 40) the China has become one of the largest developing country in the world today. And this is decentralisation, less governmental control or interference in the market. China’s policy shift from self-reliance and self-sufficiency of import substitutes to export push and openness have played a very critical role in the success of China’s economy, in the sustainability of China’s economic success and in the creation of a better material condition for the Chinese people. (Yao 2006) Moreover, the open policy has also brought to China technology transfer – “new technology and international business attitude and practices- that may help developing countries.” (Yao 2006, p 340) China’s open door policy has helped bring into reality “China’s economic miracle.” (Liu & Diamond 2005, p 1185) and the economic miracle redound into the roots are concrete actions for growth and progress like “China is committed to break away from the isolationist past, in levelling all its tariffs and trade and investment barriers to other nations” ( Wen 2000, p 434). In the same way, the government should optimize Pareto-improving. It is the current condition of the society. In the end there is only one important thing that should be kept in mind as policies are created, define and redefine – China and her people should be benefitting from this shift of policy. CONCLUSION International trade has a very high, significant impact and vital role to China’s economic success in the past twenty years. And the reasons for this are: The open door policy implemented by China in her international trade and relations has created the necessary venue or arena for foreign investors to take cognizant of China. International trade in terms of FDI act as strong driver for economic growth as manifested in various studies. Liberalism, which supports open door policy, also entails decentralisation of power which is necessary in free trade. Without international trade, as shown by statistics, China will not be able to pump up the economy. Some scholars are saying that the change in ideology which is perceptible in the open door policy has also created a shift the mind set and attitude of the Chinese people. Although, studies are still undertaken to clearly show the direct relation of FDI to GDP, it still be cannot denied that the China experience shows that international trade is a very powerful driver of economic success. It should be noted that the success of China’s economy is multi-dimensional. For China to sustain her current experience of economic success, further socio-political re-structuring should be undertaken. This is to highlight the fact that an economic success will not suffice if other facets of society is lagging behind. China’s integration to the global market is a challenge to WTO, an inspiration to developing countries and a cause of worry for developed countries. In the end, the Sleeping Dragon of Asia has awakened. REFERENCES: Burbidge, J.B. 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