Chinese Trade Liberalization - Case Study Example

INTERNATIONAL ECONOMICS Name: Course: Instructor: Institution: Location: International economics In the early 1970s before it imitated its economic reform china was the thirtieth largest trading country in the world; by the year, 2000 China had become the seventh largest trading country. In 2004 for its trade had surpassed those of Canada and the United Kingdom to become the faith biggest trading nation in the world. Its trade was growing so fast that in 2003-it easily surpassed that of France to become the fourth biggest trading country in the world. By the turn of the decade chins trade surpassed that of Japan to become the second biggest in the world. Currently it is the largest trading country in the world after surpassing the United States mid last year. The rise in China becoming a trading powerhouse has coincided with it becoming an economic powerhouse and a major player in the world’s economy. The easy is divided into two parts; it first analyses the trade liberation reforms that china undertook in the 1970s and the effect these reforms on its economy. The next part analyses how china manoeuvred through the global financial crisis in 2007-09. China joined the world trade organization in the year 2001 but by then it had already transformed its economy to become the fastest growing in the world and had become the seventh largest trading country in the world. During this period of economic transformation, china had transformed its economy from being one of the most protected to become one of the most open economies among the emerging and newly industrialized countries. To demonstrate the level of transformation that the Chinese economy, it was compared to that of the Indian economy. During the time of the Indian independence, India commanded a bigger share of the world’s economy than china. However, over the years the Chinese economic and trade performance has been far much superior to that of India. In the middle of the 20th century the Chinese worlds trade share was less than one percent while that of India was over two percent but by two thousand and two Indians share was less than one percent while that of China had increased to over four percent. During this period, Chins share had more than tripled while that of India had reduced by more than two thirds. Most of Chinese global trade share has occurred after its reforms and opening up of its economy beginning in 1978. The transformation took place within a quarter of a century. In history, there is no other country in history to achieve such a fit in such a short period. 19xx 2002 India 2.2 0.8 China 1.5 4.8 NB base year of data India 1948, China 1953 Source: World trade organization, world trade report 2003 Chinese trade liberalization Before the nineteen seventies, the Chinese commodities trade was sorely determined through economic planning. The government state planning economic commission imported more than ninety percent of the countries commodities. The government’s intention when designing the economic plan was to boost the supplies of equipment and machinery, intermediate goods and industrial raw materials, which in short supply. The plan was very compressive and included more than three thousand commodities. Before the late seventies, several foreign trade corporations controlled by the government were responsible for conducting the trade. Each of these corporations dealt with a narrow range of commodities. Each of the corporation had sole authority to trade in the goods they were trading in. The planning process was conducted in physical term when determining the size and type of composition and did not take into account the relative prices or the exchange rate. These policies had adverse effects on the chins economic growth and the domestic resource allocation. A large portion of its exports consisted of goods that did advantage in production when compared to her competitors. Thus, the producers of these goods did not have any economic incentives to produce for the international market. The lack of expansion in to the international market hampered Chinas ability to bankroll imports that would have catalyse its productivity and improved its productivity and economic growth. There are several consequences of these policies namely China share of international trade steadily decreased from a high of one and a half percent in the fifty’s to less than a percent in 1977. In addition to a decrease in the volume of trade, the composition of the commodity reign trade was distorted especially with regard to expert side. Chinas exports were mainly composed of capital-intensive goods rather than labour intensive goods. The physical planning policies were responsible for these erratic patterns of export. In turn of the decade, the policies were dismantled progressively and by the beginning of the next decade, the policies were largely abandoned. Although the Chinese government through its foreign trade companies directly controlled some of the more important commodities, a large part of the trade was decentralized and controlled market conditions. This allowed new and experienced firms dealing in foreign trade to enter the Chinese market. In addition, it allowed price reforms of traded goods, which enabled international prices to be transmitted into the domestic market. Direct trade controls were removed and the country developed exchange rates favourable to export and adapted indirect mechanisms to regulate export and import such s non-tariff and tariff barriers. The government introduced import and economic substitution policies that greatly improved the growth of domestic industries. As growth intensified, several national industries were established but due to lack of enough competition, the country could not achieve resource optimization and its trade sector could not enjoy the benefits that come with international trade such as competition benefits. After 1978, the country embarked on trade liberalization, which enabled its economy to be integrated into the global trade system. In the early stages of the liberalization the people’s party’s 11th central committee, during its third plenary session developed a new political party line and adapted an open door policy which ushered in a new period of the governments economic and political relations with foreign nations. In terms of the import strategies China was geared towards reducing trade barriers and opening up itself to the world. In the eighties china removed the import substitution list that imposed traffics on many foreign products and was preventing them from flooding into the Chinese market. This allowed the domestic market to achieve efficient resource allocation with minimal or no interference from the government. The introductory tariff rate was 56% in the early nineteen eighties but by 2001 it had reduced to 15% and in 2008 it reduced further to 9.85%. The Chinese government started by modifying it foreign exchange policy and systems and as early as the 1980s the government started allowing exporters to keep apart of the foreign exchange earned. This all gave them the ability and resources to finance experts without the need to seek foreign currency from the state and gave them the impetus to their goods into the international market. Nonetheless, the most important aspect of the foreign exchange policy changes was the government’s gradual devaluation of the domestic currency, which allowed it to loose over sentry percent of its value between 1980 and 1995. It enabled the government to remove restriction on the purchasing of foreign exchange Another policy that contributed to accelerated growth of china’s exports was the 1984 state councils decision to rebate the indirect rates that affected the profitability of exports. With the support of the world trade organization the reforms enabled china to compete with companies in countries that primarily rely on direct taxes a situation which was different form that of china that heavily relied on indirect taxes. The third policy enabled the government to use the duty drawback system to rapidly expand its export quotas in just two decades. The system, which supports the states export processing program, was introduced in mid 1980s. It introduced rebates on import duties commodities such as raw materials an machinery, which enabled the countries export processing to and run on international prices. Over the years, processed exports have grown exponentially to reach 180 billon dollars and account 55% of China’s total exports. The reforms also changed the composition of Chinas trade especially on the export side. Initially a majority of its exports were capital intensive. However, as the reforms took root the export shifted to labour intensive product, which complimented its huge and cheap labour force. As the reforms started to take root main of China’s exports were petroleum and agricultural products. Nevertheless, it gradually moved towards to finished and manufactured goods which let to a fall of its primary exports of agricultural and petroleum products from a high of 45% in the 1980s to 10% by the late 1990s. The biggest intensive-intensive commodities trade by china included toys, textiles, shoes, and clothes. In twenty years, the value of these items rose by more than ten times from just over four billion in the eighties to more than fifty billion dollars by the late nineties. By 2003, the four products accounted for almost thirty percent of china’s total exports. In the recent past China has emerged as a major manufacturing and assembling hub of computers and other consumer electronics. Due to its cheap and abundant labour China has become an important player in the assemblage and manufacturing of these goods that is exports to the United States rose by more than half between the years of 2000 and 2002 The rapid and large expansion of china’s economy introduce competition to it domestic market. The competition allowed it to increase its import ratio to drastically improve from below fifteen percent in 1990 to more than thirty percent. It has surpassed that of the United States to become the country be with the biggest ratio in the world. It is more than twice that of the United States which is fourteen present, almost four times that of Japan which currently stands at eight percent and almost three times that of India which currently stands at twelve percent. Foreign affiliated companies set up shop in the country and started selling internationally branded goods in to the domestic market thus increasing the competition through domestic sales. These foreign affiliates increased inward foreign direct investment to a high of over four hundred billion by the end 2003. Most of these investments have gone into manufacturing and are currently contributing more than thirty percent of china’s manufacturing out put. Contrary to the belief that most of the goods manufactured by these companies are exported, more than sixty percent is consumed in China. The increased competition has improved the quality of good produced by locally owned manufacturing companies and has had a transformative on china’s domestic economy. The competition was so transformative that it reduced unemployment in china and reduced the locally owned companies’ inventory accumulation. In addition, it rubbed off on the state owned manufacturing companies that they started to make profit. During the first decade of the transformation the number of people employed by the sate continued to rise and it soared to a high of one hundred and nine million by ninety five. Nonetheless, as the policies began to take root in the mid 90s the trend took a revise turn and stated to reduce and by early 2000 the number had reduced by more than thirty eight million people. Country Trade volume (Billion $) Share (%) European Union 425.58 16.60 United Sates 333.74 13.00 Japan 266.79 10.40 ASEAN 231.12 9.00 Hong Kong, China 203.67 8.00 Korea 186.11 7.30 Taiwan, China 129.22 5.00 Australia 59.66 2.30 Russia 56.83 2.20 India 51.78 2.00 Source: Chinese Statistical Yearbook The economic crisis The 2008 economic crisis stared in the developed world and quickly spread in to the developing and emerging counties. It started in the financial sector but eventually spread to the real economy. China was not spared by the crisis. Its effects although not immediately apparent due to the fact that it was not reflected in the year on year economic comparison, it left its mark on a number of aspects of the Chinese economy. The economic crisis had two types of impact on the economy short-term and long-term impacts. The first and most visible effect was on the export light industry in some parts of southern China. Several thousand companies closed shop and in the process lay off hundreds of thousands of workers. Statistics from the Chinese labour office indicated that more that ten million migrant workers to there home provinces. The financial and backing sector did not fair any better. The stocks and markets started crashing as early as 2007and it wiped out almost three quarters of the market value. Foreign base banks pulled out of Chinese banks by selling off their minority stake to get much needed cash that they could use to reduce the effects of the crisis on the parent banks. The crisis significantly affected the several Chinese owned wealth funds especially the China investment corporation. The funds incurred huge loses especially from their dealings with western companies that the Chinese public become critical of their investment strategies. The crisis had an impact on how China conducted its external economic relations. In November 2008, Chinese exports declined for the first time in seven years by more than two percent and at the same time its import deduced by more than twenty percent. The table below shows Chinas economic performance during the pick period of the crisis 2007 2008 Inflation rate (%) 4,8 5,9 Current Account surplus (% of GDP) 11,3 9,7* Fiscal balance (% of GDP) 2,1 2,0* GDP (billion CNY 25731 30067 Trade (billion US$) Exports (billion US$) Imports (billion US$) Trade surplus (billion US$) 2174 1218 956 262 2562 1429 1133 296 GDP growth rate (%) +13,0 +9,0 Unemployment rate (%) 4,0 4,2 Foreign exchange reserves at year end (billion US$ 1530 1950 FDI received (billion US$) 82,7 92,4 Sources: Statistical Bureau of the People’s Republic of China, People’s Bank of China, WTO, IMF. *OECD projection Policy responses In 2009 during the peak period of the crisis the Chinese government introduced a stimulus package which was in excess of half a billion dollars. The aim of the package was to stimulate the third quarter of the Chinese economy. The funds were utilized to fund huge infrastructural projects, tax rebates for struggling industries. The package was introduced together with anti-cyclical monetary policies. Conclusion In conclusion, China can be used as an example to demonstrate how openness and adopting an open door policy can be an avenue or catalyst for economic growth and development. The reforms that China undertook transformed from a closed and protectionist market economy to become second biggest and most integrated economy in the world. The focus of this paper was to demonstrate how trade could be an essential ingredient to economic development. It also showed that a country’s economy integrated into the global economy could be affected by the action of the other plays in the global economy. As with the case, with China the open door, policy enabled it to develop its economy beyond the world's imagination but it also exposed it to risks that come with an integrated economy. In order to ensure that in the future such a scenario do not occur, many countries have started to put up impediments to globalization. Although as the a new wave of liberalization is necessary to slow and eventually stop this trend, countries also need to take a cautious approach that will allow them to promote liberation but at the same time protect their economy from any future global economic meltdown and its adverse effects. References Lary, N. R. 1992. Foreign trade and economic reform in China: 1978-1990. Cambridge u.a, Cambridge Univ. Press. Rotberg, R. I. 2008. China into Africa trade, aid, and influence. Washington, D.C., Brookings Institution Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=472735. Chang, P.-C., & Huenemann, R. W. 1988. China's foreign trade. Lantzville, B.C., Oolichan Books. Yeats, A. J. 1991. China's foreign trade and comparative advantage: prospects, problems, and policy implications. Washington, D.C., World Bank. Nanto, D. K. 2009. The global financial crisis: analysis and policy implicKAAR, M. (2009). A critical analysis of the 2007 - 2009 global financial and economic crisis and its implications for the travel industry and associated businesses. München, GRIN Verlag GmbH. http://nbn-resolving.de/urn:nbn:de:101:1-201009112399. ations. Darby, Pa, Diane Publishing. Shaw, D., & Lui, B. J. (2011). The Impact of the Economic Crisis on East Asia Policy Responses from Four Economies. Cheltenham, Edward Elgar Pub. http://public.eblib.com/choice/publicfullrecord.aspx?p=730814. Zheng, Y., & Tong S. Y. (2010). China and the global economic crisis. Singapore, World Scientific. http://public.eblib.com/choice/publicfullrecord.aspx?p=731211. Obstfeld, M., Cho, D., & Mason, A. (2012). Global economic crisis impacts, transmission and recovery. Cheltenham, Edward Elgar. http://public.eblib.com/choice/publicfullrecord.aspx?p=981479. Read More