International Trade and Foreign Investment

1. International Trade and Foreign Investment Junhui Qian 2013 October

2. Content • Trade Reform • Foreign Direct Investment • The China Circle • Toward An Open Economy

3. Trade Reform • “Double Air Lock” • State monopoly of foreign trade • Inconvertible RMB • The reform began with an urgent attempt to increase and diversify sources of foreign exchange. • The first step in opening came in 1978 when Hong Kong businesses were allowed to sign “export-processing” (EP) contracts with Chinese firms in the Pearl River Delta. • Four Special Economic Zones (SEZ) were set up in Guangdong and Fujian. • Liberalizing the Foreign-Trade System • Devaluation of RMB • De-monopolize trade • Creation of Tariff and Nontariff Barriers • Import substitution and export promotion

4. Export Processing • An example: A Hong Kong firm would ship (for example) fabric to a Chinese rural firm and have it sewn into shirts. The Chinese firm would be paid a processing fee, while the fabric and shirts would be owned by the Hong Kong firm at all times, so they did not have to pass through the foreign-trade system air locks. In this way, the export production network already created by Hong Kong could expand into China, but Chinese industrial firms were not exposed to import competition. • EP has been extended to all kinds of manufacturing. • Globally, there is a redistribution of the stage of production.

5. More and More Open

6. Trade By State of Production (2002)

7. Composition of Trade (2003)

8. One Question for Discussion • Can we say that China has become a technological power, observing that the share of electronic, telecom, and electrical machinery has surged to 150 billion USD (34.2% of total export)?

9. Regional Distribution of Trade

10. Foreign Direct Investment

11. FDI/GDP (%)

12. Characteristics of Chinese FDI • Foreign direct investment has been the predominant form in which China has accessed global capital (as opposed to portfolio capital or bank loans). • An unusually large proportion of Chinese FDI inflows are in manufacturing industry, as opposed to services or resource extraction. • FDI inflows have predominantly come from other East Asian conomies, especially Hong Kong and Taiwan.

13. Main Sources of FDI

14. Modes of FDI in China

15. China’s Balance of Payments (% of GDP)

16. Korea’s Capital Account Balance

17. External Debt

18. Decomposition of the External Debt

19. Toward An Open Economy • China formally applied to rejoin the GATT (General Agreement on Trade and Tariffs, the forerunner of WTO) in 1986. • On Dec 11 of 2001, China finally joined WTO (which was created during the Uruguay Round negotiations in 1996). • China implemented substantial reforms before formal accession into WTO. There reforms were on reformists’ agenda anyway. WTO membership was a powerful excuse for pushing through reforms that reduced dualism in the economy. • China was committed to open its trade system and lower its tariffs. • The average nominal tariff was reduced in stages from 43% in 1992 to 17% in 1999, the year when the breakthrough in WTO negotiations finally came. In the actual agreement, China agreed to lower average industrial tariffs to 9.4% by 2005, and this rate was actually achieved in 2004. The agreement lowered average agricultural tariffs to 15%, which was also easily achieved.

20. Reading Assignment • Chapter 16 and 17 of the textbook • Lall, Sanjaya, and M. Albaladejo (2004). “China’s Competitive Performance: A Threat to East Asian Manufactured Exports?” World Development, 32(9): 1441–66.