Lec 5.2 Trade Reform Flashcards
Other terminologies for Opening Up and Reform
Opening up - open, release, liberalization (KaiFang)
Reform - to change (Gaige)
Difference between opening up and reform
Opening up and liberalization are used interchangeably without distinction
An economy can do domestic reform without opening up
Liberalization: opening up to foreign cooperation, trade, investment -> Liberalization is generally more related to opening up a domestic economic to foreign cooperation/trade/investment
Trade Reform Timeline from 1950s, 1978, 1985, 1986, 1990, 1992, 1997, 2001, 2008
1950s - Isolation, Autarky
1978 - Opening up & trade reform, first movers of HK entrepreneurs through EPs
1985 - Plaza Accord (Yuan depreciated by ‘84), Relocation of production networks
1986 - Implementation of CDS
1990 - Explosion of trade in machinery parts, intermediate goods
1992 - end of 1st phase reform - start of FDI inflows
1997 - Asian Financial Crisis
2001 - Entry/Membership in WTO
2008 - Global Financial Crisis
Foreign Trade during Centrally Planned Economy
- International Trade was unified in 1950
- Specialized FTC (Foreign Trade Companies) were created
- The State was the monopolist and the monopsonist: the single seller and
the buyer of all traded goods
Situation of Chinese Foreign Trade before 1978 Trade Reform
1) Period of isolation post GLF
2) Period of self-reliance and strategic self-sufficiency
3) During the Cultural Revolution - everything foreign was
discouraged and frowned upon (strong aversion to foreign domination)
China’s Foreign Trade situation from 1949-1960 (Pre-1978 trade)
- 1949 to 1960 – foreign trade mainly with the Soviet bloc
- IMPORTED industrial raw materials, energy, fuel, machinery to implement five year plan from 1953-1957
- EXPORTED textiles and processed food
- At this time, if M>X, China has to borrow to finance the trade deficit ( BOP
Accounting Principle) - Soviet Union extended credit to China, the country was in a perpetual state of trade deficit -> POLICY MOTIVATION TO IMPLEMENT REFORM
Two Channels of Control / Double air-lock
1) Centrally controlled foreign trade monopoly
2) Foreign exchange system
What were the occurrences when the foreign exchange system was under government control
- Renminbi fixed below market level (distorted macro policies – one of the
Trinity) - Renminbi was not convertible
Effects of double air lock
- Insulates domestic market from global markets
- Government is the monopolist/monopsonist – single seller/buyer
What were the occurrences when foreign trade was monopolized
1) 12 national FTCs exercised monopolies over imports and exports
2) FTCs buy at domestic/controlled prices and sell at world prices;
buy at world prices but sell the products at domestic controlled prices
3) Only authorized goods were allowed to pass through this first layer
of control
What are FTCs
state monopolies
Define the purpose of State Control
to regulate foreign trade and serve the interest of the planned economy,
i.e., fill in domestic supply gaps, import
modern technology , raw materials
Define State monopoly
more effective in regulating trade than price and non-price policy tools
Initial Trade Reforms
1) New innovative trade channels opened in late 70s (1978-1992)
2) Introduction of EPs which eventually became SEZs
Where were the newly-opened trade channels established?
Coastal regions close to HK and Taiwan -> GUANGZHOU (in Guangdong) and FUJIAN
Why were the trade channels opened there?
- Guangzhou and Fujian are part of MARITIME CHINA where they conducted trade historically
- Wanted to trade and open up while their domestic market remains insulated from the global market
- Lessons from history: Visit of MacCarthy
What instrument was used in order to limit the opening of trade channels in Guangzhou?
Export Processing (EP) contracts which eventually became SEZs
What are the elements/processes of EPs
1) HK firm brings in raw materials to China, tariff free
2) Domestic firms from China provide cheap labor
3) ALL outputs produced by Chinese laborers are SOLD to HK firms
4) HK firms provided capital, latest technology
What were the initial effects of EPs?
1) SOEs are still not exposed to competition
2) There is an indirect participation in the export production network of HK
3) Simulation of free trade conditions
Where was the first 4 SEZs set up and why?
Guangdong and Fujian
Proximity to HK and Taiwan
What are SEZs
1) Result of the Expansion of EP trade
2) Has special powers within the existing foreign trade system
3) Industrialized enclave that continued to shape trade development
What are SEZs’ special powers?
Imports brought in to SEZs are exempted from duties and taxes as long as the goods are imported in the zones that are intended for manufacturing exports
At the expansion of EPs into SEZs, what happened to centrally-controlled FTCs?
FTC Provincial branches continued to operate and they can still retain foreign exchange income generated from exports
What is the Plaza Accord
Initiated by the US in 1985 in order to help the country CORRECT their TRADE DEFICIT
Effects of Plaza Accord by the US
CURRENCY REALIGNMENT by depreciating the dollar, allowing other currencies to appreciate against it (Yen, Franc, pound)
HIGHER LABOR COSTS as currencies appreciated
How is China involved in the Plaza Accord?
China’s currency devaluation coincided with this period of realignment (started in ‘84) as part of their TRADE REFORM
What pushed countries to move production/relocate to lower-wage locations?
1) currency realignment and 2) higher labor costs
To where did they relocate?
Lower-cost countries in SEA, coinciding with China’s currency devaluation
Why was China devaluating their currency?
By keeping their currency BELOW equilibrium, they are making their EXPORTS CHEAPER
What was the effect of China’s devaluation of currency?
Cheap labor allowed them to become an ATTRACTIVE SITE TO PRODUCE CHEAPER GOODS -> FDIs SHIFTED TO CHINA as a result
What are the effects when FDI shifted to China?
1) Trade surplus of Newly Industrializing Economics (NIE) (HK, SK, SG, TW) and with US and EU shifted to China
2) SEA countries – envious, threatened and worried
3) China’s trade deficit with SEA
4 key elements of trade liberalization
1) setting realistic exchange rate (devaluation)
2) demonopolizing the trading system (demonopolization of foreign trade regime)
3) liberalizing import prices
4) setting up a normal tariff system (system of tariffs and non-tariff barriers)
(1) What occurred during the devaluation of currency in the price of foreign exchange?
1) Traded good has two prices: 1) national price and the 2) price of the currency
2) Depreciation of currency – alters relative price within traded/tradable goods
3) Liberalization of foreign exchange to price tradable goods properly -> changed incentives from a protectionist regime to export-oriented policy
(1) What was the situation prior to the 1st element of reform?
Before the devaluation of currency,
1) Yuan was OVERVALUED (below market level)
2) BOP Accounting: current account – open ; capital account – closed
(2) What occurred during the demonopolization of foreign trade regime?
1) Remove/reduce state monopoly (12 FTCs), relaxed entry for
international trading, number of FTC companies allowed to expand
2) Provincial branches of FTCs were granted autonomy under a dual track system where they surrender FX target quota and keep above quota FX
3) Trade licensing: right to export and import were granted to some 10,000
enterprises
(3) What occurred during the liberalizing of import prices?
1) Liberalizing import prices allowed world market prices to interact
with local markets
2) World prices can now be transmitted to the domestic economy
(4) What occurred during the system of tariffs and non-tariff barriers?
1) Replaced by trade policies – price and non-price
2) Early 1980’s – a new set of tariffs were implemented
3) NTBs – regulation of trading rights
4) Trade Regime similar to many developing countries protecting their
domestic industries and import competing sectors
When EPs became full blown export processing zones in the late 70s, what were the 2 existing regimes?
Dualistic trade regime: (1) ORDINARY TRADE vs. (2) EXPORT PROCESSING CONTRACTS
OTs vs. EPs
What’s the difference between OT and EP?
OT goes through tariffs and NTBs
EPs is a free trade zone with no trade restrictions
Why was Coastal Development Strategy (CDS) launched in 1986
To further support the export restructuring of Asian
production networks (note that production networks started relocating in ‘85)
What was the effect of CDS?
EPs trade grew rapidly and it surpassed OTs in size
What did the CDS entail?
1) all types of firms in the coastal provinces, including TVEs were
allowed to engage in EPs
2) Foreign investors in HK and Taiwan moved in
3) Exporting firms were allowed to operate outside of the domestic protective trade regime
Why did OT had to wait for WTO entry and multilateral liberalization?
Because domestic firms weren’t as competitive in exports (compared to EPs) due to lack of access to resources and technology
Had to wait for WTO membership in order to fully tap into global trade export potential
What are the characteristics of the Export Processing System?
(1) Entire coastal region was an EP zone (SEZ)
(2) It extended to any area where there are foreign-invested enterprise (FIEs) and reinforced their advantage
(3) EPs moved into an integral part of global high technology production
networks
(4) FIEs eventually moved into the coastal provinces that are export power houses of China
(5) Mainly responsible for most of China’s exports
What is the relevance of China’s membership in WTO?
This was the motivating factor to implement trade reforms
Background of the 1997 Asian Financial Crisis
- SEA – liberalized both CA and capital account convertibility in early 90s after
removing tariff and NTBs in the 80s - Open and liberal economies of East Asia poised to emerge entered a sharp
recession - CA account convertible; Capital account - closed
- Competitive devaluation: silent debut of China
- Fixed exchange rate of the RMB - anchor
- Effects - felt in the regional economies of East Asia and the Pacific
Entry to and Membership in WTO
Entry to and Membership in WTO:
(1) Process of Accession: Before joining the World Trade Organization (WTO), China had to make a series of changes and reforms to its economic policies, laws, and regulations to meet the WTO’s standards.
(2) Commitments: After becoming a member of the WTO, China agreed to continue making additional reforms and follow specific rules to comply with WTO requirements.
What is the one important reform that China undertook before WTO membership?
Unification of the exchange rate in 1994 that GREATLY LIBERALIZED ACCESS to foreign exchange, although with limited convertibility
What were the ongoing reformation commitments that China had to fulfill after joining the WTO?
Chinese reforms driven by WTO membership:
1) Liberalize the OT regime -> trading rights to all WTO members
2) Foreign trade law –> remove restrictions /liberalize trade reserved for state-owned FTCs
3) Lower tariffs
When did China file for membership and when was it granted?
Filed for membership in 1986
Membership granted in 2001
Within 15 years, regional and global economy changed substantively
What are IMPACTS of China’s membership in WTO?
1) China’s exports surged
2) Large trade surplus
3) RMB appreciated slightly only after the surge in exports/trade surplus
4) Created shocks and trade frictions in the global trading system
