Chapter

Chapter 12 Institutional Change, Trade Composition, and Export Supply Potential in China

Editor(s):
Manuel Guitián, and Robert Mundell
Published Date:
June 1996
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Author(s)
Ligang Song

The main objectives of this paper are to analyze the changing composition of China’s trade within the context of the reform of the Chinese economy and to discuss its export supply potential with reference to the experience of other developing economies in Asia. The paper presents the following key arguments. First, the rapidly changing composition of trade in China during the past 15 years is the result of a convergence of its trade pattern toward market-determined comparative advantage. Such convergence is primarily due to institutional reform, particularly trade system reform, aimed at introducing market mechanisms into economic and trading activities. Second, China’s export supply potential will be very much determined by progress in further trade liberalization that leads to a dynamic change of its comparative advantage. Progress may be examined in the context of the contribution of exports to economic growth in China and its economic integration into the world economy, namely, how the scale of China’s expected future trade expansion will transform its stature in world trade.

Institutional Change, Trade Reform, and Patterns of Trade

The arguments put forward in this paper are based on two fundamental considerations centering on the forces that influence China’s comparative advantage in international trade: institutional change and trade liberalization. Both have a strong impact on China’s pattern of trade and therefore on China’s rapid integration into the world economy. At the same time, the combination of the two makes China’s case uniquely different from that of other developing countries that have been undergoing trade liberalization.

International trade theory tells us that a country’s relative factor endowment will strongly influence the focus of its comparative advantage in international trade. However, in an institutional setting such as a centrally planned economic system, a country’s trade patterns could deviate from its market-determined comparative advantage (judging from its pattern of resource endowments). This is mainly because, under that system, trade may be more consistent with serving a set of planned production and consumption (distribution) targets or development strategies (the heavy industry development strategy, for example) than with deliberately seeking gains from international trade by allowing market forces to allocate its resources.

The inability of a centrally planned economic system to take full advantage of international trade is due to institutional restrictions on economic activities, particularly on external economic activities, such as trade and capital flows. The key point is that when production and trade activities are subject to institutional controls or planning, there is not much incentive, from the point of view of enterprises and central planners, to reduce the costs incurred in production and trade activities. Therefore, there is no theoretical ground for seeking a country’s comparative advantage in international trade on the basis of an efficient allocation of resources. The motive for trade, under these circumstances, is limited to filling the production gap that emerges under state planning.1

In theory, therefore, institutional changes that are accompanied by the introduction of market forces into the operation of the economy could alter the deviation between the pattern of trade and its resource supplies and make trade patterns conform more closely to the resource structure.

The speed and scale with which a country’s pattern of trade conforms to the resource structure will inevitably be influenced by the degree of marketization, which has been directly determined by the institutional changes implemented under various reform programs. In other words, there is a close link between the degree of marketization and the degree of internationalization of the economy. Internationalization here refers to the degree to which a country participates in the world economy.

The increasing marketization in China resulting from the reform program can be characterized as follows: an increasing share of goods and services transactions operates through the market (price signals increasingly direct the allocation of resources); there is a rapid reduction of state planning of both production and distribution; there is a diversification of the ownership structure in the overall economy, including private and foreign ownership; the way in which the Government adjusts and controls the economy (by resorting to macroeconomic control mechanisms suitable to a market economy) has changed; and laws and regulations compatible with a market economy have been introduced.

The progress of marketization has fundamentally changed the attitude and behavior of enterprises and individuals. The incentive to make a profit has become a driving force in all kinds of business activities, including foreign trade. It is this fundamental change that provides a theoretical justification for the argument that the convergence between the pattern of trade and that of resources has taken place in China because of institutional changes.

Compared with trade reform in a market economy, changes in incentive brought about by institutional changes produced more immediate and profound changes in trading activities, which could partly explain why there was a sudden surge in exports and imports after China opened up its economy in the late 1970s and early 1980s. This incentive-enhancing effect, resulting from institutional changes, will exist during the entire transition period. Yet, the impact on economic activity will diminish along with the establishment of a new system. However, institutional change or the reform of the overall economic system is only one precondition for the convergence of China’s patterns of trade and resource endowment. To enhance the realization of this convergence, China must also formulate trade policy that addresses the incompatibility of its own trade system with the world standard on the one hand and that aims to improve efficiency in its production and trading activities on the other.

Unlike other developing countries that have undergone substantial changes by undertaking trade liberalization, China is unique in the area of changing trade policies in the direction of market liberalization. The central issue is the possible consequences of the interaction between institutional changes under the reform program and trade policy adjustments. These possible consequences may offer the Government a wide range of policy choices (subject to changing policy environments—for example, the changing conditions for removing export subsidies along with the adoption of new reform measures) in deciding its future trade orientation. These choices, which may lead the country in different directions, may in turn strongly influence the pace of institutional change in China, patterns of trade, export supply potential, and general economic growth. In addition, they will also affect the welfare of the international community at large.

In choosing the pace of reform and trade liberalization, the Government must treat the two issues, namely, institutional change and changes in trade policy, comprehensively and must handle them carefully by maintaining a balance between the domestic policy agenda and the external one. Although the two should in principle reinforce each other, in practice they may not because of some short-term conflicts emerging from the changes or because of the lag in the implementation of one or the other. One example is the attempt to increase the efficiency of the state-owned export sector, which might be hindered by difficulties in reforming the whole structure of the state sector.

Because the concept of comparative advantage is itself theoretically based on an essentially market-driven economy, further establishment and promotion of an integrated, open market system in China has become key to deepening the current reform of its trade system and to further realizing China’s international comparative advantage, which reflects a more efficient use of its resources.

In this sense, conformity of a country’s comparative advantage to its pattern of resources could be used as a hypothetical measure of the extent to which domestic market distortions have been reduced. The implication is that the progress of China’s trade expansion so far reflects only partial marketization in China. The potential for further trade expansion along with the movement toward establishing a market system is enormous (see discussion on pp. 206–11).

For an economy with a high degree of protection, relatively cheap labor or the abundance of other resources cannot automatically be translated into comparative advantage in the world market. Both institutional changes and trade policy reform with market orientation will be instrumental in the realization of a country’s true comparative advantage. In other words, the consequences of both institutional change and changes in trade policies would be better trade performance resulting from a more efficient use of a country’s resources.2

A convergence of patterns of trade and resources in China has brought several immediate gains. The first one is a direct gain from trade owing to the changing composition of trade and the increasing market share of its products. The changing pattern of trade over time provides convincing support for this gain (see discussion on pp. 199–201). The increasing share of foreign trade in total GDP and China’s ever-increasing integration into the world economy are generally regarded as indications of the success of its policy to open up its economy.

The second gain is that increasing trade helps to ease the pressure of excess domestic demand generated by the rapid development of the economy. To a great extent, it cushions against inflationary pressures and thus helps to maintain the high economic growth rate and create favorable conditions for further reform. Without the realization of China’s comparative advantage on the world market, it would be impossible to maintain such a high level of imports to meet the ever-increasing domestic demand.

The third gain is that a convergence of patterns of trade and resource endowments has made China one of the most attractive places in the world for foreign direct investment, which in turn contributes significantly to trade expansion in China through the direct impact of investment on production and trade.

Some long-term gains are also associated with the convergence of patterns of trade and resource endowments. The first one is somewhat less obvious, but by no means less significant. It is the positive impact of trade activities (or externalities) on the process of reform, also called the “indirect effects” of trade (Myint, 1984, p. 238). The effects are indirect because internationally accepted trading practices force enterprises in the export sector to compete in a competitive environment and consequently they have to change and adapt themselves just as firms in other countries do. Changes in the enterprise system are thereby enhanced, in particular those in the state sector in China. Consequently, substantial productivity gains can be obtained from such changes.3

The second one is the contribution of trade to economic growth, overall efficiency, and structural changes taking place in the economy.4 “Export-oriented policies lead to better growth performance than policies favoring import substitution. This result is said to obtain because export-oriented policies, which provide similar incentives to sales in domestic and in foreign markets, lead to resource allocation according to comparative advantage, allow for greater capacity utilization, permit the exploitation of economies of scale, generate technological improvements in response to competition abroad, and, in labor-surplus countries, contribute to increased employment” (Balassa, 1978, p. 181).

Specialization for the export market also helps ease the pressure resulting from structural problems. For example, capital is relatively scarce in China, but capital in many industries is very much underutilized. Resource allocation based on comparative advantage will change industrial structures toward optimality.

The relationships between factor endowments and trade patterns change over time in a dynamic fashion, supporting the hypothesis of shifting comparative advantage, which says that shifts take place as endowments change. These shifts, subject to market restraint, create a substantial export supply potential. The implication for China of shifting comparative advantage will be discussed in the context of trade and endowment structure in East Asian economies.

The forces that advocate change through altering trading practices have contributed positively to institutional reform in general and to reform of the trade system in particular over the entire history of economic reform. This has happened largely because of changes in the perceptions of the authorities over the role of foreign trade; they have realized the gains to be made from actively pursuing China’s comparative advantage on the world market. As a result, further institutional reform and reform of the trade system and associated changes in trade policy have ranked high on the national reform agenda.

If the institutional framework continues to adjust and adapt in the direction of a market system and if policy, particularly trade policy, is becoming more rules based, there will be further dynamic changes in trade composition, and the gains from international trade will continue to benefit the Chinese economy.

Trade System Reform in China

This section briefly reviews the reform of the trade system and the associated changes in trade policies in China, providing evidence of institutional changes that have led to changes in its trade composition.

In the context of the overall economic reform and institutional changes that started at the end of the 1970s, the reform of the trade system in China has gone through the following five stages, each with its own emphasis and associated problems. The reforms throughout the reform period so far have moved from being experimental to being closely in line with the requirements of the rules of the General Agreement on Tariffs and Trade (GATT).

The first stage of the trade system reform in China lasted from 1979 to 1984, starting at the same time as the general reform of the economy. The aim of this initial stage was to explore the possibility of reforming the highly centralized trading regime inherited from the Soviet-style central planning system. Various experiments were undertaken at this stage of reform in an effort to change the old system, under which total imports and exports were centrally controlled and managed, the Central Government took responsibility for profits and losses in trading activities, and there was a disconnection between production and trade (presumably owing to rigid planning for production).

The reform experiment at this initial stage was successful in that it took the first but very important step of reforming the whole trade system. However, owing to resistance to reform, a lack of experience and the human skills needed for handling the reforms, and the problems that emerged in the process, the reform program achieved only limited results. One important outcome of this initial period of reform is that the experience made the Government realize that reforming the trade system would be a long and painful process and that it might be necessary to take a step-by-step approach, closely monitoring the results of each step and then making policy adjustments accordingly. This approach was crucial for conceiving and designing the subsequent reforms, not only in trade but also in other areas of the economy.

The second stage of reform was 1984–86.5 The reform program aimed at separating government functions from those of enterprises, simplifying administrative procedures for approving imports and exports, and decentralizing power to enterprises. Under this program, experiments in reforming the planning and accounting system were also carried out. For example, attempts were made to break the planning framework in order to have more direct links between production and trade. Because of this reform, China entered a stage where compulsory planning, indicative planning, and market adjustment were all in place at the same time.

As had happened during the first stage of the reform program, the measures taken at the second stage represented one more step toward the liberalization of the trade system. However, reform at this stage also encountered some difficulties. For example, enterprises could not be truly independent because of their close relationship with the Government, and price signals could not fully function because of the operation of a two-tiered price system. As a result, enterprises were not able to be truly responsible for their profits and losses.

What the Government learned from this stage of reform was the importance and necessity of reforming the system in a comprehensive manner. But owing to various difficulties—particularly those existing in the relationship between the Government and enterprises—and, more important, because of the benefits of the reform measures—namely a rapid increase in trade—the Government decided to continue the step-by-step approach to reforming its trade system and resisted the idea of a sudden change in the whole system.

On the whole, up to this stage, the reform measures had been aimed at changing and adjusting the basic structure of the old system and not at deliberately conforming to the requirements of the GATT. However, the Government realized the potential benefits to the reform process of joining the GATT and believed that the time had come for China to apply for re-entry. Accordingly, reforming the trade system in accordance with the requirements and guidelines of the GATT became the main task of the reform program at the next stage.

The third stage started in 1987, one year after China formally launched its application to re-enter the GATT, and ended in 1990. The key reform measure adopted at this stage was the general implementation of the “contract system” in both trading and production enterprises in the export sector. It was also significant in the relationship between the local and central governments. The system included contracts between enterprises, trading companies, local governments, and the Central Government, in the areas of foreign exchange earnings, quotas of foreign exchange earnings handed over to the state, and the reduction of export subsidies. These reform measures touched upon the issue of operational mechanisms within enterprises. The move itself, therefore, had important implications for the Government’s attempts to build up a modern enterprise system to be adopted at a later stage of its reform program.

One result from this stage of reform was a rapid expansion of trade owing to the strong production and trading incentives for enterprises, trading companies, and local governments that resulted from the contract system. However, some problems were also associated with the reforms at this stage. The key problem was that a favorable environment in which fair competition could be conducted had not been created.

The fourth stage of reform covered 1991–93. In line with the national policy of further opening up the economy, the objective of the reform program at this stage was to let enterprises be responsible for their profits and losses in order to equip them with a mechanism for competing both domestically and internationally on a fair basis. The measures adopted included phasing out export subsidies, narrowing the regional differences in foreign exchange retention rates, giving more power to enterprises to use foreign exchange, and using exchange rates and tariff rates to adjust trade activities. The Government’s intention was to create a truly competitive environment that was similar to that in which firms in other countries operated.

China also speeded up its efforts to re-enter the GATT at this stage by substantially reducing export items subject to planning, further improving the export-licensing system by increasing its transparency, and deepening reform of the enterprise system.

Another important area of reform that resulted from conforming to the requirements of the GATT was the reform of the import system, which, compared with the reform of the export system, had lagged far behind. The import system in China was closely related to the system of central planning, which used import planning, administrative approval, import licenses, import price determination, exchange controls, and import tariffs to control import activities. The general results of these measures were nontransparency in import transactions and overprotection of some domestic industries. The urgency of reforming its import system became even more obvious when China set its sights on re-entering the GATT.

China initiated the reform of its import system at the beginning of 1992 by unilaterally reducing tariff rates for a wide range of commodities, abandoning import adjustment taxes, reducing the coverage of import licensing, and reexamining internal documents for import management and control. While reforming the old import system, China aimed to establish a modern import management system, characterized mainly by reliance on tariffs and exchange rates to adjust imports, that was compatible with normal practice in other countries and consistent with the GATT rules. The measures undertaken to achieve this goal included further reduction of the coverage of mandate planning for imports, abandonment of the system of administrative approval for imports, and further improvement of the import-licensing system, which entailed increasing its transparency and fairness.

Compared with the reform program at the previous stage, the new reform program went one step further in reforming China’s whole trade system. More important, the reform of the trade system made it more and more consistent with the requirements of the GATT. However, structural problems existing at a deeper level remained. For example, the two-tiered currency system, where foreign exchange transactions were conducted according to both the official rate and the one prevailing in so-called foreign exchange swap centers, was still in place. This system hindered the further deepening of the reform in China’s trade system.

In principle, the two-tiered exchange rate system should have been abolished but in reality there were many difficulties in doing so. The system, by creating more distortions, tended to discourage exports and imports, induce more scarcity of foreign exchange, increase the secondary market price of foreign exchange, and lower real incomes (Martin, 1990). The main difficulty of reforming this currency system was that the system itself was tied up with the old institutional framework in which the relationship between the Government and enterprises was intrinsically linked. This meant that there were some preconditions for taking the steps necessary to reforming the system.

Although there were pros and cons for domestic enterprises—for example, unifying the exchange rates would end the effective subsidy given to state enterprises that were allowed to buy foreign currency at the cheaper official rate—the potential gains for the Chinese economy from abolishing the system could be substantial. Most important, the reform measures taken at previous stages of the reform process laid the foundation for the Government to take more dramatic measures in reforming its trade system. In other words, those preconditions have been more or less satisfied after several rounds of reforms. So reforming the two-tiered currency system became one of the most important targets of the most recent reforms of the trade system in China.

The fifth stage of reform started at the beginning of 1994. This, characterized by its comprehensiveness in reforming taxation, finance, and the currency systems, has been the most dramatic program so far for reforming China’s trade system. The key measure adopted was the reform of the system of controlled exchange rates, which aimed at creating a system of managed floating exchange rates based on market forces and the gradual transformation of the yuan into a convertible currency.

The Government abandoned the former two-tiered exchange rate system—the foreign exchange certificate (FEC)—and unified the yuan’s exchange rates at the beginning of 1994 by cutting the official exchange rate by 33 percent and beginning to phase out FECs in an effort to bring the system up to world standards. This move, a positive step in China’s application to rejoin the GATT, was welcomed in foreign business circles. Previously, foreign investment was calculated in yuan at the official rate, while profits were repatriated at the swap market rate, which tended to follow the currency’s black market value.

With respect to the reform of the trade system, the Government plans to abolish mandatory import and export plans, exempt trading companies from turning over all their foreign currency, and modernize the management of state trading companies in order to boost trade.

To institutionalize the proposed trading practices and speed up its campaign to re-enter the GATT, China issued its first trade law in May 1994, which is designed to fulfill the two basic demands of the GATT: transparency and uniformity. The trade law emphasizes market measures over administrative means for the management of trade. With the new trade law, a uniform, fair, and free trade policy is expected to take shape in China.

In summary, the reform of China’s trade system, along with the general reform program for the whole economy, has been implemented on a step-by-step basis, which gradually satisfied some of the preconditions for further reform at each stage and paved the way for the more comprehensive reform package initiated at the beginning of 1994. All these reform measures have contributed to a trade expansion in China and led to a rapid change in its trade composition.

Convergence of the Patterns of Trade and Resources

This section provides empirical evidence of the convergence between the patterns of trade and resources in China since the reform began in the late 1970s and then discusses the gains made from the rapid development of trade and economic integration with the world economy.

Studies show that the international distribution of China’s resources changed substantially between the 1960s and the late 1980s.6 The impact of changes in resource supplies on trade patterns of China’s manufactured products can be seen in its growth rate of exports in comparison with other Asian economies that have similar patterns of factor endowments, particularly with respect to labor and capital. Table 1 lists the average annual growth rates of GDP, total exports, and exports of manufactures in a group of selected Asian economies and in the United States for two periods: 1970–80 and 1980–90. It shows that annual real growth rates of manufactured exports in other Asian economies were considerably higher than the growth rates of total exports throughout the two periods, providing evidence for the expansion of manufacturing sectors in these Asian economies. In the case of China, both growth rates were high during both periods, although there was not much difference between the two rates.

Table 1.Annual Real Growth Rates of GDP, Total Exports, and Manufactured Exports for Selected Asia-Pacific Economies(In percent)
GDPTotal ExportsExports to

Manufactures
Country1970–801980–901970–801980–901970–801980–90
Hong Kong9.277.138.414.298.504.31
Indonesia7.245.617.563.2713.6434.96
Japan4.514.149.494.219.734.41
Korea8.609.3122.6211.8924.6612.31
Malaysia7.865.993.8810.5114.2020.12
Philippines5.861.605.793.6623.909.15
Singapore8.917.044.888.5011.0511.76
Taiwan Province of China5.778.9210.0110.4510.0210.96
Thailand6.697.8210.7813.6525.5923.46
United States2.742.906.643.066.244.57
Source: GDP and trade figures were obtained from World Bank, World Debt Tables 1992 (Washington).Notes: The growth rates of GDP are based on the constant price in the local currency; growth rates of total exports and exports of manufactures are obtained by adjusting total exports and exports of manufactures against the U.S.-dollar-based export price index (1987=100). Annual growth rates of both total exports and exports of manufactures are based on 1972–80 for the first period for Taiwan Province of China and on 1980–89 for the second period for Hong Kong.
Source: GDP and trade figures were obtained from World Bank, World Debt Tables 1992 (Washington).Notes: The growth rates of GDP are based on the constant price in the local currency; growth rates of total exports and exports of manufactures are obtained by adjusting total exports and exports of manufactures against the U.S.-dollar-based export price index (1987=100). Annual growth rates of both total exports and exports of manufactures are based on 1972–80 for the first period for Taiwan Province of China and on 1980–89 for the second period for Hong Kong.

Table 1 also indicates that the more advanced an economy becomes, the narrower the gap is between the growth rate of its total exports and that of its manufactured exports. Thus, the potential for revealing comparative advantage (gaining a larger market share) in manufactured products is relatively large for developing economies. Fulfillment of this potential and the structural changes that accompany this process will have important implications for market and policy issues as these economies industrialize further.

Table 2 reports the results of changing patterns of China’s exports and imports by groups of commodities, which indicate clearly that China’s commodity compositions have changed dramatically since the beginning of the reform in the late 1970s.

Table 2.Patterns of China’s Exports and Imports by Groups of Commodities(In percent)
1978198519901993
Commodity MarketCommodity MarketCommodity MarketCommodity Market
Commodity GroupshareshareRCA1shareshareRCAshareshareRCAshareshareRCA
Exports
Agriculture-intensive36.10.52.0021.72.31.5012.42.40.939.23.00.71
Mineral-intensive17.10.50.7028.81.91.309.41.60.614.71.60.38
Labor-intensive31.12.22.9435.55.23.3050.810.34.0256.817.44.13
Capital-intensive15.20.20.3212.90.40.2626.81.20.4728.82.10.49
Total manufacture249.30.60.8050.41.20.7880.12.81.0887.94.81.14
Imports
Agriculture-intensive29.01.11.6010.61.40.7216.21.61.2010.71.70.61
Mineral-intensive7.00.20.295.10.40.215.10.40.316.51.30.49
Labor-intensive4.20.30.429.71.80.9416.01.71.2912.72.50.93
Capital-intensive59.00.91.2773.32.91.4960.81.51.0972.13.41.24
Total manufacture65.70.71.0886.02.51.3682.11.51.1388.53.21.16
Source: International Economic Databank, Australian National University.

Revealed comparative advantage.

Total manufacture includes both capital-and labor-intensive products.

Source: International Economic Databank, Australian National University.

Revealed comparative advantage.

Total manufacture includes both capital-and labor-intensive products.

Commodity shares represent exports of a particular group of commodities in total exports. In 1978, the predominant commodity shares were agriculture-intensive (36.1 percent) and labor-intensive (31.1 percent), followed by mineral-intensive and capital-intensive products. Total manufacture accounted for about half of China’s total exports (49.3 percent) at that time.

By 1993, China’s commodity shares for exports had changed remarkably. While agriculture- and mineral-intensive products dropped, those for labor-and capital-intensive products increased substantially. Total manufacture accounted for about 88 percent of China’s total exports.

Commodity shares for imports also show a pattern of rapid changes. The shares for both agriculture- and mineral-intensive products declined, but the former dropped more substantially during the period. The import share for labor-intensive products increased first and then declined from the peak year of 1990. In contrast, import shares for capital-intensive products increased rapidly. By 1993, 72.1 percent of China’s total imports were capital-intensive products, accounting for about 81.5 percent of total imports of manufactures.

An increasing share of exports of labor-intensive products compared with a declining share of imports of the same products provides strong evidence that China is gaining comparative advantage on world markets in labor-intensive products. This can be demonstrated by looking at the changing market shares of these products.

Market shares denote shares of exports and imports of particular groups of commodities in world total export and import shares of the same groups of commodities. The results show that by 1993 China’s share of exports of labor-intensive products accounted for 17.4 percent in world total exports and that it imported only 2.5 percent of these products from the world. China had a slightly higher market share of imports than of exports for capital-intensive products for the same year, and both shares increased very rapidly from a low base in 1978.

Indexes of revealed comparative advantage, which measure the ratios of commodity share of a country to the world average, summarize the changing patterns of trade in China. The results show that China is losing international comparative advantage in both agriculture- and mineral-intensive products while it is gaining comparative advantage substantially in labor-intensive products during the same period. It is noted that China is also gaining a slight comparative advantage in capital-intensive products (Table 2).

Table 3 reports major commodities exported by China from 1965 to 1992. The table supplements Table 2 and lists commodities that rank high as China’s major export items. The most remarkable change over the period is the export of clothing: it increased from 3.12 percent in 1965 to 4.49 percent in 1975, to 13.35 percent in 1985 and up to 20.50 percent in 1992, ranking as the top export item in that year. In comparison with the situation in 1965, several items, mainly agricultural products (such as cereals) and energy-related products (such as petroleum products) disappeared from the list of major export items in 1992 or dropped to a lower position. This evidence also supports the changing patterns of China’s comparative advantage during the period.

Table 3.Ranking of China’s Exports by Share(In percent)
19651975
RankSITC1CommodityShareSITCCommodityShare
165Textile yarn, fabric18.3333Petroleum and products13.80
204Cereals and preparations7.1465Textile yarn, fabric13.60
305Fruit and vegetables5.7404Cereals and preparations8.91
422Oil seeds, nuts, kernels5.4805Fruit and vegetables5.29
529Crude animal, vegetable matter4.9884Clothing4.49
626Textile fibers4.6289Misc. manufactured goods4.04
700Live animals4.2726Textile fibers3.62
867Iron and steel3.9501Meat and preparations3.46
984Clothing3.1200Live animals3.41
1089Misc. manufactured goods3.1029Crude animal, vegetable matter2.95
1166Nonmetal minerals2.9603Fish and preparations2.58
1203Fish and preparations2.7566Nonmetal minerals2.54
1307Coffee, tea, cocoa, spices2.5622Oil seeds, nuts, kernels2.13
1468Nonferrous metals2.0806Sugar, honey2.05
1506Sugar, honey2.0207Coffee, tea, cocoa, spices1.94
1601Meat and preparations1.9469Metal manufactures1.78
1702Dairy products and eggs1.8471Machinery, nonelectrical1.70
1821Undressed hides, skins, furs1.6068Nonferrous metals1.57
1964Paper, paperboard1.4951Chemical elements1.57
2069Metal manufactures1.4872Electrical machinery1.23
Total81.4582.67
Source: International Economic Databank, Australian National University.

Standard International Trade Classification.

Source: International Economic Databank, Australian National University.

Standard International Trade Classification.

Table 4 lists major commodities imported by China from 1970 to 1992, showing that the composition of China’s imports changed substantially during the period. For example, cereal imports ranked at the top as a proportion of total imports in 1965 but were replaced by more value-added manufactured products such as machines in 1992. Imports of other manufactured commodities, particularly those associated with transportation and communication such as motor vehicles, aircraft, and telecommunications equipment, also rose.

Table 4.Ranking of China’s Imports by Share(In percent)
19651975
RankSITC1CommodityShareSITCCommodityShare
104Cereals and preparations25.9467Iron and steel22.75
226Textile fibers12.8371Machinery, nonelectrical14.05
371Machinery, nonelectrical7.7173Transport equipment10.15
406Sugar, honey7.0504Cereals and preparations9.08
567Iron and steel6.7926Textile fibers6.43
651Chemical elements5.7168Nonferrous metals6.29
756Fertilizers5.3656Fertilizers5.74
823Rubber, crude, synthetic5.1351Chemical elements3.77
968Nonferrous metals4.8172Electrical machinery2.99
1065Textile yarn, fabric2.8906Sugar, honey2.77
1172Electrical machinery2.6323Rubber, crude, synthetic2.52
1273Transport equipment1.9969Metal manufactures1.90
1386Instruments, watches, clocks1.8665Textile yarn, fabric1.41
1459Chemicals1.1664Paper, paperboard1.21
1507Coffee, tea, cocoa, spices0.8758Plastic materials1.11
1664Paper, paperboard0.8428Metalliferous ores0.98
1725Pulp and waste paper0.7486Instruments, watches, clocks0.92
1858Plastic materials0.6625Pulp and waste paper0.74
1927Crude fertilizer0.6533Petroleum and products0.66
2053Dyes, tanning0.6407Coffee, tea, cocoa, spices0.51
Total96.2895.99
Source: International Economic Databank, Australian National University.

Standard International Trade Classification.

Source: International Economic Databank, Australian National University.

Standard International Trade Classification.

The figures reported in Tables 3 and 4 not only reflect the changing pattern of trade owing mainly to its convergence with the pattern of resources, but also indicate that China has indeed further integrated its economy with the rest of the world since the beginning of the reform. In other words, China has become more and more dependent on the world market.

Table 5 presents China’s geographic trade structure and reveals how China’s economy has been linked with the rest of the world. The figures show that about half of China’s imports, exports, and total trade are conducted with East Asian economies, including the Association of South East Asian Nations (ASEAN), and about 70 percent of that trade is with Asia-Pacific economies. This clearly indicates that China has strong trade relationships with the Asia-Pacific economies.

Table 5.China’s Geographic Trade Structure(In percent)
Export ShareImport ShareTotal Trade
Partner197019801985199019931970198019851990199319701980198519901993
Newly industrializing economies (NIEs)31.224.533.748.030.91.93.811.839.320.317.114.120.443.825.6
Hong Kong24.622.426.242.924.20.62.911.224.611.513.112.517.134.117.6
Taiwan Province of China1.21.112.80.16.80.7
Korea0.73.10.45.90.64.5
ASEAN5.74.02.72.92.71.22.32.13.73.73.53.22.33.23.2
Japan13.420.722.314.617.332.426.135.712.925.622.523.430.513.821.4
East Asia50.349.358.765.550.835.532.349.655.949.643.240.753.260.950.2
Australia2.11.20.70.71.27.45.42.72.32.14.63.31.91.51.7
North America1.15.89.49.119.97.723.514.913.713.24.314.712.811.316.5
New Zealand and other Pacific0.50.30.20.10.20.30.90.40.20.40.40.60.30.20.3
Asia-Pacific53.856.568.975.572.150.862.167.672.165.352.459.368.173.868.7
Western Europe21.814.39.410.313.929.917.717.216.518.625.716.014.213.316.2
Rest of the world24.429.321.714.214.119.220.215.211.416.121.924.717.712.815.1
World total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Source: International Economic Databank, Australian National University.
Source: International Economic Databank, Australian National University.

The rapid increase in foreign trade and the deepened market integration of the Chinese economy with other countries have changed China’s position in the world economy. Tables 6a and 6b show leading exporters, importers, and merchandise traders in 1980 and 1993. China ranked twenty-fifth, twenty-third, and twenty-fourth in terms of exports, imports, and total trade, respectively, in 1980. In 1993, these rankings were eleventh for exports, imports, and total trade.

Table 6a.Leading Exporters, Importers, and Merchandise Traders, 1980
CountryExports

(billion

U.S. dollars)
Share

(percent)
CountryImports

(billion

U.S. dollars)
Share

(percent)
CountryTotal

Trade

(billion

U.S. dollars)
Share

(percent)
World2,007.9100.0World2,069.1100.0World4,077.0100.0
United States220.811.0United States257.112.4United States477.911.7
Germany, former Fed. Rep. of192.99.6Germany, former Fed. Rep. of188.09.1Germany, former Fed. Rep. of380.99.3
Japan130.46.5Japan141.36.8Japan271.76.7
France116.05.8France134.96.5France250.96.2
United Kingdom110.15.5United Kingdom115.75.6United Kingdom225.85.5
Saudi Arabia103.45.2Italy99.54.8Italy177.24.4
Italy77.73.9Netherlands78.13.8Netherlands152.03.7
Netherlands73.93.7Belgium-Luxembourg71.83.5Belgium-Luxembourg136.53.4
Canada67.83.4Canada67.13.2Canada134.83.3
Belgium-Luxembourg64.73.2U.S.S.R., former45.82.2Saudi Arabia133.63.3
U.S.S.R., former48.42.4Switzerland36.41.8U.S.S.R., former94.22.3
Iraq31.31.6Spain34.11.7Switzerland66.01.6
Sweden30.91.5Sweden33.41.6Sweden64.31.6
Switzerland29.61.5Saudi Arabia30.21.5Spain54.81.3
Nigeria26.21.3Singapore26.51.3Singapore46.91.2
Libya22.41.1Brazil25.01.2Brazil45.11.1
Australia22.01.1Austria24.41.2Australia44.31.1
Indonesia22.01.1Hong Kong22.41.1Iraq43.81.1
United Arab Emirates21.81.1Australia22.31.1Austria41.91.0
Kuwait20.81.0Korea22.31.1Hong Kong41.71.0
Spain20.71.0Poland21.21.0Nigeria40.71.0
Singapore20.41.0Taiwan Province of China20.21.0Taiwan Province of China40.01.0
Brazil20.11.0China19.81.0Korea39.81.0
Taiwan Province of China19.91.0Mexico19.50.9China39.31.0
China19.51.0Denmark19.40.9Poland38.61.0
Hong Kong19.31.0Norway16.90.8Denmark36.40.9
Table 6b.Leading Exporters, Importers, and Merchandise Traders,1993
CountryExports

(billion

U.S. dollars)
Share

(percent)
CountryImports

(billion

U.S. dollars)
Share

(percent)
CountryTotalTrade

(billion

U.S. dollars)
Share

(percent)
World3,710.1100.0World3,887.4100.0World7,597.5100.0
United States461.612.4United States597.115.4United States1,058.713.9
Germany, former Fed. Rep. of366.29.9Germany, former Fed. Rep. of328.78.5Germany, former Fed. Rep. of694.99.2
Japan362.29.8Japan240.06.2Japan602.27.9
France207.95.6United Kingdom205.15.3France407.85.4
United Kingdom180.44.9France199.95.1United Kingdom385.55.1
Italy164.34.4Canada148.03.8Italy310.24.1
Canada141.63.8Italy145.93.8Canada289.73.8
Hong Kong133.43.6Hong Kong144.83.7Hong Kong278.23.7
Netherlands114.53.1Netherlands132.93.4Netherlands247.53.3
Belgium-Luxembourg97.32.6Belgium-Luxembourg125.43.2Belgium-Luxembourg222.82.9
China91.32.5China91.12.3China182.42.4
Taiwan Province of China88.12.4Korea84.72.2Taiwan Province of China166.32.2
Korea75.12.0Spain82.22.1Korea159.82.1
Singapore71.31.9Singapore81.22.1Singapore152.52.0
Switzerland63.31.7Taiwan Province of China78.22.0Spain145.01.9
Spain62.81.7Mexico65.21.7Switzerland124.11.6
Sweden49.41.3Switzerland60.81.6Mexico112.21.5
Saudi Arabia48.01.3Austria48.71.3Sweden91.71.2
Malaysia (IMF data)47.51.3Australia46.61.2Malaysia (IMF data)89.51.2
Mexico47.01.3Thailand45.41.2Australia89.31.2
Australia42.81.2Sweden42.31.1Austria88.61.2
Source: International Economic Databank, Australian National University.
Source: International Economic Databank, Australian National University.

A rapid expansion of trade requires that China continue to open its markets to products from its trading partners. This is because rapid expansion of trade also causes market saturation, which in turn will lead to severe structural adjustments in many countries of the world.

One solution to this mounting pressure on the world market is to gradually open up China’s domestic market to imports. In fact, “the continued growth of China’s economy and trade in line with its comparative advantage would, of course, also create valuable opportunities for others” (Drysdale and Elek, 1992, p. 13).

As China’s exports have gained international competitiveness, its imports have also increased. Table 7 reports China’s share of total world imports of those commodities (averages for 1987–89 and 1990–92) that constitute major import items for China. Although imports of wheat accounted for only a small proportion of China’s total imports, its share in total world imports was very high. Other commodities of great importance on the world import market are machinery for producing textiles and leather, woven textiles, and iron and steel products. There was a notable increase in the share for aircraft.

Table 7.China’s Share of Selected Major Imports in World Trade(In percent)
SITC1Commodity1987–891990–92
041Wheat, unmilled13.1512.31
512Organic chemicals2.102.02
581Plastic materials4.193.69
651Textile yarn and thread2.423.48
653Woven textiles, noncotton3.165.32
674Iron, steel, plate, sheet8.064.26
714Office machines0.740.67
717Textile, leather, machinery8.038.94
718Machinery for special industries2.762.95
719Machinery, nonelectrical3.733.31
722Electric power machines1.912.11
724Telecommunications equipment3.312.82
729Electrical machinery1.841.81
732Motor vehicles1.381.43
734Aircraft1.662.14
Source: International Economic Databank, Australian National University.

Standard International Trade Classification.

Source: International Economic Databank, Australian National University.

Standard International Trade Classification.

Increases in both its exports and imports have made China more dependent upon the world economy. Table 8 reports import and export dependence ratios of the Chinese economy from 1965 to 1993. Both ratios increased very rapidly, particularly after the reform started in the late 1970s. It is noted that, except for a few years during the mid-1980s, China’s export dependence ratios are higher than its import dependence ratios, indicating the competitiveness of China’s export products on the world market.

19851992
SITCCommodityShareSITCCommodityShare
33Petroleum and products24.7284Clothing20.50
84Clothing13.3589Misc. manufactured goods15.79
65Textile yarn, fabric13.0872Electrical machinery11.12
89Misc. manufactured goods5.5465Textile yarn, fabric7.75
26Textile fibers4.2485Footwear6.74
05Fruit and vegetables3.3183Travel goods, handbags3.84
04Cereals and preparations2.4371Machinery, nonelectrical3.29
51Chemical elements2.3233Petroleum and products2.97
72Electrical machinery1.9486Instruments, watches, clocks2.56
07Coffee, tea, cocoa, spices1.7269Metal manufactures2.23
69Metal manufactures1.7205Fruit and vegetables2.14
83Travel goods, handbags1.6451Chemical elements1.68
29Crude animal, vegetable matter1.6366Nonmetal minerals1.64
22Oil seeds, nuts, kernels1.4803Fish and preparations1.52
03Fish and preparations1.3504Cereals and preparations1.15
85Footwear1.2167Iron and steel1.02
00Live animals1.0873Transport equipment1.00
27Crude fertilizer1.0882Furniture0.98
66Nonmetal minerals1.0629Crude animal, vegetable matter0.87
01Meat and preparations1.0126Textile fibers0.84
85.9189.63
Table 8.Import and Export Dependence Ratios
ImportsExportsGDPImport

Dependence

Ratio
Export

Dependence

Ratio
Year(billion U.S. dollars)(percent)
19651.391.64168.000.820.98
19661.511.91192.250.790.99
19671.501.80180.040.831.00
19681.301.66171.390.760.97
19691.391.82195.740.710.93
19701.671.77233.110.710.76
19711.642.09251.340.650.83
19722.112.70283.380.750.95
19733.874.45346.971.121.28
19745.915.73356.471.661.61
19755.966.30400.661.491.57
19764.686.56372.121.261.76
19775.567.17423.571.311.69
19788.779.12482.721.821.89
197912.6012.54574.022.192.19
198017.0717.48655.472.602.67
198116.3520.66626.982.613.30
198214.6920.66657.442.233.14
198316.4220.95738.412.222.84
198422.8024.87830.452.752.99
198535.6227.93977.813.642.86
198633.6832.59943.123.573.46
198736.6243.16851.464.305.07
198848.2656.09972.894.965.77
198948.9569.671,099.394.456.34
199045.9284.161,156.313.977.28
199158.64106.091,197.874.908.86
199276.80129.251,265.196.0710.22
199397.71146.401,372.737.1210.67
Source: International Economic Databank, Australian National University.
Source: International Economic Databank, Australian National University.

Table 9 provides further evidence of China’s increasing dependence on the world market by presenting the shares of exports in production and of imports in the domestic consumption of textiles, clothing, and leather products. By 1991, China exported more than half of its production of textiles, clothing, and leather products, and imports of the same groups of products became increasingly important to China’s domestic consumption.

Table 9.Trade Dependence of China’s Textile, Clothing, and Leather Industries(In percent)
YearExport/ProductionImport/Consumption
198011.13.0
198519.76.7
199048.816.8
199162.426.5
Source: International Economic Databank, Australian National University.Note: Trade dependence is based on International Standard Industrial Classification (ISIC) 32 (textile, clothing, and leather industries) because production data are not available for ISIC 322.
Source: International Economic Databank, Australian National University.Note: Trade dependence is based on International Standard Industrial Classification (ISIC) 32 (textile, clothing, and leather industries) because production data are not available for ISIC 322.

The results in this section show that China’s trade patterns have indeed conformed more closely to its resource structure, and there has been a dynamic change in China’s comparative advantage (an increasing trend of exporting capital-intensive products) in recent years. This change has some implications for China’s export supply potential.

China’s Export Supply Potential

China’s export supply potential will depend very much upon the following factors: the pace and measurement of further trade liberalization, future trade orientation, changing patterns of dynamic comparative advantage—both internationally and domestically—and conditions on the world market.

The central issue is the pace and measurement of further trade liberalization based on previous reforms. These issues are important in that the implementation of already formulated trade reform measures and the design of future reforms will continue to contribute to trade expansion in China. The problem, however, is that adjustment costs and subsequent changing policy environments will have some impact (both positive and negative) on policy implementation and the reform process. For example, further trade liberalization, particularly in reforming the import system, will lead to greater structural adjustments in industries with a high level of protection and a low level of efficiency. This problem has been complicated by China’s difficulties in reforming its enterprise system. In that sense, the pace of trade liberalization will be very much determined by the pace of reform of the enterprise system, particularly the state sector.

19851992
SITCCommodityShareSITCCommodityShare
71Machinery, nonelectrical18.2171Machinery, nonelectrical17.47
67Iron and steel15.9472Electrical machinery12.34
72Electrical machinery14.0365Textile yarn, fabric10.47
73Transport equipment12.1173Transport equipment9.16
65Textile yarn, fabric5.9867Iron and steel5.52
58Plastic materials3.3158Plastic materials5.35
86Instruments, watches, clocks2.8689Misc. manufactured goods3.93
89Misc. manufactured goods2.8186Instruments, watches, clocks3.34
26Textile fibers2.6933Petroleum and products2.82
68Nonferrous metals2.5651Chemical elements2.35
51Chemical elements2.3826Textile fibers2.35
04Cereals and preparations2.1968Nonferrous metals2.26
56Fertilizers1.3904Cereals and preparations2.10
24Wood lumber and cork1.2764Paper, paperboard1.98
69Metal manufactures1.2761Leather, dressed fur1.57
64Paper, paperboard1.2356Fertilizers1.44
93Special transactions0.9428Metalliferous ores1.37
28Metalliferous ores0.9493Special transactions1.36
23Rubber, crude, synthetic0.7863Wood, cork manufacture1.31
66Nonmetal mineral0.6869Metal manufactures1.22
93.5789.70

One policy suggestion is to let the export sector have a more positive effect on the industrial sector by implementing trade liberalization faster than the overall reform of the enterprise system. This move will enhance the entire reform process in China and will eventually boost further trade liberalization. Therefore, the move helps to create an environment in which economic reform programs and reform of the trade system reinforce each other in order to overcome the constraints on further trade liberalization. The importance of this kind of positive effect (externalities) from the export sector and a strong demonstration effect through more frequent international transactions cannot be underestimated.

When adopting reform measures for further trade liberalization, the Government should also consider the balance between trade liberalization and exchange rate policy. The issue is important because implementing different policies may lead to conflicting results in obtaining gains from trade.7 In future liberalization attempts, “exchange rate policies and anti-inflation programs should be better designed so that they do not lead to overvalued exchange rates and loss of export competitiveness.” In other words, “trade liberalization must also be accompanied by a competitive exchange rate” (Congdon, 1990, p. 241).

Based on the discussion in the section on institutional change, trade reform, and trade patterns (pp. 190–95), one important consideration for the Government in adopting reform measures is to rely mainly on incentive policies or schemes that work through the market mechanism. This is consistent with the argument of market-driven conformity between patterns of trade and resources.

Second, the issue of future trade orientation is related 2to the question of whether it is preferable for a large developing country like China, which has a huge domestic market, to rely heavily on an export-oriented development strategy.8 It can be argued that China is far from realizing its full potential for developing its external economy and will continue to gain from deepening the international integration of its economy for many years to come.9

Third, relationships between factor endowments and trade patterns change over time in a dynamic fashion. These changes, subject to market restraint, create substantial export supply potential. The implication for China of shifting comparative advantage can be discussed in the context of trade and endowment structure in East Asian economies. The structure of factor endowments in East Asian economies has two notable characteristics. One is that rapid increases in capital accumulation were observed in these economies from the 1960s to the 1980s. As Table 10 shows, average annual growth rates of capital stock from 1965 to 1988 in a group of selected Asian economies were much higher than the world average in terms of capital per worker (6.8 percent compared with 3.1 percent). As a result, the capital per worker ranking of most of these economies rose substantially during this period.

Table 10.Capital per Worker Endowments in Selected Countries and Areas
Capital per WorkerAnnual Growth Rate
(U.S. dollars)(percent)
1965Rank1974Rank1988Rank1965–741974–881965–88
Asia
China14744554441,3574215.86.610.1
Hong Kong6,020259,6602520,234225.45.45.4
India4494257143883442.73.23.0
Indonesia36143718422,332397.98.88.4
Israel14,7761619,6651918,096233.2−0.60.9
Japan9,1182022,7951537,071410.73.56.3
Korea1,008393,036359,2212813.08.210.1
Malaysia2,863323,812347,259313.24.74.1
Myanmar8245774517945−0.76.23.4
Philippines1,268381,622391,938412.81.31.9
Singapore4,3922913,8122228,8721413.65.48.5
Taiwan Province of China1,792364,937319,5892711.94.87.6
Thailand645411,278402,062407.93.55.2
Turkey1,342372,311373,582376.23.24.4
North America
Canada19,987821,8811630,369121.02.41.8
Mexico4,576277,101287,351305.00.22.1
Panama4,127307,014296,107326.1−0.91.7
United States19,8151021,3181724,068180.80.90.8
South America
Argentina10,8741913,1472310,501262.1−1.6−0.1
Brazil2,547344,174334,983345.61.33.0
Chile5,049266,301305,187332.5−1.40.1
Colombia2,689332,825363,896360.52.31.6
Peru6,074244,681323,96435−2.8−1.2−1.8
Africa
Egypt85140992413,023381.78.35.7
Ghana2,231351,709381,01343−2.8−3.7−3.3
Europe
Austria14,0021826,3331232,555117.31.53.7
Belgium-Luxembourg16,7211329,743933,84286.60.93.1
Denmark20,805732,108827,739164.9−1.01.2
Finland17,8201228,2171033,540105.21.22.8
France19,1701132,114735,13865.90.62.7
Germany, former Fed. Rep. of22,507632,209634,75274.10.51.9
Greece4,4882810,9112411,8462510.40.64.3
Iceland27,044535,011535,70752.90.11.2
Ireland8,3072216,0052120,626217.61.84.0
Italy16,6171425,2891328,506154.80.92.3
Netherlands28,855337,444433,57992.9−0.80.7
Norway35,307244,305250,31024.20.92.2
Portugal4,119318,704279,188298.70.43.5
Spain8,5322118,8082020,796209.20.73.9
Sweden27,217440,466339,59834.5−0.11.6
Switzerland36,447145,869154,02412.61.21.7
United Kingdom14,5341720,0831821,814193.70.61.8
Yugoslavia, former6,205238,8192615,120244.03.93.9
Oceania
Australia19,939927,2231129,067133.50.51.7
New Zealand15,2911523,8981424,617175.10.22.1
Source: Song (1993).
Source: Song (1993).

The other characteristic is that, as shown in Table 11, the average annual growth rates for skilled labor in these economies during the period were almost the same as world average annual growth rates in terms of the share of skilled labor in total labor (3.6 percent compared with 3 percent). As a result, with respect to skilled labor as a percentage of total labor, the ranking of about half of the Asian economies in 1988 had worsened compared with 1965, while the remaining economies had increased their ranking only slightly. (China, Hong Kong, and Taiwan Province of China were the exceptions.) These data may indicate that these economies were on average doing a better job of accumulating physical capital than of producing highly skilled labor from 1965 to 1988.

Table 11.Skilled Labor in Selected Countries and Areas
Percent of

Total Labor
Annual Growth Rate

(percent)
Country1965Rank1974Rank1988Rank1965–741974–881965–88
Asia
China0.3451.2455.13918.010.913.6
Hong Kong5.1235.3327.4310.42.41.6
India1.7432.7422.7445.30.02.0
Indonesia2.2422.2442.9430.02.01.2
Israel11.4219.0222.835.81.33.1
Japan5.5217.82010.3233.92.02.8
Korea2.6383.2416.3372.34.93.9
Malaysia4.8254.5357.629−0.73.82.0
Myanmar2.2414.0382.4456.9−3.60.4
Philippines3.3345.4315.1385.6−0.41.9
Singapore4.72610.21511.1219.00.63.8
Taiwan Province of China4.6274.9336.9340.72.41.8
Thailand1.3442.6432.9428.00.83.5
Turkey2.2394.0374.7406.91.23.4
North America
Canada10.6413.7816.672.91.42.0
Mexico3.6326.2277.3326.21.23.1
Panama4.5286.82610.3244.73.03.7
United States10.8313.9715.3102.80.71.5
South America
Argentina6.1197.5227.5302.30.9
Brazil3.1364.8346.9355.02.63.5
Chile4.9245.6307.1331.51.71.6
Colombia3.9314.5369.7261.67.14.9
Peru3.3357.4247.6289.40.23.7
Africa
Egypt4.4296.12811.3193.74.54.2
Ghana2.2403.7394.0415.90.62.6
Europe
Austria6.8178.71913.7162.83.33.1
Belgium-Luxembourg8.01317.3315.798.9−0.73.0
Denmark9.5712.21021.452.84.13.6
Finland8.21215.0523.126.93.14.6
France9.11011.41214.1132.51.51.9
Germany, former Fed. Rep. of7.6169.81714.0142.92.62.7
Greece3.4335.72911.7175.95.35.5
Iceland6.41811.11411.1206.32.4
Ireland7.8159.31814.3122.03.12.7
Italy5.3227.32511.5183.63.33.4
Netherlands9.2913.3921.544.23.53.8
Norway8.01416.3421.368.21.94.3
Portugal2.7373.6406.7363.24.44.0
Spain4.1307.4238.5276.81.03.2
Sweden15.1122.1127.314.31.52.6
Switzerland8.61112.11115.1113.91.62.5
United Kingdom9.6611.11315.981.62.62.2
Yugoslavia, former5.6207.6219.9253.41.92.5
Oceania
Australia9.3810.11610.6220.90.30.6
New Zealand10.2514.1614.0153.7−0.11.4
Source: Song (1993).
Source: Song (1993).

How have the resource patterns described above affected the development of trade, particularly in manufactured products, in these economies? The question can be approached using the three propositions most commonly put forward with respect to shifts in comparative advantage. These propositions are based on changes in commonly used but broadly defined capital-labor ratios as indicators of changes in resource supplies.10

The first proposition is that an increase in the ratio of capital to labor will lead to an increase in the size of the manufacturing sector as a proportion of the total economy. The second proposition is that a further increase in this ratio will enhance production of more capital-intensive products within the manufacturing sector. The third proposition is that an increase in the ratio of skilled labor to workers, together with an increase in the capital-labor ratio, will be conducive to more sophisticated manufacturing production with greater value added.

In a dynamic context, these three propositions can be considered as three stages of structural change in the development process (overlapping between stages may exist), and they can thus be used to examine trade development in these Asian economies based on the characteristics of their resource patterns.

Rapid increases in capital-labor ratios from the 1960s to the 1980s led to a continuous expansion of the manufacturing sectors of these Asian economies. In most cases, expansion took place in sectors where labor-intensive manufactured goods were being produced, partly because “the process of capital accumulation and rising per capita incomes forces changes in the industrial composition of manufacturing activity through its effect on the wage level” (Garnaut and Anderson, 1980, p. 386).

The impact of changes in resource supplies on trade patterns of manufactured products in these economies can be seen in the growth rate of exports. Table 10 lists the average annual growth rates of GDP, total exports, and exports of manufactures in a group of selected Asian economies and in the United States for the periods 1970–80 and 1980–90.

The table shows that annual real growth rates of manufactured exports in these economies were considerably higher than the growth rates of total exports throughout the two periods, providing further evidence of the expansion of the manufacturing sector in these Asian economies. It has been observed that the more advanced an economy becomes, the narrower the gap between the growth rate of its total exports and that of its manufactured exports. Thus, the potential for revealed comparative advantage (gaining in market share) in manufactured products is relatively large for less developed economies. Fulfillment of this potential and the structural changes that accompany this process will have important implications for the Chinese economy. “Over time, as the per worker endowment of capital increases, the comparative advantage within the manufacturing sector will shift towards more capital-intensive activities” (Anderson and Smith, 1981, p. 296).

All except Japan ranked low in terms of capital per worker in 1965 (Table 10). In 1974, Korea and Taiwan Province of China had improved their rankings of capital per worker, and by 1980, both had become net exporters of capital-intensive manufactured products. Taiwan Province of China’s progress was even more obvious in 1988, by which time it had become a net exporter of labor-intensive, capital-intensive manufactured products and machinery after rapidly improving its capital per worker ranking (Song, 1993, chap. 4).

The third proposition is that, within its manufacturing sector, a country tends to specialize in the production and export of more sophisticated manufactured products with high value added, such as machinery and chemicals, and that this is mainly attributable to an increase in the country’s skilled labor endowment together with an increase in its capital-labor ratio. This proposition in the context of East Asian economies also has important implications for China’s export supply potential.

Relatively high growth rates in physical capital and semiskilled rather than skilled labor indicate that much of the change in trade structure (reflected in rapid increases in labor-intensive and capital-intensive manufactured products) in these economies during the period under study was driven by the accumulation of physical capital and semiskilled labor. This is reflected in the changing structure of trade in manufactured products, particularly machinery and chemicals, in these economies and suggests the huge potential these economies can realize by increasing skilled labor as physical capital increases.

Table 12 presents manufactured commodity shares for the Asia-Pacific economies. The figures show that China almost doubled its manufactured commodity share from 1965 to 1992. The estimated share in 1992 was still lower than that of Hong Kong, Japan, Korea, and Taiwan Province of China but was much higher than that of many economies in the region and also above the average for the countries of the Asia-Pacific Economic Cooperation (APEC).

Table 12.Manufactured Commodity Shares of Total Exports(In percent)
Country19651970198019901992
APEC countries155.3063.8064.4078.3280.70
Australia14.5518.8726.2636.1535.51
Brunei Darussalam0.020.070.0113.5711.25
Canada36.6851.2148.4863.6564.18
Chile4.124.449.7012.6415.24
China (estimated)45.7945.0748.7280.0185.42
China (official)73.4679.25
Hong Kong93.5695.9196.5195.8095.29
Indonesia3.701.412.4335.4647.53
Japan91.1493.2995.7497.4497.53
Korea59.4376.5789.9193.5892.89
Malaysia6.047.4019.0454.1664.96
Mexico16.4232.5328.0843.5152.43
New Zealand5.4211.0020.1824.9326.54
Papua New Guinea9.574.773.3211.1612.03
Philippines5.667.6036.8368.8072.96
Singapore34.2030.5053.9572.8078.04
Taiwan Province of China41.4776.1087.9292.6591.94
Thailand3.058.0128.0864.3267.92
United States65.4170.1567.7978.1480.45
Source: International Economic Databank, Australian National University.

Asia-Pacific Economic Cooperation.

Source: International Economic Databank, Australian National University.

Asia-Pacific Economic Cooperation.

Further industrialization requires the continual injection of large quantities of capital into an economy. Thus, capital flows on a larger scale and in various forms can be anticipated within the Asian economies. A combination of highly skilled labor and physical capital will definitely lead to production of highly sophisticated products. This in turn will generate demand for a highly skilled labor force along the path of further industrialization in these Asian economies.

If the issues of market competition, enhancing international and regional capital flows, and facilitating the movement of skilled labor in the region are resolved, shifts in comparative advantage in the Asian region can be facilitated in such a way that its resources are used most efficiently. A natural consequence of this would be that the degree of integration in the region would increase.

In addition, the accumulation of human capital in these economies lagged behind the accumulation of physical capital during the period under study. Therefore, there is a huge potential for the East Asian economies to gain more competitive edge by producing more sophisticated manufactured products through greater investment in human capital development through education, training, and diffusion of knowledge and technological know-how. A more efficient use of their labor force, particularly the skilled labor force, through better management and encouragement of labor flows, will also help these economies gain more competitive edge.

These changes, based on the shift of comparative advantage in an international context, are particularly relevant for China. As a latecomer and one of the world’s most rapidly developing economies, China is accumulating both physical capital and human capital on a large scale, which provide great opportunities for China to increase its export supplies not only of labor-intensive but also of capital-intensive products on the world market.

However, market issues remain. As Rana (1990) says, “shifts in comparative advantage are … not smooth and could involve considerable frictions in adjustment” (p. 244). Market constraints on the development process have been aggravated by structural adjustment in industrial countries and could lead to a resurgence of trade protectionism. Any such movement would undoubtedly affect the development process. As economies become more integrated, the sustained growth of the world economy depends very much upon whether countries can properly settle this market issue.

China’s economic reform in general and the changes in trade policy in particular since the beginning of the reform process in the late 1970s have made China’s patterns of trade conform more closely and dynamically to its patterns of resource endowment. The challenge is, however, that, owing to the size of China’s economy and the increasing scale of its foreign trade, both China and its trading partners have to cope with China’s dynamic realization of its comparative advantage. The issue of China’s membership in the recently formed World Trade Organization (WTO) becomes important in this context.

In a domestic context, endowment structure and wide regional differences in terms of level of development provide China with much leeway to expand its trade activities. There exists a ladder of comparative advantage owing to these regional and structural differences within China, which leads to a shift of comparative advantage domestically. The shift can be expected to last for quite a long time because of wide regional differences in terms of endowment structure and level of development. When shifts of comparative advantage take place domestically, they demonstrate different patterns of comparative advantage within a single economy and therefore indicate a wide scope for developing trade. This will overcome the economy’s growth limits as set out in the traditional theory of comparative advantage.

The size of an economy makes a considerable difference in terms of domestic shifts of comparative advantage, because large countries tend to have different factor endowments and levels of development across regions. There are also some benefits in these shifts of comparative advantage within a country. For example, domestic trade barriers are relatively easier to overcome than those between countries.

One challenge posed by the large size of an economy, however, is that domestic shifts of comparative advantage like those in the international setting require a well-developed domestic market. In other words, shifts in comparative advantage are contingent on a market foundation for defining the relationship between patterns of trade and resource endowment. In this sense, the current market reform in China will enhance both types of shifts of comparative advantage, widening the scope for trade development in China. Domestic shifts in comparative advantage will not compromise China’s external trade as long as such shifts do not lead to an expansion of import-competing industries relative to the country’s export sector.

Concluding Remarks

China has handled the sequencing and timing of its reform program well. The whole reform process is heading in the right direction, namely, toward gradual trade liberalization and reform of the economic system. Market-oriented institutional change raises the degree of marketization of the economy; marketization causes a convergence of the pattern of trade and resource endowment, thereby generating trade expansion. In a transition economy, marketization has differential effects on the export sector and nonexport sectors (owing to a quicker response in the export sector to the changing incentive scheme resulting from market-oriented reform measures), causing export expansion to contribute more to general economic growth. A dynamic shift of comparative advantage both internationally and domestically raises China’s prospects for further increasing its export supplies and enhancing the contribution of export expansion to economic growth in China. This historical process started in the late 1970s, and its potential will continue to be realized for many years to come.

Future studies could focus on a more detailed analysis of policy-induced structural changes that lead to trade expansion and on theoretical explanations for, and the character of, shifts in comparative advantage in a domestic setting.

References

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Howe and Walker (1989) conducted a documentary survey based on “The Role of China’s Import Trade During the First Five-Year Plan” by Lu Shiguang and Huang Junting, in which the roles of importing and exporting in state planning under a centrally planned economy system, with a particular emphasis on their role in overall and sectoral balances, were discussed.

A typical example of the impact of marketization on economic and trading activities is the development of township and village enterprises (TVEs) in China. Subject to competition from both inside and outside, the expansion of TVEs has been accompanied by the development of both the product and the factor market within the traditional sector of the economy. As a result, the shares of TVEs in both GDP and exports have increased rapidly. For example, exports from TVEs increased from $8 billion in 1988 to $40 billion in 1994, which accounts for about one-third of China’s total exports (People’s Daily, overseas edition, May 6, 1995). This example illustrates that the direct gains from trade obtainable by bringing underutilized resources from the subsistence sector into export production offer a more convincing explanation of their growth than the conventional gains in terms of an increase in the static allocative efficiency of the “given” and fully employed resources (Myint, 1984, p. 235).

However, these indirect effects are not theoretically demonstrable in the same way as the direct static gains from trade and are not conducive to accurate measurement. But they are based on widely acceptable general presumptions that are, at least in principle, capable of empirical verification (Myint, 1984, p. 238).

A positive statistical association between the expansion of exports and the growth of national incomes among the developing countries does not tell us much about causal relationships (Myint, 1984, p. 223). However, when the relationship between export growth and economic growth is examined in the context of institutional changes for a transition economy, which can be treated as a third factor, it is likely that exports will have some positive impact on economic growth because the export sector has to respond more quickly to market pressure, leading generally to a higher growth rate than the one for the overall economy.

Some studies treat the first two stages of reform as one, for example, Wu (1992). Summaries of the reform of the trade system in China can also be found in Li (1992) and Zhang (1993).

Table 3.16 in Song (1993) provides world resource shares in selected countries. It shows that China’s share of capital, skilled labor, and semiskilled labor increased dramatically, while its share of unskilled labor and arable land decreased. Zhang (1993) also provides evidence of changing resource patterns in China.

Sodersten and Reed use Chile as an example of a country in which “a determined program of trade liberalization yielded dramatic gains, but where the gains were largely lost by an inappropriate exchange rate policy” (1994, p. 415).

See Lau (1994) for further discussion of this issue.

This viewpoint is supported by the evidence of the changing comparative advantage reported in the section on the convergence of trade and resource patterns (pp. 199–201).

See Song (1993) for a more detailed discussion.

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