China Plays a Constructive Role in the Dynamic Growth of the Asian and Pacific Economies
Li Zhongzhou
Trilateral Forum on US-China-Japan Economic Cooperation in Promoting the Liberalization of Trade and Investment in Asia-Pacific Region
University of California, Berkeley
November11-12
This paper attempts to briefly illustrate the constructive role China can play in promoting the dynamic economic growth in Asia-Pacific economies in a harmonious, cooperative trilateral relations between China, the United States and Japan.
I. Constant economic reform and its impact on the Asian Pacific economies
The open policy and economic reform launched in 1978 marked a fundamental shift of China’s economic thanking to a favorable attitude towards international division of labor, shifting emphasis on self-sufficient internal growth towards a more outward-looking growth pattern. The change of economic strategy is based on the assumption that greater integration with the world economy would accelerate domestic economic growth by allowing China to build upon its comparative advantage in international trade. The participation in the multilateral trading system based on the principle of unconditional most-favored-nation treatment could provide China with an opportunity to allocate its resources in an optimal manner while making its moderate contribution to the expansion of world trade. In order to ensure smooth integration with the world economy without causing unnecessary disruption in the development process , a progressive approach was adopted in the economic reform. It began with the rural sector and was followed by much more complex full-fledged urban reform. The ultimate goal is to complete the transition from a centrally-planned economy to a market economic system.
The transition involved a complex structural adjustment relating to the reform of the planning system, the pricing system, the taxation system, corporatization of the state-owned enterprises, the establishment of an entirely new social security system (to relieve the state-owned enterprises of the security and welfare burden) and the liberalization of the trading system, etc. This is a typical systemic engineering normally requiring several decades to take shape. It causes fundamental change of life for the whole population. At times, the adjustment is extremely hard particularly in time of high inflation and massive layout arising from industrial adjustment. It is still painful process for a large segment of the population. There are about ten million people out of jobs without an effective social security system. Fortunately, we have so far managed to handle it successfully. The open policy and reform has brought about an average 9.9% of GDP growth for the past 19 years with personal consumption increasing by 7.4% annually. The rapid GDP growth quickly proliferated in the world economy particularly the Asian and Pacific region. This is reflected in the rapid expansion of the external sector. By the end of 1996,consolidated utilization of foreign loans and credits reached US$ 175 billion (about half of it used for infrastructure projects). Consolidated foreign direct investment (FDI) is US$177 billion, and import and export trade reached US$289.9 billion. China’s economic growth is inextricably linked with the Asian and Pacific region. It has played a constructive role in the growth of the APEC economies. APEC member economies are China’s major trading partners accounting for more than 73% of China’s total trade of US$280.9 billion (1995).
The top five trading partners are Japan, Hong Kong, the United States, Taiwan Province and the Republic of Korea. APEC is also the main source of foreign direct investment accounting for 76% of the US$36.62 billion inward investment for 1995.Hong Kong alone accounts for 43% of foreign direct investment. More than 2 million people in south China are engaged in production activities for Hong Kong business. According to WTO annual report of 1996, Hong Kong imported US$196.1 billion in 1995 of which only US$52.1 billion is retained for Hong Kong consumption. A major proportion of the US$134 billion goes to the mainland of China. Hong Kong economy is closely integrated with the mainland economy.
The United States Administration has missed no opportunity in emphasizing U.S. economic interests in Hong Kong on the eve of its return to China. China loses no time in announcing that it would protect legitimate economic interests of foreign countries in Hong Kong after 1997. China has vital interests in ensuring the prosperity of Hong Kong and Hong Kong’s prosperity hinges on fast growth of the Chinese economy. China should thank American politicians for keeping on reminding China of the need to maintain Hong Kong’s prosperity. China’s own interests require us to do so.
Certainly, China shares common interests with Japan and the United States in maintaining dynamic growth of the APEC region. China’s potentials for growth as a developing economy is far from being exhausted. China will continue to make efforts to make contribution to the dynamic growth of the APEC economies. In the coming four years till the end of this century, China envisages to achieve an average 8% annual GDP growth. As the economy grows in magnitude, growth rate will fall hopefully to around 7% for the first decade of the next century. In other words, China will continue to be an important growth factor for the APEC region. The external sector has already played a very significant role in the national economy. Import and export trade together is equivalent to some 40% of GDP. Although the method of comparison has been questioned, it doesn’t change the basic fact that foreign trade has strong bearing on the national economy. Import and export trade is envisaged to reach US$400 billion by the year 2000. In other words, for the coming four years, China will create a total demand of some US$700 billion. for imports.
To encourage foreign investment is one of the cornerstone of China’s open policy. By the end of 1996, China has absorbed a cumulative foreign direct investment of US$177 billion. Foreign investment accounts for 17% of total domestic investment. The Chinese Government has undertaken to further improved investment environment by guaranteeing profit repatriation(already significantly facilitated by convertibility of RMB), accelerate law-making, enhance policy transparency and administrative efficiency. In keeping with the national focus on infrastructure construction, the government will continue to use foreign loans and credits as well as encourage foreign investment on infrastructure projects.
The service sector assume rapidly increasing importance as the economy grows in size. Great efforts are being made to build a regulatory system to get prepared for further multilateral negotiations on trade in services.
China, Japan and the United States will substantially benefit from dynamic growth of the APEC economies. Previous paragraphs describe the constructive role China could play in promoting APEC economic growth. Appropriate policy by Japan and the United States could interact with each other to create the momentum of growth.
Japan is China’s most important trading partner except Hong Kong. For the period of 1991-1995, China’s import and export trade with Japan was US$190 billion, accounting for 18.74% of China’s global trade during the same period. China’s export to Japan was US$87.76 billion accounting for 16.93%. In the import scene, Japan took 20.62%, amounting to US$102.29 billion. Given the Complementality of the two economies and the geographical vicinity, there is still large potential for further trade growth. Japan can take on more goods from China and can also create greater demand by investing more in China. Japan’s share in China’s foreign investment has actually dropped sharply from 32.69% for 1986-1990 to 11.27% for the period of 1991-1995. Protectionist pressure in the Japanese domestic industry such as textiles and clothing may create problem for bilateral trade relations. The two governments need to work together to find appropriate solution to promote both trade and investment.
Economic and trade relations between the United States and China has the largest untapped potentials. Given the high degree of Complementality between the United States as a highly developed industrialized country and China as a fast growing developing country, there is no conflict of interests. China’s major exports to the United States are labor-intensive products such as textiles and clothing, footwear and other light industrial products which the United States no longer produce. China imports a wide range of products from the United States. Large items includes wheat, chemical fertilizer, civil aircrafts, industrial equipment, etc. At present, China is the top buyer of American wheat as well as a major buyer of American civil aircrafts. Up to date, China has purchased 308 crafts amounting to US$8.72 billion.
The United States is also one of the major sources of foreign investment. About 100 out of the 500 top American enterprises are investing in China. Five American banks have established 8 branches in China. Out of the six foreign insurance companies approved by the Chinese Government to open business, three of them are American firms.
China-US trade relations started from scratch in 1976 by signing the first bilateral trade agreement in which both parties mutually granted most-favored-nation treatment. That agreement ushered in a period of expansion of bilateral trade with an average 18% growth rate. The United States quickly become China’s third largest trading partners after Hong Kong and Japan. Obviously, constructive bilateral relation is the basis for expansion of bilateral trade. Unfortunately, recent political debates in the United States have distorted the actual constructive bilateral economic and trade relations and dramatized the so-called "threat" of Chinese economic growth. The fundamental MFN principle prevailing in international trade is labeled as "privilege" granted to China. Extremist group advocated for trade sanction. Trade will occur only when both sides benefit from it. The withdrawal of MFN is likely to inflict a destructive impact on the dynamic growth of the whole APEC region. Processing trade is a major component of China’s trade accounting for 55.8% of total trade. The withdrawal of MFN will seriously hurt suppliers of intermediate goods and foreign investment enterprises engaged in processing in China including many American enterprises such as NIKE. The Chinese Government and the US Administration are working together to defuse explosive issue. It is important for the academics and the administration to explore the true story of the most touching issue of trade deficit that caused so much emotion in the United States. A joint expert group consisting of Chinese and American statistical experts was established to investigate the issue. The group discovered three aspects that divide the two parties.
First, US imports statistics overstated imports from China by omitting value-added in further processing by third parties. The added value ranged from 40% to 100%, but still counted as Chinese Goods without discounting the added value. According to US data, only 20% of Chinese goods imported into the United States is directly delivered by China.
Secondly, US exports statistics omitted transshipment through Hong Kong to China, the value is around US$2.3 billion (1993).
Thirdly, problems also arise from rules of origin which needs to be further investigated.
Analysis based on the first two factors revealed that US trade deficit has been exaggerated by at least 60%. Confrontation touched off by emotion based on inaccurate information could mislead us to overlook the real mutual interests of a constructive relation. Both parties should discourage emotional debates and carefully look into the areas where common interests lie. The United States should not lose sight of the fact that China is the fastest growing market for the United States, best places for American investment and direct export to China alone create at least 300,000 jobs for the United States. China should bear in mind that the United States is the most important market for Chinese goods, major source of foreign investment and supplier of high technology badly needed for economic development. The trade balance issue could be resolved constructively through friendly consultations.
China already undertakes to liberalize market access on 3 fronts, namely, WTO concession, APEC individual action plan and unilateral measures taken as part of the overall economic reform program. The Chinese Government took another major steps in market access liberalization and made autonomous tariff reduction covering 4,874 tariff items. This represents an average 26% reduction. As a result, the average tariff level has dropped from 23% to 17%, a level very close to our committed target of 15% by the year 2000. China has done its utmost within its ability and will continue to do so. The United States may need to make its own efforts to increase exports to China. The most important thing to do is to resolve the uncertainty of US-China trade relations, lift export restrictions on non-military technology and equipment, enhance competitiveness in competition with Japan and European enterprises, permit American enterprises to participate in public tenders for infrastructure projects and provide export financing generally available for other countries.
II. China’s approach to the liberalization of trade and investment.
As explained in Section I, China adopts a progressive approach to economic reform in the light of China’s special conditions. It is practical and pragmatic approach which is also applicable in the liberalization of trade and investment.
The objective of development strategy is to achieve high, sustainable, low-inflationary economic growth by full utilization of internal and external financial resources as well as the internal and external markets. The open policy adopted in 1978 has resulted in rapid development of the external sector. By any standard, the external sector is already very large in proportion to the national economy. Total value of imports and exports is equal to around 40% of the GDP. Foreign investment accounts for 17% of total national investment. Foreign investment enterprises take 47% of import and export trade. This suggests that the Chinese economy is already highly integrated with the world economy and will continue to move toward even greater degree of integration. Depression of the world economy will have immediate impact on the Chinese economy and sharp decline of China’s dynamic growth will in turn inflict heavy loss on its partners particularly in the APEC region. China shares common interests with APEC economies to maintain dynamic growth in the region.
As demonstrated in the above section, China’s main exports are low value-added labor-intensive products and more than 50% are simply processed products with 10-20% value-added. Our industrialized partners no longer produce such products or maintain production at high cost through protection. China’s main imports are high value-added industrial equipment, technology and food grains. This complementary pattern of trade is a win-win game based on comparative advantage.
However, this pattern of trade now faces a danger of being short-circuited by protectionist measures such as unilateral restrictions, discriminatory anti-dumping actions, biased rules of origin taken by China’s industrial partners. Take textiles and clothing for example, China has been downgraded from first to third biggest supplier in the US market. At the insistence of the United States, new agreement expanding quota restriction coverage and reducing growth rate of existing quotas was signed. The US side insisted on putting pure silk products on quota restrictions even though the United States has no domestic silk production to be injured. The only result is increased cost for consumers. Such protectionist measures always cause chain reaction. The European Union wanted similar agreement by claiming MFN treatment. Japan threatens to impose unilateral quota for the first time for fear of trade diversion as a result of US and European restrictions. This has been done when the Uruguay Round Agreement on Textiles and clothing to phase out all quota restrictions within ten years has come into effect. If this tendency continues, China’s liberalization efforts may be bounced back as its comparative advantage is dented by protectionist measures. It should also be recognized that the globalization of production has blurred the traditional country-to-country division of labor. Restriction on a product produced in one country may affect one or several other countries. For example, US footwear manufacturers are hurt by EU quota restrictions on Chinese footwear.
China has no intention to provide permanent protection for sun-set industries. The basic objective of protection is to give infant industries adequate time to achieve scale of production to allow them to enter into international competition. The ultimate goal is to upgrade the industries rather than insulate them forever from international competition.
Questions have been raised about China’s protection of the auto industry. Three factors have to be borne in mind. First, the world auto market has been carved up by intra-firm transaction and governmental market sharing arrangements. China could emerge as a new competitive market. Auto producers are teaming up for manufacturing in China. There is likely to be healthy competition. Secondly, auto production is globalized. The Chinese auto industry to emerge will be multinational ventures with benefit-sharing. Thirdly, auto industry is regarded as a pillar industry which has broad linkage effects proliferating into the steel, glass, paints, motors, road constructions and auto services. It is not a question of protection, but a question of development.
China favors multilateralism and support regional cooperation which is consistent with multilateral rules. China does not wish to see regional cooperation arrangements drifting into exclusive trading blocs, because that would be detrimental to China’s full-fledged open policy and her efforts to diversify her trade relations. China has actively participated in the APEC liberalization of trade and investment, and reiterated her emphasis on unconditional MFN. This is the fundamental principle of international trade for half a century. The United States still has reservation on this principle. APEC liberalization will not be smooth-going short of strict observation of this principle.
China views WTO membership as an effective instrument to promote integration with the world economy. WTO provides a comprehensive framework of rights and obligations for all members. China is ready to take this framework as the basis for economic reform. China has already accepted the Uruguay Round package by signing the final document in Marrakesh. The remaining issue is to reach agreement on market access concessions. The major trading partners take advantage of the negotiations to demand China to pay a high price which China consider to be beyond the level of her economic development. There is also the outstanding controversy over the major trading partners’ insistence on having provisions permitting WTO members to apply trade remedy measures beyond what is provided for in the existing legal instruments of WTO. China does not accept such discriminatory protectionist provisions.
III. System Friction and Level Playing Field
The world economy consists of diversified economic systems and divergent level of economic development . There is no single model which is universally applicable for all countries. If each of our country carry out trade only by our own system, then there is a real system friction. We need a common denominator to regulate our trade relations. The World Trade Organization notwithstanding all its inequality and imperfection, has been accepted as the common denominator for countries to observe in the conduct of international trade. While recognizing the marked improvement of the dispute settlement procedures, one should not take for granted that the WTO can in all cases guarantee fair play and provides for level playing field in international competition. To large extent, economic power is still the rule in rule-making. Small economies can in no way prevent things from happening which may cause harms to their economic interests. Late comers are normally asked to undertake more obligations than existing members. A higher entrance fee for late comers. China has taken the position that it will do its utmost to make greater market access concession to the maximum extent possible, but will not accept discriminatory rules inconsistent with existing WTO legal instruments. All major trading partners of China including the United States and Japan have in one way or another maintain discriminatory trade measures against China. Accession to the WTO will of course require China to make radical trade policy and system adjustment. It also requires China’s trading partners to eliminate discriminatory measures against China. We are aware that vested interests strongly resist such policy adjustment. That is the background behind the demand for trade remedy clauses to be included in the future Protocol of Accession. China’s accession is actually left at the mercy of its major trading partners. Top Chinese leaders have made it clear that China wants to be part of the multilateral trading system, but will not sacrifice its fundamental economic interests in order to accede to the WTO. Within WTO, China has an important role to play in maintaining sustainable, dynamic economic growth in the Asian and Pacific region, as well as strengthening the multilateral trading system. China has come to terms with Japan on the accession, but has yet to reach common understanding with the United States.
The US Administration’s position on China’s accession to the WTO has been heavily influenced by the emotional reaction to the exaggerated trade deficit in goods, overlooking the substantial benefits the United States has gained in the overall positive economic and trade relations. This relation is a dynamic one in nature. It has served to accelerate the process of structural reform in both countries. It is inappropriate to focus only on the imbalance on trade in goods. There is a lot more positive elements to talk about in our bilateral trade and economic relations. There is only a temporary balance in China’s favor and only in goods. The United States has surplus in services. The United States began to have deficits on trade in goods in 1972 and had never regained surplus ever since then. Deficits in goods is compensated by surplus in services. In 1996,the United States had a record high trade surplus of US$72.6 billion in services, offsetting 40% of the trade deficits in goods(CSI Reports-The Service Economy by Joseph P. Quinlan). It is a dynamic structural adjustment in US interests. It reflects the continuous upgrading of the US economy. It means more white collar jobs, less blue collar jobs. The US economy is in extremely good shapes with a strong Dollar, comfortable growth rate, low inflation and low unemployment.
For China, the expansion of the external sector and the reform and open policy are interacting with each other. Without rapid growth of exports , there would have been no rapid expansion of imports (five folds between 19 and 1996). Without substantial increase of foreign exchange reserves, we would have not been able to abolish foreign exchange certificate, multiple exchange rate and foreign exchange retention scheme. And we would have not been able to achieve the goal of RMB convertibility on current account so soon. Probably, there would have had not been so many American banks established in China.
China-US bilateral relation should be assessed from a long term perspective and broader framework. The two governments should work closely to avert disruption of this constructive relationship by emotional debate on particular issue such as trade deficits in goods. We do not underestimate the problem, but it should be examined on a economy -wide basis, not on sectoral reciprocity.
With the rapid advance of modern technology and profound structural changes in the world economy, many of the traditional concepts such as "national treatment", "reciprocity", "asymmetry" , "fair trade" have to change. All these concepts were developed on the basis of international movement of goods with relative static state of factors of production. Now all factors of production have become active actors of the world economy moving across border extensively. Indulgence in sectoral balance by argument of reciprocity, asymmetry or fair trade only delay the dynamic process of structural adjustment of the world economy. It does not make sense to talk about asymmetry in the labor-intensive sector when the major industrialized countries have actually monopolized the high technology and service sectors.
The two countries should work together to narrow the gap by way of positive balance, in other word by expanding trade to grow out of the imbalance on an overall basis. China on its part , has been undergoing drastic economic reform and has incessantly taken measures to facilitate the transition toward a market economy system. In spite of high unemployment of more than ten million, China has made 4 rounds of autonomous tariff reduction which effectively brought down the simple average tariff rate by more than 60%. Most of the non-tariff measures have been eliminated, the remaining will be phased out in the framework of WTO negotiations. China has also substantially liberalized its foreign exchange regime by abolishing the exchange allocation system, multiple exchange rate and has achieved the goal of current account convertibility, completing the transition from IMF Article XIV to Article VIII within an unprecedented short period. However, US trade officials continue to assert that the widening trade gap is attributable to protectionist measures by China. Such assertion gives the business community a wrong message to scare them away from the Chinese market.. China is in a process of dynamic, liberal reform, moving rapidly towards globalization. As mentioned in previous paragraphs, foreign investment enterprises account for 47% of China’s imports and exports trade, and 17% of China’s domestic investment. Sustainable, dynamic economic growth is no longer a mere national pride of China, but a major contribution to regional economic growth for which all three of our countries share common responsibility. Many in the United States fail to observe this fast evolving trend. They are obsessed with trade sanction. Sanction does hurt China, but the United States as well. It never solves problems, but create problems. The US has missed many of the opportunities of its own faults. Ban on exports of high technology, nuclear power equipment, withholding export financing, discouraging American enterprises from participating in international tenders for the Three Gorges projects… etc. High technology and huge projects provides effective solution to narrow down the trade gap. The United States wishes to maintain its existence in Asia. Active participation in Asia’s dynamic economic growth is the most effective means to achieve that objective.
Accession to the WTO will lock in China economic and trade regime with WTO rules and accelerate the integration with the world economy. If the issue is to be resolved, the misconception that China has not made commercially significant offer has to be corrected. How can one argue that China’s offer is not commercially significant when negotiators privately admitted that China’s package offer outweighs the total concession of the whole Tokyo Round? How can such negotiating rhetoric be convincing, when China as an agricultural countries gives up the right to provide export subsidy for agricultural products when all major agricultural exporting countries continue to provide large amount of agricultural export subsidies well into the next century, commit to phase out all non-tariff measures inconsistent with WTO and further reduce tariff level along with its economic growth?
China is aware of the need to make necessary legal and administrative adjustment to meet WTO obligations. But the ultimate goal is to build a system that will ensure sustainable, dynamic growth , increasing purchasing power and progressively expanding market access for foreign goods and services. The adjustment will include:
This is an illustrative list of broad areas requiring China to make substantial adjustment, many more detailed, specific adjustment requirement are contained in the Uruguay Round package agreements. We are confident that we can manage to meet those obligations within the framework of WTO. Imposition of additional obligation beyond WTO will distort competition and sow discord in future trade relations between China and WTO members.
National Treatment
Finally, a few words about national treatment. National treatment is a broad terms. It has different ramification in different context. National treatment in GATT relates only to non-discriminatory treatment for imported products in respect of internal taxes and regulation of marketing and distribution. It has nothing to do with treatment for foreign enterprises and foreign natural persons. National treatment in GATS (General Agreement on Trade in Services) does relate to legal natural persons. But such treatment is negotiated case by case. It is not automatic. Negotiated national treatment may be qualified, modified or limited, depending on the writing of the schedules. China recognizes national treatment for imported products and are negotiating qualified national treatment for selected sub-sectors of services.
National treatment in respect of foreign investment has to be dealt with differently in different context. What has been frequently referred to by foreign investment enterprises reflects their interests in gaining equal access to foreign exchange, access to public services at the same prices available to Chinese citizens and Chinese enterprises, and access to bank loans and credits. The achievement of convertibility on current account has already solved the problem of access to foreign exchange. As market-oriented reform is being intensified, state pricing for production inputs is disappearing. The government has decided to unify prices for public services. The reform of the banking system requires commercial banks to operate on market principle. Domestic enterprises are going to have advantage over foreign enterprises.
Another side of the matter is how to deal with preferential tax exemption for foreign investment enterprises. The government has to respond to domestic enterprises’ demand for right to compete with foreign investment enterprises on level playing fields.