1. Modern theory of comparative advantage :

1. L-4 Foreign Trade Business in China 1. Modern theory of comparative advantage : If two countries differ only in input endowments, then a country exports the commodity which uses intensively its relative abundant inputs and imports the commodity which uses intensively its relative scarce inputs. 2. China exports labour-intensive goods to and imports capital intensive goods from the West. 3. protectionism : a. economise the use of foreign exchange b. protection of local industry September 2000

2. Foreign Trade and China Hong Kong China Business Week 4

3. II. Foreign trade reform in the PRC A. Background

4. 2. Before reform of late 1978 • a. no concept of the ‘gains from trade’ - import only goods not available in China, export to pay for them. The same outlook as the Emperor in 1840. • b. state monopoly of trade at the central level - Ministry of Foreign Economic Relations and Trade (now Moftec) controlled 12 Foreign Trade Corporations (FTC) each of which was responsible for a particular group of commodities (textiles, machinery, and chemicals). • c. export products acquired by the state at pre-set prices according to the national plan • d. FTC were administrative units: fulfilling targets only. Therefore the goods were not marketable.

5. 3. After 1978 (trade reform proceeds gradually) Exports a. some technical and industrial ministries at central and regional levels are allowed to form their own import-export corporations. b. Large enterprises and municipal provincial corporations are allowed the right to trade, and county governments to form their own FTCs. They are able to retain part of the foreign exchange earnings.

6. c. stop issuing export subsidies to FTCs in Jan 1991 (responsible for their own losses). d. by end-1994, around 7000 FTCs and 500 large enterprises had the right to trade. Consequences: strong competition [cut-throat?] and efficiency boosted e. produce products for export, export products manufactured by a third party or as agent for domestic producer. f. export control system to eliminate "harmful competition"

7. g. formation of conglomerates Merge of different trading and manufacturing companies which are encouraged to set up subsidiaries overseas to develop trade. e.g. CITIC h. role of foreign-invested enterprises - - accounted for 41% of the nation's total exports in 1997

8. c) import trade barriers: i. tariffs ii. import licensing system iii. complicated approval procedures ( Moftec, State Administration of Exchange Control [SAEC], the Planning Commission, Customs, and regional governments) d) conducted by FTCs which act as an agent e) foreign-invested enterprises accounted for 30-40% of the total imports (Implications: outputs of SOEs are not competitive)

9. III. Determinants of the trade pattern 1. The trade pattern a. country pattern (HK. Japan, Taiwan and the USA) b. commodities Exports :- low-valued consumer goods; Imports :- raw materials, machinery, semi-finished goods Implication: moving towards the comparative advantage of China - - In the mid-1990s, over 83 % of the exports were light manufactured goods.

10. 2. Determinants a. The desire to join World Trade Organisation (formerly GATT) membership i. established in 1950, WTO provides the international institutional frameworks for conducting trade with the objective of promoting trade through the reduction of tariff and multilateral negotiations with the following principles:

11. . non-discrimination in trade relations - all 116 signatories are treated in the same way with regards to import and export duties and charges (unconditional most favoured nation clause) • . prohibition in the use of quantitative restrictions – import quotas may however be used for balance of payments reasons • ii. in 1986, PRC started to apply to become a member of the GATT(now the WTO).

12. iii. measures to liberalise and promote trade • . cut quota or license and mandatory export plans and import licences • . lower tariff (upper ceiling is 30% as allowed by WTO) - lower tariff of 4,000 items in Apr 96 • . reform of the exchange rate system • . free trade zones in SEZs • . promote border trade • increase the transparency of foreign trade policy and regulations (foreign trade law enacted in July 1994. • . price reform

13. b. Effects of foreign exchange management on trade • i. Rmb became fully convertible for current account transactions on 1 April 1996 (facilitate trade and long-term direct investment) • c. Barriers to entry to WTO • i. restricted access to the service sector • ii. tariffs remain too high • iii. lack of complete trade regulations - protection of intellectual property rights

14. IV. Why trade reform has been successful • 1. no external debt to begin with • 2. liberalised policies are gradual and appropriate • a. falling in line with the comparative advantage • b. appropriate exchange rate policy • 3. desire to join WTO imposes market discipline • 4. important role of the foreign-invested enterprises • a. accounted for only 1% of the total trade in 1985, but increased to 41% in 1997. • 5. role of HK

15. Role of HK : Trade between HK and China Mainland

16. 2. Given that HK's re-export of Chinese origin goods as a proportion of HK’s total re-exports has increased from 27.7% in 1978 to 59.6% in 1998, the re-export figures reaffirm the revival of HK as a entrepot for PRC. • HK's comparative advantages - - • physical and financial infrastructure : • airport & container port, • telecommunication network • banking and insurance centre • legal and accounting services • 3. the shift from re-exports to transhipment.