Econ – Chapter 16: International Trade – Course Note – jen95
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Econ – Chapter 16: International Trade
Chapter 16: International TradeIntroduction2005: Worlds 3rd largest trading nation (Exports are 64% of GDP)Current degree of openess is exceptional for large continental economyInsane trade growth in past 30 yearsTrade is now fueled by FDIBackgroundOpen to trade mostly to Soviet bloc (48%) the rest to communist countriesHigh imports of machinery for big push and GLF.Trade fell sharply due to industrialization failure and break up with Soviet UnionRelied on food imports from Canada, Australia and ArgentinaPost CR, exports increased again for light industry and oil. Used foreign currency to import technologyFell through after oil failedTrade ReformIntroductionDouble Air Lock Soviet SystemAir Lock 1: Centrally controlled foreign trade monopoly. 12 national foreign trade companies have monopoly over imports and eportsAir Lock 2: Foreign exchange system. Value of RMB is set and cannot be converted. Need government authorization to convertReason for Double Air LockKeep domestic and foriegn market seperateKeep domestic prices stableProblemsFTCs have to cross subsidize to balance prices. Profitable goods in foreign markets may not be set to be profitable in local markets as SOEs were made to be profitableCaused by Import Substitution Industrialization (ISI) strategy to again protect SOEs.Reasons for Reform:Need foreign currency urgentlyInitial Reform StepsGuangdong and Fujian (1978-1979)Trade links opened with these provinces to make use of their proximity to Hong Kong and TaiwanHong Kong firms allowed to sign export processing (EP) contracts with Chinese firms in Pearl River deltaEP is just outsourcing of work into China.Creation of EP Zones (EPZs) Allows China to selectively promote exports within a ISI system.Special powers given to Guangdong and Fujian incentivized local governments to promote trade further as they could retain foreign currencyGuangdong and Fujian grew quicker than all other areas in China.Liberalizing the Foreign Trade System – Moving the Guangdong/Fujian experiment NationwideDevaluationDevaluation say RMB drop from 1.5 to 3.5 ratio to USD.Exporting became valuableImporting was checked due to high costCoincide with dual exchange rate regime where producers outside the plan can sell foreign exchange earnings in less regulated secondary marketsCoincided with Japanese Yen appreciationDemonopolizaition of Foreign Trade RegimeNumber of companies allowed into foriegn trade expanded dramaticallyFTCs were easier to set up and there were 5000 FTCs for every SOEDirect import and export rights were granted to 10,000 manufacturing firms.Target setting and contract system (From Chap 13) were applied.Changes in Pricing PrincplesExposure to greater competition both local and foreign made FTCs more cost conscious. They began to work with C.A TVEsWorld price signals were now transmitted into domestic economyAgency System to Price Imports: Domestic Price = World Price + Commission paid to importer / distributor.Trading companies now adapt to opportunities caused by world pricesCreation of Tarrifs and Other Trade BarriersFear of mistakes, import surges, currency debt caused policy makers to adopt barriers.Similar to other highly protected developing economies (tarriff = 43%)Non Tariff Barriers:Limited extension of trading rights. Import only for your own production needs.Trade only in a limited product rangeCentral government FTCs had monopoly on imports of sensitive commodities like grainNTBs prevented domestic firms from participting in EP contractsImport Substitution and Export Promotion1980s: From Planned Trading to Barrier filled TradingISI held some advantages for China:Trading becomes more centered on profit making in world pricesFlexibility was created that helped in later domestic reforms. Easier to harmonize both foreign and domestic sectorsTariffication allowed China to negociate with WTO about entry. They had something to lower and provide as an exchange.To counter some antiexport measures, China allowed a partial system of rebates of VAT for exports. Banks also provided preferential interest rates for exportersAlso the creation of a seperate export processing regime allowed exporters to simply bypass old centralized foreign trade monopolyA Dualist Trade Regime: The Export-Processing SystemCoastal Development StrategyAll firms including TVEs can handle processing and assembly contractsForeign investors allowed to take control of components and raw materials that they imported duty free. (Cost advantage)Export promotion trade grew quicklySize of EPZs were huge and much larger than SEZsThis policy enabled China to tap the expertise of FIEs from export experts Hong Kong and TaiwanFIE share of exports increased Domestic firms did not enjoy the same growthToward An Open EconomyIntroductionReforms for WTO reduced the dualism in trade regime. Lure of WTO pushed many reforms through.Currency ConvertibilitySecondary swap market established in 1994 for foreign exchangeExchange rate now near unifiedBetter access to foreign currencyNational taxation system moved to reliance on VATTakes advantage of the rule that rebates can be claimed by exporters on VAT.No complete convertibility of currency yet probably also influenced by 1997 Asian crisis where China decided to prevent depreciating its currencyWorld Trade Organization Membership – Changes AdoptedHampered by Tienanmen massacreHampered by dumping natureDue to service orientated trade from developed countries, China had to grant broader and fairer access to its economyChina required to reduce duality of trading regimeTariff rate quotas were introduced (tariffs reduced from 43% to 17% (1999) then 9.4% in 2004)Openness (Total Trade to GDP) RevisitedImports: Imports as a share of GDP increased Most trade came from EP share till the mid 1990sOT surged after WTO membershipOutcomes: Rapid Growth & Structural ChangeExports1979-1985: Mostly petroleum1985-1995 : Coastal Development strategy and increased participation of FIE greatly increased trade. Export commodities mainly from light industry1996-2001: Trade growth slowed due to financial crisis + 30% appreciation in RMB. China begins focusing on domestic demand. VAT rebate reduced2002-Now: Second surge mainly in electronics and machinery exports. Garments continue to be robustImportsCapital intensive products: 66% of imports. Mostly targeted at overcoming lack of land endowment. Also for heavy process technology industriesSkill intensive products: Machinery for transport and electronicsHigh Technology TradeNot a technology exporter. Tech is under EP, all China did was to process and package. Final stage of production only, thus non high tech.Regional Composition of Trade Within ChinaCoastal benefits again Easier to trade due to better locationCaused by policies like the Coastal Development StrategyLower Yangtze is eclipsed and resurges1980s giant sees share decline from 34% to 21% but swings forward in 1990s with FDI inflowsResurges back to 38% and eclipses the southeastNorthern continues to decline steadily since 1980s Dips below 20% in 2003ConclusionHigh trade to GDP ratios is due to economies being part of a global production network. Thailand, Malaysia and China included. Trade to GDP ratio is thus a degree of openess and not a measure of the trade sectorChinas differences from the rest of the world gives it tremendous C.A.Chapter 17: Foreign InvestmentIntroductionFDI pours in after 1992 and increasing steadilyChina holds 33% of LDC FDIs3 Characteristics of FDI in ChinaFDI is Chinas main arm of accessing global capitalFDI goes into manufacturing instead of resource extractionFDI comes from other East Asian economiesFDI in the Chinese EconomyFirst accepted in 1978 when China established SEZsPolicy became more localized and FDI seeped into individual regionsFDI floods in 1992Caused by Deng Xiaopings Southern Tour. China had already built some credibility with investors a decade before. The tour reassured investors after TienanmenChina also allowed FDI into more sectors than just the manufacturing sectorFits SEA pattern in reliance on continual FDIsFDI impact is multifaceted:Contribution to overall investment and structural changeBrings in management experience and marketing channels with technologyZones: The Gradual Liberalization of the Investment RegimeEvery wave of liberalization is done via zones = Permission of incremental progress within a rigid systemTestbed crucial due to Nationalist mistrust of foreign involvement. Zones enhance credibility of reform processWave 1: SEZs went beyond normal Asian EPZs as they also serve domestic reforms and attract non local Chinese back to ChinaTeething problems include smuggling and corruption with FDIs leaking to surrounding areas like the Pearl River DeltaWave 2: Economic and Technological Development Zones (ETDZs) encouraged aggressive bargaining and trade with foreign investors to facilitate investmentsWave 3: SEZs opened in Pudong (East Shanghai), smack in the center of Chinas heart.Experiments allowed in housing and retail sectorsWave 4: Extension to Western areasThe Investment Regime TodayFavourable:Moderate taxesInvestment protection agreementsApparatus for arbitration is availableInvestment regime is decentralized and discretion is held by local government officials = favourable for high FDI intake.Difficulties spring as it is not claer who has ultimate power to approve. Foreign investors have to navigate choppy inter-governmental relationships. Also hampered by some ineffective low quality governments.Also problems with enforcing intellectual property rightsContractual Joint Ventures (CJV)Flexible agreements to share profit. Useful in investments that span multiple sectorsLargely illegalTailored for oil exploitation. Equity Joint Ventures (EJV)A legal entity where foreign and local firms have a stakeNot successful due to differing aims for locals (employment, firm expansion, technology transfer) and foreigners (profit margin)Sources of Investment in ChinaGroup 1: Hong Kong, Taiwan, Macau and Free Ports / Tax Havens (60%)Group 2: United States, Canda, Japan, EU (25%)Group 3: Korea and SingaporeSpecial Focus – Hong KongNot foreign as it is part of China. But kept foreign due to different administration and development statusHong Kongs development cycle sees the land too tiny for manufacturing firms prompting firms to enter China for productionProximity to China also means that Hong Kong is very aware of policy shifts and exploit them quickly.China signs Closer Economic Partnership with Hong Kong – earlier access for Hong Kong firms to new zonesThe China Circle – PRC, Hong Kong & TaiwanChinese officials sort to emulate the success of Hong Kong and Taiwan in their labor intensive manufacturing exports during the 1960s and 70sWhen China opened up, HK and Taiwans labor became more expensive and migrating manufacturing to China was an easy solution (Shoes and PCs later)High FDIs between the circle funded the changeProximity including common language and customs made things easy and kept costs low. Easy to spread production processs without high transportation costs.FDI In ContextSectoral Composition of FDI: The WTO ImpactHigh FDI penetration into manufacturing Services only stand at 27%Caused by government safeguarding some servicesFDI only find place in real estate services in China. Unlike other countries where FDI can find areas in retail, transport, communications and finance.WTO commitments will reverse that in timeModes of Capital Inflow1980s -1990: Funding came from governments and international organizations1990- now: FDIs dominateCaused by slow financial marketsChina reacts by placing limits on foreign borrowing leading to tiny foreign debtChina maintains the lid on capital account convertibility to prevent large sales of currencyBut BOP shows that high amount of funds are still moved via other channels, this is seen in the large errors and omissions section.Capital controls do not work. Funds still flow freely when anticipating devaluation, etc just like in East Asian economies before 1997.Better to legalize and open it to prevent greyness of the black marketConclusionChina was smart to prevent 1997s crisis from affecting them by:Ensuring long term commitment of FDIEnsuring invested assets cannot be quickly liquidated.China should liberalize capital account convertibility and allow FDI to flow into more sectorsChapter 18: Macroeconomic Trends and Cycles
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By: jen95
Submitted: August 29, 2017
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