THE GLOBAL CONSEQUENCES OF CHINA'S TRADE EXPANSION: A LOOK AT THE FUTURE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90B01390R000300350007-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 55
• Document Creation Date: December 22, 2016
• Document Release Date: November 9, 2011
• Sequence Number: 7
• Publication Date: October 30, 1986
• Content Type: MEMO

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Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
30 October 1986
The Global Consequences of China's Trade Expansion:
A Look at the Future
Summary
Under the economic reform measures now in place, we estimate
that by the year 2000 China is likely to double its share of
world exports to become a trading power equaling Canada or
Italy. The most detrimental effects of China's outward looking
trade strategy will be incurred by the less developed countries
as China expands its share of the developed countries' markets
in products such as textiles, clothing, hand tools, toys, and
sporting goods produced by the LDCs. China's trade expansion
will help improve the US trade balance as it increases its
purchases of capital goods and industrial supplies and will work
to reinforce moderation in Beijing's political dealings with
Washington. China's trade expansion will also present an
important challenge for US trade policy as Beijing becomes more
vehement in using its economic leverage as a bargaining chip to
advance its chief economic aims of gaining greater access to US
markets and technology. Only through a comprehensive agreement
will the United States be able to insure that the economic gains
from China's trade expansion do not accrue to China alone. In
our judgment, the United States has a major stake in China's
successful integration into the global trade system. The success
or failure of China's market-oriented economic reforms will
depend in no small measure on its ability to gain access to
Western markets and technology. If it fails, the implications
would be unnerving--not just for China's relations with the West,
but f7r the promise that economic reform holds for the Third
World
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This memorandum was prepared by Office of Global 25X1
Issues. Information available as of 1 August 1986 was used in
its preparation. Comments and queries are welcome and may be
directed to Chief, Development Issues Branch, Economics Division,
OGI, 25X1
GI M 86-20234
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THE GLOBAL CONSEQUENCES OF CHINA'S TRADE EXPANSION:
A LOOK AT THE FUTURE
Page
CHINA'S ECONOMIC REFORMS 1
Origins of The "Open Door" Policy 1
Prospects For Future Reforms 2
EXPORT POTENTIAL 4
China's Growing Export Competitiveness 4
China's Place in the World Market 9
Impact on Western Markets 12
Impact on China's Competitors 15
Alternative Export Scenarios 18
IMPORT PROSPECTS 21
The Future For Imports 21
China's Take From the World Market 25
Beneficiaries of China's Import Surge 28
IMPLICATIONS FOR THE GLOBAL TRADE SYSTEM 34
Converging Economic Interests: China and the Developed Countries 34
Diverging Economic Interests: China and the LDCs 35
China and the GATT 37
IMPLICATIONS FOR US ECONOMIC POLICY 41
Economic Costs and Benefits 41
Political Costs and Benefits 44
Recommendations 45
APPENDIXES 49
A. Estimation Methods For Exports 49
B. Estimation Methods For Imports 52
ii
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CHINA'S ECONOMIC REFORMS
In the last two years China has incurred record trade deficits resulting from
a sharp increase in imports. Beijing's efforts to decentralize the foreign
trade regime unleashed a vast, latent demand for foreign goods. Beijing's
ensuing retrenchment--and cutbacks in purchase orders--have led many Western
observers to believe that prospects for China's trade are dimmer than previously
hoped. We believe this view is shortsighted; the longer historical record shows
a dramatic upturn in China's economic growth and trade since 1976, which has
been barely affected by these recent events
Origins of the "Open Door" Policy
In the 10 years since the death of Mao Zedong, China has reversed Mao's
policy of "self-reliance" and moved steadily towards greater participation in
the world economy. Beijing has dropped its ideological aversion to foreign
debt, encouraged foreign investment in the domestic economy, established trade
and diplomatic relations with the United States, joined the International
Monetary Fund and World Bank, and applied for membership in the GATT
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Beijing also has begun to institute major reforms throughout the economy that
are aimed at reducing the scope of central planning and increasing the role of
the market. Domestically, Beijing is now giving greater decisionmaking
authority to provincial and local governments, separating government
administration from enterprise management, and making enterprises responsible
for their own profits and losses. In the area of foreign trade, Beijing is
reducing the share of trade handled by the state-owned trade corporations,
encouraging direct contacts between domestic and foreign businesses, and
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permitting enterprises to make their own foreign trade decisions and hold their
own foreign exchange balances.'
The open door policy and market-oriented reforms have resulted in China's
rapid expansion out of international isolation. During the Cultural Revolution
(1966-76) China's exports never exceeded 1 percent of world trade or 3 percent
of China's GNP, the smallest share for any major country. From 1977 to 1985,
however, the dollar value of China's exports expanded at an average annual rate
of 18 percent--three times the growth rate for world trade. Exports worth $31.5
billion made China the second largest LDC exporter last year, after Saudi
Arabia, and this year we expect China to become the largest
The Chinese leadership does not appear content, however, with this remarkable
progress. They are genuinely displeased that a nation with nearly one-quarter
of the world's population, and perhaps 7 percent of the world's resources, still
accounts for less than 2 percent of the world's trade. Under the Seventh Five-
Year Plan (1986-90), they plan to increase trade at least 8 percent per year, a
figure that is consistent with their goal of quadrupling domestic output by the
year 2000.
Prospects for Future Reforms
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Beijing's open door policy often has clashed with its concurrent economic
reform efforts. Twice in the early 1980s China has attempted to decentralize
its trade apparatus and make trading companies responsible for their own profits
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and losses. Each time, however, China has had to retrench as irrational
domestic prices and an overvalued exchange rate led to imports of luxury goods,
exports of necessities, trade deficits, and declining foreign exchange reserves.
Opposition to reforms has been voiced by some individuals within the Chinese
leadership who favor retaining a strong element of central planning. They have
been particularly critical of the detrimental side-effects of reforms such as
black-marketeering, smuggling, and the importation of "bourgeois Western
influences." Although xenophobia and anti-imperialist attitudes are deeprooted
in the Chinese culture and Communist ideology, these factors probably are not
the reason for opposition to the reforms. Many of the problems China is
encountering in decentralizing trade are quite real and stem from an irrational
price system. As a result of these negative experiences, Beijing probably will
proceed more slowly with foreign trade reforms in the future, not letting them
outstrip the pace of domestic price reforms
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Given the magnitude of the task, setbacks to the reform program are almost
unavoidable. Nevertheless, we believe the long-term prognosis for the open door
policy are good. The Chinese have learned that there is a high price to be paid
for closing off their economy and they do not want to fall further behind the
modern world. They realize that they need to trade with market economies not
only to obtain new technologies but also to help make their own economic system
more rational. The Chinese now see their national self-interest in terms of an
open door--not only for themselves but for the rest of the world as well.
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EXPORT POTENTIAL
China's tremendous success in boosting exports--and its potential to continue
rapid growth--are due.to three underlying factors:
o Vast untapped resources and underemployed labor.
o Sharp improvements in economic productivity.
o Sizeable gains through increased specialization and trade.
Ironically, because China's economy is one of the least efficient in the world
at turning resources into finished goods, small improvements in efficiency can
increase output dramatically. Moreover, the Chinese can continue to get large
increases in exports without straining domestic consumption or production
because exports still account for a only small share of output
China's Growing Export Competitiveness
Over the last 10 years, the Chinese have made remarkable progress in
expanding their exports. Since 1977 China has been able to maintain a real
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growth rate for exports of 14 percent per year by diverting marginal amounts of
output away from domestic consumption and by breaking into established Western
markets through competitive pricing policies (see figure 1). The Chinese have
actually increased their share of the world market at a faster rate in the
deflationary 1980s than in the inflationary period of the late 1970s. This
undoubtedly reflects their competitive strength as a low-cost manufacturer. 25X1
At 20 cents per hour, China's average wage is the lowest in East Asia and one
of the lowest in the world. China has more workers--urban and rural--than all
the OECD and CEMA countries combined and in the next five-year plan (1986-90)
China must absorb nearly 100 million new entrants into its labor force--a number
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4000-
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CHINA: EXPORTS BY SECTOR OF ORIGIN
MILLION US $
TOTAL
MANUFACTURES
EXTRACTIVE
3 '?'
4' ? 1 4? 1* 40
1 A A 1 0 0 0
eI.
e
e
AGRICULTURE
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equal to the present size of the total US labor force. Although wages are going
up relatively rapidly in China, in absolute terms the gap between wages in China
and elsewhere is widening. Thus the Chinese are particularly well suited to
compete in a deflationary world trade environment
China has been able to achieve a real growth rate for Net Material Product of
10 percent per year since 1979 in large part by overcoming its technological
shortcomings, maintaining .a high rate of investment in capital goods, and
reforming the economic system. With a continuation of these efforts we believe
that China's goal of boosting total output by an average of 7.2 percent per year
is attainable. This growth will greatly increase demand for imports, but will
also free up considerable capacity to export
China's plan targets for the domestic economy will generate an export growth
rate of 7 to 10 percent per year until the turn of the century, according to our
projections, which are presented in table 1.* This conforms with China's own
export target for the Seventh Five-Year Plan (1986-90) of 8 percent annual
growth.
In our judgment, the main thrust of China's export drive will continue to
come from the manufacturing sector. Since 1979 exports of manufactures have
grown at nearly twice the rate of agricultural and extractive commodities,
rising 16 percent per year in current dollar value and more than 20 percent per
year in real terms. A continuation of high industrial growth rates, combined
with more emphasis on exports and a strong shift into higher valued export
* Our projections are based on past relationships between major components of
output and trade and on plan targets for output in 1990 and 2000. See
Appendix A for a discussion of the forecasting methods used.
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Table 1
China: Exports Generated by Beijing's
Targets for the Domestic Economy
(Billion US Dollars)
Actual Projected
1980 1985 1990 2000_
Total*
18.9
31.3
43.4
97.8
Agricultural
4.7
6.4
7.8
12.5
Extractive*
4.8
7.8
5.3
9.1
Manufacturing
9.4
17.1
30.3
76.2
* Figures assume price of crude oil remains at
$15 per barrel.
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lines, should enable China to maintain a growth rate of at least 12 percent per
year in foreign sales
China's exports of.manufactures are spread out over a range of light
industrial products--a wider range than any other developing country. China's
potential appears greatest in labor-intensive areas such as textiles and
clothing, metal products, hand tools, light machinery and transport equipment
(shipped primarily to the LDCs), handicrafts, footwear, glassware, crude
chemicals, radios, and military equipment. As with many other emerging nations,
textiles and clothing are playing an important role, accounting for about one-
quarter of China's total exports. Beijing has had more success than any other
LDC, however, in breaking into highly protected Western markets for these
products.
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Based on our simulations, we believe China's agricultural exports are likely
to grow at the same pace as domestic production, thus remaining at roughly 5
percent of total output. There are some crops, however, for which dramatic
increases are possible--corn, cotton, soybeans, and peanuts--if China shifts
crop patterns to maximize the dollar value of the yields. For example, based on
China's present yields and world prices, by shifting an acre of land from wheat
production to cotton China could earn enough foreign exchange from exporting the
cotton to import roughly two acres worth of wheat. Nevertheless, sales of
agricultural commodities to foreign countries will continue to be constrained by
inadequate storage and transportation facilities. Beijing intends to establish
a series of export bases in coastal areas for growing these crops, however, and
probably will prove to be strongly competitive in selling them in the Asian
market.
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Export earnings from the extractive sector will depend primarily on China's
success in boosting domestic output. Our simulations show that every 1-percent
increase in output is likely to bring a 2-percent increase in exports.
Normally, the Chinese do not respond quickly to changes in world prices by
altering exports. Essentially, their surplus domestic production is exported at
whatever price the market will bear. Over the next few years we believe that
Chinese planners will attempt to hold exports of crude oil at present levels,
but if the price of crude were to fall much lower, they probably would face
strong internal political pressure to cut exports
China's Place in the World Market
By the year 2000, China will become an exporter equal in stature to Canada or
Italy today if it continues to expand its share of the world market at the same
rate it has since 1978. At current growth rates, China's share of the world
market will reach 2.4 percent in 1990 and 4.4 percent in 2000. This is
consistent with an export growth rate of 8 percent per year, the scenario we put
forward above, and world trade expansion at 2 percent annually. Slower growth
in world trade probably would result in China capturing an even larger share of
the market, while faster growth would probably lower China's share
China's fastest growing exports (in terms of China's share of the world
market) are shown in Table 2. These 40 commodities account for roughly two-
thirds of China's total exports and one-third of the world's total imports.
o Manufactures account for nearly three-fourths of the items. Five of the
top seven items on the list are either textile fibers, fabrics, or
clothing. At the top of the list, China has captured the largest share
of the half-billion dollar market for explosives, and if trends continue
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Table 2
China: Actual and Projected Shares of World Exports,
Top 40 Growth Commodities*
(Percent, ranked on 1984)
Actual** Projected***
Commodity
1975
1980
1984
1990
2000
TOTAL, ALL COMMODITIES
0.9
1.0
1.6
2.4
4.4
TOTAL, TOP 40 COMMODITIES
1.1
1.7
3.1
4.6
7.1
Explosives
10.7
22.6
28.6
36.8
50.6
Yarn of natural fibers
3.6
4.2
11.0
17.1
27.2
Textile fabrics
3.9
5.6
10.3
15.4
23.9
Fibers other than cotton
3.9
6.1
8.1
11.1
16.1
Misc. textile products
3.7
6.5
7.7
10.1
14.1
Tin manufactures
0.1
1.9
7.7
13.3
22.7
Clothing
- 1.4
4.0
7.6
12.2
20.0
Hand tools for farming
1.5
3.8
5.9
8.4
12.5
Vegetables
3.4
5.2
5.4
7.2
10.2
Crude vegetable material
3.6
4.5
5.1
6.1
7.7
Essential oils
2.9
4.3
5.0
6.3
8.4
Aluminum ore
1.3
4.6
4.9
7.5
11.9
Misc. consumer goods
2.0
2.7
4.8
6.9
10.4
Cotton fibers
1.5
0.3
4.4
6.6
10.2
Toys
0.9
0.9
4.0
6.4
10.4
Soybeans
2.4
1.7
3.8
5.4
8.2
Cocoa
1.5
2.3
3.6
5.0
7.2
Crude Minerals
1.2
2.3
3.4
5.1
8.0
Feedstuffs for animals
0.6
0.7
2.7
4.3
6.9
Watches
0.4
1.1
2.6
4.2
7.0
Misc. nonferrous manufactures 1.4
1.9
2.5
3.8
6.1
Hides
1.2
1.8
2.4
3.3
4.8
Pharmaceutical goods
1.1
1.5
2.4
3.2
4.6
Radios
0.1
0.4
2.3
4.0
6.7
Cutlery
1.0
1.7
2.3
3.3
5.1
Footwear
0.9
1.5
2.2
3.3
5.2
Hand & machine tools
0.4
1.1
2.1
3.2
5.1
Glass
1.6
1.5
2.1
2.6
3.5
Petroleum products
0.3
1.7
2.0
3.2
5.2
Inorganic chemicals
0.6
1.3
1.8
2.7
4.2
Yarn of synthetic fiber
0.0
0.5
1.8
3.2
5.4
Crude petroleum
0.8
0.8
1.7
2.6
4.1
Furniture
0.7
1.2
1.7
2.4
3.7
Coal
0.2
1.0
1.7
2.8
4.7
Medicinal products
0.8
1.5
1.6
2.3
3.4
Immitation jewelry
0.3
1.5
1.5
2.4
3.9
Ships
0.0
0.1
1.3
2.3
3.9
Metal manufactures, nes
0.3
0.7
1.3
2.0
3.1
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Mineral
tars
0.0
2.5.
1.1
1.9
3.3
.. Corn
0.3
0.2
1.0
1.5
2.4
Elect.
equip. for home use
0.0
0.3
0.8
1.3
2.2
This table lists China's 40 fastest growing export commodities
in terms of Ching's share of world market. These commodities
are not necessarily the most important in terms of China's export
revenues. Commodities are defined at the three and four digit
level of the SITC, Revised.
** Data for 1975-84 are estimated based on China's market share
in its trade with 33 trade partners. This sample represents
more than 80 percent of world trade.
***Projections are based either on straight line or linear regression
methods.
This table is
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would account for half of world sales by 2000.*
o Only a few basic commodities made the list, including bauxite, cotton,
soybeans, cocoa, corn, coal, and crude oil.
o Although most of China's big-ticket items are on the list, some are not
because their share of the world market is either stagnant or declining.
Over the last 10 years China has lost its position in the world market
for only a few of its exports, including such commodities as rice, fish,
tobacco, unwrought tin and zinc, leather, and textile machinery.
Impact on Western Markets
China has yet to tap its full potential in the world's largest markets for
these commodities. In the past China's exports have been skewed heavily towards
Japan and Hong Kong, the world's fifth and eighth biggest markets, respectively.
The Chinese are just beginning to mount a significant sales effort in the United
States and West Germany, the top two markets. The United States is not only the
largest, but also the fastest growing market in the world for these 40
commodities, having expanded from 7 percent of the world market in 1975 to about
13 percent last year. The Chinese have only captured 3 percent of the US
market, however, compared with nearly 10 percent of the Japanese market.
Table 3 presents projections for China's share of its 10 leading Western
markets for 1990 and 2000. China will remain Hong Kong's leading supplier as
* Although pyrotechnical articles account for the lion's share of this
category, China is rapidly invading the market for dynamite, detonators,
and ammunition. China is one of the most advanced countries in the
field; recently it even signed a joint venture agreement to transfer
technology to Sweden's Nobel Corporation, whose founder invented
dynamite.
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Table 3
China: Actual and Projected Shares of
Ten Leading Markets*
?
Actual
(Percent)
Projected**
Market - 1975
1980
1984
1990
2000
ALL COMMODITIES:
WORLD
0.9
1.0
1.6
2.4
4.4
Hong Kong
20.3
20.0
25.0
29.8
37.9
Japan
2.6
3.1
4.4
5.7
7.7
United States
0.2
0.5
1.0
1.4
2.2
Singapore
3.5
2.6
4.7
5.7
7.3
West Germany
0.3
0.4
0.6
0.8
1.2
Brazil
0.0
1.1
3.9
4.3
7.1
Australia
0.9
1.2
1.4
1.4
1.8
Italy
0.3
0.4
0.5
0.5
0.7
France
0.3
0.3
0.4
0.6
0.8
United Kingdom
0.2
0.3
0.4
0.6
0.7
TOP 40 COMMODITIES***
WORLD
1.3
2.3
3.8
5.4
8.1
Hong Kong
20.5
28.4
40.1
53.2
74.9
Japan
4.2
6.2
9.5
13.0
18.9
United States
0.4
1.9
3.3
5.2
8.5
Singapore
8.9
7.5
9.2
9.4
9.7
West Germany
0.5
1.1
1.5
2.2
3.3
Brazil
0.1
0.1
0.1
0.1
0.1
Australia
2.6
3.5
4.2
5.3
7.0
Italy
1.1
1.6
2.0
2.6
3.6
France
0.7
1.0
1.2
1.5
2.1
United Kingdom
0.7
0.9
1.0
1.2
1.5
* The markets listed in this table were China's ten leading
markets in terms of total export revenues. Several other
LDC trading partners were larger in terms of China's share
of the market.
** Projections use linear extrapolation methods on disaggregated
commodity data.
***Unlike the previous table this group of China's fastest growing
exports excludes crude oil.
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the 1997 date for China's resumption of sovereignty over the Territory
approaches. By that date China and Hong Kong will be highly integrated
economically. In the interim their economic interests are gradually beginning
??
to coincide. Beijing and Hong Kong, for example, have agreed to take the same
positions on multilateral trade issues in such fora as the Multi-Fiber
Arrangement
China already has become a concern for economic policymakers in Japan. Last
year China ranked sixth on Japan's list of foreign suppliers. China has exerted
immense pressure on Tokyo to open up its markets to Chinese exports of
manufactures, especially since the price of crude oil has declined. Beijing is
particularly disturbed that Tokyo tends to use it as a natural resource base,
buying up most of its oil, coal, nonferrous minerals and metals, while greatly
restraining imports of clothing, textiles, and other light manufactures. The
Chinese have some leverage in the matter by virtue of the direct controls
Beijing can place on imports from Japan, which totaled $12 billion in 1985--
nearly twice the level of China's exports. The United States has a major stake
in the outcome of Sino-Japanese trade negotiations, because Tokyo's
unwillingness to open its doors to China will put even greater pressure on
Beijing to expand into the US market and because we are allies in our efforts to
open up the Japanese market
China's share of the US market has not risen as quickly as its share in some
other markets, in part because the US market itself was expanding so rapidly. A
rise in protectionist demands in the United States could reverse this tendency,
however, and create even greater competition between China and other suppliers
of labor-intensive manufactures. US quantitative restraints on imports tend to
114
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CONFIDENTIAL
favor more established suppliers over newcomers to the market, and this could
become a source of great friction in bilateral relations, should Washington take
more restrictive measures. The recent slide in the dollar against the major
currencies should restrict US imports from most countries. The Chinese
themselves, however, have been devaluing against the dollar in order to be in a
better position to compete. China's share of the US market also could do better
than past trends suggest if the Chinese join the GATT and become eligible for US
GSP tariff treatment. About 60 percent of China's exports would be covered by
GSP and the average tariff on them would be lowered by 14 percentage point
Western Europe is one area China has targeted for a vast expansion in sales,
a factor not accounted for in our projections. The EC constitutes nearly half
of the world market for the products China will be exporting but accounts for
only 15 percent of China's current exports of them. Likewise, the share of
China's exports to the LDCs will gradually diminish as China concentrates its
marketing efforts on the biggest and fastest growing markets.
Impact on China's Competitors
The strongest competition for China will come from the Newly Industrializing
Countries (NICs), in particular Taiwan, Hong Kong, South Korea, Brazil, and
Mexico. The 10 largest LDC competitors for China and changes in their shares of
the world market over the last 10 years are shown in Table 4. Overall, only
India and Argentina are badly losing ground, while South Korea and Taiwan are
keeping pace with China. Shares of the world market for the other six countries
have inci-eased marginally
China's competitiveness varies by commodity, but in textiles and clothing
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Iable.1.
Chins and Its Competition: Clumges In Shares of Uorld Market
from 1376 to 1984 for China's fastest Growing Cavorts
Hong South
? ?
Cmmdity
China
Taiwan
tang
Korea
Irani
Mexico
India (holland Singapore Prgentino Ksiovslo
Total, lop 10 Commodit
2.6
2.5
0.5
7.1
0.6
0.2
1.1
0.1
1.0 0.2
0.3
Crplosiurs
11.0
-1.1
0.6
-0.1
-3.1
0.1
0.1
?
0.1
6.1
Yarn of natural fibers
leatilerabrics
0.2,
6.8
0.2
1.3
-1.2,
-0.7
-0.8
3.1
0.7
0.5
-0.6
-0.1
-0.6
-1.2
0,3
3.2
-0.6 -0.1
-0.1
0.1
Clothing
6.2
2.1
-0.7
1.1
-OA
0.1
16
0.2 -0.1
C.6
fibers other khan cotton
4.1
1.1
0.3
0.1
0.4
-0.1
-0.7
-0.1
Aluminum ore
3.1
0.1
8.1
0.1
Hand tools for farming
3.3
10.2
0.2
1.3
1.s
0.7
0.1
. Toys, Sporting cads
3.3
11.5
1.6
4.1
0.6
1.2
0.1
6.6
0.1 -
- Misc. tektile products
3.2
2.1
-2.3
17
19
0.2
-0.1
Cotton. fibers
3.0
0.1
-0J
-0.3
-1.1
0.1
-1.2
Misc. consumer Quids
2.8
6.6
-0.6
11
12
0.3
0.2
Crude Minerals
2.4
0.1
18
1.1
16
0.1
0.2
Uegetabies
2.4
0.1
0.3
2.7
-12
1.0
-0.3
Soybeans
2.4
-1.1
12
-1.9
F.7
Uatches & Clocks
2.2
0.3
8.6
0.7
Radios
2.2
3.7
-1.7
3.3
1.1
3.1
1.7
1.3
feedstuffs
2.2
0.2
6.0
13
1.1
0.3
Cocoa
1.9
-0.3
0.1
-0.2
-0.3
0.2
0.7
0.8 0.1
3.9
Yarn of sothet:c f:her
1.8
3.2
-0.1
1.5
C.?
0.2
1:
0.3
Misc. nonferrous netais
1.8
0.2
-0.3
0.1
-0,5
-OA
1.1
Petroleum Products
1.7
0.1
0.2
1.2
1.1
0.2
0.i 0.2
0.2
Coal
1.6
Hand a Nschine tools
1.5
5.7
0.3
0.3
0.1
0.2
-0.3
0.3
footwear
1.5
7.1
-0.i
3.3
4.8
-3.1
0.3
-CA
-2.3
Cutlery
1.1
6.2
1.3
3.7
0.2
-0.2
0.9
0.1
Ships(rion-wor)
1.3
1.9
1-1
3.1
0.1
0.2
3.3
1.3
6.2
Crude vegetacie materials
1.3
0.2
0.1
-0.5
-0 2
-0.5
-1.2
0.1
-0.1
:rude Petroleum
1.3
u.0
0.f
s
:nurganic Chemicals
1.3
0.2
0.5
3 7
IrvJatich Jeweler,*
1.2
13.1
-3.7
3.0
-0.1
[..1
1.4
O.'
I
Cr.oe Chemicals
1.1
0.8
5.
L
0.;
I.?
Pharmaccitical SoDds
1.1
-0.1
0.3
0.1
C.
O.:
C.
Hides
1.0
3.1
-0.1
rj
1.urritjre
1.0
C.8
-0.3
0.2
1.2
0.1
!
M.t41 mdNIA3."../e5, r.es
1 0
:7.1
'.0
C.
L?
C.I
Meolcihal Pr0o,c1s
3.9
-0.1
-0 1
1
6liss
0.8
3.9
0.5
1.1
0.1
0.6
0.1
;.!
Elect. eoui;. for hcme
0.7
2.3
3.8
3.3
3.4
0.
i .
Corn
0.?
0.1
-0.2
-2.5
0. -2.6
This Table is Unclo:isificd
CONFIDFN7'
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China has no peer. Its share of the world market for natural yarn, fabrics, and
clothing has increased by 8,7, and 6 percentage points, respectively, the
largest gains for any country. Hong Kong, Mexico, India, and Singapore have all
felt China's onslaught, each having lost shares in these products.
Hong Kong's situation presents a major dilemma for Beijing. In many cases
China's gain has come at Hong Kong's expense. As China expands its presence in
the world market, Beijing will have to take account of the negative impact of
its actions on the Territory. This will circumscribe Beijing's options,
probably leading to greater moderation in its trade policies. South Korea and
Taiwan have held their shares better than Hong Kong. Both of these economies
have had greater success in moving rapidly into new product lines--hand and
machine tools, toys and sporting goods, radios, household electrical equipment,
etc, as well as many new technologies
Several developed countries have been the largest "losers" over the last 10
years in the product lines where China has done the best. West Germany, France,
the United Kingdom, Italy and the United States, combined, have lost 10 percent
of the world market in these goods. These countries probably did not have a
comparative advantage in most of these products, however, and their shift into
higher-technology areas may have produced a net gain in world output. Many LDC
producers, however, have not come away unscathed. Iran--largely for its own
reasons--and Pakistan, as well as Jamaica, Trinidad and Tobago, Ghana, Nigeria,
Sudan, and Peru, have seen their market shares slip sharply
For many countries, the export lines China has targeted for fastest growth
account for a significant share of export earnings. These include some of the
poorest countries of Asia, Africa, and Latin America. On average, China's 40
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fastest-growing exports account for an estimated 40 percent of the non-oil
exporting LDC's foreign exchange earnings. They account for nearly 70 percent
of the exports of South Asia, the region most likely to be hurt by China's
advances.
Alternative Export Scenarios
Until recently the Chinese were counting on oil exports to help support their
ambitious drive for modernization. Disappointing results of offshore oil
development and declining world prices, however, have forced Chinese leaders to
reexamine their trade policies. China now appears to be adopting an even more
aggressive export strategy, which will create more competition and conflicts
with other developing countries.
Our analysis suggests that even though China's exports now amount to 7
percent of GNP*, China still is severely undertrading. We believe a "normal"
export share of GNP for China might be on the order of 14 percent, nearly double
the current share. A number of factors determine what share of a country's
output is likely to be traded, including the size of the domestic market, the
per capita income of the populace, the domestic availability of resources, the
physical accessibility of the country to international shipping lanes,
population density, and the nature of the economic system. Our estimate of a
"normal share" for China is based on multiple regression analysis of export to
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* Western estimates of China's GNP in terms of dollars are subject to a large
degree of error because of the lack of an appropriate exchange rate for
converting national accounts data, the lack of good statistics on the services
sector in China, and the irrationality of domestic prices used to value
output. Comparisons of output and GNP figures between China and other
countries suggest that China's MP MRV hla Trinnh larger than even the highest
Western estimates now available.
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GNP ratios on these eight factors for 44 countries.**
Although we have no evidence to show that the Chinese have made any precise
calculations on how much they ought to trade, intuitively Beijing must realize
that China is still not trading up to its potential. Each time Beijing has
pushed the "open door" wider--both exports and imports have risen dramatically.
We believe that China's potential to expand exports is vast, but that in the
near term a range of factors will restrain export growth:
o China's international marketing network is skewed towards Asia--
developing a presence in the United States, Europe, and in the rapidly
advancing LDCs will take time.
o China has yet to develop adequate concern for the needs of the buyer, the
result of operating for so long in a supplier's market in which consumers
had no choice but to take what was offered.
o Chinese managers still have little incentive to take risks in developing
new products or markets.
o Perhaps the largest constraint, however, is China's antiquated
transportation system. The cost of moving goods between the hinterland
and the coastal cities of China often exceeds the cost of shipping goods
overseas.
**These countries include eight developed countries (the United States, Canada,
Japan, France, Italy, the Netherlands, United Kingdom, and West Germany),
eight communist countries (the USSR, Bulgaria, Czechoslovakia, East Germany,
Hungary, Poland, Romania, and Yugoslavia), and 28 less developed countries
(Indonesia, Malaysia, Philippines, Thailand, Bangladesh, India, Pakistan,
Iran, Iraq, Syria, Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Egypt,
Algeria, Libya, Morocco, Ivory Coast, Gabon Nigeria.ire, Zimbabwe, Chile,
Columbia, Ecuador, Peru, and Venezuela)
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Thus, while China ultimately might benefit from doubling the share of trade in
GNP it is highly unlikely to do so in the near term. Nevertheless, our analysis
suggests that China's trade will continue to expand at a faster rate than the
domestic economy, for at least the next 15 years.
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IMPORT PROSPECTS
The Future For Imports
According to our projections, China's targets for domestic output would
generate import growth of 7.3 percent per year between 1985 and 1990, a figure
which coincides roughly with the Chinese target for imports of 8 percent (see
Table 5).* Our projections also imply an import growth rate of 9.6 percent over
the entire period 1980-2000, a rate only slightly faster than the 7.2 percent
targeted by Chinese planners for the growth of Net Material Produc
Industrial supplies will continue to account for the largest chunk of China's
import budget. Demand for industrial supplies will increase at a faster pace
than the domestic economy can supply them. Our simulations show that every
1-percent increase in the Gross Value of Industrial Output (GVIO) has resulted
in a 1.1- to 1.3-percent rise in imports for the industrial sector. If GVIO
rises 7 percent per year according to plan, imports are likely to increase 7.4
to 8.9 percent per year.
Foodstuffs are likely to remain a small portion of China's total import bill.
Agricultural reforms, begun in 1979, have been so successful in boosting
production and raising living standards that many of China's recent policies
have centered on controlling, rather than increasing production, in order to
reduce surpluses and reduce storage costs and waste. Over the long term we have
no reason to believe that shortfalls in agricultural production would lead to a
significant upturn in imports. In the past China's imports of grain have been
* See Appendix B for a discussion of the methods used in estimating China's
imports.
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Table 5
. China: Import Requirements Generated By Beijing's
Targets for the Domestic Economy
(Billion Current US Dollars)
Actual Projected
1980
1985
1990
2000 .
Total
19.2
39.5
56.1
119.6
Foodstuffs
2.9
1.9
2.6
2.6
Consumer Durables
0.5
2.2
2.9
5.5
Industrial Supplies
10.0
17.9
25.6
54.4
Capital Goods
5.8
17.5
25.0
57.1
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primarily related to shipping constraints within China. The Chinese found it
more economical to import grain into coastal areas than to ship it from the
interior on an already overburdened transport system. Although the Chinese
could gain substantially by shifting production out of wheat and into higher-
yielding crops, we believe that over the next five to 10 years these transport
costs will remain the major constraint on trade. Hence, we feel imports of
foodstuffs probably will not increase substantially from current levels.
Consumer durables have always been a small share of total imports, even in
recent years, when China's planners made a conscious attempt to boost standards
of living and soak up excess currency by selling these goods in the domestic
market. Wasteful expenditures on TVs, VCRs, cameras and the like were much
ballyhooed in the Chinese press last year in conjunction with the anti-
corruption campaign; however, these clearly were not the reason for the
significant jump in imports (see figure 2). Future increases in consumer
durable imports will come only gradually
Capital goods have always been the most variable component of China's total
imports, declining (from their previous peak) in the first half of a five-year
plan and rising sharply to a new peak late in the second half (see figure 2).
In 1985, imports of capital goods skyrocketed to more than $17 billion, as
Chinese enterprises rushed to complete projects scheduled under the last five-
year plan and began gearing up for production in the next. We estimate that
capital goods imports will tail off during 1987 and 1988 but then begin to rise
in 1989, before peaking again in 1990.
Our projections of China's imports of capital goods are based on their past
relationship to Chinese investment in fixed capital. According to a recently
23
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11000-
10000-
9000-
8000-
7000-
6000-
5000-
4000-
3000-
2000-
1000?
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CHINA: IMPORTS BY END USE
MILUON US $
TOTAL
INDUSTRIAL SUPPUES
CAPITAL GOODS
CONSUMER DURABLES
FOODSTUFFS ?
1- T 1 T T -1-
42
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C0NFIDENTIA1
completed Rand Corporation Study,* China's goal of quadrupling outpat by the
year 2000 will require investment growth of 7.5 percent per year, a figure that
we have used for our simulation. Overall our projections show a net trade
deficit of roughly $50 billion from 1986 to 1990, and equal amounts for the
following two five-year plans. This is in line with statements made by Chinese
leaders concerning China's financing needs, as well as with the results of the
Rand Study. Assuming an average maturity of five years on this debt, China's
debt service ratio would only rise to 20 percent, an amount that is certainly
tolerable
China's Take From the World Market
By the year 2000 China will become one of the world's 10 largest markets if
it continues to expand imports at the same rate it has since 1978. At current
growth rates, China's share of the world market will reach 2.8 percent in 1990
and 4.8 percent in 2000. This would be consistent with import growth of 7.7
percent per year, the scenario we put forward above, provided world trade
expands at 2 percent annually.
China's fastest growing imports (in terms of its share of the world market)
are shown in Table 6. During the Sixth Five-Year Plan (1981-85) these 40
products accounted for roughly 70 percent of China's total imports and one-
quarter of the world's total exports.
o Capital goods and industrial supplies are clearly Beijing's top priority.
They are the fastest growing imports and account for four out of five
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* K. C. Yeh, "Estimating Capital Needs For China's Economic Development," A Rand
Note, N-2439, March 1986 ?25X1
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Table 6
China: Actual and Projected Shares of World Imports,
Top 40 Growth Commodities*
(Percent, ranked on 1984)
Actual** Projected***
Commodity 1975
1980
1984
1990
2000
TOTAL, all commodities 0.8
1.0
1.4
2.8
4.8
TOTAL, top 40 commodities 1.6
2.5
4.1
7.2
11.0
Zinc unwrought 0.0
0.0
11.1
15.0
27.6
Steel bars 2.5
4.4
9.0
13.8
21.8
Fertilizer 6.7
8.0
9.0
9.1
12.7
Televisions 0.0
3.8
8.6
10.8
18.9
Wheat 4.8
12.4
8.4
12.4
19.2
Steel sheets 4.1
3.4
7.5
10.1
14.5
Electron accelerator equip. -- 1.0
0.2
7.5
12.4
20.5
Railway vehicles and equip. 0.5
0.1
7.4
12.8
21.8
Fibers other than cotton 2.1
6.9
6.8
10.3
16.2
Steel pipe 4.0
3.4
6.7
8.0
10.3
Yarn of natural textile fiber 0.6
3.3
5.9
9.9
16.5
Copper ore 0.0
2.0
5.8
10.2
17.4
Yarn of synthetic fibers 0.9
3.8
5.6
9.0
14.8
Electric medical apparatus 0.4
1.0
4.6
7.7
12.8
Copper unwrought 1.1
0.8
4.4
7.4
12.4
Textile machinery 0.4
2.8
4.4
7.5
12.6
Steel ingots 2.7
0.6
4.3
6.3
9.7
Insecticides 0.3
1.0
4.1
7.0
11.9
Electric measuring equip. 0.8
1.8
3.8
6.3
10.4
-Crude rubber 2.4
3.4
3.7
5.6
8.7
Wood, lumber & cork 0.0
0.4
3.7
6.4
10.9
Plastic materials 0.6
1.3
3.4
5.5
9.0
Textile fabrics 0.3
1.7
3.4
5.6
9.2
Glassmaking machinery 0.8
2.7
3.3
5.8
9.9
Motorcycles 0.0
0.1
3.3
5.8
9.9
Silver, platinum, & lead 0.6
0.2
3.1
5.1
8.5
Mining machinery 0.5
1.7
3.0
5.1
8.6
Trucks 1.1
0.7
2.8
4.6
7.6
Misc. industrial machinery 0.7
1.9
2.6
4.1
6.6
Leather & dressed furskins 0.0
2.5
2.4
4.2
7.2
Telecommunications equip. 0.2
0.5
2.4
4.1
7.0
Watches & clocks 0.5
1.5
2.1
3.4
5.7
Sound recorders 0.0
0.4
2.1
3.6
6.1
Phonograph records & tapes 0.0
0.5
2.1
3.6
6.1
Paper and pulp mill machinery 0.2
0.3
2.0
3.4
5.8
Cameras 0.2
0.5
2.0
3.4
5.8
Ships 2.1
3.5
1.8
2.9
4.8
Tobacco 0.0
0.4
1.8
3.2
5.4
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Food processing machinery
0.1
0.2
1.8 .
3.2
5.4
.Electric equip. for home use
0.0
0.2
1.7
3.0
5.1
Computers
0.1
0.6
1.4
2.4
4.2
This table lists China's fastest growing import commodities
in terms of shar?of the world market. These commodities are
not necessarily the most important in terms of China's total
import expenditures. Commodities are defined at the three and
four digit level of the SITC, Revised.
** Data for 1975-84 are estimated from China's market share in
its trade with 33 trade partners. This sample represents more
than 80 percent of world trade.
***Projections are based either on straight line or linear regression
methods.
This table is
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items on the list. Imports such as steel, zinc, copper, and lumber,
suggest Beijing's emphasis on capital construction projects; purchase of
railway equipment, trucks, ships, and road-building machinery are
indicative of China's efforts to overcome transport bottlenecks; and
imports of fertilizers, insecticides, textile fibers and yarn, tobacco,
and machinery for the textile, glassmaking, papermaking, and food
processing industries demonstrate China's commitment to relieving
constraints on light industry.
o On the other hand, the increase in Chinese purchases of televisions,
motorcycles, watches, sound recorders and recordings, cameras and
household electrical equipment, from virtually a zero share of the world
market, suggests that a huge repressed demand for consumer durables
exists in China. We believe this will be a continuing problem Beijing
will have to grapple with, at least through the turn of the century.
Beijing's solution probably will be to continue restricting imports while
forging ahead to boost domestic production. This is probably consistent
with China's comparative advantage in these areas.
o A number of China's high-value imports are not on the list--as China's
own production increased its share of the world market dropped for such
products as organic chemicals, paper, cotton,, vegetable oils, aluminum,
metalworking machinery, boilers and turbines, and ball bearings
Beneficiaries of China's Import Surge
Presently, the geographic distribution of China's imports of these
commodities differs substantially from the geographic distribution of the rest
of the world's imports. This leads us to believe that as China's economy
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approaches a more "normal" market-orientation, the direction of China's imports
may change significantly. China's imports have been skewed heavily towards
Japan, perhaps more a reflection of Japan's geographic proximity and historical
trade relationship than of Japan's innate competitive abilities in these areas.
In the last two years Japan accounted for more than 30 percent of China's
imports, compared with its share of only 15 percent of the world market. In
contrast, the US share of China's market for these 40 commodities is slightly
below its 13-percent share of the world market; West Germany, the world's
largest exporter of these 40 products with a 14-percent share of the world
market, accounts for only 4 percent of China's imports
Table 7 presents projections for China's share of the exports of its 10
leading Western suppliers for 1990 and 2000, based on the assumption that
current trends continue. Japan would remain China's leading supplier, with Hong
Kong--acting in many cases as an entrepot for other countries--fast approaching
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Japan's share
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In 1985 China became the second largest market for Japan, accounting for 7.1
percent of Japan's total exports. Last year was undoubtedly a peak year,
however, and we expect China's share of Japan's total exports will grow only
marginally hereafter, to perhaps 8.8 percent by 1990. From 1980 to 1984 Japan's
exchange rate depreciated 24 percent against the dollar, but then jumped back to
the 1980 level at the end of 1985. This has led the Chinese to request
renegotiation of major capital equipment contracts already signed, a request to
which some Japanese firms have reluctantly agreed. The Chinese tend to be more
sensitive to import price hikes than most countries; hence, the yen appreciation
could lead to slower growth in China's share of Japan's sales than past trends
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Table 7
.Leading Suppliers of China's Imports:
Share of Exports Going To China*
.or
Actual
(Percent)
Projected**
Exporter
1975
1980
1984
1990
2000
ALL COMMODITIES
WORLD
0.8
1.0
1.4
2.8
4.8
Japan
4.0
3.9
4.2
8.8
12.0
Hong Kong
0.6
6.4
17.8
29.3
48.4
United States ?
0.3
1.7
1.4
2.4
3.7
Canada
1.1
1.2
1.1
1.2
1.2
West Germany
0.6
0.6
0.6
1.5
2.1
??
France
Australia
0.7
2.7
0.3
3.5
0.3
3.3
0.9
4.2
1.7
5.2
Italy
0.4
0.3
0.6
0.7
1.0
Brazil
0.8
0.4
1.8
2.5
3.6
United Kingdom
0.4
0.3
0.5
0.5
0.8
TOP 40 COMMODITIES
WORLD
1.6
2.5
4.1
7.2
11.0
Japan
5.0
5.0
6.8
15.4
22.2
Hong Kong
0.6
15.4
39.0
64.6
100.0
United States
0.1
3.5
4.3
7.1
11.8
Canada
3.9
3.3
3.7
3.6
3.3
West Germany
1.1
1.0
1.5
1.8
2.2
France
0.8
0.7
1.0
2.2
3.0
Australia
6.0
7.4
9.1
11.2
14.6
Italy
0.9
1.0
1.8
2.4
3.4
Brazil
0.0
1.3
0.0
12.5
20.8
United Kingdom
0.4
0.9
1.4
2.1
3.2
* This table shows China's top 10 suppliers based on China's
total import expenditures, not on China's share of the
exporter's market. Several LDCs had higher export shares
going to China.
** Projections use linear regression techniques on disaggregated
commodity data.
This table is
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suggest
China's purchases from Hong Kong --as well as its sales to the Colony--are
growing at such a pace that by 1997 the colony will be economically integrated
into the mainland. Projections of current trends show that for China's top 40
imports, China would account for all of the colony's sales by 2000, a feat which
of course is virtually impossible. What our projections clearly suggest,
however, is that Hong Kong's economic fate will depend in great part on China's
continued economic growth. Major shifts in Beijing's economic policies could
have a devastating impact on the colony.
US prospects for sales to China probably are better than indicated by a
projection of past trends. US exports have been held in check since 1980 by
several factors, including the appreciation of the US dollar, declining Chinese
demand for grain, and perhaps even Chinese retaliation for US attempts to
restrict textile imports. In 1980, with the dollar at a low, the United States
occupied 20 percent of the Chinese import market, a figure which fell to 11
percent in 1984, when the dollar reached its peak. Roughly half of the decline
was due to Chinese cutbacks in grain purchases, however. If the dollar
stabilizes at current levels, the United States probably could take a 15 percent
share of the Chinese market, equal to the present US share of the world market
for the commodities China is buying.
Overall the developed countries account for more than 80 percent of the
world's supplies of China's 40 fastest growing imports, and we expect them to
gain the most through China's emergence. Western Europe's share of the China
market is far below its share of the world market for the same commodities.
China simply has been too far away to attract much attention from businessmen in
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these countries. Only the biggest European firms have put much effort into
exploiting this rapidly growing market. Nevertheless, we expect China's imports
from Western Europe to continue making sizeable gains because of the nature of
the products China will be buying
Among grain exporters, Canada and Argentina probably will be hurt the most
from China's shift away from importing wheat. China has not yet tapped Canada's
potential as an exporter of trucks, mining equipment, and telecommunications
gear, nor of various commodities such as fertilizer, copper, and zinc. On the
other hand, China's importance as a market has continued to rise for Australia,
because Australia has been able to find other commodities such as iron ore,
steel, zinc, and plastics to sell in place of wheat.
We estimate that sales to China will not grow nearly as fast for the
developing countries as for the developed. A number of developing countries,
however, are major exporters of some commodities that China will be buying, and
therefore, stand a good chance to benefit from China's import surge. These
include exporters of copper ore and unwrought copper and zinc: Zambia, Zaire,
Chile, Papua New Guinea, and Peru; wood exporters: Burma, the Philippines, and
several other equitorial countries; tobacco exporters: Malawi and Zimbabwe; and
rubber exporters: Malaysia, Sri Lanka, and Liberia.
For many products the NICs also are in an excellent position to reap the
benefits of China's expansion. South Korea and Taiwan are becoming major
exporters of synthetic textiles, fabrics, steel, plastics, televisions and
telecommunications equipment. Their sales to China, through Hong Kong, have
jumped dramatically, a factor that could lead to increased pressures to deal
directly with Beijing. Of all the developing countries, however, Brazil clearly
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has the most to gain from China's emergence. By 1990 China will be one of the
top three buyers for several of Brazil's exports: plastics, pig iron, steel,
and fertilizer. Brazilia and Beijing have agreed to technological exchanges in
a variety of fields, including nuclear power development.
The Communist countries' share of China's trade probably will not increase
dramatically, with one exception, the USSR. The Soviets have many of the goods
that China needs most: steel, lumber, nonferrous metals, trucks, aircraft, and
other capital goods. Soviet technology in areas such as hydropower, long-
distance power transmission, and metallurgy generally is equal to what China
could get from the West. The Chinese realize, however, that for development
purposes the latest in Western technology is not always the most appropriate for
their needs--Western technology often is geared to saving on high-cost labor,
while the appropriate technology for China would be capital saving and labor
using. In some fields, the Soviets offer technology that may be more
appropriate for China's stage of development. For example, the Chinese will be
able to use Soviet assistance in revitalizing many of the factories built by the
Soviets back in the 1950s. The Sino-Soviet five-year trade agreement agreement
signed last year calls for a tripling of bilateral trade by 1990--as a result
the USSR's share of China's trade probably will increase from 3 percent last
year to over 6 percent by 1990. This share could increase even further if China
contracts with the Soviets to construct major development projects outside the
barter agreement
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IMPLICATIONS FOR THE GLOBAL TRADING SYSTEM
Converging Interests: China and the Developed Countries
China's entry into the global trade system--after years of economic
isolation--offers the rest of the world the possibility of major economic gains
through specialization of production and trade. The gains will undoubtedly be
greater for the developed than for the developing countries, due to the greater
complementarity of the economies and the lower risk of destructive competition.
In our judgment, China will be a major buyer of Western technology and
industrial goods, at a time when other markets may be in decline. China will
also be a significant new borrower of Western capital, at a time when other
developing countries have reached their limits. Because China used great
caution in borrowing when interests rates were high, China is one of the few
developing countries that still has a large capacity to expand borrowing and
repay its loans.
The surge in China's demand for capital goods and technology has opened
significant opportunities for sales by the developed West, but it has created
new challenges as well. In some sectors--textiles and apparel in particular--
the Chinese will outcompete local producers, causing a contraction of domestic
industries. China's entrance into the world economy thus will entail some major
adjustment costs on the part of the developed countries.
China's growing power as a major buyer has also given Beijing a new source of
influence with Western policymakers. Beijing often has used the lure of
increased sales as a bargaining point in its negotiations both with foreign
suppliers and with their governments. Beijing also has threatened to cut
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imports from countries that have restricted Chinese exports
We believe the Chinese will use their economic leverage primarily to achieve
their overriding econpmic goals, not in the pursuit of political or military
ends. Chinese negotiators frequently insinuate that increased trade depends on
an improvement in political relations, but Beijing does not normally use
explicit trade threats or promises for political objectives. There is no hard
evidence, for example, that Beijing has ever promised to increase trade with a
country in return for its switching diplomatic recognition from Taipei.
Diverging Economic Interests: China and the LDCs
Over the last 35 years Beijing has consistently supported the views of the
developing countries in international organizations. China's own economic
interests, however, do not always match those of the Third World. In practice,
China behaves more as a competitor than as a compatriot. In the future, we
expect that China's practical objectives in the international economy will begin
to clash strongly with those of many other developing countries
The most detrimental effects of China's outward looking trade strategy will
be incurred by the developing countries. As an exporter, China will compete
fiercely in developed country markets for light industrial goods, particularly
with the Newly Industrializing Countries. This export thrust will squeeze the
foreign exchange earnings of labor-intensive, low-cost, LDC manufactures by
making it more difficult for them to compete in developed country markets.
Although the Chinese have consistently urged the developed countries to grant
trade preferences to "emerging" nations, they have used their leverage as a
major buyer to obtain favorable treatment for their own exports, to the
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exclusion of other low-cost producers. This behavior conceivably could force
many developing countries to accept market sharing arrangements with the
developed countries, just so that they can hold onto their present shares
As an importer, too, China's interests probably differ substantially from
those of most LDCs. China's competitive strength comes from exporting finished
products. For most commodities China will be mainly a buyer rather than a
seller. As a buyer China will benefit most by declining commodity prices, in
contrast to many LDCs, which would rather see commodity prices increase.* For
this reason, China has consistently refused to participate in any of the major
commodity cartels.
So far most LDCs have not felt the brunt of China's expansion, and appear to
be oblivious to China's potential negative impact on them. Most see China as a
champion of third world causes, a source of development aid, and as a
potentially large market for their own exports--an image Beijing has carefully
cultivated.** They fail to see China as a first rate competitor, an alternative
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Crude oil may be an exception to this. At this point the Chinese are not
sure whether their advantage lies in higher or lower prices. The sharp drop
in price earlier this year cut China's expected foreign exchange earnings
from oil in half, to about $3 billion. In the long run, however, energy is
one of the chief constraints on China's economic growth, and if prices stay
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** In the last year, the Chinese have made a major effort to court the LDCs of
South Asia, the Middle East, Africa, and Latin America, with lengthy trips to
those areas by Premier Zhao Ziyang, Party Chairman Hu Yaobang, President Li
Xiannian and other ranking leaders. They have voiced strong support for debt
relief for the developing nations, economic sovereignty over the
multinationals, and a New International Economic Order, issues in which they
have only marginal interest. In large part, this effort to portray China at
the forefront of the fight for Third World issues is designed to garner
support among the LDCs for the issue most critical to China--the elimination
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outlet for Western investment, or as a importing country with many interests in
common with the industrialized nations.
Only a handful of LDCs have voiced any concern about the implications of
China's emergence for themselves. India was the first LDC to have any
misgivings, having lost nearly half of its World Bank allocations to China,
following China's admission to that organization. Even though Brazil probably
has much to gain through trade with China it is becoming more reluctant to .
support China's participation in activities of the Group of 77, GSTP meetings,
and in the GATT. Pakistan, too, is beginning to adjust its views on China, a
likely result of changes in the structure of bilateral trade in the last few
years. Pakistan now sees China as a major competitor for cotton fiber exports,
rather than as a major buyer, the situation just three years ago. Indonesia's
trade relations with China have been on-again and off-again, but Jakarta's
reluctance is not out of concern for China's economic potential, but out of fear
that Chinese traders will act as insurgents.
As China has offered generous terms in its trade with the developing
countries, most of them will be unwilling to erect barriers to China's exports
In order to fence off China's thrusts into third-country markets. Their best
hope is to negotiate carefully on China's accession agreement to the GATT
China and the GATT
The case for China's admission to the GATT is substantially different from
that of other centrally planned economies because of its huge export potential.
Although China is moving to reform the economy, whenever problems arise with the
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economic reform effort China's natural inclination will be to return to previous
modes of operation. In the process, the Chinese will create institutions that
may be rather onerous to the market oriented trading system. The Chinese have
made every effort to insure that they gain the maximum benefits of the open door
policy and of economic reforms, often at the expense of their trade partners:
o China has a strong penchant for the use of barter and bilateralism in
its foreign economic relations. The Chinese will link their import
decisions to the willingness of foreign markets to open up to China's
exports.
o The Chinese have developed and will maintain an extensive system of
subsidies to exporters. These include favorable "internal" exchange
rates, direct rebates, foreign exchange retention and allocation
schemes, favorable tax and tariff treatment, and priority access to raw
materials, energy, and transportation. If the GATT contracting parties
are to protect themselves against unfair trade by China, they will need
to devise procedures for judging whether the Chinese are engaged in
dumping their products.
o The Chinese system is replete with devices for protecting the domestic
market. In addition to the standard methods of tariffs, quotas, and
licensing procedures, there are a host of other channels for government
interference in import decisionmaking, including direct and indirect
administrative controls, credit controls, and restrictions on foreign
exchange allocations and disbursements.
o In order to cope with what the Chinese perceive as a persistent foreign
exchange shortage, the Chinese have adopted a series of trade-related
investment measures that will distort trade patterns. These include
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such measures as export performance requirements, technology import
requirements, and requirements that investors maintain foreign currency
balances with the Bank of China.
o Government-run trade corporations will remain a part of the landscape,
even though their direct role in trade decisionmaking diminishes.
Industrial targeting and trade discrimination are second nature to these
corporations. Although the Foreign Trade Corporations (FTCs) under the
Ministry of Foreign Economic Relations and Trade (MFERT) presently are
?
directly responsible only for about 40 percent of trade, probably more
than 80 percent of all trade transactions involve the FTCs in some way--
marketing, negotiations, shipping, etc.
As a result of these problems we believe that the West must negotiate carefully
China's admission to the GATT to insure that their economies are not unfairly
hurt by China's trade expansion.
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Are the Chinese Dumping?
Because wages, prices, and interest rates do not reflect their true
costs in China, the Chinese have difficulty determining in what product
lines they have a comparative advantage. In their annual trade plans, the
Chinese establish foreign exchange targets for individual exports. As a
result of these foreign exchange targets, China's trade behavior has been
economically perverse. In the short-run, declining world prices often
meant the Chinese would try to expand exports in order to reach a specific
foreign exchange target, while increasing world prices allowed them to cut
the volume of exports after fulfilling their foreign exchange quotas.
Over the longer run, volumes generally were adjusted to changing world
prices but without much regard for real domestic costs
Once foreign exchange quotas have been established in the plan China's
pricing strategy in essence has been to sell at whatever price the market
would bear. The Chinese have already encountered complaints from US
manufactures that they are dumping products as diverse as manhole covers,
menthol, mushrooms, wax candles, clothespins, chloropicrin, ammonium
paratungstate, greige goods, and printcloth. In some of these commodities
the Chinese probably have a comparative advantage--based on low real labor
costs--and are relatively efficient producers. In other eases, the
Chinese may be exporting, despite a comparative disadvantage, simply
because they do not know what their real costs are. Although we do not
have any evidence that China is pursuing a policy of predatory pricing in
order to drive competitors out of the market, in effect it sometimes--
wittingly or unwittingly--engages in a form of dumping to expand its
market share. Perhaps the biz2est nhA lenge for GATT will be to find a
solution to this problem
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IMPLICATIONS FOR US POLICY
We believe the United States has a major stake in China's successful
integration into the Nestern trade system. China's geopolitical course and
growing economic and political power will offer numerous opportunities for the
advancement of US interests. As with any change of such global proportions,
however, there are bound to be conflicts as well as common interests. The
Chinese are tough-minded and hard bargainers. Still mindful of the exploitation
of China by other countries when it was disunited in earlier times, the Chinese
today are sensitive to what they regard as their sovereign prerogatives when
negotiating with either governments or private business firms. Their constant
use of the term "equality and mutual benefits" in laying down the preconditions
for any dealings demonstrates their continued prickliness on this issue. But
they often pursue their interests in a way to ensure that the benefits accrue
more equally to China than to its partners
Economic Costs and Benefits
China's program of economic modernization will benefit many US economic and
commercial interests. Prospects for US sales are very good in areas such as
coal-mining and oil-extraction equipment; hydroelectric and electric power
generation; locomotives, aircraft, and trucks; telephones, computers, and air
traffic control systems; defensive weapons and military avionics; and plastics,
synthetic fibers, lumber and fertilizer. We estimate that US sales to China
over the period 1986 to 2000 will total $130-160 billion. This will be
partially offset by losses of $8-10 billion in US exports from Chinese
encroachment on traditional US markets, particularly in the Far East and
primarily for commodities such as corn, cotton, soybeans, and crude chemicals.
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( C )
How much the US economy gains or loses from China's huge financing efforts
will depend primarily_on whether the United States itself is a net borrower or
lender. The $150 billion in financing that we project China will need over the
next 15 years pales in comparison with net US borrowings of $125 billion last
year alone. Although US banks would clearly benefit from fees earned through
servicing Chinese loans, these fees may not be sufficient to offset the economic
losses caused by upward pressure on interest rates if both the United States and
China are competing for funds.
In a similar vein, the economic benefits of US direct investment in China may
be diluted if the investment would otherwise have been made in the United
States. This danger would be compounded if the technology transfered to China
through the investment created competition for industry in the United States.
US investment in China may carry less risk than investment elsewhere, however.
Because China's investment demand will be largely for infrastuctural and
resource development projects, we believe China is not likely to be a
significant alternative to US investment at home.
We estimate that US investment in China--already worth about $1.4 billion--
could reach $10-15 billion by 2000. As investment increases US businessmen will
intensify pressure on Washington to obtain concessions from China for fair and
equal treatment of investments, compensation against expropriations, and
guarantees of foreign exchange convertibility and remittances. Unless China's
economic system changes dramatically, however, Beijing will continue to have
difficulty offering such concessions, a factor that will be a source of
irritation in bilateral relations.
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We estimate that Chinese sales to the United States will total $75-100
billion over the next 15 years. US industries such as textiles, clothing, and
processed foodstuffs will be hurt the most. Actual economic losses, however,
will not be as large as they appear on paper. Many of China's exports will
simply displace those of other higher-cost exporters in US markets that have
long been dominated by foreign goods. Moreover, the negative impact on some
industries probably will be greatly outweighed by the benefits to other US
industries from greatly increased sales to China and to US consumers through
lower prices.
Accommodating a new entrant into the US market will not be easy. China is
following its new path at a time when protectionism is being advocated with
increasing regularity throughout the world. With stagnant or declining world
trade, China's expansion can come only at the expense of some other countries'
trade shares. Difficult choices will have to be made between several deserving
trade partners. Although these decisions will have a significant economic
impact on some of the United States' trade partners, we believe they will depend
primarily on political rather than economic considerations
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UUNrILMNTIA
Political Costs and Benefits
The potential political benefits of increased US-China trade and economic
cooperation could be as great or greater than the economic ones. Expanding
economic relations should help strengthen political ties. Even though closer
economic links cannot guarantee friendly political relations, on balance they
will enhance the prospects for good overall relations. To the extent that US
cooperation, both private and governmental, helps Beijing achieve its
developmental goals, this should contribute to political stability in China,
increase the chance that Beijing will continue to pursue pragmatic, growth-
oriented policies at home, and reinforce the trend towards more moderate,
cooperative Chinese foreign policies.
A China that sees its future modernization dependent on improvements in
economic relations with the West will be less likely to lean back towards the
Soviets. Economics and trade are potent weapons for drawing China closer to the
United States and away from the Soviet Union. Moscow recognizes this, too,
however. The Soviets have offered a range of technology that would help the
Chinese in developing their economy. China's economic needs thus could lead to
a reduction in Chinese vituperance against the Soviets, and perhaps even to some
improvement in relations on the political front. Because the Chinese have
sufficient commercial options through their trade with Japan, Western Europe,
and the USSR to obtain most of the most of the technologies that they need for
development, US economic leverage on Beijing through restrictions on sales will
be very limited.
China's increasing desire for markets, technology, and industrial supplies
probably will make China less belligerent regionally, as well as globally. We
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believe, for example, that China will be less likely to jeopardize its economic
ties to Washington by becoming involved in a major confrontation over US links
with Taiwan. Although an economically stronger China could appear more
menacing, both militarily and economically, to some South East Asian countries,
we suspect these countries would turn to the United States for support, not to
the Soviet Union. South Korea, Taiwan, Indonesia, Singapore and Malaysia, in
particular, would find that capitulation with the Soviets is intolerable. Many
of these countries will thus seek redress from Washington for damages wrought by
competition from China, whether they are justified or not
Finally, China's economic expansion may also have a profound psychological
impact on the Third World. If market-oriented reforms succeed in China, many
developing countries will be tempted to follow in China's path. China's
economic success already has led North Korea to take a more neutral position
between Beijing and Moscow, and thus is partly responsible for the reduction in
tensions on the Korean Peninsula. China has gone further than any other
communist country in breaking away from Soviet-style planning. Western attempts
to contain China's economic expansion probably would cause Beijing to reexamine
the open door policy and could lead to a retrogression in its efforts. A
reversal in China's course could lead many Third World countries to believe that
free trade and market-oriented reforms would not work for them either.
Recommendations
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The Chinese view full participation in the world economy as a right that is
naturally due them. They believe the current level of their trade falls far
below their present capabilities and they are working feverishly to raise trade
to a level that is commensurate with their national economic stature. Any overt
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WWLUGIVIIML
attempt by the United States to hamper Chinese efforts to reach this goal--for
example by denying China access to markets, supplies, or technologies--is likely
to be considered an unfriendly act by Beijing. Yet, we believe several steps
could be taken to insure that the benefits of China's participation in the
global economy are shared more equally
In our judgment, China's desire to join the GATT probably will provide
Washington with the best opportunity it has of influencing China's trade
behavior. In the past the United States has been at a disadvantage in dealing
with China. Unlike China, the United States lacks a mechanism for directly
linking import and export decisions. We believe that through comprehensive
bilateral negotiations the United States will be able to insure that all of its
interests are served.
As a condition for China's entry into the GATT, we believe it is more
important to get a commitment from Beijing to gradually move its internal prices
to external levels than to negotiate reductions in China's tariffs, which in the
Chinese system do not have a major role in influencing trade. Many of the trade
problems that the United States has with China can be attributed to China's lack
of a rational pricing system. The Chinese use tariffs and quotas largely to
overcome the distortionary effects of their domestic pricing system--quite a
different purpose than for market economies. The Chinese would have less need
to subsidize exports or to protect their own industries from imports if they
were to allow internal prices to rise or fall to external levels. A more
rational pricing system would also help to eliminate the boom-bust cycles in
China's imports that have had such a destabilizing influence on Western trade
partners. Nothing has been more discouraging to Western businessmen than to
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have their deals go sour after years of negotiation because the Chinese
authorities arbitrarily clamp down on foreign exchange usage at the first sight
of a drop in their reserves.*
Japan's experiences in dealing with China probably contain some useful
lessons for the United States. Japanese trading companies have established a
much larger presence in China than US firms have. These companies are able to
offer China "one-stop" shopping, in which not only financing, but barter and
compensation trade deals can be arranged. This became a major advantage to the
Japanese as China decentralized. Chinese enterprises had to search for their
own source of funds; no longer could they depend on direct allocations from the
state. Japanese firms were ready to supply them with the funds and any other
help they needed. Now that anti-trust restraints on US firms have been removed
under the Export Trading Act of 1982, we believe US firms could be encouraged to
join forces to participate in the China market.
The Sino-Japanese Long Term Trade Agreement has increased Tokyo's leverage on
Beijing and has provided a focal point for discussions on major trade
disagreements. Although bilateral trade agreements tend to distort the
efficient allocation of resources, as a second best solution, we believe a
concrete arrangement such as Tokyo has with Beijing would more firmly establish
the benefits to be gained by both sides from expanded trade. An agreement of
* We believe the GATT negotiating process might also be used to extract
concessions from Beijing that would improve conditions for US investors in
China. There is no guarantee that American businessmen will continue to
regard China with favor unless there is a perception that they can eventually
be profitable in China's market. China's desire to gain the benefits of GATT
membership will provide the United States with levera e that was lacking in
the Sino-US Bilateral Investment Treaty negotiations.
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this sort could be negotiated as side document to the GATT process
Japan has been able to gain more from trade with China because it has taken a
much more active position in ferreting out what China has to offer. The
Japanese, for example, have actively participated in financing several railroads
that are dedicated to bringing Chinese coal to port cities for export to Japan.
The Japanese are helping to build infrastructure in Yunnan Province in
southwestern China in order to make extraction and processing of several
minerals and metals commercially viable. Because of Japan's coordinated efforts
to obtain those goods that are most useful to it, the Japanese have taken the
bulk of China's resources, while other countries have gotten what is left. In
contrast, the United States has tended to focus on sales to China as the only
benefit of the trade relationship while viewing imports as a necessary evil--
losing sight of the fact that the only reason for exporting is to get something
else in return
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APPENDIX A
Estimation Methods for Exports
We used a supply-side approach to estimate China's future exports because
China's export growth has been driven primarily by China's own competitiveness
rather than by increasing world demand. The supply side approach, ignoring
world demand, is justified based on China's past export record. Over the past
10 years, about 55 percent of China's export growth has been due to China's
increasing competitiveness in the world.* Of the remainder, about 35 percent was
due to the general increase in world imports (the demand side), and 15 percent
was due to the geographic destination of exports, while the particular
commodities China exported created a drag on export growth of minus 5 percent.
In the period since 1979, China's competitiveness has increased to account for
nearly 70 percent of export growth. Most impressively, China has been competing
in product lines that have been subject to decreasing world demand, but has
managed to garner an increase in market share by undercutting the prices of its
competitors.
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Our estimates of export availabilities generated by the plan were derived by
first, examining relationships between exports and domestic output of
agricultural goods, extractive commodities, and manufactures for the period 1978
* This estimate was made using the Constant-Market-Share AnalYsis of export
growth, developed by Edward Learner. According to this technique, changes in a
country's exports can be broken down into four categories according to the
following causative factors: a general change in world imports (the engine of
growth concept); a change in particular markets and how it relates to the
geographic dispersion of the country's exports; a similar structural change in
respect of product composition; and changes in price or quality that can be
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to 1985, then, applying China's plan targets for each of these variables to the
estimating equations to derive export availabilities. Our estimates, with t-
Statistics in parenthesis, are as follows:
Xag = 1920.7 + 0:0346 Qag Adjusted r = 0.88
(3.50) (5.97)
where:
Xag = Dollar value of agricultural exports.
Qag = Gross value of agricultural output at constant 1980
prices, converted to US dollars at 3.0 Yuan/$.
Ln Xext = -8.443 + 2.0377 Ln Qeng + 1.099 Ln Poil
(6.85) (11.27) (11.19)
where:
Adjusted r?"' = 0.95
Xext= Dollar value of exports from the extractive sector.
Qeng= Total energy production (in standard fuel equivalents).
Poil= World price of crude oil.
Ln Xman = -7.283 + 1.3621 Ln Qind Adjusted r = 0.80
(2.19) (5.01)
where:
Xman= Dollar value of exports from the manufacturing sector.
Qind= Gross value of industrial output in constant 1980 prices,
converted to US dollars at 3.0 Yuan/$.
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Our estimates for China's share of the world market for individual commodities
in tables 2 and 3 were derived by linear regression or by linear projection of
end-year trends, whichever procedure appeared to produce the best fit, given the
existence of outlying data. This same procedure was also used to estimate
China's import share of the world market, in tables 6 and 7.
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APPENDIX B
Estimation Methods For Imports
Linear regression pethods were used to estimate China's import requirements
generated by the plan. Our model assumes a totally elastic supply of world
exports, so that only China's demand is taken into account. We analyzed past
relationships between the growth of domestic demand for investment goods,
intermediate inputs, and final consumer goods and imports of those goods in
order to project the effects of dhinais long-term targets for the domestic
economy on trade. Our projections for China's imports are subject to more error
than projections for exports, in part because China's imports will ultimately
depend on export growth and in part because China's imports have behaved more
erratically than exports
Our estimating equations, with t-Statistics in parenthesis, are as follows:
Ln Mind = -6.293 + 1.273 Ln Qind
(2.78) (6.88)
where:
Adjusted r2. = 0.89
Mind= Dollar value of imports of industrial supplies.
Qind= Gross value of industrial output in constant 1980 prices,
converted to US dollars at 3.0 Yuan/$.
Mcap = -5276.3 + 0.3828 If ix
(2.20) (5.42)
where:
Adjusted r = 0.83
Mcap= Dollar value of imports of capital goods.
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Ifix= Investment in fixed assets, converted into US dollars.
Our estimate for imports of consumer goods is a linear regression on time trend,
since no other regression yielded satisfactory results. Likewise, we could find
no significant correlation between imports of foodstuffs and agricultural output
and therefore assume, for reasons stated in the text, assumed that they will
remain constant.
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