CHINA: FOREIGN TRADE POLICY IN THE 1970S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80T00702A000200060012-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 14, 2016
• Document Release Date: March 20, 2003
• Sequence Number: 12
• Publication Date: August 1, 1978
• Content Type: RP

1
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Foreign
Assessment
Center
China:
Foreign Trade Policy
in the 1970s
Secret
ER 78-10455
August 1978
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China: Foreign Trade Policy in the 1970s
Central Intelligence Agency
National Foreign Assessment Center
Kev Judgments
Policy and Politics
? A Chinese decision to expand foreign trade, made in the early 1970s,
marked a return, on a larger scale, to the trade policies of the mid-
1960s.
? Debate over this policy was one of the major features of the political
struggle between the. radical and moderate factions within the Chinese
leadership for the next several years.
? Leftist attacks were strongest during the Campaign To Criticize Lin
Piao and Confucius (1973-74) and the Anti-Teng Hsiao-ping Cam-
paign (late 1975 to autumn 1976).
? The trade debates aired genuine radical-moderate differences over
foreign trade policy; they were also a vehicle for political opportunism.
The real differences centered on the interpretation of self-reliance, but
they were greatly magnified in the propaganda, as radicals sought to
discredit their moderate opponents.
? The moderate faction's program, launched- in 1972, was highlighted by
large-scale purchases of Western technology, increased use of credits,
and an export drive to pay for imports.
? The strategy unraveled when the need for record agricultural pur-
chases and Western inflation and recession led to a balance-of-
payments crunch in 1974. Peking reacted by holding down imports in
1975. Imports tumbled in 1976 as political infighting disrupted the
economy and hampered planning.
? The basic policy still holds, however. It was reaffirmed repeatedly in
1977, and trade levels recovered.
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? Peking's traditional conservative reaction to economic forces, not
politics, has been the dominant influence on the trade sector. Radical
attacks may have slightly strengthened the reaction to balance-of-
payments problems. Local dislocations stemming from political turmoil
cut severely into imports in 1976. But the dominant influences were
agricultural production and debt avoidance.
? A new major round of technology purchases will begin soon; the
emphasis will be on lagging industries, such as steel, petrochemicals,
electric power, and transportation. The better the agricultural situa-
tion, the more funds will be available for industrial purchases.
? Concerted efforts are under way to increase exports, but they will bear
fruit only slowly. One key to export earnings in the short run is the
recently signed long-term agreement with Japan. For the longer run,
the Chinese are seeking both to develop export industries and to
improve marketing.
? Peking remains unwilling to admit to direct foreign borrowing but has
adopted several techniques of obtaining only thinly disguised foreign
credit. Further movement along this path is likely to be slow-but
inexorable.
? China's foreign trade and financial policies nonetheless remain conser-
vative. Trade is a small part of the economy-roughly 5 percent of
gross national product. Self-reliance is the guiding principle which,
since the Sino-Soviet split, has meant avoidance of dependence on any
one country and cautious use of foreign credits. Under these circum-
stances, dramatic changes in trade levels or patterns are unlikely.
SECRET
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China: Foreign Trade Policy in the 1970s
Background
Since the founding of the People's Republic of
China (PRC), foreign trade has been a small but
important sector of the economy. The Chinese
have always recognized the value and necessity
of foreign trade as a means of making up for
shortfalls in production, providing goods not
available in China, and acquiring advanced
technology.
Economic and political necessity led to heavy
dependence on the Soviet Union in the 1950s.
The need to rebuild the economy amid the
Western embargo on China led Mao to pursue a
policy of "leaning to one side" by which China
based its industrial and technological growth on
a rapid buildup of trade with the USSR. Sino-
Soviet trade-about one-half of China's trade in
the first decade of the PRC-peaked in 1959
when imports and exports totaled $2 billion.
Imports from the USSR provided the major
impetus to China's industrialization efforts, sup-
plying both capital goods and industrial raw
materials. Soviet aid provided $1.4 billion in
credits and large amounts of technical assistance.
The abrupt withdrawal of Soviet technicians-
blueprints and all-in mid-1960 was a serious
shock to the Chinese economy, already strained
by the Great Leap Forward. Peking decided to
reduce its dependence on the USSR. Sino-Soviet
trade plummeted to 20 percent of the 1959 peak
by 1965. China decided to pay off its Soviet
debts ahead of schedule by running a hefty trade
surplus with the USSR during 1961-65. The
unhappy experience with Soviet economic co-
operation left a deep impression on the Chinese
that persists today in their reluctance to depend
too heavily on any one country for trade or to
incur large debts.
After 1960 China reoriented its trade toward
Japan and the West, shifting 80 percent of its
trade to the non-Communist countries by the end
of the decade. At first the principal impetus
came from harvest failures that led to substantial
grain imports. By 1962 the economy was recover-
ing from the setbacks of the Great Leap and
China turned to the West for increasing amounts
of industrial supplies and capital goods. In mid-
1963 Peking began to purchase complete plants
and the services of 'Western technicians from
Japan and Western Europe, financed in part by
medium-term credits. By 1966 contracts for over
50 plants worth more than $200 million had been
signed.
The Cultural Revolution (1966-69) cut short
this resurgence in the trade sector. Economic
disruption in 1967 hampered exports, and im-
ports were cut in 1968, in part to correct the
trade deficit. Trade relations with many coun-
tries were strained by Red Guard harassment of
foreign businessmen and technicians at plant
sites. The plant import program was suspended
and Techimport, the trade corporation for tech-
nology imports, was dissolved in 1969.
Foreign Trade Debates
With the restoration of orderly economic plan-
ning after the Cultural Revolution, the leader-
ship-with Mao's approval-embarked on a pro-
gram to accelerate economic development. The
goals of this program, publicly revealed by Pre-
mier Chou En-lai at the Fourth National Pco-
. ple's Congress in 1975, were the Four Modern-
izations: modernize China's agriculture, indus-
try, science and technology, and defense by the
end of the century. A key element of this pro-
gram was a new emphasis on foreign trade,
highlighted by large-scale imports of foreign
technology, an export drive to boost foreign
exchange earnings, and a more liberal credit
policy. The apparent goals of the trade policy for
the 1970s were:
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? Increased purchases of foreign technology to
spur modernization and industrial supplies to
meet the needs of the expanding economy.
? An export drive to increase foreign exchange
earnings through expanded markets for tradi-
tional goods and larger exports of raw mate-
rials, particularly petroleum.
? Balancing total foreign exchange expendi-
tures against total foreign exchange revenues;
thus, a more liberal use of credits for capital
imports and other forms of import financing.
? Expanded trade relations with all nations,
regardless of social system, but without
dependence on any one country.
Debate over foreign trade policy in the 1970s
has centered on the elusive Chinese concept of
"self-reliance." While never officially defined,
self-reliance has been described in such terms as
"maintaining independence," "relying primarily
on our own efforts," "keeping the initiative in our
own hands," and "learning what is good from
foreign countries." These ambiguous statements,
of course, leave open a number of questions-for
example, what is the proper level of foreign
trade? What types of goods should be imported?
How to balance technology imports with the
need to develop indigenous technical capabili-
ties? To what extent do export requirements and
use of credits compromise independence?
Throughout the foreign trade policy debates of
the 1970s, it was possible to discern in the
Chinese propaganda two opposing points of view,
which, for the sake of simplicity, can be classified
as "radical" and "moderate." It should be kept
in mind, however, that the boundaries between
these two competing persuasions have often been
blurred and that the personalities allegedly sub-
scribing to each view have sometimes changed
sides owing to genuine conviction as well as
purely political motivation.
The Radical View
In general, the radicals believe that large-scale
imports of foreign goods undermine the faith of
the Chinese people in the successof the revolu-
tion. The radicals fear that exposure to capita-
lists, capitalist-made products, and capitalist
business procedures gradually erodes the "revo-
lutionary will" of the masses, leading eventually
to "revisionism." In addition, according to the
radical view, China should never again rely on
the outside world. China's leaders should rely
instead on the "wisdom of the masses" in order
to discover, develop, and master new technology.
Reliance on foreigners, in the eyes of the radi-
cals, would not only rekindle the latent sense of
Chinese inferiority caused by a century of hu-
miliation at the hands of the West but also
make China vulnerable to future economic
"blackmail."
The Moderate View
The moderates, who view China as a weak,
vulnerable, and underdeveloped country, are con-
cerned, above all else, with the ultimate goal of
transforming China as rapidly as possible into a
modern, industrialized state. Because the mod-
ernization of a backward China requires the
import of goods from the industrially and techno-
logically advanced West, foreign trade is consid-
ered by the moderates to be essential. Moreover,
in contrast to the radicals, the moderates are
concerned less about the possibility that China
may become tainted with "revisionism" by deal-
ing with the capitalist West and more about the
much stronger probability that China will not be
able to keep pace economically without the
West's goods and technology.
A brief review of the major foreign trade
debates of the 1970s, which took place during
two periods of intense political conflict among
the Chinese leadership, provides much insight
into the actual differences between radical and
moderate foreign trade policies.
The Campaign To Criticize Lin Piao and Confucius,
1973-74
During the course of the relatively brief but
disruptive Campaign To Criticize Lin Piao and
Confucius, many articles-usually allegorical in
style-appeared in the Chinese media both at-
tacking and defending the foreign trade policies
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that were then being implemented by the moder-
ates led by Premier Chou En-lai.
In their rhetorical attacks, the radicals criti-
cized the moderates' foreign trade policy, charg-
ing the moderate leaders with such "crimes" as
being "slaves of foreigners," "not relying on the
masses," "trailing behind at a snail's pace," and
being "agents of imperialism." The moderates, in
response, defended their policies by emphasizing,
usually with the help of a quotation from Chair-
man Mao Tse-tung the importance of foreign
trade in economic modernization.
Perhaps the best defense of moderate foreign
trade policies at the time was made in January
1974 by Foreign Trade Minister Li Chiang in
the lead article of the newly resurrected journal,
China's Foreign Trade, which had ceased publi-
cation during the Cultural Revolution. Although
Li acknowledged the need for self-reliance in
foreign trade and reaffirmed that China never
intends to attract foreign investment capital,
condone exploitation of domestic or Third World
natural resources, or engage in joint ventures; he
asserted that China does wish to participate in
"negotiation by the two business parties in the
light of common international trade practice"-a
clear reference to more liberal financing proce-
dures. To make his defense of "making foreign
things serve China" legitimate, the Foreign
Trade Minister quoted from a 1949 Mao Tse-
tung statement which declared that the "Chinese
people wish to have friendly cooperation with the
people of all countries and to resume and expand
international trade in order to develop production
and promote economic prosperity." Interestingly,
this obviously moderate statement was not again
publicized in the Chinese press until after the
purge of the "gang of four" (see below).
The Anti-Tang Hsiao-ping Campaign (Late 1975
to Autumn 1976)
Radical critiques of moderate foreign trade
policy, which had dropped noticeably in frequen-
cy after early 1975, resumed in force during the
campaign to discredit Teng Hsiao.-ping. The
renewed upsurge in radical attacks undoubtedly
reflected the rising influence of the "gang of
four." Several of the "rightist" policies attribut-
ed to Teng and severely criticized by the radicals
were directly concerned with foreign trade. One
Teng document, entitled, "Some Questions on
Accelerating the Development of Industry" ("20
Points," for short) proposed both the increased
export of China's natural resources-especially
oil and coal-in order to pay for advanced
technology, and the signing of contracts with
foreign countries "in accordance with accepted
practices of international trade such as deferred
payments and installment payments."
The most common criticism of Teng's "20
Points" made by the radicals was that Teng
wanted to "sell China out to the imperialists."
Rhetorically, these attacks usually took the form
of charges that Teng attempted to turn China
into a "raw material base," a "repair assembly
workshop," and an "investment ground for
imperialism."
In addition, according to recent Chinese press
accounts, the radicals extended their attack be-
yond Teng Hsiao-ping to the Ministry of Foreign
Trade, which they denounced as the "Ministry of
National Betrayal." The radicals also criticized
oil exports, denouncing them as "shifting the
international energy crisis on the Chinese peo-
ple." One report released in the Chinese media
after the October 1976 purge of the "gang"
accused the now-discredited radicals of having
instructed their subordinates in Shanghai and
Liaoning to convert certain coal-powered fac-
tories to the use of oil, thereby creating an
artificial "oil crisis" for which the moderates'
export policy could be blamed.
The Role of the Debates
The polemical articles appearing in the Chi-
nese media during the two periods of foreign
trade policy debate appear to have served two
purposes simultaneously. First, the articles aired
honest differences between moderates and radi-
cals over such issues as the type and amount of
foreign technology to import, and the methods
for financing these purchases. Second, the po-
lemics provided a platform for the radicals to
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attack moderate leaders through a frontal assault
on moderate foreign trade policies.
These two aspects of the foreign trade policy
debates tend to cloud their role and purpose.
Although differences between radicals and mod-
erates did exist over certain foreign trade poli-
cies, these differences were magnified in the
media as each side attempted to discredit the
other. On the other hand, the radical-moderate
ideological disagreements cannot be entirely dis-
missed as political opportunism.
Foreign Trade-A Larger Role in the 1970s
While the foreign trade policy debates were
taking place, the moderates, led by Chou En-lai,
continued to implement their newly formulated
foreign trade policy. China improved relations
with its traditional trading partners and opened
trade relations with others, most notably the
United States. Table 1 illustrates the rapid in-
crease of China's foreign trade in the 1970s.
Trade data in current US dollars, of course, show
the effects of inflation and devaluation of the
dollar as well as the growing volume. Neverthe-
less, real growth in trade was substantial. The
Communist countries benefited from the overall
expansion of Chinese trade but did not improve
their share.
Technology Imports
Signs of a more expansive trade policy began
to appear in 1970-71 with a sharp upsurge in
inquiries and negotiations for complete plants
and increasing purchases of major items of ma-
chinery and equipment. Techimport was recreat-
ed as a separate trading corporation in Novem-
ber 1972 and the first major plant contracts
began to be signed that year. During the first
half of the 1970s China purchased nearly $6
billion worth of Western industrial plants, trans-
port equipment, specialized machinery, and sci-
entific instruments. These purchases have en-
tailed the largest influx of technicians into China
since the 1950s-some 3,000 Western techni-
cians in the past several years. In addition, more
than 2,500 Chinese have been trained abroad
under these contracts.
Complete plants have been the cornerstone of
China's technology imports. Beginning in 1972,
over 140 plants worth about $2.8 billion have
been purchased. The pattern of plant purchases
reflects Peking's wariness of becoming overly
dependent on any one supplier. Contracts have
been scattered among Japan, Western Europe,
and the United States, with only Japan's share
being more than one-third of the total. The plant
program has concentrated on facilities for the
Non-Communist Communist
Countries Countries
1970 ............................ 2.1 2.2
1971 ............................ 2.4 2.3
1972 ............................ 3.2 2.8
1973 ............................ 5.1 5.2
1974 ............................ 6.7 7.4
1975 ............................ 7.2 7.4
1976 ............................ 7.2 6.0
19771 ........................ 7.9 6.9
1.6 1.9 0.5 0.4
1.9 1.8 0.6 0.5
2.4 2.3 0.7 0.5
4.1 4.5 1.0 0.7
5.2 6.4 1.4 1.0
5.8 6.4 1.4 1.0
6.0 4.9 1.2 1.1
6.4 5.4 1.5 1.4
' Estimates based on a 15 January 1978 claim by the New China News Agency that trade in 1977
increased more than 12 percent over 1976, reaching the highest total in PRC history, with a favorable
balance of trade. In this paper, exports are f.o.b. and imports are c.i.f.
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petrochemical, metallurgical, and electric power
industries with the twofold aim of acquiring
advanced technology and permitting import sub-
stitution for major commodities such as grain,
fertilizer, steel, and cotton.
Concealed Borrowing
Since the repayment of its loans from the
USSR in 1965, China has publicly prided itself
on being a nation without debts. Although Pek-
ing's financial policies are ultraconservative, this
no-debt claim is a facade based on Chinese
definition. Short-term credits of six to 18 months
have been used since the early 1960s for pur-
chases of Western grain and fertilizer, and sever-
al plants in the mid-1960s were financed by
medium-term credits from Japan and Western
Europe. Use of five-year medium-term credits
was resumed, but on a much larger scale, for i
plant purchases in the 1970s. Contracts for com-
plete plants totaling $1.5 billion have been fi-
nanced under credits from Japan and Western
Europe as of 1972. In line with China's conserva-
tive financial policy, the financing has all been
done with supplier credits-that is, the firm that
supplies the plant borrows the money, and China
repays the firm over five years with interest. By
Peking's definition this method of financing is
called "deferred payments," not loans.
In addition to the plant credits and the con-
tinuing grain credits, Peking began to tap other
sources of short-term financing to support its
increasing imports of industrial supplies.
Export Drive
China also launched a parallel drive to boost
export earnings. Before the 1970s Chinese export
goods were noted primarily for their low prices,
which compensated foreign importers for the
often frustrating deficiencies in style, quality,
and delivery schedules. Beginning in 1972 work-
ers were exhorted to increase production of ex-
port goods and to improve the quality and pack-
aging of these products. PRC trade delegations
began to travel to many Western countries, trade
agreements were signed with the growing num-
ber of nations establishing relations with Peking,
and China began to stage or participate in
greater numbers oftrade fairs overseas. Empha-
sis was put on increasing the proportion of
manufactured goods in total exports and greater
attention was given to raising prices to interna-
tional levels. Finally, a major port improvement
program was launched and China's international
fleet was expanded to handle the growing trade.
The export drive got added help in 1973 when
the Arab oil embargo and OPEC price hikes
created demand for China's newly available sur-
plus of crude oil. Despite the relatively small
quantities available, the premium prices asked,
and the adverse refining characteristics of Chi-
na's oil, oil exports soon became a sizable compo-
nent of export earnings-11 percent in 1975-
largely because of sales to Japan.
The export drive was very successful, but not
trouble free. The value of China's exports to the
non-Communist world jumped sharply from $1.6
billion in 1970 to $6.0 billion in 1976. Even in
real terms, Chinese exports roughly doubled over
the period. But problems arose in the course of
the rapid expansion. Prices of some commodities
at the 1973 spring Canton fair were set too high
and had to be rolled back at the fall fair. A
September 1973 NCNA article admitted that
China could not produce enough to meet the
needs of its growing foreign trade. Failures by
the Ministry of Foreign Trade promoted criti-
cism from Premier Chou himself.
Trade Strategy Unravels
Expansion of China's trade meant greater
exposure to the vagaries of the world economy.
-Growing economic problems in the West com-
bined with domestic agricultural setbacks to
disrupt Peking's trade plans. by the, mid-1970s.
Just as China began its major technology
purchases,. poor harvests, especially in 1972,
forced Peking to import record amounts of agri-
cultural products at a time of tight world supplies
and sharply rising prices. Imports of agricultural
products jumped from $0.6 billion in 1972 to
$1.4 billion in 1973 and then to $2.0 billion in
1974. Meanwhile worldwide inflation was push-
ing up the costs of China's imports of machinery
and industrial supplies such as fertilizer and
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metals. Downpayments on the $1.3 billion in
whole plant contracts signed in 1973 added to
the financial burden.
China's hard currency trade deficit hit $440
million in 1973, more than five times the surplus
level of the previous year but still manageable
because of credit. financing. Although another
substantial deficit was expected, Peking probably
did not anticipate the deterioration in its balance
of payments in 1974. The crunch came in the
second half of the year as the bulk of repayments
for grain credits from 1973 fell due and growing
world recession cut demand for Chinese exports.
Measures were taken to reduce foreign exchange
outlays by canceling contracts and delaying de-
liveries of agricultural products and scaling back
purchases of machinery and equipment. Despite
these measures the trade_ deficit with the West
hit a. record $1.2 billion
new plant orders from the peak year of 1973.
reflects not only a desire to trim back outlays for
downpayments . and future machinery imports,
but also the need for a breathing space to enable
China to absorb the large amounts of technology
already received or on order.
In 1976 Peking probably intended to continue
to restrain imports moderately in the face of
lagging Western demand for its exports. Grain
requirements were the lowest in years and equip-
ment deliveries for whole plants were declining
as the contracts from previous years were wind-
ing up. Political turmoil, however, disrupted the
economy, prevented agreement on the new five-
year plan for 1976-80, and inhibited initiatives
by the trading corporations. Imports from the
West plummeted while exports continued to rise,
largely unscathed by the disorders. The result
was a record $1.1 billion trade surplus with the
A general retrenchment in foreign trade fol-
lowed in 1975. Improved harvests in 1974 per-
mitted cutbacks in agricultural imports. Mean-
while, higher oil deliveries more than offset
declining traditional exports to the recession-
plagued West. Peking thus was able to cut its
hard currency trade deficit in half, thereby eas-
ing pressure on the balance of payments. Table 2
shows. the pattern of trade with the non-Commu-
nist world including the results of Peking's ef-
forts to correct its deficits. The steady decline in
West for the year.
Trade in 1977
Trade officials had cautioned foreign business-
men not to expect a rapid recovery in trade in
1977, despite the positive rhetoric, because it
would be a year of rebuilding for the economy
after the setbacks of 1976. On 15 January 1978,
NCNA announced that exports and imports in
1977 grew by more than 12 percent, reaching the
highest total in PRC history with a favorable
Trade
Balance
Agricultural
Machinery and
Equipment
New Contracts
for Complete
Plants
1972
............................
95
650
255
58
1973
............................
-440
1,405
520
1,265
1974
............................
-1,185
1,960
1,240
851
1975
............................
-585
1,030
1,710
410
1978
............................
1,115
645
1,295
160
19771 ........................ 1,000
1,500
1,000
62
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balance of foreign exchange. The trade surplus
fell slightly short of the 1976 level. Imports
rebounded, but remained well below 1974 and
1975 levels. Agricultural imports-at least $1.5
billion worth-and industrial supplies such as
steel and nonferrous metals led the growth in
imports. Exports, on the other hand, set a new
record. Nonoil goods accounted for the bulk of
export growth; petroleum deliveries probably
posted only. moderate gains over 1976.
The anticipated surge in new contracts for
whole plants did not materialize last year-only
three contracts worth about $60 million were
signed. Delay in setting import priorities was
probably the major factor, although the need for
large-scale agricultural purchases may have
raised concern over avoiding another balance-of-
payments crunch as in 1974. Orders for major
equipment did pick up steam, however, reaching
around $200 million.
An Assessment of the Impact of Economic and
Political Factors on Foreign Trade Policy
The interplay of global and domestic economic
factors and Chinese politics is complex, and the
relative impact of each of these forces on China's
foreign trade policy and operations cannot be
precisely weighed. The trade policy put forth by
Chou En-lai in the early 1970s was still quite
conservative by world standards. The share of
trade in the overall economy never grew beyond
6 percent of GNP-a small share even for a
large country like the PRC-and China's foreign
debt position was kept well within safe limits.
Setbacks to trade expansion plans were due
primarily to economic factors Peking could nei-
ther anticipate nor control-the unfortunate
combination of poor Chinese harvests and West-
ern inflation and recession. Although the deterio-
ration of China's balance of payments in 1974
roughly coincided with the beginning of the
Campaign To Criticize Lin Piao and Confucius,
the resulting cutbacks in imports were typical of
Peking's historically conservative reaction to
large trade deficits. Criticism by radical leaders
of imports may have strengthened this reaction,
but the net effect was probably not great.
This is not to say that politics did not play an
important-albeit negative-role in China's for-
eign trade policies of the 1970s. Many local
political figures took advantage of the moderate-
radical debates.- in -Peking in order to pursue
disruptive factional causes at home. These local
disputes frequently resulted in serious economic
dislocations including factory work stoppages
and railway workers' strikes, which indirectly
affected the export industry. Although there is
no evidence that ranking leaders within the
Ministry of Foreign Trade were attacked by the
radicals, there are reports that some lower level
foreign trade personnel, both in Peking and the
provinces, were intimidated by local followers of 25X1
the "gang of four."
The radicals, in short, acted as a negative
rather than a positive political force in foreign
trade policy. Despite the radicals' reported "con-
trol" of the mass media, their domination of
many local political organizations, and their oc-
casional enlisting the support of Mao Tse-tung
by playing upon the Chairman's fears that the
moderates would eventually reverse his most
"revolutionary" accomplishments (most notably
the Cultural Revolution), the radicals failed to
develop a positive policymak- i g force in the
foreign trade arena. There were no purges of
foreign trade officials; the foreign trade corpora-
tions, including Techimport, continued routine
operations; and foreign businessmen were con-
stantly reassured that basic policy was
unchanged.
According to several recent articles in the
Chinese media, the radicals first went along with
the moderates' foreign trade policies and even
selected some of the future locations of imported
complete plants, but subsequently "went back on
25X1
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their words" and attacked the moderates' trade
policies "for ulterior motives," that is, power
seizure.
The failure of the radicals to develop or press
an independent foreign trade policy reflects their
lack of a power base within the foreign trade
apparatus. Had they been able to seize power,
they might have pursued a more restrictive. trade
policy. Trade, however, would still be necessary
and even the radicals admitted that some imports
of technology were good if they advanced Chi-
na's economic development. But, when the Hua
Kuo-feng administration purged the "gang of
four" in October 1976, the radicals were "nipped
in the bud."
Outlook for China's Trade Policy
The Hua Kuo-feng regime was quick to publi-
cize the important role foreign trade will play in
the new leadership's overall developmental goals.
Almost immediately following the ouster of the
"gang of four," the New China News Agency
released a dispatch from-the autumn 1976'Can-
ton trade fair that quoted, for the first time since
the January 1974 Li Chiang article in China's
Foreign Trade, Mao Tse-tung's 1949 declaration
of China's intention to trade with all nations in
order to promote economic prosperity. Later, at a
national agricultural conference in December,
the new party chairman disseminated for the
first time publicly a 20-year-old Mao speech
entitled "On the Ten Major Relationships." This
remarkably pragmatic speech, which was obvi-
ously being used to place Mao's mantle on the
new regime's moderate economic policies, includ-
ed a section on foreign trade in which the
Chairman declared that it is China's policy "to
learn from the strong points of all nations and all
countries" (emphasis added).
During 1977, various articles in the authorita-
tive party newspaper, People's Daily, and in
other national media continued to reaffirm the
importance of foreign trade to China's national
economy. In addition, a national conference on
foreign trade-the largest since the creation of
the PRC-was held in July, both giving national
attention to, and symbolizing the new leader-
ship's -interest in,-Ioreign trade. Perhaps the
clearest single statement on the foreign trade
policies of the Hua administration was the article
written by Foreign Trade Minister Li Chiang in
the October issue of the party's theoretical jour-
nal, Red Flag. Drawing on Lenin as well as Mao,
Li restated the new regime's interest in foreign
trade and remarked that, in accordance with the
principle of "self-reliance" and with Chairman
Mao's "Three Worlds Theory," China would
export "our products in exchange for advanced
technology, equipment, and materials that are
needed in socialist construction in our country."
Li broke some new ground in at least two
areas: the production of export goods and trade
practices. With regard to exports, Li stated that
"bases" are to be established "at selected points"
in order to increase the quality and stabilize
delivery of "well-known brands." In addition
foreign trade personnel will, according to Li,
assume a more active role in supervising the
actual production of export goods. Concerning,
financial practices, Li suggested that China will
loosen up its traditionally conservative policies by
adopting "accepted practices in international
trade," employing expanded use of deferred pay-
ment financing, perhaps for longer terms.
Overall, the Chinese have established clear
priorities for imports and have decided to expand
their exports of both traditional goods and natu-
ral resources. Recently Li Chiang told a visiting
delegation that China would import only the
most advanced technology and a State Planning
Commission official announced that "following
development in industrial and agricultural prod-
uct, China will sell more and more petroleum,
coal, and other products to buy advanced equip-
ment." In essence, these public statements reaf-
firm the trade policies of the early 1970s. While
these vague policy pronouncements leave room
for liberalized interpretations of self-reliance, it
is unlikely that the present leadership will go so
far as to abandon the traditional ideological
constraints on foreign trade.
A gain in the political influence of the radical
faction-an unlikely prospect in the near fu-
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ture-could affect trade if political turmoil again
disrupted the economy. But, even if the radicals
achieved power, trade would remain necessary
and trade levels could not be cut substantially
without damaging the economy. Any such cuts
likely would be in the area of imported technol-
ogy, and even here the radicals have admitted in
their own propaganda the value of "some" for-
eign purchases.
Prospects for 1978 and Beyond
Since the trade policies of the post-Mao re-
gime are still essentially conservative, foreign
trade is likely to expand at a relatively moderate
pace-perhaps 10 to 20 percent per year-and
not grow significantly as a share of the Chinese
economy. Trade will continue its present strong
orientation to the West. Even with improvement
in political relations with the USSR and Eastern
Europe, trade with the Communist countries will
remain at around. 20 percent of China's total
trade. The Communist countries cannot provide
the types of advanced technology that China is
seeking in the West, nor would they be willing to
provide hard currency markets for Chinese
exports.
With a commitment to an active, albeit still
cautious, foreign trade policy, economic factors,
both domestic and foreign, will govern Peking's
ability to expand trade. In general, China's
success in increasing exports together with its
willingness to use foreign credits will be the
major constraints on import growth. In addition,
year-to-year needs for agricultural imports will
also affect the pace of technology purchases.
Exports
Concerted efforts are under way to improve
export potential, but they will bear fruit only
slowly. China's traditional exports of foodstuffs,
textiles, light manufactures, minerals, and met-
als face the twin problems of inadequate supply
and limited foreign demand, particularly in the
developed countries. Chinese trade delegations
are roving the world seeking better knowledge of
foreign markets; trading corporations are making
efforts to produce goodsto specifications
and to ensure prompt delivery; two new trading
corporations-China National Packaging Corpo-
ration and China National Arts and Crafts
Import-Export Corporation-have been estab-
lished. There are even hints of intentions to
establish specific export industries. But progress
will be hampered by the fact that many of the
products come from China's slowly growing agri-
cultural sector. Higher levels of traditional ex-
ports will also run into barriers from protectionist
action by developed countries, particularly on
sensitive products such as textiles and footwear,
and from the growth of competing industries in
the Third World.
While increased sales of oil and coal have been
discussed by Peking, the long-term potential is
uncertain. Coal reserves are huge, but much
investment is needed in this lagging sector. Cur-
rent estimates point to declining supplies of oil
for export by the mid-1980s. For the near term,
exportable surpluses of oil exist; yet marketabil-
ity is hampered by high prices, transport costs,
_ and -undesirable refining characteristics. - More-
over, Japan is the only viable major market. The
long-term trade agreement (LTTA) signed. with
Japan in February 1978 will secure a market for
China's oil and coal although growth of these
exports will be limited. Under the eight-year
agreement, deliveries for the first five years will
total 345 million barrels for oil and 9.2 million
tons for coal. The quantities of oil and coal will
rise slowly through 1981 to 1982 goals of 110
million barrels and 3.7 million tons, respectively.
Increased quantities for 1983-85 will be negotiat-
ed in 1.981. Chinese exports of oil and coal under
the agreement are to total $10 billion, with
Peking purchasing an equal amount of Japanese
plants and equipment in return. Yet to be settled
are the knotty problems of Japanese interest
rates for plant credits and sales of equipment
restricted by the Coordinating Committee on
Export Controls (COCOM).
Imports
Increased purchases of foreign technology will
be the highlight of growing Chinese imports over
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the next several years. Negotiations and inquiries that edge closer to direct borrowing. Debt levels
for complete plants are picking up and a major will be kept within safe margins with a close eye
round of contracts is expected in 1978. Technol- on the balance of payments. Besides the trade
ogy purchases will be aimed at lagging sectors of and financial factors, China's technical ability to
the economy such as steel, petrochemicals, elec- absorb large amounts of advanced technology
tric power, and transportation. Orders for major will also limit the number of plants being deliv-
equipment, particularly for the petroleum indus- ered at one time. Therefore, plant purchases may
try, will continue the upward trend begun in follow the previous pattern of a large initial bulge
1977, and imports" of industrial supplies will rise with declining contract levels as the technology is
as the domestic economy expands. Agricultural digested.
imports, of course, remain a question mark. Even with this cautious approach, trade expan-
Mediocre harvests in 1977 will keep foodstuffs sion will expose the trade sector more heavily to
imports at high levels into 1978. This may have a external economic forces that can alter the pat-
dampening effect.on the rate of technology pur- terns of trade. As in the early 1970s, inflation,
chases, but improved agricultural performance recession, supply shortages, and even shifts in
would quickly lift this constraint. foreign tastes will influence both Chinese im-
Although the ability to expand exports to pay
for imports will be Peking's primary concern,
liberalized policies on import financing could
accelerate the growth of technology imports.
Bank of China delegations to Japan and Western
Europe in 1977 explored the possibilities of
longer term credits. and direct borrowing from
--Western banks. One area of particular Interest to
Peking is the financing of plant imports through
deposits by foreign banks with the Bank of
China. This has been discussed with both West-
ern Europe and Japan. The appeal, of course, is
that this could be disguised as "normal banking
practices" to enable Peking to maintain its no-
debt facade. Financing of capital imports would
make sense for the Chinese: larger amounts of
plant and equipment could be purchased than
current export levels would allow; higher export
levels and any import substitution effects from
the completed plants could ease the financial
burden during the repayment period.
Peking is in a good position to launch its
import drive: the political situation has stabi-
lized, the economy is recovering, trade has
chalked up two years of record surplus, and
repayments on the previous round of plants will
begin to decline next year. Credit policies will
probably be liberalized only gradually with Pe-
king incrementally accepting slightly longer re-
payment terms and adopting financing methods
ports and exports and force Peking to make
adjustments in its trade strategy.
Ideological Limits
The protrade rhetoric currently emanating
from Peking raises the question of how far the
foreign trade option might be pushed. Dramatic
increases in trade would require an extremely
broad interpretation, or even abandonment, of
the Chinese concept of self-reliance. This devel-
opment could only come about through a victory
by an ultrapragmatic modernizer faction over
opposition from both leftist and conservative-
moderate rivals.
The type of action that might be taken to
expand trade would depend on the degree to
which self-reliance is compromised. In ascending
order Peking could decide to accept long-term
credits but maintain the no-debt facade, openly
accept direct loans, purchase plant and equip-
ment on a compensation basis, or permit joint
ventures in China. These, of course, are some of
the very things cited by the Chinese as examples
of Soviet revisionism. It would be possible, how-
ever, for Peking to perform the proper semantic
gymnastics to defend such actions.
In recent months Peking has been pushing a
line of new flexibility in foreign trade and fi-
nance. Chinese officials have been considering
trade and financing arrangements that they
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would not even discuss previously:
? Long-term credits and financing capital im-
ports through foreign bank deposits with the
Bank of China.
? Use of barter and compensation deals for
plant purchases.
? Imports of materials for reprocessing for
export.
? Plants producing goods specially for the Jap-
anese market.
? Chinese compliance with international stand-
ards on patents, trademarks, and copyrights.
? Cooperation with Japan on offshore petro-
leum exploration.
An NCNA article on the closing of the 1978
spring Canton fair highlighted the "flexible prac-
tices" used at the fair to promote exports. These
included supplying goods under customer trade-
marks and brand names, producing goods using
customer-supplied designs and raw materials,
bartering for some commodities, and flexibility
in setting export prices and contract currencies.
In expanding trade, acceptance of long-term
credits probably presents the easiest ideological
hurdle for Peking to overcome. Credits from the
West are available and Western banks would
likely cooperate with Peking suitably to disguise
the loans. China appears to be taking the first
steps toward accepting bank deposit financing.
Barter and compensation deals would have
appeal because export markets for Chinese pro-
ducts could be secured when the plant contracts
are signed. Chinese proposals for such deals,
however, have met with lukewarm response.
Joint ventures would be the most ideologically
troublesome concept for Peking to accept be-
cause they would involve direct foreign participa-
tion in the Chinese economy. Having the foreign
supplier bear the development risks in return for
a share of the output would be very helpful to the
Chinese, particularly in the area of raw materials
and energy. In fact, Peking has approached
Japanese and US firms on cooperation in exploit-
ing its offshore oil resources.-While the extent of
this cooperation. has not been detailed, foreign
help with this costly and difficult task would
make sense for China. Also, being "offshore,"
such foreign cooperation might be more
palatable.
While Teng Hsiao-ping and the other econom-
ic pragmatists in the leadership appear to have a
freer hand in pursuing more adventuresome
trade practices, Peking continues to maintain
that its basic policy of self-reliance is unchanged.
Official statements still rule out direct loans,
joint ventures, and foreign investment in China.
In discussing China's interest in Japanese help
with offshore oil development, Foreign Trade
Minister Li Chiang made the point that China is
willing to consider any form of cooperation with
Japan, provided that these three principles are
not violated. Also, on a recent visit to Austria,
Tang Ko, the Minister of the Metallurgical
Industry, tempered China's interest in foreign
technology with caution over becoming depend-
ent on foreign countries. He rejected loans, but
noted that it is possible "to agree on a kind of
installment plan." This need to square the new
flexibility in trade with self-reliance may well
indicate resistence by some members of the
leadership.
Despite the current pragmatic approach of the
leadership to economic development, it does not
seem likely that they would cast off their essen-
tially conscrva"tive attitudes to embark on a
massive increase in foreign trade. Economic con-
straints-principally China's ability to expand
exports'and to absorb technology-will be strong
determinants of trade policy along with Peking's
ingrained concern over dependence on trade and
foreign participation and control of the economy.
More likely, the leadership will pursue a policy of
cautious trade expansion introducing more flexi-
ble practices on a selective and limited basis. The
definition of self-reliance will be stretched to
justify their new practices, but the basic principle
will not be abandoned.
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Secret
Secret
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