Pat­terns and Ex­pe­ri­ence of China’s Four Decades of Open­ing-Up

对外开放四十年:中国的模式与经验

China Economist - - Articles - YangDan­hui(杨丹辉)

Ab­stract: China’s four decades of open­ing-up co­in­cided with the trend of the world econ­omy, and con­trib­uted to its own eco­nomic devel­op­ment. With a grad­u­al­ist ap­proach, China achieved open­ing-up with­out caus­ing eco­nomic and so­cial reper­cus­sions, and un­leashed in­sti­tu­tional div­i­dends that fa­cil­i­tated its re­form and devel­op­ment. This ap­proach has breathed last­ing mo­men­tum and vi­tal­ity into China’s eco­nomic growth and struc­tural tran­si­tion, and im­proved China’s in­dus­trial com­pet­i­tive­ness and sta­tus in the in­ter­na­tional di­vi­sion of la­bor. As a ba­sic na­tional strat­egy and one of the coun­try’s five devel­op­ment con­cepts, open­ing-up is essential for China to pur­sue peace­ful devel­op­ment and stand proudly in the fam­ily of nations. Fac­ing new changes in do­mes­tic and in­ter­na­tional en­vi­ron­ments in the new era, par­tic­u­larly in­creas­ing com­pe­ti­tion among ma­jor coun­tries such as China and the United States, China should proac­tively ex­plore a new model of open­ing-up, re­fo­cus open­ing-up from pol­icy sup­ply to ca­pac­ity build­ing, and form a new pat­tern of open­ing-up on all fronts for high-qual­ity eco­nomic devel­op­ment.

Key­words: open­ing-up, in­sti­tu­tional in­no­va­tion, ma­jor-coun­try com­pe­ti­tion, new pat­tern of com­pre­hen­sive open­ing-up

JEL clas­si­fi­ca­tion code: F43, O43, P20

DOI: 1 0.19602/j .chi­nae­conomist.2018.07.03 In the late 1970s, China em­braced the his­tor­i­cal op­por­tu­nity to pur­sue open­ing-up that marked a

1 brand-new chap­ter in its his­tory. “To­day’s world is a world of open­ness.” Com­rade Deng Xiaop­ing made this ob­ser­va­tion of post-war world devel­op­ment and high­lighted the need for China to open up to the out­side world. Based on China’s re­al­ity and chang­ing in­ter­na­tional sit­u­a­tion, we de­fine open­ing-up as a long-term na­tional strat­egy. Over the past four decades, China has im­proved its sys­tem of openingup poli­cies and ex­pe­dited its open­ing-up process. This has led to re­mark­able im­prove­ment in the level of China’s open­ing-up and un­der­pinned China’s eco­nomic growth and in­ter­na­tional com­pet­i­tive­ness.

1. Jour­ney, Model and Achieve­ments of Open­ing-Up 1.1 Jour­ney of Open­ing-Up and Pol­icy Evo­lu­tion

Since 1978, China has ex­pe­ri­enced four stages of open­ing-up with dis­tinc­tive char­ac­ter­is­tics. 1978- 1991 : Proac­tive pi­lot­ing and ex­plo­ration. The Third Plenum of the 11th CPC Cen­tral Com­mit­tee called for im­port­ing for­eign equip­ment and en­gag­ing in eco­nomic co­op­er­a­tion with other coun­tries. This marked China’s ma­jor pol­icy tran­si­tion from self-iso­la­tion to an ex­port-ori­ented econ­omy. In 1980, China es­tab­lished four spe­cial eco­nomic zones in Shen­zhen, Zhuhai, Shan­tou and Xi­a­men with

pref­er­en­tial poli­cies granted for de­vel­op­ing an ex­port-ori­ented econ­omy. In 1984, China fur­ther opened 14 coastal cities, in­clud­ing Shang­hai, Tian­jin, Dalian, Qing­dao and Guangzhou, and so on. In this stage, China’s open­ing-up pol­icy was car­ried out by des­ig­nat­ing spe­cific pi­lot cities. With re­spect to for­eign in­vest­ment, China en­acted the Law on Sino-For­eign Joint-Stock En­ter­prises in 1979, and ini­tially ap­proved three for­eign-funded en­ter­prises in 1980. In 1986, the State Coun­cil es­tab­lished the For­eign In­vest­ment Steer­ing Group, and en­acted the Reg­u­la­tions on En­cour­ag­ing For­eign In­vest­ment, which of­fered greater pol­icy pref­er­ences for for­eign in­vest­ment and im­proved the in­vest­ment en­vi­ron­ment. At the be­gin­ning, For­eign di­reacr in­vest­ment (FDI) al­most came from over­seas Chi­nese who in­vested mainly in the ar­eas of la­bor-in­ten­sive ex­port pro­cess­ing and ser­vice sec­tors like ho­tels and restau­rant. Most of th­ese in­vest­ments went to the spe­cial eco­nomic zones and coastal cities. Th­ese pol­icy mea­sures greatly spurred eco­nomic growth and in­sti­tu­tional change in China’s coastal re­gions, serv­ing as good ex­am­ples that could be repli­cated.

1992-2001: From pi­lot cities to over­all open­ing-up. Com­rade Deng Xiaop­ing’s pol­icy re­marks dur­ing his tour to south­ern China in early 1992 pro­vided im­por­tant op­por­tu­ni­ties for China’s openingup. Through the devel­op­ment of Pudong New Area, China seized op­por­tu­ni­ties from in­ter­na­tional in­dus­trial re­lo­ca­tion to in­crease its level of open­ing-up. By in­tro­duc­ing FDI, de­vel­op­ing pro­cess­ing trade and ben­e­fit­ing from moder­ately pro­tec­tive poli­cies and pol­icy in­stru­ments for Ren­minbi ex­change rate un­der­val­u­a­tion (Wu, 2008), China swiftly in­creased its ex­ports and in­ter­na­tional mar­ket shares of man­u­fac­tured prod­ucts such as tex­tiles and electro­mechan­i­cal prod­ucts. On July 1, 1994, China of­fi­cially en­acted the Law on For­eign Trade, its first leg­is­la­tion on for­eign trade. Af­ter two decades of open­ing-up, most of China’s spe­cial eco­nomic zones were cre­ated in three coastal re­gions: the Pearl River Delta, the Yangtze River Delta and the Bo­hai-Rim Delta. Such con­cen­tra­tion wors­ened China’s re­gional eco­nomic im­bal­ances. To open up the in­land re­gions, the cen­tral gov­ern­ment adopted the strate­gic de­ci­sion to de­velop the western re­gion in 1999. This stage was also an im­por­tant pe­riod for China to fight for its re-en­try into GATT and then en­trance to WTO. Af­ter hard ne­go­ti­a­tions, China con­cluded an agree­ment on WTO ac­ces­sion with ad­vanced economies such as the United States and the Euro­pean Union and its ma­jor trad­ing part­ners. To fa­cil­i­tate ne­go­ti­a­tions, China also re­formed its trade man­age­ment sys­tem, stream­lined its in­sti­tu­tions, laws and reg­u­la­tions, and de­volved power to lower-level au­thor­i­ties. Th­ese ef­forts greatly im­proved its over­all level of for­eign trade and eco­nomic ad­min­is­tra­tion.

2002-2012: Open­ing-up at all lev­els in var­i­ous fields with clear pri­or­i­ties. In De­cem­ber 2001, China of­fi­cially ac­ceded to the WTO. China’s WTO en­try ex­pe­dited and ex­panded its open­ing-up process. In the tran­si­tion pe­riod with WTO mem­ber­ship, China shifted the pri­or­ity of open­ing-up from in­dus­trial sec­tors to ser­vice sec­tors by deep­en­ing fi­nan­cial, trade and for­eign ex­change re­forms, and from coastal re­gions in eastern China to cen­tral and western re­gions. In line with in­ter­na­tional prac­tices, China’s econ­omy is in­creas­ingly in­te­grated into the world econ­omy. On the one hand, the mass in­flow of multi­na­tional firms in­creased the level of global fac­tor al­lo­ca­tion, mak­ing China’s econ­omy more de­pen­dent on ex­ter­nal re­sources and in­ter­na­tional mar­kets. On the other hand, China had been play­ing a big­ger role in world eco­nomic growth, and a rapidly grow­ing and in­creas­ingly open Chi­nese econ­omy con­trib­uted an in­creas­ing share to the world econ­omy. The en­act­ment of the En­ter­prise In­come Tax Law in 2007 marked a cru­cial step to­wards uni­fy­ing tax rates for do­mes­tic and for­eign en­ter­prises. This also marked a shift in China’s pol­icy ori­en­ta­tion from of­fer­ing ul­tra-na­tional treat­ment as an in­cen­tive for for­eign com­pa­nies to pro­mot­ing mar­ket stan­dard­iza­tion and fair busi­ness en­vi­ron­ment. To ad­dress th­ese prob­lems of rapid in­creases in for­eign ex­change re­serves and trade sur­plus, Ren­minbi ap­pre­ci­a­tion, la­bor and en­ergy price hikes, en­vi­ron­men­tal con­straints and trade fric­tions, China shifted its pol­icy pri­or­ity from en­cour­ag­ing ex­port earn­ing to bal­anc­ing trade. Spe­cific pol­icy mea­sures in­cluded im­pos­ing a tar­iff on the ex­port of nat­u­ral re­sources, low­er­ing tax re­bates for cer­tain prod­ucts and putting a brake on lowtech­nol­ogy pro­cess­ing trade. Trans­form­ing the trade de­vel­opent­ment pat­tern was iden­ti­fied as a key ob­jec­tive of China’s in­dus­trial up­grad­ing. In the open­ing-up process, many Chi­nese com­pa­nies gained

ex­pe­ri­ence in com­ply­ing with in­ter­na­tional trade rules and deal­ing with in­ter­na­tional com­pe­ti­tion. Th­ese com­pa­nies helped China over­come the global fi­nan­cial cri­sis.

From 2013 to present: Form­ing a new pat­tern of com­pre­hen­sive open­ing- up. The 18th CPC Na­tional Congress de­cided to con­tinue open­ing- up as a ba­sic na­tional pol­icy. Since the 18th CPC Na­tional Congress in 2012, China has adopted the in­no­va­tive Belt and Road Ini­tia­tive, es­tab­lished the Asian In­fra­struc­ture In­vest­ment Bank (AIIB), ex­pe­dited the pi­lot pro­grams of free trade zones, and im­ple­mented the neg­a­tive list ap­proach, among other strate­gic ini­tia­tives. In its De­ci­sions on Ma­jor Mat­ters Con­cern­ing the Com­pre­hen­sive Deep­en­ing of Re­forms, the Third Plenum of the 18th CPC Cen­tral Com­mit­tee called for cre­at­ing an open eco­nomic sys­tem and “re­lax­ing the in­vest­ment thresh­old, de­vel­op­ing free-trade ar­eas, and open­ing up in­te­rior prov­inces and bor­der re­gions”. Th­ese De­ci­sions led to a new wave of deep­en­ing for­eign trade re­form and pro­mot­ing in­no­va­tive for­eign trade and eco­nomic co­op­er­a­tion. The Fifth Plenum of the 18th CPC Cen­tral Com­mit­tee iden­ti­fied “open­ness” as one of the five devel­op­ment con­cepts to pro­mote a new round of two-way open­ness on all fronts for win-win re­sults. The erup­tion of the 2008 global fi­nan­cial cri­sis pre­sented China with fall­ing ex­ter­nal de­mand and chal­lenges from trade pro­tec­tion­ism. In this con­text, China deep­ened sup­ply-side struc­tural re­forms and pro­moted trade fa­cil­i­ta­tion, which led to im­prov­ing im­ports and ex­ports. The 19th CPC Na­tional Congress called for “fos­ter­ing a new pat­tern of com­pre­hen­sive open­ing-up”. De­spite the set­backs of glob­al­iza­tion, China stead­fastly safe­guarded the mul­ti­lat­eral trad­ing sys­tem, and took it upon it­self to pro­mote glob­al­iza­tion as a his­toric mis­sion. While mak­ing full use of in­ter­na­tional plat­forms such as the G20, China has in­creased its right of dis­course, called for cre­at­ing a com­mu­nity of shared destiny for mankind, con­trib­uted to a more in­no­va­tive, vi­brant, in­ter­con­nected and in­clu­sive world eco­nomic sys­tem, and shared its wisdom for the re­cov­ery of world trade. Through th­ese ef­forts, China’s econ­omy con­tin­ued to serve as an “an­chor of sta­bil­ity” for world eco­nomic growth. In April 2018, Pres­i­dent Xi Jin­ping an­nounced China’s plans to re­lax mar­ket ac­cess, cre­ate a more at­trac­tive in­vest­ment en­vi­ron­ment, en­hance in­tel­lec­tual prop­erty rights pro­tec­tion, in­crease im­port and ex­pand open­ing-up. He sent a clear mes­sage to the world: “China’s open gate will not close. It will open wider and wider. This is a strate­gic choice of China based on its devel­op­ment needs, and also rep­re­sents China’s real ac­tion to

2 pro­mote eco­nomic glob­al­iza­tion for the ben­e­fit of hu­man­ity.”

China’s open­ing-up since 1978 is un­prece­dented in his­tory. All its steps and achieve­ments have been made based on China’s own choice, and are con­sis­tent with the trend of his­tory. Ob­vi­ously, China’s open­ing-up is a grad­ual process that started with a few pi­lot pro­grams be­fore scal­ing up na­tion­wide. It started from China’s coastal re­gions to the whole na­tion, ex­panded from man­u­fac­tur­ing to ser­vice sec­tor, and evolved from trade and FDI at­trac­tion to in­ter­na­tional eco­nomic co­op­er­a­tion at all lev­els. With the ini­tial ob­jec­tive of un­leash­ing de­mo­graphic div­i­dends, China’s open­ing-up started to of­fer in­sti­tu­tional div­i­dends. In a mat­ter of four decades, China has evolved from an eco­nom­i­cally and so­cially iso­lated coun­try to a fully open coun­try, a jour­ney rarely seen in hu­man his­tory. Un­der the joint ef­fects of in­ter­nal re­forms and ex­ter­nal open­ness, China cre­ated a growth mir­a­cle of in­dus­tri­al­iza­tion for a late-mov­ing large coun­try, and has be­come a ma­jor sta­biliser and driver of world eco­nomic growth.

1.2 Main Achieve­ments and Ex­pe­ri­ences

The achieve­ments of China’s open­ing-up are man­i­fested in the ex­pan­sion of its open sec­tors. In 1978, China’s to­tal im­port and ex­port vol­ume of mer­chan­dise goods stood at 20.64 bil­lion US dol­lars. In 2017, this fig­ure rose to 4,105 bil­lion US dol­lars, up about 198 times over a pe­riod of 40 years, or 14.5% on an an­nual av­er­age ba­sis. As a re­sult of im­port and ex­port growth, China’s in­ter­na­tional sta­tus of

mer­chan­dise trade has in­creased sub­stan­tially, rank­ing first in the world in 2017, up from 32nd in 19783. China’s to­tal im­port and ex­port of mer­chan­dise as a share in the world to­tal in­creased from 2.9% in 1978 to 12.0% in 2017. In ad­di­tion, China has also made great achieve­ments in at­tract­ing for­eign in­vest­ments. Ac­cord­ing to the Min­istry of Com­merce, since the in­cor­po­ra­tion of the first Sino-for­eign joint stock en­ter­prise in China in 1980, China had cu­mu­la­tively ap­proved the in­cor­po­ra­tion of 885,000 for­eign­in­vested en­ter­prises and at­tracted FDI in­flows 1.85 tril­lion US dol­lars by 2017. Among de­vel­op­ing coun­tries, China boasted the largest FDI in­flow for 25 con­sec­u­tive years. As an im­por­tant chan­nel for open­ing-up, China’s for­eign eco­nomic co­op­er­a­tion also de­vel­oped strongly. Over­seas in­vest­ments by Chi­nese com­pa­nies in­creased sub­stan­tially. By 2017, China’s non-fi­nan­cial over­seas di­rect in­vest­ment in­ven­tory reached 1.48 tril­lion US dol­lars (see Ta­ble 1).

China’s ba­sic ex­pe­ri­ence is that open­ing-up and mar­ket-ori­ented re­forms re­in­forced each other. First, open­ing-up tran­scended the in­sti­tu­tional bar­ri­ers of eco­nomic devel­op­ment, in­creased di­ver­si­fi­ca­tion in com­pe­ti­tion en­ti­ties, and pro­moted mar­ket-based fac­tor flow and al­lo­ca­tion. At the be­gin­ning of China’s re­form and open­ing-up, de­ci­sion-mak­ers adopted a va­ri­ety of ex­per­i­men­tal and re­gional pol­icy mea­sures for trial and er­ror (Jiang, 2008). Such a grad­u­al­ist ap­proach was highly con­sis­tent with the “in­cre­men­tal

re­form” path. Un­like the “shock ther­apy” of some tran­si­tion coun­tries, China’s grad­u­al­ist ap­proach mit­i­gated the so­cial and eco­nomic im­pacts of re­form and open­ing-up. Mean­while, China’s open­ing-up pol­icy was im­ple­mented in an in­cre­men­tal man­ner. A typ­i­cal ex­am­ple was China’s FDI pol­icy. For­eign­fund­eded com­pa­nies in­creased China’s mar­ket vi­brancy through com­pe­ti­tion be­tween their peer and with lo­cal com­pa­nies. With their ad­vanced cor­po­rate gover­nance struc­tures and di­verse com­pe­ti­tion strate­gies, for­eign-in­vested com­pa­nies served as ex­am­ples for Chi­nese com­pa­nies and espe­cially SOEs to learn from and re­form their own op­er­a­tion and gover­nance struc­tures, while com­pet­i­tive pres­sures forced Chi­nese com­pa­nies to re­form and re­or­ga­nize, and in­ef­fi­cient lo­cal com­pa­nies were forced to exit the mar­ket. This also im­proved the exit mech­a­nism for some sec­tors in China. At the reg­u­la­tory level, di­ver­si­fi­ca­tion in com­pe­ti­tion en­ti­ties re­quired a higher de­gree of mar­ket stan­dard­iza­tion. By en­act­ing a host of laws and reg­u­la­tions in­clud­ing the Anti-Un­fair Com­pe­ti­tion Law, the Anti-Mo­nop­oly Law and the Merg­ers and Ac­qui­si­tions Law, China greatly in­creased its level of leg­is­la­tion on mar­ket stan­dard­iza­tion. For lo­cal gov­ern­ments, stream­lin­ing ap­proval pow­ers, in­creas­ing ad­min­is­tra­tive ef­fi­ciency and op­ti­mis­ing in­vest­ment and busi­ness en­vi­ron­ment rep­re­sented im­por­tant di­rec­tions and com­po­nents of in­sti­tu­tional re­form. China’s WTO en­try marked an im­por­tant up­grade of China’s open­ing-up on all fronts, and cre­ated a new in­sti­tu­tional sup­ply. Ac­cord­ing to the WTO’s re­quire­ments, the frame­work of China’s eco­nomic sys­tem should grad­u­ally come to terms with in­ter­na­tional prac­tices, and the WTO prin­ci­ples such as “fair­ness, trans­parency and nondis­crim­i­na­tion” have be­come the ba­sis for leg­is­la­tion on trade and eco­nomic co­op­er­a­tion and law en­force­ment. In ad­di­tion, ex­ter­nal pres­sures from WTO en­try cre­ated op­por­tu­ni­ties for China to re­move in­sti­tu­tional bar­ri­ers and ex­pe­dite re­forms for its SOEs and au­to­mo­bile, bank­ing and telecom sec­tors.

Fur­ther­more, open­ing-up pro­moted China’s tech­no­log­i­cal progress and struc­tural im­prove­ment. From the late 1970s to the mid-1980s, open­ness of China’s in­dus­trial sec­tors was rel­a­tively low to for­eign di­rect in­vest­ment (FDI), with pur­chased pro­duc­tion lines and equip­ment as a main form of tech­nol­ogy im­por­ta­tion. Al­though this ap­proach in­creased the pro­duc­tion ca­pac­ity of in­dus­trial prod­ucts and par­tic­u­larly durable con­sumer goods, China still faced the “two-gaps” con­straint (sav­ings gap and for­eign ex­change gap) in ac­cel­er­at­ing in­dus­tri­al­iza­tion due to the low level of cap­i­tal ac­cu­mu­la­tion and lim­ited for­eign ex­change earn­ings from ex­ports. In such case, China adopted a “mar­ket for tech­nol­ogy” strat­egy in the con­text of world­wide struc­tural ad­just­ment and in­dus­trial re­lo­ca­tion to at­tract FDI in or­der to ex­pand pro­duc­tion ca­pac­ity and im­prove the level of in­dus­trial tech­nol­ogy. Since the 1990s, China’s in­dus­trial sec­tors ac­cel­er­ated their open­ing-up to for­eign cap­i­tal, re­sult­ing in a huge in­flow of FDI into China’s man­u­fac­tur­ing sec­tors. Com­pared with other sec­tors, China’s man­u­fac­tur­ing sec­tor had rel­a­tively com­plete in­dus­trial sys­tems, sup­port­ing ca­pa­bil­i­ties and more suf­fi­cient com­pe­ti­tion, which cre­ated nec­es­sary con­di­tions for China to re­ceive in­ter­na­tional in­dus­trial re­lo­ca­tions. When in­vest­ing in China’s man­u­fac­tur­ing sec­tors, for­eign in­vestors faced a rel­a­tively more re­lax­ing reg­u­la­tory en­vi­ron­ment in terms of in­vest­ment method and eq­uity ra­tio re­quire­ment than other sec­tors. This en­cour­aged multi­na­tional com­pa­nies to re­lo­cate man­u­fac­tur­ing ca­pa­bil­i­ties to China on a large scale, con­tribut­ing to China’s in­dus­trial up­grad­ing and im­prov­ing its ex­port struc­ture (see Ta­ble 2). In ad­di­tion, em­pir­i­cal re­search ex­ten­sively shows that open­ing-up ex­posed China to more sources of ad­vanced tech­nol­ogy and that FDI had a pos­i­tive ef­fect on China’s tech­no­log­i­cal progress (Jiang, 2002; Wang et al., 2006). This is man­i­fested in di­rect tech­nol­ogy trans­fer, pro­mo­tion and as­sim­i­la­tion from multi­na­tional com­pa­nies, as well as the learn­ing ef­fect of op­er­a­tional meth­ods, know-how, patents, trade­marks, tech­ni­cal pro­ce­dures, prod­uct stan­dards and man­age­ment mod­els of for­eign-fund­eded com­pa­nies. Since the dawn of the 21st cen­tury, multi­na­tional com­pa­nies have es­tab­lished var­i­ous R&D cen­ters in China, fur­ther in­creas­ing the level of in­ter­na­tion­al­iza­tion for China’s R&D sys­tem. There re­mains con­tro­ver­sies re­gard­ing tech­nol­ogy trans­fer by multi­na­tional com­pa­nies and its spillover ef­fect, as well as dif­fer­ences in the tech­nol­ogy spillover ef­fects for FDI of dif­fer­ent sec­tors and places of ori­gin (Chen, 2003; Xie, 2007; Shao, 2017). Over­all, how­ever, open­ing- up cre­ated a fa­vor­able in­sti­tu­tional en­vi­ron­ment for China to re­ceive

in­ter­na­tional in­dus­trial re­lo­ca­tions. Of course, the lim­i­ta­tions of tech­nol­ogy trans­fer by multi­na­tional com­pa­nies and the re­liance on ex­ter­nal tech­nol­ogy have also re­stricted China’s choice of path­ways for in­dus­trial re­struc­tur­ing and tech­no­log­i­cal progress. This prob­lem is espe­cially prom­i­nent for China’s high-tech in­dus­tries. Over a rather long pe­riod of time, about 80% of China’s high-tech prod­ucts were ex­ported in the form of pro­cess­ing trade with lim­ited value-added, lock­ing China into the mid­dle- and low-end links of the global value chain. In the face of fierce in­ter­na­tional com­pe­ti­tion, the lack of core tech­nolo­gies and crit­i­cal links of the global value chain has ex­posed China’s high-tech sec­tors to ma­jor shocks amid chang­ing world mar­kets and in­ter­na­tional eco­nomic and trade re­la­tions.

More­over, open­ing-up in­creased China’s in­ter­na­tional com­pet­i­tive­ness. First, open­ing-up un­locked China’s eco­nomic po­ten­tials. Huge de­mand from in­ter­na­tional and do­mes­tic mar­kets sup­ported rapid devel­op­ment of China’s in­dus­trial pro­duc­tion and ex­ports over a short pe­riod of time, achiev­ing economies of scale that un­der­pinned China’s sta­tus as an in­dus­trial pow­er­house. Sec­ond, open­ing-up broad­ened the chan­nels and scope of re­source uti­liza­tion for China’s in­dus­trial devel­op­ment. While China used to be a large de­vel­op­ing coun­try with a weak in­dus­trial foun­da­tion, back­ward tech­nol­ogy and lim­ited per capita re­sources, open­ing-up helped China bring ex­ter­nal re­sources, in­clud­ing en­ergy, ad­vanced tech­nolo­gies and in­sti­tu­tional sys­tems, into its own eco­nomic sys­tem. This pro­vided much­needed ex­ter­nal re­sources for China’s in­dus­tri­al­iza­tion. At the mi­cro-level, cor­po­rate com­pet­i­tive­ness served as the linch­pin of in­dus­trial and na­tional com­pet­i­tive­ness. Open­ing- up ex­posed Chi­nese com­pa­nies to risks and com­pe­ti­tion both at home and abroad, giv­ing them op­por­tu­ni­ties to be ex­pe­ri­enced with in­ter­na­tional mar­ket op­er­a­tions. Th­ese com­pa­nies are not only the “bal­last stone” of China’s econ­omy, but also are vi­tal to China’s struc­tural up­grade and high-qual­ity devel­op­ment. Third, open­ing-up fol­lowed the prin­ci­ples of di­vi­sion of la­bor and ef­fi­ciency, shifted agri­cul­tural work­force to in­dus­trial and ser­vice sec­tors, un­leashed com­par­a­tive ad­van­tages, and helped achieve in­dus­tri­al­iza­tion and ur­ban­iza­tion. Un­der the joint ef­fects of th­ese fac­tors, China’s man­u­fac­tured goods de­vel­oped unique in­ter­na­tional com­pet­i­tive­ness (see Ta­ble 3).

By ac­tively in­te­grat­ing into the world econ­omy, China has be­come in­creas­ingly in­ter­con­nected with world com­mod­ity and fac­tor mar­kets over the past four decades of open­ing-up, and wit­nessed

the trans­for­ma­tions in in­ter­na­tional di­vi­sion of la­bor. In re­cent years, China’s par­tic­i­pa­tion in the in­ter­na­tional di­vi­sion of la­bor has in­creased in depth and scope, and the pat­tern of its par­tic­i­pa­tion has evolved from prod­uct spe­cial­iza­tion to fac­tor spe­cial­iza­tion and from in­terindus­try spe­cial­iza­tion to in­train­dus­try spe­cial­iza­tion in the global value chain. In terms of nat­u­ral re­sources and the en­vi­ron­ment, China has paid a price. But China is also a ma­jor ben­e­fi­ciary of this round of glob­al­iza­tion. De­spite China’s im­prov­ing sta­tus in the in­ter­na­tional di­vi­sion of la­bor, China’s econ­omy has been de­pen­dent on the in­ter­na­tional mar­ket and ex­ter­nal re­sources as a re­sult of its par­tic­i­pa­tion in the in­ter­na­tional di­vi­sion of la­bor with cheap fac­tors of pro­duc­tion. Cheap Chi­nese ex­ports have also stim­u­lated con­sumer de­mand in de­vel­oped coun­tries. Fi­nan­cial in­no­va­tion in de­vel­oped coun­tries also pro­vided credit sup­port to the con­sump­tion of in­ex­pen­sive goods im­ported from China. As coun­tries be­come more cor­re­lated and in­ter­ac­tive with each other in their in­dus­trial struc­tures, China’s in­dus­trial sec­tor as an open sys­tem has evolved through in­ter­ac­tions with that of other coun­tries. How­ever, China’s fixed pat­tern and roles in par­tic­i­pat­ing in the in­ter­na­tional di­vi­sion of la­bor have also re­stricted its au­ton­omy in con­duct­ing struc­tural ad­just­ment.

2. Ma­jor-Coun­try Com­pe­ti­tion and Fur­ther Open­ing-Up in the New Era

In the new era, both the ex­ter­nal en­vi­ron­ment and in­ter­nal con­di­tions for ex­pand­ing open­ing-up have been chang­ing. The prac­tice and ex­pe­ri­ence of open­ing-up have be­come valu­able as­sets for China’s eco­nomic and so­cial devel­op­ment, in­flu­enc­ing the world econ­omy and in­ter­na­tional or­der in pro­found ways. Changes in the in­dus­trial com­pet­i­tive­ness of coun­tries trans­formed the pat­tern of in­ter­na­tional com­pe­ti­tion as well. China must seize the strate­gic op­por­tu­ni­ties from a new round of tech­nol­ogy rev­o­lu­tion, global in­dus­trial up­grade and deep­en­ing di­vi­sion of la­bor. China should also cope with in­creas­ingly fierce in­ter­na­tional com­pe­ti­tion, espe­cially ma­jor-coun­try com­pe­ti­tion with the United States on all fronts from tech­nol­ogy to en­ergy, trade, in­vest­ment and in­ter­na­tional right of dis­course. This is a ma­jor test for China’s re­solve of open­ing-up and global gover­nance ca­pa­bil­i­ties.

2.1 Tech­nol­ogy and In­no­va­tion Are the Top Pri­or­i­ties for Ma­jor-Coun­try Com­pe­ti­tion

In re­cent years, in­dus­tri­al­ized coun­tries have all adopted strate­gic plans for tech­nol­ogy in­no­va­tion and eco­nomic tran­si­tion to lead a new round of tech­nol­ogy and in­dus­trial rev­o­lu­tion. As can be seen

from the his­tory of tech­no­log­i­cal re­search and ap­pli­ca­tion, dis­rup­tive in­no­va­tions have al­ways been dom­i­nated by a few coun­tries in the world, and the con­cen­tra­tion of global in­no­va­tions tends to in­crease. The United States, Ja­pan and the Euro­pean Union still ac­count for 80% of global in­no­va­tions. Over the past cen­tury, the United States has al­ways been the most in­no­va­tive coun­try, boast­ing one of the high­est com­mer­cial­iza­tion rates for R&D re­sults in the world. The U.S. pre­dom­i­nance in sci­ence and tech­nol­ogy will meet more chal­lenges in the com­ing two or three decades, but no other coun­try is ex­pected to sur­pass the United States on all fronts. Coun­tries com­pete for in­no­va­tion not only be­cause of their na­tional power and devel­op­ment stage - such com­pe­ti­tion is largely a re­sult of change in the or­ga­ni­za­tional pat­tern of sci­en­tific re­search. Given the com­plex­ity of in­no­va­tion in the 21st cen­tury, it is un­likely for ma­jor sci­en­tific re­search pro­grams to be achieved sin­gle-hand­edly by a few per­sons. Rather, in­no­va­tion needs to be sup­ported by sys­tem­atic and or­ga­ni­za­tional in­puts over a long pe­riod of time. De­vel­oped coun­tries have formed an ef­fec­tive sci­en­tific re­search sys­tem, where gov­ern­ment tech­nol­ogy in­put is able to in­vite more cor­po­rate cap­i­tal and so­cial re­sources that boost the ef­fi­ciency of in­no­va­tion and in­dus­tri­al­iza­tion.

Hav­ing made great progress in the re­search of sci­ence and tech­nol­ogy, China is now in a po­si­tion to com­pete with de­vel­oped coun­tries. While ma­jor in­dus­tri­al­ized coun­tries have their re­spec­tive ad­van­tages in the new round of tech­nol­ogy and in­dus­trial rev­o­lu­tion (see Fig­ure 1), the ready-made ex­pe­ri­ence for China to fol­low and tar­gets to ex­ceed are be­com­ing fewer and fewer as China nar­rows its gaps with ad­vanced world lev­els of sci­ence and tech­nol­ogy. When it comes to cut­ting-edge tech­nol­ogy, key equip­ment and com­po­nents, the “low-hang­ing fruits” of tech­nol­ogy trans­fer from multi­na­tional com­pa­nies which China has picked eas­ily through in­dus­trial re­lo­ca­tion are di­min­ish­ing, and China faces

var­i­ous risks and un­cer­tain­ties in its tran­si­tion from a fol­lower to a pace­set­ter.

2.2 Dis­tri­bu­tion of Div­i­dends from Glob­al­iza­tion Is Un­even and Plagued by Con­ser­vatism and Pro­tec­tion­ism

In mod­ern times, the his­tory of trade devel­op­ment usu­ally re­flects the rise and fall of a na­tion. China’s sta­tus as the world’s largest na­tion of mer­chan­dise trade em­bod­ies its achieve­ments of ac­cel­er­at­ing in­dus­tri­al­iza­tion and mod­ern­iza­tion from an agri­cul­tural coun­try. China’s bril­liant eco­nomic per­for­mance is rec­og­nized world­wide, and so is its model of open­ing-up and eco­nomic devel­op­ment. Al­though quite some Chi­nese in­dus­tries re­main in the low-value links of the global value chain, China is in­creas­ingly tak­ing an ac­tive stance in glob­al­iza­tion as its trade ag­gre­gate grows and man­u­fac­tur­ing sys­tem im­proves. Ac­cord­ing to data re­leased by the Min­istry of Com­merce, China is the largest trad­ing part­ner for over 120 coun­tries and re­gions, and it both ex­ports and im­ports var­i­ous types of goods and ser­vices. Be­fore China, only the United King­dom and the United States be­came the largest trad­ing nations mea­sured in goods, and China is the only de­vel­op­ing coun­try that has en­joyed this sta­tus to date. It is also the most open ma­jor de­vel­op­ing coun­try. China’s role as the largest na­tion of mer­chan­dise trad­ing is unique and in­flu­en­tial in var­i­ous ways.

In this round of glob­al­iza­tion since the 1980s, there is no doubt that cap­i­tal has ben­e­fited the most. With their tra­di­tional com­par­a­tive ad­van­tages of la­bor and fac­tor costs, emerg­ing economies like China have shared in the div­i­dends of glob­al­iza­tion by serv­ing as destinations for in­ter­na­tional in­dus­trial re­lo­ca­tions and re­shaped the pat­tern of world trade (see Ta­ble 4). There seems to be con­sen­sus on this as­sess­ment. But the in­flu­ence of glob­al­iza­tion is ob­vi­ously more com­pli­cated. Change in the rel­a­tive in­dus­trial com­pet­i­tive­ness among coun­tries has in­creased the im­bal­ance in the dis­tri­bu­tion of div­i­dends from glob­al­iza­tion, arous­ing re­sis­tance from low- in­come groups in de­vel­oped coun­tries against glob­al­iza­tion. Such re­sis­tance has been mag­ni­fied by the slow re­cov­ery of world econ­omy af­ter the global fi­nan­cial cri­sis. Our world pre­vi­ously flat­tened by in­for­ma­tion tech­nol­ogy and trade lib­er­al­iza­tion has be­come un­even once again and is fraught with “anti- glob­al­iza­tion” noises. While un­bal­anced dis­tri­bu­tion gave rise to an­tag­o­nism and iso­la­tion­ism, sovereignty demis­abil­ity and de­na­tion­al­iza­tion in the process of glob­al­iza­tion have been crit­i­cized by na­tion­al­ists, pop­ulists and other anti-glob­al­iza­tion forces (Ernst Benda, 2004). De­spite the preva­lence of con­ser­vatism and es­ca­lat­ing pro­tec­tion­ism, China es­tab­lished its im­por­tant po­si­tion in in­ter­na­tional trade as a de­vel­op­ing coun­try as one of the ma­jor ben­e­fi­cia­ries of glob­al­iza­tion. How­ever, glob­al­iza­tion has its in­trin­sic lim­i­ta­tions, and China has deep- seated con­tra­dic­tions in its in­sti­tu­tional sys­tems. Th­ese lim­i­ta­tions and con­tra­dic­tions have en­hanced China’s weak­nesses and bar­ri­ers in fur­ther open­ing up and im­prov­ing its devel­op­ment qual­ity and com­pet­i­tive­ness.

2.3 Ma­jor-Coun­try Com­pe­ti­tion be­tween China and the U.S. In­ten­si­fied

In the fierce in­ter­na­tional com­pe­ti­tion, com­pe­ti­tion be­tween China and the United States draws the most at­ten­tion. In to­day’s world, Sino-U.S. re­la­tion­ship is the most im­por­tant bi­lat­eral re­la­tion­ship. Un­der the con­ser­va­tive “Amer­ica first” pol­icy, the Trump ad­min­is­tra­tion has in­creased pres­sures on China in such fields as iron and steel and non­fer­rous metal prod­ucts and tight­ened trade poli­cies against China, then uni­lat­er­ally launch a trade war in June, 2018. Un­doubt­edly, the in­dus­trial sys­tems of both coun­tries are still to some ex­tent com­ple­men­tary, of­fer­ing po­ten­tials of co­op­er­a­tion in var­i­ous fields. How­ever, the re­al­ity is that both coun­tries have started to com­pete on all fronts. China and the United States have se­ri­ous dis­agree­ments over trade deficits, trade in high-tech prod­ucts, pro­tec­tion of in­tel­lec­tual prop­erty rights, ser­vice sec­tor open­ness and gov­ern­ment in­dus­trial sub­sidy. Some of th­ese prob­lems, such as trade deficit, have re­sulted from change in fac­tor dis­tri­bu­tion in the course of glob­al­iza­tion over the years, as well as dis­tor­tions in the cur­rent trade sta­tis­ti­cal sys­tem. His­tor­i­cally, it was jus­ti­fied for China to main­tain a trade sur­plus over a long pe­riod of time as the largest trad­ing na­tion of mer­chan­dises. As Fig­ure 2 shows, dur­ing the pe­riod be­tween 1978 and 2017, there were 24 years that China has trade sur­plus - not as many as the US, Ger­many and Ja­pan once had. More­over, China’s trade

sur­plus is not sim­ply a quan­ti­ta­tive prob­lem, but more of a re­flec­tion of struc­tural prob­lems. Since more than 95% of China’s ex­port prod­ucts are man­u­fac­tured goods, un­der the cur­rent acount­ing syestem of to­tal value rather than value-added, China has trade sur­pluses with 75% of coun­tries and re­gions in the world. In 2017, China’s trade sur­pluses with the United States and the Euro­pean Union as its two ma­jor trad­ing part­ners ac­counted for 65.0% and 30.1% of its cur­rent-year to­tal trade sur­plus re­spec­tively, while in 2011 China’s trade sur­pluses with th­ese two trad­ing part­ners were 1.33 and 0.93 times of its to­tal balance of trade. In com­par­i­son, China’s trade sur­pluses have re­duced in re­cent years, and so did the im­bal­ance of sur­plus sources. Given the dif­fer­ences in the eco­nomic struc­tures, po­lit­i­cal sys­tems and de­ci­sion-mak­ing mech­a­nisms of both coun­tries, the trade fric­tions be­tween China and the United States can­not be re­solved with one at­tempt. The com­plex do­mes­tic po­lit­i­cal sit­u­a­tion of the United States will in­crease un­cer­tain­ties in com­pe­ti­tion be­tween China and the United States as two ma­jor coun­tries (Yan Guom­ing, Zhang Anyuan, 2004). Sino-U.S. com­pe­ti­tion is be­com­ing a real chal­lenge for China, and China must make suf­fi­cient strate­gic and tac­ti­cal prepa­ra­tions, iden­tify the in­ter­ests of var­i­ous par­ties, max­i­mize com­mon ground, and seek co­op­er­a­tion and devel­op­ment amid com­pe­ti­tion.

2.4 Dif­fi­cul­ties for Com­pre­hen­sive Open­ing-Up In­creased as Re­form En­tered Un­charted Wa­ters

In re­cent years, price hikes of pro­duc­tion fac­tors like la­bor, en­ergy and land have dented China’s tra­di­tional com­par­a­tive ad­van­tage with fac­tor cost as the core ad­van­tage. In com­par­i­son of la­bor cost be­tween both coun­tries, shift in in­dus­trial com­pet­i­tive­ness has also led to change in rel­a­tive man­u­fac­tur­ing fac­tor cost be­tween China and the United States (see Fig­ure 3). In face of the process of glob­al­iza­tion be­ing blocked, China should pro­mote lib­er­al­iza­tion and per­sist with the ba­sic di­rec­tions of trade and in­vest­ment lib­er­al­iza­tion. How­ever, China is faced with var­i­ous pres­sures and bar­ri­ers in ex­pand­ing open­ing-up. First, China’s ex­port growth has slowed down com­pared with the rapid growth af­ter its WTO en­try, and con­tri­bu­tion of net ex­port to GDP re­duced sub­stan­tially. In 2006, China’s net

ex­port con­trib­uted to 28.89% of GDP, but this ra­tio dropped to 3.47% in 2017. As the growth driver of ex­port lost steam, China’s econ­omy now mainly re­lies on the two other driv­ers of in­vest­ment and con­sump­tion (Qu et al., 2018). From the per­spec­tive of act­tract­ing FDI, as China’s cap­i­tal ac­cu­mu­la­tion and in­no­va­tion ca­pa­bil­i­ties in­creased, the role of FDI in China’s cap­i­tal for­ma­tion has be­com­ing less im­por­tant (Yang et al., 2017), as man­i­fested in the fall­ing share of FDI in China’s to­tal fixed as­set in­vest­ment af­ter peak­ing in the mid-1990s (this ra­tio was 15.65% in 1995). Af­ter the 2000s, this ra­tio re­duced rapidly. In 2010, the share of FDI in China’s to­tal fixed as­set in­vest­ment dropped to 2.84%, and this ra­tiowas only 1.22% in 2016. Dur­ing the same pe­riod, FDI ac­tu­ally ul­tilized in China’s man­u­fac­tur­ing sec­tors as a share in to­tal paid-in for­eign in­vest­ment re­duced to 29.3% in 2016, down from 70% in the late 1990’s. Th­ese indi­ca­tors re­flected the chang­ing role of open sec­tors in China’s econ­omy, likely mak­ing some Chi­nese less mo­ti­vated to pur­sue fur­ther open­ing-up.

Af­ter four decades of open­ing-up in a few rounds with dif­fer­ent pri­or­i­ties, China has grad­u­ally fully opened sec­tors with rel­a­tively smaller costs and reper­cus­sions, while ac­cu­mu­laing prob­lems and ma­jor con­tra­dic­tions in the sec­tors re­mained un-re­formed and un-opend. To ad­dress th­ese in­sti­tu­tional prob­lems, it re­quires not only new con­cepts, ap­proaches and mod­els, but syn­ergy be­tween re­form and open­ing-up as well. But the re­al­ity is that as China’s re­forms en­ter un­charted wa­ters, in­tri­cate in­ter­ests present grow­ing dif­fi­cul­ties and bar­ri­ers to China’s grad­ual and in­cre­men­tal re­form ap­proach, ob­struct­ing the con­tri­bu­tion of open­ing-up to re­form and devel­op­ment. Pol­icy im­ple­men­ta­tion prob­lems due to vested in­ter­ests have led to a mis­match be­tween the choice of in­dus­trial pol­icy in­stru­ments and trade pol­icy ori­en­ta­tion. De­spite China’s im­prov­ing busi­ness en­vi­ron­mentin re­cent years, some lo­cal­i­ties are not mo­ti­vated to at­tract more for­eign cap­i­tal and have yet to im­prove the soft in­vest­ment en­vi­ron­ment and stream­line gov­ern­ment ad­min­is­tra­tion. Th­ese prob­lems have se­ri­ously com­pro­mised the strat­egy im­ple­men­ta­tion and pol­icy ef­fect of a new round of open­ing-up.

3. Form­ing a New Pat­tern of Com­pre­hen­sive Open­ing-Up

China’s eco­nomic devel­op­ment over the past four decades could not have been achieved with­out open­ing-up. In the fu­ture, China’s high-qual­ity eco­nomic devel­op­ment also re­quires a higher level of open­ness. As a ma­jor devel­op­ment con­cept, open­ness is essential to China’s peace­ful devel­op­ment, na­tional re­ju­ve­na­tion and pros­per­ity. In this sense, China should pur­sue a new model of open­ness, cre­ate a new pat­tern of open­ness and de­velop into a strong trad­ing na­tion (Wang, 2017; Zhong, 2018). In ac­cor­dance with the com­mit­ments for a new round of open­ing-up men­tioned by Pres­i­dent Xi Jin­ping in his key­note speech at this year’s Boao Fo­rum for Asia, we should sig­nif­i­cantly re­lax mar­ket ac­cess con­di­tions, steadily open up sec­tors like fi­nance, cul­ture, tourism, pro­fessi­nal serive and high-end man­u­fac­tur­ing, co­or­di­nat­ing the open­ing-up of land and sea, and balance do­mes­tic open­ness with ex­ter­nal open­ness. In ad­di­tion, the in­ter­ests of var­i­ous lo­cal­i­ties and de­part­ments must be aligned to

fa­cil­i­tate pol­icy im­ple­men­ta­tion and un­leash the div­i­dends from a new round of open­ing-up. In the new era, China’s in­ter­na­tional com­pet­i­tive ad­van­tages must be re­shaped and up­graded. This re­quires Chi­nato fore­cast the trends of a new round of tech­nol­ogy and in­dus­trial rev­o­lu­tion and change in the mode of pro­duc­tion. By pro­mot­ing in­sti­tu­tional in­no­va­tion and cor­po­rate tran­si­tion, we should un­leash the po­ten­tials of new econ­omy, new tech­nolo­gies, and new in­dus­tries and mod­els (see Fig­ure 4).

Un­der the theme of re­spond­ing to global chal­lenges and seek­ing com­mon devel­op­ment, China shoul­dunswerv­ingly pur­sue a path of peace­ful devel­op­ment and be­come a key player in pro­mot­ing a new in­ter­na­tional eco­nomic or­der for win-win re­sults. In the new sit­u­a­tion, the gov­ern­ment should trans­form its func­tion from pol­icy for­mu­la­tion to ser­vice pro­vi­sion and ca­pac­ity build­ing, fo­cus­ing on the fol­low­ing pri­or­i­ties: de­vel­op­ing high-qual­ity free trade port, fur­ther sim­pli­fy­ing the neg­a­tive list, im­prov­ing the busi­ness en­vi­ron­ment, en­hanc­ing in­tel­lec­tual prop­erty rights pro­tec­tion, deep­en­ing co­op­er­a­tion with coun­tries along the Belt and Road. With the goal of build­ing a com­mu­nity of com­mon destiny for mankind ( Feng and Tang, 2017), China should prop­erly deal with the over­lapped and dif­fer­ent in­ter­ests of var­i­ous coun­tries, es­tab­lish a new con­cept of global gover­nance, take ini­tia­tive to as­sume in­ter­na­tional re­spon­si­bil­i­ties and obli­ga­tions com­pat­i­ble with its ca­pa­bil­i­ties and sta­tus, and proac­tively par­tic­i­pate in the sup­ply of global gover­nance and pub­lic goods. It also calls for the Chi­nese gov­ern­ment toin­crease in­ter­na­tional co­or­di­na­tion with re­spect to eco­nomic, po­lit­i­cal and for­eign poli­cies, strive to ad­dress prom­i­nent is­sues such as global devel­op­ment in balance, the dig­i­tal gap and sys­metic fi­nan­cial risks so as to of­fer Chi­nese so­lu­tion and con­trib­ute Chi­nese wisdom to the constant im­prove­ments of the global gover­nance sys­tem to be­come more ef­fi­cient, ef­fec­tive, bal­anced and able to re­flect the wills and in­ter­ests of most coun­tries.

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