Seven Decades of China’s Foreign Trade: Growth and Structural Improvement
中国对外贸易70年：量质并进
Abstract: Over the past seven decades since the founding of the People’s Republic of China in 1949, China has continuously increased its import and export volumes along with improving its trade structure, becoming a major trading nation and making progress toward a trading power. In the 13th Five-Year Plan period (2016-2020), China has experienced acceleration in its foreign trade structural adjustment under its opening-up strategy, and the function of foreign trade has shifted from being a driver for growth to being a way to balance development. China is expected to continue its trade growth momentum and structural improvement and strengthen its trade competitiveness. In achieving this vision, China should make efforts to increase structural equilibrium, create a favorable external trade environment, and pave the way for trade growth and sustainable development.
Keywords: foreign trade, trade growth, qualitative improvement, trade structure, trading
power
JEL classification code: F13, F14
DOI: 1 0.19602/j .chinaeconomist.2019.7.03
Over the past seven decades since the founding of the People’s Republic of China in 1949, foreign trade has played a positive role in China’s economic growth and opening-up. With its growing import and export volumes and its improving trade structure owing to constant trade policy adjustments, China has developed into a large and increasingly more competitive trading nation.
1. Evolving Philosophy on Foreign Trade and Trade Growth in China
Since the founding of the People’s Republic of China in 1949, foreign trade has played an increasingly more important role in China’s economy. China’s trade growth has been accompanied
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by a changing trade philosophy. After reform and opening-up in 1978, in particular, China integrated itself to the global value chain of specialization, which enabled its foreign trade development (Pei, 2009; IMF, 2004). 2. By integrating into the East Asian manufacturing network, China increased its trade
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volume along with improving its trade structure (UNCTAD, 2007). In this process, China’s institutional development and policymaking went hand in hand. By increasing its trade openness and developing free-trade systems in line with international standards, China has brought about synergy between reform Correspondence: yueyx@cass.org.cn
1 Pei Changhong: “Basic Theme of China’s Foreign Trade in 65 Years: Transformation and Growth,”, Researches In Chinese Economic History, p.23-33.
2 Pei Changhong: “China’s Foreign Trade: Six Decades of Evolution and Forecast,” Reform, Vol.7, 2009, p.5-12; Eswar Prasad (ed.), China’s
Growth and Integration into the World Economy: Prospects and Challenges, IMF, 2004, p.1.
3 UNCTAD, Trade and Development 2017: Regional Cooperation for Development, https://unctad.org/en/pages/PublicationArchive. aspx?publicationid=2146, 2018.
4 and opening-up that has fueled its sustained trade and economic growth (UN, 2007).
1.1Philosophical and Institutional Evolution on Foreign Trade in China
After the founding of the People’s Republic of China in 1949, China experienced a development journey that started with isolation followed by openness and further opening- up in the context of changing domestic and international environments. China’s foreign trade philosophy evolved over different stages, in which imports and exports played different roles.
Stage I (1949-1978): Trade protection at the inception of the founding of the People’s Republic of China. Adopted in September 1949, the Common Program of the Chinese People’s Political Consultative Conference states that “the People’s Republic of China may, on the basis of equality and mutual benefit, restore and develop trade relations with governments and peoples of all countries.” In this stage, China’s economic development relied on its own efforts and domestic market, while foreign aid and trade played a supplementary role. The purpose of foreign trade was to “exchange goods with other countries to make up for each other’s deficiencies.” During this period, China enacted the Interim Regulations on the Administration of Foreign Trade and other administrative rules and regulations, which formed an administrative framework for foreign trade. In this stage, China’s foreign trade system was characterized
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by state dominance. The State and a few trade companies held sway in foreign trade operation and administration. The State enforced strict foreign exchange control and imposed plans on imports and exports in various categories.
Stage II (1978-2001): Trade control was relaxed at the inception of reform and opening-up. The Third Plenum of the 11th CPC Central Committee adopted an overall strategy for reform and openingup as China’s basic national policy6 and called for “proactively developing equal-footed and mutually beneficial economic cooperation with all countries on the basis of self-reliance and striving to adopt advanced technology and equipment from other countries.” In this stage, the Chinese government vigorously developed imports and exports as an important way to “leverage both domestic and overseas resources, open up both domestic and international markets, and foster skills to develop our economy and international economic relations.” In 1992, the 14th CPC National Congress declared that the goal of China’s economic reform was to establish a socialist market economic system, further reform the foreign trade system, create economic operational mechanisms in line with international rules, and open
7 up on all fronts. With the enactment and implementation of the Foreign Trade Law and other laws and regulations, China started to increase its trade openness, created special economic zones and various special customs regulation areas, devolved foreign trade operation rights subject to a new review and approval system, and launched various strategies to pursue market diversification, quality superiority and trade development through technology advancement. These measures led to an improvement in China’s trade volume and quality.
Stage III (2001-2013): Development into a major trading nation. The Outline of the 10th Five-Year Plan identified the “going global” strategy to expand foreign trade. Imports and exports are a vehicle for a country to deepen and broaden its participation in international division of labor and utilize factors and resources on a global scale. After its WTO entry, China amended and enacted its new Foreign Trade Law, Administrative Regulations on the Import and Export of Goods, as well as supporting departmental rules. The foreign trade system continuously improved in a more open, stable and transparent process 4 Murray Gibbs, “Trade Policy”, United Nations Policy Notes, https://esa.un.org/techcoop/documents/pn_tradepolicynote.pdf, 2017, p.13..
5 The Common Program of the Chinese People’s Political Consultative Conference states that “China adopts foreign trade control and trade protection policies”.
6 Hu Yaobang: “On External Economic Relations”, speech at the Central Secretariat meeting on January 14 1982, from the Party History Records of the CPC Central Meetings, http://dangshi.people.com.cn/GB/151935/176588/176597/10556282.html.
7 Decisions of the CPC Central Committee on Matters concerning the Establishment of Socialist Market Economic System, adopted at the Third Plenum of the 14th CPC Central Committee on November 14, 1993.
consistent with market-based economic rules.
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Stage IV (2013-present): China’s growth as a trading power. In the era after the global financial crisis, China put forward a new concept of creating an open economic system for a new round of opening-up at a higher level. The promotion of imports and exports, which is conducive to mitigating dual pressures from international trade protectionism and domestic economic adjustment, took center stage in China’s diplomacy and economic development. Meanwhile, a swathe of trade policies started to be implemented, including:
The strategy of free trade areas. The Report to the 17th CPC National Congress identified the strategy to create free trade areas for bilateral and multilateral economic and trade cooperation. The Third Plenum of the 18th CPC Central Committee in 2013 called for creating free trade areas along the Belt and Road routes to form a high-standard global network of free trade areas. By the end of 2018, China had signed 17 free trade agreements with 25 countries and regions and created 12 free trade pilot areas for institutional innovation in the field of investment and trade.
The implementation of a proactive import policy helped China rebalance trade. China launched the China International Import Expo, modified the Catalogue of Encouraged Imported Technology and Products, offered import discount interest funds, increased import credit, and improved the import and export structure.
China adopted trade and investment liberalization and facilitation policies in line with international standards. China started to comprehensively implement a pre-access national treatment plus negative list system, substantially eased market access, increased service sector openness, and supported integration of its firms into the global industrial, value and logistical chains.
China began to encourage the new business model. The modes such as cross-border e-commerce and procurement trade grew rapidly and become new growth drivers.
1.2 Growth of China’s Foreign Trade
With its improving foreign trade mechanism and policy implementation, China’s import and export volumes have been growing over the past seven decades. As Figures 1 and 2 show, China’s foreign trade has been growing by different degrees in 56 out of 70 years since 1949, and its trade growth outpaced the world average in 47 years. After reform and opening-up in 1978, China achieved miraculous trade growth by expanding its openness and taking an active part in the international division of labor and competition in all fields. China’s total import and export volumes reduced only briefly four times, and led the world trade growth in most years.
According to the General Administration of Customs, China’s total import and export volume amounted to 4,622.8 billion U. S. dollars in 2018, up 223 times over 1978, or 14.5% annually. Specifically, China’s export volume grew by 254 times with an annual average growth rate of 14.9%, and
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its import volume increased by 155 times, up 14.1% annually. Yet China’s trade growth also exhibited phase characteristics in different stages due to its different development goals and external environment.
Stage I (1949-1978): China’s foreign trade developed amid apparent volatility. Due to the blockade and embargo imposed by Western countries and its domestic political and economic situations, China adopted an import substitution industrialization (ISI) policy with limited external openness - a common
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approach among developing economies at the time. Under this system, China used imports to meet its needs of industrial production and exports to earn foreign exchange. In about three decades before 8 Li (2018), Pei (2017) and Zhao (2013) et al. believe that after China became a large trading nation, its trade imbalance deteriorated. With poor efficiency and environmental performance of industrial activity, China remained at the bottom of the value chain. Strategic upgrade from a large trading nation to a strong and competitive one marks the overall strategy for China’s trade development in the new era.
9 Calculated based on data from UNCTAD Handbook of Statistics 2018.
10 From the 1950s to the early 1980s, import substitution industrialization (ISI) was widely adopted in the developing world, including Latin America and most African countries, as well as South Korea, Singapore and the Philippines in East Asia (from 1952 the early 1960s).
reform and opening-up in 1978, China’s total import and export volume rose from 1.13 billion US dollars in 1950 to 21.09 billion US dollars in 1978, up 11% annually and slightly below the annual
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average world trade growth rate of 11.5% (see Figure 2). Given the roles of imports and exports, China’s trade imbalance was limited during this period, but its import growth outpaced its export growth in most years. Despite the export growth, China’s exports as a share in total world export volume peaked at 2.69% in 1959 and dropped to 0.76% in 1978. China’s ranking in world export volume also fell from 12th in 1959 to 32nd in 1978.
Stage II (1978-2001): Foreign trade became an important part of China’s economy and maintained rapid growth. After 1978, China became a major destination for the third wave of global industrial relocation. From 1979 to 1991, the Chinese mainland served as a destination for the relocation of light and traditional processing industries from Hong Kong, including fabrics and accessories, toys, clocks, consumer electronics and small home appliances. From 1992 to 2001, China became a destination for the relocation of low-end processing and assembly activities of electronics, communication and computer industries from the Taiwan region, Japan and South Korea. As a result, processing trade became a key form of China’s foreign trade, driven by overseas-funded firms, and underpinned China’s surging export growth.
In 2001, China’s total import and export volume reached 509.65 billion US dollars (accounting for 4% of world trade and ranking sixth globally), up 24 times over 1978 or 15% annually. This
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growth rate far surpassed the annual world trade growth rate of 7% during the same period. In this stage, China’s exports grew by 15.5% on an annual average basis, exceeding its annual average import growth rate of 14.5%. After 1994, China’s exports surpassed imports, leading to trade surplus that lasts till today. Consequently, China’s international reserves have accumulated rapidly. In 1996, China’s foreign exchange reserves exceeded 100 billion US dollars, which increased to 212.16 billion US dollars in 2001. 11 Calculated based on data from UNCTAD Data Center. 12 Calculated based on data from UNCTAD Data Center.
Stage III ( 2001- 2013): Trade developed by leaps and bounds. China’s accession to the WTO in November 2001 marked a new era in China’s trade development characterized by wider and multidimensional openness and an export- oriented economy13. China’s foreign trade dependence, especially export dependence, increased rapidly, exceeding 50% in 2002 and peaking at 67% in 2006, and its export dependence reached 36.9% in the same year. Under such a development model, China’s total foreign trade increased to 4.2 trillion US dollars by 2013 at an annual average growth rate of 19.1%; in comparison, the annual average world trade growth rate was 9.6% during the same period of time. By 2013, China’s share in global trade of goods expanded to 11%, making it the largest goods trading nation in the world. Specifically, China’s export growth rate (19.3%) still outpaced its import growth (18.9%). In 2009, China’s export volume as a share in the world total rose to 9.6%, making it the world’s largest exporter of goods and cementing its position as the “world’s factory.”
Stage IV (2013-present): China’s trade development started to focus on quality upgrade. In the era after the global financial crisis, although China’s status as a major trading nation has strengthened, its economic growth has become less dependent on trade. In 2018, China’s trade dependence was about
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33.7%, and its export dependence reached roughly 18.1%. With its falling trade dependence, China’s annual trade growth slowed to 2.1% but it was still above the world average of 0.7%. In 2018, China’s total trade volume reached 4.6 trillion US dollars, and its share in global trade climbed to 11.8%. 13 “Communiqué of the 5th Plenary Session of the 15th Central Committee of the CPC” and ““Communiqué of the 6th Plenary Session of the 15th Central Committee of the CPC”, http://cpc.people.com.cn/GB/64162/64168/64569/65414/index.html
14 NBS: Statistical Communique of the People’s Republic of China on the 2018 National Economic and Social Development, http://www.stats.gov. cn/tjsj/zxfb/201902/t20190228_1651265.html, cited on April 1, 2019.
Meanwhile, China’s exporting industries started to upgrade toward capital- and technology-intensive industries such as equipment manufacturing and technology industries. While maintaining steady export growth, China attached great importance to increasing imports. In 2017 and 2018, China’s imports grew by 16.1% and 15.8%, respectively, substantially outpacing export growth rates during the same period (7.9% and 9.9%, respectively).
Despite trade volatility due to the impact of domestic and international environments over the past seven decades since 1949, China’s foreign trade supported its economic growth and development priorities over different stages, with an annual average growth rate of 13%, far above the world average of 8%. Rapid growth in both imports and exports (12.8% and 13.2%, respectively, compared with the world’s average of both at 8.8% during the same period) turned China into a major trading nation.
2. China’s Qualitative Trade Evolution
From 1949 to 2013, the year China became the world’s largest goods trading nation, the country not only achieved trade growth but improved its trade structure as well. By joining the tide of globalization since reform and opening-up in 1978, China has transformed its trade structure and evolved into a trading powerhouse.
2.1 Pre-Reform Trade Structure
Under its inward-looking development model of import substitution prior to reform and opening-up in 1978, China’s trade was positioned to maintain its economic independence, and trade functions were relatively uniform. While imports were meant to supply much-needed industrial equipment, the role of export was to earn foreign exchange. In this stage, seeking international recognition was a primary goal of China’s diplomacy, and official trade was restricted to the countries with which it had diplomatic ties. In terms of product structure and flow, China’s trade lacked diversity and developed in a closed loop. With limited export competitiveness, China was yet to exhibit any significant international influence as a large market. Prior to reform and opening-up, therefore, China’s trade was largely isolated from the international division of labor and exogenous from international trade.
Prior to reform and opening-up, China’s import and export structure was in consistent with its industrial growth did. As Figure 3 shows, during this period, China’s exports were dominated by primary products and resource-intensive finished products, with a rising share of finished products. At the inception of the founding of the People’s Republic of China in 1949, agricultural and sideline products represented more than half of China’s exports - a typical trait for agricultural countries, of which the processed agricultural and sideline products accounted for more than three-fifths; industrial and mineral products made up for less than 10%. With the creation of China’s industrial system, the shares of processed agricultural and sideline products and industrial and mineral products surged, peaking at 45.9% and 34.7%, respectively, in 1962.
Subsequently, however, domestic political and economic turbulence dealt a blow to China’s industrial activity, and agricultural produce, byproducts and finished products once again dominated China’s exports. The share of industrial and mineral products in China’s exports declined and did not recover until after 1974. To strike a balance between foreign exchange earnings and the necessity of industrial production, priority was given to the import of industrial raw materials. Capital goods
15 dominated China’s imports before reform and opening-up, with an average share of 80.4%. Consumer goods, however, accounted for less than 20% of China’s imports most of the time, with the exception of economic hardships during 1959-1961, when the share of consumer goods in China’s imports briefly expanded, peaking at 44.8% in 1962, which still paled in comparison with the share of capital goods.
During this period, China’s foreign trade was closely related to its diplomatic situation, as manifested in trade flow, structure and form. At the inception of the founding of the People’s Republic of China, 70% of the Chinese mainland’s imports and exports were with the USSR and other socialist countries like the former Yugoslavia in Eastern Europe through barter trade and transit trade via Hong Kong and Macao. After China started to import grain in 1961, its trade focus shifted toward Western countries, with significant diversification in trade flow and structure and a transition to cash-settled trade.
Before reform and opening-up, China’s trade structure was dominated by domestic production, thus making endogenous factors a major source of shocks. Despite overall stability in the import and export structure, it was difficult for China to realize continuous improvement and upgrade solely on its own strength. Trade growth had a limited effect on the improvement of trade quality.
2.2 Trade Structure after Reform and Opening-up
After reform and opening-up in 1978, China swiftly became integrated into the international division of labor. After its accession to the WTO, China emerged as the “world’s factory” and a major market. As China’s trade became increasingly endogenous to the global trading system, its import and export quality improved in sync with its trade growth.
First, China’s trade expansion was accompanied by an improving export structure. Qualitative trade improvement became evident in Stage II, when labor-intensive finished products replaced primary products as China’s main exports. In 1991, the share of primary products in China’s exports dropped to 22.5%, down from 50.3% in 1980, while the share of industrial finished goods rose to 77.5%, up from
16 49.7% in 1980. Textiles, shoes and other fabrics and accessories became China’s major export products.
In Stage III, China’s exports upgraded from labor-intensive products to capital-intensive products, with an above-average growth of exports in electromechanical products. In 2003, electromechanical products, for the first time, represented more than 50% of China’s total export value. In 2011, China’s exports of electromechanical products exceeded 1 trillion US dollars.
In Stage IV, China’s exports became even more tech-intensive, with electromechanical products as an export stabilizer. Significant improvement in the level of China’s export technology was accompanied by an upgrade in its product structure. After 1995, resource-intensive products, especially labor-intensive products, decreased proportionally in China’s exports, while the share of technology products increased in relative terms. Since 2002, medium- and high-tech products have represented more than 50% of China’s exports. High-tech products replaced labor-intensive products to become the biggest category of China’s exports (see Figure 4). China’s export sophistication is positively correlated with its increasing export volume. The implication is that after reform and opening-up, trade growth contributed to a qualitative improvement in China’s exports.
Second, China’s import growth drove an improvement in import functions. Around 1978, China’s import structure transformed significantly to meet the needs of China’s industrial development. In Stage II of China’s trade development, processing trade growth was accompanied by a rising share of raw materials and intermediate inputs in China’s imports. In Stage III, raw materials, parts and components, as well as advanced equipment, became China’s major import products. Meanwhile, rapid growth in the import of energy and resource products such as petroleum, iron ore and nonferrous metals undergirded China’s development into a global manufacturing powerhouse. In Stage IV, China experienced robust growth in its consumer power and consumer upgrade, as manifested in spikes in the imports of consumer goods like gold and pearls, along with high-end consumer goods such as pharmaceuticals, cosmetics, dry fruits and nuts.
Another change was the technology composition of imported products. In parallel with rapid growth in the imports of high-tech and primary products since 2000, low-tech and resource-intensive products as a share in China’s imports were reduced substantially (see Figure 5). With its efforts for GATT