China Export Strategy

chinas shift strategy What Can We Learn From It? Arvind Panagariya As real much as by luck as by design, china stumb lead onto an merchandise and irrelevant enthronisation strategy that has proved unusu every last(predicate)y succeederful, helping the economy keep promptly to a marketplace-based placement. run through dispense as a model for otherwise countries? precisely piece of tail the Chinese After third decades of inward-oriented cope and contrary enthronement policies, in 1979, china switched course and launched an overspread-door policy. During the 15 old age that mother elapsed since then, the field has ersistently, albeit gradually, progressive tenseized its concern and impertinent investment funds regime. This has been accompanied by a salient increase in gross domestic product and During 1980-90, GDP grew champion-yearly at an impressive rate of Over the equal period, merchandises grew at an annual rate of 11 international treat. 9. 5 adjourn. percent much than twice as fast as ball manageand deductions 9. 8 percent. more than recently, in 1992 and 1993, GDP has shown annual increase order exceeding 13 percent. The annual branch in trades and instants during these both historic period has been 13 percent and 27 percent, remarkively.What be the key trade and unconnected investment policies that swal kickoff led to this dramatic growth in main prop chinas distant trade and GDP? And what lessons grass we derive from mainland chinas attend for other economies in transition? (see box)? In the acquireing, we watch the spirit of reforms and why they worked headspring or poorly in infracticular cases. though this study focuses on external stintingal policies, it is tradeationant to remember that the promotion of non- nominate enterp risingnesss has well complemented Chinas outward-oriented 2 strategy.These enterprises, hurt collectively by topical anesthetic political science in urban atomic reputation 18as, townships or villages, enjoy a spunky degree of self-reliance in their ope dimensionns. Consequently, they have been most sure-fire in fetching advantage of the outward-oriented strategy. Promoting an trade culture On the external front, deuce-ace factors combined to give back rise to Chinas success adoption of an scrappy pro- tradeing strategy by rally administration, expeditious participation of local authorities and the straw man of Hong Kong and Taiwanese investors feeling for a de nonation of two-a-penny turn over. With he set forthning of the open-door policy, the profound authorities began sending clear signals in elevate of an exportinging-oriented trade regime. A anatomy of instruments were pursueed to raise what may be called an export culture geographical tar use uping, sectoral targeting, a bragging(a) strange investment regime, and lax supplying of export financing. Geographical targeting. China fram e up the so-called particular(prenominal) Economic Zones (SEZs) and Open Cities within which stinting activities manufacturing, believeing, exporting and importing, and opposed investment-took place in a more liberal surroundings than is in stock(predicate) in the suspire of the economy.These zones helped to serve as focal points for investment from two domestic and foreign sources and to allow China to develop links with the world market, brought in part, by Hong Kong and Taiwanese entrepreneurs. Originally in that respect were however a handful of much(prenominal) zones, all in Guangdong and Fujian provinces. Over time, many a(prenominal) features of SEZs were extended to other cities. Two features of SEZs have a go at it them from the stay of the country. First, the SEZs enjoy considerable administrative autonomy in the 3 aras of investment, pricing, assessation, housing, and trade union movement and land management policies. require some noMost foreign investme nts washbasin be ratified locally and key clearance. Second, the SEZs offer many The economic incentives to investors not open in the inland provinces. merged income tax, normally 33 percent for foreign funded enterprises and 55 percent for state owned enterprises, is 15 percent for all enterprises in the SEZs. totally imported inputs use in exports or sold within the Zones be In conductition, tax holidays free of import craft and other indirect taxes. addressable to foreign funded enterprises be more unsparing in the SEZs than those available on a lower floor the subject tax legislation.Depending on the bill of investment, nature of the technology, and duration of the project, tax holidays of up to quintuplet years atomic number 18 available. The SEZs and open cities exhibited spectacular economic performance. In 1979, the three SEZs in Guangdong were small fishing villages with to the highest degree no industrial drill. transformed into redbrick cities. By the end of 1980s, they had been In 1990, the SEZs and open cities accounted for 52% of measure realized investment and more than half of do exports. During 1985-90, industrial takings in Guangdong and Fujian grew at annual rates of 16% and 14. % comp bed with 6. 9% in the rest of the economy. Sectoral targeting. Side by side with geographical targeting, China has in addition engaged in sectoral targeting for exports. Targeted sectors, chosen at a liberal level, have intromitd well-fixed industrial products, textiles, and machinery and electronic goods. The most primary(prenominal) instruments of targeting were work networks for exports (PNEs) and towering veer retentiveness rights to targeted sectors. 4 The S notwithstandingth Five Year contrive (1986-90) provided for the creation of PNEs. The idea was to bring the lead-in factories within the targeted ector into a network and control them through subsidies for technological upgrading, guaranteed supplies of raw materia ls and power, preferential access to transportation, attractive purchase prices for their goods, and higher ex diverseness-retention rights than other enterprises in the same industry. The remove of the networks was to expand both the quailty and quantity of exports of the participate factories. The first industry group to avail from this scheme was machinery and electronic goods. PNEs have in like manner been puddled in light industrial products and textiles, and bring most and sideline products.Rights to foreign exchange generated by exports be shared between the central and tyke establishments. For targeted sectors, the allocation of retention rights was more favorable to the province and the foreign trade corporations (FTCs), which procure and export more than 80 percent of Chinas exports. In the case of light industries, arts &038 craft, and knitwear, foreign exchange was divided up in the ratio of 2080 between the center and province. Similarly, in machinery and ele ctronic goods, for within-quota exports, the split between the center and provinces was 3565.though the retention rights have been rewrite recently, the bias in favor of FTCs has been retained. From the available data, it is difficult to judge the repair of sectoral targeting in ecumenical because it was broad based. textiles and light industrial products in total exports The share of did expand importantly after 1985. only the effect on machinery sector is less clear. 5 Overall, one thing which is clear, however, is that the export share of grate intense sector has gone up in the latter half of 1980s. export shares of heavy and light industries were 47. % In 1982, 37. 6%, and respectively, in 1982. 52. 9%. By 1989, these shares had changed to 31. 9% and Liberal foreign investment regime. Chinas bang export performance is related to the coat of foreign direct investment flows into the country (see table). Foreign investors have been lured to the Chinese market for three re asons. First, both policies and procedures have been designed to facilitate foreign investment. A 25 percent foreign investment gives an enterprise the At status of a pin venture and qualifies it for various tax incentives. he same time, foreign equity investment potentiometer rise all the focal point up to 100 percent. Restrictions on the election of sectors are minimal any preferences, sectoral or otherwise, take the form of unnecessary incentives. As a result, formulate ventures have been set up in sectors ranging from hightechnology to consumer goods, endure, and raw materials. lower or upper limit on the amount of foreign investment. There is no In large open cities such(prenominal) as Shanghai, foreign investment projects up to $30 million so-and-so be revered by local authorities. The limit in smaller open cities is $10 This autonomy has illion while that in unopened cities is $3 million. greatly simplified the approval procedures. Second, use of goods and service s, lucre and pricing policies for word ventures are flexible. strikeual Joint ventures are free to employ any required personnel on a tail end. Employees are subject to warnings, lock cuts and 6 dismissal. Except for a hardly a(prenominal) product categories for which prices are set by the state, joint ventures are free to set their prices both domestically and abroad. Products or services for which prices are fixed are of two types. In the first category, prices are wholly fixed (e. . , products such as grain, oil, and sack and services such as electricity and rent). In the second category, prices are allowed to hover within prespecified bands usually ranging from 10 to 30 percent (e. g. , steel, cement, timber, coal and other study with child(p) goods). Finally, China has given extra incentives to joint ventures. As already discussed, these incentives are in particular generous in the SEZs and open cities. Since 1986, additional preferential treatment has been The av ailable to export-oriented or technologically advanced projects. ncentives include o Exemption from state subsidies compensable to employees to cover the benefits provided by the government of China o Priority in obtaining entrust of China loans o Tax right on profits remitted abroad o Longer tax holidays from corporate income tax o Extra tax benefits on profits reinvested in export-oriented or technologically advanced projects and o Further trim land-use fees, priority in obtaining utilities, transport, and communication facilities. art exemptions. China has similarly instituted an e diligenceate system of Under these schemes, uty exemptions on imported inputs used in exports. the concessional share of imports was 35 percent in 1988 and rose to 50 7 percent in 1991. played an The schemes, introduced in 1984 or later, seem to have berth in expanding Chinas exports. Total exports important associated with concessional import arrangements account for 64 percent of Chinas manuf acture exports. These exports doubled between 1988 and 1991. The domestic respect added of these exports is, of course, lower than of other exports. Export financing. put access to export credits is believed to ontribute favourably to export performance. The Bank of China, which is the primary bank dealing in foreign exchange, provides trade credits. Credit, offered in domestic currency, is available for work capital as well as fixed investment for the action of exports and import substitutes. main beneficiaries of these credits are FTCs. of total trade credits in 1991. The They accounted for 85 percent The Bank of China also offers loans in terms of foreign exchange, primarily to enterprises in which foreigners have invested, for working capital and fixed investment.Though contributing favorably to exports, the liberal credit policy has led to a straightaway expansion of striking loans. The total volume of outstanding trade loans at the end of 1991 was more than three time t hat at the end of 1985. In part, this expansion was due to the growth of exports. unless perhaps it also reflects a rising ratio of export credit to total exports. According to one calculation, this ratio was cl percent in 1988. The Hong Kong lodge A key element in Chinas success in the world markets so-called Hong Kong connection. as been the In the mid-1980s, Hong Kong entrepreneurs began shifting manufacturing facilities to China, attracted by lower labor 8 be as wages rose cursorily at home. This link with Hong Kong has not only brought much implyed capital to China but also supplied new technology, modern management practices and critical links to the world market. Today more than half of Chinas exports to the rest of the world are handled by Hong Kong. Of the $45 billion in cumulative foreign investment commitments to China through 1992, 70 percent came from Hong Kong.This investment went mainly to export-oriented joint ventures. A large proportion of Guangdongs export pr oduction is supervised under contract by firms in Hong Kong. Processing activity for exports in Guangdong is also carried out more often than not in collaboration with partners in Hong Kong who emerge materials. Many items, particularly in the roleplay and clothing sectors, which were previously exported by Hong Kong are straight exported by Guangdong. Local policies Chinas economic system is extremely decentralized now and the implementation of policy is by and large under the control of provinces.Hence, in the fast- ontogeny provinces, eclogue and local officials have been deeply multiform in the development process in general and export promotion in particular. The role of local authorities in facilitating foreign investment has been described earlier. In addition, on that point are a number of bureaus in which local authorities promote exports. First, the center gives mandatory targets or export quotas for only a modified number of items or in check volumes. But in s ome provinces, for Moreover, instance Jiangsu, the export-quota-system is faraway more elaborate. aking advantage of their monopsony power, FTCs are able to buy goods from enterprises at prices well below the corresponding domestic prices. Though 9 the economic desirability of exports at any cost has been questioned, the FTCs have sure been able to operate profitably on account of the monopsony power. Second, operating within the centers guidelines, provincial authorities have been expanding Direct Export Rights (DERs) to enterprises. Because the criteria for obtaining such rights are stringent, the DERs have not expanded as rapidly as would have been desirable, however. ith DERs account for only 5% of Chinas exports. Third, within the States guidelines, provincial and city governments limit the allocation of raw materials imported by using locally retained foreign exchange earnings among enterprises, collectives and TVEs and across unlike sectors. provinces and cities also pr ovide indirect export Enterprises subsidies through the provision of critical inputs such as electric power to export oriented enterprises. higher bonuses for Further incentives are provided in the form of and employees on the basis of export managers erformance. Within the guidelines laid low by the State, provinces tooshie confer rights to trade directly upon enterprises and enterprise groups. Finally, local authorities establish joint ventures between FTCs and enterprises to promote exports. established 160 of these ventures. establish other 200 such ventures. The central lesson perhaps the most important lesson, also uniform with the experience of other due east Asian countries such as Korea, Taiwan Province of China, During the Seventh Plan, Wuxi City alone In the Eighth Plan, the city intended to 10 Singapore and now Thailand, is that the key to high GDP growth rates is export orientation and eventual success in the world market. The success in export expansion, in turn, depends on the policy package, which conveys a message in no indefinite terms that, rather than shelter import competing industries, the country result give priority to export oriented activities. China benefitted greatly from the clarity of signals sent by its policy reforms. Once the reform process began, there was ra swan any doubt disdain occasional policy reversals, provincial and about its direction. ity governments, which implemented policies and enterprises, both state and nonstate, were win over that the country was headed towards an export oriented regime. geographical In terms of static efficiency, virtually all policies-preferential treatment of foreign investment in targeting, general and in export sectors in particular, and discriminatory exchange retention rightswere highly distortionary. Yet, they combined to give a loud and clear signal that the government was determined to change the economys orientation out from import substitution to export promotion. 11 B ox Can India benefit from Chinas experience? Operationally, the Chinese model is not very applicable to the economies of eastern atomic number 63 or the former Soviet Union. These countries have largely rejected the planning model, which has remained an integral part of the Chinese development strategy. The countries in Eastern Europe The have already evolved far nigher to the market model than China. countries emerging out of the former Soviet Union, on the other hand, are all the same try with the problem of macroeconomic stabilization. The country for which the Chinese experience is most relevant is India. two are highly populous and, by developing-country standards, large economies. They began their development process rough at the same time and accentuate self-reliance. Both relied increasingly heavily on import substitution policies and ended up with a highly capital intense production structure. China changed course in 1979 while India continued (with modest liberaliz ation) on the old course. In 1991, in many ways, India stood where China stood in 1979. Chinas in 1979. write and The trade-to-GDP ratio was the same as controls were rampant and the investment domestic currency was overvalued. scorn these similarities, even in Indias case, lessons from China are limited. In addition to the obvious differences in political systems which lead to very incompatible political-economy processes in the two countries, there are three reasons for this. has been highly interventionist. been in China and elsewhere in First, the Chinese uprise This blast can be successfulas it has East Asiaprovided the government can 12 implement right interventions judiciously. Indias experience during the Second, Indias last four decades in this respect has not been encouraging. conomy has already evolved far closer to a market economy than that of China. have For instance, export targets and foreign exchange contracts, which helped create a pro-exports ethos in China are neither arguably desirable nor operable in India. greater role in India than in China. Similarly, private sector plays a far Finally, India has already carried out For example, in the area of many reforms that China is still contemplating. exchange rate, China has a doubled exchange rate system and its exchange market is not organised on the lines of market economies. India has chieved virtual current account convertibility and its foreign exchange market is organized along modern lines. Of the lessons that have general relevance to India, the following points would seem to be the most pertinent. o First, creating a liberal and flexible economic environment along the lines of SEZs in China would stimulate greater foreign investment. The country can begin with a small number of citiese. g. , Bombay, Bangalore, Cochin, and Madrasand, as in China, local governments may be given full authority to approve foreign investment up to a certain limit.Most important, rules of entry and go in the zones can be make more flexible. Because these zones will be introduced in limited areas with a high growth potential, political consensus may be easier, even if this requires new legislation. Eventual success in the open zones may open the way for Currently, India does have export political consensus on a wider scale. processing zones. But the geographical area over which such zones operate 13 is far too limited to allow for the full play of liberal policies and make them focal points of investment activity. Second, provision of infrastructure facilities through active In participation of local authorities in the reform process is critical. the fast growing provinces in China, local authorities oddly mayors of the citieshave been deeply involved in the process of development. They try to ensure that investors get speedy clearance with respect to land use, supply of electricity, water and other facilities. In India, so far, it seems that the enthusiasm for reforms has n ot filtered to state governments and the center may well have to take a lead in this regard, offering both carrot and stick.All incentives and reforms at the central level can be rendered ineffective if the state and local authorities, which must provide land, power, communications facilities, and environmental clearance, do not cooperate. There is an urgent need to study caefully how such bottlenecks can be removed. o Third, there is a need for a shift in the production structure towards more labor intensive industries. The share of capital goods imports in total imports is rather small in India when compared with China and other fast-growing countries in East Asia. This, combined with the fact thatIndias import-to-GDP ratio is small, suggests that India is far more deeply into the production of capital goods than China and other comparator countries. In late 1970s and early 1980s, China also suffered from this problem and adopted policies to change the structure of production in favor of labor intensive goods. An important part of this strategy was targeting of a few 14 sectors, especially for exports. this route. For India, it is perhaps unwise to follow Given the countrys generally neutral and rules-based approach to reforms, it is perhaps best to rely on the standard trade policy tools, particularly the structure of tariffs.Recent reduction in tariffs on capital goods should help move the economy towards more labor intensive goods. What is needed is resistance to policies that reverse the impact of this policy change. In particular, there is need for labor-market reforms. The country will not be able to take advantage of low wages of skilled and unskilled labor unless potential investors are sure that they can operate factories around the year without fears of perennial labor disputes. This fear has been behind the highly capital intensive technologies chosen by investors in recent years. Fourth, duty exemptions for fable type operations combined with rapid processing of imported inputs and materials by usance authorities made a remarkable contribution to Chinas export growth. In India, duty exemptions for exporters exist but an service in their administration and simplification of procedures leading to speedy processing by customs will help boost exports. Also, for small exporters who rely on duty drawbacks, delay in getting the drawback as well as in obtaining inputs from abroad are common. An improvement in this direction is also desirable. Fifth, it is important to note that China was welcoming of foreign investment for both domestic and foreign markets. Most of the incentives tax holidays, lower fees on land use, flexibility in the employment of labor etc. ,were available to all foreign investors. ventures, some extra incentives were provided. For export-oriented joint The lesson here is that 15 fears of tariff-jumping type of foreign investment should not lead to erection of barriers. Instead, if the regime is to be t ilted in favor of export-oriented foreign investments, it should be through through positive incentives.Imposition of barriers to foreign investment will only add noise to signals of openness that India has been sending. A last point concerns the importance of a Hong Kong connection. In Indias case, there are no geographic neighbors that are as economically can-do as Hong Kong or Taiwan, Province of China. But through cultural ties, the most India can do is to attract investments from Indians in Hong Kong and Non occupier Indians (NRIs) elsewhere in the world. While this is patently worth doing, India has to rely on a more diversified base of foreign investors.It may be argued that to meet the East Asian challenge, investors in the United States and Europe will be increasingly looking for sources of cheap labor. With its vast pool of cheap unskilled to middleMoreover, level skilled labor, India all the way fulfills this requirement. Indias economic and political institutions are also familiar to western investors. What is needed is more open policies, transparency, and infrastructure. If this can be accomplished, India may well become the primary export base for the United States and European residential area in the 21st century.Arvind Panagariya an Indian national, was a Principal Economist in the Banks handle Policy Division and is a professor of Economics at the University of Maryland. He gain his PhD from Princeton. 16 Direct foreign investment into China (billion dollars) Commitment 1988 1989 1990 1991 1992 (first half) Cumulative, end 1991 5. 3 5. 6 6. 6 12. 0 14. 5 48. 9 Actual n. a. 3. 4 3. 5 4. 4 3. 4 20. 3 &8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212&8212- Sources China Statistics Yearbook 1990, 1991, Ministry of Foreign Economic dealings and Trade, China.