China's Foreign Economic Relations

China's Foreign Economic Relations

May, 1997

1. Introduction

China's presence in the world economy continues to grow and deepen. The foreign sector of China plays an important and multifaceted role in the country's economic development. ₁At the same time, China's expanded role in the world economy is beneficial to all its trading partners. Regions that trade with China benefit from cheaper and more varied imported consumer goods, raw materials, and intermediate products. China also provides a large and growing export market. While the entry of any major trading nation in the global trading system can create a process of adjustment, the outcome is fundamentally a win-win situation. It is a simple but powerful lesson from economics that freer international trade and investments benefit all parties concerned.

In 1995, China's merchandise exports to the world amounted to $148.77 billion, an increase of 22.9 percent over the year before. Merchandise imports by China in 1995 were valued at $132.08 billion, an increase of 14.2 percent (table 1). There was a modest drop in the growth rate of exports in 1995, but the growth rate of China's imports accelerated. Compared to 1991, the value of both exports and imports had more than doubled. China's share of world exports rose slightly from 2.9 percent to 3.0 percent in 1995, and China ranked as the eleventh largest global exporter.

In 1996, China's merchandise exports were worth $151.07 billion, while its merchandise imports were $138.83 billion. These data represent a dramatic slowdown in China's foreign trade growth rates. In 1996, exports rose by only 1.5 percent, while imports grew by 5.1 percent.

Source: General Administration of Customs of the People's Republic of China, China's Customs Statistics, various years.

Note: Figures are in US$ billions. Exports are measured on an f.o.b. basis, imports are recorded on a c.i.f. basis.

2. China's Foreign Trade by Major World Regions

Using China's official statistics,tables 2 and 3 highlight China's merchandise exports and imports to and from major world regions: Asia, Africa, Europe, Latin America, North America, and Oceania. ₂

Source: General Administration of Customs of the People's Republic of China, China's Customs Statistics Yearbook 1994 and China's Customs Statistics Monthly, December 1995 and December 1996.

Note: Figures are in US$ billions. Percentages in brackets represent each region's share of China's total merchandise exports. Exports are recorded on an f.o.b. basis.

From table 2, we see that China's most important export region in 1996 was Asia, which absorbed more than 60 percent of China's exports. North America (which included the United States and Canada) took in more than 18 percent of China's exports and Europe took in more than 15 percent. Together, these three regions took more than 94 percent of China's exports. From 1993 to 1996, the shares of the major regions were relatively stable, with no abrupt changes. ₃A somewhat surprising finding is that Africa was a slightly larger export market for China than was Oceania, which includes Australia and New Zealand.

Table 3 highlights merchandise imports by China from various world regions. Again, Asia dominated as by far the largest supplier, accounting for more than 60 percent of China's imports in 1996; while the next largest supplier was Europe, with a share of more than 19 percent. North America ranked third, with a share of more than 13 percent. These three regions supplied more than 93 percent of China's imports. As in the case of exports, these shares were subjected to only minor changes over 1993-1996. The relative importance of these various regions remained quite stable.

3. China's Merchandise Exports and Imports by Major Trading Region

Tables 4 and 6 document China's merchandise exports to and imports from its major trading partners, using China's official statistics.

According to table 4, the major export markets for China in 1996 were (in order of importance): Hong Kong (21.78 percent), Japan (20.44 percent), the United States (17.66 percent), and the European Union (13.13 percent.) ₄Together these markets took 73.01 percent of China's exports in 1996. Since 1994, Japan has overtaken the United States as the second largest export market for China. Within the Association of Southeast Asian Nations (ASEAN), Singapore was the largest export market for China, accounting for $3.75 billion in 1996. Within the European Union, Germany was the largest market, taking $5.84 billion of China's exports in 1996. The second largest E.U. market was the Netherlands, with an export value of $3.54 billion in 1996.

Table 4 gives a comparative impression of China's various export markets based on officially recorded figures. However, many of China's exports go through Hong Kong. For example, in 1995, 55.3 percent of China's officially recorded exports went through Hong Kong to be re-exported elsewhere. ₅ Despite China's improved efforts since 1993 to classify exports by final destination, it is still likely that many of China's indirect exports via Hong Kong were miscounted as exports to Hong Kong. This explains why according to Chinese official statistics, a small economy like Hong Kong was the largest export market for China.

In table 5, we attempt to provide more accurate estimates of China's export figures. We do this by assuming that China's re-exports through Hong Kong represent China's indirect exports to its various trading partners. The re-exports are first discounted by a re-export margin of 25 percent. ₆They are then added to the direct exports, that is, China's officially recorded exports. For China's exports to Hong Kong, we use figures estimating Hong Kong-retained imports, as provided by the Hong Kong government. ₇ Table 5 presents our estimates of China's exports to various trading partners. Because of insufficient re-export data, we are not able to estimate China's adjusted exports to all the European Union and ASEAN countries, even though we provide estimates for most of the important E.U. and ASEAN members. In addition, because of insufficient re-export data for 1996, we only provide adjusted estimates up to 1995.

Source: General Administration of Customs of the People's Republic of China, China's Customs Statistics Yearbook 1994 and China's Customs Statistics Monthly, December 1995 and December 1996.

Note: Figures are in US$ billions. Figures in brackets represent each partner's share of China's total merchandise exports to the world. Exports are reported on an f.o.b. basis. ASEAN (Association of Southeast Asian Nations) includes Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and, for 1996 only, Vietnam. EU (European Union) includes Belgium, Denmark, United Kingdom, Germany, France, Ireland, Italy, Luxembourg, Netherlands, Greece, Portugal, Spain, Austria, Finland, and Sweden. For 1993 and 1994, Germany refers to the Federal Republic of Germany; EU comprises imports and exports of EEC and China's trade with Austria, Finland, and Sweden.

Our adjusted estimates provide a more accurate picture of the relative importance of China's various export markets. First and foremost, Hong Kong was no longer the largest one. Its 1995 share dropped from 24.19 percent in table 4 to 2.64 percent after our adjustments. As an export market for China (rather than re-export market), Hong Kong was smaller than Netherlands, the United Kingdom, and Singapore. The export values and export shares of all other trading partners rose after adjustments. The 1995 share of the United States jumped from 16.61 percent to 31.45 percent, making it China's leading export market. As mentioned before, because of data constraints, we are not able to compute total Chinese exports to the entire European Union or ASEAN countries as a whole. The E.U. countries for which we do have data (Germany, France, Netherlands, Italy, and United Kingdom) combined to give a share of 18.61 percent in 1995.

In table 6, we use China's official data to show the relative significance of China's various import providers.

While one can argue that table 6 suffers from the same pitfalls as table 4, as China may also have failed to distinguish between importing from Hong Kong and importing from other countries via Hong Kong, for our purposes table 6 is by and large satisfactory. Most countries, including China, are much more careful in tracing the origins of their imports. This is particularly the case since 1993. Furthermore, if we check China's import figures from Hong Kong and from the United States (as given in table 6), we find that they match fairly closely estimates derived from United States government figures and Hong Kong government figures. For example, in 1995, if we adjust the U.S. government's figure for exports from the United States to China by the extent of re-exports of U.S. goods via Hong Kong, the total direct and indirect U.S. exports to China will be $16.7 billion. From the above table, China's official data indicate that China's imports from the United States in 1995 were $16.12 billion. Similarly if we take Hong Kong's domestic exports to China, its 1995 figure was $8.22 billion, as compared with China's figure of $8.59 billion. Thus, table 6 can be taken to present a reasonably good picture of the relative significance of China's major suppliers of imports.

In 1996, Japan was the number one provider of China's imports, with a share of 21.02 percent. The European Union came second, with a share of 14.31 percent. Taiwan and the United States were respectively third and fourth, with shares of 11.66 percent and 11.64 percent. It is surprising that the amount of exports from the United States was somewhat lower than the amount from Taiwan. In fact, in 1993 and 1994, Taiwan also exported more to China than the United States did. In 1996, ASEAN countries accounted for 7.70 percent of China's imports, a larger share that than that of Hong Kong (5.64 percent). Among ASEAN members, the largest exporter to China was Singapore, with a value of $3.60 billion in 1996. Among E.U. countries in 1996, Germany was the largest, its exports to China totaling $7.32 billion. This was followed by Italy, with an export value of $3.25 billion. Third was France, with $2.24 billion.

Source: Census and Statistics Department, Hong Kong, Hong Kong External Trade, December 1994 and December 1995, Annual Review of Hong Kong External Trade 1995, Hong Kong Monthly Digest of Statistics, February 1996; General Administration of Customs of the People's Republic of China, China's Customs Statistics Yearbook 1994 and China's Customs Statistics Monthly, December 1995.

Note: Figures are in US$ billions. Figures for Hong Kong are estimated retained imports from China; figures for all other major trading partners are the sums of China's officially recorded exports and re-exports from China via Hong Kong adjusted by 25 percent re-export margins. Exchange rates of various years are taken from Annual Review of Hong Kong External Trade 1995. Bracketed figures are percentages of China's total exports.

Source: General Administration of Customs of the People's Republic of China, China's Customs Statistics Yearbook 1994 and China's Customs Statistics Monthly, December 1995 and December 1996.

Note: Figures are in US$ billions. Figures in brackets are percentages of China's total global imports. Imports are recorded on a c.i.f. basis. ASEAN (Association of Southeast Asian Nations) includes Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and, for 1996 only, Vietnam. EU (European Union) includes Belgium, Denmark, United Kingdom, Germany, France, Ireland, Italy, Luxembourg, Netherlands, Greece, Portugal, Spain, Austria, Finland, and Sweden. For 1993 and 1994, Germany refers to Federal Republic of Germany; imports from EU are calculated by adding imports from EEC to imports from Austria, Finland, and Sweden.

4. Foreign Direct Investment into China

Table 7 highlights major sources of utilized foreign direct investments in China for 1993-1995. ₈

Source: China Economics Publishing House, Economic Information and Agency, Almanac of China's Foreign Economic Relations and Trade, various years.

Note: Figures are in US$ billions. Figures in brackets are percentages of the total foreign direct investment in China.

According to table 7, Hong Kong continued to be the largest direct foreign investor in China, accounting for 53.47 percent of the total in 1995. While it is likely that much of those investments actually came from sources other than Hong Kong (including capital "roundtripping" from China), it is also reasonable to assume that even if one discounted the magnitude of Hong Kong's share, it would still most likely remain the number one supplier of foreign direct investment in China.

The next level of foreign investors all contributed about the same amount. In 1995, the second largest supplier was Taiwan, with a share of 8.43 percent. Close behind were Japan and the United States, which had respective shares of 8.28 percent and 8.22 percent. A mild surprise in table 6 is the finding that in 1995, ASEAN countries had more direct foreign investment in China than did the European Union. As expected, among ASEAN countries Singapore had the highest level of foreign direct investment, with a total of $1.85 billion in 1995, more than that of any E.U. member country. Within the European Union, the United Kingdom accounted for the largest foreign direct investment, with a 1995 value of $0.91 billion. Next was Germany, with a foreign direct investment value of $0.39 billion.

The category of foreign direct investments includes Sino-foreign equity joint ventures, sino-foreign cooperative joint ventures, wholly foreign-owned enterprises, and joint development. In addition, there are foreign investments related to processing and compensation trade. While they are recorded as "other foreign investments" in official Chinese statistics, they are technically not direct investments. In an investment related to processing, a foreign firm subcontracts a part of the production process to a Chinese entity. In 1995, Hong Kong provided the largest amount of these other foreign investments, with a utilized investment value of $0.12 billion (a share of 43.74 percent of the total "other foreign investments"). The next largest was Japan, which had $0.104 billion of utilized other foreign investments (a share of 36.47 percent). Taiwan reportedly had only $3.61 million of such investments.

Source: Hong Kong Census and Statistics Department, Annual Review of Hong Kong External Trade, 1995 and Hong Kong Shipping Statistics, various years.

Note: Figures are in US$ billions for re-exports; transshipments are measured in tons. Exchange rates used are annual averages given in Hong Kong Census and Statistics Department, Annual Review of Hong Kong External Trade, 1995. The exchange rates are HK$1=US$7.736 for 1993, HK$1=US$7.728 for 1994 and HK$1=US$7.736 for 1995.

5. Economic Relations between China and Its Trade and Investment Partners

5.1 China's Economic Relations with Hong Kong and Taiwan ₉

The most significant event that will affect economic relations within Greater China (China, Hong Kong, and Taiwan) is no doubt the impending reversion of Hong Kong to Chinese sovereignty on July 1, 1997. Relevant laws governing the new Hong Kong Special Administrative Region (HKSAR) can be found in the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China, adopted by the Seventh National People's Congress on April 4, 1990. The Basic Law gives a high degree of autonomy to the HKSAR. Under the law, Hong Kong will maintain the status of a free port and pursue a free trade policy. It will remain a separate customs territory. The HKSAR may act on its own to maintain, develop, and conclude agreements with other states, regions, and relevant international organizations in fields such as trade, money, and finance. ₁₀ One consequence is that even after China joins the World Trade Organization (WTO), Hong Kong can and will remain a separate member.

There is no question that both Hong Kong and Taiwan are extremely important to the economic development of China. In 1995, Hong Kong and Taiwan were China's first and second largest foreign investors, respectively. Together, they contributed $23.22 billion (or 61.9 percent) of foreign direct investments to China that year, ₁₁ bringing in new managerial know-how, new forms of firm organization, newer techniques of production, and additional sources of capital.

In 1995, foreign direct investments from Hong Kong increased by 1.98 percent to $20.06 billion. As pointed out above, Hong Kong is also the major re-export center for goods leaving and entering China. In 1995, 55.3 percent of China's exports went through Hong Kong and were re-exported elsewhere, while 37.58 percent of China's imports were re-exported to China via Hong Kong.

Taiwan still officially maintains a "no direct trade" policy with China. A substantial portion of trade between the two takes the form of re-exports via Hong Kong. There is also indirect trade between Taiwan and China via Japan, Singapore, Guam, and other third parties. China-Taiwan trade is also carried out in the form of transshipment via Hong Kong. Transshipment occurs when goods are consigned directly from the exporting country (say Taiwan) to a buyer in the importing country (say China). The goods go through Hong Kong and are often transferred to another vessel for further transport; but unlike re-exports, the goods do not go through Hong Kong Customs. Consequently, we do not have official transshipment data in value terms, but in weight only. Table 8 highlights re-exports and transshipment between China and Taiwan via Hong Kong.

Available data in table 8 indicate that both re-exports and transshipment continue to increase between China and Taiwan. Tables 5 and 6 show that China's total exports and imports have also been increasing. ₁₂However, in 1995, foreign direct investments from Taiwan had slowed (see table 7) to $3.16 billion, a drop of 6.78 percent. Military exercises over the Taiwan Strait in March 1996 could further the slowdown for 1996 and 1997. But in the longer run, given the complementary nature of the two economies, further economic integration led by the private sectors seems likely.

5.2 China-United States Economic Relations

Based on our estimates in table 5, the United States was probably the largest export market for China in 1995. ₁₃ For the same year, it was the third largest supplier of China's imports and fourth largest foreign direct investor in China. Economic relations between the two countries continued to expand in 1995. China's exports to the United States increased by 12.13 percent over the previous year, while China's imports from the United States rose by 16.05 percent. U.S. foreign direct investments went up even more, by 23.69 percent to $3.08 billion. ₁₄

In 1996, the Clinton administration again renewed China's most favored nation (MFN) status. This allowed the United States and China to continue to trade under a normal trading framework. The Clinton administration had previously de-linked human rights issues from the MFN renewal debate, even though some members of the U.S. Congress continued to argue for denial of a normal trading status on grounds of China's alleged human right violations. In general, it is expected that MFN renewal will continue.

While MFN renewal seems to have returned to the right track, there are two other trade issues looming between the two large Pacific economies. The first is the large and growing bilateral trade deficit. ₁₅ It is well recognized by professional economists that bilateral trade imbalances are not correlated with measures of openness; nonetheless, policy makers in the United States consistently argue that the U.S. deficit with China represents a lack of market access.

Official U.S. statistics show that in June 1996, China surpassed Japan for the first time as the country with the largest trade surplus with the United States. However, there are significant accounting and measurement problems in obtaining a true picture of China's external balance with the United States. The main problem is again the large amount of U.S. re-exports that go through Hong Kong. By definition, re-exports occur in Hong Kong when goods are first shipped there, change legal possession, and are then re-exported to China. Since the goods change hands in Hong Kong, it is difficult, if not impossible, for U.S. Customs to trace how many of the U.S. exports will end up in China. ₁₆ Furthermore, the extent of re-exports is large. Official U.S. government data show that in 1995, U.S. exports to China were $11.7 billion. ₁₇ Re-exports of goods from the United States to China via Hong Kong amounted to $5 billion, or 42.74 percent of official U.S. exports. ₁₈ The point is that in bilateral trade with China, even the U.S. trade statistics are inaccurate.

Another important aspect of the China-U.S. trade imbalance issue is the neglect of the role of service trade. It is well known that the United States is a net exporter of services. In considering countries' external relations, there is no particular reason why one should focus on the trade balance in goods and ignore the trade balance in services.

Finally, an alternative way to look at trade relations between the United States and China is to consider Hong Kong and China as a single entity. In that case, re-exports will in effect be internal trade among regions of the same economic entity. Another advantage in looking at a combined China-Hong Kong entity is that it takes into account "deficit-shifting." Because of the massive movement of factories from Hong Kong to China, a large volume of Chinese exports is sent from plants owned by Hong Kong firms. This causes exports from China to increase and exports from Hong Kong to decrease.

Source: U.S. Department of Commerce, U.S. Foreign Trade Highlights, various years; U.S. Bureau of the Census, Exports, Imports, and Balance of Goods by Selected Countries and Geographic Areas--1995, 1996; U.S. Department of Commerce, Survey of Current Business, 1995; Hong Kong Census and Statistics Department, Hong Kong External Trade, various years.

Note: Figures are in US$ billions. For the 1995 estimate of adjusted U.S.-China balance in goods and services, we assume that the net service exports of the United States are the same as those in 1994. A negative sign indicates deficits by the United States. Estimates are taken from tables 7, 8, and 9 of K. C. Fung and Lawrence J. Lau, "The China-United States Bilateral Trade Balance: How Big Is It Really?" (Asia/Pacific Research Center, Stanford University, 1996).

Thus, some of the deficit is shifted from Hong Kong to China. Furthermore, the same "deficit-shifting" argument applies to Taiwan. Instead of looking just at the China-United States trade balance, it may be more meaningful to focus on the trade balance between Greater China and the United States. In table 9, we present estimates of the impact of these three considerations on the China-U.S trade balance. The first column of table 9 shows U.S. government figures for the China-U.S. trade balance. The second figures show our estimates of the U.S.-China trade balance after adjusting for re-exports and re-export markups. ₁₉ It can be seen that after adjustments, China's 1995 trade surplus drops from $33.8 billion to $24.0 billion. The third column adds in the net service export position of the United States with respect to China. With the addition of the service account, the 1995 bilateral balance drops further to $23.3 billion. The last column of table 9 shows the balance between the United States on one hand and China, Hong Kong, and Taiwan (Greater China) on the other. Obviously, with three economic entities counted as one, the deficits become higher. But the growth of the deficits over the years is slower than that in the U.S.-China balance alone. This relative stability provides some evidence for the "deficit-shifting" hypothesis. Overall, we note that the U.S. deficits with China are significantly lower than the official U.S. figures.

Another area of significant trade friction between China and the United States has been textiles. China is the third largest supplier of textiles and apparel to the United States. In September 1996, the United States imposed quotas on thirteen categories of textile goods and raised import duties of some others. The United States alleged that despite the 1994 Sino-U.S. Textile Agreement, Chinese firms continue to circumvent U.S. import quotas by transshipping textile goods through third parties. The increase in textile trade restrictions amounted to an estimated $19 million in punitive charges. The 1994 Sino-U.S. Textile Agreement will expire in December 1996. ₂₀That agreement allows less than 1 percent annual growth in import volumes of Chinese textiles and apparel to the United States. Partly because of increased competition from Mexico and partly because of more stringent and time-consuming checking of the country of origin of textile goods from China by U.S. Customs, in the first nine months of 1996, imports of Chinese apparel fell 13 percent from the year before. ₂₁ In response to the U.S. penalties, China had threatened to ban imports of certain U.S. textiles, farm goods, fruits, and alcoholic beverages. On December 8, 1996, China delayed by one month its deadline to implement these bans. After some hard bargaining, the fifth Sino-U.S. Textile Agreement was reached in February 1997. ₂₂

The U.S.-China textile trade friction is an example of the increased use of the rule of origin by importing countries to reduce imports. ₂₃ Except for some selective textile items, the United States lost its comparative advantage in the textile and clothing sector quite some time ago. It is often difficult to ease out an important declining industry, and import restrictions are used instead. While there may or may not be attempts by China to evade textile quotas on a large scale, from an economic efficiency standpoint, these textile quotas and other trade restrictions should not have been there in the first place. Using the rule of origin to reduce imports is just another way to enforce inefficient restrictions on trade.

5.3 China-Japan Economic Relations ₂₄

According to our estimates of adjusted Chinese export figures, China exported $34.58 billion to Japan in 1995, up by 31.68 percent from 1994. Japan was most likely the second largest export market for China, behind the United States (see table 5). China's 1996 imports from Japan, its largest supplier that year, totaled $29.18 billion, an increase of 0.62 percent. Utilized Japanese foreign direct investment in China amounted to $3.11 billion, up by 49.5 percent. Japan was the third largest foreign direct investor in China in 1995, behind Hong Kong and Taiwan, and by the end of 1995, its cumulative direct investment projects there totaled 13,257. In 1995, China also imported 533 items of technology and equipment from Japan, making Japan the second largest provider of imported technology items, behind only the United States. ₂₅

Japan has been by far China's largest source of concessional financing and aid since China started its reforms in 1978. ₂₆ Japan's development assistance to China has mainly come in the form of concessional loans administered by Japan's Overseas Economic Cooperation Fund (OECF). These are low-interest loans, with a thirty-year repayment period and a ten-year grace period. Since 1979, Japan has announced four yen loan packages to China. Most have been used to support infrastructure projects, including transportation, electric power, and telecommunications. ₂₇ For 1995, the loan was [yen]141.429 billion, with an interest rate of 2.3 percent. The fourth yen loan package, announced in December 1994, covers 1996-1998. These new concessional loans amount to $6.1 billion. Whether it is trade, investments, or loans, it is clear from the above figures that despite historical hostilities, the economic relationship with Japan is very important to China.

If there is an area that is likely to be a source of friction between the two countries, it is trade in textiles. Textile raw materials and products have consistently been China's most important export commodity to Japan. ₂₈ China's official data show that in 1995 textiles accounted for $7.38 billion, or a whopping 26 percent, of its total official exports to Japan. Japan had indicated that it was concerned by the increase in imports of shirts, sweaters, and towels from China. In February 1995, the Japanese government initiated investigations into exports of China's cotton cloth and cotton yarn. Even though no major actions were taken, Japan would officially monitor imports of these items.

5.4 China-E.U. Economic Relations

Based on our estimates of adjusted export figures in table 5, the European Union was the third largest export market for China in 1995, behind the United States and Japan. In the same year, it was also the second largest provider of imports and the sixth largest foreign direct investor in China. Its foreign direct investments rose by 38.96 percent to $2.14 billion in 1995. But in 1996, exports from the European Union to China decreased by 6.49 percent to $19.83 billion. ₂₉

Despite the slowdown of E.U. exports in 1996, the general pattern over time is expansion of both trade and direct investment linkages between China and the European Union. But, as is normal with any major trading partners, there are also some difficulties in their economic relations. One major source of trade friction between them is the frequent use of antidumping duties against China. The European Union imposed temporary antidumping duties of 22.6 percent on thirty unbleached cotton fabrics from China on November 20, 1996. Final decisions will be made in May 1997. China has vowed that it will fight, as the E.U. market was an important one for China's unbleached cotton fabrics, with an export value reaching $96 million in 1995. Furthermore, on September 17, 1996, the European Union imposed 94.1 percent antidumping duties on imports of shoes from China, and it is also carrying out antidumping investigations of bags imported from China. ₃₀

There is widespread consensus among professional economists that the use of antidumping duties against imports is just another way for domestic producers to harass foreign exporters. More specifically, there are two major complaints against existing antidumping laws. First, governments of importing countries are given too much leeway in deciding whether dumping occurs and how large the dumping margins are. Second, in cases where dumping is judged to have occurred, the criteria for levying antidumping duties rest primarily on whether producers competing with imports have been injured. The welfare of consumers is not taken into consideration at all. The result, typically, is higher prices for consumers. ₃₁ It is important to remember that consumers are not always individual end-users--in some cases, they can be other domestic producers. ₃₂

Traditionally, the European Union is one of the biggest users of antidumping duties in the world (along with the United States, Canada, and Australia). As global economies continue to liberalize and as tariffs continue to come down, more and more countries (including Japan and Mexico) are resorting to the use of antidumping duties. The imposition on China's textile and other products represents a way for E.U. domestic firms to seek protection from, rather than adjust to, increased international competition.

5.5 China-ASEAN Economic Relations

Using our adjusted export estimates, ASEAN countries were the fourth largest export market for China in 1995. In the same year, they were the fifth largest provider of China's imports and also the fifth largest foreign direct investor. Foreign direct investment increased by 40.11 percent over 1994, while exports to China rose by 37.43 percent. Among ASEAN members, Singapore was China's most important trading partner. Estimated Chinese exports to Singapore were $5.14 billion in 1995, while imports were $3.60 billion in 1996 (see tables 5 and 6). Singapore's utilized direct foreign investments in China were $1.85 billion in 1995, making it the sixth largest direct foreign investor. ₃₃Its 1995 direct investments in China represented a 56.93 percent increase over 1994.

Some of the biggest investment projects in China involve ASEAN countries. For example, Singapore has been involved for more than two years in the construction of the China-Singapore Suzhou Industrial Park. Its ambitious plan is to transform 70 square kilometers of farmland into an industrial township. One of the aims is to transfer Singapore's management know-how to China. ₃₄ Some of the biggest foreign investors in China are also from ASEAN member nations. For instance, Charoen Pokphand, a Thai conglomerate, has been involved in 130 joint venture companies in China since 1979. It recently invested in a $118 million motorcycle plant in Pudong. ₃₅ Both the systematic trade and direct investment figures as well as isolated company and project reports suggest that China's economic relations with ASEAN and, in particular, with Singapore, have been significant and in all likelihood will continue to expand rapidly.

6. Other International Issues Concerning China

6.1 China and the WTO

Since March 1986, China has tried unsuccessfully to (re)enter the WTO (and its predecessor, the General Agreement on Trade and Tariffs [GATT]). At this point, it is uncertain whether China can do so in the near future. The United States continues to argue that China's WTO offer is not "commercially meaningful" enough. ₃₆Reports indicate that the United States would like additional provisions for safeguards, dumping, and balance of payments to be applied to China--special provisions that appear to go beyond normal WTO requirements. ₃₇ Furthermore, the United States also wants to look at specific conditions of market access, one sector at a time, to determine what the concessions for China should be. Generally, the United States has indicated that it wants China to further open up its markets, including its financial service sector, and make its trade rules and regulations more transparent.

China so far insists on three basic positions with respect to the WTO: first, that the WTO would be incomplete without the participation of China; second, that China is a developing, not a developed country; ₃₈ and third, that China must have a transition period while it gradually meets the relevant requirements of the WTO. The second and third positions are related, since developing-country status would allow China a longer transition period to bring tariffs in line with other WTO members. China also argues that it has already met the basic requirements for WTO membership. It started to cut tariffs on 4,900 products on April 1, 1996, and announced at the Asia-Pacific Economic Cooperation forum in November 1996 that by 2000 it would further slash the current average tariff of 23 percent by 15 percent. ₃₉ However, as late as December 11, 1996, during the Singapore Ministerial Meeting of the WTO, discussions about speeding up China's entry process had apparently produced few results. ₄₀But Chinese entry is as much a political issue as an economic one, and a breakthrough compromise agreement between the leaders of the two countries is always possible.

Chinese entry into the WTO would be beneficial to both China and its trading partners in the long run. From China's standpoint, membership will provide better protection from the various capricious and inefficient trade barriers imposed by different importing countries. Trade disputes involving China are more likely to be resolved by WTO dispute settlement panels than by mutual threats of trade wars. Moreover, membership in the WTO represents a strong pre-commitment to a competitive open economy, which in turn promotes overall economic efficiency.

It should be remembered that WTO membership is far from universally supported in China. From the point of view of narrow self-interests of domestic Chinese enterprises and industries, it might well be better if China stayed out indefinitely. There is another school of thought that suggests that China should join the WTO only after "invisible" non-tariff barriers to trade have been put in place, as Japanese enterprises and industries allegedly did before they fully acceded to the GATT. ₄₁ From China's trading partners' standpoint, they can expect, in addition to lower tariffs, increased transparency and nondiscrimination and in time a China that fully subscribes to accepted international norms. Yet, the WTO by itself cannot resolve all trade disputes. For example, it still allows too much discretion in the application of antidumping duties by individual countries. Nonetheless, China's entry into the WTO will reduce the influence of international power politics on international trade. Instead, trade and economic relations will be governed by international laws, rules, and regulations.

6.2 Status of China's Currency and Foreign Reserves

On December 1, 1996, China made its currency convertible for the settlement of current accounts. Thus, for purposes related to the export and import of goods and services, foreign exchange may be freely bought and sold on the market. For the purpose of settling capital accounts, the yuan remains nonconvertible. Chinese official foreign reserves reached $105 billion by the end of 1996. The People's Bank of China (the central bank) held a significant portion of its reserves in U.S. Treasury securities. China spent $11 billion on U.S. Treasury securities during the first half of 1996, compared with only $703 million in 1995. ₄₂

The People's Bank of China is not an entirely independent entity. It operates under the State Council. In particular, its proposals on exchange rate policies have to be approved by the State Council. In February 1996, the People's Bank of China signed a bilateral repurchase (repo) agreement with the Hong Kong Monetary Authority, the first Chinese agreement with another monetary authority. Governor Dai Xianglong of the People's Bank also reaffirmed that the bank will act to support the Hong Kong-U.S. dollar peg in the event of a currency crisis.

7. Conclusion

In 1996, there was a sharp decline in the growth of China's foreign trade activities. The slowdown of exports is a fairly widespread phenomenon throughout East Asia, related in part to the slow demand for imports in OECD (Organization for Economic Cooperation and Development) countries, particularly Japan and those in Europe. However, because of high domestic inflation in 1994 and 1995, and the slight appreciation of the yuan against the U.S. dollar (and hence against the other currencies as well), Chinese exports have lost some competitiveness relative to other developing countries. The premature exhaustion of funds for the tariff and tax rebate program for exports also had an impact.

The slowdown of China's import growth is related to the continued tight domestic credit policy. However, 1996 was not a normal year because some imports of equipment into China by foreign direct investors and joint ventures were accelerated from 1996 into 1995 because of the anticipated expiry of tariff exemption. As a result, 1995 imports were somewhat higher than normal, and 1996 imports somewhat lower. It is therefore expected that the slowdown in 1996 will prove transitory and that in 1997 the growth of both exports and imports will return to its historical trend.

China is expected to make significant progress on her application for WTO membership in 1997. However, even though the positions of China and the OECD countries, principally the United States, have become closer, it is still too early to tell whether China will be able to enter the WTO in 1997 or 1998. But there is reason to be cautiously optimistic. The renewal of China's MFN status by the United States does not appear to be a serious problem this year.

Apart from the WTO and MFN issues, China has reasonably good trade and investment relationships with all its trading partners. From China's standpoint, there are still three related concerns. First, almost all its major trading partners impose trade restrictions against its exports of textiles and garments. Second, countries importing Chinese goods are increasingly resorting to antidumping duties to reduce the growth of Chinese exports. Third, some countries such as the United States are using rule-of-origin as a way to reduce the import of Chinese goods. These concerns are likely to continue.

References

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Notes

Note 1: In Lau, "The Chinese Economy," it was pointed out that China's economic development is likely to be led by domestic demands. Given China's size, there are simply no foreign markets large enough for China's growth to be primarily export-led. The foreign sector continues to play an important role. It provides managerial know-how, increases competition, transfers technology, and often leads in legal and institutional reforms. This view of the multifaceted role of China's foreign sector is also consistent with empirical results in Fung, Trade and Investment. Back.

Note 2: The regions in Asia include Hong Kong, Macau, Taiwan, Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Afghanistan, Bahrain, Bangladesh, Bhutan, Burma, Democratic Kampuchea, Cyprus, Korea DRP, India, Iran, Iraq, Israel, Japan, Jordan, Kuwait, Laos DRP, Lebanon, Maldives, Mongolia, Nepal, Oman, Pakistan, Palestine, Qatar, Saudi Arabia, Korea Rep., Sri Lanka, Syrian Arab Rep., Turkey, United Arab Emirates, Republic of Yemen, Vietnam, and China.

Regions in Africa include Algeria, Angola, Benin, Botswana, Burundi, Cameroon, Canary Is., Cape Verde, Central Africa, Ceuta, Chad, Comoros, Congo, Djibouti, Egypt, Eq. Guinea, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Côte d'Ivoire, Kenya, Liberia, Libyan Arab Jm., Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Reunion, Rwanda, Sao Tome & Principe, Senegal, Seychelles, Sierra Leone, Somalia, S. Africa, Western Sahara, Sudan, Tanzania, Togo, Tunisia, Uganda, Burkina Faso, Zaire, Zambia, Zimbabwe, Lesotho, Melilla, Swaziland and Eritrea.

Regions in Europe include Belgium, Denmark, United Kingdom, Germany, France, Ireland, Italy, Luxembourg, Netherlands, Greece, Portugal, Spain, Austria, Finland, Sweden, Iceland, Liechtenstein, Norway, Switzerland, Estonia, Latvia, Lithuania, Georgia, Armenia, Azerbaijan, Belorussia, Kazakhstan, Kirghizia, Moldavia, Russia, Tadzhikistan, Turkmenistan, Ukraine, Uzbekistan, Albania, Andorra, Bulgaria, Gibraltar, Hungary, Malta, Monaco, Poland, Romania, San Marino, Yugoslavia, Slovenia, Croatia, Czech Rep., Slovakia, Macedonia Rep., and Bosnia & Hercegovina. Regions in Latin America include Antigua & Barbuda, Argentina, Aruba, Bahamas, Barbados, Belize, Bolivia, Bonare, Brazil, Cayman Is., Chile, Colombia, Dominican Rep., Costa Rica, Cuba, Curacao, Dominica, Ecuador, French Guyana, Grenada, Guadeloupe, Guatemala, Guyana, Haiti, Honduras, Jamaica, Martinique, Mexico, Montserrat, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Saba, Saint Lucia, Saint Martin, Saint Vincent & Grenadines, El Salvador, Suriname, Trinidad & Tobago, Turks & Caicos Is., Uruguay, Venezuela, Br. Virgin Is., and St. Kitts-Nevis.

Regions in North America include Canada, United States, Greenland, and Bermuda.

Oceania includes Australia, Cook Is., Fiji, Gambier Is., Marquesas Is., Nauru, New Caledonia, Vanuatu, New Zealand, Norfolk Is., Papua New Guinea, Society Is., Solomon Is., Tonga, Tuamoto Is., Tubai Is., Samoa, Kiribati, Tuvalu, Micronesia FS, Marshall Is. R., and Palau. Back.

Note 3: We start our comparison with 1993 because that year China started to seriously trace the country of origin and the country of destination of its imports and exports. Before then, China classified all its goods sent to Hong Kong, whether for re-export elsewhere or for consumption in Hong Kong, as exports to Hong Kong. Consequently, before 1993, China's trade with Hong Kong was greatly exaggerated. For details, see Fung and Lau, "The China-United States Bilateral Trade Balance." Back.

Note 4: It is fairly well known that a significant portion of China's exports to Hong Kong is re-exported through Hong Kong. Even though China has reformed its system of collecting export and import data since 1993, it is still likely that the role of the Hong Kong market is exaggerated. See the next table for our adjustments to these export values and export shares. Back.

Note 5: This is calculated by dividing China's 1995 re-exports via Hong Kong by China's 1995 total exports to the world. The re-export figure is from Hong Kong External Trade, December 1995, Census and Statistics Department. China's total export figure is from China's Customs Statistics Monthly, December 1995, General Administration of Customs of the People's Republic of China. Back.

Note 6: In 1994, the re-export margin of Chinese goods via Hong Kong was estimated to be 24.9 percent. See Hong Kong Monthly Digest of Statistics, February 1996. Back.

Note 7: Imports from China retained by Hong Kong are given for 1993 and 1994 in Hong Kong Monthly Digest of Statistics, February 1996. For 1995, we took the figure for China's re-exports via Hong Kong, discounted it by the re-export margin of 25 percent, then subtracted it from Hong Kong's total 1995 imports from China to obtain Hong Kong's 1995 retained imports from China. Back.

Note 8: For a study of Hong Kong's and Taiwan's investments in China, see Fung, Trade and Investment. Back.

Note 9: For detailed discussions of some economic relationships among China, Hong Kong and Taiwan, see Lau, "The Role of Government in Economic Development" and Fung and Ng, "Trade in Greater China." An early discussion of the economic relationship between Hong Kong and China was in Sung, The China-Hong Kong Connection and Kao, "Economic Interactions." For a detailed examination of Taiwan's economic development see Lau, Models of Development; for a study of the sources of economic growth of Hong Kong and Taiwan, see Kim and Lau, "The Sources of Economic Growth." Back.

Note 10: These provisions can be found in Articles 114, 115, 116, and 151 of the Basic Law. Back.

Note 11: Foreign direct investments supposedly originating from Hong Kong also include an unknown but significant amount of recycled Chinese capital. Back.

Note 12: The adjusted exports from China to Taiwan given in table 5 already include re-exports via Hong Kong. Similarly, the import figures in table 6 should also have taken re-exports into account. Back.

Note 13: See table 5 and discussions following the table. Back.

Note 14: See tables 5, 6, and 7. Back.

Note 15: For details, see Fung and Lau (1996) and Fung, "Accounting for Chinese Trade." Further discussions on this topic can be found in People's Daily, May 21, 1996. Back.

Note 16: By definition, re-exports mean that little or no change will be made to the U.S. goods in Hong Kong. By the time these goods arrive at China's Customs, they will still be U.S. goods, not goods "made in Hong Kong." Back.

Note 17: See U.S. Bureau of the Census, 1996. Back.

Note 18: See Hong Kong External Trade, Hong Kong Census and Statistics Department, December 1995. Back.

Note 19: We treat U.S. official exports to China as direct exports. We then take Hong Kong re-exports of U.S. goods, discounted by the re-export margin of 14 percent, as indirect U.S. exports to China. The sums of these direct and indirect exports are estimates of our adjusted U.S. exports to China. We treat U.S. official imports from China as including both China's direct and indirect exports (with the re-export markup) to the United States. We discount China's indirect exports to the United States by the re-export margin of 25 percent and add them to China's direct exports to get estimates of U.S. adjusted imports from China. For details, see Fung and Lau (1996). Back.

Note 20: See Asian Wall Street Journal, December 2, 1996. Back.

Note 21: Ibid. Back.

Note 22: See Hongkong Standard, December 9, 1996, and China Daily, February 3, 1997. Back.

Note 23: For a discussion of the rule of origin as a trade barrier, see Krueger, "Customs Union." Back.

Note 24: For a discussion of a comparative analysis of Japanese and U.S. trade and investment in China, see Fung and Iizaka, "U.S.-Japan Rivalry." Back.

Note 25: See "The Economic and Trade Relations Between China and Japan in 1995," Almanac of China's Foreign Economic Relations and Trade (China Economics Publishing House, Economic Information and Agency, 1996/97). Back.

Note 26: This contrasts sharply with policies of the United States, which provides virtually no bilateral financial assistance to China. Back.

Note 27: See Evans, "Japan and the United States Diverge" and Lardy, China in the World Economy. Back.

Note 28: China's textile exports to Japan from 1989 to 1994 are given in Fung and Iizaka, "U.S.-Japan Rivalry." Figures for 1995 are given in "The Economic and Trade Relations Between China and Japan in 1995" (Almanac of China's Foreign Economic Relations and Trade, China Economics Publishing House, Economic Information and Agency, 1996/97). Back.

Note 29: See tables 6 and 7. Back.

Note 30: See Hongkong Standard, December 9, 1996. Back.

Note 31: See, for example, Finger, Antidumping, Fung and Finger, "GATT Enforcement," and Staiger and Wolak, "Trade Effects of Antidumping Investigations." Back.

Note 32: For some discussions of the U.S. flat panel display case which hurts the domestic U.S. personal computer industry, see Finger and Fung, "Can Competition Policies Control `301'?" Back.

Note 33: As a foreign direct investor, Singapore was behind Hong Kong, Taiwan, Japan, the United States, and the European Union. Back.

Note 34: See Asian Wall Street Journal, September 25, 1996. Back.

Note 35: See Far Eastern Economic Review, September 26, 1996. Back.

Note 36: See Asian Wall Street Journal, December 2, 1996. Back.

Note 37: See Hongkong Standard, August 26, 1996. Back.

Note 38: The United States insists that the volume of China's exports and the size of China's economy make China a developed economy. Back.

Note 39: See Hongkong Standard, December 9, 1996. Back.

Note 40: See South China Morning Post, December 11, 1996. Back.

Note 41: For an empirical study of how the Japanese keiretsu may have acted as an "invisible" trade barrier, see Fung, "Characteristics of Japanese Industrial Groups." Back.

Note 42: See South China Morning Post, October 3, 1996. Back.