China’s Miracle in Foreign Trade PDF
Preview China’s Miracle in Foreign Trade
Studies in Modern Chinese Economy Miaojie Yu China’s Miracle in Foreign Trade Studies in Modern Chinese Economy The series aims to look through all key issues around China’s development since thereformandopen-up,involvingtopicsofeconomicgrowth,institutionalreform, reform of state-owned enterprises, income distribution and balanced development, movementofpopulationandregionaleconomicdevelopment,ruraleconomicdevel- opment, innovation and economic incentive polices and local governance etc. The authorsareallfirst-classeconomistsinChina.It’shelpfultounderstandthehistory aswellasthestatusquoofChina’spathindevelopment. Moreinformationaboutthisseriesathttps://link.springer.com/bookseries/16588 Miaojie Yu China’s Miracle in Foreign Trade MiaojieYu NationalSchoolofDevelopment PekingUniversity Beijing,China ISSN2730-5376 ISSN2730-5384 (electronic) StudiesinModernChineseEconomy ISBN978-981-16-6029-0 ISBN978-981-16-6030-6 (eBook) https://doi.org/10.1007/978-981-16-6030-6 JointlypublishedwithTruthandWisdomPress TheprinteditionisnotforsaleinChina(Mainland).CustomersfromChina(Mainland)pleaseorderthe printbookfrom:TruthandWisdomPress. ISBNoftheCo-Publisher’sedition:978-7-5432-2946-4 ©TruthandWisdomPress2022 Thisworkissubjecttocopyright.AllrightsarereservedbythePublishers,whetherthewholeorpartofthe materialisconcerned,specificallytherightsofreprinting,reuseofillustrations,recitation,broadcasting, reproductiononmicrofilmsorinanyotherphysicalway,andtransmissionorinformationstorageand retrieval,electronicadaptation,computersoftware,orbysimilarordissimilarmethodologynowknown orhereafterdeveloped. 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The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Dedicatedtomydarling,WeiTian &myson,YushenYu Preface China began its era of reform and opening-up around four decades ago, which profoundly changed China and has significantly influenced the world. As a result of its opening-up policies, China has become the largest country in the world in goodstradeandthesecond-largestcountryinservicestrade,registeringwithgoods tradeofUSD4.58trillionandservicestradeofUSD784billionin2019.Partially becauseofthisamazingachievement,thegrowthofChina’sforeigntradesince1979 isdescribedas“China’sMiracleofForeignTrade.” HowChinarealizethissplendidachievementwithinsuchashorttime?Thisisa verynaturalquestionthatcomestoourmind.Chapter1henceprovidesapossible answer to this question. Briefly, China’s opening-up since 1979 has experienced threestages:theextensivemargin,theintensivemargin,andall-aroundopening-up. Before China’s access to the World Trade Organization (WTO) in 2001, China’s foreigntradeexhibitsafeatureofarapidexpansionintheextensivemarginwhich isdue,inlargepart,toChina’slowlabourcostbasedonitslabourabundantfactor endowment. It is important to stress processing trade, especially in this stage, that plays an important role to contribute China’s miracle of international trade. After China’saccessiontotheWTO,thedevelopmentofChina’sforeigntradeisfeatured withthedeepeningintensivemargin.ThemaindrivingforceofChina’sincremental internationaltradebecametherealizationofscaleeconomieswiththelargeinterna- tionalmarket.Afterglobalfinancialcrisisin2008,becauseofincreasinglabourcosts andanexpandingChina’sdomesticmarket,weakforeigndemandandtradeprotec- tionism in some developed countries, and cheap labour costs in other developing countries,theChinesegovernmenthasproposedanall-aroundopening-upasthenext majorphase,especiallysince2013.ThenewdrivingforceofChina’sinternational trade will be the dividends of institutional reform achieved by expanding imports, expanding market access for foreign firms, strengthening IP rights protection, and nurturinginnovation. TurningtothedevelopmentstrategyofChina’sforeigntrade,itisevidenttosee thatChinastartedwiththeadoptionofimportsubstitutionaftergainingitspolitical independencein1949.Chapter2aimstounderstandhowimportsubstitution,along withotherpolicyinstruments,helpedChinatoestablishitsowncompleteindustrial vii viii Preface system. Particularly, Chap. 2 extends the Sah-Stiglitz “Economics of Price Scis- sor”modelbyextendingtheirmodeltoanopeneconomyandallowingagricultural rationingandestimateitskeystructuralparametersinChina’sgovernmentwelfare objectivefunctionusingaprovince-levelpaneldatabeforeChina’seconomicreform. Itturnsoutthattheweightofpeasantsinthegovernment’swelfareobjectivefunction issmallerthantheweightofworkers.Inaddition,theweightofcurrentconsumption isalsosmallerthanthatoffutureinvestment.Suchfindingswereconsistentwiththe realityofChineseeconomybeforetheeraofeconomicreform. Chapter 3 takes a step forward to consider how import protection affects an importing sector’s relative size. This is an important question indeed for both academic researchers and policymakers. Trade theory has no clear prediction on howimportprotectionaffectsanimportingsector’srelativesize.Itisalsoimportant forpolicymakerstounderstandtheeffectivenessofindustrialprotection.InChap.3 we estimate the impact of trade protection on industrial production relative size basedonatranslogGDPfunctionalsystem.Usinganindustrialpaneldatasetand controllingforfactorendowmentsandtechnologyimprovement,wefindempirical evidence that trade protection does not help much increase asector’s relative size. Suchfindingsarealsorobusttoboththeinclusionoftheroleofpoliticaleconomy andthecoverageofvariousnon-tariffmeasuresasproxiesofindustrialprotection. Export-led development strategy is one of the most important driving forces to boostChina’sforeigntrade,particularly,inthelastthreedecadesinthe20thcentury. The key interesting questions are how China proceeds its export-led development strategy, and consequently, how such policy designs affect firm productivity given that manufacturing firms are the most fundamental microeconomic individual to support the whole-country’s macroeconomic development. Section 3 picks up this taskandcoversfourchaptersfromChaps.4to7provideananswertothisimportant question. Chapter4startswithafirm-levelinvestigationonChina’sprocessingtrade,with a particular focus on size, trends, characteristics, and key features. We begin to analyze why processing trade has developed rapidly in China since 1979. China’s opening-uppolicy,particularlytheestablishmentofspecialexportzones,hasplayed a significant role in the rapid growth of processing trade. We use transaction-level tradedata(2000–2006)fromChinatoinvestigatevariousfactorsaffectingprocessing trade. These include origin and destination countries, leading import and export commodities,transportmodes,firmownership,leadingportsandtheirtradevolume, andtopcitiesandprovinceswhereproducersandconsumersarelocated. SinceChina’sopening-up,Chinahasbecometheworldfactory.Needlesstosay, itisessentialtounderstandChinesemanufacturingfirms’productivityifonewants tounderstandtheChineseeconomy.Yethowproductivityisandshouldbeestimated remainsanareaofactiveresearch.Chapter5reviewssomestate-of-the-artmethods forestimatingproductivity.WeapplythesemethodstoChinesemanufacturingdatain thenewcentury.Weestimatedozensofdifferentspecificationsforhundredsproduc- tionfunctionestimatesandcomparethestrengthsandpitfallsofeachTotalFactor Productivity(TFP)estimationapproach. Preface ix SinceChina’sopening-upinlate1970s,Chinasetupavarietyofindustrialparks including Special Economic Zones (SEZs), economic development zones, export processing zones, and high-tech industrial zones. How does the establishment of industrial zones affect firm productivity? Chap. 6 provides an analysis for us to enrich the understanding of this question. In Chap. 6, we investigate the effect of theplace-basedindustrialpolicyonfirmproductivityinChinausingtheresponses ofChinese medium and largefirms totheestablishment ofstate-level SEZs inthe firstdecadeofthenewcentury.EvidenceshowsthatSEZsimproveproductivityand generatepositivespillovers.Theproductivitypremiumoffirmslocatedinindustrial parksismainlyattributedtothebetterbusinessenvironment(lowertaxes)inSEZs. Onaverage,theestablishmentofaSEZleadstoaproductivitygainof19%. Chapter7takesastepfurthertoexaminehowfirmsadjusttheirextensivemargin measured by firm’s export scope in response to trade liberalization. Chapter 7 providesatheoreticalandempiricalanalysisoftheeffectsofmarketcompetitionand marketexpansiononfirms’productlinedecisions.Thetheoreticalmodelexplicitly incorporatescostofmanagement.Firmsareheterogeneousintermsofmanagerial efficiency.Weuseimporttariffcutasaproxyforincreasedmarketcompetitionand export tariff reduction as a proxy for market expansion. The theoretical analysis predicts that the home country’s tariff cut reduces all home firms’ export product line,whereasinresponsetotheforeigncountry’stariffreductions,firmswithhigh managerialefficiencyexpandexportproductlineswhereasfirmwithlowmanagerial efficiencyreducesexportproductlines.ThesepredictionsaresupportedbyChinese firm-leveldata. Since 1990s, China experiences a rapid trade liberalization by cutting import tariffs.SuchpolicyreformshavesignificantimpactonChineseeconomy.ThusSect.4 includestwochapters(i.e.,Chaps.8and9)toexaminehowtradeliberalizationaffects Chinesefirmproductivity. Chapter8developedaMincer(1974)-typeapproachtoinvestigatetheimpactof input trade liberalization on firms’ wage inequality between skilled and unskilled workers(orskillpremium).Whencontrollingforproductmarkettariffsinafirm’s industry, we find robust evidence that reduced input tariffs in a firm’s industry are associated with a higher skill premium at firms with more skilled workforces. Thiseffectismorepronouncedatordinary(non-processing)firms.Wealsoprovide evidence that reduced input tariffs in a firm’s industry are associated with higher valueaddedandprofitsatfirmswithmoreskilledworkforces. Chapter9insteadexamineshowinputliberalizationaffectsfirmimportbehaviour. ByusingcomprehensiveproductionandtradedataofChinesefirms,weshowthat import sources of Chinese firms switch from developing countries to developed countries as input tariffs fall in China. This is evident for both import value and import scope. The observation still exists after we exclude the possible influence of reducing processing trade. We further demonstrate that the mechanism can be attributedtoqualityupgradingandinnovationledbyinputcostreductions.Wealso carefully handle the possible endogeneity problem and the findings are robust and significanttodifferentempiricalmethodologiesandmeasurements. x Preface The last section of the present book examines the impact of China’s ongoing all-aroundtradeliberalization.ItincludesthreechaptersfromChaps.10to12. As Prof. Paul Krugman mentioned: productivity is not everything, but in the longrunitisalmosteverything.Wehavealreadyseen,mostlyinSect.2,thatfirm productivity plays a key role for us to understand Chinese economy. But an un- answeredquestioniswhatdeterminesfirmproductivity.Chapter10tendstopickup thisquestionfromtheperspectiveoffirmtraining. Particularly, Chap. 10 discusses a novel mechanism—worker training—that outputtradeliberalizationaffectsfirmproductivity.WithdisaggregatedChinesefirm- levelproductiondatafrom2004to2006,wefindstrongevidencethatoutputtrade liberalizationboostfirmproductivity.Moreimportantly,aftercontrollingforfirm’s self-selectiontoinvestonworkertraining,ourextensiveempiricalsearchsuggests the following findings. First, with fierier import competition, firms experience a decreaseinprofitabilityandhencearelesslikelytoinvestonfirmtraining.Second, lowerproductivefirmsaremorelikelytotraintheirworkers,asotherwisetheywould collapseandexitfromthemarket.Thelowerthefirmproductivity,themoreisthe firm’sworkertrainingexpenses.Finally,theeffectofoutputtradeliberalizationon firmproductivityismorepronouncedforfirmswithmoretraininginvestment. Sincethe2008globalfinancialcrisis,therehasbeenanewwaveoftradeprotec- tionism headed by the USA, casting a shadow on the world economy. With slug- gishexternaldemandandincreasingtradeprotectionismbytheUSAandtheEuro- peanUnion,Chinaisfacingseverechallengesinimplementingitsdeeper,ongoing reforms.Chapter11introducessuchreformsindetail.Torespondactivelytosuch challenges, the Communist Party of China’s 19th National Congress proposed to “promote a new pattern of all-round opening up.” In particular, the establishment of free trade ports is considered an important means to realize deeper integration withtheworldeconomy.Thispaperdiscussesthebackground,themotivation,the possiblechallengesaswellasafeasiblepathforthesuccessfulimplementationof freetradeportsinChina.Basedontheinternationalexperience,theconstructionof free trade ports in China requires freer trade in goods, high mobility of talent and freecapitalflow.Finally,Chap.12providesabriefsummaryofChina’sopening-up experienceinthelastfourdecades. My last remark is to express my sincere gratitude to all my co-authors who contributedtoeachchapterofthebook,includingProfs.BoChen,JustinLin,Qing Liu,LarryQiu,WeiTian,andZhihao.Thesameappreciationextendstomyformer studentsincludingXiaominCui,WeiXiang,ZhuxiXu,andHuihuangZhu.Without theirwarmsupportandintellectualcontributions,itisimpossibletohavethisvolume. I also want to thank Dr. Chuangyin Xu to provide excellent research assistance to thebook.IoweMs.YunyuChen,mycolleagueintheGezhiPress,toencourageme towriteupthisbook.Ofcourse,allerrorsaremine.
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