China Export Strategy

main get down mainland chinas exportingation Strategy What Can We Learn From It? Arvind Panagariya As much as by mint as by design, China stumbled onto an export and strange investment strategy that has proved remarkably successful, support the economy move quickly to a grocery store- free radicald system. realize serve as a representative for impudent(prenominal) countries? besides can the Chinese After third decades of inward-oriented change over and orthogonal investment policies, in 1979, China switched course and launched an unresolved-door insurance policy. During the 15 years that pay elapsed since then, the country has ersistently, albeit gradu every last(predicate)y, openized its trade and unknown investment regime. This has been come with by a spectacular growth in GDP and During 1980-90, GDP grew annually at an fulgurant rate of Over the same period, exports grew at an annual rate of 11 exotic trade. 9. 5 percentage. percent to a greater extent(preno minal) than twice as fast as reality tradeand imports 9. 8 percent. More recently, in 1992 and 1993, GDP has shown annual growth rates exceeding 13 percent. The annual growth in exports and imports during these 2 years has been 13 percent and 27 percent, paying attentionively.What ar the enlist trade and foreign investment policies that get h octogenarian of led to this dramatic growth in Chinas foreign trade and GDP? And what lessons can we derive from Chinas experience for former(a) economies in transition? (see box)? In the following, we examine the nature of reforms and why they worked salubrious or ailing in particular cases. Though this study focuses on external economic policies, it is important to remember that the advance of non-state enterp purloins has closely complemented Chinas show upward-oriented 2 strategy.These enterprises, owned collectively by local regimen in urban areas, townships or villages, enjoy a high degree of autonomy in their operations. C onsequently, they beget been around successful in taking good of the outward-oriented strategy. Promoting an export culture On the external front, three factors combined to give rise to Chinas success adoption of an aggressive pro-export strategy by central regime, active participation of local authorities and the presence of Hong Kong and Taiwanese investors looking for a source of cheap moil. With he beginning of the open-door policy, the central authorities began s wipeouting clear orients in advance of an export-oriented trade regime. A variety of instruments were employed to promote what whitethorn be called an export culture geographical targeting, sectoral targeting, a liberal foreign investment regime, and liberal readiness of export financing. Geographical targeting. China set up the so-called Special frugal Zones (SEZs) and Open Cities indoors which economic activities manufacturing, banking, exporting and importing, and foreign investment-took place in a more l iberal environment than is for sale in the rest of the economy.These zones dish uped to serve as focal points for investment from some(prenominal) house servant and foreign sources and to supply China to develop links with the domain of a function grocery, brought in part, by Hong Kong and Taiwanese entrepreneurs. Originally in that location were whole a handful of much(prenominal) zones, all in Guangdong and Fujian provinces. Over time, mevery features of SEZs were extended to other cities. ii features of SEZs distinguish them from the rest of the country. First, the SEZs enjoy considerable administrative autonomy in the 3 areas of investment, pricing, taxation, housing, and assiduity and land management policies. require virtually noMost foreign investments can be approved topically and central clearance. Second, the SEZs offer m some(prenominal) The economic incentives to investors not available in the inland provinces. corporate income tax, usually 33 percent for f oreign funded enterprises and 55 percent for state owned enterprises, is 15 percent for all enterprises in the SEZs. All imported inputs used in exports or sold at heart the Zones are In addition, tax holidays free of import duty and other indirect taxes. available to foreign funded enterprises are more generous in the SEZs than those available under the national tax legislation.Depending on the amount of investment, nature of the technology, and eon of the project, tax holidays of up to five years are available. The SEZs and open cities exhibited spectacular economic performance. In 1979, the three SEZs in Guangdong were subtle fishing villages with virtually no industrial activity. transformed into modern cities. By the end of 1980s, they had been In 1990, the SEZs and open cities vizored for 52% of pith realized investment and more than half of total exports. During 1985-90, industrial output in Guangdong and Fujian grew at annual rates of 16% and 14. % compared with 6. 9% i n the rest of the economy. Sectoral targeting. expression by side with geographical targeting, China has besides engaged in sectoral targeting for exports. Targeted sectors, elect at a broad level, spend a penny included light industrial products, textiles, and machinery and electronic goods. The most important instruments of targeting were issue networks for exports (PNEs) and higher(prenominal) supersede retention mightys to targeted sectors. 4 The seventh Five Year Plan (1986-90) provided for the creation of PNEs. The idea was to call for the leading factories within the targeted ector into a network and support them by subsidies for technological upgrading, guaranteed supplies of raw materials and power, preferential memory access to transportation, attractive purchase prices for their goods, and higher transposition-retention rights than other enterprises in the same industry. The aim of the networks was to expand both the quailty and exemplification of exports of the participating factories. The first industry group to benefit from this scheme was machinery and electronic goods. PNEs give also been created in light industrial products and textiles, and off the beaten track(predicate)m and sideline products.Rights to foreign exchange generated by exports are shared surrounded by the central and provincial governments. For targeted sectors, the allocation of retention rights was more esteemable to the province and the foreign trade corporations (FTCs), which insure and export more than 80 percent of Chinas exports. In the case of light industries, arts & craft, and knitwear, foreign exchange was divided in the ratio of 2080 between the internality and province. Similarly, in machinery and electronic goods, for within-quota exports, the fracture between the center and provinces was 3565.Though the retention rights have been revised recently, the bias in favor of FTCs has been retained. From the available data, it is difficult to judge t he impact of sectoral targeting primarily because it was broad based. textiles and light industrial products in total exports The share of did expand significantly after 1985. But the effect on machinery sector is less clear. 5 Overall, one thing which is clear, however, is that the export share of labor intensive 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 striking export performance is related to the size of foreign direct investment flows into the country (see table). Foreign investors have been lured to the Chinese market for three reasons. 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 joint venture and qualifies it for various tax incentives. he same time, foreign fai rness investment can rise all the way up to 100 percent. Restrictions on the choice of sectors are minimal any preferences, sectoral or otherwise, take the form of extra incentives. As a result, joint ventures have been launch in sectors ranging from hightechnology to consumer goods, services, 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 can be approved by local authorities. The limit in littler open cities is $10 This autonomy has illion while that in unopened cities is $3 million. greatly simplified the compliment procedures. Second, employment, wage and pricing policies for joint ventures are flexible. contractual Joint ventures are free to employ any required personnel on a basis. Employees are subject to warnings, wage cuts and 6 dismissal. Except for a few product categories for which prices are set by the state, joint ventures are fre e to set their prices both domestically and oversea. Products or services for which prices are fixed are of two cases. In the first category, prices are completely fixed (e. . , products such as grain, oil, and fuel and services such as electri city and rent). In the second category, prices are allowed to fluctuate within prespecified bands usually ranging from 10 to 30 percent (e. g. , steel, cement, timber, coal and other major 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 available to export-oriented or technologically move on projects. ncentives include o Exemption from state subsidies paid to employees to cover the benefits provided by the government of China o Priority in obtaining Bank of China loans o Tax exemption on dinero 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 reduced land-use fees, priority in obtaining utilities, transport, and conversation facilities. Duty exemptions. China has also instituted an elaborate 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. compete an The schemes, introduced in 1984 or later, seem to have role in expanding Chinas exports. Total exports important associated with concessional import arrangements account for 64 percent of Chinas manufactured exports. These exports doubled between 1988 and 1991. The domestic value added of these exports is, of course, lower than of other exports. Export financing. Ready access to export cites is believed to ontribute favorably to export performance. The Bank of China, which is the primary bank traffic in foreign exchange, provides tr ade credits. Credit, offered in domestic currency, is available for working capital as well as fixed investment for the issue 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 rapid involution of with child(p) loans. The total volume of outstanding trade loans at the end of 1991 was more than three time that at the end of 1985. In part, this expansion was due to the growth of exports. But perhaps it also reflects a rising ratio of export credit to total exports. According to one calculation, this ratio was 150 percent in 1988. The Hong Kong connection A lynchpin element in Chinas success in the world markets so-called Hong Kong connection. as been the In the mid-1980s, Hong Kong entrepreneurs began devious manufacturing facilities to China, attracted by lower labor 8 costs as wages rose rapidly at home. This link with Hong Kong has not only brought much needed capital to China but also supplied new technology, modern management practices and unfavourable 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 production is supervised under contract by firms in Hong Kong. Processing activity for exports in Guangdong is also carried out largely in collaboration with partners in Hong Kong who supply materials. Many items, particularly in the toy and article of clothing sectors, which were previously exported by Hong Kong are now exported by Guangdong. Local policies Chinas economic system is highly alter now and the implementation of policy is largely under the control of provinces.Hence, in the fast-growing provinces, provincial and local officials have been deeply involved in the development surgical procedure in general and export procession in particular. The role of local authorities in facilitating foreign investment has been described earlier. In addition, at that place are a number of ways in which local authorities promote exports. First, the center gives required targets or export quotas for only a limited number of items or in limited volumes. But in some provinces, for Moreover, example Jiangsu, the export-quota-system is far 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 certainly been able to opera te 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 grow 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 decide the allocation of raw materials imported by using locally retained foreign exchange earnings among enterprises, collectives and TVEs and across different sectors. lands and cities also provide 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 down by the State, provinces can discuss rights to trade directly upon e nterprises and enterprise groups. Finally, local authorities establish joint ventures between FTCs and enterprises to promote exports. established 160 of these ventures. establish another 200 such ventures. The central lesson Perhaps the most important lesson, also consistent with the experience of other 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 uncertain terms that, rather than shelter import competing industries, the country testament give priority to export oriented activities. China benefitted greatly from the clarity of signals sent by its policy reforms. Once the reform process began, in that respect was rarely any doubt Despite occasional policy reversals, provincial and about its direction. ity governments, which use policies and enterprises, both state and nonstate, were convinced that the country was headed towards an export oriented regime. geographical In terms of electrostatic 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 away from import substitution to export promotion. 11 cut Can India benefit from Chinas experience? Operationally, the Chinese model is not very applicable to the economies of Eastern europium 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 closer to the market model than China. countries emerging out of the former Soviet Union, on the other hand, are still struggling with the worry of macroeconomic stabilization. The country for which the Chinese experience is most relevant is India. both(prenominal) are highly inhabited and, by developing-country standards, large economies. They began their development process approximately at the same time and stressed self-reliance. Both relied increasingly heavily on import substitution policies and ended up with a highly capital intensive production structure. China changed course in 1979 while India continued (with modest liberalization) on the old course. In 1991, in many ways, India stood where China stood in 1979. Chinas in 1979. Import and The trade-to-GDP ratio was the same as controls were rampant and the investment domestic currency was overvalued.Despite these similarities, even in Indias case, lessons from China are limited. In addition to the obvious differences in political systems which lead to very different 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 come along This approach 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 feasible 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 multiple exchange rate system and its exchange market is not organized along t he 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 possess 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 exit in the zones can be made 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. touch zones. Bu t 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 authoritiesespecially 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 not 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(prenominal) provide land, power, communications facilities, and environmental clearance, do not coop erate. 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 archaean 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 inexpedient 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, particula rly 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 masterful and unskilled labor unless potential investors are sure that they can operate factories around the year without fears of recurrent labor disputes. This fear has been behind the highly capital intensive technologies chosen by investors in recent years. Fourth, duty exemptions for assembly type operations combined with rapid impact of imported inputs and materials by customs authorities made a significant contribution to Chinas export growth. In India, duty exemptions for exporters exist but an improvement in their administration and simplification of procedures leading to speedy processing by customs will help boost exports. Also, fo r small exporters who rely on duty drawbacks, train 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 tilted in favor of export-oriented foreign investments, it should be done through positive incentives.Imposition of barriers to foreign investment will only add noise to signals of openness that India has been sending. A final point concerns the importance of a Hong Kong connection. In Indias case, there are no geographic neighbors that are as economically dynamic 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 Resident Indians (NRIs) elsewhere in the world. While this is obviously 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 clearly 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 Community in the 21st century.Arvind Panagariya an Indian national, was a Principal Economist in the Banks Trade constitution Division and is a Professor of Economics at the University of Maryland. He earned 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 - Sources China Statistics Yearbook 1990, 1991, Ministry of Foreign Economic Relations and Trade, China.