-q i,;\ ne , 1 ':' S ' f k g 0 ' i ' ' t , t f liCy s; Ait tS a, 'S; ; t l t I ~ ~ t ;n 91:1s;;t;0';1; 0 0 ^if h ? w X ' a 0: i: ;'';,.:i:'001; :i; ;00: i pj S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I fW C 'VX' ;8~~~~~~~~~~~~~~~~~~~~~~Ufi . . . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Ir b___=_b_ - _ b ~~~~~~~~~~~~~~~~~~~~~~~~~~~~q A W OR L D BANK CO U NT RY STUDY China Foreign Trade Reforn The World Bank Washington, D.C. Copyright @ 1994 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing February 1994 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the econoniic and related conditions of its developing member countries and of its dialogues with the governments. 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ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data China : foreign trade reform p. cm. - (A World Bank country study) ISBN 0-8213-2751-8 1. China-Commercial policy. 2. Exports-China. 3. China- Foreign econonic relations. L World Bank. IL Series. HF1604.C4513 1994 382.0951-dc2O 93-47692 CIP CONTENTS Contributors ...................................... xi Currency Equivalents; Acronyms and Abbreviations . ................. xiii Executive Summary ............. ,v IL China's Merchandise Trade-Trends and Perspectives ............ 1 A. Introduction ..................................... 1 B. Trends in the Trade Balance ........................... 2 C. Perspectives on China's Export Performance ................. 4 The Changing Composition of China's Exports .... ........ 6 The Role of Assembly Operations .................... 11 Markets for China's Exports ........................ 12 The Role of the Nonstate Sector ..................... 13 The Role of Hong Kong .......................... 1S D. Trends in China's Merchandise Imports .15 The Structure of Merchandise- Imports .15 E. Trade in China's Economy: Some Concluding Observations .20 Endnotes .23 2 The Trade Plani and Foreign Exchange Systems-Managing Reforms ffirough a Period of Transition .24 A. Foreign Trade Planning, Foreign Trade Corporations, and Subsidies .24 The 1988 and 1991 Reforms .26 B. The Exchange Rate Regime .28 Foreign Exchange Plan .29 Retention Scheme .......... 29 Foreign Exchange Markets.31 C. Broad Impact of Recent Developments .34 Inpact of Developments in the Exchange Rate Regime .34 Impact of Reforms in Trade Planning .................. 38 D. Remaing Problems and Recommendations for Future Reform 39 Export Planning and the Foreign Trade Contract .... ....... 39 Import Planing ............................... 40 Exchange Rate Issues ............................ 41 Endnotes .... 45 ...i - iv - 3 China's Systen of Foreign Trade ControL-: A Quantitative Evaluation ......................................... 47 A. Objectives and Instruments of China's System of Foreign Trade Controls ........... ....................... 47 B. Tariffs . ....................................... 48 Tariff Structure .......... ...................... 48 Conclusions ........... ....................... 56 C. Tariff Revenues and Exemptions ...... ................. 57 Administration and Revenue Raising: Implications of China's Import Duty System .57 Impact of Exemptions on Exports and Economic Performance . . . 60 Conclusions .62 D. Nontariff Barriers to Trade ............................. 63 Types, Administratzv.i and Coverage ................... 63 The Structure of N13 Protection ..................... 66 Conclusions ......... ................ 67 E. Export Controls and Taxes ............................ 67 F. Impact of Trade Controls ............................. 69 International Price Comparisons ...................... 69 Effective Rates of Protection ..... 73 Evidence from Sectoral Analyses .75 Conclusions ...... 78 Endnotes ...... 79 4 Priorities and Perspectives on Reforming China's Trade Regime ... ... 80 A. Trade Strategy and Trade Regime Orientation .80 B. Reform Priorities for the Immediate Term .82 COnalized Inports and Products Subject to Mandatory Import Planning .82 Import Licensing and Quotas .82 Import Controls .83 NTBs and Balance of Payments Management .84 Tariffs ..-.......... . ........ 84 Tariff Exemptions .85 Export Controls and Taxes .85 C. Priorities for the Medium Term ......................... 86 Reducing Protection on Consumer Goods .87 Reducing Protection on Intermediate and Capital Goods .87 Reducing the Bias against Raw Materials .88 D. Alternative Approaches to Reform .88 The Base Case: Effects of a 50 Percent Radial Cut in Effective Tariffs .91 Impact of the Other Reform Scenarios .94 Summary .................................... 97 Endnotes ........ 98 -V. S Toward a Program for Trade Liberalization ................... 100 A. Timing, Sequencing and Linkages with Other Reforms .... ...... 100 Trade Reform and Reform of the Planning System .... ...... 100 Trade Reform, Reform of the Exchange Rate Regime and Macroeconomic Policy .......................... 101 Trade Policy and Price Reform ...................... 102 Trade Liberalization and Enterprise Reform .............. 102 Trade Liberalization, Support for Exports and Industrial Policy . . 103 Trade Reform and the International Environment .... ....... 104 B. Recent Refcrm. Initiatives ............................. 104 Transparency ................................. 104 Liberalization of the Import Regimne ..............10..... C. Conclusions and Recommendations ........ ............... 106 Recommnendations for the Immediate Term ..... .......... 106 Recommendations for the Medium Term ..... ........... 107 Enduotes .................................... 109 6 Policies for Export Development: A Critical Evaluation ......... .. 110 A. Introduction ..................................... 110 B. Developing Buyer-Seller Links: The Role of Trading Companies ... 110 The International Experience ........................ 111 The Experience of China's FTCs ..................... 113 Lessons for FTC Policy in China ..................... 1!8 C. Developing Buyer-Seller Links: The Role of Public Support Services . 120 Public Support for Export Marketing .................. 120 Public Support for Quality Control .................... 122 Public Support for Other Nonfinancial Export Support Services . . 125 D. Export Financing .................................. 126 Recommendations .............................. 129 E. Product Targeting for Exports .......................... 129 . Conclusions .................................. 134 F. Geographical Targeting ...... ........................ 134 Policies for Coastal Development .136 Assessing the Performance of SEZs and Open Cities .137 Lessons and Recommendations .139 Endnotes .......................................... 141 - vi - 7 External Markets and China's Exports . ..................... 143 A. Protection Against China's Exports: The Facts ............... 143 B. Evolving External Markets and Implications for China's Exports .... 150 Implications of the Uruguay Round for China's Exports .... ... 150 The Potential Effects of Regionalism on Chie's Exports ...... 151 Implications of a Loss of China's Provisional MEN Status in the United States ................................ 155 C. Perspectives on Future Directions for China's Exports .158 Diversification of Markets .158 Product Diversification and Comparative Advantage .158 The Potential for Upgrading China's Major Exports .163 Opportunities for Diversification .164 Conclusions ...... 166 Endnotes ...... 167 Rderences ........ 169 ANNS 1.1 Differentating Labor- and Capital-Intensive Manufactures .178 2.1 Criteria for Access to FEACs ............................. 180 2.2 Operational Mechanism of FEACs ....................... 182 2.3 Understanding China's Foreign Exchange System ................. 184 3.1 Effective Rates of Proteceon Calculations: A Methodological Note ...... 193 4.1 A Computable General Equilibrium Model of the Chinese Economy ...... 196 6.1 Developing Buyer-Seller Links: The Intenational Experience .... ..... 208 6.2 China's SEZ Policy-An Evaluation ............... ..... 221 6.3 Economic Zones in China: A Taxonomy ...................... 246 7.1 Description of the SMART Trade Production Model used to Simulate the Effects of a 30 and 50 Percent Liberalization of Nontariff Barriers and Tariffs. 252 7.2 An Assessment of China's Changing Revealed Comparative Advantage in Labor-Intensive Manufactures . 254 Statistical Annex .260 - vii - TABLES IN TEXr 1.1 Structural Changes in China's Major Exports: Selected Years from 1965 to 1990 ....................................... S 1.2 The Value and Share of Major Three-Digit SITC Products in China's Exports-Selected Years from 1965 to 1990 .................... 7 1.3 The Value and Share of Various Types of Products in China's Manuu Exports: Selected Years 1965 to 1990. 9 1.4 Concentration of China's and Comparator Country Exports .10 1.5 Exports from Assembly Operations . ......................... 12 1.6 Markets for China Exports, 1990 . ........................... 13 1.7 Township and Vilage Enterprise Exports ........ .............. 14 1.8 China: Structurzl Change in China's Imports (CIF) Custows Basis. 16 1.9 Structure of China's Imports (CIF) Customs Basis (A Comparison with Other Importers for 1990) ........... s18 1.10 Origin of China's Imports: A Comparison with Odter Economies of East Asia (Selected Years) ............................... 19 1.1! Share of Merchandise Trade in GDP: Selected Countries .... ........ 20 1.12 China: The StructLre of Production, Imports and Exports, 1985 and 1990 ...................................... 21 2.1 Losses of Foreign Trade Corporations Financed by Central Government Budget ................................... 26 2.2 Foreign Exchange Retention Rates, 1991 ....................... 32 2.3 Exchange Rate and Trade Tax Relationships under China's Exchange Rate System .35 3.1 Average Tariff Levels by Broad HS Category ..................... 0 3.2 Average Taiff Levels by HS Section ......................... 51 3.3 The Tariff Systems of China and Other Large Developing Countries ..... 56 3.4 The Commodity Pattern of Tariff Systems in China and Other Large Developing Countries (Unweighted Average Tariff Rate) .... ........ 57 35 Imports by Import Duty Concession Category ................... 59 3.6 Value of Imports and Revenues from Import Duties ..... ........... 60 3.7 Coverage.of Nontariff Barriers by Sector and Type (1992) .... ........ 61 3.Sa Estimates of Protection to Importables based on International Price Comparisons (1992) .................................. 71 3.8b Estimates of Export Taxation (1992) ......................... 71 3.9 Effective Rates of Protection to Chinese Industry (1991) .... ......... 74 4.1 Effects of Reductions in Protection: Various Scenarios .............. 90 4.2 Effects of Reduction of Foreign Exchange Retention Ratios for the Machinery Sector .93 4.3 Nontrade Barriers before and after Import Liberalization Proposed by China .95 6.1 Foreign Trade Credit ................................... 127 6.2 Exports of Targeted Sectors, 1978-91 ......................... 131 - viii - TABLES im TExT (cont'd) 7.1 Average Level of Tariffs Chinese Exports Encounter in Nine Major OECD Markets .......................................... 146 7.2 Analysis of the Relative Importance of Nontariff Barriers on Exports from China and Other Developing Countries ................... 147 7.3 Sectoral Coverage of China's Exports by Nontariff Barriers in the United States, Japan and European Comununity .................. 148 7.4 Estimated Effect of a 50 Percent Liberalization in Trade Barriers by the EC, United States and Japan on Inports from China ................. 152 7.5 Estimates of Trade Diversion in the United States due to a Mexican- US Free Trade Arrangement ............................. 153 7.6 Aram of Potential Displacement of China's Exports to Canada due to the United States-Canada FTA .......................... 154 7.7 Projections of the Trade Effects of Applying United States General Tariffs on Major Chinese Export Products ........................... 157 7.8 Cross-Country Comparison of Trends in Average Labor Intensity of Exports ........... .............................. 160 7.9 Share of China and Other East Asian Countries in the World Exports of Selected Products .161 7.10 Relative Prices Received by China and Other Exporters to the EC, Japan and United States in 1990 .163 BOXES IN TEXr 3.1 The Construction of Three Smanl Polyester Factories in Chengdu .76 3.2 Supply Imbalances withia the Refrigerator Industry: Asymmetric Investmect Requirements .76 6.1 Foreign Trade Corporations in China: Two Examples .116 7.1 Can International Markets Accommodate a Major Chinese Trade Expansion? 144 7.2 Current Protectionism and China's Trade Prospects: Some Comparisons with an Earlier Period .145 FIGURES IN TErr 1.1 China: Trends in Trade, 1978-91 .3 1.2 Broad Money and Imports ................................ 6 2.1 Trends in the Official and Swap Market Exchange Rates ............. 36 2.2 Trends in Real Effective Official and Swap Market Rates .37 2.3 The Weighted Average Exchange Rate and Exports .38 3.1 Tariff Structure-Food, Beverage and Tobacco .53 3.2 Tariff Structure-Raw Materials .54 3.3 Tariff Structure-Manufactures .55 3.4 Structure of NTB Coverage, 1992 .66 - ix - FiGuRns IN TEr (cont'd) 7.1 Nominal Protection Against Clhina's Textile and Clothing Exports to the United States in 1988: Tariffs, Nontariff Barriers and Combined Protective Effects .................................... 149 7.2 Analysis of Cbina's Revealed Comparative Advantage in Broad Groups of Manufactured Products, 1979/80 and 1989190 . .162 7.3 Selected Labor-Intensive Manufactured Products in Which China May Have a Major Future Export Potential ........... .. ............... 165 CONTRIBUTORS This report and its annexes are based on the findings of a mission that visited China during May-June 1992. In addition to interviews and discussions in Beijing, the mission visited Jinan and Qingdao (Shandong Province) and Wuhan (Hubei Province). The mission consisted of Hoe Ee Khor from the IMF; Nicholas Lardy and David Wall (Consultants); Sonia Zhao and Chen Xingdong from the World Bank Resident Mission in Beijing; and Alexander Yeats, Will Martin, Peter Harrold and Rajiv Lall from World Bank headquarters. The report is based on contributions from mission members. Research assistance in Washington was provided by Teja Raparla. Rajiv Lall is the principal and coordinating author of the Report. The mission received valuable collaboration from a team headed by Mr. Yuan Wenqi, Director of the Research Department of China's Foreign Trade at the Institute of Finance and Trade Economics of the Chinese Academy of Social Sciences. This team was comprised of Messrs./Ms. Chen Jiaqin, Li Xiaoxi, Yang Shangxiang, Yu Lixin, Feng Yuan, Zhang Li and Lu Shengliang. Special thanks are owed to Mr. Ji Chongwei, Senior Research Fellow of the Development Research Center, Mr. Liu Xiangdong, Assistant Minister, Ministry of Foreign Trade and Economic Cooperation (MOFTEC), and Mr. Song Haipeng, Deputy Director General of the State Administration of Exchange Control (SAEC) for their guidance and suggestions. Acknowledgments are also due Mr. Qiu Xichun, Deputy Division Chief, Deparmnent of Policy and Development, MOFIEC, and Mr. Wang Qin Hua, Division Chief, Department of Foreign Trade, State Council Economic and Trade Commission (SCETC) for their comments. The mission is grateful to MOFTEC for facilitating its work in Beijing and for helping to make the visits to Shandong and Hubei provinces fruitful. Finally, the mission extends its gratitude to all the officials from the various government agencies, trading companies and enterprises with whom it met - xi - CURRENCY EQUIVALENTS Currency Unit: Yuan (Y) $1.00 = Y 5.73 Y 1.00 = $0.175 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ACRONYMS AND ABBREVITIONS ACP African, Caribbean and Pacific (Countries of the Lomd Convention) BESD (World) Bank Economic and Social Database BOC Bank of China CES Constant Elasticity of Substitution CET Constant Elasticity of Transformation CGE Computable General Equilibrium (Model) CCPIT China Council for the Promotion of International Trade CETDC China External Trade and Development Council CNC Computer Numerically Controlled GOEs Collectively Owned Enterprises COFERT Commission of Foreign Economic Relations and Trade cOMTRADE Commodity Trade (System) DIP de facto import promotion DLUC Domestic Letters of Credit EC European Community EP Export Promotion EPOs Export Promotion Office ERP Effective Rate of Protection ETCS Export Trading Companies ETDZs Economic and Technology Development Zones E1E Export Tax Equivalent FDI Foreign Direct Investment FEACs Foreign Exchange Adjustment ("Swap") Centers FFEs Foreign-Funded Enterprises FIEs Foreign-Invested Enterprises FT Free Trade FTA Free Trade Area FTCs Foreign Trade Corporations GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross National Product GSP Generalized System of Preferences - xiii - - xiv - GTCs General Trading Ccmpanies GVIO Gross Value of Industrial Output HKDTC Hong Kong Trade Development Council HS Harmonized System HTDZ High Techniology Development Zone IMF International Monetary Fund IS Import Substitution ISO International Standards Organization ITCs Import Trading Companies JETHRO Japanese Export Trading Organization KOTRA Korea Trade Promotion Corporation LF3 Linear Expenditure System LICs Large Trading Companies MFA Multifibre Arrangement MFN Most-Favored-Nation (status) MOFERT Ministry of Foreign Economic Relations & Trade MOFTEC Ministry of Foreign Trade and Economic Cooperation MPS Materials Product System NAFrA North American Free Trade Area NIEs Newly InLdustrialized Economies NTB Nontariff Barrier OECD Organization for Economic Cooperation and Development PBC People's Bank of China PEP Protected Export Promotion PNEs Production Networks for Exports PTA Phthalic Anhydride QCC Quality Control Circle RAS Richard A Stone (algorithm) RCA Revealed Comparative Advantage REER Real Effective Exchange Rate RMC Resident Mission in China SCEIMO State Council Machinery and Electronics Import Office SCETO State Council Economics and Trade Office SCETC State Council Economic and Trade Commission SAECs State Administration of Exchange Control SEZs Special Economic Zones SITC Standard International Trade Classification SMART Software for Market Analysis and Restrictions on Trade SOEs State-Owned Enterprises SPC State Planning Commission SRC System Reform Comnission STDB Singapore Trade Development Board TVEs Township and Village Enterprises UN United Nations UNCTAD United Nations Conference on Trade and Development US United States USSR Union of Socialist Soviet Republics XTB Xiznen International Bank EXECUTIVE SUMMARY A. OvERvIEw Since the launching of the reform program in 1979, the promotion of external trade has been central to China's efforts to modernize its economy. The policy has met with remarkable success, with exports having increased ninefold and imports more than sevenfold over the period. This has been accompanied by rapid changes in the institutional support system for foreign trade and in the incentive framework. But China has a long way to go in replacing direct administrative intervention with indirect price-based instmments for managing its trade policy, and much is still unclear about the fumctioning of China's trade regime. Historically, China's approach to trade policy has been aimed at achieving export growth fcr the sake of generating foreign exchange without sufficient regard to its costs, while import policy has featured controls to regulate import growth. Although, as a result of the "open-door' policies of the 1980s, decisions concerning exports have become increasingly determined by the market rather than administrative flat, reform of the import regime has, by comparison, remained neglected and is now taking on some urgency. The report addresses key issues in import as well as export policy for accelerating the country's transformation into a market based economy. Four important conclusions emerge. First, while the role of planning in China's foreign trade sectr has been declining, several problems of transition remain. The report recommends reforms that would enable China to transform what remains of its trade and foreign exchange planning systems into instrunents for the indirect management of trade policy. Second, the report fids that despite a complex array of tariff and nontariff barriers to trade, China has become a relatively open economy, with evidence of considerable tariff redundancy. It demonstrates that the present is, not least for this reason, an- opportune time for China to embark on a substantive program of trade liberalization. Import competition would be an important instrument for helping China make its state-owned sector more responsive to market forces-an issue of mounting concern for the country. Import liberalization would also contnrbute to the growing momentum of China's drive to become a full member of the international trading community. Moreover, in view of its remarkable export performance so far and its comfortable reserves position, China would appear to be well positioned to launch such a program at this time. Thrd, notwithstanding the diminishing reliance on export planning, the Chinese government has been actively involved in export development. Aside from financial assistance and incentives, the goverrunent has directly provided a variety of other support services, including marketing and quality control. Such support should be maintained. However, as China continues its drive towards a miarket economy, the way in which export assistance is - xv - -xvi - delivered will need to be refined. The report proposes a program of action for making the institutional support structure for exports, and public support for export development in general, more effective. Finally, the success of China's continued reforms in the area of foreign trade depends on its ability to sustain a healthy rate of export growth. The report finds that, even in today's uncertain global trading environment, China should be able to maintain its export performance through quality improvements and some product and market diversification. On the other hand, there is little doubt that the successful conclusion of the Uruguay Round would be very helpful for China, or that the discontinuation of China's Most-Favored-Nation (MFN) status in the United States would lead to significant trade dislocation. B. MAiN FEATuRES OF CEHNA's TRADE oRMANCE Over the decade of the 1980s, China's exports outperformed those of most other countries, including such newly industrialized economies (NIEs) as Malaysia. The only economies that registered average znnualized export growth rates higher than China were Thailand (13.2 percent), the Republic of Korea (12.8 percent), Taiwan, China (12.1 percent) and Portugal (11.7 percent). China is now the eleventh largest exporting nation in the world. It exports about 17.percent of the gross value of industrial output (GVIO) of its overall manufactmring sector. Institutional decentralization, foreign investment (especially from Hong Kong), depreciation of the real effective exchange rate, and duty-free access to imported inputs for export assembly all seem to have contributed to this strong performance. Whereas in 1978 all trade was monopolized by only 12 Foreign Trade Corporations (FTCs) and their branches, today over 3,600 FTCs compete increasingly fiercely for export business. From no foreign direct investment (FDI) in 1978, the total has risen to over 90,000 approved projects with a contracted value of $58.1 billion. Since 1985, the real effective official exchange rate has depreciated more than 100 percent, and almost two thirds of China's manufacturing exports are now based on processing activity that utilizes duty-free imports. Another development which has had a bearing on China's export performance over the decade of the 1980s has been the decliiing importance of trade planning. Direct subsidies for exports have been more or less phased out, and export targeting has become progressively more macro in nature (it now operates essentially only through the foreign trade contract system).. As a result, the composition of China's exports has been allowed to evolve increasingly along the lines of the country's comparative advantage, with the contnbution of nonstate and foreign-invested enterprises also growing very fast. Nonstate and foreign-funded enterprises now account for at least one third of China's exports. Manufactures as a whole constitute 80 percent of exports, with labor-intensive manufactures contributing almost three fourths of total exports. As in many other East Asian economies, clothing, toys, sporting goods and footwear have emniged as among the most dynamic of China's export sectors. Unlike exports, imports seem to have remained subject to much stronger government management. Over the 1980s, import trends closely followed trends in planned domestic economic activity and appear alSD to have been sensitive to changes in administrative controls such as foreign exchange retention and import licensing. Overall, the pattern of China's imports remained very stable and reflected the country's import strategy of assuring supply of key raw materials and acquiring embodied technology while minimizing imports of consumer goods. The degree of central government control over imports has been diminishing, but even - xvii -. today, over 50 percent of the country's foreign exchange earnings are subject to central government control, and 50 percent of imports are subject to some form of nontariff barriers (NTBs). On the whole though, China's economy has become increasingly open. Most remarkably, the share of merchandise trade in China's gross domestic product (GDP) went from 10 percent in 1978 to 31 percent in 1991, with imports accounting for 15 percent.l/ Based on this measure, China appears to be more than twice as open as India and Brazil, and significantly more open than the United States or Japan. Moreover, import penetration in certain sectors is extremely high. For example, in 1990, imports amounted to an estimated 28 percent of GVIO in China's machinery and tansport equipment sector. While the growing openness of the Chinese economy has had a perceptible impact on the quality of a range of Chinese products, it is noteworthy that the structure of China's industry hardly changed between 1985 and 1990, despite a nonnegligible degree of import penetration and rising export ratios over the same period. Thus, the respective shares of light and heavy industries in total industrial output remained virtually unchanged at around 47 and 53 percent between 1985 and 1990. Likewise, the share of consumer manufctres (with such heavily export-oriented sectors as clothing, footwear and travel goods) has also stayed remarkably stable at around 8 percent of GVIO. This suggests that investment in China remained heavily directed, at least until the late 1980s, such that the allocation of investment across sectors went largely unaffected by the country's changing patterns of external trade. As open as the Chinese economy is today, trade still does not appear to play a sufficient role in domestic resource allocation. C. TRADE AND FOREGN ExCHANGE PLANNIG: THE REMABINIG 1SsuEs Trade Planing: What Next? China's trade system has moved from one in which, at the start of the reform period, almost all trade was planned and carried out through a handful of FTCs, to one in which the role of planning is much diminished. Similarly, pricing has moved from a position of wide- ranging rlbsidy and cross-subsidy, to one in which, in 1992, only import subsidies remain, and these are reaIly enterprise subsidies. Such export planning as exists now takes place through the foreign trade contract system in the form of value targets for export earnings. The present foreign trade contract system, although intended to be fixed on a "bottom-up' basis, still takes on a compulsory quality for several reasons. First, the value targets negotiated i- the contract for exports and the amount of foreign exchange to be remanded to the center are still mandatory. Second, fulfillment of the targets in the contract is a precondition for awarding bonuses to officials responsible for carrying out the export plan. Each province's contractually determined targets are in turn disaggregared and assigned as targets to 1/ This figue needs to be teated with caution. First, China's GNP is likey to be mesimated. Second, customs statistics on exports include the full value os exports based on processing of imported inputs, which tends to exaggerate the role of trade in the Chinese economy. Excluding the latter would reduce the value of China's exports in 1990 by about $11.9 billion, and the trade to GDP share to about 28 percent. Depending on what estimate of China's GDP is taken, the trade to GDP share could be anywhere between 18 and 26 percent. - xviii - various provincial trading companies. Third, rebates for domestic taxes levied on export goods have now been linked to fulfilling targets for exports. The problem is that these targets have to be met by FTCs that are not entirely free to choose what goods they can trade and are no longer eligible for subsidies to cover their loss-making exports. As a result, FTCs cannot pay full attention to profitability while at the same time meeting their obligations under the foreign exchange contract. Available evidence suggests that the incidence of bad bank loans to FTCs nas gone up sharply since the contract responsibility system was introduced and subsidy payments began to be phased out in 1988. In order to address this problem, the authorities need to take the reforms of the export planning system to their logical conclusion as soon as possible. The trade contract responsibility system should be abolished and FTCs should be allowed to work towards maxinizing profits rather than foreign exchange earnings. Linking bonuses to profits, instead of to foreign exchange targets, would motivate FTCs to market only profitable exports, thereby generating export earnings for the country without concomitant domestic currency losses. Such measures will, however, not be effective without further institutional reform of the FTCs themselves. FTCs need to be granted greater autonomy (along the lines of the recent regulations pertaining to the operating mechanism of state-owned enterprises) so that they can function as truly independent profit centers. At a minimum, FTCs must be granted the right to choose their own product scope. On tht import side too, as noted above, the importance of planning has declined, with the coverage of the trade plan having fallen to under 20 percent of all imports (from 40 percent in 1988), and this trend can be expected to continue. However, a large proportion of nonmandatory plan imports continues to be subject to administrative regulation through tight control of foreign exchange allocations. The central government still controls 50 percent of all fioreign exchange earnings. Funding for key projects and for their associated imports is already allocated as part of the government's investment program and the state industrial policy. It is, therefore, redundant to also administratively assign foreign exchange for the purpose of procuring these imports (which account for more than 30 percent of all imports). All concerned state-owned enterprises (SOEs) or government agencies ought simply to purchase the foreign exchange they need in the foreign exchange adjustment ("swap') centers (FEACs) instead of having local enterprises surrender 30 percent of their foreign exchange earnings to the central government at the swap rate and then having these funds allocated to them administratively. The Exchange Rate Regime: Toward Convertibility Since the establishment in 1986 of FEACs, which created an official two-tier exchange rate system, the volume of FEAC transactions has grown rapidly; it reached $25 billion in 1992, or about one-half of all cash imports. The FEAC system has served two key functions: it has provided critical relief to exporters in maintaining export incentives, and it has forced the government to move the official rate to more market-determined levels. Nevertheless, important defects remain. For one, the existing system of quota retention is flawed. Quotas are monopolized by FTCs, with most local manufacturing enterprises being left with little or none of the foreign exchange they help generate. Since FTCs themselves do not have any direct import requirements, they have tended to hoard retention quotas for speculative purposes. More importandy, the system of trading predominantly in quotas instead of cash has denied the - xix - People's Bank of China (PBC) an instrument for intervening in the foreign exchange market for purposes of stabilizing the exchange rate. Second, although 80 percent of foreign exchange earnings are now priced at the swap rate, the market for foreign exchange remains thin and fragmented, in large part because the government still does not purchase its foreign exchange requirements through the FEACs. Besides, the differential between the swap market and the official exchange rate, down to under 10 percent in 1991, has once again become significant. The differential exceeded 45 percent at the end of the first quarter of 1993 (despite amtempts, later abandoned, to enforce price ceilings in the FEACs). Strucural reform of the exchange regime has therefore become urgent. It is the stated objective of the authorities to unify the exdhange rates and make the renminbi a convertible currency. This process needs to be accelerated through the speedy implementation of the following recommended measures: (a) Replacement of the system of retention quotas with a system of cash retenton that would allow enterprises to retain their foreign exchange in resident bank accounts, reduce the incidence of hoarding and allow the PBC to intervene, if necessary, to stabilize the swap market rate; (b) Elimination of remaining restrictions on access to FEACs (reflecting either the status of the purchaser or the purpose of the transaction), and parallel creation of an integrated national swap market; (c) Widening of the scope of FEACs to cover all current account transactions (icluding nontrade transactions), and parallel abolition of all remaining surrender requirements, with the govermment having to purchase all its current account foreign exchange needs (mcluding for mandatory imports) through the swap market; and (d) Abolition of administered foreign exchange allocation for priority investment projects, and phasing out of that for mandatory imports. The above measures would make the renminbi convertible on the current account, strengthen the links between the monetary and the external sector of the economy, and thereby place a greater burden on monetary policy as an instrument for influencing the balance of payments outcome. It is important, particularly in light of the recent trends in monetary aggregates, that the authorities adopt a disciplined monetary policy stance while these measures are being implemented. Finally, as concems the question of moving towards full convertability on the capital account, the experience of other countries in general suggests that a measured pace is advisable, although there are some exceptions. Generalized opening of the capital account often leads to exchange rate instability. As such, the prudent course of action would be to leave liberalization of the capital account until after important remaining structural reforms, such as those relating to the import regime, have been implemented. - xx - D. REFORmiNG CHNA'S TRADE REGIME Priorities and Perspectives on Reform Despite the declining importance of trade planning, China still operates a relatively complex trade regime. Apart from continued reliance on the mandatory import plan and the use of controls over the allocation of, and access to, foreign exchange, imports are regulated through tariffs, canalization (monopoly or limited import rights), licensing and direct controls. Overall, more than 50 percent of China's imports were subject to some form of nontariff administrative control in 1992, with imports under the mandatory plan covering 18.5 percent of imports. The import regime, therefore, bears the marks of considerable government management. In addition, licenses, quotas and taxes are maintained to regulate the exports of a variety of products. After seeing a substantial increase over the last few years, China's weighted average tariff in 1992 was back to its pre-1987 level, with a trade-weighted average of 32 percent On average, however, China's tariffs remain higher, more numerous and more dispersed than those of most other large developing countries, with 69 rates and a standard deviation of 30 percent, compared with, for example, 34 rates and 17 percent for Brazil at an identical, average ariff rate. The multiplicity of objectives seems to account for the high dispersion of China's tariff structure, with a desire both to protect sectors in which domestic production is significant and to penalize nonessential consumption. This has kept import penetration in certain sectors very low and has provided high margins of protection to local production. The most important method of nontariff control of imports is to assign inmport rights to one or a few FTCs, such as for timber, cement and fertilizers. This process we label canalization. An estimated 32 percent of total imports are subject to control through canalization. Of these, two thirds are imports under the mandatory trade plan. For the remaining 13.5 percent of imports, therefore, canalization is used as an instrument for controlling import demand for reasons that have nothing to do with the trade plan. In addition to canalization, import licenses are used to serve multiple objectives. On the one hand, licensing is used as an administrative device to allocate a fixed quantity of planned imports and centrallylprovincially controlled foreign exchange. Here it functions as a quota allocation mechanism. On the other hand, licensing is also used for protecting domestic economic activity as well as for regulating, for balance of payments purposes, the demand for imports financed through retained foreign exchange. In all, there are presently 53 broad categories of products subject tO import licensing. These accounted for 12 percent of all HS tariff lines in 1992 and covered 25.1 percent of China's total imports. Of these imports, however, more than half were also subject to canalization and there appears to be some redundancy. In 1992, those imports for which licensing requirements applied in a nonoverlapping manner accounted for an estimated 11.7 percent of China's total imports. Import controls (distinct from import licerLes) are primarily used to protect the machinery and electronics sector, through the State Council Machinery and Electronics Inport Control Office (SCEMIO), and such controls currently apply to about 7.7 percent of total imports. The combined effect of licensing and controls serves primarily to control three groups - xxi - of products: agricultural raw materials subject to domestic price control, critical domestic production such as steel and textiles, and nonessential consumer goods. Export quotas/licenses covered 15 percent of China's exports in 1992. A large set of commodities subject to export licensing was agricultural goods, such as beef, pork and vegetables, exported to Hong Kong. Here, the objective of the licensing arrangements is to increase the prices received for these commodities by controlling supply. The same is true for export licensing in the case of such commodities as tungsten, in which China has a very large share of the international market (40 percent). On the other hand, export controls on such products as rice and maize have been used to ensure the adequate availability of these goods domestically. The scope of export controls was reduced somewhat this year. Even so, 38 broad categories of products still remain subject to export quotas/licenses. The use of export licenses to increase the domestic availability andlor depress the price of a variety of key planned commodities has, however, been more significant. The government's objective seems to be not only to fix official prices below international levels but also to maintain the secondary market price of selected exportables, such as coal, petroleum, maize and rice, below world parity by restricting exports through the widespread use of export licensing. The rationale for these controls will disappear as China phases out the implicit subsidies to consumers and industry that its policies of price control entail. In summary, China's import and export regimes appear to operate essentially to raise the price of final consumer goods relative to producer intermediates, mirroring basic biases in China's general industrial policvy Prices of many agricultural goods appear to be depressed through the use of implicit export taxes and their equivalents. Prices of basic producer inputs to manufacturing, such as coal, oil and timber, are likewise depressed. On the other hand, the prices of most intermediate and capital goods are maintained above import parity. The prices of some intermediate inputs, especially petrochemicals and textile yaws, that account for a significant proportion of China's total industrial output are exceptionally high. This no doubt penalizes the competitiveness of some downstream sectors, such as apparel and footwear, in which China has obvious comparative advantage and seems to contribute to the low domestic content of export-processing activity. Import licensing is also used to reinforce the price- increasing effect of even higher tariffs on a selection of "higher-tech" manufactured goods. Notwithstanding the formal regulatory system tat survives de jure, China's import regime is de facto more open than the above description might suggest- First, despite the 32 percent average nominal tariff rate (which is not dissimilar to average tariff lei Als in other developing countries), China's actual duty collection ratio is only 5.6 percent (more akin to the situation in industrial countries). The gap between nominal and effective rates indicates very high levels of duty exemption in China. China operates a relatively well-developed system of duty exemptions for exporters, and duty concessions of 50 percent are provided for foreign- funded enterprises. About half of all imports are treated as concessional in this sense. In addition, it seems that a range of imports for priority projects is also exempted. The rate of duty collection as a share of total imports has declined from 9.7 percent in 1986 to today's very low level, which is only about one-third of the average rate of collection of other developing countries. The rapidly declining duty collection ratios are in fact cause for sorme concern to the extent that they are caused by (a) increasing evasion on products for domestic consumption, or (b) increasing exemptions on imports for use on domestic (as opposed to export) production. On the other hand, the small revenue contribution of China's tariffs endows it with much greater - xxii - flexibility than most other developing countries. In particular, it enhances China's options with regard to the sort of fundamental restructuring of its tariffs suggested by the report's analysis. Second, price comparison data suggest that such protective devices as high nominal tariffs and nontariff barriers (NTBs) are not binding for many products (particularly for a range of mature consumer manufactures), i.e., their domestic prices, although still higher than world prices, are nevertheless below the duty-inclusive prices of competing imports. For these products, import licenses are redundant as a protective instrument and there would also appear to be considerable 'water in the tariff" caused in part by smuggling. Examples of such products include automobile tires, small gasoline engines, cassette recorders, televisions and domestic refrigerators. In the case of cassette recorders, domestic prices are still close to two-thirds above import parity, although they are 35 percent below the duty-inclusive price of competing imports. Likewise, domestic prices of color and black-and-white televisions are between 80 and 40 percent above import parity but between one-fifth and two-thirds below the duty-inclusive price of imports. The foregoing analysis of the trade regime underlines the need for substantive reform. Aside from simplification and reduction in the number of instruments of control and the dispersion of tariff rates, significant overall lowering of tariffs (but with fewer exemptions, except for export production) would seem to be in order. There could be a number of strategies for such a reform effort, and the report examines six alternatives through a simulation exercise. The results of the simulations provide several useful pointers. First, they suggest that China should be able to undertake deep cuts in tariffs and NTBs without this resulting in any major contraction of even the most protected sectors such as textiles and machinery. In a country of China's size, domestic consumption relative to imports can be expected to remain large and domestic dislocations are likely to be limited because of the considerable differentiation between imports and domestic production. Import liberalization should improve China's export performnance, particularly of its machinery sectors. The conditions for successful liberalization, however, are that activities within each sector be allowed and able to switch to the more export-oriented segments and that macromanagement remain disciplined. Second, it seems that radial import liberalization (e.g., a 50 percent across-the- board reduction in nominal tariffs) is a superior option to selective liberalization limited to the currently most protected sectors. Nonetheless, among the possibilities for selective liberalization, the option of reducing import protection on only the machinery sector is likely to produce the best results for the least effort and dislocation. Third, notwithstanding possible dislocation to downstream industries, significant gains could be derived from the reduction of export controls and taxes in addition to the reduction of import protection. Timing, Sequencing and Linkages It is evident that trade reform on its own is unlikely to yield the desired results. For it to succeed, progress in and coordination with, other areas of policy and reform will be essential. This does not mean, however, that reform of China's trade regime should wait. While it is true that trade reform needs other reforms to make it fully effective, it is also true that progress in trade is likely to generate important momentum for reforms in other areas. Moreover, a number of factors relating to both the domestic situation and the international trading environment suggest that the time is indeed ripe for China to embark on a bold program of trade liberalization. - XXIiI - Trade reform in China cannot proceed without the further dismantling of the country's trade and investment planning apparatus. In addition to the elimination of the current system of foreign exchange planning and allocation, the system of foreign exchange contracting needs to be replaced with one in which FTCs are free to pursue profits rather than foreign exchange targets. Further, it is imperative that investment (especially nonplan investment) be allocated in accordance with market signals. One step that should be taken immediately in this context is to substantially raise the minimum level of investment requiring central government approval. Trade policy is an integral part of overall macroeconomic policy. The evidence from other countries is clear about the importance of a real depreciation of the currency for the success of programs of trade liberalization. It is critical that the steps recommended above for unifying the exchange rate and making the currency convertible for all current account transactions be implemented as quickly as possible and certainly before trade liberalization proceeds too far, not least so that the impact of reduced protection on the domestic industrial sector can be moderated through an appropriate depreciation of the exchange rate. Action on reforming the exchange rate regime is all the more important now, given the most recent tendency of the gap between the official and the swap market exchange rate to widen again. The experience of other countries also indicates that trade reform will go much better if carried out during a period of relative macrostability. At the same time, by acting as a "safety valve," a more liberal trade regime can itself contribute to the management of aggregate demand. This is a perdnent consideration for China. With its comfortable level of international reserves and a current account surplus, China is well placed at present to use trade liberalization as a means of addressing the threat of overheating and the emerging shortage of essential industrial raw materials. An important objective of reforming the trade regime is to rationalize the structure of incentives for domestic economic activity and thereby improve resource allocation. If domestic price controls remain in place, however, the trade regime would be of little help in accomplishing this objective. This is not to say, in the case of China, that trade liberalization should await further price liberalization. China has already made very considerable progress with regard to price reform. The incidence of subsidies for imported commodities has declined substantially. Moreover, the widespread application of the two-tier pricing mechanism has meant that a large measure of price flexibility exists for much of nonplan domestic economic activity. Under the circumstances, import liberalization can be expected co be effective for an important segment of the economy even without removing such price controls as still remain. Enterprise efficiency is not only a micro but also a significant macro problem in China. With losses equivalent to almost 5 percent of GDP, and financed in good part through loans from the banking sector, SOEs are the largest contributors to the government's fiscal and quasi- fiscal deficit. Trade liberalization can be a valuable reform tool for altering the behavior of enterprises and improving the efficiency of resource allocation. To be successful, it requires enterprises to be able to shift patterns of production and investment in response to changing incentives. In this context, the growing volume and importance of nonstate enterprises and the increasing flexibility being accorded to SOEs are encouraging trends which suggest that the time is right for initiating trade liberalization. Indeed, import liberalization should not wait because, once initiated, it can play a key role in exerting competitive pressure on SOEs and in maintaining the momentum for enterprise reform. - xxiv - It should be emphasized that rationalization of China's industry will require much more than just import liberalization. Parallel efforts will need to be made in such areas as support for export development, quality control, worker training, technology policy and competition policy. If China wishes to have a targeted program of support to its export sector and, indeed, if it wishes to have a meaningful industrial policy, then these two policies will have to become the mirror image of each other and be very closely coordinated, preferably within a single agency. Finally, as China's presence in global markets continues to grow, it must become increasingly responsive to the demands of trade diplomacy. In its bid to attain full membership status in the General Agreement on Tariffs and Trade (GATI), China has already made significant efforts to conform to the expectations of the international community in general and the United States in particular. However, the requirements for GATT membership are not precise and are a matter for some negotiation. If the treatnent of recent applications to the GAiT is any guide, China is likely to be called on to go further in relaxing its import regime. From the perspective of the emerging international trade environment, therefore, this appears to be an opportune time for China to pursue a substantive program of trade liberalization. Defining a Bold Program of Trade Liberalization Over the last decade and a half, China has achieved a phenomenal upsurge in exports and trade. Most recently, however, its success in raising investment, growth and trade surpluses has raised the specter of overheating and inflation. Besides, enterprise inefficiency remains an important micro and macro problem for China, and its dramatic entry into export markets has raised concerns amongst its major trading partners about its responsibility for opening up to imports. The launching of a program of trade liberalization could help China address all three of these issues. What is more, given (a) its comfortable reserves position, (b) the advanced state of price reform, (c) the expanding role of the nonstate sector and growing flexibility in domestic resource allocation in general, and (d) evidence of tariff redundancy and the de facto openness of the economy, China is particularly well positioned to implement bold measures in the area of import lit ..lization at this time. China has begun to move in the right direction. Recent import liberalization initiatives undertaken as part of China's bid to attain full membership status in the GATT and as part of its bilateral trade negotiations with the United States include publication of regulations, some reduction of tariffs (tariffs on 3,371 tariff lines were reduced an average of 7 percent in December 1992), abolition of import substitution lists, and limited removal of import licenses and controls, with a commitment to eliminate two-thirds of these over time. However, no aanouncements have yet been made on import planning, canalization or phased tariff reduction. Considering the opportunity that China has to liberalize trade at this time, these measures seem quite incomplete and need to be complemented by other measures over the immediate and medium term. The report makes the following recommendations: Phaseout of Canalization. The distinction between Category I and IH imports should be abolished immediately, such that a single list of only those products that are subject to mandatory import planning remain subject to canalization for an interim period. All other imports should be made open to any FTCs or enterprises with direct trading rights. Beyond this, as reliance on import planning declines, China should phase out the practice of canalization altogether. - xxv - Phaseout of Licensing and Controls. Nonbinding NTBs (as in the case of a range of consumer manufactures) should be removed immediately. The discretionary element of remaining import licenses and controls should be reduced by ensuring that all decisions with regard to imnport licensing and controls are made only by central govermnent authorities according to criteria that are uniform and transparent. Thc Memorandum of Understanding (MOU) that China recently concluded with the United States is an important initiative intended to reduce NTB coverage significantly by 1997. China must implement this agreement on a multilateral basis. Only then would this initiative constitute significant progress. Tariff Simplification and Reduction. The number of rates and the level of tariFfs applying to consumer goods should be reduced right away. imnediate steps could be taken on a range of mature consumer products for which there is evidence of "water in the tariff" (i.e., a partially redundant level of protection). On the basis of available data, it appears that reductions in the order of 20 to 40 percent should be possible, depending upon the product, without resulting in any significant dislocations in domestic production. Where tariffs are currently being used as a way to discourage consumption, these tariff reductions should be accompanied by the imposition of an appropriate sales tax. In parallel with the implementation, on a multilateral (not merely bilateral) basis, of the program of NTB reduction agreed to in the MOU with the United States, China should pursue an equally bold program of tariff reduction. A reasonable target would be to implement a 50 percent radial cut in tariffs as soon as possible. Such a tariff cut would bring China's tariff structure into line with that for Korea, for example, with average rates on consumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, agricultural goods to 17 percent and mining to 10 percent. Given that trade diplomacy is likely to remain an important part of China's future trade strategy, the actual phasing of these tariff reductions could be linked to progress in negotiations with trading partners, most notably within the context of the GATT. Tariff Exeemptions. It is recommended that all tariff exemptions (including those for foreign-invested enterprises) on imports for use in domestic production not as yet on- stream should be abolished, while exemptions on imports for use in domestic production already on-stream should be phased out over the shortest period possible. Reduction in Export Controls. Wherever China's existingprice controlpolicies necessitaw.: the use of export regulation, export taxes should be used in place of licenses because the latter allow the few FTCs designated to handle such products to capture sizable rent which would more appropriately accrue to the Government budget Such export regulatory devices as remain should in any case be eliminated progressively and in tandem with ongoing price reform efforts. E. POICICES FOR EXPORT DEVELOPMENn PRIORrS FOR THE 1990S China's past export support structure, centered on national foreign trade corporations, a very active and interventionist Ministry of Foreign Economic Relations and - xxvi - Trade (MOFERT),Z/ and some foreign partners, such as entrepreneurs from Hong Kong, that were allowed to play an active role in the export sector, has served it very well during the first decade and a half of reform. Its experience has provided another example of the lesson observed elsewhere in East Asia that appropriate public intervention in export development and provision of explicit public support to the export sector can yield substantial dividends. While successful reform and continued success in export markets may require a change in the way in which China provides this support, it does not imply the removal of this support. Rather, it requires reform in the way support is provided in such areas as marketing, quality control, export promotion, export credit and the fostering of appropriate trade intermediaries. International experience offers a rich set of options from which China can learn in drawing up future reform plans in this regard. The most important issue will be how to deepen the reform of FTCs, which are likely to remain at the core of China's export support structure, without losing the considerable body of expertise that has been accumulated over the past. In order to meet its diverse needs, China should encourage the development of a variety of trading firms, ranging from small, flexible Hong Kong-type trading companies (best suited to handle its rapidly growing export segments such as garments and light industrial goods) to large trading companies similar to the Japanese sogo sosha or Korean chaebol (suitable for developing efficient production systems or promoting the trade of afiTliated conglomerate groups). To help achieve this objective, the report offers the following suggestions: subject FTCs to greater competition by removing remaining barriers to cross-provincial transactions, granting more producing enterprises the right to trade directly, and allowing entry to foreign trading firms; make FTCs operate as independentprofit centers, with bonuses linked to profits rather than to foreign exchange targets; eliminate all restrictions on the product scope of FTCs and permit them to participate in domestic commerce; allow ailing FTCs to exit and permit mergers between FTCs and, for example, emerging enterprise groups. At the same time as FTCs are being converted into competitive enterprises, the government should also assist manufacturing enterprises to export directly if they so choose, given the well-accepted benefits of direct contact between producers and overseas buyers. There are four essential elements in such support: (a) Export Marketing. At present, direct trading rights are not often granted to domestic manufacturing enterprises themselves, on the grounds that they are inexperienced in matters pertaining to international trade. Public support for export marketing (similar to that provided in Hong Kong, for example) could help ensure not only that those domestic enterprises that wish to export directly learn how to establish direct contact with foreign buyers but also that FTCs compete more vigorously to earn the business of local enterprises. Given the economies of scale involved, MOFERT could easily develop, with the support and participation of the nonstate owned sector, an effective intelligence network worldwide and chanrel information services to small firms that would otherwise be denied the opporrunity to trade directly- (b) Quality Control. China is well aware of the importance of export quality control, and has devoted a lot of attention to developing the State Commission V Now called the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). - xxvii - for Import and Exporn Commodity Inspection, but despite this effort, it appears that rejection rates remain high. Success in this area will depend on more general economic reform, but progress could be achieved, as in Taiwan (China), by making the present inspection system less extensive while increasing the intensity of the inspections. At the same time, the government could encourage the creation of quality control institutions by business associations and by accredited quality control agencies, including foreign ones, and it could then focus its attention on inspecting these. In short, China should focus on the efficacy of its quality control apparatus, rather than its coverage. (c) Other Support Services. The general promotion of an efficient, competitive service sector, which is now a key element of China's development strategy, will do most of what is required. Care must be taken to avoid monopolies in services for exports, and restrictions on the use of foreign service suppliers should (as has already begun to happen) be dismantled. (d) Export Financing. The Bank of China already provides a large volume of credit to support China's exports. Four measures seem necessary to improve the effectiveness of the export financing system. First, steps must be taken to ensure that firms with direct trading rights enjoy the same access to trade credits as FTCs. Second, if FTCs are to take responsibility for their own profits and losses, they must not be allowed to benefit from a soft budget constraint by tapping without restraint into the banking sector. Third, export insurance should be made available to all local enterprises as a way of encouraging and enabling them to acquire and exercise direct trading rights. Product selection has been an inherent part of China's export strategy, with special schemes and incentives being used to promote the exports of specific sectors. The experience of Korea suggests that export selection is a risky business and success requires that it be accompanied by an active and focussed policy of assistance for industrial restructuring to the targeted sectors. Unlike Korea, however, where decision making on trade and industrial policy issues has been highly centralized, the focus of China's industrial policies has been dispersed. This is partly due to the involvement of a large number of agencies, and partly to differences in priorities across provinces. As a result, China's efforts at export selection do not appear to be adequately supported by matching initiatives in industrial assistance. Given the country's size and diversity, such a strategy may prove to be difficult to pursue at the national level, except perhaps for a few strategic sectors. In such cases, greater national coordination between trade policy measures and assistance for industrial restructuring would seem to be warranted. The establishment of the State Council Economic and Trade Office (SCETO) in early 1992 (and its subsequent elevation to the status of a Commission), and ongoing efforts to create enterprise groups free from multiple channels of supervision and control, could prove to be important initiatives in this regard. A fundamental featare of China's past success in attracting FDI and generating exports has been its policies towards geographical targeting in general and the Special Economic Zones (SEZs) in particular. A key lesson is the importance of the policy environment in attracting export-oriented FDI. In this context, Pudong is potentially an important new initiative. As long as Pudong can offer a policy environment that is as flexible as the SEZs, it can be - xxviii - expected to attract more investment flows and inject an important measure of vitality in the greater Shanghai area. The policy environment, though important, has by no means been the only attraction for export-oriented FDI. Thus, despite their new open cities, inland provinces would seem to offer limited prospects for attracting FDI flows because of the relatively longer distance of these provinces from international markets. By the same token, provinces such as Liaoning and Shandong, should be actively encouraged to exploit their proximity to Korea and Japan along lines similar to what Guangdong has done with Hong Kong and Macao and Fujian is pursuing with Taiwan (China). The tax and import duty concessions of China's SEZs and open cities have served their purpose in helping generate a momentum for export-oriented EDI flows. Their application has now become counterproductive. The ubiquitous use of such incentives has resulted in serious resource misallocation, with numerous domestic firms changing location merely to reduce their tax burden. These incentives should be phased out at the soonest possible opportunity and a standard national corporate tax should be adopted with local and foreign- invested enterprises being accorded equal treatment in the fiture. Instead, SEZs should focus on expanding their role as economic laboratories. Experiments with market mechanisms in China are still at an early stage, and adequate rules and regulations to prevent the abuse of market power and rent seeking are conspicuously absent. SEZs should be at the fiorefront of experimentation with the introduction of such checks and balances. Specifically, the System Reform Commission could be asked to develop a program along these lines in cooperation with the SEZ authorities. Meanwhile, plans to increase the number of SEZs should be resisted, and proposals to develop Hainan, Shenzhen and Xiamen as free ports should not be pursued. The creation of free ports would only exacerbate tle problem of smuggling, which is already quite severe with regard to goods from Hong Kong and those being channeled through existing SEZs. F. THE INTERNATIONAL ENvIRoNmENT Am CHNA'S EXPORT PROSPEcTS In order for China to successfully implement the program of import liberalization proposed above, it is critical that world market conditions allow it to sustain the momentum of its export growth. With a sluggish world economy, growing protectionism and trends towards regionalism, it is clearly relevant to assess China's prospects for continued high export growth. In this regard, the analysis of the report shows that while China faces a relatively low set of tariffs in its export market, it does face a significant number of nontariff barriers, primarily because of the importance of products such as clothing, textiles and footwear. However, this does not imply that China's export prospects are poor, nor does it suggest that China needs to reorient its export structure rapidly toward higher technology or knowledge-based products. The report finds that even in today's global trade environment, there exist opportunities, in terms of both markets and of other products that China could pursue in order to sustain high export growth rates. Although it can in general be concluded that import penetration issues will not act as a constraint on China's exports, two external factors could have an enormous impact: (a) the outcome of the Uruguay Round of the GAIT; and (b) the possible loss of MFN status in the United States. - xxix - Most observers anticipate that a successful Uruguay Round could reduce protection levels in the European Community (EC), the United States and Japan by up to 50 percent. In such an event, China's exports would increase by an estimated 38 percent, or $11.4 billion, in terms of 1988 prices. Moreover, China would fare considerably better than other developing countries, the exports of which are projected to rise by only about 15 percent from a Uruguay Round liberalization. This is because the Uruguay Round tariff cuts would erode the preference margins that exports from other countries currently enjoy (through schemes such as the Generalized System of Preferences) and that China does not receive. China would benefit from trade diverted away from those countries. In addition, China would gain a lot due to the relatively high share of textiles and clothing products in its total exports. China has thus much to gain from the successful conclusion of the Uruguay Round. Although China's MFN status in the United States has, by executive order, been renewed for another year, uncertainty remains about its future and the impact of its possible discontinuation. The report finds that complete MFN loss would lead to severe dislocation of China's exports to the United Sttes. For example, the increase of roughly three and one-half times in the clothing duty (from an MFN rate of 15.3 percent to a general race of 55 percent) would significantly reduce, if not eliminate, exports of this key product (its projected decline is between 50 and 100 percent, depending on the assumptions, from its present level of $2.2 billion). Overall, China's annual export losses to the United States are likely to be between 42 and 96 percent, i.e., between $7.0 and $15.2 billion. Chinese exporters are, however, not the only ones that would lose. According to one estimate, United States consumers could end up paying as much as $14 billion per year in higher prices, resulting from a combination of costlier substitutes from alternative supply sources, and higher tariffs on the products that would continue to be imported from China. On the whole, it appears that the dislocation of trade flows likely to result from withdrawal of China's MFN status by the United States would range from the dramatic to the disastrous, with the associated costs being high for both parties. Other aspects of China's export prospects remain entirely within its own hands. Revealed comparative advantage calculations suggest that China's exports have been moving in line with its comparative advantage, which lies in labor-intensive (and especially in skiled labor- intensive) exports as well as in higher technology exports that can be assembled locally. Over the medium term (three to five years), China's present comparative advantage is unlikely to change significantly. The report's analysis indicates that China does not yet have a broad-based comparative advantage in machinery and electronics, despite all the programs of support to this sector, and it is unlikely to develop, for a few years yet, any significant advantage in the exports of heavy industrial equipment or in high technology exports that cannot be assembled locally. On the other hand, the report finds that there exist both underexploited geographical markets and new products that China could pursue without trying to alter the nature of its comparative advantage, while reducing the risk of market access problems. In conclusion, therefore, priorities over the next few years should lie in upgrading quality, diversifying into other skilled labor-intensive products and assembly-type exports, diversifying into underexploited geographical markets, and participating as fully as possible in initiatives to promote multilateral trade liberalization. I. CI]NA'S MERCHANDISE TRADE-TRENDS AND PERSPECTIVES A. INTRODUClON Since the initiation of its "open-door" policy in 1979, the contribution of foreign trade to China's economy has grown at an extraordinary pace. For the last fourteen years, China's average annualized rate of export growth has been about 17 percent and its imports have grown at over 15 percent per year. Over the period, China's total exports (on a customs basis) increased almost ninefold and in 1992 were estimated at $85 billion, while imports grew more than sevenfold, and stood at $80.6 billion. In 1991, China was the thirteenth largest exporting nation in the world and it ranked as the sixteenth largest importer; its trade accounted for 1.8 percent of world merchandise trade.1 The World Bank analyzed China's trade regime in 1987. The objective was to assess the status of China's foreign trade and capital system and make suggestions for improvements. Since then, much has happened. On the one hand, there has been an increase in trade frictions the world over. China itself has been engaged in bilateral trade negotiations with the United States, even as it has been pressing its case for resuming its membership of the General Agreement on Tariffs and Trade (GATI). On the other hand, after seeing a temporary slowdown in 1988, China's trade has picked up momentum again. The fast paced growth in China's merchandise trade since 1988 is in part explained by the economy's recovery that has followed the austerity program of 1988189, but two major spurts of foreign trade system reform, in 1988 and 1991, respectively, have no doubt also contributed to it. These reforms have been far reaching in scope and substance, and their implications are still unfolding. China's 'Hong Kong connection" has also developed very rapidly over this period, and is another contributing factor to the country's impressive trade performance. Given these developments, China's foreign trade regime and prospects merit a second in-depth look. This report takes stock of the rapid changes that have occurred in China's trade performance and evaluates the country's emerging trade policy and the prospects for its exports. It is also the report's objective to propose directions for future policy. In order to do so, it seeks to address a number of questions that have not as yet been tackled. First, China's continuing shift from a planned to a market economy poses important challenges for the country's foreign trade policy. Of particular relevance is the question of how China's trade and foreign exchange planning systems should evolve so as to allow the use of indirect as against direct instruments of trade policy. Second, China's approach to trade policy so far as been "mercantHist," i.e., motivated by achieving export growth for the sake of generating foreign exchange without sufficient regard to its costs and linked with attempts to contain import growth. China has not used its trade regime as a well defined instrument of industrial policy and, as a result, reform of the import regime has hitherto been neglected. Much is still unclear about the functioning of China's import regime. The issue is -2- not merely to examine the extent of market access that the regime provides, but also to define an approach for (i) maling the import regime more rational from the point of view of incentives to domestic industry; and (ii) liberalizing the regime over time, and thereby exposing a greater cross-section of domestic economic activity to international competition. Third, so far the Chinese government has played a very active role in providing support for exports. Aside from regulating trade activity and providing financial assistance for exports, the government has also directly provided a variety of other support services including marketing and quality control. As China continues its drive towards a market economy, an important question that needs to be addressed is the future role for public intervention in export development. Finally, growing uncertainties in world markets and a marked trend towards regionalism in mternational trade relations make the question of the prospects for China's exports a pertinent one. Whether world markets can absorb China's exports, and how vulnerable are Chinese exports to trade barriers in parter country markets are issues that need to be reexamined as China becomes a more important presence in world trade. With these issues in mind, the report is structured as follows: this chapter reviews the trends in China's merchandise trade, and provides an appraisal of the evolving composition and character of China's trade with the rest of the world. Chapter 2 traces the recent evolution of China's trade and foreign exchange planning system and analyzes the remaining problems. Chapter 3 provides a quantitative evaluation of China's current system of foreign trade controls, particularly from the point of view of protection of the domestic market. Chapter 4 explores options and strategies for future reform of this system of trade controls. Based on the analysis of previous chapters, Chapter 5 seeks to elaborate a program of trade liberalization for China. Chapter 6 focusses on export support measures. Lessons are drawn from the experience of other East Asian countries for defining the future role of public intervention for export development in China. Finally, Chapter 7 examines future prospects for China's exports and issues relating to access to international markets. B. TRENDS IN THE TRADE BALANCE Although trade grew over the 1979-89 period as a whole at very high rates, it is since 1984 that the most impressive growth has been observed. In 1983, total trade was only $43.6 billion. It then exploded over the next two years, to reach almost $70 billion in 1985 (Figure 1.1). Since then, trade has more than doubled, reaching $149.6 billion in 1992. Throughout this period, the trade balance has followed other macro economic variables with a lag of about 6 months to a year. In general, there has been a tendency for imports to rise faster than exports, except when the government has intervened. Thus, over the last decade, a trade deficit has been recorded in every year except 1982183 and 1990/91, the years immediately following the two retrenchment programs of 1981 and 1989, respectively. In 1988, the trade deficit was almost down to zero, following a third period of retrenchment which lasted from 1985 to 1987. In the early 1980s, exports were driven by the trade plan. Export performance was, therefore, largely explained on the basis of the availability of an exportable surplus. Excess aggregate demand translated into a poorer export performance and a larger trade deficit. This provoked the government's first retrenchment program, which involved scaling down import requirements through the import plan and other administrative controls. The results of this program manifested themselves in the form of a temporary trade surplus of 1982/83. -3- Figure 1.1: CHNA: TREND iN TRAE, 1978-91 Exporls/Imports in $ billions Trade Balance in $ billions 100 10 --- - - - -- - ----- - - - --5 80 t 0 60 40--- ________________ -5 40- ________________- --------------____ - 10 20 _- 0 l l l l l l -20 1978 1980 1982 1984 1986 1988 1990 1992 Year -Merchandise exports +Mercha.ndise imports IlTrade balance Note: In current prices and on customs basis (exports are .ob. and imports are c.i.t). Since then, China's macroeconomic management has remained plagued by sharp cycles. While the reform of the country's trade regime has progressed considerably, the govenument has continued to resort to all manner of administrative controls in order to address macro imbalances. In 1984185, major trade reform initiatives were implemented.1I These had the effect of liberalizing imports and the foreign exchange allocation system, and reducing the importance of the trade plan. As a result, a greater proportion of China's imports and exports were left to be determined by market forces. The very rapid growth rates that China experienced in 1984/85 were accompanied by a deteriorating trade balance. The trade balance reached a record deficit of $15 billion in 1985, as exports remained stagnant, while imports surged by over SO percent. In response, the government resorted to stricter controls. Credit was tightened, and heavy use made of administrative controls such as import bans, quotas and licenses, the importance of such instruments having gone up as that of the import plan had diminished. As a result of these various measures, import growth was stabilized. Meanwhile, exports finally 'took off,' growing at the dizzying pace of 20 percent per annum, and by mid- 1988, the trade balance was virtually restored. At that time, controls were relaxed and imports were allowed to pick up again. However, the underlying macroeconomic trends were such that export growth, though rapid, could not keep up with imports. A major austerity program was I/ The Mnistry of Foreign Economic Relations and Trade's (MOFERT's) report on the reform of the tade system appmrved by the State Council in September, 1984. -4 - launched in 1988. By mid-1989, the trade deficit was back up at $12.3 billion, not far from the record of 1985, prompting the major austerity program of 1989. As on previous occasions, the trade balance responded, but with a lag. Thus, although in mid-1989 the trade deficit was still $12.3 billion, close to the record of 1985, 1990 saw a surplus of $13.1 billion, reflecting an 18.1 percent growth in export value and a 9.8 percent decline in merchandise imports. As the recovery continued in 1991, there was yet again a sharp reversal in pattern, with exports continuing to grow at 15.8 percent to $71.8 billion, but with imports rising sharply by 19.5 percent to $64 billion. However, unlike in previous years, China was able to maintain a surplus on the trade balance in 1991. All the evidence suggests that over the decade of the 1980s, export performance has become increasingly independent of the level of within-plan domestic economic activity. The secular growth of exports can no longer be explained merely on the basis of the availability of an exportable surplus, resulting from an excess of planned output over domestic demand. Since the mid-1980s the overall export trend has been much more stable than it was in the early 1980s. In fact the growth rate of the few key sectors such as clothing and footwear that have underpinned China's recent export performance was hardly affected by the excess domestic demand of 1988/89. This trend is likely to continue, and it is safe to assume that export perfbrmance will depend much more on such factors as the exchange rate, policies for export development, and the prospects for world trade.21 On the other hand, inports appear to be explained by a combination of three factors. Recent analyses (Figure 1.2)1/ have confirmed a strong correlation between broad money and currency, industrial production and imports The level of domestic industrial activity appears to be the most important determinant of import demand in China. In parallel, the expansion of the system of foreign exchange retention has undoubtedly also made imports more sensitive to the exchange rate.4l Finally, the trend in the trade balance discussed above demonstrates how important administrative controls still are in managing China's import demand. The one important lesson that emerges is that, as long as China is unable to better manage macroeconomic balances, it will be very difficult to dismantle the array of discretionary controls that still distort the country's import regime.5/ C. PERSrECVS ON CHINA'S EXPORT PERFORMANCE Over the decade of the 1980s, China's exports outperformed those of most other economies, including such Newly Industrialized Economies (NIEs) as Malaysia. The only exporters that registered average annualized export growth rates higher than China were Thailand 2I Chapter 2 examines the evolving link between the exdcange rate and export performance, Chapter 6 explores China's policies of export development, and Chapter 7 examines the prospects for China's exports. 3/ Intemational Monetary Fund (IMF) (1991). U The reminbi recorded an effective devaluation in the swap market rate of over 13 percent between the third quarter of 1989 and end 1990, while access to swap centers reached new heights (the volume of transactions on the foreign exchange adjustment centers (FEACs) rose 53 percent to reach $13 billion in 1990). Imports fell by around 10 percent in 1990. 51 See Chapters 3 and 4. Table 1.1: SRUCruRAL CHNGES IN CHINA'S MAJOR EXPORTS: SELECrED YEAS FROM 1965 TO 1990 La Commodity group L 1965 1975 1980 1985 1990 (value of trade in terms of $ million) Total exports 1,718 6,303 18,237 27,764 80,541 All foods 642 2,088 3,272 4,073 6,862 Agricultural raw materials 189 450 1,170 1,810 2,198 Mineral fuels 32 897 3,974 7,158 5,290 Crude petroleum 13 778 2,572 5,347 3,654 Refined petroleum 7 92 1,246 1,556 1,070 All manufactures 783 2,632 8,521 13,657 64,220 Chemicals 75 322 1,176 1,460 3,420 Textiles and clothing 364 1,140 4,089 7,304 23,204 Nonelectric machinery 20 107 248 282 1,930 Electrical machinery 14 78 240 536 8,666 Transport equipment 15 74 71 88 574 Ores, minerals and metals 68 212 560 760 1,486 Miscellaneous goods 4 24 740 303 485 (as a percentage of total exports - Total exports 100 100 100 LIA 100 All foods 37 33 18 15 9 Agicultural raw materials 11 7 6 7 3 Mineral fiels 2 14 22 26 7 Crude petroleum 1 12 14 19 5 Refined petroleum - 1 7 6 1 All manufactures 46 42 47 49 80 Chemicals 4 5 6 5 4 Textiles and cothing /c 21 18 22 26 29 Nonelectric machinery 1 2 1 1 2 ElectiLA machiery 1 1 1 2 11 Transport equipment 1 1 - - 1 Ores, minras and metals 4 3 3 3 2 Miscellaneous goods Id - - 4 1 1 LI Data used here are based on imports of partner countries from China. This procedure was necessitated by the fact that China did not begin reporting exports to the United Nations until the mid-1980s. I Total exports consist of all products classified in Standard International Trade Classification (S]TC) 0 to 9; foods are groups (0+1 +22+4); agricultural raw materials (2 less 22, 27, 28); mineral fuels (3); crude petroleum (331); refined petroleum (332); manufactures (5 to 8 less 68); chemicals (5), textiles and clothing (65 + 84); nonelectrical machinery (71); electrical machinery (72); transport equipment (73); ores, minerals and metals (27+28+268); miscellaneous goods (9). Jc The share of clothing alone went from 13.1 percent in 1985 to 19.6 in 1990. Td The share of footwear went from 1.2 percent in 1985 to 4.5 percent in 1990. Source: Statistics are compiled from the United Nations Commodity Trade System (COMTRADE) database. -6 - Figure 12: BROAD MONMY AND IMPORTS Z Oily. Chunge In Imports % Qily. Change Tn Broad Money 60 16 40 1 4 4 12 20 10 0 -20 b 6 4 -40 2 -60 0 12341 23412341234123412341234 1986 | 1987 1 1988 1 1989 1 1990 1 1991 1 1992 Quarter/Year -% Gr. Imports +% Gr. of Broad Money Source: IMF and Bank Economic and Social Database (BESO). (13.2 percent), Korea (12.8 percent), Taiwan (China) (12.1 percent) and Portugal (11.7 percent).2 Institutional decentralization, depreciation of the real effective exchange rate, foreign investment (especially from Hong Kong), and duty free access to imported inputs for export assembly, all seem to have contributed to this strong performance. The Changing Compositior, of China's Exports 61 Table 1.2 shows the value and share (in total trade) of China's major export products for selected years from 1965 to 1990 (on the basis of import data from partner 61 Unless stated otheiwis, all data pertaining to sectoral composition of merchandise trade are presented throughout the reDort per classifications of Standard Intemnational Trade Classification (SITC) Revision 1. This was done for the purpose of historical continuity. Table 1.2: T1I VA ANo SimARE OF MJoR FlURDtaiT S1TC PROWCIS IN 'Cums EwORms-Swzcm YR FROM 196S To I9 Product IStTCI 1965 1975 1980 1955 S199 1965-90 Value Shari of Value Share of Value Share of Value Share of Value Share of Share $ mill.) total (23 S *mil1.) total (2) (4 *sll.) total (2) (4 mill.) total (2) (S mill.) total (l) change ToUtl trade (0 to 9) 1,718 100.0 6,305 100.0 18,237 100.0 27,764 100.0 80,541 100.0 - Clothing (641) 54 3.1 26S 4.3 1,592 6.7 3,629 13.1 15,760 19.6 12.3 Toy. and sporting goods (694) 14 0.6 38 0.6 108 0.6 653 2.4 6,049 7.3 6.7 Tolec inicatione equipment (17243 1 - 11 0.2 51 0.3 256 0.9 4,715 5.9 5.9 Crude petroleum (331) 13 0.8 778 12.3 2,572 14.1 5,347 19.2 3,654 4.5 3.7 Footweer (351) 16 1.0 60 1.0 201 1.1 330 1.2 1,632 4.5 3.5 Travel goode (831) 1 - 23 0.4 92 0.5 456 1.6 2,987 3.7 3.7 Other miecallanecue manufacture. (8992 22 1.3 115 2.2 403 2.2 534 1.9 2,060 2.6 1.' Woiwn teatile artielee (653) 53 3.1 148 2.3 500 2.7 923 3.3 2,443 3.0 -0.1 Doseetic electrical equipment (725) 1 - a 0.1 32 0.2 74 0.3 1,725 2.1 2.1 Cotton fa-brics (652) 174 10.1 327 5.2 697 3.8 973 3.5 1,652 2.1 -8.0 Presb fimb (031) 44 2.6 150 2.4 347 1.9 346 1.3 1,583 2.0 -0.6 Sound recording equipment (8913 2 0.1 8 0.1 25 0.1 62 0.2 1,472 1.8 1.7 Articlee of plestlc (8931 1 - 6 - 27 0.1 87 0.3 1,367 1.7 1.7 Wade-up textile articles (656) 43 2.5 181 2.9 554 3.0 586 2.1 1,290 1.6 -0.9 Vatchee and clocka (164) 3 0.2 18 0.3 76 0.4 186 0.7 1,270 1.8 1.4 Electric power machinery (722) 2 0.1 24 0.4 54 0.3 102 0.4 1,233 1.5 1.4 Textile yarn (6512 24 1.4 117 1.9 278 1.5 753 2.7 1,101 1.4 - Refined petroleum products (332) 7 0.4 92 1.5 1,246 6.8 1.556 5.6 1,070 1.3 0.9 Organic chemicele (512) 8 0.5 52 0.8 265 1.6 334 1.2 803 1.0 0.5 Other electrical mbchinery (729) 6 0.5 30 0.5 79 0.4 64 0.3 766 1.0 0.5 Prepared or preserved vgetablea (035) 14 0.8 93 1.5 279 1.5 338 1.2 713 0.9 0.1 Hachinery and appliane.s, nec (719) 4 0.2 22 0.3 66 0.5 111 0.4 703 0.9 0.7 office achinery (714) - - 2 * 8 - 51 0.2 694 0.9 0.9 Purniture (621) 3 0.2 29 0a5 127 0.7 157 0.6 633 0.8 O.6 Vegetables fresh or frozen (054) 45 2.6 97 1.5 311 1.7 293 1.1 631 0.6 -1.8 Scientific instnumentu (861) 12 0,7 10 0.2 27 0.1 43 0.2 583 0.7 floor coveringe (657) 6 0.5 54 0.9 270 1.5 277 1.0 565 0.7 0.2 Oil ceeds and nutC (2213 92 5.4 135 2.1 165 0.9 413 1.5 556 0.7 -4.7 Coal and coke (3211 13 0.8 26 0.4 135 0.8 243 o.s 547 0.7 -0.1 Pottsry and coramice (6d6) 15 0.9 71 1.1 140 0.6 147 0.5 546 0.7 -0.2 Total of above Items 699 40.7 3,011 47,6 10,767 59.1 19,354 69.7 62,609 75.0 37.3 Other tbree-dSgit exports 1,019 59.3 3,290 52.2 7,450 40.9 8,410 30.3 17,736 22.0 -37.3 Source: Sahtideatu camcmpUd ffom the UniteA Naiona COMTRADE data bue uslng the reporS bprtb of parb= countui frm China. -8- countries).21 The top half of the table indicates that China's total exports roughly tripled three times over this period; between 1965 and 1975; from 1975 to 1980, and thirdly between 1980 and 1990. In the early years, China's exports were guided by the philosophy of exporting only surplus commodities. Thus1 initially, China's export growth was dominated by crude petroleum and nonstaple foods. Raw materials that could have been exported very profitably in view of domestic price distortions-such as coal-were restrained by tightly administered export quotas. As the reforms have progressed, the structure of China's exports has changed dramatically. Most importantly, the share of China's traditional exports, foods, agricultural raw materials and petroleum, has declined progressively since 1975 from 52 percent down to 18 percent in 1990. On the other hand, the share of manufactures has grown by 34 percentage points from 46 percent of total exports in 1965 to 80 percent in 1990.8/ What is notewordty is that China's manufacturing exports did not "take-off" until after 1985. Just within the five year period 1985-90, the share of manufactures in total exports rocketed by 31 percentage points. The explanation for this sudden upturn in the performance of manufacturing exports lies undoubtedly in two factors: (i) the specific foreign trade reforms that were initiated at around that time including in particular, the decentralization of FTCs, the creation of swap markets for foreign exchange and the introduction of foreign exchange retention for exporters3; and (ii) the quantum jump in the utilization of foreign direct investment! The steady depreciation of the swap market exchange rate cerainly provided a strong boost to exports in general and to exports of sectors entitled to higher retention rates in particular.2/ The sector whose share in China's exports grew the fastest over the 1985-90 period was electrical machinery (SITC 72), which recorded a 10 percentage point expansion of its share, going from 1 percent of China's exports in 1985 to 11 percent in 1990. However, clothing and footwear also enlarged their share by 9 points over the same period, to reach 23 percent of China's exports, more than double that of the share of electrical equipment. 71 China did not officially bea reporting trade data to the United Nations until 1984. Historical statistics on China's exports were, therefore, reconstructed from reported imnpons from China by other countries. Several points need to be bome in mind when interpreting the data. First, parter country data on China's exports are systematically higher than the value of exports reported by China, because the former are in most cases based on the c.i.f value of partner country imports from China, whereas the latter are based on the fo.b value of China's exports. Thus, while Table 1.1 shows China's total exports in 1990 as $80.5 billion, the value of exports reported by China for the same year was $62 billion (see Table A1.2)-the difference between the two being in large part the value of tanwsport and insurance payments. Second, for some product categories, the difference between partner country and Chinese data is difficult to explain. In the case of transport equipment (SITC 73), for example, China's exports per partner country records were $0.6 billion in 1990, whereas Chinese data indicate a sotal export value of $4.1 billion. Third, some of China's trading partners-particularly the (former) socialist countries of Eastem Europe-did not report to the United Nations (UN) during the full 1965-80 period so some of China's tade (perhaps about 10 percent) is not accounted for in those years. In general though, statistics on imports are thought to be more accurate than those for exports (particularly since the former are used for applying import tariffs) so the partner country (import) information should provide a more accurate profile of China's exports. 8I Based on Chinese reported data, the share of manufactues reached 71 percent in 1990 and 80 pflpct in 1992. 9f Between 1985 and 1990 the real effective exchange rate (REER) applying for exports depreciated by over 120 percent (mneasured in yuan per dollar, see Chapter 2). - 9 - Table 1.2 provides a more detailed look into the factors undedying China's changing export structure over 1965 to 1990 by ranking the 30 largest three-digit SITC products (in terms of 1990 values). Crude petroleum ranked as China's most important export as recendy as 1985, when it was replaced by clothing. Clothing more than doubled its share in ten years to account for 19.6 percent of China's total exports in 1990. Toys and sporting goods were the second most important export item for China in 1990, followed by footwear, accounting for 7.5 and 3.7 percent, respectively, of China's exports. Both these subsectors saw their shares more than treble between 1985 and 1990. The rapidly expanding share of electrical equipment in China's exports seems to be accounted far in large part by telecommunications equipment (comprised essentially of black-and-white televisions, radio receivers, and telephone equipment) and by domestic electrical equipment (which includes washing machines, air conditioners and refrigerators). These two subsectors saw their share of China's exports rise from zero in 1975 to 7.3 percent in 1990, with almost all the growth coming after 1985. Table 13: TmE VALUE AND SHARE OF VARIoUS TYPES OF PioDucTs IN CmNA'S MANUAcuRD Exroars: SELECtED YARS 1965 Xn 1990 Growt rate ( Product category 1965 1975 1980 1985 1990 1965-90 1980-90 (Value of China's exports in tenrs of S millions) Total exports 1,718 6,303 18,237 27,764 80,541 16.6 16.0 Labor-ienive manuficturs 570 2,253 7,168 12,319 59,787 20.5 23.6 Unskilcd labor-intensive -oods 454 1,557 5,254 9,742 41,222 19.8 22.9 Capital-itcensive manufictes 1,113 3,128 6,353 7,984 14,978 10.9 8.9 Human capital-intensive goods 148 473 1.292 1,708 12,325 19.3 25.3 Naturl resource-based products 961 3,665 9,116 13,339 16,585 12.1 6.2 Coal, petroleum and gas 32 897 3,974 7,157 5,290 22.7 2.9 (as a shae of total exports - f) Total cpots 100 100 100 100 100 - - Labor-intensive manufactures 33 36 39 44 74 - - Unskiled labor-intensive goods 26 25 29 35 51 - - Capital-intensive manufactures 55 50 35 29 19 - - Human capital-intensive goods 9 8 7 6 IS - - Natural rcsource-based products 56 58 50 48 21 - - Coal, petroleum and gas 2 14 22 26 7 - - /a The procedures used for idnifying labor and capital-intensive goods (as well as a broad list of the former) can be found in Annex 1.1. Note that although the two classes of goods are mutually cxclusive, they do not encompass aL product categories, some of which are excluded from both classifications. See Annex 1.1 for details. Unskilled labor intensive, human capital intensive, and natural resource based products arc defined in Lawrence B. Krause, United Swates Economic Policy Toward the Associaion of Southeast Asian Nations (Washington: Brooldngs Instiution, 1984). Annex 7.2 to this report provides a complete tabulation of all the SITC codes that are included in the category of labor-intcnsive manufactures' product groups. - 10- The sectors that have emerged as China's most dynamnic exports appear to conform well to the country's natural comparative advantage. The analysis of Table 1.3 confirms this impression. The important point that emerges is that the composition of China's exports has become increasingly labor incensive over the years. Over 1965 to 1990 the share of labor-intensive products in China's exports has grown from roughly one third to about 75 percent.101 Over the same period, the share of capital-intensive products was cut down to less than 20 percent, less than a third of what it was in 1965, and that of natural resource- based exports was more than halved, declining from 56 percent in 1965 to 21 percent in 1990. A second point to note is that, within the category of labor-intensive manufactured exports, the share of products using unskilled labor has been declining since 1985. That China has begun to turn to products requiring higher skill levels for its exports is evident from the rapid rise in its exports of relatively simple telecommnunications equipment and domestic electricals since 1985. Table 1.4 compares changes in the concentration of Chinese exports (i.e., the range of products involved) over the years with that of selected East Asian economies. Some Table 1.4: CONCEaNRAmON oF Cr&s AN COMPARATOR COUNTRY ExPORTS No. of three-dinit uroducts exported (Hirschmann index in parentheses) 1962 (Rev. 1) 1972 (Rcv. 1) 1980 (Rev. 2) 1988 (Rcv. 2) EVoner Singapore 144 (0.324) 176 (0.234) 232 (0.235) 231 (0.143) Rep. of Korea 30 (0.245) 162 (0.262) 207 (0.085) 215 (0.098) Hong Kong 91 (0.337) 128 (0.374) 164 (0.164) 173 (0.141) Taiwan, China 44 (0.429) 57 (0.401) 210 (0.117) 217 (0.093) China 47 (0.411) 58 (0.390) 190 (0.156) 211 (0.120) memo item Japan 174 (0.103) 176 (0.158) 224 (0.118) 220 (0.142) United States 175 (0.084) 180 (0.107) 236 (0.064) 235 (0.086) Source: United Nations Coafcrencr on Trade and Development (UNCTAD) Handbook of International Trade Stadstics, various issues. Indices for China esimated by the World Bandk To be counted a dtr-digit product must have exports of more than $50,000 in 1980 or $100,000 in 1988 or be more dtan 0.3 pement of total exports. The 1962 and 1972 statistics are based on SfTC Revision 1 data while 19W and 1988 employ Revision 2 data. About 180 three-digit products are dermed in the former and 240 in the lazier. indication of concentration is provided by the number of tiree-digit SITC products exported by each country. Another indicator used is the Hirschmann concentration index.5 This index lO See Annex l. I to this report for an explanation of how these products were identified and defined and for a complete tabulation of all SITC codes that comprise each product category. It should be noted that the groups are not necessarily mutually exclusive and some double counting is involved in the tabulations shown in Table 1.3. - 11 - ranges between 0 and 1.0, with higher values representing more concentrated expoits. Two points are evident from these tabulations. First, in all countries a progressive deconcentration of their exports has occurred, although the rate of deconcentration appears to slow down appreciably (or in the case of Korea was even reversed) over time as the export drives of these countries reach maturity. China appears to be following the same trend. After its Hirschman concentration index more than halved over the 1970s, the Index registered a decline of only 20 percent over the 1980s. Second, China's exports have shifted from being far more highly concentrated than those of the East Asian NIEs to a point where they are no longer significantly more or less concentrated than other East Asian economies. In 1988, China's Hirschinan concentration index was smaller than that of Hong Kong or Singapore, but somewhat higher than that for Taiwan (China) or Korea. The Role of Assembly Operations In 1984, the State Council approved two schemes designed to facilitate exports based on processing or assembly type activity. The schemes are known as "processing with supplied materials" and 'processing with imported materials," respectively. The former entitles a local enterprise to import free of duty all raw materials provided to it by an overseas supplier to help the firm meet an export contract. The latter exempts a local firm from import duties on 9all raw materials that it uses to manufacture its exports.j/ These schemes have proven to be enormously successful. They have contributed in a major way to the marked rise in manufactured exports from China since 1985, and have helped China move into product categories such as telecommunications equipment, whose exports appear to have grown in large part based on assembly type operations using cheap yet reasonably skilled labor. Exports based on processing of imported or supplied materials accounted for 23 percent of total exports in 1988 (Table 1.5). Since then they have almost doubled their share, and now account for 45 percent of all exports or 64 percent of all of China's manufactured exports. 12/ Although a substantial proportion of exports based on processing activity was generated in Special Economic Zones (SEZs), over the years such activity has spread to firms outside the zones. Thus, while SEZs accounted in 1986 for over 27 percent of exports based on processing of supplied or imported materials, their share of such exports declined to 19 percent in 1991. Complete data on the sectoral composition of exports based on processing activity were not available. It is estimated, however, that the share of machinery and electronics exports is the largest, at about a third of all exports based on processing activity, followed by clothing (24 percent) and then toys (11 percent). It appears, therefore, that processing-based exports of machinery and electronics were in the order of $10 billion or almost 80 percent of all Chinese exports from these sectors in 1991. Much of this activity is clearly low in domestic value added. This is evident from estimates of the import content of exports based on processing activity. In 11/ The details of these schemes and how they operate are discussed in Chapter 3. It should be noted that these schemes are distinct from compensation tade. Compensation trade is similar to processing with supplied raw materials, except that the local firm gets paid in kind and does not receiv any foreign exchange. The value of exports under compensation trade schemes in 1991 was $221 million (Source: CustDms Directorate). 12/ Based on export data reported by China. The share of manufcctured exports on this basis was 70.9 percent in 1991, as opposed to an estimated 80 percent based on partner country data. - 12 - Table 1.5: EXPORTS FROM ASSEMBLY OPERATIONS (X billion) 1988 1991 1. Exports processed with supplied materials 6.5 12.9 2. Exports processed with imported materials 6.4 19.5 3. Total value of processed exports 12.9 32.4 of which, from SEZs 2.6 6.2 4. Imports of materials for export processing 13.7 25.0 of which, into SEZs 2.6 5.1 Memo Item Total merchandise exports 47.5 71.8 Total merchandise imports 55.3 63.8 Source: Customs Directorate. 1991, imports for processing activity represented 77 percent J3t of the value of processed exports. Markets for China's Exports China would appear to have experienced a marked increase in the geographical concentration of its export markets (Table A1.3 414), due to the more than doubling of Hong Kong's share and the disappearance of Eastern European markets.L5/ However, this is misleading because Hong Kong has served increasingly as a conduit for Chinese exports rather than as a consumer of such products. China reports having exported 53 percent of its exports to Hong Kong alone in 1990, this share having risen from 26.5 percent in 1984. In fact, almost all of the growth of China's exports to Hong Kong is due to the fast growth in reexports of Chinese goods to other countries-only a small and rapidly declining proportion of China's 131 This is likely to be somewhat of an overestimate of the import content of processed exports. Time lags in the utilization of imports mean that not all inputs imported in any one year are likely to be used in the export production for that year. 14/ The statistics in Table 1.7 are based on data reported to the United Nations by China. A longer time pewspective was not possible since China did not report trade to the UN prior ti 1984. 15, While, in 1984, five Eastern European countries, including the then Union of Socialist Soviet Republics (USSR), were amongst China's top thirty markets, absorbing a little under 5 percent of its exports, by 1990, and not surprisingly, their share of China's exports had become negligible. - 13 - exports tO Hong Kong is actually consumed in Hong Kong. Of the $6.9 billion that China exported to Hong Kong in 1984, $3.3 billion was reexported. In 1990, of the $32.9 billion exported from China to Hong Kong, $29 billion was reexported to countries other than China. The major markets for these reexports were the United States, which in 1990 absti 36 percent, followed by the European Community (EC) (17 percent), and Japan (7 percent). Taking into account the final destination of Hong Kong's reexports of Chinese products (Table 1.6), it turns out that Hong Kong's share of Chinese exports has in fict declined from about 14 percent in 1984 to only 6 percent in 1990. The fastest growing market for China has been th EC, whose share more than doubled to reach an estimated 19 percent in 1990, followed closely by the United States (US) whose share went from 13.6 to 25.6 percent between 1984 and 1990. As the share of the US and EC markets has grown, that of Japan has shrunk. Japan went from being the largest importer of Chinese products in 1984, to being the third largest in 1990, after the US and the EC. All these changes have made the market structure for China's exports very similar to that of other East Asian economies. For each of these countries the US is the largest export market, absorbing anywhere from 28 to 34 percent of their exports, followed by the EC and then Japan Cfable A1 6). Table 1.6: MARKFI5 FOR CHINA ExPRTS, 1990 Share of China exports (%) Export market Adjusted for Unadjusted for reexport thru reexport thim Hong Kong Hong Kong Japan 11.5 8.2 USA 25.6 8.7 EC 19.2 9.2 Other of which: Hong Kong 6.2 53.9 Memo Items Value of China's exports to Hong Kong ($ billion as reported by China) 32.9 Value of Hong Kong reexports of Chinese products to the rest of the World ($ billion as reported by Hong Kong) 29.0 Value of China's total merchandise exports 62.1 Source: United Nations COMTRADE data base, China's Customs Statistics and Hong Kong Review of Overseas Trade, various years. The Role of the Nonstate Sector Definitional issues pertaining to ownership make it difficult to pin down the contribution of China's burgeoning nonstate sector to exports. However, data are available on - 14 - certain types of nonstate enterprises.j.i/ The share of township and village enterprises (TVEs) in total exports, for example, increased fivefold between 1985 and 1990 (Table 1.7), and their share was estimated to have exceeded 25 percent by 1992. An estimated 90 percent of IVE exports are manufactured products, of which a little less than half are spread evenly between textiles, clothing and arts and crafts. Also, not surprisingly, almost all TVE export earnings (88 percent in 1990) are generated in Eastern China, with the coastal provinces of Guangdong, Jiang-su, Shanghai, Zhejiang, Shandong, Tianjin and Hebei accounting for the lion's share. Table 1.7: TOWNSIUP AND VILLAGE ENTERPRISE ExPORTS Export-oriented Exports As share of total enterprise ($ billion) (%) (number) 1985 1.20 4.4 8,500 1986 2.67 8.6 9,000-11,000 1987 4.35 11.0 18,000-20,000 1988 8.03 16-9 La. 1989 10.00 19.1 n.a. 1990 12.501a 20.2 56,000 /a Beiing Review, Vol. 24, No. 4, January 24, 1992, p. 29. Source: For exports 1985-88: A. Ody (1992). Data for foreign-invested enterprises (FIEs) indicate that the contribution ofthese to China's exports has also been growing. The share of FlEs in total exports went from less than half of 1 percent in 1984 to 5 percent in 1988, and then quadrupled to reach $17.4 billion or 20 percent in 1992. All FIE exports have been in manufacturing, and 94 percent were generated in the coastal provinces in 1990.' It can be concluded from the above that the contribution of the nonstate sector to China's exports has become very important. The share of this sector, taking account only of the exports of TVEs and FIEs, stood at a minimum of 40 percent of China's total exports or L61 Bromadly speaking, the nonstate sector is considered to comprise urban collectives, nual collectives, private enterprises, individual businesses and foreign-invested firms. See Yusuf (1992). Township and village enterprises (IVEs) are distinct from foreign-invested enterprises or urban collectives, but constitute a subset of the other categories. Foreign-invested enterprises inchde equity joint ventures, wholly foreign-owned ventures, cooperative operations and cooperative development ventures. See Khan (1991). - 15- 50 percent of its manufacturing exports,17/ with the bulk of the contribution of nonstate enterprises originating in the coastal provinces. The Role of Hong Kong China's 'Hong Kong connection" has been vital to the success of its export drive. It was noted earlier that more than half of China's exports to the rest of the world are now handled by Hong Kong. Although the role of Hong Kong as trade intermediary is critical, its contribution to the development of China's exports goes much further! Most importantly, 70 percent of the cumulative value of $58.1 billion in foreign direct investment (FDiI) commitments to China has come from Hong Kong and been mostly directed to export-oriented joint-ventures in the coastal provinces, Guangdong in particular. Guangdong has attracted an estimated 50 percent of all the country's foreign investment commitments and the province accounted for almost 40 percent of China's total exports (and certainly a much higher proportion of manufacturing exports) in 1992. Hong Kong's involvement in export-oriented production in China is not just limited to joint ventures. A lot of Guangdong's export production is supervised under contract by partners in Hong Kong. Much of Gluangdong's success with processing using supplied or imported materials is based on partnerships with counterpnrts in Hong Kong. It is no wonder that Guangdong recorded $16.6 billion in exports from processing activity or about 70 percent of the country wide total for such exports in 1991.' All evidence suggests that the economies of Hong Kong and Guangdong are becoming increasingly integrated with one another. As exports of certain products such as toys and clothing, from Guangdong have increased, those of similar products from Hong Kong have declined.' This suggests that production of a variety of low value products has been displaced from Hong Kong to the hinterland, where wages are lower and the labor force is reasonably skilled. This has enabled resources in the very tight labor market in Hong Kong to be reallocated to higher value products such as office machines, for example, the share of which in its domestic exports has been rising steadily. Clearly, the growing interdependence between Guangdong and Hong Kong is working to their mutual benefit, and to the benefit, of course, of China's overall export performance. D. TRENDS IN CxA'S MERCHANDISE IMPORTS The Structure of Merchandise hIports The story of China's merchandise imports since the "open-door" policy is much simpler than that of its merchandise exports. Three tendencies are noticeable (Table 1.8). First, the share of foodstuffs in China's imports has seen a marked decline-compared to shares of between 16 and 23 percent in the early 1980s, foodstuffs now account for around 6 percent of total imports. Second, the share of intermediates and raw materials, although smaller now than in the early 1980s, appears to have stabilized at a little over a third of total imports. And third, capital goods (machinery and transport equipment) have seen a steady increase in their shares. -Capital goods now account for roughly 43 percent of total imports, compared to 19 percent at the start of the reforms. The share of mineral fuels has ink-eased somewhat, while that of consumer goods did not exceed 5 percent at any time during the decade of the 1980s. 17/ Prybala (1992), reported in Yusuf (1992) estimates that about half of China's total exports originate in the nonstate sector. - 16- Table 1.8: CmNA: STRUCTURAL CHANGE IN CIUNA'S IMORTS (CIJ CUSrOMS BASIS (% share to Total) Commodity 1984 1987 1988 1989 1990 Food 9.8 7.2 7.7 9.1 8.6 Mineral fuels 0.5 1.2 1.4 2.8 2.4 Intermediate 53.8 43.2 46.1 43.1 39.4 of which: Chemicals 16.6 11.8 16.7 13.1 12.9 Crude materials 10.0 7.8 9.6 8.4 7.6 Iron and steel 17.1 11.1 8.4 9.8 5.3 Consumer goods 2.3 4.5 4.1 3.7 4.7 Capital goods 33.5 43.5 40.1 41.0 44.3 of which: Transport equipment 7.7 9.4 8.7 9.0 11.2 Miscellaneous 0.0 0.4 0.6 0.4 0.5 Source: Chinese Trade Data (SlTC Revision 1), Customs Directorate. In the earlier years of reform, the import plan explained much of China's import struture. The plan has been used, by and large, to ensure minimum imports of key foodstuffs, intermediate goods and raw materials.l8/ The products most subject to plinning have been typically ones with the largest domestic price distortions. Quantities to be imported have been determined through a gap-filling" exercise, rather than on the basis of relative prices or quality. The importance of the plan has been declining, however. Less than a third of imports are now subject to mandatory planning or to canalization, i.e., the practice of restricting the imports of such commodities to a few designated foreign trade corporations (see Chapter 2). Whereas, in 1984, over 80 percent of the imports of food and intermediate goods came under the plan, by 1991, only half of food imports and only two thirds of intermediate good imports, respectively, were comprised of planned commodities. Within the category of foodstuffs, cereals remain by far the most important planned commodity. Chemical fertilizers, plastic materials (mainly plastic sheeting), textile yarn, iron and steel and wood are the largest intermediate goods imports that remain subject to import planning. Meat and dairy products, along with animal feed, account for the bulk of the growth in nonplanned commodities in the food group. Within the category of intermediate goods, chemical elements and paper products have underpinned the rising share of ncnplanned imports. This changing composition of imports suggests that an increasing proportion of food and raw material imports has become market driven. Although the share of import planning has declined progressively, China's import structure still bears the mark of management. Thus, although capital goods are not part of the import plan, the steady rise in their import share is due in large part to a systematic IS! Almost none of the plannedlcanalized commodities fa1 into the categoq of consumer or capital goods. Tlle only exceptions are televisions, cathode ray tubes and diesel engines. - 17 - government strategy of using imports as a way of importing embodied technology for modemization. Over the last decade, China has imported the equivalent of about 3 percent of GDP in capital goods, accounting for about 7.5 of all investment, and about 15 percent of all investment in equipment.'0 The growth in such imports reflects, more than anything else, trends in directed domestic investment, and has been supported by controlled access to foreign exchange. The central government still directly controls over 50 percent of the country's foreign exchange earnings, which are allocated to planned imports and imports of materials and equipment needed for priority projects (Chapter 2). The inconsequential share of consumer goods in China's total imports also suggests the use of administrative controls and foreign exchange allocation. Consumer goods have to a significant degree been the "residual" component of imports, their share falling in years of retrenchment and rising in years of relaxed controls. The managed nature of China's import structure is reflected quite clearly in recent shifts in import shares. Over the 1985187 period, which was a period of retrenchment following the build up of domestic excess demand, the share of consumer goods fell from 5.5 to 4 percent of imports, while that of capital goods and critical commodities subject to import planning, such as cereals, petroleum and fertlizers, and textile yarn was allowed to rise. Again, the immediate effect of the retrenchment of 1989 was to restrain the growth in consumer goods imports, while the share of cereals, textile yarn, iron and steel and machinery and transport equipment went up. China's import structure thus clearly reflects a conscious import strategy, which has been to ensure the supply of key raw materials and to acquire embodied technology through the import of capital goods, while imports of consumer goods have been regarded as a residual. Overall. however, China's import structure resembles that of its East Asian neighbors, except that its share of food imports is somewhat larger. What is significant is the relative openmess of China, like Korea, Taiwan (China) and Malaysia to the imports of capital goods. In fact, the share of capital goods in China's imports is not excessive by the standards of these other economies. On the other hand, this is what sets China and the East Asia NIEs apart from other large developing countries such as India and Brazil, where the share of capital goods imports is significantly smaller. Fmally, a word about the origin of China's imports. As in the case of exports, Hong Kong plays an important role of intermediary in the procurement of China's imports. In 1990, 27 percent of China's imports were recorded as having come from Hong Kong, when in fact almost all these were reexports from other places of origin. A large proportion (45 percent) of Chinese imports coming in as reexports through Hong Kong are from Taiwan (China) and Japan. Until the normalization of diplomatic relations earlier this year, China's imports f.om South Korea were also handled in this manner. Taking account of the country of origin fbr products reexported from Hong Kong, Japan emerges as the single largest supplier of China's imports accounting for one fifth of total imports (Table 1.11). In this regard China is hardly different from other East Asian economies although overall, China's dependence on Japanese imports is markedly smaller than for the other countries of the region and appears to be declining fast. The second largest supplier of Chinese imports is the United States which has had a more or less stable 15-percent share since 1984. The US share of China's imports is higher than in other East Asian countries, such as Thailand, and Indonesia, but it remains substantially lower than in Taiwan (China) and Korea. The EC is the only bloc of member countries of the Organization of Economic Cooperation and Development (OECD) countries that has posted even modest gains in its share of China's imports. Between 1984 and 1990, the EC's share of - 18- Table 1.9: STRUCTURE OF CIUNA'S IMPORTS (CIF) CUSTOMS BASIS (A Comparison with Other Importers for 1990) (%) Commodity China Korea Taiwan Brazil India Malaysia (China) Food 8.6 5.2 5.5 9.3 3.2 6.8 Food 6.5 4.7 4.7 8.7 2.4 6.1 Beverages 0.3 0.3 0.6 0.2 0.0 0.4 Animal fat 1.8 0.3 0.2 0.3 0.8 0.3 Petroleum (mineral fuels) 2.4 15.8 11.0 26.8 27.3 5.3 Intermediate 39.4 36.4 34.6 27.3 40.4 24.3 Chemicals and related products 12.9 10.7 13.0 15.9 12.9 8.8 Crude materials (nonfood) 7.6 12.4 8.2 5.3 9.4 3.4 Leather 0.7 1.1 0.5 0.9 0.3 0.1 Cork 1.1 0.6 0.6 0.1 0.0 0.1 Textile yarn (yarn, fabrics, etc.) 9.9 2.8 1.9 1.1 1.0 3.4 Nonmetallic minerals 0.8 1.3 1.2 0.7 9.1 1.1 liron and steel 5.3 4.7 5.4 1[3 4.9 5.3 Nonferrous metals 1.1 2.8 3.8 1.9 2.6 2.1 Consumer Goods 4.7 3.4 5.3 4.7 2.3 6.3 Paper and related products 1.4 0.6 1.2 1.2 1.0 2.0 Rubber 0.1 0.3 0.3 0.5 0.2 0.3 Furniture 0.1 0.2 0.2 0.0 0.0 0.2 Travel goods 0.0 0.0 0.1 0.0 0.0 0.1 Clothing 0.1 0.2 0.5 0.3 0.0 0.3 Footwear 0.0 0.0 0.1 0.1 0.0 0.1 Photo supplies 0.0 0.0 0.0 0.0 0.0 0.0 Miscellaneous 2.9 2.1 2.7 2.5 L10 3.5 Capital goods 44.3 38.8 41.2 31.9 20.5 57.1 of which: Transport equipment 11.2 - 3.9 7.2 3.5 3.9 10.0 Miscellaneous 0.5 0.4 2.4 0.0 6.2 0.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: United Nations COMTRADE Data (SlTC Revision 1). - 19 - Table 1.10: ORICIN OF CmNA's IMPORTS: A CoMPARISoN wrmi O0n EcoNomms oF EAs AsA SELECED YEARS (Tn Year Thailand Indonesia Taiwan Korea China In Origin of Share of Share of Share of Share of Shar of Sham of irports imports imports imnports imports imports impots (adjusted for (unadjusted ror rcaxports thu rexpoits thru Hong Kong) Hong Kong) 1934 Japan 27 24 29 25 35 31 USA 13 18 23 22 16 15 EC 13 15 9 9 13 13 Other 47 42 39 44 29 41 of which: Hong Kong - - - - - 12 1990 Japan 31 24 30 27 21 14 USA 11 12 24 24 15 12 EC 15 19 13 12 15 15 Other 44 46 33 37 49 59 of wbich: Hong Kong - - - - 4 27 /a Discrpancies between thesc and figures rcported by China possible because of transport margins and period differcut information reporting lags. Source China's Customs Statistcs, Hong Kong Rcview of Overseas Tsde, various years, and United Nations COMTRADB data base. 1984 1990 Memo Iems Value of China's imports from Hong Kong (S billion as reported by China) 3.1 14.4 Value of Hong Kong's reexports to China from other places (S billion as rcported 3.3 12.4 by Hong Kong, of which: Share of reexports originating in Taiwan (China) (%) 13 23 Sharc of reweorts originating in Japan (%) 36 22 Share of rexpots originating in USA (L)e 11 9 China's imports went from 13 to 15 percent. It appears that the more advanced East Asian economies are the ones that have made the largest inroads into China's market by exporting through Hong Kong. The joint share of Taiwan (China) and South Korea in China's imports went from an estimated 4 percent in 1984 to over 9 percent in 1990. - 20 - Table 1.11: SIARE OF MERCHANDISE TRADE IN GDP: SELECTED COUNTRIES (%$) China 31 USA 16 Japan 18 India 14 Brazil 12 Mexico 36 Turkey 34 Source: Data for China are for 1991 (see World Bank, 1992c). Data for other countries are from the General Agreement on Tariffs and Trade (GAIT) (1992b), Volume 1, Appendix Table 5. E. TRADE IN CHNA'S EcONOMy: SOME CONCLuDING OBSERVAnONS 'The trends in exports and imports discussed above illustrate how far China's approach to trade has evolved since the open door policy was first announced. Traditionally, China viewed exports as a surplus over domestic production, to be sold in order to generate financing for the purchase of commodities, such as grain, in short supply at home, and of imported technology for purposes of modernization. This philosophy of 'gap filling led to an autarkic approach to trade, with the handful of foreign trade corporations (FTCs) granted permission to carry out external trade operating an 'airlockl between the outside world and the domestic economy."1 Since then, the number of FTCs has gone from 12 to a peak of 6,500 in 1989, and 3,600 at the present time. From no fbreign investment in 1978, the total has risen to over 29,000 joint ventures with a contracted value of $45 billion. And most remarkably, the share of merchandise in China's Gross Domestic Product (GDP) went from 10 percent in 1978 to 31 percent in 1991.19/ This is a significant and permanent change in the face of the Chinese economy. As compared to other large countries, China has become a very open economy (Table 1.l)-by this measure, China appears to be more than twice as open as India and Brazil, and significantly more open than USA or Japan. China now exports about 17 percent of the gross value of industrial output (GVIO) of its overall manufacturing sector, and imports an estimated 28 percent of the GVIO of its machinery and transport equipment sector (Table 1.12). 19! This figure needs to be treated with caution. First, China's Gross National Product (GNP) is widely regarded as underestimated. Second, customs statistics on exports include the funl value of exports based on processing of imported inputs, which tends to exaggerate the role of trade in the Chinese economy. Excluding the latter would reduce the value of China's exports in 1990 by about $11.? billion, and the trade to GDP share to about 28 percent. Depending upon what estimate of China's GDP is taken, the trade to GDP share could be anywhere betwee 18 and 26 percenL - 21 - Table 1.12: CIuNA: THE STRUCTURE OF PRODUCTION, IMPORTS AND ExpoRrs, 1985 AND 1990 Share in total Imports/GVIO Exports/GVIO Sector GVIO(%) L(% . L%) 1985 1990 1985 1990 1985 1990 Food, beverages 11.6 11.6 5.0 8.0 10.6 14.7 & tobacco Raw materials 20.8 20.9 8.2 8.4 15.4 10.8 Manufactures 67.5 67.5 16.6 16.2 5.0 16.9 of which: Intermediates 39.4 40.2 12.6 11.3 4.9 10.2 Machinery & transport 20.0 19.2 28.0 28.5 1.3 14.4 Consumer goods 8.1 7.9 8.0 10.8 14.6 56.9 Memo Items Light Industry 49.1 47.0 Heavy Industry 50.9 53.0 Clothing 2.0 2.1 0.2 0.6 34.9 118.0/a Travel goods 0.1 0.1 0.9 1.5 27.0 90.5 Footwear 1.2 1.2 0.2 0.2 7.3 41.3 /a An export share of greater than 100 percent indicates large export volumes from outside the independent accounting sector of the Chinese economy. Source: Based on Table A3.3. GVIO shares pertain to output of firms with independent accounting only. These firms accounted for 77.8 percent of total GVIO in 1990. Data on light and heavy industry are from Chin's Statistical Yearbook, various years. On the one hand, the growing openness of the Chinese economy has had a perceptible impact on the quality of a range of Chinese products that have benefited from the use of updated technologies and exposure to the demands of consumers in external markets. On the other hand, it is also noteworthy how little the structure of the China's industry has changed, despite a non-negligible degree of import penetration and high export ratios. Table 1.12 compares the sectoral share of GVIO between 1985 and 1990 and the import penetration and export ratios of each board sector over the same period. It indicates that, while import penetration ratios have remained more or less stable across sectors, the share of exports in (;iVIO has grown more than threefold in the case of manufacturing in general, and almost fourfold in the case of consumer manufactures. Despite these very substantial increases in export ratios, however, the overall sectoral composition of output, including the share of consumer manufactures (with such heavily export-oriented sectors as clothing, footwear and travel goods) has remained virtually unchanged. While it is probable that capital-output ratios in the more export-oriented sectors have fallen during this period, it appears that the allocaion of investnent - 22 - has remained unaffected by the growing openness of the economy. Investment is evidently still heavily directed, resulting in a "planing' phenomenon, such that investable rescurces are divided more or less equally amongst all sectors instead of being channelled to the most efficient ones.2Q/ As open as the Chinese economy is today, trade still does not yet play a sufficient role in domestic resource allocation. An important challenge for the future will be to allow a stronger link to be established between trade and investment. 20/ See I. J. Singh (1992). - 23 - Endnotes 1. GATT (1992b). The figures for shares in world trade include exports, imports and reexports and the trade of Eastern European countries. 2. World Bank (1992e). 3. MOFERT's report on the reform of the trade system was approve& by the State Council on September 15, 1984. The system of foreign exchange retention, though first introduced on an experimental basis in 1979 was formalized in Januay 1984, and was subsequently modified in January 1985 such that te retention rights were shared eqially between the exporting enterprise and the province. See World Bank (1987). 4. FBI annual utilization, sluggish until then, doubled from $0.6 billion in 1982 to $1.3 billion in 1983, and grew at an average rate of over 34 percent per amum thereafter till 1989. See Khan (1991). 5. Hirschmann index normalized to make values ranging from 0 to 1 (maximum concenration), according to the following fonnula: where: j = country index; 239 xj = valueofexportsofcommodityi; x x, and 239 = number of products the three-digit SITC, Revision 2 level. 6. Almanac of China's Foreign Economic Relations 1991/92, page 88. 7. See Yun-Wing Sung (1991). S. Almanac of China's Foreign Economic Relations 1991/92, page 88. 9. While Hong Kong's domestic exports of toys declined from $1.5 to $1.3 billion between 1985 and 1988, reexport of toys, almost all originating in China, rose from $0.6 billion to over $2.1 billion over the same period. Similarly, from 1986 to 1988, while the share of clothing in Hong Kong's domestic exports declined from over 40 perceat to 31 percent, reexports of garments from China almost doubled, rising from $1.6 billion to $3.1 billion over the same period. 10. World Bank (1992c). 11. See World Bank (1987a). - 24 - II. THE TRADE PLANNING AND FOREIGN EXCHANGE SYSTEMS-REFORMS THROUGH A PERIOD OF TRANSITION Until recendy, the fundamental feature of the Chinese foreign trade system was the planning mechanism used to control exports and imports and to allocate foreign exchange to priority uses. Since the launching of the open-door policies, this mechanism has undergone significant change. In general, the thrust of successive waves of system reform has been to reduce the importance of the plan. Although remarkable in its impact on China's foreign trade, the process has not been an entirely smooth one. Numerous difficulties have arisen along the way, most stemming from the unique circumstances of China's transition from a rigidly planned economy to a more market-oriented one. Since the mid-1980s the Chinese authorities have launched two major reforms of their foreign trade and exchange planning system, one in 1988 and the second in 1991. The basic objectives of the two major reforms were similar. They were designed to increase the role of the market in determining the pattern of imports and exports and the use of foreign exchange, and to reduce the burden of financial subsidies imposed by the external sector on the state budget. This chapter takes stock of the reforms of the trade planning and foreign exchange management system that have occurred since 1986 and makes recommendations for the future. A. FOREIGN TRADE PLANNING, FOREIGN TRADE CoRPoRTnoNs, AND SuBMEs Foreign trade planning has entailed not only formulating the export and import plans, but also defuiing the role of China's foreign trade corporations that have been used as an institutional vehicle for implementing the plans. The original objective of trade planning was to identify the key raw materials and commwdities that were is short supply and had therefore to be imported, and then ensure that sufficient foreign exchange was generated through selected exports-the plan was thus driven by the country's import requirements. In 1978, all trade was handled by a dozen FTCs and their branches, which had the responsibility of executing the plan. Following approval of the reform plan of the Ministry o: Foreign Economic Relations and Trade (MOFERT), now called the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) in 1984, the foreign trade system was decentralized very considerably, with the provincial branches of national FTCs allowed to become independlent financial and operating bodies, and each province allowed to create its own FTCs. By 1986 there were already 1,200 FTCs in operation. The foreign trade plan also became more export driven. A target for exports would be fixed, and the objective of the planning exercise became one of managing imports within the foreign exchange constraints implied by this target. The export plan was split into two components: the command plan and the guidance plan. The command plan was mandatory, fixed in quantitative terms, applied to specific products, and was accompanied by an assured supply of necessary inputs to the producing enterprises. In contrast, - 25 - the guidance plan contained value targets assigned to provincial authorities, which were accorded considerable flexibility in determining how to achieve them. Products subject to the command export plan were in turn split into two lists: the list of so-called Category I exports, comprising products that could be handled only by a few designated national FTCs, and Category II exports that could be handled by a wider range of FTCs, including local and provincial ones. An estimated 60 percent of exports were subject to the mandatory export plan and 20 percent to the guidance plan in 1986, with the balance being "above plan" exports. The import plan was comprised of three components: a mandatory plan for key raw materials, the steady supply of which was considered essential-these imports were to be handled only by designated national and/or provincial FTCs (see also Chapter 3); a system of foreign exchange allocation for imported raw materials and spare parts for key established national projects, and for the import component of priority new investment projects .1; and an import licensing system (see also Chapter 3). As in the case of exports, commodities subject to the mandatory import plan were divided into two lists: Category I imports that could only be handled by a few designated national FTCs; and Category I[ imports that could be handled by several FTCs, including local and provincial ones. In 1986, an estimated 40 percent of imports fell under the mandatory import plan, and another 30 percent were procured under the foreign exchange allocation mechanism for priority projects-the remaining 30 percent, financed either out of retained foreign exchange or foreign borrowing by noncentral authorities, were subject to selective import licensing.? All procurement for the mandatory export and import plans took place at fixed prices. For the export guidance plan, the price could be fixed, floating or free market, depending on the how each province decided to meet the value targets of the guidance plan,21 and on the negotiating position of producing firms vis-a-vis the procuring FTCs. Given that all export transactions still had to be routed through FTCs, which in many cases were designated, the link between international prices and the procurement price offered to exporters was still not systematic. On theother hand, such a link was much better established for nonmandatory import transactions. The widespread use of the so called agency system fcr irnports meant that importers were free to choose any FTC for procuring nonmandatory imports and would pay the import price plus the FTC's costs. Under such a system, with pervasive domestic price distortions on the one hand, and FITCs bound by obligations of the mandatory export and import plans on the other, domestic currency losses on some international transactions were inevitable. FTCs incurred financial losses measured in domestic currency each time they were required, under the import plan, to procure imports of such products as food grains and chemical fertilizers, which were purchased at international market prices, but then had to be sold on the domestic market at the state fixed price applicable to domestic producers of the same products. Likewise, they incurred losses when the export plan required them to purchase relatively high priced domestic goods, such as certain types of machinery and electronic products, and then to sell them on the international market.2 In 1986 direct fiscal subsidies to foreign trade companies to cover their losses were 1/ This included imports of complete plant for industrial expansion, and centrally funded general investment projects. 2J Some provinces essentially converted the guidance plan into a provincial command plan with fixed quantities and prices. - 26 - more than Y 24 billion, more than two percent of China's gross national product and larger than the size of the official budget deficit. By 19B8, total fiscal subsidies to FTCs had reached an annual level of over Y 26 billion C(able 2.1). Table 2.1: LOSSES OF FOREIGN TRADE CORPORATIONS FINANCED BY CENTRAL GOVERNMENT BuDGEr (Y 100 million) Year 1986 1987 1988 1989 1990 1991 Losses 249.6 282.1 268.5 336.4 224.4 176.1 Memo Item Total losses of SOEs within budget 417.1 481.7 520.6 749.6 932.6 931.1 Source: Industrial and Commercial Deparanent, Ministry of Finance. The 1988 and 1991 Reforms The Foreign Trade Contract. The key institutional feature of the 1988 refonn of the foreign trade system was the contract system. Every provincial level administrative unit and all specialized national FTCs signed contracts with MOFERT. These specified three targets: the amount of foreign exchange earnings; the amount of foreign exchange to be remitted to the central government; and a fixed amount of domestic currency that the center would provide to subsidize losses on export sales. MOFERT, the Ministry of Finance, and the State Planning Commission jointly determined the values of each of these targets and the State Council approved these numbers before they were incorporated in the signed contracts? The contract was the key policy instrument the central government used to control indirectly the increasing amount of decentralized trade that was to be undertaken by local govermment while, at the same time, controlling the magnitude of export losses for which the central government was responsible! Starting in 1991, the foreign trade contracting system was modified so that targets for the value of exports, foreign exchange earnings, and foreign exchange remitted to the central monetary authorities are now set annually, rather than every three years.af Also, the process of setting targets, though still involving some negotiation, has beccme 'bottom up." Typically targets are proposed by enterprises and local authorities bas'd conservatively on growth trends from previous years. 3/ In the case of conuacts between the cenzer and national FTCs spealized in Category I exports, quantitative targets are still specified. - 27 - Fiscal Subsidies. One of the important features of the foreign trade contracts introduced in 1988 was its attempted limitation of the size of the fiscal subsidies that the central government would provide to offset domestic currency losses incurred on the sale of exports. Nationally the aggregate amount of export subsidies was fixed at an amount equal to four percent of the value of exports in 1988 or around Y 7 billion. This total was divided among all of the contracts signed so that each provincial level government received a fixed amount of export subsidies. Not only did the government try to put a cap on export-related subsidies, but in 1991, it went further and eliminated such subsidies altogether. The key provision of the 1991 reform made all specialized national foreign trade companies and all provincial-level administrative units responsible for their own domestic currency profits and losses, at least on exports. Central government fiscal subsidies for money-losing exports were said to be cut to zero beginning in 1991. In parallel, the central govermnent has also moved to reduce the burden of fiscal subsidies to offset money-losing import transactions. If the cap of Y 7 billion on export subsidies was in fact respected in 1988, Table 2.1 suggests that central government subsidies for import transactions amounted to Y 20 billion. Efforts to reduce this burden focussed on price increases for domestic products that historically had been sold at low prices. During the course of 1989 the state raised the domestic prices of steel, nonferrous metals and several other products to near world market prices. And the procedure for fixing the domestic prices of imports of these goods was changed. Beginning in 1989, they began to be priced like noncommand impoas, i.e., on an agency basis, meaning that the world price converted to domestic currency at the official exchange rate formed the basis of the domnestic price. To this the authorities added import duties, port fees and other costs. The reform meant that the domestic prices of these goods would change in response to changes in either world market prices or the exchange rate. Previously domestic users of these imported products were fully insulated from these changes. These changes reduced the value of import subsidies paid by the central government by Y 2.5 billion in 1989. Overall, however, subsidies on import transactions went up substantially in 1989 owing to the devaluation of the renminbi which aggravated rTCs losses on the imports of important items such as fooc grains for which no price adjustments had been made at that tirne. This presumably explains why total subsidies to FTCs reached a record Y 33 billion in that year. In April 1990, the domestic prices of six other imported goods, soda ash, caustic soda, aniline, cattle hides, tallow, and coconut oil were raised and imports of these goods were priced to fully reflect international market prices. That action reduced the value of import subsidies paid by the central government by Y 270 million. . Action was also taken on China's single largest money-losing import product-food grains.5 In the spring of 1990, the internal distribution price of imported grain increased by Y 30 per ton. The state followed this up in the spring of 1991 by raising the retail prices of edible vegetable oils, flour, and rice for the first time in 25 years. The increases were large. The average price paid by urban residents for wheat flour, rice, and corn rose by 0.2 yuan per kilogram or 71 percent The average price for edible vegetable oil (peanut oil, sesame oil, rapeseed oil, refined cottonseed oil, and soybean oil) rose by even more-Y 2.70 per kilogram or 160 percent. The main effect was to reduce the losses incurred on the retail sale of domestically produced output. But the reduction of subsidies on imported food grains and vegetable oils in 1991 was also significant-Y 1.27 billion. Even -28 - so, financial losses on import transactions are far from eliminated. The internal distribution price of food grains still remains below the import cost plus handling and transportation costs, and although overall subsidies to FTCs have declined substantially from their peak in 1989, they still amounted to Y 17.6 billion in 1991. If all export subsidies were indeed eliminated as claimed starting January 1991, all this Y 17.6 billion can be assumed to be on account of subsidies on import transactions. The Export and Import Plans. Perhaps the most important feature of the reform introduced in 1988 was a reduction in the importance of the foreign trade plan. Ihe number of so-called Category I export products that were subject to mandatory planning was reduced to 21, roughly half the number previously falling in that category.' Category II exports, comprised an additional 91 commodities, down from 120 in 1986. The reform initiatives of 1991 went further in this area and it seems that all mandatory export planning has been abolished. However, the state still retains some control through the continued use of canalization and licensing. Exports that used to be subject to mandatory planning are still channelled through a few designated FTCs if they are classified as Category I or II exports. In the first quarter of 1992 about 15 percent of China's exports were either Category I or Category II. The import plan has also been scaled down since 1988, although not to the same extent as the export plan. The number of import products in Category I, largely under the control of specialized national FICs, has been cut almost in half, and was down to 14 in 1992. Only an additional six imports now fall in Category I. In the first quarter of 1992, mandatory planned imports constituted only 18.5 percent of all imports compared to 40 percent in 1986, and covered 11 broad product categories.7 The process of scaling down the plan has been accompanied by the decentralization of responsibility for implementing the plan and an expanding number of foreign trade companies, mostly at the local level. The number of FTCs allowed to handle Category II imports and exports has grown over the years as has the total number of FTCs authorized to undertake trading activity. From about 800 in 1986, the number of FTCs has increased to over 3,600 FTCs in operation, more than 300 times the number existing at the start of the reforms. B. THE EXCHANGE RATE REGIME From 1981 until 1984, China had dual exchange rates: official and secondary. The official rate depreciated gradually under a system of managed floating while the secondary rate was fixed at a more depreciated rate. The secondary rate, termed the internal settlement rate, was used for settlement of payments between FTCs and the supplying enterprises. In January 1985, the official exchange rate was set at the internal settlement rate, and the latter was abolished. However, dual exchange rates reappeared with the establishment of foreign exchange adjustment or "swap" centers (FEACs) in late 1986. At present, the administered official rate is used for foreign trade and other extemal transactions included in the annual areign exchange plan, including probably, debt transactions. A second, more depreciated rate is determined in FEACs, where enterprises are pennitted -t buy and sell foreign exchange as well as retention quotas which can be used to acquire foreign exchange at the official rate to finance primarily trade transactions not included in the plan. Between July 5, 1986 and December 15, 1989, the official exchange rate was pegged de facto at Y 3.72 per US dollar, leading to a real appreciation of the yuan in the face . 29 - of rising inflation. At the same time, the exchange rate in the FEACs depreciated, allowing exporting enterprises to maintain their profitability. The devaluation of the official rate by 21.2 percent (to Y 4.72 per US dollar) in December 1989 and by a further 9.6 percent in November 1990 returned the real exchange rate to the level prevailing in 1986; the nominal bilateral rate was maintained at Y a.22 per US dollar from November 1990 till April 1991. On April 9, 1991, a new system of a managed float was adopted, under which the administered official rate is adjusted frequently through small periodic changes based upon several factors including: (a) developments in the balance of payments, (b) developments in foreign currency markets, (c) developments in FEACs, and (d) changes in the domestic resource cost of earning foreign exchange. Although the rate has been adjusted in both directions, it has tended to depreciate and, as of end-March 1993, had reached to Y 5.73 per US dollar. In the FEACs, the average exchange rate depreciated by about 21 percent to a peak of Y 6.7 per US dollar in early 1989. It appreciated to about Y 5.9 per US dollar in December 1989 in the wake of the devaluation of the official rate. Since then it appreciated slightly to Y 5.7 per US dollar in December 1990, before depreciating to about Y 6.9 per US dollar towards end-September 1992, and further to Y 8.4 per US dollar, by the end of the first quarter of 1993. Thus, as of end-March 1993, the spread between the two exchange rates had once again become substantial and stood at over 45 percent. Foreign Exchange Plan The annual plan for foreign exchange receipts and expenditures has been, and continues to be, formulated by the State Planning Commission (SPC) and approved by the State Council. The State Administration of Exchange Commission (SAEC) is responsible for supervising the implementation of the plan, which has traditionally taken explicit account of the foreign exchange implications of the mandatory export and import plans for trade in key products. With the elimination of mandatory export planning in 1991, the foreign exchange plan now takes account of the foreign exchange targets negotiated with each province in the context of the foreign trade contracting system. Importers of goods included in the import plan are allotted quota accounts by the SAEC and a quota notice form that is required by MOFERT before import licenses are issued. When payment for the import is due, foreign exchange is made available to the importer upon surrender of local currency against the quota account in the SAEC. In addition, the foreign exchange plan is used to allocate foreign exchange to finance part of the import requirement of priority investment projects. Ihis would appear to be redundant given that funding for key projects and their associated imports is already allocated as part of the government's investment program. Retention Scheme China traditionally combined an inconvertible currency with a rigid system of exchange control requiring all exporters to turn over all of their foreign exchange receipts to a specialized bank, the Bank of China, in exchange for domestic currency. Exporters thus were left with no foreign exchange to finance their imports. Like any other would-be importer they had to depend on the State Planning Commission, which allocated all foreign exchange earnings via an annual import plan. The government began to decentralize the administration of foreign exchange earnings in 1979 by allowing local authorities, departments, and enterprises to retain - 30- the rights to buy back a certain proportion of their foreign exchange earnings.4/ Initially, retention quotas,' which are transferable between enterprises, were transacted at the administered exchange rate, but by 1988, all MIEs and domestic enterprises with retention quotas were permitted to operate in the FEACs. Retained foreign exchange can be sold at the FEACs for renminbi or used to purchase imports. Retention quotas can be traded in the foreign exchange centers or used for acquiring foreign exchange at the official rate to purchase approved imports. Because of the premia that swap market rates fetch over the official exchange rate, the right to retain foreign exchange has constituted an important financial inducement for beneficiary enterprises. The original retention rates, or the proportion of its foreign exchange earnings that enterprises can retain as their quota, were relatively low. In 1984/85, local authorities and enterprises retained rights to only 25 percent of their planned export earnings while the remaining 75 percent went to the central authorities. Over time, the government has adapted the foreign exchange retention system to fiuther its industrial policy objectives. Beginning in early 1988, corporations trading in priority sectors-light industries, arts and crafts, clothing, machinery, and electrical products 5/-were permitted to retain oDnsiderably higher proportions (between 70 and 100 percent) of foreign exchange retention quotas in order to give greater incentives to those sectors.9 A higher rate of retention was also allowed on foreign exchange eanings above planned targets.6/ Lilewise, special higher retention rates applied to cerin provinces such as Guangdong and Fujian, several of the autonomous regions populated by minodty peoples, and the SEZs, the latter enjoying retention rates of up to 100 percent. Although the specific afrangements varied from locality to locality and depended on the type of good involved, retained foreign exchange was in general split evenly between the FTC handling an export transaction and the firm producing the good. In the case of general commodities exported from ordinary provinces, for example, of the 25 percent of foreign exchange earnings that could be retained, 12.5 percent would normally go to the FTCs and the remaining 12.5 percent to the producing enterprise. Several important modifications were made to the retention scheme in 1991. First, the retention system, as it had evolved, had given rise to considerable distortions and provided an unfair competitive advantage to some coastal provinces. Thus, in February 1991, a uniform retention rate was set throughout the counry.7/ For general commoditiesj/ this rate 4t The fiul amotmt of the freign exchange eceipts was required to be surredered to the state at the official rte by exportrs. 5I In the case of light industry, arts and cafts, and clothing this provision seems to have been a quid pro quo for them having taken on responsibility for their own profits and losses. 6/ These disappeared in 1991, with the dimination of the mandatory export plan. 7, Tibet, the only exception, was allowed to retain a 100 percent retention quota for its modest expors- 81 For commodities such as crude oil and petroleum deNivatives which are in effect monopolies of the State, retention rates are set very low (less than 5 percent). - 31 - was set at 80 percent. Of the 80 percent, 10 percent accrues to local government, 10 percent to the producing enterprises and the remaining 60 percent to the foreign trade corporation.2/ Second, special rates for certain sectors were retained and adjusted upwards. For machinery and electronics products, the retention rate is now 100 percent of which 10 percent accrues to the producing enterprises and 90 percent to the foreig,' trade corporation. FIEs and joint ventures can still retain 100 percent of their export earnings in foreign currency accounts in resident banks. The retained share of new foreign exchange earned in processing activities was pegged at 90 percent, up significantly from the 30 percent rate prevailing in 1985. Third, although retention ratios were raised across the board, the central govenment ensured access to foreign exchange sufficient to meet its own requirements by reserving the right to purchase, albeit at the prevailing FEAC rate, an additional 30 percent of the foreign exchange initially retained-20 additional percent points from the FTCs and 10 from export producers. All indications are that the center fully exercised this option in 1991. In effect, therefore, 50 percent of the overall foreign exchange earnings of the local authorities and enterprises was still appropriated by the central government, and producers of export goods were left with no retained foreign exchange (T.'le 2.2) with which to directly buy nonplan imports. If a firm producing export goods want xd to purchase imports outside the plan it had to seek access to the FEACs in order to do so. 10I Finally, the authorities have started experimenting with a cash retention system on a limited scale in several centers around the country. In such a system, the enterprise would only be required to surrender a portion of their foreign exchange earnings to the SAEC and would bc allowed to keep a portion of their foreign exchange earnings in resident bank accounts. Foreign Exchange Markets As early as 1980, in some localities, companies with excess retained fbreign exchange were allowed to sell it to other firms who sought access to foreign exchange to purchase imports outside the plan. Initially the volume of transactions in these local secondary foreign exchange markets was limited, perhaps in part because the state sought to constrain the price at which these swaps occurred to the official exchange rate which highly overvalued the domestic currency. More regularized markets formally opened in several cities in 1985. However, following a rndown in its foreign exchange reserves in 1984, the central govermnent effectively froze the cumulative foreign exchange retention rights of exporters and used the underlying foreign exchange to finance its own imports. As a result, the volume of transactions on the swap market was limited, and the major participants were FlEs which from the outset had been allowed to retain one hundred percent of their foreign exchange earnings from exporting. 9J In the case of those selected producing enterprises which have been granted direct trading rights (i.e., not required to deal through FTCs), the share of the foreign trade corporations accrues to the producing enterprises. This also applies to producing enterprises which export under the agency system. 10/ All of the foreign exchange sold to the State is eventually credited to the state reserves at the People's Bank of China (PBC), although large amounts are in transit on the books of the Bank of China (BOC) (the amounts in transit on the books of the specialized banks are aggregated in the PBC data). - 32 - Table 2.2: FoREicN EXCHANGE RETEnoN RATES, 1991 Pcrcent to cental Of which Percent Calegory governmcnt market rate retained /a Of which 1. Gcenral 50 30 50 8 provincial govt commoditics 2 municipal/local 40 foreign trade co II. Machinery & 30 30 70 5 provincial govt electronic products 65 foreign trade co and science and technology products m. Petroleum (including crude oil and rtemed petroleum products) Unified plan 96 0 4.0 2.7 local govt amounts 1.3 Sinochem Over plan amounts 30 30 70 WV. Fees from 10 0 90 10 provincial govt processing 45 foreign trade co contracts 35 cnterprisc is The distribution of retentions is that prevailing aftcr the central government exercises the right to purchase, at the swap market rate, some of the initil distnbutions of retine foreign ecchange. The 1988 reform linked expanded foreign exchange retention rights with a liberalized foreign exchange market. Liberalization of the FEACs was assured by several measures. First, quota controls on the utilization of retained foreign exchange, which had been imposed by the central government in 1985, were abolished beginning in 1988. Second, the number of authorized local foreign exchange markets increased. Each province, autonomous region and centrally administered city was authorized to establish at least one foreign exchange swap center within its territory. By end-December 1992, there were over 100 FEACs in operation. Third, a national foreign currency swap center was also to be established in Beijing to facilitate currency transactions between central government agencies and to facilitate transactions between local swap markets in different administrative jurisdictions. Finally, the swap markets were opened formally not only to foreign-invested enterprises but to sta-owned and collectively owned enterprises as well. These reforms led to significant increases in the volume of foreign currency transactions on secondary markets. Volume rose from $4.2 billion in 1987 to $6.3 billion in 1988, $8.6 billion in 1989, and then $25 billion in 1992. However, inter-market transactions appear still to be restricted, leading to nonnegligible differentials in rates across markets in different parts of the country. - 33 - Criteria for Access to FEACs. Sales of foreign exchange at the swap rate have been virtually unrestricted since December 1991, when all domestic residents were allowed to start selling foreign exchange at the swap rate at designated branches of banks.l1/ Sales of foreign exchange consist of sales of actual foreign exchange mainly by PIEs and of foreign exchange retention quotas by Chinese enterprises (the actual foreign exchange having been surrendered to the state). By contrast, access to FEACs to purchase foreign exchange is subject to approval and is restricted mainly to enterprises which need foreign exchange either to service their foreign currency debt or to import goods which are not inconsistent with the industrial policy of the state. Purchases of actual foreign exchange are usually limited to sums needed by FIEs which, according to the termns of their contracts as approved by MOFERT, can be used for designated purposes including their own operating needs, debt repayment, and remittances. 121 Domestic enterprises, which are approved by MOFERT to import, can purchase retention quotas in the FEACs; the purchased quotas must be used within a six-month period to acquire foreign exchange from the state reserves at the prevailing official rate. SAEC authorization is dependent on conformity with the priority uses of foreign exchange as set out in current government regulations. The priority list (Annex 2. 1 reflects plan objectives regarding key commodities, and it provides for favorable treatment for exporting activity as well as for the acquisition of advanced technology. On the other hand, requests for foreign exchange to finance imports of consumer durables, luxury goods or goods judged to be speculative in nature are not permitted. Two points are essential to understanding the manner in which enterprises can have access to foreign exchange to conduct import operations outside the plan.lIN First, applications for foreign exchange are checked by the local MOFERT office, the Commission of Foreign Economic Relations and Trade (COFER1), for conformity with the purposes of the enterprise, as specified in its business license.j14/ Enterprises are allowed to import products that are not subject to import licensing, provided that COFERT verifies that they are within the scope of the enterprise's business license. Second, every enterprise authorized in this manner has a foreign exchange budget (or quota) assigned to it by the local SAEC based upon its export targets and expected demand for imports, debt service, and remittances. Each application for foreign exchange is also checked against the enterprise's foreign exchange quota before access to the FEAC is approved. Only after the documentation of the applicant is checked and an import license is obtained, where required, are buy orders processed or the applicant allowed to trade in the swap market. For applicants with retention quotas, the procedures are simpler, since only verification of the enterprise's foreign exchange retention quota is required. Il/ [ at least one local branch of the Bank of China, the rate at which domestic residents can sell their foreign exchange was fixed by the bank at about 3˝h percent below the rate prevailing in the local swap center. 12/ Also individuals are allowed to purchase foreign exchange for foreign travel and foreign language examination fees. 13/ See Annex 2;2 for more detail on the operation of FEACs. 141 In establishing an enterprise, its basic license sets out its purposes and stipulates if it is allowed to import to cany out its activities which would be dearly specified. MOFERT approval of this license (or a contract with a foreign-invested enterprise) is required. Authorization of the ministry responsible for that activity is also required. - 34 - These guidelines on access do not appear to have inhibited the development of the market in foreign exchange." It was noted earlier that transactions volume jumped more than 25 percent in 1992 to reach $25 billion. Equally significant, interregional transactions expanded even more rapidly and exceeded $6 billion, resulting in greater competition among exporters of general commodities in different regions, and thereby in a reduction in the spread among various regional markets in the price of foreign exchange. However, it is clear that the regulations on market access did lead to pent-up demand for many of the products for which foreign exchange could not be purchased legally.151 This was evident not so much in an active black market for foreign exchange as in rampant smuggling from Hong Kong to Guangdong of a variety of consumer goods including automobiles, motorcycles, household electronic appliances, cigarettes and liquor. Estimates of the magnitude of smuggling are necessarily unreliable. But it appears that most transactions involving smuggled goods, at least at what might be called the wholesale level, are carried out in Hong Kong dollars. By the early 1990s, an estimated fifth of the total value of Hong Kong currency and coins outstanding was believed to be in circulation over the border in South China. C. BROAD IMPACT OF RECENT DEvELOPMES Impact of Developments in the Exchange Rate Regime hIpact on E"cports. In a dual exchange rate system such as China's, the effective exchange rate received by exporters is a weighted average of the official and swap market rates, the weights being determined by the size of the foreign exchange retention ratioll/ Overvaluation of the official exchange rate is equivalent to imposing a tax on exporters in the amount of the difference between the swap market rate and the effective exchange rate received by exporters (see Annex 2.3 for analytical explanation). Figure 2.1 illustrates how wide the gap between the secondary and the official rates had become in the 1988 to 1989 period-in the fourth quarter of 1988, for example, the sewndary market rate was 79 percent above the official rate and the implied tax exports at the time was at a peak of 33 percent (Table 151 In response to a deteriorating trade balance, the authorities began tightening up administrative measures to regulate swap market activity in February 1993. In particular, attempts were made to enforce price ceilings by severely restricting access to swap markets. As a result, trade volumes in swap markets fel off and the black market became more effective. These price ceilings were, however, removed on June 1, 1993. 16/ The effective exchange rate facing an exporter is determined by a weighted average of the official and swap rate as faolws: r'eswap + (1-r)*eoff, where br? is the retention ratio, geswap" the swap center rate and eoff the official exchange rate. If the marginal retention is higher-as was the case for many exporters-then the marginal exchange rate facing the exporter is correspondingly higher. Prior to 1991, FTCs and direct exporters of most products had to surrender more than 75 percent of their foreign exchange eanings, all valued at the official exchange rate, to the central government and provincial authorities. Since 1991, not only are these same exporters able to retain a higher share of foreign exchange, but they also get compensated at the higher FEAC rate for a good part of the foreign excanmge that they are required to surreader to the central government. In effect, 80 percent of the export earnings of local enterprises is now valued at the FEAC market rate, even though a substantial portion of these (30 percentage points) is surrendered to the central goverment and does not explicitly go through the secondary market. See Annex 2.3 for details. - 35 - Table 2.3: EXCHANGE RATE AND TRADE TAX RELATIONSIDPS UNDER CIlNA's EXCIHNGE RATE SYSTEM Official Secondary Implied Weighted Year- exchange market export exchange rate quarter rate rate tax for exports (Yuanl$) (Yuanl$) (%) (Yuan/$) 1987-I 3.72 5.25 20 4.39 1987-II 3.72 5.3 20 4.42 1987-UIl 3.72 5.46 22 4.49 1987-IV 3.72 5.61 23 4.55 1988-I 3.72 5.7 24 4.59 1988-11 3.72 6.3 30 4.86 1988-111 3.72 6.6 32 4.99 1988-IV 3.72 6.65 33 5.01 1989-I 3.72 6.65 33 5.01 1989-II 3.72 6.6 32 4.99 1989-Er 3.72 6.55 32 4.97 1989-IV 3.89 5.9 24 4.77 1990-I 4.72 5.91 13 5.24 1990-11 4.72 5.81 12 5.20 1990-r 4.72 5.8 12 5.20 1990-IV 4.97 5.7 8 5.29 1991-I 5.22 5.8 2 5.68 1991-11 5.31 5.84 2 5.73 1991-i 5.36 5.87 2 5.77 1991-IV 5.39 5.87 2 5.77 1992-I 5.46 5.95 2 5.85 1992-II 5.50 6.25 2 6.10 1992-E 5.50 7.0 4 6.70 1992-NV 5.66 7.11 4 6.82 Source: IMF and Staff estimates. 2.3). During the same period the real effective (official and swap) exchange rates also saw a significant appreciation (see Figure 2.2). Under these difficult circumstances, the foreign exchange retention system appears to have provided critical relief to exporters. Figure 2.3 suggests that the effective exchange rate to exporters successfully insulated export performance from the overvaluation of the official exchange .Lte. Indeed, exports have followed very closely the trend in the weighted average exchange rate since 1987. Thus, access of exporters to a more depreciated swap market rate has helped preserve the profitability of exporting. Moreover, it is probable that the availability of foreign exchange has also been enhanced from a reduction in the incidence of hoarding as exporters have been more willing to sell their retention quotas and foreign exchange at the more depreciated swap rate. -36- Figure 2.1: TREND IN TIIE OFFICIAL AND SwAP MARKET EXCHuNGE RATES Nominal exchange rates (yuan/$) 10 10 6 ----------------- ----6l 6 __________ x x X X XX 85 I86 I87 I88 1 89 1 90 1 91 1 92 03 Quarter/Year *XOfficial Rate +Official swap -11Wtd. Rate for Export Source: IMF The series of devaluations of the official exchange rate starting in 1989 had a significant impact in reducing the burden on exporters of the overvaluation of the currency. The implied export tax due was brought down to 8 percent by the final quarter of 1990. However, the impact on exports of official devaluations was attenuated by the accompanying appreciation of the secondary market rate. The gap between the official and secondary rates narrowed as much due to the depreciation of the former as to the appreciation of the latter. An inevitable consequence of having introduced the retention scheme for exporters has been to reduce the responsiveness of exports to the official exchange rate. 71 ]Impact on ImnpGrts. Unlike exports, imports can be divided into three categories. First there are the imports that qualify for the official exchange rate. These consist mainly of mandatory imports and imports for key investment project and their volume is determined to a large extent by administrative means and they are not responsive to changes in the swap market rate. Second, there are the central government imports that are financed from the 30 percentage points of retained foreign exchange that are bought back by the central government from local enterprises. These imports, although priced at the swap market rate, are not financed 17( In dhe extreme case of 100 percent retention, devaluation of the official rate would have no impact on exports (See Annex 2.3 . - 37 - Figure 2.2: TRENDS IN REAL EFFEaIvE OFCIAL AND SWAP MAr RATES REER (yuan/$) Index 1980 = 100 500 - 500 400----- -- ------------ ___ 400 300… -------------- - -300 200- ___-___________--200 100…-- - - - - - - - - - -- - - - - - - - - - -100 0 - 1 I I I I I I i I I . I I I I I . I I . . I . I .- .1- . .. I _ 123412341234123412341234123412341 85 1 86 1 87 1 88 1 89 1 90 1 91 1 92 $3 Quarter/Year '-reer yuan/$ *reer swap yuan/$ Source: IMF through it, and are unlikely to be responsive to relative prices, because they are driven primarily by plan targets and administrative requirements. Finally, there are the nonplan, nonpriority project imports that are fnanced through the swap market. These are all valued at the secondary market rate, and are the most responsive to changes in the relative price of foreign exchange. It is estimated that such imports accounted for 50 percent of total imports in 1991.18/ Under this situation, the more depreciated swap market rate has, by increasing their price, helped to curtail the demand for at least 50 percent of total imports, Le., the imports purchased through the swap market. Without the FEACs, the demand for such imports would have been much stronger, while the availability of foreign exchange would have been less. For the remaining imports, the requirements of the investment plan are still the primary driving force determining demand. Pricing at least a part of central government imports at the swap rate is a step in the right direction, but as long as there is no discipline imposed on the government's 18/ Estimated as a residual on the basis that (a) about 20 percent of imports are subject to the mndatory plan; and (b) the percetage of imports comprising inputs for priorty projects is 30 percent, i.e, has remained roughly the same as in 1986 and is financed in part from the 30 percentage points of foreign exchange rained by enterprises (equivalent to roughly 35 peent of imports) that is bought back by the cental governent at the swap rate, and in part from the government's holding of foreign exchange from the sale of invisibles and from foreign loan proceeds, each valued at the official exchange rate. - 38 - Figure 2.3: TiE WEIGHrED AvERAGE EXCIANGE RATW AND ExPoRrs Wtd. Average Rate (Yuan/$) Exports ($billions) (Thousands) 7 25 5__-- A-z …1~~~~~~~~~~~0 3 ___ ----- -X---------- --:1 2 - - -------x- 5 0 1 I I I - I 1 I I I I I I I .- I I I I I .t I I I I I I l l 123412341234123412341234123412 85 I 86 1 87 I 88 1 89 1 90 1 91 1921 Quarter/Year 4\Wtd. Rate for Export *Exports Source: IMF, BESD own import requirements, the secondary market will have only a limited effect on import demand. Overvaluation of the official exchange rate has had the impact of favoring planned versus above-plan imports by making the former relatively cheaper. This has only accentuated the problem of insufficient discipline on administratively driven import demand. Moreover, the presence of the FEACs has made the implications for overall import demand of a depreciation of the official rate more ambiguous. Depreciation of the official rate has, as noted earlier, been accompanied by an appreciation of the swap rate. The latter has lowered the price of imports purchased in the FEACs and has thereby increased the demand for nonplan imports, and although the former has raised the cost of planned imports, it is unlikely to have lowered demand. Under the circumstances, it has been difficult for the central government to resist turning to administrative controls as a means of managing import demand, an unsatisfactory outcome from the point of view of the import regime (Chapter 3). Impact of Reforms in Trade Planning The effectiveness of the exchange rate in influencing the trade balance is dependent on its ability to affect the domestic price of export and import products. The link between international and domestic prices of imported goods has become stronger over the years - 39 - because of the declining share of mandaLory and priority imports and the increasing share of imports conducted through the agency system. Unlike imports, the agency system has not taken hold as strongly in the export sector and the link between domestic and international prices is still intermediated by the FTCs. Jn principle, there could still be a strong linkage between international and domestic prices if FTCs are competitive and profit maximizing agents who are responsible for their own profits and losses. However, until the trade reform in 1991, FTCs were able to receive subsidies from the state to cover losses sustained on certain exports. As a result, many FTCs were relatively insensitive to the relation between the export price and the price at which they purchased those products from domestic producers. In 1991, export subsidies were abolished and FTCs were made responsible for thL!r profits and losses; as a result, it appears that there is increased competition among FTCs, particularly at the local and provincial level. They no longer have fixed relations with an unchanging group of production enterprises. Many of them buy a significant share (up to 30 percent) of the goods they sell on international markets from producers located outside the province in which they primarily operate. All this has meant that the links between international and domestic price of export products have become stronger as FTCs have become pressured into offering better prices to export suppliers.121 D. REMAING PROBLEMS AND RECOMMENDATIONS FOR FruT REFORM As much as the reforms initiated in 1988 and 1991 have improved China's trade and exchange planning system, they have fallen short in certain critical respects. Certainly, reforms can and should go further. More importantly, however, is the fact that the latest round of reforms has created special problems of transition of its own. These need to be addressed immediately. Export Planning and the Foreign Trade Contract While it may be true that mandatory export planning no longer exists, it must be recognized that such planning has essentially been replaced by the foreign trade contract system, which has the effect of holding local authorities and FTCs to what are in effect mandatory export targets. Foreign trade contracts, although supposedly fixed on a "bottom-up" basis, take on a compulsory quality for several reasons. First, the State Council document spelling out the provisions of the 1988 foreign trade reform states categorically that the value targets negotiated in the contract for exports and the amount of foreign exchange to be remanded to the center are mandatory.20/ There has been no official pronouncement to the contrary and provincial officials responsible for trade still clearly see targets in the post-1991 reform contracts as mandatory. Second, fulfillment of the targets in the contract is a precondition for awarding bonuses to officials responsible for carrying out the export plan. Each province's contractually determined targets are in turn disaggregated and assigned to various provincial trading companies. These targets too are treated as mandatory and the personnel of these firms are not eligible for wage 19/ In some cases, however, E1TCs are sfill able to command monopsony power (see Chapter 6). 20/ Until 1991, the amount of losses on export transactions that would be covered by a cenral government subsidy was also fixed in the contract. - 40 - bonuses unless all export targets have been fulfilled. Third, rebates for domestic taxes levied on export goods, introduced in 1990 as an automatic benefit for exporters, have now been linked to fulfilling targets for exports and the delivery of foreign exchange to the central authorities. The compulsory nature of these export value targets is of itself not so problematic. The problem arises because these targets have to be met by FTCs that are not entirely free to chose what goods they can export, and are no longer eligible for subsidies to cover their loss making exports. As a result, FTCs cannot pay sufficient attention to profitability and at the same time meet their obligations under the foreign exchange contract. Some evidence suggests that the incidence of bad bank loans to FTCs may have gone up sharply since the contract responsibility system was introduced and subsidy payments began to be phased out in 1988 (Table 6.1). If no changes are made to the rules by which FTCs operate, their losses are likely to build up and infect the portfolio of the banks, much like those of state-owned enterprises, many of which appear to survive because of the soft-budget constraint that recourse to the banking sector provides them. Under present circumstances, FTCs cannot be expected to take full responsibility for their own profits and losses. The elimination of direct subsidies seems merely to have transferred the burden of supporting FTCs from the government budget to the banking sector. In order to address this problem, the authorities need to take the reforms of the export planning system to their logical conclusion at the soonest possible. The trade contract responsibility system should bc abolished and FTCs should be allowed to work towards maximizing profits rather than foreign exchange earnings. Linking FTC bonuses to profits instead of foreign exchange targets would motivate FTCs to market only profitable exports, thereby generating export earnings for the country without concomitant domestic currency losses. Such measures, however, will not be effective without further institutional reform of the FTCs themselves. FICs need to become truly independent profit centers. In effect, they need to be granted greater management autonomy along lines similar to the July 1992 "Regulations for Transforming the Operating Mechanism of State-Owned Enterprises.21/" In particular, they must as a first step be given the freedom to choose the products they deal with. Imnport Planning 22/ Although the size of the mandatory import plan has shrunk, administrative control over imports has not declined to a significant degree. A large proportion of nonmandatory plan imports continues to be subject to control through tight control of foreign exchange allocations. All imports of inputs for priority projects come under this category. These still account for an estimated 30 percent of imports over and above those under the 211 These regulations are intended to protect, through law, the autonomous rights of SOEs in 14 key areas. These managernt rights are: (a) production management and decision-making powers, (b) the right to decide prices, (c) the right to sell products, (d) the right to purchase rods and materials, (e) import and export rights, (t) the right to make investment decisions, (gj tae right to determine application of reserve fands, (h) the right to dispose of assets, (i) the right to operat joint ventures or undertake mergers, a) the right to hire workers, (k) the right to determine personnel management, (I) the right to determine distribution of wages and bonuses, (m) the right to decide the organization of internal units, and (n) the right to refuse proration (demand for resources from government departments). 22/ The question of import licensing is tackled in Chapters 3, 4 and 5. - 41 - mandatory import plan. In addition, the imports that are procured on an agency basis and financed with foreign exchange bought in the FEACs, are controlled through the screening of access of purchasers to the FEACs and through the widespread use of discretionary import controls such as licenses. The use of their right to buy back an additional 30 percentage points of retained foreign exchange from local enterprises in order to finance part of the import requirements for priority projects represents one of the several cases of 'double planning' by the central government and is not necessary. Funding for key projects and for their associated imports is already allocated as part of the governnent's investment program and the state industrial policy. It is, therefore, inappropriate to go one step further and also administratively assign foreign exchange for the purpose of procuring these irmports by having local enterprises surrender to the central government an additional 30 percent of their retained foreign exchange at the swap rate. This results in needless distortion of the foreign exchange allocation system in the country. It would be more logical for the concerned state-owned enterprises (SOEs) and government agencies to simply purchase the needed foreign exchange in the FEACs (directly, or through FTCs). Not only would this be less distortionary, but it would significantly increase the volume of transactions handled through the FEACs, and help reduce the risk of volatility that is often associated with thin markets. Over time, as mandatory imports are phased out, all administrative allocation of foreign exchange should be eliminated. Exchange Rate Issues The reforms introduced in 1991, which dramatically increased the share of fbreign exchange transactions occurring at the market price, are clearly a step in the right direction. However, significant problems remain. The present system of retention quotas has several defects. First, the quotas are in effect monopolized by FTCs, with most loeal manufacturing enterprises being left with little or none of the foreign exchange they help generate (ICable 2.2). To the extent that there is still insufficient competition between them, FTCs have been able to appropriate a disproportionate share of the benefits from exports, and have not fully passed these on to the manufacturing enterprises. Second, since FTCs themselves do not have any direct import requirements, they have tended to hold onto retention quotas for speculative purposes. Hcarding of foreign exchange by FTCs has been facilitated by the fact that retention quotas held by exporters have no expiration date. The very rapid rise in the swap rate in early 1992 and again in 1993, was probably fueled in part by an artificial shortage of foreign exchange caused by potential sellers, especially FrCs, withholding their quotas in the expectation of further depreciation of the swap rate. 'Third, and most importantly, the rresent system of trading predominantly in retention quotas instead of cash has meant that the People's Bank of China (PBC) has not been able to intervene in the foreign exchange market in order to stabilize a sometimes volatile rate. Moving to a system of cash retention would provide the authorities with an effective instrument for exchange rate stabilization. As a transitional arrangement FEACs have served the economy well because they have provided flexibility to an otherwise rigid exchange and trade system. However, the FEACs have also resulted in a dual exchange rate system. Although only 20 percent of all foreign - 42 - exchange earnings are now handed over to the central government at the official exchange rate, the coverage of transactions at the official exchange rate is considerably wider, and includes debt service payments and all the central government imports that are financed from foreign loan proceeds, the draw down of reserves, or foreign exchange earnings from the exports of invisibles. The ebonomic significance of the dual exchange rate was perhaps marginal in most of 1991, when the differential between the two rates was well under ten percent on average. But as the gap between the two rates widened in 1992, and again in the first quarter of 1993, the distorting effect of the dual exchange rate has become more apparent again. By midyear 1992 the average rate of Y 6.3 per dollar meant a iS percent premium over the official rate and in some regional markets the price had reached Y 6.8 per dollar, implying a premium of one quarter. Rates of over Y 8.5 were reported by end-March 1993. While the resulting implicit tax on exports is still low at about 7 percent, the widening gap has more important consequences for distortions on the import side for it accentuates the bias in favor of planned imports. Although there has been an increase in the volume o"f transactions between different FEACs, intermarket differentials in swap market rates remain. In March 1993, for example, swap market rates across the country ranged from between Y 8.0 to Y 8.5 to the dollar. This suggests that significant administrative barriers remain to interprovincial transactions in the market for foreign exchange. In fact, as pressure on foreign exchange resources mounted in the first quarter of this year, local authorities became clearly more parochial, restricting access to the foreign exchange resources generated within their respective jurisdictions. This has proven to be a setback for the central government's efforts to create a nationwide unified market for foreign exchange, for it has the effect of selectively suppressing demand for foreign exchange and impeding the allocation of excess funds to where they may be needed most. It is the stated objective of the authorities to unify the official and swap market exchange rates and eventually to make the renminbi a convertible currency. To achieve this, it would be necessary for the exchange rate to be set at a realistic level determined by supply and demand. The FEACs have contributed towards the realization of this objective by providing a market mechanism for determining the exchange rate and for allocating foreign exchange for a significant segment of the foreign exchange market. It would be desirable to widen the scope of this market as widely and as quicldy as possible so that it covers virtually all current account transactions in the economy and becomes the equilibrium market excrhange rate. To meet this objective, the authorities are encouraged to adopt the following measures: (a) Effective immediately, all retention quotas should have an expiration date (say three months from the date they are created), with the possibility of an extension for certain valid reasons. This would reduce the incidence of hoarding of retention quotas for speculative purposes. (b) The system of retention quotas should itself be abolished as soon as possible and replaced with a system of cash retention that would allow enterprises to retain their foreign exchange earnings in resident bank accounts. This would provide - 43 - an important boost to exporters and foreign investors, while taking the foreign exchange regime a step closer to current account convertability. In addition, such a measure would enable the monetary authorities to intervene, should the need arise, in swap markets to maintain an orderly and stahle market for foreign exchange. (c) Access to FEACs should be liberalized by eliminating all restrictions on entry to the swap centers.23/ In parallel, an integrated national swap market should be developed by abolishing all local restrictions on trading across different FEACs, i.e., enterprises should be able to trade in any FEAC without seeking prior permission from local SAEC authorities.241 (d) The role of FEACs in the allocation of foreign exchange should be expanded by channeling an increasing proportion of all current account transactions through the swap markets, including nontrade transactions such as travel and other services and transactions relating to the foreign exchange requirements of the central government. This would involve the elimination of the existing requirement for exporters to provide 20 percent of their foreign exchange to the state at the official rate. Exporters should be allowed to receive retention quotas for 100 percent of their foreign exchange earnings,251 and the authorities should purchase all their current account foreign exchange needs through the swap market, whether it is for imports of goods related to the mandatory plan or for priority state projects. This will eliminate a source of price distortion in the existing system and ensure that the domestic cost of foreign exchange is more accurately reflected in the costing of projects and the attendant decision to borrow abroad to finance some projects. In this regard, there is no reason why the central government's noncurrent transactions should continue to be priced at the official rate. The application of the swap market rate could be extended to these. (e) Administrative allocation of foreign exchange for priority investment projects through the foreign exchange plan should be eliminated and that for mandatory imports should be phased out. Only when SOEs and local authorities are faced with the prospect of accessing the swap market whenever they need foreign exchange will the overall demand for imports become more responsive to relative prices than to the administrative requirements of the plan. Such measures would enhance the role of market forces in the allocation of foreign exchange which would lead to more efficient use of foreign exchange. 23/ It appears that, effective June 1, 1993, the authorities relaxed restrictions imposed earlier during the year. 241 One way to achieve this would be, as suggested by the Chinese authorities, to set up an electronic trading system linking all the FEACs. 25/ The authorities can stiU maintain a 100 percent surrender requirement of export eamings at an official rate. However, the official rate will become of little relevance from an economic sLtndpoint, since virtually all tansactions will be taking place at the swap rate. -44 - Full implementation of the above measures would be tantamount to achieving unification of the exchange rates and convertability of the renminbi for current account transactions. Such limited convertability would strengthen the links between the monetary and the external sector and put a greater burden on monetary policy to play an effective role in influencing the balance of payments outcome. Finally, as concerns the question of moving towards full convertability on the capital account, the experience of other countries suggests that a measured pace is advisable. Generalized opening of the capital account often leads to exchange rate instability. Without very effective sterilization it could undermine efforts to keep inflation under control at a time when the government is moving towards freeing up the current account. As such, the prudent course of action would be to leave liberalization of the capital account till after important remaining structural reforms, such as those relating to the import regime (Chapter 5), have been implemented.2fi 261 What this implies is that although the system of cash retention could be generalized to all foreign excbange earuings, restrictions on where this cash can be held would need to remain in place. - 45 - Endnotes 1. World Bank (1987a). 2. These losses arose from domestic price distortions, not a disequilibrium exchange rate. Thus, a devaluation would not have necessarily led to a reduction of domestic currency losses on trade transactions. Given the traditional procedures used to price traded goods on the domestic market, currency devaluation would have reduced losses traders incurred on exports, but increased those incurred on import transactions. Partially offsetting these losses were profits that FTCs incurred when they were able to purchase certain goods, such as crude oil, that were underpriced on the domestic market for resale on the international market. Similarly, they could earn domestic currency profits from the sale of imported goods when the domestic price level for the goods was set relatively high. 3. World Bank (1990b). 4. Lardy (1992). 5. Domestic farmgate prices of food grains and edible vegetable oilseeds were raised significantly after 1978. But the retail prices of wheat flour, rice, and edible vegetable oils sold to the urban population through the rationing system remained fixed at close to the prices the state had set in the mid-1950s. Inevitably financial losses on these transactions rose steadily. The state incurred losses as well on the grain it imported for resale to the urban population since the price of grain products sold through the rationing system was identical regardless of whether the product originated domestically or was imported. 6. GATI (1991), p. 14. 7. However, the coverage of Category I and II imports was considerably larger. Category I and II imports accounted for 32 percent of total imports and so included a good proportion of imports not subject to mandatory planning. (See Chapter 3). 8. The foreign exchange retention quotas are noninterest bearing quota accounts held at the SAEC or its local offices. A retention quota constitutes a right to purchase foreign exchange in the fulture for renminbi at the prevailing official exchange rate They determine the arnount of foreign exchange each enterprise is entitled to obtain from the state at the official rate and are denominated in US dollars. Retention quotas are transferable among finns. 9. Exporters in the light industry, arts and crafts and garments sectors were allowed to retain a relatively high 70 percent of their foreign exchange earnings; only 30 percent was remitted to the central government. Because retained foreign exchange could be sold in the secondary or so-called swap market where the exchange rate in 1988 was at a two-thirds premium over the official rate, the favorable retention rate boosted domestic currency earnings from exporting. Foreign exchange retention in the machinery and electronic equipment sectors was more complex, reflecting both the heavy reliance of these sectors on imported components and parts and an explicit state policy of promoting exports of machinery and electronic equipment. Exporters of these goods were allowed - 46 - to retain the first 30 percent of their foreign exchange earnings to cover these imports. Then the remaining 70 percent was divided with half going to the central government and the other half to be retained and divided among the producing enterprise, the local government and the departnent responsible for supervising the enterprise. However, certain electronics and vehicle enterprise groups (not specifically identified) were allowed to retain all of the foreign exchange they earned in exporting. The state also allowed exporters of military products to retain 100 percent of their foreign exchange earnings. 10. In practice the arrangements appear to have been varied and complex with FTCs frequently agreeing to pay producers somewhat higher domestic currency prices than they otherwise would, but then retaining most or even all of the foreign exchange. 11. Some modifications were made in 1992. On the one hand, access to FEACS was liberalized somewhat, with Chinese enterprises and other organizations being allowed to purchase foreign exchange to finance trips abroad to attend exhibitions or carry out inspections. Authorized banks and nonbank financial institutions can also now purchase foreign exchange for use as working capital and management funds. On the other hand, strict controls were placed on the purchase of foreign exchange to import cotton and wool textiles, ethylene, polyester, sodium carbonate, sodium hydroxide, penicillin, vans, small trucks, photocopy machines, calculators, color television monitors and receivers, video cameras, microwave ovens, meridian tires, compact discs, compact disc players, video disc players and video discs. - 47 - m. CHINA'S SYSTEM OF FOREIGN TRADE CONIROLS: A QUANTITATIVE EVALUATION The institutional features of China's trade regime are relatively well understood by now.' This chapter attempts to provide a detailed quantitative analysis of China's system of foreign trade controls, covering not only the tariff regime, but also the complex system of nontariff barriers to imports, and export taxes and controls. A. OB1ECrI AND INSTRUMES OF CNA'S SYSrEM OF FOREIGN TRADE CoNTRoLs Prior to 1978, China's trade system was highly centralized and its objective were pursued in a relatively nontransparent way through the decisions of planning and trade officials. The process of reform has involved the gradual development of instruments for indirect control and has resulted in a progressive restructLring of China's foreign trade system into one whose basic operation is more comparable to the foreign trade systems of developing market economies. The desirable characteristics of any foreign trade regime depends heavily upon the objectives for which it is intended. China's system of foreign trade controls appear to have the following objectives: (a) stimulating national economic development and the growth of exports; (b) stimulating the upgrading of technology and the development of new industries through price incentives and foreign investment; (c) maintaining and developing particular industrial sectors which may not otherwise exist at China's current stage of development; (d) redistributing incomes by insulating the prices of goods "necessary for the peoples' livelihood" from world market prices; (e) improving China's terms of trade by restricting the export of particular goods; and (t) implementing international agreemeus such as the Multifiber Arrangement. Some of these objectives are a legacy of the prerefonn foreign trade regime. However, as China's open-door policy has progressed, the objectives of trade policy have evolved from a focus on self sufficiency to one which reflects a greater appreciation of the role of trade in the process of growth and development. -48 - Interestingly, despite the continuing pressures on the state budget, the role of the trade regime as a source of government revenues does not appear to be widely viewed within China as an important policy objective for the trade regime. Compared to most other developing countries, the contribution of tariffs to total central government revenues is small (ess than 5 percent). Another significant omission from the stated objectives of trade policy is its potential use for domestic stabilization, although as in 1988/89, for example, it has sometimes been used for this purpose. The policy instruments used to pursue China's policy objectives include the following: (a) import tariffs and export duties; (b) the foreign exchange regime; (c) the import plan and foreign exchange contracting; and (d) licensing, quotas, import/export canalization, and other quantitative controls on imports and exports. Although there are four instruments, they cannot be used to achieve all the various objectives of China's trade regime simultaneously because, to a large degree, they each affect trade flows in the same way, i.e., by changing the domestic price of traded goods. In this situation, oDnflicts and overlap are inevitable. One example of conflict arising from the use of the existing set of instruments is the use of an import duty to raise the price of luxury" consumer goods. While this discourages the consumption of luxury goods, it also stimulates the development of assembly industries which are high cost and import intensive, drawing resources away from competitive export industries and from the development of efficient, high technology production. In contrast, maintaining low prices for essential consumer goods through import subsidies or an overvalued exchange rate may inhibit the growth and upgrading of efficient local industries. A challenge of reform will be to rationalize and reorient the objectives of the trade regime, with some of the objectives being reassigned to other, more appropriate, policy instrumnts. For example, redistributing incomes is not an appropriate objective for the trade regime. Instead, trade policy will need to be used more effectively as an instrument for enhancing domestic efficiency. B. TARFS Tariff Structure The broad structure of the present tariff system is similar to what it was in 1987. Based on the 1992 Harmonized System tariff schedule, the average unweighted tariff rate was 43 percent, up 5 percent from the corresponding average reported in 1986 and 4 percent above the UNCTAD estimate of the unweighted average tariff rate in 1987. / When weighted by the value of trade in each category (at world prices), the average tariff rate was 32 percent, approximately three percent above the 1987 UNCTAD estimate of 29 percent. The current tariff I/ Woodd Bank, 1988, p. 149, and UNCTAD, 1987, p. 77. - 49 - structure would be higher than computed if not for (a) the sizeable reductions in tariff levels on 225 tariff lines implemented on January 1, 1992,21 and (b) the abolition, effective March 1992, of the Import Regulatory Duty. The latter, an import surcharge of between 20 and 80 percent, was introduced on fourteen product groups, including a range of textile products and elaborately transformed manufactures.? Until these measures were announced, the trend in the tariff schedule between 1986 and 1991 was clearly to increase the average rate of protection. However, taking account of these recent reductions, the weighted average tariff in 1992 was back to the same level as the 1987 tariff inclusive of the then still applicable Import Regulatory Duty.3/ An indication of the structure of the tariff system is provided by the average rates of tariff protection presented by Harmonized System (HS) section and chapter in Tables 3.1 and 3.2, respectively. For comparison purposes, both the trade-weighted and the unweighted averages are presented. Table 3.1 indicates that the trade weighted average tariff rate is in general lower than the unweighted average. This may reflect in part the substitution effect of higher tariffs on the composition of imports: higher tariffs on individual commodities reduce the demand for those goods and hence their trade share. Another possible cause of this difference might be the presence of "water in the tarif; of situations where high tariff rates are applied on categories where there is no, or very little, trade. A look at the tariff structure at a more disaggregated level (Fable 3.2) suggests that the latter may be the relevant explanation in the case of products categories such as food preparations, perfume and cleaning products, leather products and wood manufactures, the import shares of which are small or negligible. On the other band, the former explanation seems the valid one for products with sizable import shares, such as office machinery, telecommunications equipment and electrical machinery In order to examine the structure of protection implied by the tariff schedules it is useful to make the data on tariff rates comparable to production and trade data. Figures 3.1 to 3.3 plot China's trade weighted average tariffs by 2 digit SITC (Revision 2) categories, the share of each category in the 1990 gross value of the industrial output (GVIO) of all Chinese enterprises with independent accounting,4/ and its share in China's merchandise imports in 1990. First, within the broad category of food, beverages and tobacco products (Figure 3.1), the tariff escalates as the products become less essential and so represents a consumer focus. Essential foodstuffs (basically cereals and animal feedstuff, both still subject to mandatory planning) have the lowest tariff rates (under 10 percent). A cluster of nonessential foodstuffs, including dairy products, fish preparations, meat products, vegetables and fruit, coffee and tea, are subject to tariffs in the range of 20 to 50 percent. Finally, products considered least essential are subject to high tariffs, reaching punitive levels of over 140 percent in the case of tobacco products. Of 2J GAIT, 1992. These items account for 4.4 percent of China's total import tariff lines. 3J With this surcharge included in addition to scheduled tariffs, the UNCrAD weighted average of total import charges in l987 was 32 percent. the same as the present estimate for the 1992 tariff schedule. Since March 1992, fiurther tariff cuts have been undertalcen. In December 1992, tariffs on 3,371 tariff lines (mostly agriculual commodities and raw materials), bringing the avenage unweighted tariff down by 7 percent (see Chapter 5). 41 These enterprises account for about 80 percent of china's total GVIO in 1990 (see Table A3.3). - so - Table 3.1: AvERAGE TARIFF LEVELS BY BROAD HS CATEGORY (Percent) China's tariff regime by HS section Commodity HS Unweighted Trade section average weighted tariff rates average tariff rates Live animals and products 1 40 33 Vegetable products 2 44 24 Animal or vegetable fats & oils 3 36 28 Prepared foods 4 66 47 Mineral products 5 21 11 Chemicals 6 27 15 Plastics 7 36 32 Hides and leather 8 58 29 Wood and products 9 28 19 Pulp and paper 10 28 22 Textiles and textile products 11 73 61 Footwear 12 86 78 Articles of stone 13 47 33 Jewelry 14 - - Base metals 15 28 20 Machinery and electrical 16 32 28 Transport and motor vehicles 17 43 57 Precision instruments 18 38 36 Arms and ammunition 19 60 60 Miscellaneous and manufactures 20 67 74 Art and antiques 21 30 2 Total 42.8 31. Source: Customs Directorate and staff estimates. The weighted average tariff rates have been computed using tariff data provided by the Customs Directorate, aggregated up to the six-digit Harmonized System level, and weighted by corresponding import data for the first quarter of 1992, also provided by the Customs Directorate. all fbod products, the only one that represents a substantial share of imports is cereals (4.8 percent) and this product group is also a significant contributor to domestic GVIO (2.8 percent). Of the others, the very high tariffs on beverages and tobacco, though apparently - 51 - Table 3.2: AVEACE T&mw LEvEI By IIS SEnoN (percent) Description HS section Weighted Unweighted Live animals 01 0.0 0.0 Meat and edible meat 0_ 50.2 51.3 Fish and crustaccan, molluse and other invcrtcbrate 03 30.9 33.6 Dairy products, cggs, honey 04 32.7 57.0 Products of animal origin 05 31.0 32.7 Livc trce and othcr plant 06 58.1 52.4 Ediblc vcgetables, roots and tubers 07 28.7 45.5 Edible fruits and nuts 08 44.4 56.3 Coffec, tca, mat 09 50.5 46.1 Cereals 10 3.0 3.0 Prod. mill indust; malt; starches; insulin; wheat gluten 11 41.1 33.2 Oil seed, oleaginous fruits; miscell. gmin, seed, ect. 12 33.9 33.6 Latex; gums, resins & other vegetable saps & cxtracts 13 30.1 41.2 Vegetable plaiting materials 14 25.2 38.2 Animal/veg. fats & oils & their clcavage products, etc. 15 27.8 35.7 Prep. of meat, fish or crustaccans. molluscs, ctc. 16 70.0 70.0 Sugar and sugar confectionery 17 39.9 51.6 Cocoa and cocoa preparations 18 38.9 35.6 Prep. of cereal, flour, starch/milk products 19 60.0 60.0 Prep. of vegetables, fruits, nuts or other paits of plants 20 60.9 60.8 Misccllaneous edible prepartions 21 77.9 72.1 Beverages, spirits and vincgar 22 88.2 118.0 Rcsidues and waste from food industry 23 6.8 22.1 Tobacco and manufaetured tobacco substitutes 24 143.4 116.7 Salt; sulphur, earth & stone; plastering mat; lime 25 21.8 29.2 Ores, slag and ash 26 0.9 8.4 Mineral fuels, oils and products of their distillation 27 13.2 21.1 bnorg. chcm., compds of prec. meL, radioact. elements 28 18.4 18.9 Pharmaceutical products 29 41.9 23.5 Fertilizers 31 5.0 5.4 Tanning/dyeing extracts; tannins & dcrivs; pigm., etc. 32 31.2 31.8 Essential oils and resinoids 33 98.7 96.6 Soap, organic surface-active agents, washing prep. etc. 34 35.3 49.6 Albuminnoidal substances; modified starches; glues 35 64.8 39.8 Explosivcs, pyrotwehnic products; matches; pyrop. alloy 36 55.5 65.7 Photographic or cinematographic goods 37 53.2 41.1 Miscellaneous chcmical products 38 27.5 25.9 Plastie and articles therof 39 32.8 37.7 Rubber and articls thereof 40 28.4 32.0 Raw hides and skins 41 24.1 26.5 Articles of leather 42 78.2 76.4 Fur skins and artificial fur 43 95.6 82.3 Wood and articles of wood 44 18.4 23.0 Cork and artickls of cork 45 26.8 23.0 Manufactures of straw 46 74.2 74.0 Pulp of wood/of other fibrous cellulosic materiaI; waste, etc. 47 2.0 2.0 Paper and paperboard; art of paper pulp, etc. 48 34.3 36.7 Printed books. newspaper 49 14.6 18.8 ...continued - 52 - Table 3.2: (cont'd) Dcscription HS section Wcighted Unwcighted Silk 50 59.0 61.4 Wnoofinc coarsc animal hair 51 24.2 57.0 Cotton 52 48.0 45.9 Other vegetable textile fbers; paper yarn & woven fib. 53 48.1 32.5 Man-made filaments 54 78.5 74.4 Man-made staple fibers 55 62.2 82.0 Wadding, felt and nonwoven; yarns, twine, cordage, etc. 56 61.1 64.1 Carpcts and other textile floor coverings 57 85.7 93.3 Special woven fabric; tufted tcxtilc. fab; lace; tapesbies 58 80.0 73.5 Impregnated, coated, cover/laminated textile fabric, ec. 59 49.7 49.2 Knitted or crocheted fabrics 60 50.0 50.0 Art. of apparel & clothing access, knittedtcrocheted 61 93.9 90.8 Art of apparel. & cloth. accessories, not knittedlcrocheted 62 81.0 85.8 Other made up textile articlcs; sets; worn clothing, etc. 63 79.5 79.8 Footwear, gaiters and the like 64 70.4 78.5 Hcadgear and parts thereof 65 82.8 88.9 Umbrellas, walldng-sticks, seat-sticks, whips, etc. 66 100.0 100.0 Prep. feathers & down; artif. flowcr, a.t human hair 67 98.4 97.1 Articles of stone, plaster, cemcnt, asbcstos, mica 68 45.5 42.4 Ceramic products 69 30.1 53.1 Glass and glassware 70 30.8 48.6 Natural/cultured pearls, precious stones & metals, coin, etc. 71 45.5 45.8 Iron and sted 72 13.9 14.5 Articles of iron and stecl 73 19.5 39.6 Copper and articles thereof 74 11.8 22.8 Nickel and articles thereof 75 12.2 11.3 Aluminum and articles thereof 76 25.7 28.8 Lead and articles thereof 78 23.1 24.0 Zinc and articles thereof 79 19.0 24.0 rm and articles thereof 80 36.6 26.9 Other base metals 81 16.3 19.4 Tool, implement, cutlery, spoon & fork, of base met., etc. 82 29.8 36.0 Miscellaneous articles of base metal 83 57.3 54A6 Nuclear rcactors, boilers, mchy. & mech. appliance; pants 84 25.5 27.4 Electrical machinery oquip. parts thereof; sound recorder 85 30.6 40.1 Railw/tramw locom. rolling-stock & parts thereof, etc. 86 9.9 9.9 Vehicles oft railwltramw. roll stock, pts. & accessories 87 77.8 59.4 Aircraft; spacoeaft and parts thereof 28 6.0 6.0 Ships, boats and floating structures 89 8.9 13.6 Optical, photo, cine, measurm., checldng, precision, etc. 90 26.1 28.0 Clocks and watches and parts thercof 91 57.6 62.6 Musical instruments; parts and access. of such articles 92 58.6 54.2 Arms and ammuniLion; parts and accessories thereof 93 60.0 60.0 Furniture, bedding, mattress, mat support, cushion, ctc. 94 63.4 71.5 Toys, games and sports requisites; parts and access. thereof 95 65.9 5' 0 Miscellancous manufactured articles 96 89.7 75.7 Works of art, collectors pieces and antiques 97 2.2 30.0 Source: Customs Dircctorate and staff estimates. -53 - Figure 3.1: TAmnr STRUCrURE-FOOD, BEVERAGE AND ToBAcco Percentage Percentage Share 160 5 140 - - - -- - - - - -- - - - -- --- -- - -- -- - - - -- - -- - -4 120 …------------ …--------- --3 60… ______- 2----t- - 40 20Ll ----- -l___--__- ___|. _ 20 1 2 3 4 5 6 7 8 9 11 12 SITC (Rev 2) Category OShare in Total GVIO *Weighted Tariff EShare in Imports Year: 1990-92 designed to penalize consumers, also provide very substantial protection for local production of these sectors which together account for a good 4.7 percent of GVIO. Raw materials (Figure 3.2), can be grouped into roughly two clusters. The first is comprised of materials that are subject to low tariffs (under 15 percent). All of these reflect plan priorities and are commodities whose domestic prices are kept artificially below international prices through export taxes and controls as in the case of coal, or through subsidies as in the case of importables such as metallic ores and wood pulp. For such products, the tariff level is clearly driven by the objectives of the plan, not the structure of incentives to domestic nonplan production. The second cluster is comprised of lower priority raw materials that are subject to rates of between 15 and 30 percent. Most of these are items such as edible oils that are not of the trade plan, but also include textile fibers (wool, cotton) and rubber, product groups that are still subject import planning. The rates on such raw materials are higher presumably to provide some protection to domestic production. This certainly appears to be the case for textile fibers that are subject to rates close to 30 percent and account for a nonnegligible share of GVI0. Tariffs on manufactures appear to be constructed in a way that ensures that finished goods are more protected than upstream inputs (Figure 3.3). Thus, intermediate and - 54 - Figure 3.2: TARIFF STRuCTuRE-RAw MATERIALS Percentage Percentage Share 70 20 60 _____________________________ -__ -------- 7q\ _ ~~~~1 5 50 -15------------------ 30 - ----------- 20 - -------- --- 5 10 - - - - ------ 0 0 21 22 23 24 25 26 27 28 29 32 33 34 41 42 43 67 68 SITC (Rev 2) Category MShare in Total GVIO *Weighted Tariff EShare in Imports Year: 1990-92 capitl goods, which represent the heart of China's industrial and import structures, are mostly subject to rates between 20 and 40 percent, rates that are 5 to 15 percent higher than on most critical raw materials (petroleum, nonferrous metals and metallic ores). Rates on chemicals, wood manufactures and specialized industrial machinery, including power generating equipment, are closer to 20 percent. Those on products such as rubber manufactures, plastics and specialized and electrical machinery and telecommunications equipment are closer to 40 percent, suggesting that the interests of domestic producers are quite important in these sectors. Two intermediate product groups, namely iron and steel and chemical fertilizers, stand out as exceptions because their tariff structures do reflect more the interests of consumers than producers. Low tariffs are applied on each of these (15 percent for iron and steel and 5 percent for chemical fertilizers). Both products have, however, been subject to mandatory planning in the past and local enterprises in each sector have no doubt benefitted from subsidies through the planning system. On the other hand, two intermediate/capital goods stand out for the importance that is attached to protection for domestic production. These are textile yarns and fabrics (SITC 65) and road vehicles (SlTC 78). Although these are both important inputs in to downstream manufacturing, they are subject to very high average tariffs of 66 and 79 percent, respectively. This is not altogether surprising given that these sectors together account for about 14 percent of GVIO. Textiles alone accounts for 11 percent of GVIO and is by far the single most important sector of Chinese industry. -55 - Figure 33: TARIFw STRUCUkF-MANUFACrURES Parcentag6i Percentage Share 100 12 8 80 0 ------------------ t----- ------- - - -- 1 6 40 ----…- _ _ _ 4 20 0 2 SITC Sector Share in GVIO XWeighted Tariff EShare in imports Year: 1990-92 Rates on finished consumer products 2re markedly higher than even the highest rates on intermediate goods, ranging mostly over 60 percent, with products such as fiurniture, clothing, travel goods and footwear being subject to average rates that exceed 80 percent. Although these high rates are no doubt aimed to discourage consumers of nonessential imports (an objective that is largely met as evidenced by the negligible iLiport shares of these products), they have the effect of providing margins of protection to domestic manufacturing activity that are disproportionately large in relation to the rather modest share of these sectors in GVIO.5/ How do China's tariff rates compare with other developing countries? Table 3.3 shows that average tariff rates in China are relatively high by international standards. Using trade weighted measure, China's 1992 average rate was equal to Brazil's,W and was third highest amongst large countries after India and Pakistan. In terms of the number of individual tariff rates, China has a larger number than any other developing county except India, and almost 1 The share of SlTC 82 to 85 in tDtal GVIO is less than 4 prcent, and the share of l consumer goods (S1TC 81 to 80+55) is 8 percent. 6/ Brazil has, however, recently embarked upon what is ilnteded to be a far-reaching program of trde libemalizaion - 56 - Table 3.3: TllE TARlFF VrFEMS OF CHINA AND OTnER LARGE DEVEL.OlING COUNTRIES Duty Trade collected Unweighted weighted No. of SW value of Country Year mean mean rates deviation imnports (%) (%) (%) (%) Argentina 1987 21.8 17.1 37 24.3 16.1 Brazil 1987 47.8 31.9 34 17.1 6.9 China 1992 42.8 31.9 69 30.0 5.6 Colombia 1990 26.4 15.1 26 20.3 16.7 Egypt 1991 31.0 na 16 31.0 17.0 Hungary 1989 15.1 na 78 13.7 9.6 India 1986 99.6 54.8 13 50.1 51.2 Kenya 1987 40.0 na 22 21.5 15.6 Pakistan 1990 64.8 35.9 15 41.4 30.8 Philippines - 27.9 na 8 15.1 15.6 Source: Pritchett and Sethi, World Bank, unpublished (1992). twice as many as the country with the next largest number, Argentina. In terms of the standard deviation measure of tariff rate dispersion, only India and Pakistan had a wider dispersion of tariff rates, with China having a much higher standard deviation than Brazil despite the latter's similar average tariff rates. The relatively higher tariff rates on manufactured consumer goods in China mirror similar tariff structures in other developing countries (Table 3.4). Tariff rates on manufactured intermediate and capital goods, while lower in China than in otherwise comparable Brazil, and much lower than in India and Pakistan, are still high compared to such countries as Argentina, Egypt and Hungary. Conclusions After seeing a substantial increase over the last few years, China's weighted average tariff in 1992 was back to its pre-1987 level. On average, however, China's tariffs remain higher, more numerous and more dispersed than most other large developing countries, except India and Pakistan. The multiplicity of objectives seems to account for the high dispersion of China's tariff structure. On the one hand, the desire to protect sectors in which domestic production is significant has meant that tariffs on capital goods and intermediates are on the high side. In some cases, such as road vehicles and textile yams, the rates are exceptionally high. Likewise, where the tariff is used to penalize nonessential consumption, as in the case of tobacco, beverages, and certain items of clotiing, for example, rates are very - 57 - Table 3A: TliE CoMMoDrI PArTERN OF TARiFF SYSTEMS IN CIIINA AND OTIIER LARGE DEVELOPING COUNTRIES (UNWEIGIllED AvERAGE TARIFF RATES) Manufacturing Country Agriculture Mining Consumer Intermediate Capital Argentina 20.9 27.2 13.3 20.7 23.8 Brazil 38.7 21.8 66.0 39.4 47.9 China 35.0 20.0 65 29.0 28.0 Colombia 19.7 14.1 39.7 22.2 20.8 Egypt 22.0 14.0 50.3 22.8 19.2 Hungary 11.7 5.4 16.8 9.3 20.7 India 76.6 84.2 101.8 111.0 83.2 Pakistan 62.7 35.5 88.5 57.0 44.0 Philippines 32.5 13.0 38.3 23.1 21.7 high. This has kept import penetration in these sectors very low and has had unintended effect of providing high margins of protection to local production. On the other hand, where the tariff has been used to complement the objectives of the plan tariffs have been very low and this has created an inherent bias against certain raw materials and intermediate inputs for which domestic prices have been kept artificially depressed. C. TAUREF REVENUES AND ExEMpTIONS A distinctive feature of China's tariff regime is its relatively minor contribution to revenue generation. Compared to most other developing countries, China's import duties account for a very small proportion of total central government revenues. In this respect, China is more like a developed country than a developing country. In 1991, China collected only 5.6 percent of the c.i.f. value of imports in duties. Of the other developing countries considered, only Brazil has a duty collection rate anything like as low as China (Table 3.3). In large part, it is China's extensive import duty exemptions and rebate system that accounts for such low collection rates. The characteristics and inplications of this system are discussed below. Administration and Revenue Raising: Implications of Chiina's Import Duty System A necessary condition for effectiveness of a system of duty exemptions and rebates is satisfactory design and administration. Systems which require the payment of import duties at the time of import and which allow a rebate at the time of export typically involve substantially more paperwork and impose higher costs on exporters than systems which provide exemptions or tariff reductions at the time of import. Even exemption systems, however, can impose substantial compliance and administration costs on export enterprises. Further, rigid administrative requirements can make even exemption schemes ineffective in stimulating trade. -58 - The Chinese Customs Law provides relief from import duties primarily through the provision of exemptions and duty reductions allowed at the point of import (Customs General Administration 1988), rather than through refunds of duties paid or duty drawback systems. The exemptions and duty reductions are primarily allowed for export production although some limited additional exemptions are allowed for imports required for technical upgrading, and for special categories such as goods donated by international agencies and by overseas Chinese. The administration of these exemption and duty reduction arrangements is relatively well developed. For imported goods used in the production of exports, a "Registration Carnet" for inward processing is completed at the time of importing and cancelled at the time the finished goods are exported.' The relationship between inputs and outputs is defined according to specified coefficients and a small allowance is made for loss and wastage. Explicit provision is made for transferring products from the initial importer to another processing enterprise for further processing.4 The duty exemption and duty reduction arrangements appear to operate satisfactorily; the enterprises interviewed by the mission members generally expressed satisfaction with the operation of the current arrangernents. The major categories under which import duty exemptions are provided are: (a) Inward processing with supplied materials; (b) Inward processing with imported (purchased) materials; (c) Equipment imported by foreign-invested enterprises for investment; (d) Equipment for inward processing with supplied materials; and (e) Equipment for inward processing with imported materials. In addition to the above, duty concessions of 50 percent are also provided for border trade and materials used by foreign funded enterprises in their production for the domestic market. These account for a negligible proportion of total duty concessions. Duty exemptions are also provided for compensation trade, but again, their share is not significant. Details of the value of trade covered by each of these categories are given in Table 3.5. The table shows that concessional imports became much more important in China's total imports over recent years. The share of concessional imports rose from a third to a half in three years from 1988 to 1991. The increasing scale of import duty exemptions offered has led to a substantial reduction in the revenue collections from the tariff system. For comparison purposes, data on import values and the corresponding tariff revenues since the mid-1980s are presented in Table 3.6. The tariff revenue collection rate has declined from 9.7 percent in 1986 to only 5-6 percent of the value of imports in 1991. However, this decline in import tarift revenues is considerably more rapid than the increase in the share of concessional imports in total imports as reported by the Customs Directorate. While concessional imports have risen to half of total imports, revenue collections have fallen to roughly one sixth of the revenues that might be expected given the tariff schedule and the structure of imports. This means that the customs data - 59 - Table 3.5: IMPORTS BY IMPORT DuTY CONCESSION CATEGORY ($ million) National total 1988 1991 Processing with supplied materials 7,398 10,935 Processing with imported materials 6,348 14,091 Equipment imported with foreign investment 2,842 4,690 Equipment for proc. with supplied materials - 900 Compensation trade 373 293 Border trade (50 percent concession) 289 314 Other concessional categories 2,015 937 Total concessional impos 19265 32,161 Nonconcessional imports 36,003 31,630 Total imports 55.268 63791 Concessional share of total imports (%) 34.8 50.4 Total "concessional" exports 14,661 33,428 Special Economic Zones Processing with supplied materials 1,432 1,504 Processing with imported materials 1,183 3,590 Equipment imported with foreign investment 373 1,130 All other concessional 76 151 Nonconcessional categories 2,602 3,688 Total imports 5,667 10,062 SEZ Share of total concessional imports (pct) 15.9 19.8 SEZ Share of "concessional" exports (percent) 18.1 18.8 Source: Customs Directorate. on concessional imports cannot alone explain the low collection ratios.7/ It is likely that other imports, especiallv those used for priority projects, are also exempt. It is also possible that there are other forms of revenue leakage that are going unrecorded. Whatever the explanation, 7/ A collection ration of 5.6 percent represents only 17.5 percent of the trade weighted average tariff of 32 percent for 1991. What this indicates is that, if imparts were just divided into two categories, one that pays all duties and the other that is totally exempt, 82.5 percent of 1991 imports should have entered the country completely duty free. Per Table 3.5, however, only 5G.4 of 1991 imports were concessional. Thus the Customs data on concessional imports cannot alone explain the low collection ratio for that year. - 60 - Table 3.6: VALUE OF IMPORTS AND REVENUES FROM lmPoRT DurIEs ($ billion) Total Regulatory Import import duty Collection Year value duties component rate (%) 1986 42.904 4.183 1.83 9.7 1987 43.216 4.048 2.21 9.4 1988 55.268 4.174 1.46 7.6 1989 59.140 4.949 0.95 8.4 1990 53.345 3.354 0.55 6.3 1991 63.791 3.557 0.60 5.6 Source: Customs Directorate. declining duty collection ratios is a matter for some concern to the extent that it is caused by an increase in exemptions on imports used for domestic consumption or in domestic production. The former is a sign of tariff evasion and the latter only serves to raise effective rates of protection to levels higher than they already are. Impact of Exemptions on Exports and Economic Performance The two most important categories of import duty exemptions have been those for materials used for export processing with supplied materials and export processing with imported materials (Table 3.6). Between 1988 and 1991, the importance of processing with imported materials, where the Chinese enterprise purchases imported inputs for processing into exports, increased to become the most important source of concessional imports. From this, it appears that Chinese enterprises took advantage of their greater experience in international trade and the reforms in the foreign exchange system which allowed them to increase their purchases of imported materials and to reduce their dependence on imported materials supplied by their trading partners. Import duty concessions for the import of machinery and equipment for outward processing also grew very rapidly, with imports under these two concessional categories doubling over the three year period covered by the table. Access to concessional imports has been critical to the success of China's export drive. Total exports associated with concessional import arrangements doubled between 1988 and 1991, and now account for about 64 percent of China's manufacturing exports. As noted in Chapter 1, these exports have so far not generated high levels of domestic value added. The limited domestic content of China's fastest growing exports is in part due to the structure of the existing tariff regime. The present tariff structure allows relatively high cost production of intermediate inputs to continue for the domestic market. As a result, exporters tend to favor imported over domestic intermediate inputs. It appears, therefore, that attention must be devoted to restructuring the entire tariff structure itself if China wants to extend the benefits of its export drive to the rest of the domestic economy-import duty exemptions by themselves cannot help in this regard. -61 - Table 3.7: COVERAGE OF NONTATRIFF BARRIEms BY SECTOR AND TYmE (992) Line D Nonover1avoing Individual basis NonoverlauvinR Individual basis SITC 2 Percentap shrs based Pcrcentagc sharm based digit on number of lines on imnort shares of 1992 01 codca L+C+M+F+S L+C M+F+S L+C+M+F+S L+C MN+F+S 1 0 0.0 0.0 0.0 0.0 0.0 0.0 2 1 0.0 0.0 0.0 0.0 0.0 0.0 3 2 0.0 0.0 0.0 0.0 0.0 0.0 4 3 1.0 1.0 0.0 1.7 1.7 0.0 S 4 72.0 0.0 72.0 60.7 0.0 60.7 6 S 0.6 0.6 0.0 0.8 0.8 0.0 7 6 25.0 18.8 25.0 15.4 7.7 15.4 8 7 16.3 16.3 0.0 16.7 16.7 0.0 9 8 0.0 0.0 0.0 0.0 0.0 0.0 10 9 4.2 4.2 0.0 5.3 5.3 0.0 11 I1 11.8 11.8 0.0 12.5 12.5 0.0 12 12 77.8 33.3 66.7 100.0 33.3 100.0 13 21 0.0 0.0 0.0 0.0 0.0 0.0 14 22 5.6 0.0 5.6 9.1 0.0 9.1 is 23 95.2 85.7 95.2 90.9 72.7 90.9 16 24 65.5 65.5 65.5 57.1 57.1 57.1 17 25 0.0 57.9 0.0 100.0 0.0 100.0 18 26 48.4 39.1 40.6 53.7 41.5 46.3 19 27 2.5 0.0 2.5 1.6 0.0 1.6 20 28 24.0 8.0 24.0 36.0 16.0 36.0 21 29 9.2 9.2 0.0 14.3 14.3 0.0 22 32 0.0 0.0 0.0 0.0 0.0 0.0 23 33 S.0 5.0 5.0 6.7 6.7 6.7 24 34 0.0 0.0 0.0 0.0 0.0 0.0 25 35 0.0 0.0 0.0 0.0 0.0 0.0 26 41 0.0 0.0 0.0 0.0 0.0 0.0 27 42 0.0 0.0 0.0 0.0 0.0 0.0 28 43 0.0 0.0 0.0 0.0 0.0 0.0 29 S1 1.1 1.1 0.0 0.5 0.5 0.0 30 52 1.1 O S 0.5 0.7 0.0 0.7 31 53 0.0 0.0 0.0 0.0 0.0 0.0 32 54 0.0 0.0 0.0 0.0 0.0 0.0 33 55 0.0 0.0 0.0 0.0 0.0 0.0 34 56 0.0 0.0 0.0 100.0 0.0 100.0 35 57 66.7 19.0 57.1 66.7 22.2 55.6 36 58 66.7 3.6 64.3 65.3 4.0 62.7 37 59 6.3 5.1 6.3 8.3 6.7 8.3 38 61 0.0 0.0 0.0 0.0 0.0 0.0 39 62 16.7 16.7 0.0 18.0 18.0 0.0 40 63 22.2 22.2 22.2 23.3 23.3 23.Z 41 64 0.0 0.0 0.0 0.0 0.0 0.0 42 65 53.5 30.0 30.0 54.3 30.6 .10.6 43 66 3.2 3.2 0.0 3.5 3.5 0.0 44 67 0.0 77.3 0.0 100.0 76.4 100.0 45 68 31.5 0.8 30.7 37.8 1.1 36.7 46 69 20.1 1.3 19.6 20.7 1.4 20.2 ...continued -62 - Table 3.7: (cont'd) Line N Nonoverlapoine Individual basis Nonoverlaynine Individual basis SrTC 2 Percentage shares based Percentage shares based digit on number of lines on import shares or 1992 01 code L+C+M+P+S L+C M+F+S L+C+M+F+S L+C M+F+S 47 71 19.1 14.7 S.9 23.4 17.0 8.5 43 72 22.7 22.7 0.0 24.7 24.7 0.0 49 73 14.9 14.9 0.0 14.7 14.7 0.0 SO 74 20.7 20.7 0.0 22.1 22.1 0.0 51 75 42.4 42.4 0.0 39.3 39.3 0.0 52 76 40.0 40.0 4.0 42.6 42.6 4.3 53 77 12.0 12.0 1.0 12.2 12.2 1.1 54 78 49.3 49.3 0.0 41.8 41.8 0.0 55 79 14.8 14.8 0.0 4.6 4.6 0.0 56 81 0.0 0.0 0.0 0.0 0.0 0.0 57 52 0.0 0.0 0.0 0.0 0.0 0.0 Ss B3 0.0 0.0 0.0 0.0 0.0 0.0 59 84 7.5 7.5 0.0 8.7 8.7 0.0 60 85 0.0 0.0 0.0 0.0 0.0 0.0 61 87 26.7 26.7 0.0 27.2 27.2 0.0 62 88 14.5 14.5 0.0 15.9 LS.9 0.0 63 89 0.4 0.4 0.0 0.5 0.5 0.0 64 94 0.0 0.0 0.0 0.0 0.0 0.0 65 95 11.1 11.1 0.0 0.0 0.0 0.0 66 96 0.0 0.0 0.0 0.0 0.0 0.0 67 97 0.0 0.0 0.0 0.0 0.0 0.0 TotiL a 17.5 1417 9.1 51.4 32.8 32.0 Note (1) Total number of HS lie. = 5016 ; Total value of inports (1992 firt quater) = S12,018 mmiion. (2) L = Impot Licene, C = Import Conol, M = Mandatory Plan, F = Furt Category Inports, S = Second Category Imports. /I Percentage of total numbcr of IS Lines or first quarter 1992 impors. &b Of which te shar of isnporb subject to jus mandatory plan is 18.5 percenL Soure: OffiCe of the UnitCd Staes TadC Representative (1992), and Staff estinats. Conclusions Although China's tariff structure is typical of most other large developing countries, the relatively small revenues that it generates resembles more the situation in developed countries. The small revenue contribution of China's tariffs endows it with much greater flexibility to restructure its tariffs than most other developing countries. Rapidly declining duty collection ratios are, nevertheless, cause for some concern to the extent that they are caused by (a) increasing evasion on products for domestic consumption, or (b) increasing exemptions on imports for use on domestic (as opposed to export) production. The bulk of duty exemptions in China have so far been related to exporting activity. In fact, duty exemptions on imported inputs have been critical to the success of China's export drive. The domestic content of such exports, however, remains limited, and this suggests the need for a more fundamental - 63 - restructuring of the tariff structure such that upstream domestic production becomes more competitive. D. NoNTARIF BARRIERS TO TRADE In addition to the comprehensive system of tariffs, a wide range of nontariff barriers (NTBs) to trade have been deployed in China's trade regime. These barriers comprise a variety of administrative instruments including the mandatory import plan, canalization of imports through designated national FTCs, import licensing, and import controls.8/ A lot of these mechanisms are in fact overlapping, and the exact manner of the application of each is difficult to disentangle. The responsibility for implementing these measures is widely dispersed within central and local governments. As a result, in some cases, the same import requires multiple stages of import approval from different agencies. It is estimated that in 1992 all nonoverlapping NTBs (not including mechanisms to control access to foreign exchange) taken together apply to 17.5 percent of the total number of lines of the HS Customs Tariff Schedule and acount fbr 51.4 percent of total imports (Table 3.7). Types, Administration and Coverage The Mandatory Import Plan and Canalization of Imports. The mandatory plan was at the heart of the China's original system for controlling imports (see Chapter 2 for details). Goods subject to import planning have been thus regarded as essential either for the people's livelihood or for national economic development, typically subject to state pricing at levels substantially out of line with world prices, and therefore requiring an import subsidy. Although the importance of the import plan has been declining over time (Chapter 2), in 1992 planned imports still applied to 11 broad product groups including commodities such as grain, fertilizers, iron ore, cotton, wool, plastic sheeting and wood pulp (Annex 2.2 has a complete list). Together these accounted for 9.1 percent of all HS lines and 18.5 percent of total imp ort91 The imports of all commodities subject to the import plan are canalized, i.e., restricted to designated FTCs. Most imports under the import plan are classified as so-called Category I imports. The imports of these commodities are handled by only a few FTCs (Chapter 2).10/ Canalization in such cases is understandable in that it facilitates the administration of subsidies needed to depress the price of mandatory plan commodities. In 1991, there were 648 FTCs authorized to handle Category I imports and these had in effect the responsibility for implementing the mandatory import plan handed down by the central authorities. The list of Category I imports is, however, not just restricted to planned commodities. In 1992, it, in fact, covered 386 additional HS lines, comprised mainly of raw S/ Aside from these instruments, imports are also controlled through a complex system of foreign exchange allocation, which was discussed in Chapter 2. 2/ It seems that as of 1993 there were only five commodities still subject to the import plan and associated subsidies. 10/ Wood pulp is under Category IL It is not clear how the imports of iron ore (HS 26.01), copper (HS 74) and aluminum (HS 76) are handled. These commodities are neither in Category I nor inn. - 64 - materials such as iron and steel products, textile yarns, and sugar, but also including some consumer goods such as cigarettes. In such cases, it would appear that canalization is used by the central authorities to control the flow of imports either for balance of payments purposes or for protecting domestic industry through the enforcement of import quotas handed out to designated FTCs. In addition, there exist what are called Category II imports (Chapter 2). These imports are also restricted to certain FTCs, but the number of FTCs that can handle such products is larger. This, therefore, represents a somewhat looser form of import control than that which can be exercised over Category I imports. In 1992, Category II imports covered 47 HS lines including such items as television receivers and cathode ray tubes. Overall, an estimated 32 percent of total imports were subject to control through canaliza:ion in 1992. Of these, two thirds were imports under the mandatory plan. For the remaining 13.5 percent of imports, therefore, canalization was used as an instrument for controlling import demand for reasons that have nothing to do with the plan. Import Licensing. Import licensing is administered by MOFERT, or what is now called MOFTEC. Within this system, goods are divided into two broad groupings defined on the basis of the criteria used for their award and the authorities responsible for their administration. These groupings overlap with, but do not correspond exactly to, the categorization of products for the purpose of the import plan. First, Category I licenses are import licenses whose administration is undertaken only bv the central office of MOFERT in Beijing. Criteria for the award of these licenses are the most stringent. Such licenses are awarded only to importers that have foreign exchange allocated to them by the central government. In addition to certification of central governnent foreign exchange allocation, the award of such licenses requires an approval document from the concemed ministry (e.g., ministry of textiles in the case of imports of yarn, etc.) and a valid import contract. Typically, Category I licenses are reserved for products subject to the mandatory import plan and/or products classified as Category I imports as described above. Not all Category I or mandatory imports, however, are subject to Category I import licensing, or any import licensing for that matter. Products such as cotton and fertilizers are planned commodities whose imports are restricted to specialized national FTCs and are not subject to any import licensing requirement. Second, Category II licenses are licenses for which the criteria are somewhat less stringent and which are administered either by Special Commissioners appointed by MOFERT and located in the regions, or by provincial or municipal Economic Commissions. To import products subject to Category U licenses, the importer must furnish evidence of foreign exchange allocated by the provincial/local authorities or retained foreign exchange, an approval document from the concerned provincial ministry, and a valid import contract. Typically, most Category It imports are subject to such licensing procedures.l1/ In addition, Category II licenses are required for a large array of noncanalized and nonplanned items. These include such products as beverages, food products, textile yarns and fabrics, machinery and appliances, sound recorders, road vehicles and aircraft. 11/ Although again, not all Category II imports seem to require Category II import licenses or any kind of import license at all. Inorganic chemicals, for example, although designated as a Category I1 imports, are not subject to any import licensing. - 65 - It is apparent from the above that import licenses are used to serve multiple objectives. On the one hand, licensing seems to be used as an administrative device to allocate a fixed quantity of planned imports and centrally/provincially controlled foreign exchange to different users. Here it functions as a quota allocation mechanism. On the other hand, licensing is no doubt used for protecting domestic economic activity as well as for regulating, for balance of payments purposes, the demand for imports financed through retained foreign exchange. In all, there are presently 53 broad categories of products subject to import licensing. These accounted for 12 percent of all HS tariff lines in 1992 and covered 25.1 percent of China's total imports. Of these imports, however, more than half were also subject to canalization. The imports for which licensing requirements applied in a nonoverlapping manner accounted for an estimated 11.7 percent of China's total imports. Anecdotal evidence suggests that the award of import licenses (particularly Category II licenses) is subject to considerable administrative discretion. In some cases, the distribution of licenses seems to be linked to FTC performance. FTCs in financial distress have been known to be allocated import licenses to enable them to use the associated rents to improve their financial position. In other instances, import licenses are exchanged for favors from other provincial or national authorities. Not unexpectedly, it appears that guanxi212 plays an important role in how licenses are ultimately allocated. The division of responsibility between the central government and the provinces in the administration of import licenses poses an additional difficulty. Import licensing has, it seems, been used by provincial and municipal authorities in accordance with the priorities of their respective local plans. This segments China's trade regime and in effect enables different provinces to administer foreign trade policies in different ways. Import Controls. Compared to import licenses, which appear to be used both for balance of payments purposes as well as for protecting domestic industry, import 'controls" are used specifically for protection. In 1992, controls applied to a range of goods in the machinery and electronics sector, for which imports could not be undertaken without administrative approval from the State Council Machinery and Electronics Import Control Office (SCMEJO). This office reviewed proposals by various Chinese units to import machinery and electronic equipment and assesses to what extent these needs can be met domestically. For this purpose it used lists of possible import substitutes provided to it by various industrial ministries as a sort of "examination catalog. Nominally these lists were maintained as a source of information so that would-be importers were aware of the full range of domestically produced machinery and electronic products. Anecdotal evidence, however, suggests that once a product was on such a list, approval to import a foreign product was difficult to receive. Recently, the authorities have announced the abolition of import substitution lists and a phased elimination of controls (see Chapter 5). For the time being, however, controls apply to about 3 percent of HS tariff lines and cover 7.7 percent of total imports, none of which overlap with products subject to import licensing. It appears, therefore, that a product can be subject to either import licensing requirements or import controls, but not to both. 121 That is, social relations or connections. - 66 - The Structure or NTB Protection Figure 3.4 shows how import licenses and controls are distributed across productive sectors. It plots the proportion of HS tariff lines subject to import licensing or Figure 3.4: STRUCTURE OF NTB COVERAGE, 1992 Waighled Tariff (%) NTB Cov. (% of HS lines) 160 100 1 4 0 - - - - - -- - - - -- - - - - - - - - - - - - - - - - -- - - - - - - - -- _80 120 ------ -------- - --- --- 100 ____ - - -_________ -__---__---____-____--__--_-- --- --- 60 80 ------ ----------------- :0 i X9 0 20 20 - 200 1 6 11 16 21 26 31 36 41 46 51 56 Serial Number of Product Category *Wght. Avg. Tariff +NTB Coverage Note: For mapping of serial numbers into SITC codes, see Table A3.3. "controls" in each two-digit SITC sector. The figure indicates that import licenses and controls are currently concentrated in three broad groups: (a) agricultural raw materials subject to price controls and import planuing (rubber, cork and timber, wood pulp and textile fibers such as wool and cotton); (b) critical manufacturing sectors such as iron and steel products, textile yarns and machinery where domestic production is significant; and (c) nonessential consumer items such as beverages and tobacco. These three broad categories correspond roughly to the three different objectives of China's system of licensing and control that emerged from the discussion above. In the case of (a) the high concentration of NTBs would seem to be explained by the need to allocate fixed quantities of planned imports between different users.131 In the case of (b), protection seems to be the dominant motive, whereas in (c), balance of payments control is likely 13/ The same motivation accounts for the somewhat less, although still significant, concentration of import licenses in the case of certain manufactures, such as rubber products and wood products, that are subject to price controls and are canalized. - 67 - to be the primary motivating factor. In practice, it is of course very difficult to disentangle when import licensing or controls are used for balance of payments purposes and when they are not. It is likely that NTBs (whether licenses or controls) have on occasion been used for restricting access to foreign exchange not just in the case of nonessential consumer goods but also in that of the other product groups on which they apply. Comparing the structure of the coverage of import licenses with that uf tariffs shows how the two instruments are used in a complementary fashion to achieve the government's objectives (Figure 3.4). For most planned or canalized commodities, because the objective is to keep domestic prices artiricially low, the tariff too is kept relatively low, while the NTB coverage is kept high to help allocate fixed quantities of imports between various users. On the other hand, where protection is the primary objective, we find that both tariffs and the NTB coverage are high. Finally, where the objective has been to penalize nonessential consumption, the government has in general relied more on the tariff than on NTBs. Thus, excepting tobacco and beverages, in other sectors such as nonessential foods, apparel, travel and sporting goods, we find very high tariffs but a low or negligible NTB coverage. Conclusions With the declining importance of the plan, only 18.5 percent of China's imports continued to be subject to mandatory import planning in 1992. Of the rest of tlie 51.4 percent of total imports that were subject to some form of administrative import regulation, 12 percent were subject to canalization, 11.7 percent to nonoverlapping import licensing and 7.7 percent to nonoverlapping import controls. Aside from handling planned imports, canalization is still used as a powerful instrument for controlling the import demand of a range of nonplan commodities either for balance of payments reasons and/or the protection of domestic industry. Import licensing is also used to serve the same range of objectives. There is considerable overlap between canalization and licensing, only some of it justified. Overlap between canalization and licensing seems understandable in the case of planned commodities, the fixed imports of which have to be allocated between different users. In the case of such commodities as textile yarns, sugar and televisions on the other hand, at least one of the two, i.e., either canalization or licensing, would seem redundant. Import controls are intended essentially for domestic protection and are restricted to the machinery and electronics sector. Overall, the sectors that are presently subject to. the highest concentration of NTBs are iron and steel products, textile yarns and machinery, i.e., critical manufacturing sectors where domestic production is significant. Available evidence suggests that considerable discretion is involved in the administration of import licensing and controls. FTCs and enterprises with the best connections are likely to benefit the most. E. EXPORT CONTRoIS AND TAxES As in the case of imports, the Chinese authorities have deployed a wide array of controls to manage their exports as well. However, over the years, the role of planning for exports has become considerably less important than for imports. In principle, all mandatory export planning was abolished in 1991, although some exports that used to be subject to such planning (about 15 percent of total exports) are still canalized or channeled through designated - 68 - FTCs, either as Category I or Category 11 exports (see Chapter 2). The more important remaining controls on exports are export quotas/licenses and taxes. As noted in the previous World Bank study of Chinat's trade regime,5 export quotas/licenses and taxes appear to have two major objectives: to reduce the supply of some exports, in which China has a very large market share, and to increase the domestic availability of particular goods needed for economic development.1_4/ In 1992, export licensing was used for 676 Harmonized System commodity groups accounting for over 15 percent of China's exports. A large set of comm,odities subject to export licensing was agricultural goods, such as beef, pork and vegetables, exported to Hong Kong. Here, the objective of the licensing arrangements is to increase the prices received for these commodities by controlling supply. The same is true for export licensing in the case of such commodities as tungsten in which China has a very large share of the international market (40 percent). On the other hand, controls on such products as rice and maize have been used to ensure the adequate availability of these goods domestically. As of April 1993, the scope of export controls was reduced somewhat. However, 38 broad categories of products still remain subject to export quotas/licenses. The use of export licenses to increase the domestic availability or depress the price of a variety of key planned commodities has, however, been more significant. Before secondary markets were allowed for planned cormodities, export contro;s were used to prevent such leakage of these products as might otherwise have been induced by the huge gaps between international and administered domestic prices. Now that secondary markets are functioning for a wide range of commodities, the government's objective seems to be to not only to fix official prices below international level, but also to maintain the secondary market price of selected exportables such as coal, petroleum, maize, and rice, below world parity. It has been doing this by restricting exports through the widespread use of export licensing. Such policies bias the incentive structure for nonplan production against these sectors and encourage excess consumption of their products. In the energy sector, for example, where these distortions are still very marked, depressed secondary market prices for coal and petroleum continue to make Chinese industry more energy intensive than it ought to be. The removal of such export controls - tied to progress in China's attempts at price reform. The rationale for these controls will dWjear as China phases out the implicit subsidies to consumers and industry that its policies orifce control entail. Meanwhile, a consequence of the existing wedge between the domestic secondary markcei ad international prices of exportables is that the few FTCs tat are designated to handle their sales on the international market are able to appropriate important rents (see Chapter 6).151 A temporary, even if far from satisfactory, solution to this problem would be for export licenses to be replaced with export tax equivalents. At least in this way such rents as may accrue would be directed systematically to the central government, and not to individual enterprises. 14/ In addition, however, export licensing is used to comply wiiii inLernational agreements such as the Multifiber Arrangement. .L/ At present, the government relies on profit-sharing arrangements negotiated on a case-by-case basis in order to capture some part of the rents accruing to individual FTCs. As FTCs become more autonomous, this m ism is likely to become less effective. -69 - Over recent years, China has in fact expanded the use of export taxes-the product categories subject to export taxes have risen fom 19 in 1987 to 54 at the present time. Export taxes are used in pursuit of exactly the same objectives as export licenses. However, in the sectors where they have been introduced, they have not to date replaced export licenses, but merely supplemented them.l6/ F. IMPAc OF TRADE CONTROLs International Price Comparisons The wide range of trade policies utilized by China, and the nontransparent nature of many of the policies used, makes it very difficult to evaluate their consequences for economic performance. The most immediate difficulty is that the presence of nontariff barriers provides no indication of their trade inhibiting effects. With a trade regime as diverse as China's, where some tariff rates are extremely high, there is also the possibility of "water in the tariff': that some tariff rates will be so high as to essentially eliminate trade in the affected commodity, with the gap between domestic and world prices being smaller than the tariff. Given the structure of protection in China, the price comparison approach is the only means by which any estimate of the effects of protection can be obtained. Even in more explicitly market-oriented economies, this approach is subject to severe difficulties of obtaining price information on sufficienwly homogeneous products, and of adjusting for differences in location and other attributes. In China, the approach is further complicated by the need to adjust for the two-tier exchange rate system. However, a fairly extensive analysis was possible on the basis of data on domestic prices for a range of commodities, most of which are subject to licensing, controls and/or planning.' Table 3.8 presents the results of international price comparisons for a selection of products. 17/ The secondary market price is the one that has been used in making the price comparisons in each case. For clarity, the products are classified as importables or exportables, depending on whether China was a net importer or exporter in tiat product category. This distinction is important in China because different average effective exchange rates apply for exports and imports, which necessimtae the calculation of separate price differences for importables and exportables. Given information on import tariffs and export taxes, it was possible to decompose the total difference between Chinese prices and world prices into components due to particular trade policy instruments. Thus, the table presents computations of the tariff equivalents of import licenses in the case of importables, and of export licenses .n the case of exportables. A positive tariff equivalent in the case of an iWortable means that the import license is binding and the domestic free market price of the product is above the swn of the international price and the relevant import tariff. Likewise, a posiive tax equivalent in the case of an exportable also indicates that the export license is binding in the sense that the 161 Several products, such as coal, are subject to both export taxes and export licenses. 171 The complete results are presented in Table A3.7. -70- domestic free market price is lower than the difference between the international price and such export taxes as may apply.lB/ The price comparisons presented in Table 3.8 provide a number of important perspectives on the operation of China's foreign trade regime for a wide range of commodities. It is possible to assess, in broad terms, how effective the trade regime has been in achieving its the main policy objectives. First the table shows the extent to which the authorities have been able to raise the prices of certain exportables in which they have significant market share in international markes through the use of export taxes and licenses. In the case of tungsten, an export tax of 20 percent, in conjunction widt a tax-equivalent effect of export licensing of another 55 percentage points, seems to have raised the export price of tungsten relative to its domestic price such that the world price is more hn 60 percent 121 above domestic prices. To the extent that China is a price maker in the international market, this would certainly have improved its terms of trade. Whether or not this has led to net gains for China is difficult to assess without information on world demand. Second, the table reveals in what manner planned commodities, both exportables and importables, have been handled. Export taxes and licenses have clearly been effective in depressing the domestic price of certin exportables considered to be critical for consumers. However, the table indicats that the resulting distortions have been very large. For coal, it appears that dLe substantial export tax, of 40 percent, is overshadowed by an NTB export tax- equiaent of roughly an additional fifty percent.ll This distortion encourages the inefficient use of coal in the Chinese economy and contributes to pollution p}a blems. For crude oil, the distortion is even greater, at 85 percent. The benefit of the enormous implicit export tax on crude oil, however, appears to be largely confined to the petroleum refining industry, which pays an extremely depressed price for its primary input (85 percent export tax equivalent) but faces a product price -which is depressed by under 20 percent. W-ithin agriculture, a similar policy has been pursued to maintain price distortions that benefit urban consumers at the expense of nura producers. For such exportables as maize and rice, the domestic prices were found to be substantially below the relevant export parity, 18/ Gien the wodd price, the taiff rate and the assumption that import pncg is based upon seconday maret excbange raes a comparison between the domestic price and a tariff-inclusive import price can be ma using the arbitrage condition: (1) ~~Pa= ('+t.(l+t).%XP. where p is the domestic price of fthe importable; t, is the tarff equivalent of the nontariff banier affecting tei import of the good; t is the tariff levied on the good; e, is the exchange rate applying to this tansaction, and pN is the wodd price of the good. Since we have information on every vanable in equation (1) except the ariff equivalent, it can be solved for this equationL For export taxes, t and t, are negative, depressing the domestic price. 19/ Computed per formula in footnote 18- 20/ This estimate, based on data provided by the Development Reseach Council, is likely to exaggerate somewhat actual price diffrrentials in coal. It should be trated only as a broad indicator. -71 - Tabk 3Aa EIMrAmS or Punouwua o ImPoRrASLS eAS o' ISn nomA L PEa CoMASSO5 (1M9921 Fice iuclame NIB HS Piduct Official mkeL Lioui TeiSTf a t;N Codc Desripto Price pnic price rtec cqrv.. Licans Ebb (1) (2) (YhQ(3) (YIQ (4) (Mc ) (6) (%tS7) Expod Impot 1001 WbIcL_ - 7S9.14 121.00 0.00 S N N 1101 lVe flour 524.54 93Lu 162.00 0.06 .6 N N 310210 N gcfmtilrn(usn 53229 543.16 172.00 0.05 -20 K N 310420 Ponim.. Fetlimcr (KCI 713.09 7S3.09 103.90 005 17 N N 390210 PObpIOwy1oc 4,949.80 5.25.91 544.00 0.00 14 N Y 390311 Pobl cn 4,766.S 7,161.23 572.00 C.00 114 N N 401110 Rle tires for cm 1.710.0 1.640.00 300.00 0.60 -42 - N Y 440319 WUd loge, cuifcenn 236.20 254.31 70.00 O.O -31 N Y 440391 Wood loge. .ak 349.44 SSS.77 221.00 0.00 -57 Y Y 440791 Lumber. oak 549.85 549.35 471.00 0.00 4l0 Y Y 441212 Plywood noccooifc-ue 2,349.00 2.61.00 500.00 0.30 -so Y N 441219 Plywood. coaicmf - 1.941.00 1.941.00 150.00 O.W 23 Y Y 5509 YTam of'yndbctic sbik 11.493.61 11.240.33 1.000.00 0.70 13 N Y 720450 Stcel io ingou - 1.057.44 539.00 0.00 66 Y Y 720711 Semi-fibiahed sted 1.055.99 1.168.47 469.00 Q.OD -S7 Y Y 7208-12 Fl=-aed pro dup ofaed 1.069.01 1.621.97 469.00 0.00 41 Y Y 7210m16 Ba & Rod ur . scel 1.36S.B3 1.493.69 333.00 0.15 -42 N Y 7312 WVrc cubio of sed 2.91L13 2,551.90 383.00 0.60 -2S y Y 7403 tdcfi capper 10.29617 15,893.43 2,339.00 0.12 4 N N 840731 PFatl egie, 50 e - 360.56 100.00 0.30 -13 N Y 341121 Refieamm domeszic 1,59Z.72 1,623.76 300.00 0.20 -23 N Y 145011 AUsomDSicUaaIriOgmD&4EaC 514.44 4S4.43 150.00 1.00 -74 N 347120 PcnonloemputcrCPC-Xl) - 142399 1ODD.0 0 20 103 Y Y 352031 Cue owscdner 41O.31 455.87 60.00 LOU -35 N Y 152110 VCRc 3.00D.00 3i000.00 20000 1.00 21 N Y S52S10 ColorTV 2.00D.37 1,903.62 197.38 1.00 -1 N Y SS2820 Blackandwhielc ,?77.16 348.51 80.00 l.O -63 Y Y 154012 Cathde ray TV b5.13 31.70 ISO 030 -2 2 N Y 370324 Petrl somobilc 101,314.00 1OL314.78 12.00.00 1.20 -34 N Y Tablk 3.1 Emf ms oi wE ar TAnan (EM) Fre 1n- NIB HS Produa Offiil meSa tioml Tax lte Code Dcscr4dac Prkc pric pike raw ape . Upenscir sn (1) (2) (YJQ (3) (Y/ (4) (St)5) (6 (%)7) Epin import 0202 PoAk(fgaze) 5.400.15 4.64131 10.76.00 0.00 25 Y N 0203 Beef (foen) 6.542.7 6,990.10 26,60.00 0.00 54 Y N 1005 Maize 329.2 354.11 107.48 0.00 43 Y N 1006 Rice 550.32 996.38 287.17 0.00 40 Y N 2611 Tungte 12.769.1D 13,954.51 67.63.30 0.20 55 Y N 2701 Cod 47.70 64.51 39.70 0.40 53 Y N 2709 Crde oil 200.79 109.22 130.00 0.00 aS Y Y 2o Ref pieu 342.57 1,050.93 223.50 0.00 I1 Y Y 231511 Sodiumhydromide 1918.85 1.842.33 322.0 0.00 0 Y N NGe: Pskecoa_rioo Tables 3.1had 3.Ib e eoam pke in Chin upped by the Dv mtR r Catcer of the Sta CoL InIen.de prices we obted fsoma vri efour, iluding World Bk commodity pice cetimat d u vae of gpi or impe fiomCbhiam rpoetothcUN COMTRADEayaL e lhearemgcaecowmndarymarkxchagercstedierdw=5as45Riehheexpot weighted aebange sae 5.74 for aU cmAoditiSe xcept mrcisy (HS '.) for which fial frin adae reh miom appe Sd the accoodary maskt ake of 5.845 n. thrfnre, ypplied. -72 - with export tax equivalents (ETE) of around 40 percent.21/ Moreover, it seems that the policy of depressing the domestic prices of exportables has not, as one might expect, been restricted to just planned commodities. The prices of unplanned commodities like pork and beef appear to be markedly lower than international prices. For pork the ETE of the licensing restriction was estimated at 25 percent. For beef, the ETE was even higher, at 54 percent.22/ Table 3.8 provides some interesting evidence regarding commodities that are part of the import plan. It seems that the domestic plan and market prices of wheat were both roughly at import parity in 1991, following a long period in which prices were substantially below the relevant import parity value.' This confirms the effect of recent initiatives to decontrol the price of cereals and has no doubt helped alleviate the burden of import subsidies carried by the central government. Likewise, the table suggests that import subsidies on potassium fertilizer have been reduced, if not eliminated-the domestic price for these was found to be about 20 percent higher than the world price. As such, the trade regime now has an import substituting effect in this sector with import licenses imposing a tariff equivalent margin of 17 percent above nominal tariffs of 5 percent. On the other hand, planned importables such as nitrogenous fertilizer (urea) and timber continue to be subsidized. Domestic prices of the former were an estimated 15 percent below import parity and domestic prices of different types of wood and lumber were found to be between 30 and 80 percent below import parity. FinaUy, the table shows what protective impact the trade regime has had. The price comparisons data confirm that China's trade regime provides substantial protection to a selection of high cost sectors. These include two kinds. First, there are selected high technology consumer products which would seem to be targeted by the authorities as in-front exporters." In this category, the domestic price of personal computers, for example, appears to be a good 120 percent above import parity, 20 percent points of which is attributable to the tariff, but an additional 100 or so percent to import licenses. Likewise, VCRs enjoy a 100 percent tariff and almost an additional 30 percent NTB equivalent. Second, there are a number of intermediate goods that represent significant domestic production shares. These include such products as textile yarns (yarn of synthetic staples) and certain plastics (polystyrene). The domestic prices of the former were found to be more than 80 percent above Import parity, with 70 percent points accounted for by the tariff and the rest by import licensing or control.231 An important finding from the price comparison table is that the domestic prices for a range of products, although stll considerably higher than world prices, are nevertheless, below the duty-inclusive prices of competing imports. For these products, import licenses appear to be redundant as a protective instrument, and there would also appear to be some 211 The prices of mai and rice were raised very substantially as part of the last round of price liberalization in 1992 and are now closer to international parity. 221 While some part of the price difference may, in fact, reflect quality differences, the finding of negative price distortions for these commodities is consistent with the results of a careful, disaggregated study of agnculturl commodity pricing by Webb (1992). 231 Given likely comparability problems, these estimates need to be located with some caution. -73 - nwater in the tariff. "24/ Such products include automobile tires, small (50 cc) petrol engines, cassette recorders, televisions and certain types of automobiles. In the case of cassette recorders for instance, domestic prices are still close to two-thirds above import parity, although they are about 35 percent below the duty-inclusive price of competing imports. Likewise, the domestic prices of color and black and white televisions are between 80 and 40 percent higher than import parity, but between about one fifth and two-thirds below the duty-inclusive price of imports. In the case of a handful of products, Table 3.8 suggests that tariffs and licensing are completely redundant, as the prices of these products seem to be competitive with imports. Although these include some 'mature' consumer products such as domestic refrigerators, they are mostly basic steel products such as steel ingots, semi-finished steel, flat-rolled products of steei, and bars and rods of iron and steel. Most of these products are currently subject to low tariffs, but their imports are canalized and have been subject to licensing requirements. In all cases, domestic prices appear to be well below-in the range of two thirds to one quarter below-tariff-inclusive import parity.' It is not surprising, therefore, that the authorities have declared their intention of removing all remaining import licenses on these products (Chapter ). A likely explanation for China's competitiveness in this relatively capital intensive sector is the extremely low domestic plan price for coal. In summary, China's import and export licensing regime appears to reinforce one of the major biases imparted by the tff and export tax regime: raising the price of final consumer goods relative to producer intermediates. Prices of many agricultura goods appear to be depressed through the use of implicit export taxes and their equivalents. Prices of basic producer inputs to manufacturing, such as coal, oil and timber, are likewise depressed. On the other hand, the prices of most intermediate and capital goods are maintained above import parity. The prices of some intermediate inputs, especialy petrochemicals and textile yarns, that account for a significant proportion of China's total industral output, are exceptionally high. This no doubt penalizes the competitilveness of some downstream sectors, such as apparel and footwear, in which China has obvious comparative advantage and may also help account for the low domestic content of export processing activity. Import licensing is also used to reinforce the price increasing effect of even higher tariffs on a selection of "higher-tech" manufactured goods. However, it seems that there is considerable "water in the tariff" for a wide range of mature consumer manufActures. Effective Rates of Protection Effective rates of protection (ERPs) provide an indication of the extnt to which protection policies influence the allocation of resources towards, or away from, particular activities or sectors. Where nominal rates of protection are different across commodities, the effective rates approach takes into account the fact that protection on intermediate inputs may offset, or overwhelm, the benefits provided to an import competing industry by protection on its output. Table 3.9 presents a summary of the results of ERP calculations for a selection of sectors for which data were available (see Annex 3.1 for details). These results must be must be treated with considerable caution. They only provide a very broad indication of the trade 24/ Esbimated import tariffequivalents are negative in such cases, implying that tariff rates are higher hn would be required to restrict the majority of trade in these commodities. -74 - regime's implications for incentives in the Chinlese economy. The first column of the tablegives the representative rates of nominal protection used for each sector. This is based on the analysis of international price comparisons presented above. The second and third show the value of gross output and value added, respectively, at domestic prices,9 while the fourth column contains the calculated residual return to value added when international prices are received for outputs and paid for inputs. Where value added at international prices is positive, the effective rate of protection to domestic production is presented in the fifth column. Table 3.9: EFFECTIVE RATES OF PROrECTION TO CHINESE INDUSRMY (1991) Gross Value Value Nominal output at added at added at distor- distorted distorted world Effective tion prices prices prices rate (%) (%) Cops -40.00 312.62 246.60 436.85 -43.55 Animal husbandry -30.00 61.95 20.76 21.46 -3.25 Metals -40.00 73.16 30.18 48.82 -38.18 Electricity 0.00 18.82 5.57 -33.99 n.a. coal -82.00 24.99 13.60 120.01 -88.67 Petroleum mining -85.00 51.61 44.30 324.37 -86.34 Petroleum refining -18.00 44.86 10.39 -167.27 n.a. C:hemicals 0.00 127.23 56.37 26.44 113.17 Machinery 46.62 158.37 51.59 -17.84 n.a. Bldg. materials 30.85 34.82 16.29 -5.45 n.a. Wood and pulp 30.85 16.48 6.90 -0.26 n.a. Food processing 59.19 98.78 14.93 -63.99 n.a. Texfiles 54.97 106395 28.11 -17.60 n.a. Apparel 89.59 49.06 6.31 4.10 u.a. Paper 38.45 21.92 3.34 -5.34 n.a. Misc. manufacturing 44.90 24.92 6.71 -6.32 na. Source: Staff estimates. See Annex A3. 1 The results highlight the wide range of conflicting pressures placed on industries by the structure of protection in China. As expected, in sectors such as crops, coal and petroleum mining, where output prices arc currently severely depressed by trade policies, the ERP is found to be negative. This indicates that, without other forms of intervention in these sectors (planned investments, directed credit, etc.), the current incentives would in fact result in a strong resource pull away from these industries. On the other hand, the depressed prices of these sectors help raise protection levels for downstream industries that use these commodities. Thus, the availability of low cost energy inputs, for example, results in the chemicals industry having a very high positive effective rate of assistance despite a zero nominal rate on its output. - 75 - Effective rates of protection are not meaningful when an industry has negative value added at international prices. Under the assumptions outlined above and using the rates of assistance presented in the first column of Table 3.9, this is the case for 10 of the 19 sectors for which rates were calculated, including petroleum refining, chemicals, machinery, building materials, wood and pulp, food processing, textiles, apparel, paper and miscellaneous manufacturing, all appear to have negative value added at world prices. Under the assumptions of the ERP methodology, none of these activities would appear to be able to survive under fill trade liberalization. While this is probably the case for some subsectors, such an interpretation of the results cannot be correct for the broad and highly hiterogeneous product categories used in the calculations of Table 3.9. The results are, however, indicative of the highly distorted nature of the Chinese trade regime and suggest that existing incentives exert a strong resource pull effect on a range of downstream industries as a result of depressed input prices and a cascading structure of nominal protection. Evidence from Sectoral Analyses The results of various sector studies conducted by the World Bank suggest that Chinese industry is characterized by four basic problems: (O) suboptimal scale and fragmented production capacity; Cii) structural imbalance between downstream and upstream production capacity; (iii) high cost and low quality intermediate and capital goods; and (iv) shortage of certain raw materials. In what follows, we discuss how these problems relate to the structure of the existing trade regime. Suboptimal Scale and Fragmented Production Capacty. Subopfimal scale of production is a widespread phenomenon across a range of China's industries. Partly, this is a legacy of the planning process, one of the objectives of which has been to ensure regionally balanced development. Historically, therefore, there has been a tendency for provinces to invest in a similar set of nucleus industries. With decentralization, local priorities have inevitably taken precedence over national ones, and provincial authorities have resorted to various techniques to avoid central government scrutiny, including repackaging investments into smaller subcomponents in order to escape the investment approval process (see Box 3.1). The lack of capital markets has also severely restricted the ability of local enterprises and govermments to acquire the funds required to invest in larger scale facilities. The trade regime has only accentuated this problem. Local enterprises have benefited from parochially motivated interprovincial trade barriers and have used the high import tariffs to support irvestments in small plants catering to small and regionally segmented markets. Thus, it is not surprising, for example, that 95 percent of the enterprises in the iron and steel sector were found to be operating below optimal scale in 1989, and that China had over 100 assembly plants in operation in that year.' In some sectors, the trade regime has also been used in conjunction with the investment approval process 1' to segment markets according to differentiated products. This is the case in the road vehicles sector, for example, where the volume of imports is controlled, and even where imports are allowed (as in the case of passenger cars), local enterprises are guaranteed sales through reserved market segments.'2 Structural Imbalance. The trade regime has also encouraged the proliferation of investment by local enterprises and governments in activities that require little learning and involve low start up costs. This has resulted in excess capacity in assembly and processing - 76 - Box 3.1: TIIE CONSTRUCnON OF ThREE SMALL POLYESTER FACrORIES IN CI{ENODU Three polyester factories were established in Chengdu in Sichuan Province-one within the city limits, one in Guanghang County and one in Da County. Each is within 100 km of the other but is less than one third of the estimated optimal scale. Each also tells a story about the drive of localities for local self-sufficiency and the ineffectiveness of investment approval and licensing procedures. According to the Textile Ministry, it distributes a capacity quota for polyester production to each province. Sichuan received a quota of 8,000 tons per day. The province chose to split up the quota. In addition, the ministry distributes guidelines for the optimal scale of production. These were ignored. The Chengdu Polyester Fiber Factory split up its investment program into two projects of Y 30 million each, thus avoiding review by the SPC. The Provincial Planning and Economic Commission approved the project The Guanghang County Polyester Factory was established without a license but with the support of the county. Following the completion of the initial invesunent and with the support of top government leaders, the Mnistry of Textile Industry eventually recognized the factory. Source: Jeffersun and Zou, 1989. Box 3.2: SUPPLY IMALANcEs WrHN TME REFRIGERATOR INDUSTRY: ASNcwRnC LNVES N REQUUtEMENTS W-ithin China, there are approximately 100 refrigerator assembly plants in operation. More than one half of the industry's factories are operating outside the state plan. The uncontrolled expansion of refrigerator assembly plants has caused refrigerator production to outstrip the addition of new capacity for compressor production. Domestic producers can produce approximately 2 million compressors a year; but last year's demand exceeded production by 6 million, resulting in many compressors being imported, a figure that was double the state quota. Given the shortage of compressor production, why have enterprises and local governments not committed extrabudgeary funds to expand compressor production? A principal reason is that while the scale of investment and the technologies required for establishing an assembly plant are limited, the construction of compressor plants involves sophisticated technological requirements, commitments of large- scale investment and long-term investment horizons. Source: Jefferson and Zou, 1989. -77 - capacity while upstream component and raw material production capacity has not been able to keep pace (see Box 3.2). Production in intermediate sectors typically requires high capital investment and longer learning periods. Central government assistance, or involvement, is a more likely prerequisite for investment in these sectors. Not surprisingly, therefore, footloose provincial level investment has shied away from such sectors, aggravating the problem of structural imbalance. Thus, for example, in the case of consumer durables such as refrigerator and televisions it is found that the rapid growth in assembly capacity has not been matched by the needed capacity in compressor and cathode ray tube manufacturing capacity. High cost or Intermediate Inputs. Intermediate goods typically require larger scale investments for efficient production. The tendency noted above to fragment investment and production capacity has inevitably contributed to the high cost of intermediate goods in China. The problem seems to be more acute in certain segments of machinery and electronics. In electronics, for example, components such as capacitors and cathode ray tubes cost between 1.4 to 2.7 times the world price, in part due to the fragmented nature of domestic production capacity."3 This penalizes downstream industries, which cannot rely on domestic inputs for their exports. The existing trade regime, by providing high levels of tariff and nontariff protection, has not provided the right incentive for rationalizing production capacity in ihe intermediate and capital goods sectors. While it is true that China imports substantial volumes of intermediate and capital goods, these are in large part noncompetitive with local production. Shortage of Certain Raw Materials. Aside from the high capital cost requirements, the severe antiproduction bias against raw materials with controlled prices has been an important reason why foot-loose investment funds are not used to expand raw material production capacity. In the case of the iron and steel industry, for example, enterprises with autonomy have shifted production away from iron ore to steel products, the price structure of the latter being considerably more favorable. In this situation, shortages of critical raw materials have been avoided only through planned investments, such as the Baoshan Complex in the case of iron and steel. However, when and where planned investments have fallen behind, supply bottlenecks have inevitably appeared. A case in point is the synthetic textiles sector, which suffers from shortages of such raw materials as Phthalic Anhydride (PTA).'4 Unless the trade and price regime's existing bias against raw material production is eliminated, raw material shortages could become more widespread in the future as reliance on planning declines. The central govermment has so far attempted to address these various problems by recourse to a variet of administrative controls. Thus, the investment approval system, the credit plan and the materials supply system have been used to try and guide local and provincial investment into areas of national priority, and guidelines are used to try and ensure that these investments respect criteria for minimum production scales. Prce controls and negative approval lists have been used in an attempt to check excess capacity in the consumer durables sector. And programs of technology imports and managed mergers have been used to taclde the problem of inefficiency in the intermediate goods sector. As the trend towards decentralization continues, such methods of intervention will become less and less effective As has already been seen. the govermnent's investment approval system is frequently circumvented with counterproductive results (Box 3.1). Under the circumstances, the government will have no choice but to rely on more indirect levers of cofitrol. It is in this context that the trade regime will have an important role to play. -78 - Conclusions China's trade regime has served to reinforce certain basic biases and problems of China's industrial sector. First, the elaborate system of export controls has helped keep the price of key primary goods and raw material imports depressed (this is the case for petrochemicals, for example). This has created an antiproduction bias in these sectors that, to the extent it is not offset by planned investments, can lead to shortages. Second, the trade regime has helped maintain inefficient and high cost intermediate and capital goods sectors. The key problem sectors, with large production shares accounted for by SOEs, appear to be certain types of machinery and synthetic textiles. Third, the trade regime has accentuated a strong resource pull effect into downstream consumer goods industries that are now plagued with excess capacity. High tariff barriers agait competing imports also appear to have helped parochial provincial governments sustain suboptimal investments designed to meet the needs of a regionally segmented market. Finally it appears that, in several cases, mostly mature consumer products such as washing machines, televisions, and sound recorders, the existing combination of NTBs and tariffs is not binding, Le., there is "water in the tariff' and domestic secondary market prices, although still high relative to international prices, are lower than the tariff-inclusive price of competing imports. 79 - Endnotes 1. See, for example Lardy (1992) and World Bank (1987a). 2. World Bank (1987a), p. 146. 3. Customs General Administration (1988), p. 201. 4. Customs General Administration (1988), p. 197). 5. World Bank (1987a), Annex 2, p. 35; Customs General Administration (1988). 6. Development Research Center of State Council. 7. Garnaut (1992); Findlay, Martin and Watson (1992). 8. This result is consistent with that reported by Ma and Song (see Lardy 1992, p. 92). 9. This is drawn from Martin (1992). 10. Jefferson and Zou: China Sectoral Case Studies on Industrial Policies: Iron and Steel, Consumer Durables and Chemical Fibers Industry, World Bank, December 1989. 11. See L. J. Singh (1992), for a comprehensive description. 12. Wodd Bank (1991c). 13. See World Bank (1990a). 14. Jefferson and Zou (1989). - 80 - IV. PRIORITIES AND PERSPECTIVES ON REFORMING CHEINA'S TRADE REGIME A. TRADE STEGY AND TRADE REGIME OmETAnoN Conventional classifications of trade regimes have relied on three categories to try and depict the spectrum of trade strategies followed in developing countries. These are: Free Trade (T); Import Substitution IS); and Export Promotion (EP) regimes. While free wade regimes are optimal from the point of view of static resource allocation and efficiency, developing countries have typically opted for some form of intervention. On the one hand, countries with strong incentives for domestic production 1/ have been labelled import substituting or inward oriented. On the other hand, the economies that have favored exports over import-substituting activity have been labeled export or outward oriented. This bipolar classification assumes that incentives for exportables and importables are negatively correlated. Underlying ihis classification is the standard two-sector trade model, in which one sector produces exportables and the other importables, and the production of one cannot increase without reducing the production of the other. Thus, in this model, IS and lEP are necessarily mutually exclusive and are supposed not to coexist. A recently proposed expanded typology permits a more nuanced, and more usefiul, differentiation between alternative trade regimes by including a third sector in the model, that of nontradeables.1 Under this modified paradigm, it is perfectly possible to provide strong incentives to exportables while simultaneously protecting importables-suchpolicies would attract resources into both the exportable and importable sectors at once, but at the expense of nontradeables. Between the two extremes of pure IS and EP trade regimes, the new typology allows, aside from a free trade regime, for two intermediate possibilities, these being "protected export promotion' (PEP) and "de facto import promotion' (DIP). A pure IS trade regime is one in which import substitution receives a positive incentive, while exports face a disincentive. India, Brazil and Argentina are examples of a such a regime. In the face of ample evidence concerming their poor performance, the enthusiasm for such regimes has waned. Both Brazil, and to a lesser extent also India, have taken steps to restoring some balance to the incentive structures of their respective trade regimes by reducing the pervasive antiexport bias inherent in them. At the other end of the spectrum, pure EP regimes are ones in which support for exportables is positive, while protection for importables is negative. Such regimes are biased against domestic production of import substitutes. The trade regime of Taiwan (China) in the late 1960s seems to fit this description' A free trade regime is one in which incentives are in effect neutral between domestic import-substituting activity and export promotion. The trade regimes of Singapore and Korea in the late 1960s are 1/ That is, regimes in which incentives for import substitution outweigh incentives for export promotion. examples of such a regime. The empirical evidence shows that both the free trade or neutral trade regime and the EP regime have been associated with rapid growth rates. The fourth regime type, the PEP regime is of special interest. Tkhis regime allows for the coexistence of both IS and EP policies. It is an outward-oriented strategy, based on the "infant exporter" argument, its objective being to promote import substitution in order to develop new exports. This regime captures the orientation of the Korean trade regime of the 1970s. Whether such a policy can be implemented without falling prey to the problems of rent seeking and the development of inefficient, uncompetitive industries behind protective barriers appears to depend heavily upon the ability of the government to adapt its policies and to remove assistance from industries which fail to become competitive in international markets. This general approach should therefore be used only with considerable caution and with a clear awareness of the demonstrated potential risks. As successful as Korea was in diversifying its export structure into more capital and knowledge based industries in the 1970s, it is well recorded that its import-substituting heavy and chemicals industry drive led to misallocation of resources and created serious macroeconomic imbalances. This in part is what propelled Korea to adopt an important program of import liberalization in the 1980s.3 The final regime type, the de facto import promoting" or DIP regime, is a fairly atypical one, and represents the case where strong disincentives for import-substituting activity coexist withi a bias against exporting activity. Such a trade regime minimizes exports and maximizes imports in order to provide the needed resources and incentives for domestic investment and consumption. It is tenned a *de facto" strategy because most DIP regimes come about as unintentional results of economic policies. Examples of such a regime include Colombia in the late 1960s and Hungary in the 1980s. China's prereform trade regime came closest to the pure IS paradigm. As noted earlier, historically, China's preoccupation was with self-sufficiency. As such, the economy had a pervasive antiexport bias built into it, and planned imports were used only to make up for domestic shortfalls. Over time, China's trade regime has evolved in the direction of the PEP paradigm. Certainly, all indications are that the Chinese authorities are attempting to pursue a trade strategy s&milar to that of Korea. As in Korea in the 1970s, China has been providing considerable direct and indirect, targeted and blanket, support to exports, while also maintaining strong incentives for import substitution in a number of sectors. However, China's trade regime is still fraught with inconsistencies that arise from the dual nature of its overall policy regime. Conflicts between the priorities of the planning system and market segment of the Chinese economy are in many cases reflected in the orientation of the trade regime. Thus, the exports of numerous products subject to planning remain severely taxed, while domestic price controls make import-substituting production in certain sectors equally unattractive. If not for planned investments, such a policy regime would result in even more serious domestic shortages and import hunger. In these cases, China's trade regime bears the marks of the DIP paradigm discussed above. Additional reforms are needed before China's trade regime can be used effectively in support of a PEP type strategy. And even then, the experience of Korea having demonstrated the associated risks (Chapter 6), it is not clear how successful China can be in pursuing such a strategy. The remainder of this chapter focuses on (a) priorities for future trade regime reforms, and (b) the implications of alternative approaches to reform. - 82 - B. REFORM PRIORITES FOR TIlE IMMEDIATE TERM Chapters 2 and 3 demonstrated that the structure and implementation of China's trade regime has been opaque and complex, although this is in the process of changing.Z/ The authorities have relied on an array of overlapping instruments of direct administrative control to achieve various objectives. The tariff as an instrument of trade policy remains underutilized and there appears to be considerable redundancy in the system, The first priority for reform should be to make the system more transparent, simple and less dependent on discretionary policy instruments. Canalized Imports and Products SubjecL to Mandatory Import Planning Canalization is understandable for products whose domestic price is maintained artificially below international levels and imports of which, therefore, need to be subsidized as they are fed into China's domestic economy. In such cases, canalization makes it easier to keep imports to within plan targets and to administer the associated subsidy. In principal, the imports of no commodities outside the mandatory import plan are eligible for subsidies. There is, therefore, no persuasive reason for canalizing any commodities that do not figure as part of the mandatory import plan.a/ Yet a number of such products, including sugar, cigarettes, textile yarns and fabrics, and televisions, are to be found in Category I and II imports (Chapter 3). If the intention in such cases is to provide protection to domestic activity, canalization is not the most desirable instrument to use for this purpose. More importantly, given that most of these products are also subject to some form of import licensing or control, canalization is in any case redundant. Thus, the current scope of the government's canalization is needlessly broad, and its coverage could be reduced significantly without undermining the planning process. Of the 32 perce.it of imports that were subject to canalization in 1992, only 18.5 percent were subject to mandatory import planning; there is scope, therefore, for decanalizing the remaining 13.5 percent. Second, there is no clear distinction between Category I and Category II, except that the number of FTCs authorized to handle the former are more limited than those authorized to handle the latter. Given that the number of FTCs with permission to import Category I products is already very large-as many as 57 FTCs have authorization to import chemical fertilizers alone (Chapter 3)-the distinction between Category I and II imports would seem to be redundant and could be abandoned. A single list of only those products that are subject to mandatory import planning should remain subject to canalization. All other imports should be open to any FTCs and enterprises with direct trading rights. Import Licensing and Quotas As discussed in Chapter 3, import licenses and quotas are presently used for multiple purposes, and there is considerable overlap between imports subject to licensing and those subject to canalization. Of the 25.1 percent of imports subject to licensing in 1992, 13.4 percent, or more than half, were also subject to canalization, and most of these represented 2/ See section in Chapter 5 on recent reform initiatives, and Office of the United State Trade Representative (1992). 31 The only exception to this would be the imports of petroleum products which, though not subject to mandatory import planning, are imported and subsidized. - 83 - imports subject to mandatory planning. Licensing requirements for products subject to mandatory import planning would seem to be useful only as an administrative device for distributing a fixed amount of subsidized imports between various users involved in planned activities. It follows that above plan imports of such products, i.e., imports not eligible for subsidies, should not be subject to any form of licensing or quota requirements. The 11.7 percent of imports that were not canalized, but were subject to import licensing requirements in 1992, fall into roughly two categories: those for which licenses are used for protecting domestic manufacturing activity, and those for which licenses are used essentially to restrict demand for nonessential commodities (mostly tobacco products, beverages and nonessential foodstuffs). As concerns products for which import licenses are intended as a protective device, Chapter 3 showed that there are some for which licensing is in fact partly redundant. Thus, existing import licenses on a range of road vehicles, for example, could be lifted immediately without causing any dislocation. In cases where import I icenses provide binding protection, several improvements can be made. One possibility would be to replace import licenses and quotas with tariff equivalents. This would allow the rents to be captured by the government instead of being allocated to individual enterprises or importers. Whether or not this is done, steps would certainly be taken to ensure that import licensing procedures do not penalize exporters. Specifically, the import of all capital equipment and materials could be exempted from import licensing requirements. It is difficult, if not impossible, to determine the extent to which the authorities have in the past used import licensing as a tool for controlling access to foreign exchange in addition to the various objectives discussed above. We saw in Chapter 3 that for some products, licenses are not awarded without evidence of central government foreign exchange allocation. In other cases, licenses seem to be used to regulate the imports of products, especially nonessential consumption items, financed through retained foreign exchange. Import licensing is not the appropriate instrument for controlling import demand or allocating centrally controled foreign exchange. As discussed in Chapter 2, administrative allocation of foreign exchange should be eliminated and the burden for regulating import demand should allowed to fail on indirect policy instruments such as monetary policy and the exchange rate. If the suggestions made above are implemented, such import licenses and controls as remain would have only two nonoverlapping uses: (a) that of distributing planned imports between different users, and (b) that of protecting certain industries. Finally, it is important that incentives relating to China's import regime be made as uniform as possible across the country. In practice, it seems that the administration of the import regime v* ties considerably across provinces. Part of the problem arises from the fact that each province or autonomous municipality has some discretion over the application of import licenses. In principle, no province or municipality should have the authority to administer import licenses per its own regional considerations. Province specific authority over inport licensing undermines the integrity of China as a single customs territory and should be avoided. Import Controls The most opaque part of the trade regime has been the functioning of the system of import controls. In 1992, these were administered essentially by the State Council's Machinery and Electronics Imports Office (SCMEIO) in order to protect the production of -84 - domestic industry (Chapter 3). As in the case of import licenses, import controls on a range of consumer products appear to be partly redundant. The domestic prices for consumer durables and electronics such as televisions, refrigerators, washing machines, sound recording and equipment appear to be below tariff-inclusive import prices. For such products, import controls could be removed immediately and the burden of protection should be allowed to fall entirely on tariffs. The govermment has already taken some steps in this direction and it is also trying to make the whole process more transparent (see Chapter 5)-these are encouraging signs. Second, it is unclear why the distinction between import licensing and control is necessary, other than perhaps to indicate that the former is administered by MOFERT and the latter is the responsibility of SCMEIO. Different administrative centers of decision making for the purpose of regulating imports would seem to be a needless procedural complication. It would be more rational to centralize the administration of all import controls and licensing. NTBs and Balance of Payments Management While there is no doubt about the desirability of doing away with all administered controls on access to, and the allocation of, foreign exchange, the ability of the government to do so in practice will depend on the effectiveness of indirect instruments such as monetary policy and the exchange rate in controlling import demand. Given that 100 percent of all nonplan imports, and at least 75 percent of all imports, are now priced at the swap market exchange rate, and that imports closely follow trends in the money supply (Chapters 1 and 2), China should no longer need to rely on discretionary import controls for balance of payments purposes. However, to the extent that direct controls over access to foreign exchange prove to be necessary during a period of transition towards indirect macroeconomic management, they should be used to contain the government's own plan related import demand-which after all accounts for a good 50 percent of total imports-rather than interfering with imports that are financed out of the retained foreign exchange earnings of enterprises. What this implies is that SAEC oughtnot to prevent any enterprise from accessing FEACs, even in times of balance of payments distress. The central government should instead rely on indirect instruments, and if necessary, on administrative controls on its own imports. Tariffs The problems with the current tariff regime are the multiplicity of rates, and their wide dispersion and high (in some cases extremely high) rates. Given that the tariff is not an important source of revenue for the government, China, unlike most other developing countries, has much greater flexibility in redesigning its tariff structure fairly quicldy without fear of major fiscal dislocations. The primary objective of China's tariff is to protect domestic manufacturing activity and its escalating structure is such that tariff rates on final products are typically very high. Chapter 3 showed that the average rate on consumer goods is 65 percent, with rates on items such as clothing, consumer durables, and miscellaneous manufactured articles ranging from 80 to over 100 percent. However, international price comparisons indicate that in many of these cases there is considerable "water in the tariffls applied on import-competing products. The domestic secondary market price for basic and mature consumer goods, including such items as washing machines, televisions, sound recorders, etc., is below the tariff-inclusive import parity price. Likewise, in the case of a wide variety of product groups such is apparel, footwear, toys, sporting requisites and miscellaneous manufactured items, China has already achieved export - 85 - competitiveness, and the high existing tariff rates would seem equally redundant. A substantial simplification of the tariff structure could therefore be achieved quite painlessly by reducing the level and number of rates that currently apply to consumer goods. Aside from providing protection, China's tariffs are also used to selectively penalize the consumption of items such as tobacco manufactures, and beverages. Tariffs on these product categories are in excess of 115 percent and end up providing needlessly high margins of protection to domestic manufacturing activity. The same appears to be the case for a variety of processed nonessential foodstuff. Where the objective of the govermment is to tax consumption, excise levies or luxury sales taxes should be used in place of the tariff. A sales tax penalizes consumption without distorting the trade regime because it applies equally to both sales of domestic products and imports of import competing products. Tariff Exemptions The analysis of Chapter 3 showed that the bulk of tariff exemptions are related to export processing activity. However, it appears that substantial exemptions are also being accorded for imported equipment used in domestic production, and that foreign investors in particular, are able to benefit from such provisions. Exemptions for imports used in domestic production are distortionary and encourage foreign investors to set up capital-intensive assembly type operations behind high tariff wzvlls. Moreover they represent a needless loss of revenue. While it is true that import tariffs do not constitute a very important part of government revenues, collections from import duties have been declining fairly rapidly and this is not all accounted for by exemptions relkted to export processing. Any measures that can raise tariff revenues in a nondistortionary way should, therefore, be implemented in the immediate term. Export Controls and Taxes China has used export controls and taxes for improving its tenrs of trade in the case of a few commodities in which it has a sufficiently large share of the world market. In fact, such a policy is difficult to finetune and could end up doing more harm than good for China's export earnings. There are two important circumstances under which this might happen: (a) if China's trading partners retaliate by imposing their own trade restrictions (import or export); and (b) if the effective export tax is set too high. In practice, the optimal setting of an export tax poses many difficulties because it requires knowledge of the long-run elasticity of export demand. This is not easy considering that estimates of such an elasticity must take account of the effects of possible demand switching technological changes that might be induced by short- term price increases of the product in question. Most countries have tended to levy too high a tax based on estimates of short-term export demand elasticities. And in most cases, the long run elasticity of export demand for their products has turned out to be much higher than anticipated resulting in dramatic losses of market share. Given the experience of other counties, it is not advisable for China to rely too heavily on export controls for terms of trade purposes. As was noted in Chapter 3, the more important use of export controls in China has been for keeping the domestic prices of exportables such as coal and petroleum, considered critical for the domestic economy, below international levels. Because of its likely implications for some downstream industries, the dismantling of export controls will have to be pursued in a phased manner in tandem with the ongoing process of domestic price reform for these items. Meanwhile, the use of export taxes should be favored over that of export licenses because the - 86 - latter allow the few FTCs designated to handle such products to capture sizeable and undeserved rents (see also Chapter 6). C. PRIORnITS FOR TBE MEDIUM ITRM The sectoral evidence presented in Chapter 3 suggests that four basic problems plague much of China's industrial sector: suboptimal scale and fragmentation of productive capacity, structural imbalances between downstream and upstream activity, high cost and low quality of a range of intermediate inputs, and shortages of certain raw materials. Ulntil now, the central government has attempted to address this situation through the use of administrative controls. Thus, the government has relied on investment licensing and approval mechanisms to try to ensure that suboptimal investments are not made. In addition, the credit plan and the materials supply system have been used to guide investment into priority sectors. Such measures are, however, no longer adequate, and may even do more damage than good in the current environment of transition. Essentially, centrally admninistered controls cannot address a number of problems that have been the unintentional result of the process of decentralization. For one; with local pdriorities assuming greater importance, provincial authorities have been trying to avoid central government scrutiny of locally financed investment decisions wherever possible. In this situation, central government investment licensing may in fact have accentuated the problem of suboptimal scale, as provinces have turned to repackaging investments into smaller subcomponents in order to avoid the minimum size for which central government approval is mandated. Second, as provinces have gained greater control over the use of their financial resources, they have become more responsive to considerations of financial profitability. Thus, the central government practice of administered pricing for key inputs is likely to depress provincial nonplan investment in heavy upstream industry and could result in the shortage of certain raw materials. Third, decentralization has been accompanied by parochial efforts to obstruct interprovincial trade. The central government has not been able so far to prevent this type of market segmentation. Looling to the future, for the central government to be able to bring provincial investmnent priorities into line with national requirements, progressively greater use will have to be made of indirect controls. In this context, the trade regime will have an important role to play. The existing system of trade controls cannot help resolve the structural problems of Chinese industry-if anything, it only reinforces the deficiencies of the trade regime. Chapter 3 showed that high and cascading protection to consumer goods, combined with the segmentation of China's market through interprovincial barriers to trade, only reinforces the problem of suboptimal scale and excess capacity in downstream activity. Likewise, the high protection that is in 5eneral accorded to intermediate and capital goods industries contributes to their high cost and penalizes downstream industries that seem to be able to attain international competitiveness only through continued heavy reliance on duty free imported inputs. The use of import subsidies and export taxes on a range of primary goods sectors keeps their domestic prices well below international prices and undermines the incentive for nonplan product"on in these sectors- In the light of the above, China's trade regime wiIl need to be substantially reoriented over the medium term, such that, as the importance of the plan declines, (a) protection to consumer goods production is reduced, (b) protection to intermediate and capital goods is reduced, and (c) the bias against the production of industrial raw materials is reduced- -87 - Reducing Protection on Consumer Goods Under the present incentives structure, it is profitable for provinces or local enterprises to invest such funds as they control into assembly type operations and light industrial activity, where the learning costs are low and the requirements for minimum plant size are relatively small. Rather than trying to address the problem of the proliferation of small refrigerator and television assembly plants by withholding investment approvals, subjecting these sectors to greater import competition would be a more effective way of rationalizing production capacity in these sectors. Reducing protection in the consumer goods sectors is not likely to result in much dislocation for several reasons. In many of these sectors, China has already become an efftcient exporter. In such product segments as footwear and travel goods, and other light industrial goods, for example, Chinese firms should not have any difficulty adjusting to greater import competition. Second, the contribution of these sectors to total GVIO is relatively smallAf Third, a rapidly growing TVE sector promises to absorb a good proportion of such labor as may be displaced.5/ Leaving aside a few exceptions such as personal computers and VCRs, none of the consumer goods sectors is subject to binding NTBs, and in many cases even the tariff seems to be partly redundant. An increase in import competition will, therefore, come only from substantial cuts in existing tariff levels. Given the exceptionally high protection that is provided to the machinery and textiles (mainly, synthetic textiles) sectors, both (but especially the former), important inputs for downstream consumer goods, protection on the latter cannot be reduced without also reducing it on the former. Tariff cuts in clothing and consumer durables, for example, will therefore need to be accompanied by cuts in tariffs on the machinery and textiles sector. Reducing Protection on Intermediate and Capital Goods The domestic content of many of China's fastest growing exports remains low because of the high cost and low quality of domestic intermediate inputs. Liberalizing access to imports of intermediate and capital goods would reduce costs and help to make import substitutes more competitive. As seen in Chapter 3, the two intermediate goods sectors that are likely to be the most problematic from the point of view of import liberalization are textiles and machinery and electronics.6/ The bulk of the existing NTBs and the highest tariffs amongst intermediate goods are concentrated in these two sectors, which together account for 26 percent of GVIO and employ about 28 percent of the labor force in independent accounting units. Import 4/ The shar of all consumer goods (including miscellaneous edible products, beverages and tobacco mnufactures) together in GVIO was under about 10 percent in 1990. Tobacco manufactures constitute only a subset of SlTC Category 12. 51 This is obviously the case for such sectors as clothing where TVEs account for about one quarter of GVIO in independent accounting units. But even in sectors such as food processing and beverages where the share of SOEs in GVIO has been very large (between 96 and 99 percent) there are signs that TVEs are making rapid inroads (Yusuf, 1992, p. 16). 61 Defined to include SITC revision 2 categories 71 to 77. - 88 - liberalization in these sectors would involve not only the dismantling of NTBs, some of which are not binding anyway, but also the reduction of tariffs over time. Given that existing protection is in many instances binding within these two sectors, some form of assistance will likely be needed to help them through the transition to a less protected domestic market. However, it must be noted that both sectors mask a great deal of variety and not all their subcomponents are equally vulnerable. In the case of textiles, cotton and wool textiles should be able to adjust to international competition with relative ease-it is essentially only the segment of synthetic textiles that is likely to face serious difficulty. In the case of machinery, it is the machinery for special industries and the higher technology segments of electrical machinery, together accounting for about 6 to 7 percent of GVIO, that are likely to face the most difficult adjustment problems. In the other segments, TVE penetration is already high and growing (telecommunications equipment, for example) and/or the share of local production in total GVIO is negligible (office equipment including personal computers). Other vulnerable and currently highly protected intermediate sectors include such apparently high cost product categories as petrochemicals and plastics (Chapter 3)- These, however, are considerably less important from the point of view of GVIO shares The product category of road vehicles does account for a significant share of GVIO (3.7 percent). As was seen in Chapter 3, it seems that for certain vehicle types Chinese domestic prices are not far out of line with international norms. However, this sector as a whole is far from being internationally competitive. Finally, iron and steel, an important intermediate goods sector, seems to be very competitive, with domestic secondary prices well below import parity. The large concentration of NTBs on the imports of iron and steel products would, therefore, seem unwarranted. Indeed the Chinese authorities have already indicated their intention to remove most of the NTBs on this sector over the next two years (see below). However, China's current competitiveness in this normally capikal intensive sector is likely to stem from the low domestic price of domestic energy. As such, a reduction in protection alone is unlikely to motivate this sector to raise productivity levels. Energy prices would also need to be adjusted upwards. What this serves to underline is the importance of coordinating trade and price reform. Reducing the Bias against Raw Materials Considerable progress has been made in price reform, and subsidies on a range of importables including chemical fertilizer and certain types of cereal have been reduced. However, price distortions remain for many others. As the role of planned investments declines. depressed prices of these products could lead to domestic shortages. The most extensive distortions remain for such exportables as coal, the low domestic price of which has made China one of the most energy intensive nations in the wo-ld? It is in China's interest to adjust the domestic price of such products upwards through the phased dismantling of existing export controls and taxes. D. ALTERNATIvE APPROACHES TO REFORM A fill assessment of the consequences of trade liberalization requires that the interactions between sectors be taken into account in a model which accounts for differentiation both between domestic and imported goods, and between traded and nontraded goods. For this purpose, various possibilities for trade policy refonns are analyzed using an updated version of - 89 - a general equilibrium model developed by Martin (1992).71' Given the complexity of the Chinese economy, the results of this analysis need to be interpreted with due regard to its limitations and simplifying assumptions. Such a modelling exercise can be expected only to provide insights into the broad potential consequences of alternative approaches to trade policy reform. Six reforn experiments are considered. The first, or the base case scenario, assumes a radial 50 percent reduction in the level of all effective imDort tariffs, i.e., a 50 percent reduction in the effective cumulative protection provided by binding NTBs and tariffs. This experiment involves some "flattening" of the tariff schedule since high tariff rates are reduced by substantially more than low tariff rates.8I Such a tariff cut would bring China's tariff structure roughly into line with that of Korea's, for example, with average rates on consumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, agricultural goods to 17 percent and mining to 10 percent The second experiment is the application of the "Swiss formula" (see Table 4.1 for a description) which was utilized for tariff cutting by developed country participants in the Tokyo Round of trade negotiations under the GAATT.7 Both these experiments represent a nonselective approach to reforming the import regime. Scenarios m, NI and V analyze alternative possibilities for selective import liberalization. Scenario m is a 50 percent reduction in tariffs on machinery only. The machinery sector is one of the largest sectors of the Chinese economy, large segments of which are high cost and penalize downstream industries. The exercise conforms with China's objective to modernize its industrial base and absorb new technologies. Scenario IV is a 50 percent reduction in average tariff rates of consumer goods only (processed food, clothing and miscellaneous manufacturing). Consumer goods are presently subject to the highest rates. This exercise conforms to the concerting approach to tariff reform in which the highest rates are reduced sequentially! The fifth experiment involves a 50 percent reduction of the tariff rates on consumer goods and the two intermediate goods sectors with the highest protection (textiles and machinery). Finally, Scenario VI involves an equipropor-ional 50 percent reduction in the tariff equivalent of aU trade barriers: import tariffs; import NTBs; export taxes, and export NTBs. It illustrates the implications of allowing the prices of key raw materials to rise to international levels. Table 4.1 summarizes the results of the simulations. 7! The model utilized in this analysis is based on the logic of the two-tier pricing model of the post- reform Chinese economy developed by Byrd (1987), Sicular (1988) and Wu and Zhao (1987). The model is static and focusses on enterprise and consumer responses to changes in secondary market prices, with production and consumption decisions within the plan not affecting total output and demand levels, but operating purely to achieve distributional goals. Given this simplification, the model takes into account the interactions between industries summaized in tbe input-output structure of the economy and the interactions between enterprises through competition for resources, particularly labor. While institutional constraints on labor mobility exist, it is assumed that labor can still move between sectors either through labor moving to find altemative employment or through expanding industries moving to rural areas to meet their labor needs. Consumers are assumed to respond to changes i, ;he relative prices, at the margin, of particular goods. The two-tier pricing system employed in the market for foreign exchange, which affects the retuns from exporting and the costs of importing is, however, modeled explicitly. S/ For example, a tariff rate of 100 percent is reduced by 50 percent under this experiment while a tariff rate of 10 percent is reduced by only 5 percent. - 90 - Table 4.1: EFFECTS OF REDUCI1oNS IN PROTECTION: VARIouS SCENRIOS (percent change from base) 1-basc case II 1V V VI 50% Swiss III 50% tariff 50% redn on 50% tariff fonnula 50% redn on five hi reduction reduc- tariff redn on pure cons. tarifr in all tion reduction la machinery goods /b goods Ic distortions Export volume 11.0 15.2 2.4 1.3 4.8 22.8 Import volume 11.6 16.8 2.9 1.1 5.4 33.2 Sec market cxchange rat 4.0 5.4 LO 0.6 1.8 -8.6 Rcal income Id 0.8 1.1 0.4 0.0 0.5 1.5 Real wage 0.8 1.1 0-3 -0.1 OA -0.1 SectomI Output Crops -0.2 -0.1 0.1 0.0 0.1 0.2 Livestock 0.1 0.1 0.1 -0.1 0.0 0.8 Mctallurgy -0.2 -0.2 -0.1 0.0 0.0 -0.6 Electricity -0.0 -0.1 0.0 0.0 -0.1 -0.7 Coal 0.2 0.3 0.1 0.0 0.1 18.2 Petroleum mining 0.0 0.0 0.0 0.0 0.0 0.7 Petroleum rcfuing 0.0 0.0 0.0 0.0 0.0 -0.0 Chemicals -0.1 -0.1 0.1 0.0 0.1 -1.9 Machinery -0.3 -0.5 -1.0 0.1 -0.9 -3.2 Building materials 0.1 0.2 0.0 0.0 0.0 -0.2 Wood -0.7 -1.1 0.2 0.1 0.3 -2.8 Food 0.1 4.1 0.1 -0.4 -0.4 -0.9 Textiles 04 0.4 0.1 0.7 -0.2 -1.5 Appael 1.6 2-5 0.1 0.1 1.1 -0.2 Paper -0.2 -0.5 0.1 0.1 0.2 -2.1 Misc. rnmnuring 03 0.3 0.3 -1.3 -0.9 -6.8 Constuction 0.1 0.1 0.0 0.0 0.0 -0.2 Freight tansport 1.0 1.3 0.2 0.1 0.4 -2.5 Pas. transport 0.0 0.0 -0.1 0.0 -0.1 -0.4 comme 0.9 1.2 0.0 0.1 0.3 -1.2 Misc, services 0.0 4.1 0.0 -0.0 -0.0 0.1 Educationihcalh 0.0 0.0 0.0 0.0 -0.0 0.2 Public administration 0.0 0.0 0.0 0.0 0.0 0.0 Housing 0.0 -00 0.0 0.0 -0.0 0.1 Sectoml Exports Crops 12.5 165 1.7 1.8 3.9 117.9 Livestock 123 16.3 1.8 1.9 4.0 59.6 Metallur 15.9 213 4.9 6.2 5.0 86.0 Electicity 8.1 11.1 2.1 I.5 4.0 -97.7 Coal 11.2 152 2.6 1.7 4.8 79_21 Petoleum mining 0.9 1.3 0.2 0.2 0.5 29.1 Petroleum refining 0.7 1.1 0.1 02 0.4 10.5 Chemicals 165 21.3 0.1 0.3 0.7 7.6 Machinery 19.7 27.9 11.4 1.0 12.9 -10.6 Building mastials 10.8 14.7 2.5 1.5 4.5 -28.4 Wood 16.4 22.8 1.5 1.2 3.0 -7.9 Food processing 12.9 17.7 1.5 2.9 4.8 -13-4 Textaes 9.3 13.8 0.7 0.7 6.2 -4.5 Apparel 11.1 16.4 1.0 0.9 7.1 -5.6 Paper 14.5 19.5 1.6 1.4 3.5 -15.9 Misc. manuisung 12.2 17.7 1.3 5.7 7.6 -17.1 la Utlizes the Swiss formula from the Tokyo Round of trade ncgotiations undcr GAfl whcre T1=A.TJl(A+T1) where T is the base prcentage level of the tariff and T, is its levl aftcr he reformn and A is sca a representative value of 14. &b Fifty reduction in tariffs on processed food, textilcs, apparcl and miscdllancous manufactures. Ic Includes consumer goods as in lb and textiles and rnachhiery. Id Measured as the Hicksian compensating variation for thc change, taking into account the consumption benefits less any changes in GDP at domestic prices and compensated trade tax revenucs, and expressed as a share of base period GDP. -91- The Base Case: Erfects of a 50 Percent Radial Cut in Efrective Tariffs The effects of a 50 percent tariff reduction on individual industries depend upon both the specific characteristics of each industry and the broad macroeconomic consequences of each experiment. At the macroeconomic level, the secondary market exchange rate is a key variable. Following the projected liberalization of imports, the demand for foreign exchange increases and its price rises by an estimated 4 percent in the case of this experiment This partially offsets the reduction in the landed price of imported goods and, very importantly, raises the returns from exporting. With exports more profitable, and imports relatively less expensive, both import and export volumes ar estimated to expand by a little over 5 percent each. Another important macroeconomic consequence of trade liberalization is an increase in the real wage rate expressed as the nominal wage relative to the average price of consumption goods. This increase reflects both the reduction in price of consumption goods and a shift in the composition of output towards the labor-intensive goods in which China has strong comparative advantage.9 Inpact on Sectoral Output.2/ Ihe impact of the base case reform scenario on sectoral output is, on the whole, quite small. What this indicates is that an important change in the relative price of importables is likely to have only a limited impact on overall resource allocation between sectors. This is not surprising for two reasons: (a) in a country the size of China, the size of domestic consumption relative to imports is always going to remain large; and (b), more importantly, there would appear to be considerable qualitative differentiation between imports and domestic production, so that a rise in the former would not lead to major dislocations in the latter. How different sectors fare relative to one another in the base case scenario depends upon the magnitude of the tariff reduction in the sector and its trade orientation. Industries which are purely oriented to import substitution, with a relatively large share of imports in domestic consumption and a small share of output destined for export, tend to experience a decline in output. By contrast, sectors with a strong export orienmtion tend to expand their output, even in cases where there is a sizeable reduction in the tariff applying on imports of the good produced by that industry. In general, the trade orientation of industries appears to be 2a more important influence on output effects than the initial tariff level: as an example, output ofthe more import-competition-oriented crops sector falls while livestock output rises, even though the initial tarff rate on imports of livestock products was higher. The apparel sector, not surprisingly, registers a large increase in output relative to other sectors, despite a high initial tariff reduction and a consequently large fail in the price of imported clothing, because of its very strong export orientation. Elsewhere, what is encouraging is that the chemicals and machinery sectors, both currently heavily protected, with the latter accounting for substantial shares of domestic output and employment, experience only smaU declines in output. This suggests that the adverse effects on profitability of increased import competition just barely outweigh the beneficial effects on profitability of higher export rehns following the depreciation of the secondary market exchange rate. These are both highly heterogeneous sectors characterized by large two-way trade. Inport competition appears to help 2/ It shoutd be emphasized, that since the model is a static one, changes to sectoral output take place only to the extent that there is a reallocation of resources between sectors-total national output is constrained to remain the same. Also, typically in such a model estimates of welfare gains (gains in real income) tend to be small because they capture oly the static effects of taide reform. -92 - restructure these sectors so that they become more export oriented. Another significant finding is the rising output levels of the textiles sector. This sector, it was noted earlier, is the largest contributor to GVIO and employment in the Chinese economy. It is also heavily protected, and as in the case of the machinery sector, is characterized by substantial two way trade. The simulation results suggest that the contractionary effects of import penetration in the textile sector are likely to be outweighed by the expansionary demand pull of an apparel sector that can be expected to grow rapidly. Within the services sector, the two trade related sectors of freight transport and commerce experience a significant increase in output from the projected liberalization. Output of other services sectors is very slightly affected, with the reduction in the price of services relative to exportable goods apparently having only a limited effect on domestic activitv in these sectors. hIpact on Exports. A 50 percent reduction in import tariff rates (with the resulting exchange rate adjustment) is found to produce an expansion of exports from all sectors, as the increased profitability of exports draws products from the domestic market. The size of the increase in exports depends upon the initial export orientation of the sector, the size of the output response in the sector, and the impact of the reform on the domestic demand for the output of the sector. The model specification reflects the fact that it is likely to be relatively difficult to achieve a large percentage expansion in exports where exports initially make up a large share of output from the sector. This factor appears to explain why apparel exports rise only in line with the overall expansion in exports even though the apparel sector experiences the largest expansion in output Increases in domestic demand for petroleum products as intermediates appear to explain the very small expansion in the exports of petroleum and petroleum products The machinery sector records the largest expansion in exports in the base case scenario. This reflects the special treatment which this sector receives under the two-ter exchange rate system. Alone of the sectors represented in the model, this sector benefits from a 100 percent retention rate on foreign exchange- Because of this, this sector responds to a greater degree than other sectors to the depreciation of the secondary market exchange rate noted above. While the provision of different retention rates across sectors introduces a distortion into the trade regime, the higher rate on this particular product does illustrate the importance of high secondary market exchange rates in facilitating the response of exports to price signals. To try and isolate just how important foreign exchange retention is to export performance, a separate simulation was conducted to model the implications of bringing the retention ratio to the machinery sector in line with that for te other sectors, i.e., reducing it to 80 percent. These results are reported in Table 4.2. This table shows that eliminating the positive discrimination in favor of the machinery sector has a substantial negative impact on the exports of this sector, as it sees a 1.7 percent appreciation in the exchange rate applying to it-machinery exports would decline by almost five percent. Moreover, given the large size of this sector, this fall in exports would not be compensated for by the improved export performance of the remaining sectors. Also it should be noted that if the machinery sector were no longer to benefit from higher foreign exchange retention, its export growth under the base case reform scenario would no longer be the highest of all sectors, but would fall to fourth place, after chemicals, wood and metallurgy. -93 - Table 42: EFFECTS OF REouCIlON OF FOREIGN EXCHANGE REIL1NON RATOS FOR TUE MACINERY SECTOR (percent change from base) Export volunte -0.4 Impart volume -0.3 Secon%;sy markit cxchange rate 0.1 Rcal income la 0.0 Rcal wage 0.0 Sectora! Output Crops 0.0 Livcstock 0.0 Metallurgy 0.0 Electricity 0.0 coal 0.0 Pcetrolum mining 0.0 Pctroleum refining 0.0 Chemicals 0.0 Machinery -0.1 Building materials 0.0 Wood 0.0 Food 0.0 Teaxils 0.0 Apparel 0.0 Ps.pr 0.0 Misc. Manctuing 0.0 Cosruction 0.0 Freight Tmnsport 0.0 Pass. Transport 0.0 commerce G.0 Miscellancow services 0.0 Educationlhealth 0.0 Public administrion 0.0 Housing 0.0 Sectoral Exports Crmps 0.2 Livestock 0.2 Metallurgy 0.6 Electricity 0.3 Coal 0.3 Petroleum mining 0.0 Petroleum refining 0.0 Chemicals 0.0 Machincry -4.8 Building materials 0.3 Wood 0.2 Food processing 0.2 Texties 0.1 Apparel 0.1 Paper 0.2 Miscellaneous manufacturing 0.2 la Mcasured as the Hicksian compensating variation for the change, taking into account the consumption bene:is Iess any changes in GDP at domcstic Prc and compensated trade tax revenues, and expressed as a share of base period GriP. -94 - Impact of the Other Reform Scenarios The results for liberalization following the 'Swiss formula" approach presented in Table 4.1 involve a larger reduction in average tariff rates, as well as a much greater degree of flattening of tariff rates than the simple proportiinal reduction of 50 percent. The simple average reduction in tariff rates wit the version of the Swiss formula used in this case is 71 percent. The application of the Swiss formula tariff reduction yields benefits which are broadly similar to, only- larger than thtose, resulting from the base case reform scenario. The volumes of both exports and imports expand, in this case by 15 and 17 percent respectively, as against 11 and 11.6 percent resrectively in the base case. The secondary market exchange rate deprociates by over 5 percent in order to constrain the increase in demand for imports and, in so doing, stimulates exports through increases in returns at domestic prices. The changes in sectoral output levels are generally larger than in the case of the across the board 50 percent tariff cut but, in most cases, in the same direction. Thus, the machinery sector faces a larger contraction under this scenario, but the overall estimated impact is still very small at -05 percent of current output levels. The radical tariff reform exemplified by this tariff reduction does have a very marked impact on export volumes, however, with exports from a number of sectors rising by over 20 percent. Significantly, machinery exports once again show the largest percentage increase, and under this scenario, retain this performance even if the foreign exchange retention ratio is reduced to 80 percent. None of the scenarios for selective import liberalization yield results that are as favorable as the base case or the Swiss formula reform options. The least attractive option appears to be Scenario IV, or tariff reductions on just consumer goods. Unlike the other scenarios, this one does not produce any contraction of the machinery sector. However, it results in by far the smallest overall growth in exports across all sectors and points to the importance of relieving downstream industries of the burden imposed on them by high tariff protection on intermediate and capital goods inputs. Scenario V produces better results for export performance than Scenario IV, with machinery, textiles and apparel exports recording significantly superior results. This is not surprising given that machinery is an importarnt input for its own exports and that textiles are the most important input for the apparel sector. On the other hand, the export performance under this scenario still remains substantially inferior to the base case or Swiss formula options. Besides, unlike the base case or Swiss formula, Scenario VI produces a contraction of both the textiles sector and the machinery sectors. Textile- seem to suffer because, while they are made subject to greater import competition, they seem unable to make compensating adjustnents in the absence of supporting liberalization in other upstream sectors. This points to potential difficulties of approaching import liberalization in a selective manner. Scenario m, a 50 percent tariff reduction in just machinery, appears to be the most attractive of the options for selective liberalization. Although its contribution to export performance across the board is inferior to that of Scenario V (the option of cutting tariffs on the five most protected including machinery) it results, not surprisingly, in somewhat more limited domestic dislocation in such sectors as miscellaneous manufacturing and textiles. More importantly, though, this option does not result in any significantly greater contraction for the machinery sector itself, nor does it undermine its export performance-compared to Scenario V in which machinery exports grow by about- 13 percent, they register over an 11 percent growth - 95 - Tabe 43: NONTRAD eARRIERS BEFORE AND ArmR IhpRT LIBERALZATON MOPO6ED BY CIUN NonveriappinR Individual bauis SITC 2 ParcenMle shares based on imnoni shares of 1992 01 Une - digit L+C+-M+F+S C am of 1997 L a of 1997 M4+F+S code. (as of Aug 1992) (a of 1997) 1 0 0.0 .. 0.0 0.0 2 1 0.0 .. 0.0 0.0 3 2 0.0 .. 0.0 0.0 4 3 1.7 .. 0.0 0.0 5 4 60.7 .. 0.0 60.7 6 5 0.8 .. 0.0 0.0 7 6 15.4 .. 7.7 15.4 8 7 16.7 .. 0.0 0.0 9 1 0.0 .. 0.0 0.0 10 9 5.3 .. 5.3 0.0 11 11 12.5 .. 12.5 0.0 12 12 100.0 .. 0.0 LOO.0 13 21 0.0 .. 0.0 0.0 14 22 9.1 .. 0.0 9.1 IS 23 90.9 .. 9.1 90.9 16 24 57.1 .. 0.0 57.1 17 2S 100l0 0.0 100.0 18 25 53.7 .. 12.2 46.3 19 27 1.6 .. 0.0 1.6 20 21 36.0 .. 0.0 36.0 21 29 14.3 .. 0.0 0.0 22 32 0.0 .. 0.0 0.0 23 33 6.7 .. 0.0 6.7 24 34 0.0 . 0.0 0.0 25 35 0.0 .. 0.0 0.0 26 41 0.0 .. 0.0 0.0 27 42 0.0 .. 0.0 0.0 28 43 0.0 .. 0.0 0.0 29 St 0.5 . 0.0 0.0 30 52 0.7 .. 0.0 0.7 31 53 0.0 .. 0.0 0.0 32 54 0.0 .. 0.0 0.0 33 55 0.0 .. 0.0 0.0 34 56 100.0 . 0.0 100.0 35 57 66.7 .. 0.0 55.6 36 58 65.3 .. 0.0 62.7 37 59 8.3 .. 6.7 8.3 38 61 0.0 .. 0.0 0.0 39 62 18.0 .. 18.0 0.0 40 63 23.3 .. 0.0 23.3 41 64 0.0 . 0.0 0.0 42 65 54.3 .. 0.6 30.6 43 66 3.S .. 0.0 0.0 44 67 100.0 .. 0.0 100.0 45 68 37.8 .. 0.0 36.7 46 69 20.7 . 0.0 20.2 47 71 23.4 .. 8.5 8.5 48 72 24.7 .. 0.0 0.0 49 73 14.7 .. 00 0.0 50 74 22.1 .. 3.3 0.0 Si 75 39.3 .. 39.3 0.0 52 76 42.6 .. 8.5 4.3 53 77 12.2 .. 1.7 1.1 ...arue - 96 - Table 4.31 (cont'd) Nonoverlarnlng Individuil hasli SrrC 2 Parcense sharce based on imrort shares of 1992 01 Unai digit L+C+M+F+S C as of 1997 L as or 1997 M+F+S codes (a. of Aug 1992) (as of 1997) S4 78 41.8 .. 41.8 0.0 55 .79 4.6 .. 0.0 0.0 56 81 0.0 .. 0.0 0.0 S7 12 0.0 .. 0.0 0.0 SI 13 0.0 .. 0.0 0.0 59 84 8.7 .. 0.0 0.0 60 15 0.0 .. 0.0 0.0 61 87 27.2 .. 0.0 0.0 62 83 15.9 .. 15.0 0.0 63 89 0.S .. 0.0 0.0 64 94 0.0 .. 0.0 0.0 65 95 0.0 .. 0.0 0.0 66 96 0.0 .. 0.0 0.0 67 97 0.0 .. 0.0 0.0 Toal S 1.4 0.5 7,6 32.0 Note: L -kmpot License, C I nipor Consrol. M- Mandatory Plan, F a First Categoqr hnpoiu, S -Second Category -It.. Source: Office of the United Stats Tmde Reprcaetive, October 1992. rate under Scenario M11.1/ This impressive performance of the machinery sector despite localized tariff cuts suggests that it is an adaptable sector, sufficiently diverse to be able to move to more export-oriented activities following import liberalization.1l1/ Compared to the other options for selective liberalization, therefore, tariff cus on just the machinery sector seem to yield the best results for the least dislocation and reform effort. Scenario VI, which involves reductions in export taxes and export tax equivalents of export controls in addition to reductions in import tariffs, yields interesting results. Since barriers to exports bear heavily upon exports of primary commodities, and especially coal and oil, and because some of these distortions are relatively large, this simulation shows significant effects on the structure of the economy.12/ The combination of reforms under Scenario VI results in a very sizeable expansion of both exports and imports, with overall export volumes increasing by almost a quarter and import volumes increasing by almost a tlird. The secondary market price of foreign exchange declines by around nine percent as the increase in export 10/ Also, it should be noted ffiat this scenario produces almost 80 percent of the static welfare gains of Scenario V. 111 Since the model assumes no improvements in technology or productivity, increased exports of machinery implies the reallocation of resources within this sector from its more technology- intensive segments to its less sophisticated segments in which China already has a comparative advantage- 12/ The data on the domestic prices of exportables need to be treated with some caution and may in fact exaggerate the extent of price differential in the coal secLor, for example. - 97 - supply makes more foreign exchange available and drives down its price..1/ Somewhat surprisingly, there is a small negative change in real wages despite an overall move in the structure of output towards relatively labor intensive basic commodity production. It seems that the direct price increasing effects of reductions in export taxes increase prices sufficiently to outweigh the positive effects of the increase in the demand for labor. The effects of this liberalization on output patterns is greater than the effects of the import tariff liberalization experiments. The output levels of four commodities currently subject to relatively high export taxation, coal, oil, crops and livestock all increase, while output of all other traded goods industries declines. The decline in the outputs from other sectors reflects a combination of higher input costs resulting from reduced export taxes, increased competition from imported goods and the appreciation of the secondary market exchange rate, which reduces the cost of imports and lowers the returns obtained from exports." Scenario VI yields -a very different export response from that observed with the other reform options. The most dramatic responses are in coal, crops, metallurgy and crude petroleum which experience substantial reductions in the levels of implicit export taxation imnposed by licensing. Other exports decline in response to the appreciation of the exchange rate and declines in their output levels. This package of reforms would, therefore, appear to produce important shifts in China's export structure away from manufacturing and towards resource based exports. Summary The results of the simulations provide several useful pointers. First, they suggest that China should be able to undertake fairly deep cuts in tariffs and NTBs without this resulting in any major contraction of even the most protected sectors such as textiles and machinery. In a country of China's size, domestic consumption relative to imports can be expected to remain large and domestic dislocations are likely to be limited because of the considerable qualitative differentiation between imports and domestic production. 141 Import liberalization should improve China's export performance, particularly of its machinery sectors. The condition for successful liberalization, however, is that activities within each sector should be allowed and able to switch to the more export-oriented segments and that the authorities remain disciplined about macromanagement. 15/ Second, it seems that radial import liberalization is a superior option to selective liberalization iimited to the currently most protected sectors. Nonetheless, amongst the possibilities for selective liberalization, the option of reducing import protection on only the machinery sector is likely to produce the best results for the least effort and dislocation. Third, notwithstanding possible dislocation to downstream industries, significant gains could be derived from the reduction of export controls and taxes in addition to the reduction of import protection. 13/ There is a larger gain in real income from this liberalization than from any of the liberalizations including only import tariffs. 14/ It should be noted, however, that given differences in productivity levels acioss the country, dislocations in some regions could be significanL 151 An important assumption of dLe modelling exercise is that real absorption remains constant. See Annex 4.1. -98 - Endnotes 1. See Liang, Marer and Battat, "Foreign Trade Strategies of Nations: A New Interpretation" in Koves and Marer, (Eds.), 1991. 2. See Liang et al., in Kovas and Marer (Eds.), 1991. 3. See World Bank (1986). 4. See World Bank (1991c). 5. Ii. Singh (1992). 6. The model utilized in this analysis has been updated from the model reported in Martin (1992) in several important respects. Firstly, the demand component of the input-output table used in the analysis was updated to reflect the dramatic changes in the structure of China's foreign trade which have occurred since the early 1980's. This was done by replacing the values of imports and exports in 1981 appearing in the original table with values of imports and exports for 1991 derived from the United Nations' COMTRADE database. The composition of final demand was also updated using a Richard A. Stone (RAS) algorithm tQ reflect changes in the distribution of demand between consumption, investment and government demand since 1981 and to maintain balance in the input- output table following the adjustments made to the structure of trade and the explicit incorporation of China's trade distortions in the model. The structures of intermediate demand and factor demand were not updated in the same way because adapting a standard input-output table of China for use in a general equilibrium model requires very detailed analysis of the relativities between market and secondary market prices along the lines undertaken by Thompson (1991) and time and resources did not permit undertaking this task for this study. While it would have been desirable to update the structure of output and intermediate input use in the same way that final demands and trade were adjusted, it is extremely unlikely that this would materially affect the results since the structure of industry output has changed remarkably litde relative to the changes in trade and final demand patterns. Two other important enhancements to the model were made in undertaking this analysis. Firstly, the model's solution algorithm was upgraded from a linear in percentage changes version, which is exact for small changes but suffers from unknown and potentially serious errors for large changes, to a large change version which eliminates these linearization errors (Pearson 1991). The second enhancement made was to incorporate the Balance of Trade Function or Distorted Trade Expenditure Function to provide a precise money measure of the static welfare change (Hicksian Compensating Variation) from trade liberalization. This measure captures the welfare consequences of partial liberalization in the real world context of multiple distortions and allows evaluation of welfare changes even inthe second-best case of partial trade liberalization (see Anderson and Neary 1992 for details). The model simulations were performed with the composite price of Gross Domestic Product held constant as a numeraire so as to facilitate expressing welfare changes as a proportion of base period GDP. The secondary market price for foreign exchange is - 99 - free to adjust to changes in the supply and demand for foreign exchange. An aggregate measure of absorption, which corresponds to the level of utility in the underlying expenditure function, is held constant in the model solutions allowing welfare evaluation to take place with respect to the theoretically correct compensated demand functions. The use of this particular closure means that the tariff revenues and quota rents appearing in the calculation are compcnsated trade tax revenues corresponding as specified by Anderson and Neary (1992). One other important feature of the experiments performed is the assumption that all protection measures provide constant ad valorem levels of protection. Thus, it is assumed that the policy makers responsible for policy instruments such as import licensing strive to keep domestic prices above (or below) world prices by a fixed percentage. While somewhat open to question, this assumption seems preferable to the alternative approach of assuming that policy makers have fixed quantity targets for trade levels. 7. Laird and Yeats (1987). 8. Theoretically, it can be shown that partial trade liberalization involving the reduction of the highest tariff is welfare-increasing for a "small country" as is a radial reduction in which all tariffs are reduced equiproportionately. 9. Static welfare gains were computed for each scenario. Typically, in such models, welfare gains are very small (0.4 percent of base period GDP in the case of the base case scenario) because they capture only the changes in welfare associated widt reallocation of resources and outputs between competing uses and neglect the more important gains which have been observed to follow from the opening of economies to trade, including gains from externalities between export industries and the remainder of the economy; gains from the more rapid transmission of technological imnovations to more open economies (Edwards 1992); and gains from greater competition and utilization of size economies in more open economies (Brown and Stem 1988). 10. The last of these effects is similar to the booming sector phenomenon where rising prices of resource-based commodities put severe adjustment pressure on other traded goods sectors (see Peng and Martin 1992 for an analysis of this phenomenon in China). Consistent with the response to a resource boom, output of several nontraded goods sectors expands in response to the higher relative price of nontraded goods. This response would be larger if the increase in real income were translated into an increase in spending, an effect which was precluded by holding real absorption constant in this experiment -100- V. TOWARD A PROGRAM FOR TRADE LIBERALIZATION Drawing on the analysis of previous chapters, this chapter seeks to define a program for reforming China's trade regime. Attention is first focussed on the timing and sequencing of trade reforms in China and their links to other reform areas. Stock is taken of the most recent reform initiatives in China's trade regime, and based on an evaluation thereof, recommendations are offered for future reform. A. TiMNG, SEQUENCING AND LDNKAGES wam OTHER REFORMS The reform scenarios analyzed in Chapter 4 are based on certain assumptions about how the Chinese economy will react to changes in the trade regime. The modelling exercise assumes that the central government is able to maintain macroeconomic stabilitythrough the liberalization process and that rigidities in the economy would not significantly obstruct inter- and intrasectoral resource reallocation. It is evident that trade reform on its own is unlikely to yield desired results. For it to succeed, progress in and coordination with other areas of policy and reform will be essential. This does not mean, however, that reform of China's trade regime should wait. In considering the linkages between trade reform and other policy reforms, it should be borne in mind that creating and sustaining momentum is important to the success of any reform program. While it is true that trade policy reform on its own can at best have a limited impact, it is also true that progress in one area of reform can help generate momentum for other reforms. Moreover, a number of factors relating to both the domestic and the international trading environment suggest that the time is ripe for China to embark upon a bold program of trade liberalization. Trade Reform and Reform of the Planning System Reform in China generally implies a reduction of planning. Trade reform in China cannot proceed without the further dismantling of the country's trade planning apparatus. In particular, as discussed in Chapter 2, the existing system of foreign exchange planning and allocation needs to be eliminated. All potential users, including the government, must be made to bid for foreign exchange at a market-determined price. In addition, the current system of foreign exchange contracting needs to be replaced with one in which FTCs are forced to pursue profits rather than be bound by foreign exchange earning targets. Only then will the institutions in China's foreign trade sector become truly responsive to the market. Aside from the reduction in trade planning, success of trade reforms in China will also depend on the phasing out of controls over investment decisions. An important conclusion of Chapter 1 was that despite a high degree of import penetration and a rapidly growing. share of exports in output of certain sectors such as clothing and footwear, China's industrial strucure has remained remarkably stable, at least through to 1990. Although, it seems - 101 - t'hat investment in sectors with the most rapid export growth has become more productive over the last few years, the stability of China's industrial structure suggests that the distribution of investment across sectors has remained, at least until fairly recently, heavily controlled. For the dynamic gains from trade to accrue to China, it is critical that investment be allocated increasingly in accordance with market signals and not, as it appears to have been in the past, through a process of "planing.' One step that should be taken immediately in this context is to substantially raise the minimum level of investment requiring central government approval.' Trade Reform, Reform of the Exchange Rate Regime and Macroeconomic Policy The evidence from other countries is very clear about the importance of a real depreciation of the currency for the success of programs of trade liberalization. Since liberalization entails less protection for import competing activities, a real depreciation of the currency is important to help boost exports and to relieve such pressure as may build on the balance of payments. In the simulations of Chapter 4, the depreciation of the secondary market rate plays a critical role in producing the strong post liberalizadoni export gains discussed. Already, 80 percent of exports are subject to the swap market rate. Given the importance of the swap market rate for an appropriate export response, however, it would be helpfil for China to extend the application of this rate to all export earnings, before it embarks upon a program of import liberalization. Likewise, given China's dual exchange rate system, the authorities have the additional responsibility of ensuring that the gap between the official and the swap market rates remains narrow at all times, so as not to penalize exports and favor imports financed from outside the swap market As discussed in Chapter 2, the best course of action in this context would be for the authorities to move to a unified exchange rate as soon as possible and make the currency convertible for all current account transactions. This is all the more important now given the most recent tendency of the gap between the official and the swap market exchange rate to widen again. At end-March 1993, the spread between the two rates stood at over 45 percent, up from 26 percent at the end of the fourth quarter of 1992. The widening gap is itself partly the result of a loose monetary policy 1/ that has no doubt contributed to emerging signs of overheating in the Chinese economy. By the end of the first quarter of 1993, the retail price index had risen 8.6 percent over the previous 12 months, and the cost of living index for 35 large cities had recorded an increase of almost 16 percent over the same period, reflecting higher service costs, especially public services such as housing, electricity and transport. At the same time, shortages of certain industrial inputs have appeared, causing the price of intermediate goods such as steel, for example, to more than double over the last year and for the means of production price index to rise more than 15 percent by end-1992. Macroeconomic policy's most useful role in liberalization is to keep inflation low and thus support a real depreciation of the currency. A study covering 19 countries under 36 different periods of trade pol icy reform found that expansionary fiscal and monetary policies are the single most important cause of trade policy reversals.2 It is crucial, therefore, for China to maintain disciplined fiscal and credit policies if it is pursue a program of import liberalization. it Net domestic assets grew by 32.7 percent in 1992, currency in circulation by 36 percent, and broad money by 31.3 percent. By the end of the first quarter of 1993, broad money was growing at an annual rate of 46 percet. - 102 - As important as price stability is for the success of trade liberalization, liberalization itself can be used as an instrument for keeping inflation in check by providing an external escape valve for domestic demand pressure. Given its comfortable reserve position and sizeable current account surplus,l/ China is particularly well positioned at present to use trade liberalization as a means to address the threat of overheating and the emerging shortage of essential industrial raw materials.3/ The time seems right, therefore, for China to launch a serious program of trade liberalization. Finally, as concerns the links between trade reform and management of the capital account, the experience of other countries indicates that the prudent course is to maintain control over the capital account while freeing up the current account. Capital account decontrol frequently results in exchange rate uncertainty. In the absence of effective sterilization, policy makers may lose control over the domestic price level, and hence the beneficial effects of depreciation on export performance may be lost through the critical period of import liberalization. As discussed in Chapter 2, a gradual approach to capital account liberalization is therefore advisable for China. Trade Policy and Price Reform An important objective of reforming the trade regime is to rationalize the stmcture of incentives for domestic economic activity and thereby improve resource allocation. I domestic price controls remain in place, however, the trade regime would be of litde help in accomplishing this objective. This is not to say, is the case of China, that trade liberalization should await fiuther price liberalization. China has already made very considerable progress with regard to price reform. The incidence of subsidies for imported commodities has declined substantially. Moreover, the widespread application of the two-tier pricing mechanism has meant that a large measure of price flexibility exists for much of nonplan domestic economic activity. Under the circumstances, import liberalization can be expected to be effective for an important segment of the economy even without removing such price controls that still remain. On the other hand, without further price liberalization, it would not be possible to eliminate the mandatory import plan, and without abolishing the import plan, it would be difficult to do away with canalization and its attendant problems. As concems the removal of export controls on products, especially coal, for which domestic prices are currently depressed, the simulation analysis of Chapter 4 demonstrated that the elimination of such controls, although likely to result in some dislocation for downstream sectors, would nevertheless produce large net gains to the economy. In this case, price decontrol should proceed in tandem with the removal of export controls and both should be pursued in a phased manner, allowing the hardest hit downstream sectors to adjust. 21 At the end of 1992, China's reserves (IMF definition) were the equivalent of nine months of imports, and its current account surplus was 1.9 percent of GDP. 31 For 23 of the 27 products categorized as 'means of production,' stocks declined an average of 10 percent over 1992. The stocks of steel fell S million tons, or 90 percent. -- 103 - Trade Liberalization and Enterprise Reform Enterprise efficiency is not only a micro but also a significant macro problem in China. Losses equivalent to almost 5 percent of GDP, and financed in good part through loans from the banking sector, SOEs are the largest contributors to the government's fiscal and quasi-fiscal deficit. In this situation, it is critical to raise enterprise efficiency. Import liberalization would be a valuable tool for this purpose. However, it can only work if domestic enterprises are able to restructure their activities in response to import competition. The analysis of Chapters 3 and 4, and particularly the simulation exercise, suggest the possibility of implementing fairly deep tariff cuts without causing too much disruption, provided there are no significant obstructions to the inter- or intrasectoral allocation of resources. While it is true that there remain significant barriers to labor mobility within the state-owned sector, there is already a large and growing population of footloose workers that are geographically and sectorally mobile. Also, while numerous institutional barriers remain to rationalization of productive capacity, enterprise mergers and the creation of industry groups have become more common place. These are signs of declining rigidity in the economy, and augur well for the success of any program of trade liberalization in China. More important, however, in this context, is the phenomenon of the rapid rise of the China's nonstate sector. Rapidly growing TVEs are the most promising indicator of the capacity of the Chinese economy to adjust to a more open import regime. What all of this suggests is that the process of import liberalization in China can be initiated at this time. Indeed, import liberalization should not wait because once initiated it is itself likely to generate pressure and momentum for further reform in the SOE sector. Trade Liberalization, Support for Exports and Industrial Policy Rationalization of China's industry will require much more than just import liberalization. Efforts will need to be made in parallel in such areas as export development, quality control (see Chapters 6 and 7), worker training, technology policy and competition policy. In short, trade policy reform and industrial policy will need to be pursued in a mutually reinforcing manner. The question is: in what way should the two be coordinated? Korea was able to com'ine trade policy with industrial policy to often achieve impressive results in targeted sectors. The Korean paradigm has thus been labelled the "infant exporter' model of development. However, it is not clear to what extent sector selection was done on a rational basis and to what extent it was the result of ad hoc decision making. What is certain is that the Korean authorities did make many mistakes and although many sectors that benefitted from targeted assistance became competitive exporters, others failed to do so. After the heavy and chemicals industry drive of the 1970s, Korea has over the last decade adopted a generalized program of progressive trade liberalization? A priori, China's vast size, and its trend towards more decentralized decision making, would seem to preclude the possibility of finetuning trade and industrial policy coordination. The problem is that, while trade policy necessarily requires a national perspective, industrial policy has become very much a provincial concern. On the other hand, China could certainly benefit from closer national coordination between industrial and trade policies than appears to exist at present. In the case of several key sectors, a national perspective is essential for being able to rationalize production capacity and for tackling the problem of suboptimal scales of production. In such sectors, a national strategy ought to be developed to complement a phased program of trade liberalization. The creation of the State Council Economics and -104 - Trade Office (SCETO) 4/ is a potentially important initiative from this point of view (see Chapter 6 for more on this). Trade Rerorm and the Intenational Environment China has evolved very rapidly into a major international trading nation. For it to sustain this momentum, however, China will need to become more responsive to the demands of trade diplomacy, for as its presence in global markets grows larger, so will the concerns of its trading partners (see Chapter 7). In its bid to attain full membership status of the GAIT, China bas already made significant efforts in trying to conform to the expectations of the international community in general and the United States in particular (see below). However, the requirements for GiAIT membership are not precise and are a matter for some negotiation. If the treatment of recent applications to the GAIT is any guide,5/ China is likely to be called upon to go fiuther in relaxing its import regime. From the perspective of the emerging international trade environment too, therefore, this appears to be an appropriate time for China to pursue a program of trade liberalization. B. RECENT REFORM INMrkIVES The Chinese authorities have taken some important steps in 1992 in the area of trade policy reform. In contrast with reform measures of 1988 and 1991 (discussed in Chapter 2) that were foued especialy on the export planning apparatus, the 1992 measures have focused more on the import regime. For the most part these represent efforts on the part of China to conform closer to the expectations of the General Agreement on Tariffs and Trade (GATI) 6l and constitute a response to pressure from the United States. Transparency China has taken an important step in improving the transparency of its trade regime. A significant number of trade documents that were previously unavailable to foreigners have now been published. These regulations set forth detailed administrative guidance for Chinese importers and exporters and should be particularly helpful to potential foreign suppliers of goods to China who have in the past been disadvantaged by lack of access to government regulations. Moreover, as per the recently concluded agreement with the United States (see below), (a) only those rules, regulations, laws, etc., as are readily available to other governments are to be enforced; and (b) administrative and judicial tribunals are to be set up for the purpose of reviewing and correcting admiistrative action relating to Customs matters. 41 This office has recenty become the State Council Economics and Trade Commission (SCETC) 51 Refer, for example, to the case of Veneula which committed itself to across the board tariff bindings in its bid to gain GAT membership. 6/ Although discusions of the Working Party appomted to consider China's 1986 application to resume its status as a contracting party of the GATT were suspended after June 1989, negotiations resumed in late 1991. - 105 - These steps represent an important advance. However, as discussed in Chapter 4, a number of further steps could also be taken to reduce the discretionary element from China's system of import licensing and controls. liberalization of the Import Regime Several initiatives have been taken in the direction of import liberalization. Firt, the Customs Tariff Commission of the State Council reduced a large number of tariff rates. Rates were cut on 225 separate items or tariff lines beginning January 1, 1992. These items account for 4.4 percent of Chinas total import tariff lines. In addition, special import regulatory duties, essentially import duty surcharges, that had been instituted for 14 products in 1985 and for 4 additional products in ensuing years, were lifted effective April 1, 1992. For 16 of these I8 products actual import duties fell from between 28.6 and 61.5 percent.7/ The effect of these measures has been essentially to bring the average tariff level back to their pre-1987 levels. In December 1992, tariffs were cut fiurher by an average of 7 percent for 3,371 tariff lines. Second, all import substitution lists are reported to have been abolished and the removal of import licensing requirements on 16 broadly defined product lines out of total of 53 subject to import licensing has been announced.8/ These products include steel and a range of steel products, sugar, coffee, cassette radio recorders, black and white televisions and tubes, watches and a range of production and assembly lines.4 This would constitute a substantial reduction in the coverage of import licensing. However, it must be noted that in the case of iron and steel products, and televisions for example, none of which are mandatory plan commodities, all imports would still be subject to canalization. Thus, while these announced measures appear to elimnate the overlap between licensing and canalization, it is not clear that they will result in decontrol of imports. Also, the removal of assembly lines from the import licensing list is somewhat surprising, given the continuing high levels of protection prevailing on many consumer goods. With high rates of protection provided to final goods, and typically lower rates of assistance on raw materials and components, there is a strong incentive for enterprises to undertake high cost final stage processing from imported components. While restrictions on the import of production and assembly lines are a highly imperfect means of controlling the expansion of such inefficient processing activities, their removal may spark the rapid expansion of inefficient import- intensive assembly operations. The first-best, and only long term effective response to this problem is to remove the incentive for such activity by reducing the tariffs on such consumer goods, or by replacing tariffs and nontariff barriers wit a consumption tax. Third, a much more substantial reduction in the coverage of import licenses and controls is to be undertaken as part of the package of reforms announced in October 1992 following negotiations with the US government in connection with a Section 301 trade action 71 On the other hand, the basic tariffs for two other commodities, sedan cars and video cameras, were raised. Nonetheless, overall, the rates on these commodities did fall since the basic import duty increase fell short of the import regulatory duties that were eliminated. 81 In addition, at the time this report was going to press, it was reported that SCEMIO has been abolished, although it appears that its fimctions have been taken over by some sort of an alterative import verification office. - 106 - under the US Trade Act.5 However, it is not clear if these measures are to be applied to all imports or only to imports from the United States. Obviously, these measures would constitute a significant initiative only if they are to be applied on a multilateral basis. The agreerment calls for unspecified tariff reductions by December 1993 for selected products for which tariffs had been raised since 1988. These include fruits and nuts, vegetable oils, iron and steel products, machinery and mechanical appliances, electrical machinery and parts, cosmetic and toiletry preparations. More importantly, the agreement provides for the phased removal of the bulk of existing import licenses and controls over a five year period extending up to 1997. Table 6.3 provides a summary of what import licenses and controls will be retained beyond 1997 and indicates how this list compares with the present NTB coverage. Three broad points emerge: (a) If the agreement were applied on a multilateral basis, almost all import controls would disappear and only about 7.1 percent of imports would continue to be subject to import licensing requirements. The latter would cover only 10 broad category of products, including in particular, tobacco manufactures, textile fibers, rubber manufactures, power generating equipment, office machinery, road vehicles, and photo equipment-of these power generating equipment and road vehicles would be the most important from the point of view of shares of GVIO. (b) There is no indication that the extent or coverage of canalization will be reduced. Thus, 32 percent of imports (of which only 20 percent corresponding to the mandatory import plan) would continue to be subject canalization. (c) Except for a small selection of products, no tariff or export tax reductions are called for. C. CoNCLusioNs AND RECOMMEDATONS Over the last decade and a half, China has achieved a phenomenal upsurge in exports and trade. Most recently, however, its success in raising investment, growth and trade surpluses, has raised the specter of overheating and inflation. Further, enterprise inefficiency remains an important micro and macro problem for the country. Finally, China's dramatic entry into export markets has raised concerns amongst its major trading partners about its responsibility for opening up to imports. The launching of a substantial program of import liberalization could help China address all three of these issues. Moreover, giver. its comfortable reserves position, the advanced state of price reform and the growing factor mobility and flexibility ni domestic resource allocation, China is particularly well positioned to undertake such a program at this time. There is no doubt that China's recent reform initiatives constitute an important step in the direction of import liberalization. However, viewed in the above perspective and given the reform priorities identified in Chapter 4, these measures seem incomplete and need to be complemented with other initiatives, both in the immediate and in the medium term- - 107 - Recommendations for the Immediate Term Cmalizatlon. The distinction between Category I and II imports should be abolished, and a singfe list of only those products that are subject to mandatory import planning should remain su:bject to canalization. All other imports should be open to any FTCs or enterprise with dir «ct trading rights. Licensing and Controls. Nonbinding NTBs should be removed. The discretionary element of import licenses and controls should be reduced by ensuring that all decisions with regard to import licensing and controls are made only by central government authorities and according to criteria that are uniform and transparent. TarilTs. First, the number of rates and the level of tariffs applying to consumer goods should be reductd. Immediate steps could taken on a range of mature consumer products for which there is evidence of 'water in the tariff." On the basis of available data, it appears that reductions in the order of 20 to 40 percent should be possible, depending upon the product, without resulting in any significant dislocations in domestic production. Where, iarifft are currently being used as a way to discourage consumption, these tariff reductions should be accompanied by the imposition of an appropriate sales tax. Tariff Eemnptions. It is recommended that all exemptions, including those to foreign investors, on imports for use in domestic production should be abolished. Export Controls. Wherever China's existing price control policies necessitate the use of export regulation, export taxes should be used in place of licenses because the latter allow the few FTCs designated to handle such products to capture sizeable and undeserved rent. Recommendations for the Medium Term Phase Out of Licensing, Controls and Canalization. The Memorandum of Understanding that China recently concluded with the United States is an important initiative intended to reduce NTIB coverage significantly by 1997. China must implement this agreement on a multilateral basis. Only then would this initiative constitute significant progress. In addition, an in parallel with its declining reliance on import planning, China should also phase out the practice of canalization. Tariff Reduction. Given the important initiative that the government has already taken in the form a preannounced and phased reduction of NTR coverage,9/ the same should be done for tariffs. A reasonable target would seem to be to implement a 50 percent radial cut in tariffs as soon as possible. Such a tariff cut would bring China's tariff structure into line with that for Korea's, for example, with average rates on consumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, on agricultural goods to 17 percent and on mining to 10 percent. 9/ Assuming that this is to be applied multilaterally and not just to imports from the United States. - 108 - Given that trade diplomacy is likely to remain an important part of China's fiture trade strategy, the actual phasing of such reforms could be linked to progress in negotiations with trading partners, most notably within the context of GAIT. On the other hand, China should move unilaterally and much more quickly in the reduction of import protection to the machinery sector. Of all options for selective liberalization, this one is likely to yield the most promising results. Links with other Policies. The trade, foreign exchange and investment planning apparatus must be fitbrer dismantled (see recommendations of Chapter 2). Depreciation in the real effective exchange rate and disciplined macroeconomic policies must accompany the proposed programn of import liberalization. Reform of the SOE sector should not be allowed to lag too far behind the proposed program of import liberalization. Parallel efforts must be made to provide support for export development and to articulate a national industrial policy that would lay down a strategic framework for certain sectors identified as key sectors that would complement the preannounced measures to liberalize the import regime (see Chapter 6). Reduction in Export Controls. Finally, export licensing and taxes on products for which domestic prices have been kept depressed should be reduced progressively as part of the government's ongoing efforts to pursue price reform. - 109- Endnotes 1. 1.J. Siiugh (1992). 2. See Choksi et al., in "The Design of Successful Trade Liberalization Policies" in Koves and Marer (Eds.), 1991. 3. See World Bank (1986), for details. 4. GATT (1992a). 5. Office of the Trade Representative (1992). -110 - VI. POLICIES FOR EXPORT DEVELOPMENT: A CRITICAL EVALUATION A. INTRODUCrION The experience of East Asian NICs is evidence of the potential utility of public intervention in the area of export development. This experience suggests: (a) that public support for export development can yield important externalities; (b) that interventions can be useful for offsetting disincentives to exports during the transition period to a less distorted economy; and (c) that selective intervention can be an effective catalyst for setting in motion an export growth dynamic. China has, in many respects, adopted a strategy of export development very similar to that of these countries, and it has attempted to replicate many of the institutional structures of these countries as well. This chapter seeks to provide a critical evaluation of the various experiments to date in order to draw lessons for government policy in the future. Wherever pertinent, international experience is brought to bear. B. DEvELoPiNG BuYER-SELLER LINKS: TE ROLE OF TRADiNG COMPANIES There is a growing body of literature on international trade that focusses on the nature and importance of buyer-seller links.' On the one hand, direct links between an exporter and an overseas buyer have been shown to be an important conduit for the diffusion of knowledge and information. It ;s through such contacts that an exporter learns the nature of his market, and that the buyer exercises direct quality control, and often will also transmit valuable design, packaging and production know-how. This tends to be important for consumer goods. On the other hand, it is also true that international trade has become a very complex affair. Accordingly, intermediaries can play the important function of bringing buyers and sellers together. In general, though, the appropriateness of a distribution channel for international trade will depend on the nature of the product, volumes involved and the characteristics of the market. Looking in to the future, the most important concern for China as it seeks to sustain its export drive is to draw lessons about how to access developed country markets for manufactures. in the context sketched out above, organizations specializing in export-import can play a usefil role in supporting the export drive, particularly of new entrants, int:k world markets. In fact, the continued existence of such organizations in market driven economies, not only in East Asia, but also in North America and Europe, suggests that they meet real needs of even well established and experienced trading communities. - 111 - The International Experience 1/ There is a great variety of trading companies in the market and different forms have come to predominate in different economies. The role of the giant trading houses of sogo sosha in Japan is legendary. Korea is one country that set out deliberately to replicate the Japanese sogo sosha model and has done so successfully. Taiwan (China) and Hong Kong on the other hand have relied on small trading companies or on trading companies from other countries. Six of the ten largest non-US companies in the world are sogo sosha. Not only have these trading firns come to dominate Japanese trade, they have proven to be a most enduring institution whose role extends much beyond that of a mere marketing intermediary. In fact, their principal function is that of coordinator of whole product systems or production chains. Their involvement extends to multiple stages and multiple functions. Domestic marketing, provision of logistical support, and procurement of imported materials and equipment is thus an equally important, if not a more important part of their functions, as is the marketing of finished products overseas. In addition, finance is a particularly important service that sogo sosha provide to their clients. Leaving system links to the sogo sosha enables clients to allocate scarce resources to investment in plant and equipment rather than in distribution networks, and thereby to reduce production costs. On the other hand, the profits of the sogo sosha depend on their ability to exploit the economies of scale that accrue to them through managing the procurement and marketing activities for their systemwide client base. In any given industry, therefore, sogo sosha and their clients complement one another, and recognition of this complementarity encourages the maintenance of long-term relationships between them. Typically, the clients of sogo sosha consist of sister firms of loosely structured industrial groups (zaibatsu and kerersu). In 1990, sogo sosha handled more than two thirds of JapanWs imports and balf of its exports. As successful as the sogo sosha have been, they have come under increasing pressure over recent years as traditional multi-process industries such as textiles and chemicals have faced maturity, and as the country's exports have diversified into consumer goods, automobiles and high techmology products. In response to declining profitability, sogo sosha have been entering new fields of activity. Plant and project exports, real estate, large scale ftreign direct investment and third country trade are activities that the sogo sosh/a have pursued aggressively through the 1980s. While these activities provide new opportunities for the sogo sosha, they also present new risks. Looking into the future, it seems clear that the sogo sosha's traditional activities have reached their limit, and it is likely that only those sogo sosha with sufficient resources to absorb the costs of breaking into risky new activities will survive and grow. Unlike Japan, the history of trading companies in Korea is rather short. In fact, the development of the Korean general trading company (GTC) or chongap sangsa (a direct translation of sogo sosha) is the result of a deliberate government policy, instituted in 1975. to replicate the success of the sogo sosha in expanding Japanese exports. The government established minimum criteria-one of the most important being minimum size in terms of paid-up capital and exports-for designation as a GTC.2 Generous incentives were offered to firms .I/ This section is based on Annex 6.1. - 112- meeting these criteria. The focus of Korean GTCs was intended to be restricted to export development. Consequently, Korean GTCs are much less functionally diverse than their Japanese counterparts. They do not operate as system coordinators and handle a relatively much smaller share of even the import business-less than 15 percent of Korean imports were handled by the GTCs in the mid 1980s. The minimum limits for GTC designation were set at high levels in order to encourage only the very largest of firms. It is no surprise, therefore, that all but one of the existing GTCs are affiliated to a chaebol, the Korean version of the zaibatsu. Each Korean GTC depends much more closely on its affiliated chaebol, than do the postwar sogo soshia on their respective keiretsu. Indeed, Korean GTCs function as exclusive export agents for their respective chaebols. Although the Korean GTCs did make an impressive contribution to the country's export growth, much of this performance can be attributed to active government support and the GTCs' very close links with their respective chaebols. The focus of the GTCs in the early years was on expanding business, without regard to cost. In effect, the GTCs competed fiercely for government assistance tied to export targets. In so doing they became over-extended and slashed their profit margins. They managed to overcome their worst difficulties only because of access to the vast resources of their affiliated chaebols. Moreover, their share in Korea's exports has stagnated at around 50 percent since 1982. The Korean GTCs have been trying to enter new activities such as project exports and third country trade, but face a harder challenge then their Japanese counterparts, because of their greater financial vulnerability. Impressed with the Japanese experience with big tading companies and with Korea's successful efforts to create their GTCs economic planners in Taiwan (China) also attempted to develop their own da maoyishang or Large Trading Companies (LTCs). Taiwanese LTCs, however, never really took off in part because government incentives to LTCs were very modest compared to what was offered to their Korean counterparts. Moreover, LTCs faced much greater competition thin their Korean counterparts. Roughly half of the trade (exports and imports) of Taiwan (China) is handled by Japanese sogo sosha. Foreign retailers, local manufacturers and public sector agencies each control an estimated 10 percent, leaving only 20 percent to be handled by local trading companies, of which there are reportedly about 40,000, or 20 times the number in Korea and about 4 times that in Japan. Second, LTCs in Taiwan (China) got little or no support from local business groups which, while not as important as those in Korea and Japan, could still have given the LTCs a significant boost. The multiplicity of small trading companies is a trait that Taiwan (China) shares with Hong Kong. However, in Hong Kong the small trading company is the most important form of trade intermediary and accounts for 80 to 90 percent of Hong Kong's total exports. Unlike in Taiwan (China), the role of foreign trading companies is negligible. Hong Kong trading companies tend to be specialized, both in the type of services they provide and in the number of products they handle. They are either involved in exporting or importing or reexporting and handle one, or at most, two products. Despite their small size, Hong Kong trading companies do not operate on a simple agency or commission basis. They function as fully fledged intermediaries, assuming the risks associated with taking title to goods. They guarantee quality and on time delivery to the buyer. In many instances, they pay for a certain percentage of defective items, or in case delivery deadlines are not met, they assume the cost of packaging the merchandize themselves or of making alternative transportation arrangemens. From the point of view of local manufacturers, they also serve an important technical assistance function. They carry out rigorous preshipment inspection and, in certain - 113 - cases, inspect the goods at various stages of production, and thereby provide manufacturers valuable information on the quality, packaging, and styling requirements of buyers. Finally, Hong Kong trading companies provide preshipment financing to local manufacturers-mostly this financing takes the form of credit for imported inputs or advance payments. The Experience of China's FTCs As noted in Chapter 2, China has a unique legacy of trading companies, the origins of which lie in the planned economy when all trade was carried out by a dozen FTCs with monopoly power in the trade of nonoverlapping commodities. In line with the policy of decentralization, and to encourage greater competition in foreign trade, MOFERT authorized the creation of additional FTCs. New FTCs were created in two ways. Many specialized national FTCs saw their provincial branches spun off into separate provincial specialized FTCs. More frequently, though, so called general FTCs were established at the provincial or municipal level with authority to deal with a broader range of commodities. By 1988, there were about 5,075 FTCs in operation. The explosion in the number of FTCs substantially increased competition in foreign trade, but it led to pr-oblems as well. Some of the firms were not well capitalized and lacked international experience and, as a result, defaulted on contracts. Others violated central govermment regulations in the pursuit of profitable trade transactions. In August 1988, the State Council launched a rectification campaign aimed at eliminating or merging FTCs not found to conform to national foreign trade policies. By late summer as many as 1,400 FTCs had been shut down, and there nuw remain an estimated 3,600 in operation. Unlike in any of the other East Asian countries examined, China's FTCs are all publicly owned, each being supervised by MOFERT at the appropriate level, whether municipal, provincial or national. FTCs handle over 90 percent of China's imports and at least 86 percent of exports. Most FTCs take title of the goods that they export-they do not operate on a commission basis, or on what is in China called an agency basis.2t They are supposed to absorb all the risk of marketing the product overseas. On the other hand, the bulk of imports handled by FTCs are on an agency basis. Here, most FTCs play the role of a mere intermediary, rather than that of an aggressive procurer of technology for its clients. Although China's FTCs handle the bulk of the country's exports, they depend heavily on their links with Hong Kong to market their products overseas. Over 50 percent of China's exports are to Hong Kong, almost all of which are then reexported to third countries (Chapter 1). This suggests that it is Hong Kong's trade intermediaries that are in fact responsible for delivering about half of China's exports to the rest of the world. The performance of China's FTCs varies a great deal. Small and dynamic FTCs coexist with giant, inefficient, monopolists. The more dynamic FTCs do appear to play an effective role as conduits for information regarding production technology, styling, and packaging. They finance overseas trips for their clients. They help train the workers of local enterprises, and provide credit to buy imported raw materlas. in the case of processing with 21 The government's initiative to spread the use of the agency system for exports has been a failure because of the lack of FTC cooperation. FTCs have shown a preference for the traditional system of purchasing goods from the exporter and then selling them internationally on their own account, in part because of the foreign exchange retention system-FTCs have no claim to relained foreign exchange from exports handled on an agency basis. Only 10 percent of exports were handled on an agency basis in 1990. - 114 - supplied or imported raw materials, an activity which accounts for more than half of China exports of manufactures, the FTC helps the client procure the necessary raw materials and the machinery. In some cases, FTCs have also been valuable conduits for technological upgrading by arranging imports of specialized equipment needed by their client firms. As concerns their links with clients, the more dynamic FTCs have taken the lead in organizing networks of small and medium sized supplier firms, both state-owned and TVEs. While not rigid, the links between such FTCs and their clients tend to be stable and loyalty is important. Regarding their links with buyers, such FTCs have relied a lot on contacts in Hong Kong, but increasingly they appear to be developing their own networks in third country markets. Over all, such FTCs seem to mirror the structure and approach of their counterparts from Hong Kong. As can be expected, such FTCs are found primarily in light industrial products, garments and electronics. There is no doubt that Chinese FTCs have contributed to the growth of China's exports from these sectors, even if this contribution has, in many cases, consisted only of providing an effective interface between small local firms and Hong Kong buyers who then take responsibility for marketing the products to third markets (Chapter 1). As successfil as some FTCs have been, there is ample evidence of others that are inefficient or that are engaged in activities that are not necessarily beneficial for China. Many FTCs appear to be poorly managed. It has been reported by foreign buyers that middle level staff of FTCs with whom they have had to deal with lack expertise and are poorly motivated.3 Many local firms have also reported dissatisfaction with the ability of FTCs to provide feedback from buyers and with their high agency fees. Several FTCs were found to withhold valuable market information from clients, and in some cases the local enterprise was not even aware of the prices that its products would fetch on the international market. Much of the blame for the survival of FTCs of dubious value lies in the policy framework adopted. First, the use of FTCs for foreign trade transactions is mandatory for all but a handful of firms that have been granted the right to trade directly.3/ The extent to which local enterprises use FTCs does not, therefore, reflect market determined decisions, and is hardly an indicator of their success, as it is in the case of the other economies discussed previously. It is true that decentralization has injected a good dose of competition into China's foreign trade system. Local enterprises do have a greater choice between which FTCs to use-indeed, it is estimated that up to a third of the foreign trade business of enterprises in Hubei and Shandong, for example, is handled by FTCs from other provinces-and this has allowed them to bargain on prices. Even so, the mission encountered several cases in which local enterprises were still getting prices that were substantially below the international level.41 This suggests that the previously noied monopsony power of FTCs (World Bank 1987), while no longer as widespread, is still a problem. 3/ By mid-1992, only 538 cDmpanies had the right to trade directly. These included some holding companies with many subsidiaries. -4 The mission also found in many cases that local firms were getting lower prices per unit on exports than on the domestic markeL Why do these firms export? There are two possibilities. Either it is the case that the premium from the foreign exchange they earn from exports is sufficient to compensate them for the lower price, or they are under pressure to meet foreign exchange targets in the context of their own contracts with their respective productionbureaus-in the latter case they are probably subsidizing their losses on exports with eamings on the domestic market -115 - FTC monopsony power and inefficiency remain essentially because of insufficient competition. Where information flows are poor, as in the interior provinces, and enterprises do not have easy access to alternative FTCs from other provinces, poorly managed FTCs are able survive. It may also be that provincial authorities, desirous of capturing a maximum of foreign exchange, deliberately restrict the freedom of local firms in dealing with FTCs from other provinces. Competitive pressure on FTCs is critical to ensuring that local enterprises are not penalized, that profits and foreign exchange are not misallocated to FTCs, and that products that should be exported from China are not underexported. Second, there remain a number of designated national and provincial FTCs 5/ that have monopoly power over a certain range of products (Chapter 2). These products are essentially of two types. There are those that are subject to planning and whose domestic consumption is subsidized, such as steel, fertilizer, oil and coal. FTCs serve as a sort of valve to regulate the flow of these products between the international and domestic markets. The exports of such products have to be controlled to ensure that the artificially maintained differential between the world and domestic price does not result in domestic shortages. Then there are products in which China is deemed to have market power (mainly some minerals such as tungsten). The exports of these products are controlled on the grounds that China's market power would be undermined with free competition in exports.6/ Designating a few FTCs to handie the exports of such products has led to the accrual of rents for a handful of FTCs. Thus Sinochem, for example, with exclusive rights to export petroleum products, has profited enormously from the difference between the subsidized local procurement price and the higher international price for oil. Sinochem's financial strength does not stem from the fact that it is an effective trading company, but rather from the rents that have been conferred on it (Box 6.1). In theory, the government should make compensating adjustments for these either through export taxes or profits tax. In practice, this has not happened to the extent that it should. Third, fixing foreign exchange targets for FTCs (Chapter 5) makes them drive to meet these targets without sufficient regard to their profitability. The experience of Korea has shown that such an incentives framework leads, over time, to financially weak trading companies. Unlike in Korea, Chinese FTCs do not have the luxury of relying on the financial resources of giant conglomerate enterprise groups. In the event of financial distress, they only end up burdening the state budget or, even less desirably, the banks. Fourth, all FTCs (even the so called general ones) are subject to some sort of restriction as to their product scope-no FTC is free to deal with just any product.7/ Besides, FTCs are not authorized to handle internal trade. This practice restricts the chances for FTCs to evolve as systems organizers similar to the sogo sosha of Japan-they are prevented from 5/ For a particular product, say crude oil, there is just one FrC in each province with authority to handle trade-that FTC could be the national FTC or a provincial FTC. 61 The same rationale underlies the ubiquitous use of export licenses (Chapkr 3). 71 Even where FTCs import raw materials for their clients, they are not authorized to supply these materials outside their client group, and cannot export commodities other than those for which they have permission. - 116- Box 6.1: FOREIGN TRADE CoRPORAMONs IN CLUNA: Two EXAmPLES China's FPCs are extrcmcly diverse. They range from the China National Chemricals Import and Export Corporation (Sinochen), China's rcigning Number 1 trading company with 1990 trade tumover in excess of $12 billion. to small furns with trade volumes as low as a few million dollars. Sinochem, which was founded in the 1950s, is an cconomic powerhouse. In addition to its trade in a broad rangc of bulk and spceialty chemicals, it controls all of China's trade in crudc oil and in almost all rerfed petroleum products. Its subsidiarics and joint venturCs include companics in finance, Iasing, storage and shipping, intemational advcrtising, and biotechnology rescarch. By 1990. it had bccomc the core of Sinochem Group of 155 member enterprises. The Group includcs 56 companies over which Sinochem has direct administrative or indirect control by virtue of partial ownership. There are an additional 98 companies said to have a loosc afiRiation with Sinochemn as a consequcnce of ongoing busincss transactions. Sinochen's headquarters staff in Beijing exceeds a thousand employees; an additional two to threc thousand are employed in various provincial branch offices, and hundreds more staff in more. than sixty foreign representative offices, forcign joint ventures, and wholly owned forcign affiliatcs Particularly in recent years, Sinoehem increasingly has sought to become a transnational corporation. A growing share of its operations consist of buying and sclling of chemicals and petrochemical products in third county markets, for example, buying products in Singapore and selling them in Europe. In 1991, these transactions increased almost 50 percent to exccd S3.5 billion. While the broad scope of Sinochern is clear, the sourees of its apparent success are less so. It grew most rapidly in the first half of the 1980s when China's oil expors, over which it had a monopoly, grew rapidiy. Its total Cxport volume in recent years remains well below the record level of 1985 when China's ptroleum exports hit a peak. Sinoehem's pctroleum exports were a guaranteed money maker since it was able to buy crude oil at roughly one sixth the intemational price, selU it on the international market, and kecp pant of the profits. As China's oil exports soared in the first half of the 1980s. to exeeed S6.5 bilion dollars by 1985, Sinochem controUled a flow of "profits" that was not evcn remotcly matched by any othcr foreign trade company. These were reinvested to create the burgeoning empire evidecL t by the late 1980s. Even as lalt as 1991, when the volume of China's petroleum cxports had been cut back and Sinohchm was allowed to retain only 1.3 percent of the foreig cxchange carnings, its monopoly over pctroleum exports comprised an economic rent worth an estimated $50 million. Although the Hubei Provincial Chemical Import-Export Corporation ranks amnong China's top 500 trading companies (No. 422 in 1991), its economic profile differs dramatically from Sinochem, its forrner parcnt company. Until 1989, the Hubei firm was a branch of the parent firm; since then, it has been independent. Unlike Sinochem, it deals only in chenicals-the highly profitable petroleum export business is entirely in the bands of Sinoehem. Hubei Provincial Chemical Import-Expoit Corporation actually loses money on more than 90 percent of its exports, even after factoring in the rebate of indircet taxes it receives on most exported products. These rebates average 23 prceCnt for pigments and dyestuffs, two of the main product lines. In an attempt to reduce its losses, the company has been reducing its exports stcadily sicec 1989. Offsetting these losses are profits it makes on chemical import products, cspecially high quality chemicals. But the firmn is not free to expand this business since the quantities of secvral of the most profitable imported products are restritctd by import licenses. And profits on imports wre at a peak in 1987 and 1988, prior to the two major devaluations of 1989 and 1990. Yet the strategy of curtailing money-losing cxports and lobbying for greater quantities of profitable licensed imports has met with only limited success. Cumulative financial losses at the end of 1991 exceeded Y 32 million. These losses arc financed by short-term bank loans which arc rollcd ovcr frcquently. In recent years, payments of interest and principal have averaged Y 3 to Y 4 million- In short, the Hubei Provincial Chemical Import-Export Corporation is handicappcdby a crushing burden of cumulative debL Its principal exports, which it is required to sell by virtue of an imposed mandatory cxport target of $18 million, mostly lose money. It is kept afloat largely through the rents inplicit in the import liccnscs it is allocated by highcr authoritics Any nct proftts that these activitics generate are absorbed in payments of interest and principal on its cumulative debLt - 117- meeting all the potential upstream and downstream trade-related requirements of their clients. More importantly, the current practice of restricting product scope discriminates against FTCs that happen to handle products in which China is not competitive. The problemn is that such FTCs now find themselves facing conflicting and contradictory incentives. In trying to meet foreign exchange targets fixed in the context of contracts with provincial or national authorities, they sacrifice profitability, and thereby their financial solvency. If they try to stay profitable, they risk penalties for not meeting foreign exchange targets. Under the circumstances, some FTCs such as the Hubei Provincial Chemical Import Export FTC (see Box 6.1), have had to rely on distortionary behavior (such as selling import licenses) to subsidize losses on exports in order to survive. Fifth, relations between provincial/municipal and national FTCs on the one hand, and between FTCs and their respective supervising authorities (whether provincialtmunicipal or central government branches of MOFERT) on the other, remain confused and ill defined. Decentralization notwithstanding, provincial FTCs which used to be branches of national FTCs still conduct business on behalf of their erstwhile mother companies. The terms on which such business is conducted remain ambiguous and seem to vary from case to case. Although FTCs are now supposed to be responsible for their profits and losses, the extent to which their decisions are free from noncommercial considerations varies quite considerably, and depends on their relationship with their particular supervising authority. There is no doubt that recent reforms have put existing FTCs under growing pressure. As a result, FTC dependence on the banking sector has grown, and a number of FTCs are facing difficulties. In response to this, the government has taken several steps which, while they might help FTCs survive, may not be in the best interests of China's trading system. It appears that the latest round of regulations pertaining to foreign exchange retention are in part intended to support FTCs by allowing them to enlarge their share of retained foreign exchange from 12.5 to 60 percent (see Chapter 2). This measure should have no negative consequences for local enterprises as long as FTCs are subject to adequate competition, and are thereby forced to pay them the equivalent of international prices (adjusted for a reasonable profit margin) for export products. In cases where competition still remains limited, however, this measure enables FTCs to use the premium from their foreign exchange retention quotas to raise their own profits rather than pass it on to exporting enterprises. Some FTCs have been granted generous loans to undertake "enterprising" or vertical integration into manufacatring activity, with an idea of assuring them a stable source of supply. In some cases, such links between FTCs and manufacturers could well be beneficial to both parties-while the FTC acquires a captive supply network, the manufacturers could gain aecess to greater financial resources. On the other hand, as long as such a policy is pursued with the survival of FTCs in mind, there will remain the danger of "forced marriages" which, while useful to the FTC, may place undesirable restrictions on manufacturers who lose the flexibility to chose theirtrade intermediary. MOFERT is, along similar lines, trying to facilitate mergers between FTCs. Again, much depends on how these mergers take place. Some could result in important economies of scale and scope for FICs. On the other hand, if mergers are made between FTCs that are not sufficiently diversified, there is the danger of creating monopolies. Finally, MOFERT has been actively encouraging FTCs to "internationalize' as a way to diversify their functions and spread financial risk. Thus many FTCs have received - 118- authorization to set up overseas subsidiaries, invest in real estate, engage in third country trade, and invest abroad. The experience of Japanese sogo sosha shows that breaking into these new activities is a risky business requiring considerable resources. It is difficult to see, therefore, how those FTCs already in trouble in competing for traditional business can be helped by entering new and more risky activities. At the same time, it is also not clear what sense it makes even to encourage financially strong and well managed FTCs to "internationalize" just yet, when these companies could, if allowed the freedom, surely find profitable investment opportunities within China. The evidence so far is that many of the FTCs pursuing a strategy of premature 'internationalization" have had dubious intentions. MOFERT's policy has in fact been abused, and has resulted in capital flight. Several FTCs are known, for example, to have engaged in speculative real estate investments. Others have set up overseas subsidiaries essentially to escape Chinese law. Some subsidiaries have been used by FTCs to reinvest in joint ventures with themselves, and thereby, to gain access to substantial fiscal incentives reserved for foreign investors. Lessons for ITC Policy in China The failure of Taiwan (China) to develop Japanese style giant trading companies indicates that it is not always possible to transplant models from other countries. On the other hand, the case of Korea demonstrates that effective trade intermediaries do not always evolve by themselves, but that they can be created through active policy intervention. China is a much larger and more diverse economy than any of the ones discussed above. No one country offers a model that is entirely appropriate for it. Given the diversity of its industrial structure, it is apparent that China has usefil lessons to learn from each of the economics considered. In the immediate term, the most useful trading companies for China appear to be the ones that resemble their counterparts from Hong Kong. Small,81 flexible and specialized trading companies seem to be the best suited to handle China's most rapidly growing export segments such as light industial goods, garments and electronics, and to hamess the export potential of TVEs. On the other hand, looking into the future, and taking account of the breadth of China's industrial structure, it is easy to imagine a useful role for large trading companies that could, lilke the sogo sosha in Japan, contribute to the development of efficient production systems, or as in the case of Korea, promote the trade of affiliated conglomerate groups. The real challenge for FTC policy now should not be how to help FTCs survive, but how to create a framework that encourages those FTCs to thrive that can serve as effective trade intermediaries for China. Drawing on our analysis of the deficiencies of China's current FTC policy, and of die experience of other countries, the following recommendations are offered: (a) Progress in making the trading system more competitive notwithstanding, steps need to be taken to eliminate the residual monopsony power of FTCs dealing with noncontrolled products. In theory, this can be done merely by ensuring that informational and regulatory barriers that come in the way of cross provincial transactions are removed. In practice, this may be difficult to achieve. A more effective way of applying competitive pressure on FICs would be, as in the case of Taiwan (China), to allow entry to foreign trading firms, and S/ Compared to Hong Kong trading firms, small Chinese PTCs are still large-while the former an average have less than 50 workers, the latter tend to have between 300 to 400 workers. - 119- to buying offices of foreign wholesalers and retailers.2/ Another alternative is to give more enterprises the option of trading directly. For a start, all central government enterprises could be given the option of trading directly, and also of handling trade for other firms too. Ultimately, any local firm should have the choice of trading itself, or of subcontracting this function to an intermediary. For the foreign trade system to function efficiently, it is not local enterprises that must earn the right to trade directly, but it is FTCs that must earn the right to act as intermediaries. (b) Pending the elimination of controlled commodities, a mechanism must be found to systematically transfer the rents that currently accrue to FTCs designated to handle exports of such commodities-there is no reason for them to benefit from windfalls that have nothing to do with their capacity to function as trade intermediar.es. The most rational way of doing this would be througl aIe application of compensatory export taxes.l0/ (c) As noted in Chapter 2, the practice of foreign exchange contracts between provincial or central government authorities and their FTCs should be discontinued. Instead, F-TCs should operate as independent profit centers and their bonuses could be linled to profits. In parallel, provincial FTCs must become truly independent from their national counterparts, and all business between them should be on strictly commercial terms. td) The measure proposed above cannot be implemented unless FTCs are granted greater management autonomy (see Chapter 2). At a minimum, the practice of restricting the product scope of FTCs must be eliminated. FTCs should be granted the freedom to handle any commodity (with the exception of those stil subject to import planning and export controls). This will enable FTCs, if they so wish, to diversify their product coverage and will encourage them to seek out the products in which China is most competitive, thereby reducing such distortions as remain in the composition of China's exports, and enabling the growth of the country's foreign exchange reserves without jeopardizing the financial solvability of FTCs. (e) Over time, FTCs should be allowed to engage in domestic trade as well. This would provide the opportunity for the larger Chinese FTCs in particular to play the role of systems organizers like the sogo sosha in Japan. It would create business opportunities for them within China, instead of turning them towards a strategy of premature "internationalization." (f) Vertical integration of FTCs into manufacturing, mergers between FTCs, etc., should not be facilitated with concessional loans, nor should they be "arranged" with the objective of saving ailing FTCs. Already FTCs operate on a financially 9J This already appears to be happening in Guangdong. 10/ Tfhe tax being equal to the difference between the domestic secondary market price and the international price of the product concerned. Taxes are, in some cases, used at present, but they are not sufficiently high to transfer all of the rents accruing to FTCs. -120- more autonomous basis than must state-owned enterprises. The logical next step to having FTCs take responsibility for their profits and losses, however, is to allow ailing FTCs to exit. (g) On the other hand, FTCs should be able to exercise the option, if they so wish, of vertically integrating, or merging with one another, or with manufacturing firms. If FTCs are able to operate as truly independent profit centers, voluntary mergers between FrCs can be expected to be undertaken for the right motives. In parallel with (b), (c) and (e), it is recommended, therefore, that FTCs be permitted to merge with another. Moreover, pending resolution of system wide ownership issues, integration/mergers could also be permitted between FTCs and the autonomous enterprise groups that the government is promoting. Unlike Korea, which at the inception of its GTC policy did not have any large trading companies, China already has trading companies that are financially strong and are large. The elimination of restrictions on product scope and the opportunity for mergers should encourage such FTCs to diversify and develop into general trading companies, without the govermment having to subsidize or "arrange" this process. (hi) Finally, the premature uinternationalization' of certain FTCs flush with foreign exchange does not bring any gains for China--it should not be encouraged. In particular, the loophole that allows FTCs to create overseas subsidiaries and reinvest in the mainland must be closed. C. DEvEorPNG BUYER-SELLE LENs: THE Roa OF PUBLIC SUPPORT SERVICES Given the difficulties that neophyte exporters can face in establishing links with foreign buyers, many countries have turned to public intervention of various kinds to try to facilitate the process. Thus, governments have attempted to provide assistance for export marketing, for quality control and for other export support services, with varying degrees of success. Public Support for Export Marketing Amongst developing countries, the so-called Four Dragons have undoubtedly had the most effective public export marketing institutions These institutions handle two basic functions: trade related information and inquiry services, and trade promotion (trade fairs, publicity, etc.). In some cases, assistance is also provided in the form of market analysis and development, and advice on product design, packaging, and training. While the experience of these four countries demonstrates that appropriately designed and managed institutions can be effective agents of export promotion, it must be borne in mind that, in all cases, the private sector still handles the vast bulk of information flows between buyers and sellers. Export Promotion Offices (EPOs) in these countries compete vigorously with private trading companies and other marketing intermediaries. The key to their success has been the strong involvement of the local business community in their activities and their ability to occupy a market niche. In China, there exists a diffuse and fast changing institutional structure that handles various aspects of export promotion (Table A6. 1, Organizational Structure of - 121 - MOFERT).1ll/ At the national level, there is the China Council for the Promotion of International Trade (CCPIT), that reports directly to the State Council. CCPIT was originally charged with the task of handling China's trade with Japan. Over the years, its role has changed and expanded. It now is the foremost national institution responsible for promoting Chinese exports overseas. The Council's job is to enhance China's image as an exporter. To this effect it handles the organization of trade fairs and exhibitions overseas. Participation in these fairs is open to all. However, the Council makes a selection from amongst applicants from the entire country, and the selected enterprises or FTCs are required to pay a fee intended to cover some part of the Council's costs. Aside from CCPIT, MOFERT, at both the national and provincial levels, is involved, albeit to a limited extent, in export marketing. MOFERT has a department that handles international advertising. Mostly, this involves designing international advertising campaigns for clients that comprise joint ventures, state-owned enterprises and FTCs. More significant is MOFERT's role in organizing trade fairs within China. The ministry in Beijing manages some of the most notable trade fairs that are held in China, such the one in Guangzhou. Recently, provincial and municipal branches of MOFERT have also started to organize their own trade fairs. As in Shanghai, locally organized trade fairs have now become important annual features in many provinces and municipalities. Participation in all fairs, whether organized nationally or at the provincial level, remains restricted mainly to FTCs and a few large state- owned enterprises with direct trading rights. Such exposure as local enterprises in general, and TVEs in particular, are able to get to foreign buyers at these fairs, depends on their respective FTCs. As a result, the fairs have not done nuch to promote direct buyer-manufacturer contact. Such contact remains limited in large part to entities that have been granted the privilege of direcc. trading rights. MOFERrs involvement in export marketing has declined substantially now that FTCs have become more autonomous. As the decentralization of foreign trade continues, the role of MOFERT or any successor organization can be expected to evolve further. Increasingly, MOFERT will be called upon to focus on regulating China's foreign trade policy framework, leaving the management ef the country's trade to independent intermediaries or firms with direct trading rights. Even 'within this framework though, there may still be a useful role that MOFERT can play in export marketing. By taking on a marketing function along lines similar to that of EPOs in the countries discussed above, MOFERT could serve as a catalyst for expanding direct export rights, in direct competition with independent FTCs. Recommendations. At present, the argument that is used to limit direct trading rights is the inexperience of domestic enterprises. As such, firms are expected to trade through FITCs until such time as they acquire the necessary skills, when they might be granted direct trading rights. As FTCs become profit oriented, there will be little incentive left for them to transmit skills and information that may enable clients to bypass them. Under the circumstances, public support for export marketing could help ensure not only that those local enterprises that wish to export direcdy learn how to establish direct contact with foreign buyers, but alsk! that FTCs compete more vigorously to earn the business of local enterprises. Given the economies it, This strctue is in the process of change, following recent initiatives (stemming from the 14th National Communist Party Congress in October 1992) to reorganize the govermnent. As noted earlier, the Ministry itself has been renamed the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). - 122 - of scale involved, MOFERT could easily develop an effective intelligence network worldwide, and channel information services to small firms that would otherwise be denied the opportunity to trade directly. MOFERT should have little difficulty in getting the support of the nonstate- owned sector for this purpose. As per the model of successful EPOs elsewhere,. the delivery of such services could be managed jointly by MOFERT and representatives of local firms.12 Public Support for Quality Control The importance of product quality is often underestimated by new exporters, who are used to a less demanding domestic market. Intrafirm quality control capabilities are lacking in such cases, and there may be a need for developing alternative systems for ensuring product quality. Quality is an important consideration not only for the individual buyer seller- relationship, but also for the exporting country's reputation. Positive national reputations can help a country penetrate markets for new products that it has not previously exported. Conserving country reputation is all the more important, considering that buyers tend to follow a "herd' instinct, based on general perceptions about the country and on information from other buyers.' Considering the externalities involved, therefore, public intervention in the area of quality control can play an important role in export development. Quality control can be conducted at several stages of the export chain, ranging from the preshipment stage, back to the manufacturing process itself. The experience of several countries shows that, while quality control at the preshipment stage can have an impact on the export quality of certain industries in the short mn, a wider approach to the problem is inevitable in the longer run. Ultimately improvements in export quality cannot be sustained without upstream efforts to control the quality of components, upgrade the level of technology, and even to improve management practices. Moreover, no quality control measures can be effective in improving product quality by themselves, in the absence of a sound overall policy environment. The experience of Japan is an example of a "multistage approach" to quality control. Japan's dramatic success in developing a reputation for quality has been the result of a concerted and sustained effort by the government and representatives of the private sector in developing quality control systems at various levels nationwide. In Taiwan (China), the government's role in the area of quality control has been particularly noteworthy for the effectiveness of its preshipment inspection for exports. As in the case of Japan, however, these public efforts at quality control extend way beyond the provision of preshipmenz inspection. Taiwan (China) has taken the question of its international image as quality exporter very seriously. Recognizing the "public good" nature of country reputation, the government has itself paid compensation to buyers for defective export products originating in the country.f3I More importantly, Taiwan (China) has invested heavily in a dense network of publicly funded technology assistance and testing centers. See Annex 6.1 for details. 12/ At present, MOFERT is titular head of the China Association of Intemational Trade and the Chamber of Commerce of Import and Export Commodities. The organizations, however, are comprised mainly of FTCs and a few state-owned enterprises with direct trading rights. For its proposed new functions, MOFERT will need to extend its links with associations of producers at every level. 13/ The government is reported to have paid return shipment for 300,000 bicycles rather than let them be sold in the United States (see Egan and Mody, 1992). - 123 - The Chinese authorities are cognizant of the importance of export quality control and a number of steps in the right direction have been taken. China now has a legal framework for administering export quality control in the form of the Commodity Inspection Law of 1989, which calls for inspection of exports of all products belonging to an officially determined list. In 1990, almost 1.5 million export shipments worth an estimated $27.9 billion were reported to have been inspected. These shipments accounted for almost two thirds of the value of China's manufacturing exports in that year. Of these, shipments worth about $600 million were determined to be substandard. The responsibility for export quality inspection rests with the State Commission for Import arid Export Commodity Inspection. The State Commission now has 13,400 staff spread over 200 inspection agencies nationwide. However, not all inspections are done by the Commission's own laboratories-about a fifth are designated to other Commission-approved laboratories. To improve its own in-house technical capacity, the Commission has been actively developing links and exchanging technical information with foreign testing laboratories and inspection bodies. Over 50 of the Commission's own laboratories have now received certification by international testing laboratories invited to evaluate their technical capacity and testing methods. The Commission also has 10 solely owned or joint-venture firms abroad accredited to it that it uses for inspection of imports into China. The Commission's activities go beyond providing a preshipment inspection service. In an effort to tackle upstream quality control issues, the Commission has also been involved in technical assistance and training for local manufacturers. In addition, the Commission has a certification scheme whereby it provides a "quality license" to deserving enterprises. Over 10,000 such licenses were reportedly issued in 1990 in 13 product categories, including machinery, garments and textiles. Local firms have also been encouraged to seek certification from accredited foreign laboratories. Thus, many local factories have the right, for example, to fix United Laboratories or International Wool Secretariat marks on their products. .Quality control issues are also being pursued by government agencies other than the State Commission. MOFERT, for example, does quality appraisals, and awards prizes for products deemed to be of high quality. In 1990, the MOFERT High Quality Examination and Appraisal Commission presented awards for over 100 different products nationwide. Elsewhere, efforts have been made to improve industrial standards in general in China. China has a mandatory national standard, which since the mid-1980s, has been based on the standards of the International Standards Organization (ISO). There remains, however, a problem of international confidence in the Chinese standard. In the machine tools sector, for example, foreign customers continue to insist on the use of imported components even when functionally equivalent Chinese parts are available in China.' Recommendations. Despite all these initiatives, quality control for China's exports remains a problem, and it appears that rejection rates are still high.7 Addressing this problem will require a sustained effort at various stages of the export chain, right down from preshipment, all the way up to the manufacturing process itself. In the short run, the challenge will be to reduce the frequency of buyer rejection and to ensure that Chinese exports meet the minimum quality requirements of their main markets. Over time, efforts will have to be directed at quality upgrading in general, and at inducing quality consciousness in all aspects of manufacturing activity. - 124 - Immediate attention should be devoted to improving control at the preshipment stage. Although the Law on Commodity Inspection was promulgated in 1989, Chinese legislation in this domain is still deficient. The main difficulty is that the scheme is much too inspection intensive. The law calls for mandatory inspection of all export shipments of products figuring on the rather extensive official list. Supplementary legislation introduced in 1990 does allow for a few exemptions, but these are quite limited.' As a result, the administrative burden on the State Commission is needlessly heavy, and this undermines the credibility of the inspection process. A Taiwan style low inspection intensive scheme that relies on random checks on the shipments from a selection of exporters would be more efficient and just as effective. Moreover, the Taiwan model, which involves the periodic evaluation of the quality control systems of the exporter himself, has the added advantage of forcing the latter to take responsibility for the quality of his products. A related problem is that the law does not allow exporters to use accredited agencies for inspection purposes in lieu of the inspection agencies of the State Commission. Given the limited credibility of the Commission's inspection capacity at this time, a lot of exports are in any event inspected independently by private companies or agencies acting on behalf of buyers. It is reported, for example, that 30 private companies from Hong Kong manage preshipment inspection for most exports from the province.' In such cases, inspection by the State Commission's agencies seems redundant. Consideration should be given to encouraging more foreign inspection bodies to start operations in China, giving them accreditation, and allowing exporters to use them instead of the Commission's own agencies. In parallel, of course, the network of local testing facilities needs to be expanded and upgraded, through acquisition of internationally approved testing methods and training of personnel. Given the importance of cointry reputation for export development, measures to build the international image of Chinese products should not be neglected. Trade fairs in importing countries are one such initiative that the Chinese authorities are already pursuing. But other measures such as paying for defective producs, as in Taiwarn (China), for example, can be very effective image builders. Over the medium term, attention will need to be devoted to further developing the quality control systems of Chinese enterprises themselves. Many Chinese enterprises first introduced such systems only ir the early 1980s, but they still have a long way to go. A lot can be done to raise quality consciousness at all levels of Chinese industry. First, enterprises could be induced to improve their own quality control systems by making the award of direct export rights automatic for finns that earn quality certification from the agencies of the State Commission or other accredited agencies. Under such a system, failure to maintain quality standards, as determined through periodic inspection, would jeopardize their direct exporter status. Second, learning from the experience of Japan, the government could promote the creation of business associations devoted to quality control. The Mexicii, Chilea.. and Brazilian Quality Control Associations have, for example, been effective in sptcading the Quality Control Circle (QCC) movement in their respective countries.` In China, such associations, could be a useful tool for spreading quality control in the country's growing nonstate-owned sector. - 125 - Third, steps should be taken to improve the credibility and international image of the Chinese national industrial standard. In this regard, it is suggested that the national standard be changed from a mandatory to a recommended certification, but with very strict criteria." A recommended standard, if properly enforced, can senre as a positive inducement to the firm wishing to gain recognition as a quality producer, rather than as a constraint that reduces its flexibility. National certification should only be undertaken by the most technically able government agencies and not, as has been the practice, by research institutes of limited capacity. Besides, international inspection groups should be regularly invited to inspect nationally certified factories to increase international confidence in the standard. Finally, it must be recognized that progress in the area of quality control will ultimately depend on the pace of more systemic reform of state-owned enterprises and of the incentives regime. At present, the average enterprise is not subject to an incentive regime demanding innovation or quality upgradation, nor is it organized to cope with product improvement on a continuing basis. Unless Chinese enterprises are subject to greater competition both from within the country and from imports (Chapter 5), and are given the independence to respond to such pressure, progress in improving the quality of Chinese manufacturing exports will very quickly reach its limits. Public Support for Other Nonfinancial Export Support Services Aside from marketing and quality control, a host of other services including, for example, shipping, freight forwarding, warehousing, and general consulting and legal services, have an important bearing on export competitiveness. Past neglect means that both the volume and quality of such services in China is relativhis low and this is a hindrance to the development of direct trading. As one would expect, China has so far relied heavily on outside suppliers of export support services. The role of Hong Kong has in fact been particularly important for the rapid growth of China's exports. As noted in Chapter 1, about two thirds of Chines manufacturing exports are channelled through Hong Kong, either as reexports or in the form of trans.;hipments. Moreover, the rapid growth of small-scale manufacturing in Guangdong is in large part due to the access that province enjoys to Hong Kong's service industry. Recommendations. It goes withouat saying that the Chinese go-.?ernment must press on with its efforts to develop the country's service sector. Ultimately, whether service suppliers are privately owned or state-run matters less than whether they are in a competitive situation. Monopolies in services for exports must be avoided and restrictions on the import of services and on the use of service suppliers abroad should be dismantled. In this context, the recent decision iuy the Chinese authorities to allow entry by foreign firms to the service industry is a welcome one. Some developing countries have experimented with a more activist public role in providing support services to neophyte exporters. In several countries, government agencies work with individual enterprises to help find and finance such consulting or other support services as might be needed to overcome entry barriers into export markets.'1 In most cases the financing provided is subsidized.141 Such programs of assistance, though effective, have 14/ Subsidies for export support services are one of the very few intemationally permitted means kft of providing financial support for cxports and can generate significant positive extemalities for the whole economy (Yeesirg and Singer, World Bank, 199O). -126- typically remained small in scale because of their micro-focus. Examples are the Product Specialists Program managed by the Department of Trade and Industry in the Philippines, and the Indian Export Marketing Fund, administered by the Import-Export Bank of India. The Chinese government could give consideration to the creation of a marketing fund set up along similar lines, to be managed by an appropriate agency for the purpose of financing support services to individual firms seeking to export directly. D. EXPORT FINANCING Previous World Bank reports have stressed the importance of ready access to credit for exporters.?3 The experience of the successful exporters from East Asia suggests that preshipment finance is particularly important for developing country exporters. Post-shipment financing becomes relevant only when capital goods acquire a significant share of exports. Medium to long-term investment financing specifically earmarked for export production has hardly been used by any of the East Asian countries. In Korea, the bulk of export credit has been handled by the commercial banks, which have had automatic and quick access to refinancing from the central bank. A preshipment export finance guarantee scheme has been instrumental in reducing risks and has encouraged the commercial bank to extend working capital credit to all actual and potential exporters. Korea has also implemented a system of domestic letters of credit (DL/C) 4 that has provided access to preshipment credit even to indirect exporters. Although Korea starfe with a program of preferential interest rates, these have been phased out. Preshipment credits are now denominated in foreign currencies and passed on to borrowers at world interest rates plus a processing margm. Other East Asian countries, such as Thailand and Malaysia, have had less successful programs of preshipment export credit than Korea. In most cases, the biggest weakness appears to have been lack of access by indirect exporters to export credit. These countries have recently begun experimenting with systems of DLIC. In China, the Bank of China, the principal bank dealing in foreign exchange, has long offered trade credit, but in domestic currency. These credits are offered for working capital as well as financing fixed investment for production of exports and import substitute vroducts. The volume of such credits has been rising very rapidly. The total volume of hade loans outstanding at the end of 1991 reached Y 181 billion, more than three times the level at the end of 1985 (see Table 6.1). Of these, loans outstanding to FTCs were Y 154 billion, and the total volume of loans extended to FTCs within the twelve month period of 1991 was in fact Y 390 billion, or over two-and-a-half times the value of loans outstanding to them at the end of the year. It is reported that the bulk of these domestic currency trade credits are for financing exports. In 1998, for example, according to the Bank of China, 90 percent of the trade loans extended to FTCs during the year were for exports. Rapid growth in the overall volume of trade credit notwithstanding, access to credit for enterprises other than FTCs has in fact been shrinking. Whereas in 199 7, 77 percent of total domestic currency trade credit was allocated to FTCs, in 1991 the share of FTCs had increased to over 85 percent. This does not mean that preshipment financing to indirect exporters has been declining. By all accounts, one of the important functions of the FTCs has been to provide advances on export shipments to their clients, or indeed to take over tide of their exports. What it does mean, however, is that local firms are still obliged in most cases to rely on FTCs as in;ermediaries. A lack of direct access to trade credit appears to be one reason that - 127 - manufacturing firms with direct trading rights have often not been able to exercise this authority, despite several reform initiatives in the 1980s that called for direct exporting. This situation needs to be corrected. Table 6.1: FOREIGN TRADE CREDIT (billions of yuan) Outstanding at year-end Cumulative loans Total Of which amount extended during extended to FTCs the year to FTCs 1978 20.1 1980 1981 1982 1983 1984 40.0 1985 57.0 1986 89.8 1987 101.6 78.0 1988 121.9 102.4 1989 133.0 121.0 339.3 1990 163.5 140.4 354.0 1991 180.7 154.8 390.OLa la Esdmated. Source: Bank of China. Further, the available data indicate that the ratio of export credit to total exports is very high. Assuming, that as in 1988, 90 percent of new foreign trade loans made in 1989 were also used to finance exports, export loans in that year would have amounted to an estimated 150 percent of the actual volume of exports.51/ In the absence of more detailed information 151 In 1989, Chinese exports valued in domestic currency were just under Y 200 billion. If more than 90 percent of all Bank of China foreign trade loans were used to finance exports (which is the share of incremental loans going to finance exports), cumulative export loans awarded in the 12-month period of 1989 would have been Y 306 billion (Y 340 billion x 0.9), of which about Y 109 billion (Y 121 billion x 0.9) would have been outstanding at year-end. If the avenge export loan is outtanding for one calendar quarter, one would expect that the value of export loans outstanding at any point in time would be roughly one fourth of the annual value of exports. In 1989, that would be Y 50 billion, implying that the approximately additional Y 60 bilion (Y 109 billion minus 50 billion) outstanding at the end of 1989 represents nonperforming export loans that were rolled over (perhaps more than once) during the year. It is worth noting that Y 60 billion represents approximately nine times the value of the officially acknowledged annual budgetary subsidy to export losses during the period 1988-90. - 128 - about the maturity structure of the Bank of China's trade credits, it is difficult to pinpoint the exact reason for such a high ratio. One possibility is that a large proportion of the Bank of China's trade credits have been of medium- to long-term maturities. This could be the case if, for example, FTCs have been borrowing large sums to finance export related investments in production. Such an explanation is, however, implausible. Given that the ratio of the annual volume of loans to that of loans outstanding at year-end is over 2.5, the bulk of the Bank of China's trade credits to FTCs are in fact likely to be short term. Under the circumstances, a high export credit to exports ratio points to a more disturbing explanation. What it suggests is that a significant portion of the Bank's domestic currency foreign trade loan portfolio may be bad loans that are simply rolled over periodically and are not used to finance new exports. If FTCs have indeed, much like the state-owned enterprises of the manufacturing sector, been turning to the Bank of China for off-budget assistance in this manner, one would expect to see a marked increase in loans to FTCs starting with the introduction of the contract responsibility system and the freezing of official subsidies to FTCs in 1988. Table 6.1 appears to confirm this view, for it shows that there was a sharp increase in the proportion of trade credits going to FTCs from less than 78 percent in 1987 to almost 85 percent in 1988. The apparently easy access of FTCs to bank loans for dealing with their structural problems is not healthy for China's trading systerm and it runs contrary to the spirit of recent initiatives that require FTCs to become more competftive by taking responsibility for their own profits and losses. In addition to domestic currency trade credits, the Bank of China also offers foreign exchange loans for both working capital and fixed investment. These loans are offered primarily to foreign-invested enterprises. It is reported that loans ousanding by the Bank of China to foreign-invested enterprises at the end of 1990 totalled $990 million. An apparently much smaller amount of dollar loans had been extended to domestic firms. The Bank of China also offers two other types of trade loans. Export sellers' credits have been offered since 1978 to Chinese enterprises selling electronic and machinery equipment, mosdy to developing economies, when such sales are made on a deferred payment basis.i6/ The State Council in 1992 also approved the creation of a new system of credits to be extended to buyers of Chinese exports. Ihese loans, made in foreign currency, are to be used to finance the sale of complete sets of machinery and electronic equipment valued at a minimum of one million dollars per transaction. One hundred million dollars annually has been earmarked for this program during the Eighth Five-Year Plan (1991-95).L7/ It is difficult to assess how much these initiatives can contribute to the growth of China's exports of machinery and electronics products. It is worth noting tough, based on the experience of Korea and Japan, that export credit schemes, or any other export development measures for that matter, designed to help specific subsectors are unlikely to succeed unless they are accompanied by focussed attention to industrial restructuring (see section on export targeting below). 16/ By the end of 1991, the Back of China had extended Y 6.3 billion under this program and the value of loans outstanding was Y 3.3 billion. Interest rtes on these loans are said to be subsidized. 17f Interest rates to be charged will follow OECD standards on loans extended by national import-export banks. That calls for a 1-percent premium over the rate on 5-year treasuy bonds in the United States or Japan depending on whether the loan is denominated in dollars or yen. - 129 - The Chinese authorities are considering introducing an export insurance scheme, managed either by a separate Bureau under the State Council or by the People's Insurance Company. Already, since July 1992, the Beijing Branch of the Bank of China has been providing export insurance and claims settlement services to eight major import-export companies in the municipality. It is not clear, however, whether or not such a scheme would be limited to credits for machinery and electronics exports only. This is a w ilcome initiative whose benefits should not be restricted to just a few sectors. Recommendations First, steps must be taken to ensure that firms with direct trading rights enjoy the same access to trade credits as FTCs. Second, for the initiative of having FTCs take responsibility for their own profits and losses to work, they must not be allowed to benefit from a soft budget constraint by tapping into the banking sector. Third, export insurance should be made available to all local enterprises as a way of encouraging and enabling them to acquire and exercise direct trading rights. E. PRoDucr TASGFrIG FOR EXPORTS One of the fundamental debates concerning the role of public intervention in export policy pertains to targeting specific products for export promotion. Does such targeting work and is it desirable? If so, how should it be implemented and under what circumstances? Targeting specific product cattegories for export has become an inhere-nt part of China's foreign trade regime. Targeted sectors have included light industrial products, certain types of textile products, and machinery and electronics goods in general. The bulk of special export support has, however, been directed at the machinery and electronics goods sectors. Several instruments have been used for purposes of targeting. First, targeted sectors benefited from the special preferential foreign exchange retention rates (Chapter 2) introduced in the early 1980s. The original retention rate for light industrial products and knitwear was 20 percent, and that for the machinery and electronics sector was 30 percent at a time when the average rate for other products was less than ten percent. In 1982, the retention rate for machinery and electronics sector was raised to 50 percent. At present, however, preferential retention ratios are retained only for the machinery and electronics sectors which are entitled to a 70 percent retention compared to 50 percent for all other commodities. 18/ - Second, the Seventh Five Year Plan (1986-90) provided for the creation of Production Networks for Exports (PNEs) with the objective of directing assistance to selected enterprises within targeted sectors. The machinery and electronics sector was the first industry group to benefit from such a scheme. In 1985, following approval by the State Council, several hundred factories nationwide, producing a range of products, were selected to participate in the network. Investments in the order of $100 million per annum were planned over a five-year period and the participating factories were to be accorded guaranteed supplies of raw materials, power, and packaging materials, and preferential access to transportation and tax reductions. In 1990, about Y 1.7 billion was invested in construction projects in support of PNEs in the 18/ This is the net percentage after the cental govermment has exercised its right to buy back additional foreign exchange retained by local enterprises (Chapter 2). -130 - textiles, light industry and machinery and electronics sectors, and efforts were made for the first time to draw TVEs into production networks. TMird, MOFERT has earmarked special investment funds for the technological upgrading of selected enterprises; $50 million were channelled to various exporting enterprises mostly in the machinery and electronic sector through this facility in 1990. To date, an estimated 1,300 enterprises in the machinery and electronics sector have benefitted from such funds. Fourth, as was discussed earlier (see Chapter 2), the Chinese authorities have made extensive use of export targets fixed on a provincial and on a firm specific basis. Although the practice appears to vary across provinces, anecdotal evidence suggests that export targets are not only fixed for FTCs, within the framework of their foreign exchange contracts, but also for manufacturing enterprises, with and without direct trading rights. In Jiangsu province, for example, the provincial COFERT concludes contracts with FTCs, which in turn conclude contracts with enterprises, collectives and TVEs. Likewise, several local governments establish export quotas for state owned enterprises under the enterprise contract responsibility system.' By and large, enterprise specific export targets are now fixed on the basis of past performance through a 'bottom-up" process-as such they no longer significantly distort export composition. For particular sectors such as machinery and electronics, however, it is likely that FTCs and manufacturers are still expected to meet relatively more ambitious export targets in exchange for the additional export support to which they are entitled. Finally, special export credit schemes have been used in support of targeted sectors. To date, such schemes have only been used in support of the machinery and electronic sector (see section on export finacing). It is difficult to assess the exact contribution of this combination of measures on the export performance of targeted sectors. As shown in Table 6.2, the share of light industrial and textile products- in total exports has grown rapidly from about 32 percent in 1985 to over 45 percent in 1991. But since these sectors did not really receive significant amounts of special export assistance, teir export performance can hardly be explained by China's export targeting polices. On the other hand, the growth of exports from the machinery and electronic sectors,l9J which have benefited from substantial targeted support, has been much more impressive than even that of the textiles and light industrial sector. It is remarkable that the share of machinery and electronics in China's total exports tripled from just under 7 percent in 1985 to almost 20 percent in 1991 and this suggests that export targeting in China has indeed had an impact on export composition. What is less clear is the extent to which these exports have been based on static or dynamic comparative advantage.20/ For any targeted product, success cannot just be measured in terns of export growth, but in terms of how competitive the product becomes on the world market. One way to test the success or failure of the policy would be to examine the evolution of production efficiency and product quality in the targeted sectors. In China, special incentives for machinery and electronic exports have now been in place for over twelve years. 19/ S1TC 71, 72, 73. 20/ See Chapter 7 for more on this. - 131 - Table 6.2: EXORTS OF TARCETED SECrORS, 1978-91 (% share total exports) Machinery & Light industrial & electronics a textile products a 1978 4.2 36.1 1985 3.3 31.9 1988 10.0 39.9 1989 12.4 43.8 1990 13.9 - 1991 14.3 /a SITC 71, 73 and 73 (Rev. 1) based on partner country data. Based on Chinese reported data, the shares for 1988 and 1991 are 12.4 percent and 19.2 percent, respectively. The difference is due primarily to exports of transport equipment-and in particular to exports of automotive components (SITC 732.89-which have grown much faster per the Chinese reported data than per the partner country data (compare Tables A1.1 and A1.2). As noted in footnote 6 of Chapter 1, partner country data tends to be the more reliable because greater care is taken in classifying goods in the importing country for duty assessment purposes. One possible explanation for the discrepancy is that Chinese enterprises enticed by substantial fiscal incentives for exports from these subsectors have been overreporting the value of their exports. This is not an uncommon phenomenon where substantial export incentives are offered to selected sectors. lb As per export data and definitions of the Almanac of Foreign Economic Relations and Trade (various issues), MOFERT only record the value-added of processed exports as exports. Thus as processed exports have grown, the Almanac's export figures have become systematically smaller than those of the Customs Directorate. In 1978, 1985 and 1989, the Almanac reported China's exports as $9.8 billion, $25.9 billion and $43.5 billion, respectively, compared to the Customs Directorate nunbers of $9.8, $26.1 and 52.5 billion for the same years. If cost reductions and quality improvements through the accumulation of production experience and Learning-by-doing were possible, these ought to have been realized in the course of more than a decade. Unforbtnately, there is little systematic evidence about the evolving efficiency of the machinery and electronics sectors in China. Such evidence as exists, however, suggests that China remais a high cost producer of these goods.16 The machinery sector repeatedly has been identified as one of the largest concentrations of loss-making state enterprises.2>/ A recent enterprise survey conducted for a World Bank report on the machine tools sector indicates that the gross profit margins of export oriented firms have been systematically lower than for other firms in the sector. Likewise, the domestic currency costs for exports of electronics 21! It should be noted that iinancial losses are not a good indicator of heallh in the Chinese economy because of the existence of numerous distortions and implicit subsidies. - 132 - products appear still to be high. Domestic prices of typical electronic components, for example, were between 40 and 270 percent higher than international prices in 1989. The mission found, in the case of consumer electronics, that unit export prices for black and white TVs were between 20 and 30 percent lower than ex-factory domestic prices and the enterprises interviewed reported that they were making losses on their exports.17 Another indicator of the competitiveness of China's machinery and electronics exports is an index of their revealed comparative advantage (RCA).21/ An analysis of the RCA of China's machinery and electronics sector (see Figure 7.2) confirms that, on the whole, China has not yet developed a competitive advantage in these sectors. Of the three major product categories that comprise the machinery and electronics sector, nonelectrical machinery and transport equipment subsectors show no signs of developing a comparative advantage-China's RCA indices have not even reached 0.2 for these products. The only product group within the machinery and electronics subsector that has recorded a rising RCA index over the last decade is electrical equipment, but even here, China's RCA index is still only marginally over unity. Moreover, as noted in Chapter 1, the growth of exports from this group has been generated largely through assembly type operations in a few product segments such as radio receivers, telecommunications equipment (black and white TVs and telephone equipment), electric space heaters, and domestic electric goods (refrigerators and washing machines). Sinmilar products manufactured domestically do not still appear to be competitive in the international market place. What the above suggests is that China has not yet been able to integrate into its domestic manufacturing activity the dynamic benefits and leaming that could be expected to accrue from an expansion of its export share in the machinery and electronics sector. If after all these years, China's manufactauing sector indeed remains a relatively high-cost producer of many of these products, the targeted export incentives hitherto accorded -to the machinery and electronics sectors cannot be said to have achieved satisfactory results, at least not so far. This underscores the danger of targeting. Despite these dangers, though, such a strategy continues to have considerable allure for Chinese policy makers, who are no doubt influenced by the experience of their neighbors, Japan and Korea. It is worth exploring therefore, the lessons that China can draw from the experience of these countries with regard to the targeting of specific products for exports. The Japanese and Korean approaches to export promotion have been very similar to one another. In Japan, like in Korea, great emphasis was placed on export incentives and targets. Of the two, the Korean experience, being more recent, may be more illuminating. Korean policy has been remarkable for its single minded emphasis on export performance. Of all the East Asian countries that have pursued a strategy of export-led growth, Korea has had the most centrally directed campaign of export promotion. Aside from sound management of the exchange rate, this campaign has comprised a whole range of measures including all the measures discussed in this chapter and then some, such as preferential rates for electricity and 221 The revealed comparative advantage (RCA) index measures the share of a particular product's share in the country's total exports relative to the share of that product in world trade. The higher the index, the greater is the county's "revealed& comparative advantage in that particular product. An RCA of less than one suggests that the country has no comparative advantage in that particular prodLct. See Chapter 7 for details. - 133 - rail transportation, income tax rebates, and wastage allowances.23/ It is estimated that, excluding the exchange rate effects, Korean export incentives went from 12.8 percent of the value of exports in 1965 to over 30 percent in 1971." By 1979, measures in direct support of exports had declined and were down to about 17 percent of the value of exports, in large part due to the discontinuation of those measures, such as income tax deductions, preferential credit terms, and preferential utility rates, that could be construed as direct subsidies. In addition to providing these incentives, the Korean government also made widespread use of firm specific export targets, monitored monthly by the Trade Promotion Council, chaired by the president of the country himself.'9 It was not unknown for poor performers to be faced with difficulties in accessing government controlled credit for capacity expansion and for good performers to get preferential treatment in this regard. Aside from this, the driving motivation for meeting these targets appears to have been pride and the recognition accorded to firms through prizes and national publicity. These targets were taken very seriously at all levels of the business community and had a distinct impact on export performance and structure. Although the Korean government did clearly exercise some degree of selective intervention in the encouragement of exports, intervention was limited to specific sectors identified as infant industries, and was used only as one instrument of an array of industrial assistance measures, including preferential access to governrment rationed credit, isolation from import competition and help for the development of market agents. Thus, while most export incentives, such as duty-free inputs for exports and export credit, were provided uniformly to all sectors without discrimination, infant industries had access to additional export support in the form, for example, of wastage fees and utilities at preferential rates. Likewise, while export targets were generally left to firms to determine for themselves, in the case of infant industries they were negotiated jointly between the government and local manufacturers. In fact, in such cases, export targets were used to insist that these industries sell a swiftly growing proportion of their output at world prices as a way of ensuring that they became internationally competitive. Using such an approach, Korea was able to provide universal and neutral export support to well established industries. Within this industry group, the pack-age of export support measures was not only neutral in the sense that it did not favor one activity over another, but was also neutral in the sense that it served essentially to offset the anti-export bias caused by other policies.2 In parallel, the government provided nsuneutral assistance and a proexport bias to targeted infant industries. Whether or not infant industry promotion in Korea was successful is a much contested issues and beyond the scope of this report.24/ What is clear, however, is that the selection of targeted industries was not always a rational process, and in many instances the government was forced to take supportive action having already channelled resources into a particular sector for reasons not always related to economic rates of return. It is generally agreed that the government's heavy and chemicals industry drive of the 1970s was too ambitious, and led to serious structural problems, including the "crowding out" of Korea's traditional export industries. Korea's experience confirms that product selection is not without risk, and that, for it to be successful, it requires the filQ commitment of the authorities and the 23/ Allowingproducers to import duty-free inputs in excess of their normal requirements for exports. 241 Chapter 5 does, however, explore the question of the links between import liberalization and industrl policy. - 134- ability to mobilize a whole spectrum of industrial assistance measures aside from export promotion. The significant lesson for China from the Korean experience is that targeting of specific products for exports, if it is to be successful, cannot be undertaken in isolation, but needs to be accompanied by a host of other focussed measures to support the industrial restructuring of the targeted sectors. So far, China's efforts at export selection do not appear to be supported by matching initiatives in industrial policy.- In sharp contrast to Korea and Japan, who have both had a highly centralized approach to policy making on trade and industry issues, in China authority for policy making in these areas has been dispersed across several agencies. The State Planning Commission (SPC), the System Reform Commission (SRC), the industrial line ministries, MOFERT, the State Science and Technology Commission, the Material Supply Bureau, the investment corporations, and banks are all involved in priority setting and target formulation. The result is too many contradictory lists circulating amongst different agencies at different levels and a dilution of focus.= The focus of China's industrial assistance strategy is also dispersed by the tendency, inevitable given China's size and diversity, for provincial priorities to be nomniftorm.251 The creation of PNEs could be interpreted as an effort at more nationally coordinated and focussed targeting activity. But the limited investment that has been channelled into these networks, suggests that industrial targeting still remains a diffuse activity. At present, it is not clear to what extent MOFERT's policies of providing additional support for machinery and electronics exports are in fact supported with complementary programs for industrial assistance to these sectors at the provincial level. In the event, while a national policy of export selection can contribute to the expansion of exports from these sectors, it cannot, by itself, be expected to make these exports more competitive. Conclusions China's policy of favoring the exports of the machinery and electronic sector cannot by itself make these sectors more competitive. The experience of Korea suggests that product selection is a risky business and that successful targeting would require an active and fbcussed policy of industrial assistance. Given China's size and diversity, such a strategy is likely to be difficult to elaborate at the national level, except perhaps for a few strategic sectors. In such cases, greater nadonal coordination between trade policy measures and assistance for industrial restructuring would seem to be warranted. The establishment of SCETO in early 1992, and ongoing efforts to create enterprise groups, free from multiple channels of supervision and control, could prove to be important initiatives in this regard. F. GEOGtPifCAL TARGETING A fundamental feature of China's reforms has been decentralization that has bestowed increasing authority and control in all aspects of economic decision maling to the 25/ The industrial sectors that the local authorities of Guangzhou, for example, have designated as their priority for the Eighth Plan are markedly different from those of Shanghai. The former are more focused on low technology mnanufactures such as batteries, shoes and electronic appliances, while the latter place their emphasis on such products as power generating equipment, computer numerically controlled (CNC) machine tools and computers. - 135 - provincial and local authorities. In addition, the authorities have sought to conduct reform experiments on a regionally segmented basis. The inevitable consequence of this refbrm dynamic has been to accentuate cross-regional policy differences and China's reforms have acquired a definite regional tilt. In the case of trade policy, this has meant that China's open door has been opened significantly wider in the coastal provinces than elsewhere in the country. The SEZs were the original embodiment of this policy of geographical targeting of China's open door policies. Four SEZs were established in 1979(80 in Guangdong and Fujian, 76land similar policies favoring foreign direct investment and trade were adopted in Hainan in 1983. Since then the approach of geographically targeted reform has been extended to all coastal provinces. In 1984, 14 coastal cities were designated "open cities" and 14 economic and technological development zones (ETDZs) were set up along the coastal line. In 1985, three delta areas, Pearl River Delta, South Fujian Delta and the Yangtze Delta were opened. In 1988, Hainan Island became an SEZ and also gained the status of a separate province-it is now the largest SEZ in the country. In 1990, Shanghai's Pudong Development Area was established. Pudong is de facto an SEZ for it enjoys the same degree of administrative autonomy and provides the same range of privileges and incentives to enterprises as do the other five SEZs. By 1991, 105 cities and more than 180 countries in 11 coastal provinces, autonomous regions, and municipalities had been opened to the outside world and policy makers intend to firther pursue such strategy. Most recently, the State Council declared the opening of ten major cities along the Yangtze river in June 1992. These are to enjoy the same preferential policies and autonomy as the open coastal cities Moreover, six comprehensive development zones will soon be established along the Yangtze River Valley. The impact of this policy has been dramatic, esrccially in terms of attracting foreign direct investment (EDI) and in generating exports. In 1990, SEZs and open coastal cities accounted for 66 percent of exports from China,271 and 52 percent of total realized FDI. SEZs alone accounted for 13.4 percent of China's total exports and about one fifth of realized FDI in the country. Moreover, the GDP and industrial growth rates of SEZs and most open coastal cities have been consistently above the national average.28/ The impact of the SEZs has not been confined to the zones themselves. The entire country has benefited from the reform experiments, such as the swap market for foreign exchange, that were initiated in the SEZs and then crossed the "bridge" into the hinterland. However, it is the coastal provinces that have benefited the most from the demonstration effect of policies of geographical targeting. In Guangdong, Fujian and Jiangsu, such policies seem to have unleashed a virtuous cycle of FDI and export-led growth.. Initial flows of FDI have begotten additional flows while reform experiments have become bolder and wider through a 261 Shenzhen, Zhuhai and Shantou in Guangdong, and Xiamen in Fujian. 27/ (Table A6-2.) This probably exaggerates the contribution of the coastal provinces to China's total exports because it includes the exports that do not originate in the coastal provinces but are handled by them on behalf of other provinces. 28/ The two important exceptions are Shanghai and Tianjin. - 136 - ripple effect.W$ Thus, Guangdong's per capita income has gone from just below the national average in 1978 to being fifth in the country in 1990. Over the same period, its average export growth rate was 29.3 percenit and its ratio of realized FDI to fixed assets has soared to 28.8 percent, almost four times the national average.2Q/ In 1990, the coastal provinces together accounted for 81 percent of all exports and absorbed 81 percent of all realized FDI (Table A6.3). This impressive performance notwithstanding, it is not clear (a) what the cost of China's regional tilt policies has been and (b) to what extent such policies can be successfully replicated in the inland provinces. The following sections attempt to provide a perspective on these issues. Policies for Coastal Development Special Economic Zones. The SEZs have been the model for China's policies of geographically targeted liberalization. Although initially it was intended for SEZs to be fashioned along the lines of the export processing zones of South Korea, and Taiwan (China), this was dropped in favor of a wider strategy. The basic objective of these zones was to serve as laboratories for reform and to attract FDI and technology from abroad by allowing enterprises to operate in a policy environment based much more on market mechanisms than elsewhere in the economy. Successful experiments would then be allowed to cross the "bridge" into the mainland for wider application in the rest of the country. SEZs are different from other areas in China in two important respects. First, SEZs have a greater degree of administrative autonomy than other areas. Perhaps most significant is the autonomy they enjoy over investment decisions. Likewise, the SEZs have considerable freedom of manoeuvre in the area of pricing, taxation, housing, labor policy and land management policies (see Annex 6.2 for details). Second, SEZs provided, at least until the open door was extended to other coastal regions, significantly more attractive incentives structure than elsewhere in China. The corporation tax rate, normally 33 percent for FIEs and 55 percent for SOEs, is 15 percent for all enterprises in the zones whether foreign or local. In addition, FlEs in SEZs are provided tax holidays. Exports and high technology projects are especially favored. Enterprises within the zones are subject to relaxed import licensing regulations and the zones themselves are treated as separate customs areas.31/ Open Cities, Economic and Tedhnology Development Zones (ID:Zs), Etc. As in the SEZs, the open coastal cities have considerable autonomy in economic decision making 291 The opening of the Pearl River Delta in 1984, for example, greatly enlarged opportunities for FDI in Guangdong. This was followed in 1988 by the designation of Guangdong as a "comprehensive experiment zone." 301 The experience ofFujian and Jiangsu has been similarly impressive-in fact, growth rates in these provinces have been faster than in Guangdong even through the role of FDI has been more limited. Like Guangdong, however, both provinces have taken bold reform initiatives and provided particular attention to the development of the nonstate sector and TVEs. 31f All imported inputs used in production that is exported or sold within the zones are duty free and exempt from all indirect internal taxes. Imports which are sold in the zones without further processng pay 50 pecent of the full duty and indirect tax mates. The sale of products 1mfacured in the zones to the hinterland cannot be undertaken without approval and requires the payment of full duties on imported inputs. - 137 - including, in particular, in investment decisions and approvals, and labor, land and price control regulations. However, the most daring reforms in terms of social security and labor practices are still only restricted to SEZs. From the incendves point of view, the coastal cities are comprised of two parts: ETDZs and science parks on the one hand, and the rest of the city on the other. Enterprises in ETDZs and science parks enjoy tax privileges that are essentially similar to those in the SEZs, while in the rest of each coastal city, tax concessions are relatively limited. Unlike SEZs, none of the coastal cities or their respective ETDZs or science parks are treated as separate customs areas.2/ On the whole, the open cities remain a less open version of SEZs, although, it appears in the case of the some of the cities, that there is less and less to distinguish them from SEZs.33/ Assessing the Perrormance of SEZs and Open Cities Variability of Performance. Although, in aggregate terms, the performance of SEZs and coastal cities has indeed been impressive, this masks a great deal of variability. First, the performance of coastal cities in general, and of Shanghai and Tianjin in particular, has been distinctly inferior to that of SEZs.34/ The explanation for this variability lies in large part in the different degree of openness of SEZs compared to coastal cities. The relatively less flexible policy environment of the latter has inhibited their ability to attract a critical mass of FDI. After the initial spurt in 1984 immediately following their opening up, the share of coastal cities in total FDI has in fact been declining, while that of Guangdong has been increasing.35/ Second, even within the subgroup of SEZs, the performance of Hainan, has been less impressive. Its GDP growth rate at 9.2 percent in 1989/90 although higher than the national average of 5.2, was 2 percentage points lower than that of CGuangdong, and only a fraction of the growth rates experienced in Shenzhen. Mirroring its relatively weak performance, in terms of GDP growth, has been Hainan's record in attracting FDI. Since Hainan gained SEZ and provincial status in 1988, total FDI committed has been about $800 million, which is less than a third of what was committed in Shenzhen just in 1990.3±/ What this points out is that, 32/ As such exemptions from import duties and indirect taxes are, as anywhere else in the country, restricted only to imported inputs used in exports. 331 Annex 6.3 pmvides more detail on the differences between ETDZs, science parks, other special zones and SEZs. 34/ The average annual growth rate of industrial output for the four original SEZs was over 34 percent over 1984-90, more than double the national average, while that of the open cities (excluding Shanghai and Tianjin) was only 16 percent, with Shanghai and Tianjin recording growth rates of only 6.7 and 9.4 percent, respectively (Table A6.2). By 1990, the SEZs in Guangdong and Fujian had become the most prosperous cities in China with per capita GDP reaching 6.3 times the national avenge, while the coastal cities recorded per capita GDP that was less than twice the national average. 35/ This trend may be reversed if Pudong, which is in effect as open now as any SEZ, takes off. In 1987, Guangdong's share of FDI was down to about 36 percent, with the other coastal provinces and autonomous cities, in particular, Shanghai, Tianjin, Liaoning, Jiangsn and Fujian, accounting for another 50 percenL Since then, Guangdong's share has risen again and now stands at about 47 percent, while that of the other coastal cities has declined. 361 Recent indications are that this is changing and the pace of growth in Hainan too is picking up. -138- aside from the policy environment, proximity to markets and investors, the quality of the infrastructure and the labor force are all important determinants of initial FDI flows. The importance of proximity to investors is dramatically illustrated by the fact that, while Hong Kong accounts for over the 85 percent of the FDI in Shenzhen, Shantou and Zhuhai, Taiwan (China) has the largest investment stake in Xiamen. Moreover, it appears that Xiamen, although only 150 nautical miles away from Taiwan (China), has had to work harder to attract Taiwanese investment, than the three SEZs in southern Guangdong have done to entice investment from Hong Kong. Thus, while the lack of infrastructure did not stop FDI from pouring into Shenzhen 10 years ago, Xiamen had first to 'prove itself by investing heavily in infrastructure?l Resource Misallocation. There is no loubt that SEZs and open coastal cities have served as magnets for foreign investment. In addition, these areas have also attracted considerable amounts of domestic investment. In 1990, for example, over 40 percent of total investment in capital construction in SEZs came from domestic sources. Of this a good part was either contributed by local government (through locally raised taxes, reinvested profits and bank loans) or, as in the case of Hainan, by the central government (through the planning process), in support of infrastructure development. The rest represented investments in SOEs from outside the zones that relocated a part of their activities to within the zones in order to take advantage of various tax privileges. It is very difficult to assess how much of the investment in SEZs is based on comparative advantage and accurately reflects the locational advantages of the SEZs, and how much represents an inefficient use of resources, attracted by the economic rents created by distortions and imperfections. However, the following considerations are pertinent. China's regional tilt policies have generated two sources of misallocation- inducing distortions. The first is the preferential policies intended to attract investment. The second is the interface of the two economic management systems, the socialist and the market, which attracts rent seeking activities. The logic of preferential policies is twofold: infant industry development; and provision of incentives comparable to those available in countries competing for the attention of foreign investors. The infant industry argument can justify the use of tax holidays and reduced tax rates on a temporary basis in order to allow newly established firms, whether foreign or Chinese, to overcome initial problems related to climbing up the learning curve. The problem is that the argument of comparability with other countries has been abused to maintain cost reducing incentives well beyond a reasonable period of learning. In fact, for many foreign companies tax incentives are redundant because of double taxation agreements between their home countries and China. Moreover, for most the most part, enterprises in SEZs are engaged in labor-intensive, low-skill industries or in assembly type of operations, for which there are no significant learning curves. As far as Chinese enterprises are concerned, the incentives are unlikely to encourage any significant increase in total investment. They only distort the locational distribution of that investment, artificially increasing the opportunity cost of investing in the hinterland and directing factors of production inefficiently into SEZs. The interface between the socialist and market economic management systns is the second source of resource misallocation resulting from China's regional tilt policies. The SEZs and coastal cities are a peculiar halfway house between socialist systems of management and a warket economy. While on the onehand enterprises in SEZs have much greater flexibility in making investment, production and pricing decisions compared to the hinterland, they are on the other confronted with dysfunctional factor markets, access to which is subject to an array of discretionary controls. Under the circumstances, opportunities for rent seeking are many, and -139- many enterprises are able to survive simply by exploiting these rents. Providing enterprises in SEZs, particularly Chinese ones, additional tax incentives only aggravates the problem. Despite access to the distortion related rents it is still estimated that one third of state enterprises in the SEZs are loss making and only sustained by access to continual injections of cheap finance by the banking system. Others survive, or increase their profits, by forming joint ventures with mainland Chinese companies operating in Hong Kong, sometimes ever. set up by themselves in order to gain access to the privileges available to foreign-invested enterprises.37/ LAsons and Recommendations The first lesson that emerges from the above evaluation of China's policies of geographical targeting is the importance of the policy environment in attracting FDI. In this context, Pudong is au important initiative. As long as Pudong can offer a policy environment that is as flexible as the SEZs, it can be expected to attract more investenent flows and inject an important measure of vitality in the greater Shanghai area. Second, the experience to date clearly also demonstrates that the policy enviromnent, though important, is not the only attraction for export oriented FDI. Favorable location and infrastructure also matter. Notwithstanding their new open cities, inland provinces would, therefore, appear to have limited prospects for attracting sufficient FDE flows. Even if heavy investments are made in improving infrastructure, the relatively longer distance of these provinces from international gateways and markets is likely to prove unattractive for export oriented FDI. As such, it would be unrealistic to expect inland provinces to replicate the experience of a province such as Guangdong. These provinces will probably have to rely on other sources and strategies for growth. Third, viven the important role that geographical proximity of markets and investors has played in the success of the strategy in Southern China, steps by provinces firther up Chinas coast to develop links with their natural international partners could pay important dividends. In particular, Liaoning and Shandong provinces should be actively encouraged to forge direct relations with South Korea and Japan along lines similar to what Guangdong has done with Hong Kong and Macao, and Fujian is pursuing with Taiwan (China).6 Fourth, efforts can and should be made to tackle the problem of the resource misallocation that has been generated by China's SEZ and open cities polices. An important initiative that the government could take in this regard would be the removal of tax and other incentives given to firms which invest in the SEZs and other open cities/areas. Firms should be encouraged to locate where it makes most economzic ense and their decisions should not be distorted by tax breaks.38/ As a minimum, the preferential tax treatment which induces Chinese state enterprises to locate in the SEZs should be phased out, but better still would be the adoption of a standard national corporation tax, with no distinction made between local and foreign-invested enterprises. Likewise, the duty reductions provided for imports sold within SEZs, and for locally produced goods, should also be abolished-in effect the SEZts should 371 Of the $9 billion in realized FDI in 1992, it is estimated that about 25 percent was in filet "disguised investment" by firms from the mainland. 381 Support for locations on regional development grounds can be effected by intergovernmeal transfers, such as those already in place. 140 - cease to be treated as separate customs areas. All other incentives which induce enterprises and individuals to locate in the SEZs for artificial reasons should be abolished. The role that SEZs should continue to play is that of economic laboratories. Experiments with market mechanisms are still in a very early stage and much remains to be done. All of the markets which have been created in China, even in the SEZs, are limited access markets and have not had rules and regulations established adequate to prevent the abuse of market power and rent seeLing. An important new role for the Special Economic Zones would be to experiment with the introduction of such checks and balances. The System Reform Commission could be asked to develop a program along these lines in cooperation with the Special Economic Zone authorities (see Annex 6.2 for details). Plans to increase the number of SEZs should be resisted, although the de facto SEZ nature of the Pudong Development Area in Shanghai should be formally recognized. Other, interior locations under discussion, however, do not have any locational attractions for the role of economic laboratories. Similarly, proposals to develop Kainan, Shenzhen and Xiamen as free ports are dangerous and should be resisted. Already, the p:cblem of smuggled goods coming across from Hong Kong is quite severe, and the status of SEZs as separate customs areas is being exploited to channel goods into the mainland without the payment of customs duties. The creation of free ports would, under present conditions, only exacerbate the problem and widen the distortions that have led to abusive behavior. For the time being, therefore, efforts must be directed at strengthening the administrative and enforcement mechanisms of existing SEZs, and on developing the capacity to regulate and manage them, rather than on creating new ones. - 141 - Endnotes 1. This section draws substantially on Egan and Mody, 1992. 2. These included minimum size in terms of paid in capital and annual exports, minimum number of overseas branches and number of products handled, minimum of overseas markets and the condition that the firm offer public stock. By the early 1980s, the only criteria that were maintained were export targets and the requirement of a public offering. See Karl Fields, 1989. 3. McBean (1992). 4. Turnbull (1977) and Egan and Mody (1992). 5. Almanac of China's Foreign Economic Relations and Trade, 1991/92, p. 82. 6. See World Bank (1992b). 7. World Bank (1992d), p. 64. 8. The decree allows for exemptions only in cases where (i) the enterprise has received an internationally recognized quality prize within the previous three years; (ii) product quality has been stable as confirmed by an international organization approved by the State Comrnission and proved through inspection by an inspection agency of the State Commission; and (iii) the product. has been found by an inspection agency of the State Commission to be of high quality for three consecutive years. 9. World Bank (1992d). 10. Hernando Marino Navarrete, "Quality Control Circles: Colombia's Experience," International Trade Eomm, ITC, GA=, January 1991. 11. See World Bank (1992o), p. 59. 12. Keesing and Singer in 'How Support Services Can Expand Manufactured Exports: New Methods of Assistance," World Bank, November 1990, quote many examples that show how, when a developing country has been cut off from international best practice, the returns from outside consultancy can be impressive. 13. See World Bank (1987a) and World Bank (1990b). 14. The principle of the DL/C is to provide credit to the indirect exporter on the basis of the direct exporter's creditworthiness. When the direct exporter receives a letter of credit or other firm evidence of an export order, his bank is able to open a similar credit account with the indirect exporter as beneficiary. The DL/C entides the indirect exporter to payment from the bank upon submission of evidence of delivery of goods to the final exporter, and can serve as collateral for him to access preshipment financing- - 142 - 15. A. Panagariya (1988), World Bank (1987a), World Bank (1992b), and Executive Summary (p. iii). 16. See World Bank (1992b) and World Bank (1990a). 17. Interview with Qingdao electronic firm, May 29, 1992. The firm had direct trading rights and reported that, while domestic free market price of black and white TVs was about $60 (valued at the swap market exchange rate), the FOB export price was $42, and that, while it was making a profit of Y 20 per TV on domestic sales, it was making losses on its export sales, even after taking account of the rebate for indirect taxes antd duties paid on imported inputs. 18. Balassa et al. (1986), reported in Linn and Bhattacharya (1988). In Japan, although support for export development was similarly comprehensive in its scope, it was never quite as substantial. 19. See Korea's Competitive Edge, Managing Entry into World Markets, Rhee et al. (1984). 20. See Larry Westphal (1990). 21. See World Bank (1986). 22. There is a vast and ultimately inconclusive literature on the subject. See for example, Amsden (1989), Wade (1990), Komiya et. al. (1988), Stern (1990), Westphal (1990) and Kim (1990). 23. See I.J. Singh (1992). 24. See Ma Jun and Michael Bell (1992). 25. Bateman and Mody, World Bank mimeo (1991). 26. See Ma Jun and Gang Zou (1991). - 143 - VU. EXTERNAL MARKETS AND CHINA'S EXPORTS For the remainder of the decade, growth of the global economy is expected to stay sluggish at around 2.8 percent per annum.' Prospects for the Uruguay round of GAIT negotiations, although improving, still remain uncertain, and there has been a marled trend towards regionalism in trade relations the world over. Moreover, with growing trade frictions, bilateral bargaining between trade partners can be expected to become more important. This chapter explores the question of market opportunities and access for Chinese exports and the implications thereof for China's own goals for export growth during the Eighth Plan and beyond. A. NRoEmnoN AGAINST CINA'S EXPORTS: Tx FAcas A frequently expressed concern is whether developed countries can absorb a major expansion of developing country exports. One source of pessimism in this regard stems from the perception that key OECD markets are already so "saturated" by developing country exports that a further sizeable trade expansion would not be feasible. In fact, as shown in Box 7.1, exports of manufactures from developing countries currently account for only about 3 percent of consumption of such products in OECD markets, and China's manufactured exports account for about a tenth of the developing country share. Even if all developing country exports of manufactures were to increase at a sustained rate equal to that of Korea's exports during the 1980s, and China's exports continue to grow at 15 percent per annum, the developing country share of OECD consumption of manufactures would only be 5 percent, and China's share would still be under one half of 1 percent after a decade. Import penetration ratios at these levels certainly should not produce a general protectionist response from OECD importers. A related worry is that trade barriers are now relatively more important than they were when Singapore, Korea or Hong Kong began their rapid industrialization. If external conditions are now less favorable, China may not be able to fbllow an export led growth strategy to the extent that the now more advanced Asian developing countries did in the past. Box 7.2 provides a comparison of trade barriers in place in the mid-1970s with those faced by China today in OECD markets. This analysis indicates that tariffs faced by China today are 40 to 50 percent lower than those faced by the East Asian NIEs in the 1970s. On the other hand, while the nontariff barrier (NTB) coverage of China's exports is lower than that of Korea cr Singapore in the mid-1970s, compared to Taiwan (China), and Hong Kong a greater proportion of China's present day exports are faced with NTBs. While it is difficult to be precise, on the whole and taking account of trends in both tariff and nontariff barriers, it is safe to conclude that the current external environment for China's exports is not much different from that facing the Asian NIEs in the early 1970s. The above evidence is reassuring for it indicates that there is still ample opporunity for export development, even for a large country such as China. However, this does not imply that China will not be faced with difficulties in accessing OECD markets in the future. - 144_ lox 7.1: CAN INTlfNAnoNAL MARMS AccOMMODATE A MAJOR CmNESE TRADE ExPANSION? The data cited below indicate that there remrains subsuntial scope for OECD markst to absorb developing country exports of manufactures. Thessustics show the recent (1988) share of EC, Japan and North American impoits from developing countries in total consumption of manufactures, with Chinese ratios shown separately in parentheses. Stastics are also shown (lower half of the table) th indicate how a major increase in Chinese and all other developing countries' exports would influenee these ratios. Thsce figures assume: (a) that exports from aUl developing countries (excluding China) increasc at Korea'. 1980-90 growth rate and that China's exports continue to increase at about 15 percent; and (b) that apparent consumption of these products expands at the same rate as it did for the last decade. Korea's cxports increased at a compound annual rate of about 14 percent over the decade, which was about two and one half times that rate for all other developing countries. The Korcan rate is used in these projections since it probably constitutes an upper limit to possible developing country growth. L988 AND PRoJEcPD 1998 IMPORT PENErRATON RAnos STATISTICS FOR AIL DEVELOFINO COUNTES AND CHINA SEPARAELY (in parenthesis) European North All Situationtproduct Community Amcrica Japan combined Actual 1988 Suistics All Manufactures 2.9 (0.2) 4.1 (0.3) 1.8 (0.3) 3.1 (0.3) Chemicals 1.5 (0.2) 1.0 (0.1) 1.1 (0.2) 1.2 (0.2) Transport equipment 0.9 C-) 1.7 (-) 0.1 (-) 1.1 -) All machinery 4.4 (0.1) 8.0 (0.2) 1.3 (0.1) 5.0 (0.1) Clothg 19.1 (1.6) 27.9 (3.0) 13.1 (3.4) 22.1 (2.7) High-Growdh Scenario All manuficturcs 4.3 (0.3) 6.1 (0.4) 2.7 (0.4) 4.7 (0.4) Chemicals 2.3 (0.3) 1.5 (0.2) 2.0 (0.4) 2.0 (0.3) Transport equipment 1.4 (0.1) 2.6 (0.1) 0.2 C-) 1.6 [-) All machinery 6.6 (0.2) 12.0 (0.4) 1.1 (0.1) 7.5 (0.2) Clothing 23.5 (1.9) 34.3 (3.8) 16.1 (412) 27.1 (3.3) Note: Assumes that the growth rate of all developing countries exports matched that of Korea ovcr 19S0-90 and China continued at the same rate as that for the last dccade Apparent consumption is assumed to increase by about 4 percent per year. For one, while the absorptive capacity of OECD markets for developing country manufactured exports as a whole may be sufficient, problems could occur for some specific industries where import penetration is already high. 1I Under the growth scenario for developing country exports assumed above, the increase in import penetration ratios for clothing, for example, would 11 China already accounts for 14.7 percent of US imports of clotbing, 27.5 percent of its imports of footwear, 32 percent of its imports of toys and sporting goods and 7 percent of its imports of telecommunications equipment (Souroe: UN COMTRADE, 1991, data reported by USA). -145- Box 7.2: CURnET PRoThlONISM AND CIONAS 1thDE PRosPEcIs: SOME COMPAJUSONS wnl AN EARLIER PERIOD The statisties presented below compare summary infornation on extemal trade bariers facing four Asian NIEs (Rcpublic of Korea, Hong Kong, Singapore, and Taiwan (China)) in the early 1970b with thosc now confronting China. Thea data indicate the avcragc tariffs the.. countries faced on total exports to OECD markets as wel as the share of this trade covered by hard core NTBs. Given dhe importance attributed to manufacturcs in these countries' exparts, scpart tabulaLions arc shown for these goods. OECD CouNTRs TRADE BDRRIns FACING AsiAN NIEs IN TE 1970s (%) Current OECD barriers Tmde Rep. of Hong Taiwan facing barrier Products Korea Kong Singaporc (China) China Average tariffs All tems 11.6 10.1 5.6 11.5 4.8 Manufactures 11.9 10.5 7.6 11.0 6.4 NTB coverage ratio All Items 43.0 25.1 43.9 25.4 31.0 Manufactures 44.0 23.6 16.8 25.7 41.1 Source: OBCD barriers in the 1970s from Olechowdki (1979). Other statistics are World Bank estimates. As far as taLriffs are concerned, current avengc import duties appliod by OECD countries on developing country exports (4.8 percent) are roughly 40 to 50 percent below those faeing the Asian NIEs in the early 1970s. This is due primarily to phasing in of tariff rcductions ncgotiated in the Kennedy Round, further cuts in the Tokyo Round, and the extension of GeneraLized Systern of Preference (GSP) treatment to China by some OECD countries (China is not included in the US GSP plan). The situation regarding NTBs is less clear cut, but China's current NTB coverage ratio for all goods (31 percent) is 12 points lower than that for Korea and Singapore in the early 1970s, but about 6 points higher than the coverage ratios for Hong Kong and Taiwan (China). There is some evidence (Laird and Yeats, 1990) that general increases in NTB protection wcre confmed to a handful of industries like stecl and apparel with litte change in most nanufacturing sectors. Overall, therefore, it is probable that trade barriers faced by China today are about the same as those faced by the East Asian NIHs in the 1970s. become significant, reaching 27 percent by the end of a decade, with China's share three and one half percent of OECD consumption. Similarly, it is projected that developing countries could achieve import-penetration ratios in excess of 20 percent for several other specific industrial sectors like leather clothing, footwear, floor coverings and radio broadcast receivers? Whether or not a protectionist backlash would be triggered in such cases will depend on the industrial countries' willingness and ability to provide supporting adjustment measures in their respective affected regions or industries. Second, while the export barriers faced by China may not be higher than those faced by the East Asian NIEs at the start of their export drive, this does not exclude the possibility that China's exports may be at a disadvantage because they face greater trade barriers than those of their main competitors today. , 146- Indeed, a more disaggregated analysis reveals that China's existing exports are particularly vulnerable to trade barriers in developed countries. Table 7.1 reports average import Table 7.1: AVERAGE LEVEL OF TAuRuns CIlINflE EXPORrI ENCOUNTER IN NINE bLtOR OECD MARKEm Estimated Ave rae Pout Tokyo Round Tariff Chinese Exnort. FPce in Maior OECD Markets (% Product group Ausalia Ausuia Cnzada EC Jmpan Norway Sweden Switzerland United /a La & lb Statese All rood products and aninals /c 4.9 8.0 62 3.7 9.7 2.8 1.6 10.0 4.1 Food1c 2.8 5.9 6.8 3.2 10.0 3.0 1.4 9.0 3.8 Oiseed and nuts 4.1 1.9 6.0 10.3 5.6 4.5 33 75 1.4 Animal and vegetable oils 2.0 0.8 0.0 0.1 0.3 0.0 0.0 0.2 0.9 Agicultuwl raw materials 5.1 23 0.6 3S4 0.7 0.6 1.7 1.9 03 Oreandmtabls/d 10.2 5.6 2.1 2.3 2.5 15 2.S 1.4 1.9 lron and steel products 17.2 8.4 5.4 5.5 5.0 1.8 4.8 2.0 43 Nonferrous metals 3.9 6.1 2.2 3.2 5.5 1.9 1.00 1.2 0.7 Fuels - 2.1 14 0.1 1.5 0.0 0.0 0.0 04 Chemical Products 5.4 6.3 6.4 8.4 5.5 5.9 5.0 0.9 3.7 Maraufitures excluding chemicRas 17.7 14.1 7.0 8.1 5.7 6.1 5.4 3.3 5.6 Ledlhergoods 17.8 5.3 3.8 10.2 11.9 4.7 4.1 1.8 4.2 Textile yarn and fabrics Ic 153 13.2 9A4 17.3 8.6 12.8 10.6 6.0 10.6 Clothing IC 49.3 30.2 12.6 19.9 15.0 20.3 13.6 8.6 203 Footwear 43.9 25.9 11.9 22.5 14.2 11.2 14.3 9.6 11.7 Mchineryandoiheritems 0.2 3.3 0.1 4.8 2.3 2.0 1.8 0.4 2.1 Ia Due to the Canadian-US fiee trade arrangemend intratrad between these countries is duy fire which affords a sbsntl competitive dvarnAge r Chinee xpos of some products. The United States also extends 0SP treatment to many developing countiies, while balh the US and Canada offer special oreferaces to Caribbean counties. impnor from Israel alo enter thc US duty fiee under the terms of a fiee trade arrngement. All thes special preferences asc a competitive disadvantage for Chinese exponers. lb Under the terms of a special protocol mnufactured goods between EC and Eumpean Free Trade Area (EFrA), countries am traded duty fe which displaces some potetial Chinese exports-as does special regional arrangementsbetween EFTA, the EC and Eae Europe and Near East counrries. The BC also5 cxends imponantpreferencesto some developingcountries (excluding China) under bre term of the Loam Convention. Ic Excludes the efiers of EC, Swedish and Swiss variable import levies on agrieultural products. Some estimated ad valorem equivalents for these meaurs exceed 100 perecnt. /d Excludes nominal protection fiomn 'voluntary export restraints and other NTBs that are cxtensively applied to these products. le Excludes the protective effect of the Multifiber Arrangement (MFA) and other barriers to textile and clothing trade (see Figure 4.1 for some indication of the incidence of these maures). Source: The World Bank-UNCTAD Softwar for Market Analysis and Restrictions on Trade (SMART) system and Finger and Olechowski (1987). duties levied in OECD markets on a variety of products. Three product categories, clothing, footwear and textile yarns and fabrics, that together account for over a quarter of China's exports, are subject to high tariff barriers by OECD standards. Compared to an average tariff of 4.8 percent that applies on overall OECD imports, clothing is subject to import duties in excess of 20 percent in the EC, Norway, and United States. Even higher tariffs of 30 percent or more are applied to clothing imports in Australia and Austria. Likewise, footwear also faces - 147 - average tariffs of over 20 percent in the EC, Austria, and Austrlia, while duties on textile yarns and fabrics encounter relatively high tariffs in the 10 to 20 percent ranges. Table 7.2 compares the share of China's and all developing countries' exports to the United States, Japan and European Community encountering NTBs in place in 1990.21 Table 7.2. ANALYS OF uTI RELAThE 1z h1'OaT4czE Or NonrARw BARRERS ON ExzoRns FROM CitNA AD O'iER DEVELOINC CouNuREs (Shame of expor thnt face NTBs in the US, Japanan d EC-peacentap) United Statcsr . Joan Euronean Comnmunitv Apieui- M um- All Agricul- Mam- All Agricul- Manu- Al Developing country expenr Wa fmnamd prod- turm factured prod- umal actored prod- product. good. c pmduct. goods ucta prokds good. ucts All developing countries 9.7 22.5 15.7 3835 12.9 15.0 2115 32-4 13.7 People. Republic Of China 85 59.6 47.0 34.1 23.3 22.9 17.3 40.5 29.S M 0. Iran: Selcted Dneelopfng Coutrfes All IAsn Ameuica 11.5 17.2 9.9 25.0 9.6 123 17.7 26.9 1335 Argentina 8.2 2.3 4.1 23.2 4.2 10.1 21A 11.6 1935 Mexico 1.0 12.5 8.0 18A 5.6 12.1 22.0 25.4 21.0 EIat Asia 12.8 36.3 302 38.3 13.0 17.0 27A 40.6 33.8 Lidonesia 0.1 46.0 9.2 443 4.5 8.6 10.3 32.8 16.1 Rep. of Komra 1.0 13.1 10.4 3.6 23.2 3.6 2.1 13.9 6.3 Philippines 20.2 32.1 23.0 19.5 6.1 12.6 77.6 41.9 20.9 Thaiand 32.4 28.5 27.6 42.9 232 35.2 79.9 55.2 67.8 Sub-ShaamnAfrica 4.4 12.7 3.9 45.6 23.2 31.8 13.0 17.2 5.7 Kenya - 0.6 0.1 22.6 5.2 10.1 24.1 8.4 11.7 Tanzania 0.0 0.2 0.0 182 3.2 12.1 9.0 6.0 7.0 Se-gal - 0.5 0.1 46.1 SA 42.0 30A 16.2 24.6 SOuth ASia 0.2 45.7 33.0 64.1 11.7 25.8 18.5 50.4 36.2 Note: Nontariff buTien inluded in the utade coverge alculadiOn ar 'hard cosc" NTis - foUDws: import pschibons, quantitatve restrictions, variable imposL levies, M:A reariciis, nanautnmtic liceing, and countervalipg and ani- dumpgW meamsre. Not included are: automatic licensing prcedures, scaxona tariffs, heah and sanitry requirements, and special standard or packaging regultion. Sourc: COMTRADE statistics of the Unied Nations and UNCTAD's Inventory of Trade Control Measures. The NTB coverage indices shown on dhis page have been computed using baries in place in 1990 and a 1986 trade data base. It shows that the NTB coverage ratio for China's overall exports is considerably higher than the average for the exports other developing economies, with the exception of Lnailand. In Japan, almost 23 percent of Chinese exports face one or more forms of hard core NTBs as opposed to an average of 15 percent for all developing countries. Similarly, in the USA, the Chinese NTB 21 Laird and Yeats (1990, Table 4.1, p. 90) indicate that the relative importance of NTBs as barriers facing developing counties showed only a modest increase over much of the last decade. However, based on the available evidence it is difficult to argue that current trade barriers have significantly reduced export oppotunities below those that existed in the 1970s or earlier (see Box 7.2). - 148 - trade coverage ratio, at 47 percent, is thrice the corresponding ratios for exports from other developing countries. Tbe 7.3: SECTORiAL CovRACE OF CIINA'S Ex'rn BY NONTAIuIT BARRIERS IN nil UNTED SrAT,s JAPAN AND EuRoPEAN Codiu.sTsi United Stain European Community Japan 1986 impolt NTB 1986 import NTB 1986 import NTB Product Group (SITC) value coverage value coverge value coverage (S nillion) index (%) (S nilion) index (%) (S million) index(S) All products (O to 9) 4,597 47.0 3,390 29.5 5,604 22.9 All products except fudes (O to 9 les 3) 4,052 53.3 3,720 30.1 3,878 27.7 All foods (0+1+22+4) 206 OA 766 29.0 1,387 39.5 Aguicultuad natrials (2-22-27-28) 70 32.2 527 0.3 485 18.4 Orcs and metals (27+28+67+68) 97 5.0 152 0.2 237 8.5 Fcrrous Mctals (67) 10 51.3 10 0.0 30 0.0 Chemicals (S) 165 6.3 348 2.8 305 9.5 Other manufactures (6 through 8 less 67, 68) 3,412 62.2 1,925 47.5 1,440 26.7 Lzathcr mnuufactures (61) 23 80.2 19 1.7 5 88.2 Textles (65) 435 93.5 543 81.0 673 55.3 Clothing (84) 1,653 94.3 542 69.7 443 1.4 Footwcar (85) 74 0.0 77 99.7 39 1.3 Sourmce: Uited NationsCOMTRADEdatabase andthe UNCTADData Bse onTrade ConirolMeasures. The NTB tradecoverge ratios arc for rearictions in effect in 1990 while the trade statistics relate to 1986. The Iaua fixcd-year tade wegt have been used for World Bank (192) compuatimn in order to disingui:h between changcs in tade composition and changcs in the application of NTBs. Why is the NTB coverage of China's exports so high? The answer lies partly in the composition of China's exports and partly on their distribution across key trading partners. Table 7.3 provides a breakdown of NTB coverage ratios fbr major groups of products exported by China to United States, the EC and Japan, China's three most important trading partners in that order.3/ The table indicates that the US NTB coverage ratio of 47 percent is the highest of the three mark-ets, followed by 30 percent in the EC and 22 percent in Japan. The same ranking holds if one looks only at China's exports of manufactures. The NTB coverage of China's manufactured exports is 62 percent in the USA, 4S percent in the EC and 27 percent in Japan (Table 7.3). Chinese manufacturing exports to the former two markets attract higher NTBs because of their concentration among textiles and clothing. Over 80 percent of Chinese exports of textiles and clothing to these markets are subject to quota restrictions associated with the Multifiber Arrangement. Chinese exports to the US market are subject to a particularly high NTB coverage because of the disproportionately large share of textiles and clothing-United States clothing imports from China are roughly three times those of the EC. On the other hand, the low NTB co - erage of China's manufactured exports to Japan is in large part accounted for by the fact that Japan does not impose MFA quotas on its imports of textiles and clothing products. It is difficult to estimate the implications for the competitiveness of China's exports of the application of NTBs in major OECD markets. Some relevant data is, however, Taking into account reexports through Hong Kong. - 149 - * Figure 7.1: NOMIINAL PROTECTION %AGAINSr CINA'S TEXTLE AND CLOTIUNI1G EXPORTS TO T11E UNITED STATES IN 1988 (tariffs, nontariff barriers and combined protective effects) Woven ot cont. cellulosic I _ MMF speCialtv rabncs wcl sweaters _ = = MB sweaters I AGI trousers and shorts F M3 trousers and shorts .II WGI' tMF coats - wci knit shirts Other .mis caars Other cotton apparel Me shirts, noc knit I MB suit-tvpe coats I = ___ _._- ,MB knit shirts Woolens and worsteds t Knit shirts and biouses Catton gloves and mittens _ = _ Wool hosterv r_ Cotton sweaters _ Cordurov rabnc v = = u wCI shirts. not knit _ Woven or spun ceilulosic i ..Bs wool suits I Mb SUits wvGI suits = Cotton hosierv C Brassieres. etc. I___ NIMFdresses I | uo shirts. not knit I M.% F underwear I MB trousers and shorts I *GI wool coats .I' wCi knit shirts and blouses I MB suit-type coats I Dressing gowns. etc. _ _ OtherMs coats [ Shirts. not knit [ IAMF plavsuits. sunsuits Wool knit tabrics =_ Velveteen rabrcb MMIF nightwear and paamas : MMF sis km MUF gloves and mittens = _ WGI wool suits = _ MMF hosierv |=- tvWi wool sweaters I = wCi trousers and shorts __ _ v.a trousers and shorts I Other wooL apparel MB wool sweaten I _ Other MMF apparel I______f___t Knit MMF fabrics I 1 m Tanif r4te Handkerchiefs Wool skirts =_ . Tariff equivalent of NTWS minus tarff rate Gingham fabric | 0 2D 40 60 80 100 12D SNae u a mL s 1n99unmade fiber: v ci means 'omen s. p : : . US meaz 5; .and o. Sg,urc LSTC 1999.--' -150- available for the US market. Figure 7.1 is based on a special study prepared by the United States International Trade Commission and shows US total protection for various types of textile and clothing products imported from China as well as nominal protection from NTBs and tariffs separately. It shows, that for each item, the protection accorded by NTBs is significantly higher than that provided just by tariffs. Thus, cumulative levels of protection on textile and clothing products imported from China are in fact in the range of 40 to 80 percent, with protection levels in some cases like man-made-fiber specialty products, rising to over 100 percent.4/ The levels of protection reflected in Figure 7.1 clearly suggest that a substantial expansion of China's textile and clothing exports could result from a liberalization in this sector. B. EVOLVING EXTERNAL MARKS AND IMPLICATIONS FOR CHINA'S EXPORTS Conditions of access to international markets are in a state of flux at the moment. Such changes as occur are likely to have important positive or negative implications for China's exports. Progress in multilateral trade negotiations is likely to be particularly beneficial for China. The successful conclusion of a Uruguay Round and a phase-out of the MFA would be a big boost for China's exports given the fact that this country has generally filed its annual textile and clothing quotas for exports to OECD markets. On the other hand, the growing trend towards bilateralism and regionalism 5/ could spell danger for China's export drive. The most obvious example would be any possible withdrawal of China's Most-Favored-Nation (MFN) status in the United States. Likewise, the successful conclusion of new free trade area (FTA) arrangements like NAFTA, the proposed North American Free Trade Area between Mexico, Canada, and the United States, and other arrangements currently under negotiation between EFTA and EC countries and most of the former socialist countries of Eastern Europe, could displace Chinese exports to OECD markets. This section explores how such developments in external market conditions could influence China's future export prospects. Implications of the Uruguay Round for China's Exports Most of China's trade partners already accord MFN status to its exports. Thus, China is likely to benefit from whatever liberalization of trade barriers results from the successful conclusion of the Uruguay Round even it should not regain/resume its GATT seat. Even so, as long as China is unable to enjoy contracting party status in the GATT, it would remain penalized in several respects. First, several major agreements expected to emerge from the Round (ike streamlined dispute settlement procedures, would remain inaccessible to China. Second, China would continue to be denied the potential benefits from the Generalized System of Preferences (GSP).6/ Third, if the Uruguay Round were to conclude wit a liberalization of MFN barriers, and China were to lose its United States MFN status due to bilateral issues, 4/ Although a directly comparable study has not been completed for EFTA or EC countries, most analyses suggest that protection against textile and clothing exports from China is roughly comparable to that in the United States. See Laird and Yeats (1990) for a survey. 51 In a detailed analysis, Braga and Yeats (1992) estimate that FTAs which have thus far been concluded cover approximately one half of current world trade in manufactures. 61 }Even if China were to acquire full contracting party status in the GAIT, it is not obvious that it would get GSP treatment-this would depend on the terms that the Chinese were able to negotiate. - 151 - its competitive position in the US markets would deteriorate due to the increased spread between general and MFN duties. While the precise nature and magnitude of any liberalization still remains somewhat uncertain, most observers feel that the negotiations are likely to result in an overall one-third to one-half reduction in tariffs and nontariff barriers. This estimate incorporates existing offers for tariff reductions along with proposals by Arthur Dunkel, Director General for GATT, for liberalizing NTBs.4 If protection levels in the EC, the United States and Japan were to be reduced by 50 percent, China's exports might increase by an estimated 38 percent or $11.4 billion in terms of 1988 prices (see Table 7.4).7/ These figures suggest that China would fare considerably better from a Uruguay Round liberalization than would other developing countries on average, because it is estimated I that a 50 percent liberalization in ECrUSA/Japan trade barriers would increase all developing countries' exports by about 15 percent, which is less than half the projected 37.6 percent expansion for China.f/ There are three major reasons for this disparity. First, most developing countries have a far higher share of raw materials like metal ores in their total exports and these primary products generally face zero or low import barriers in developed country markets. Second, many developing countries enjoy special preferences, like GSP in the United States or Lome Convention or special regional preferences in the EC, that China does not receive. Uruguay Round MFN tariff cuts would erode the margins of preferences these countries receive and cause some of their existing trade to be diverted to nornpreference receiving countries. Because China's exports do not benefit from GSP or other special tariff treatment, it would be one of the countries standing to benefit from trade diverted away from the preference receiving countries. Finally, the trade gains China might expect from the Uruguay Round should exceed those of the developing countries (on average) due to the relatively high share of textiles and clothing products in total exports. These products currently face trade barriers which provide nominal protection of over 100 percent (Figure 7.1) and a liberalization from these levels offers the potential for maximum trade gains.' The Potential Effects of Regionalism on China's Exports As previously mentioned, the further spread of regional preferential arrangements has the potential to impair China's export prospects. For example, current discussions aimed at creating a North American Free Trade Area (NAFTA) would grant Mexico, Canada and the 7/ This estimate is based on a partial equilibrium model that the World Bank and UNCTAD developed to help developing countries formulate their negotiating positions in the Uruguay Round. Two qualifications should be noted. First, it projects only static trade effects and does not estimate any dynamic gains that may be equally important. Second, it underestimates the gains from an NTB liberalization since nominal equivalents for some existing restrictions were not available for use in the model. For a description of this ("SMART") model see Annex 7.1 of this report. See World Bank (1992) for SMART projections of Uruguay Round results on all developing countries' trade. 81 In fact, total Chinese trade gains from the Uruguay Round should be larger than the figure reported in Table 7.4 since other countries like EFTA members, Australia, New Zealand, and Canada will also lower tariffs and NTBs. In 1989, these countries imported $3.2 billion from China. Assuming this trade expands in the same proportion as that for EC/US/Japan, the zoral Uruguay Round gains for China would be approximately $12.6 billion. - 152 - Table 7.4: ESTMAUTED EFFECT OF A 50 IERCENT LIUERAMZA1ON IN T1UDE A ARRIER BY =E EC, UNrrmD STAS AND JAPAN ON IMORTS FRtOM CIDNA Projected inerease in nomots from China EC, US and Japune Value Incwus Share of Product (SITC() 1988189 imports from China (S million) (X) total inarae (millions of US dollars) (M) Food and livesLock (0) 3,055 795 26.0 7.0 FIish and preparations (03) 947 455 48.0 4.0 Fruit & vegetables (05) 1,083 216 19.9 1.9 Beverages and tobacco (1) 43 9 20.9 Crude materials except fuels (2) 2,522 81 3.2 0.7 Tcxtile fibers (26) 1,095 12 1.1 0.1 Crude materials, nes (29) 463 60 13.0 0.5 Mineral fucls (3) 2,702 200 7.4 1.8 Petroieum produeLs (33) 2,384 194 8.l 1.7 Animal & vegetablc oils (4) 50 2 4.0 Fixed vegetable oils (42) 48 2 4.2 Chemicals (5) 1,445 38 2.6 0.3 Chemical eiements (51) 849 17 2.0 0.1 Medicinal products (54) 182 7 3.8 - Manuractures classified by material (6) 4,415 733 16.6 6.4 Textile yarn and fbrics (65) 2,272 511 22.5 4.5 Metal manufacLures (69) 593 132 22.3 1.2 Machinery and transport (7) 2,489 157 6.3 1.4 Electrical machincry 2,034 106 5.2 0.9 Misc. manufactures (8) 13544 9,385 69.3 82.3 Travel goods (83) 959 463 48.2 4.0 Clothing (84) 4,699 5,t54 109.7 45.2 Misc. manufacturcs, nes (89) 4,263 856 20.0 7.5 All goods (0 to 9) 30,338 11,400 37.6 100.0 All manufactures (5 to 8 less 68) 21,488 10,300 47.9 9i .4 United States duty-free (and nontariff barrier free) access to each other's markets while similar products from other countries (like China) would continue to face existing trade barriers. This differential treatnent will cause China's exports (and other non-NAFTA countries' trade) to be displaced in the three FTA markets. In the US, exports from China would be diverted by - 153 - Canada and Mexico, in Mexico some Chinese exports would be displaced by the US and Canada, while Mexico and the United States would divert Chinese trade with Canada. Table 7.5: EsITAns OF TRAE DIRSIoN IN nE UNITI STA7ES Dun TO A MEXICAN-US FREE TRADE ARANCELENT Tmde Dis_laced by a Mcxican-US FPA (S'000) Exporter Food & agricultural Energy Ores & All AU materals products mctals manufactures items All non-PTA cxporers -35,030 -22,390 -1,840 -3K1,370 440,640 China -3,230 -190 -20 -33,830 -37,270 Major Soulh American Exportcrs -11,90 -5,890 -60 -10,150 -28,060 Argentina -740 -100 - -270 -1,200 Bolivia - - - -20 -20 Brazil -9,830 -210 - -8,260 -18,310 Chilc -510 - - -240 -800 Colombia 420 460 - 480 -1,370 Ecuador -190 -460 - -20 -670 Praguay -10 - -60 - -10 Peru -20 -290 - -80 .450 Uruguay - - -160 -160 Venezuela -190 -4,280 - -610 -5,080 Source; Projections madc with the World Bank-UNCTAD SMART modcl. For a description, see Annex 7.1. Table 7.5 provides some indication of the potential trade diversion that might occur in the United States market as a result of an FTA with Mexico.2/ The table indicates that all non-ErA countries taken together would have trade of about one-half billion dollars displaced by the proposed arrangement, with approximately 86 percent of the trade diverted consisting of manufactures. China's trade losses are estimated to approach $40 million, a figure which, though quite small, exceeds the combined total ($28 million) of displaced exports from all the major South Americari exporters. Chinese losses are projected to be higher than those of South American countries, because China directly competes with Mexicco in many high tariff highly labor-intensive sectors like textiles, clothing, footwear, sporting goods, etc., that are subject to high tariffs in the United States and Canada. Most South American countries, like Bolivia, Perh, Ecuador, Colombia, and Venezuela, on the other hand, primarily export raw materials or fiuels to the United States and Canada where low (or zero) tariffs limit the potential for trade diversion to occur. Similarly, although no precise estimates are available at this time of the extent of trade losses to China in the Canadian market from the conclusion of the FIA with the lInited States, Table 7.6 suggests that a significant proportion of China's manufactured exports to Canada could face heightened competition from comparable products originating in the United States. The table shows that the United States is in direct competition with China for almost all 91 The projections are made with the World Bank-UNCTAD trade projections model. See World Bank (1992a, Appendix C) for a discussion of the main features and limitations of this model. -154- Table 7.6: AREAS OF POTENTItL Di SIACEMENT OF CIGINA'S ExPoRTs TO CANADA DUF TO TIIE UNITED STATES-CANADA FTA Product (SITC) 1990 Canadian Imnorts ($000) China USA All Manufactures (5 to 8 -68) 1,061,859 62,983,839 Clothing of Textile Fabric (8411) 164,383 74,555 Children's Toys (8942) 141,055 179,109 Travel Goods (8310) 81,911 22,371 Footwear (8510) 64,506 43,445 Clothing Knitted (8414) 61,243 87,509 Domestic Electrical Equipment (7250) 57,369 386,856 Leather Clothing (8413) 39,644 4,873 Radio Broadcast Receivers (7242) 32,660 191,123 Plastic Manufactures (8930) 27,167 763,015 Made-up Textile Goods (6569) 26,198 71,613 Headgear (8415) 16,430 18,427 Woven Synthetic Fabric (6535) 16,087 151,784 Telecommunications Equipment (7249) 15,101 924,655 Woven Cotton Fabrics 6522) 14,679 91,911 Other Manufactures, nes (8999) 14,636 95,797 Furniture (8210) 14,370 743,3777 Clothing Accessories (8412) 12,303 9,794 Porcelain Ware (6664) 9,871 4,141 Lighting Fixtures (8124) 8,063 116,104 Steel Nuts and Bolts 7,883 342,245 Total gf above 825.469 4.322S804 Total as a percentage of all Mfg. (%) 77.7 6i9 Source: Canadian import statistics drawn directly from United Nations COMTRADE sources. - 155- of the latter's 20 largest four-digit SITC manufactured exports to Canada. Since the FTA agreement went into effect, products originating in the United States pay no duties, whereas those from China continue to be subject, on average, to a 10 percent MFN equivalent import duty and, in some cases, also to NTBs. Implications of a Loss of China's Provisional MFN Status in the United States Article I of the General Agreement on Tariffs and Trade (GAlI) contains a "most-favored-nationN (MFN) clause that applies to all member's tariffs as well as all other rules and formalities relating to importation and exportation. The basic principle of this clause rests on the premise of nondiscrimination and requires that all members of the General Agreement be treated on an equal or nondiscriminatory basis. Article II of the GATT contains a related provision that requires that any tariff or trade barrier reduction must be extended equally to all countries that are GATT members and not just to the contracting party with which the concession was negotiated.IQ/ This latter provision formed the keystone of efforts to liberalize trade barriers within the context of multilateral trade negotiations such as the Tokyo or Uruguay Rounds. While MFN status is normally guaranteed to all the 105 countries that are now official GAIT membersJl / its extension to a nonrember nation depends entirely upon the discretion of a GATT member. It was thus that the United States provisionally granted MFN status to China in 1973. As a result of several unresolved commercial and political disputes, however, both houses of the US Congress have since voted for the withdrawal of the provisionally granted Chinese MFN status unless key points of contention were resolved. 12/ A key question is what impact the withdrawal might have on Chinese exports to the United States. 10/ There are seveml specific situations where GATT members suspended or modified this principle. One of the more important exceptions is a provision that allows developed countries to extend tariff preferences to developing countries in order to accelerate the latter's industrialization and growth. This exception led to the establishment of the GSP which OECD countries adopted in the early 1970s. GAlT Article XXIV contains special regulations concerning the formation of free trade areas and customs unions under which specific countries remove import duties and nontariff barriers from each others trade, but continue to apply the restrictions to imports from nonmembers. Also, in the mid-1970s, GATT adopted a special Protocol for Trade Rel&ions among Developing Countries that allowed developing countries to encourage their own intratrade by applying lower than MFN tariffs to this exchange. 1I/ Per Article XKU MFN privileges have occasionally been suspended on "national security grounds" (e.g., USA against Nicaragua and Cuba). Likewise Article XX can also be used to this end on such grounds as morality and health. Finally, Article VI could be used to suspend MFN privileges on anti-dumping grounds. 12/ In addition, in the case of China, it must be noted that GAIT membership does not necessarily mean automatic MFN treatment by all contracting parties. In principle, if China's case were treated as that of the accession of a new member, an existing contracting party could invoke the nonapplication clause (Article XXXV) of the General Agreement to deny China access to MFN privileges. It is not improbable that the US would seek to invoke this clause The problem is that the US is required by domestic legislation to review China's MFN status on an annual basis, and as such, it must reserve the right to suspend these privileges. Using the nonapplication clause on China would be one way for the US to satisfy the requirements of existing domestic legislation without violating the provisions of the GATT. -156- If most-favored-nation status were withdrawn, United States imports from China would no longer be taxed at the prevailing MFN rates but would be subject to the so-called 'third column" of 'general' tariffs. These general rates, which essentially were those prevailing prior to the tariff cuts negotiated in seven multilateral trade negotiations leading up to the Uruguay Round, are often 5 to 10 times or more higher than prevailing United States MFN tariffs.j3_/ With such a major upward shift in the level of import duties, Chinese exports to the United States (its largest export market in 1990-see Table A 1.3) will clearly experience a major decline and, in some product groups, may be completely eliminated. Table 7.7 examines the potential trade losses Chinese exporters could experience on 15 major four-digit SIC products if these items were to be taxed at the higher US general tariff rate.L41 The table shows the trade-weighted MFN tariff China now faces on each product as well as the general tariff rate that would be applied if provisional MFN treatment were withdrawn. The table also shows the 1990 actual value of US imports from China for each item and a projection of the trade that would occur under the general rate. For 7 of these 15 key export products, it appears likely that Chinese exports to the US would face grave difficulty due to the major cost disadvantage associated with US general tariffs. The increase of roughly three-and-one-half times in the clothing duty (from an MFN rate of 15.3 percent to a general rate of 55 percent) would substantially undermine exports of this key product (its estimated decline is between 50 and close to 100 percent, depending upon the assumptions, from its present level of $2.2 billion) with equally significant reductions estimated for toys and indoor games (SITC 894.2). For the 15 products listed in Table 7.7 combined the projected losses are on the order of $3.7 to $8.5 billion with about one half of this reduction registered in the key clothing and toys or games groups. Although it would be a major task to derive the required nominal equivalents for all US general tariffs (some 9,000 tariff-line levels are identified in the United States customs schedules), the data in Table 7.7 can provide some indication as to the overall effects of China losing provisional MFN status. Under the assumption that all goods would experience the same proportional decline as the 15 major products listed in Table 7.7, China's annual export losses 131 The previous rounds were held in 1947 (Geneva), 1949 (Annecy, France), 1951 (Toroay), 1956 (Geneva) and 1960161 (Geneva). The Kennedy Round was concluded in 1967 after four years of negotiations while the Tokyo started in 1974 and was finalized in 1979. Since these MFNs did not result in a uniform reduction in all tariffs there is no general (constant) relation between present MEN and United States general tariffs. For example, Table 7.7 shows that prevailing MFN rates for grey woven cotton (SITC 625.1) now stand at about 45 percent of the US general tariff while the corresponding ratio for watches and clocks (SITC 864.1) is currently about 7 percent. 141 These projections were made in part using the World Bank-UNCTAD SMART trade projection model-see Annex 7.1. A very high share of the United States general tariffs are expressed. in terms of combined nominal and specific duties (say, 10 percent of the f.a.s. import value plus $2 per item) and this made the conversion to pure nominal rates shown in Table 7.7 difficult since the specific (fixed rate per unit) change had to be expressed as a ratio to the product's unit value. It should be noted that the nominal equivalents of these combined general rates will change as Chinese export unit values change, i.e., if Chinese export unit values fall the nominal equivalents of the general tariffs will rise. Table 7.7: FitJo roms oF TItE Tnwu Emm CiO APPLYING UNlIED SrATes GENERAL TAiJun oN MAJOR CHINESE ExroRT PioDuCTs United States imnort from China 1990 Projected under US tariif actual general tWrits Ic (%) /a value/b Percentage Percntage SiTC Description MFN General (1000) decline(S) decline(S) Scenario I Id Scenario n 0313 Freh or frozen shellfish 0.0 22.0 398,149 -33.1 -100.0 6521 Gety woven cotton fabric. 983 13.4 142,304 -14.3 -20.9 6569 Made-up textile articles, nes 9A4 60.0 266,13S -71.1 -97.1 6575 Textile floor coverings 5.1 45.0 79,260 -63.6 -100.0 6785 Iron and steel tubes and pipes 5.9 25.8 55,426 -28.1 -503 7142 Accounting and statistical machines 3.7 35.0 82,939 43.J -100.0 7242 Radio broadcast equipment 4.7 35.0 516,632 43.1 -98.0 7331 Bicycles, nonmotor 8.7 30.0 3S,531 -283 92.7 8210 Furniture 6.9 45.0 167,986 -51.5 -100.0 8310 Travel goods and handbags 15.4 46.0 741,092 -41.4 -100.0 8411 Clothing of textile fabric 15.3 55.0 2,159,043 -51.5 -99-5 8415 Headgear 7.7 52.5 62,697 -62.1 -100.0 4 8510 Footwear 14.8 34.3 1,539,008 -25.5 -92.1 8641 Watches and watch movements 4.6 65.0 81,446 -94.1 -100.0 8942 Toys and indoor games 7.4 38.0 2,290,071 -44.2 -9923 All products listed above 13.4 42.0 9,621,008 -42.9 -96.4 Implied efTects an all imports from China L 16,260,811 -42.9 -96.4 la The MFN rates are tariff-line level trade weighted averages which have been computed using the Wold Bank's SMART tariff and trade database. The general tariff averages have been computed using data published in the ofricial United States customs schedules. /b These data are based on imports into the USA. As against the $16.26 billion in Imports reported by the US from China, exports to the USA reported by China were $5A billion. The difference would appear to be explained by reexports through Hong Kong, which were valued at $10.5 billion in 1990 (sce Chaptcr 1) and tuansprat manzis. /c Trade projections were made at the level of tariff line products and then aggregated up to the four-digit SITC product group level. /d Two sets of assumptions have been used to estimate the possible range of the trade destruction and trade diversion effects of MEPN removal. Scenario n is based on the Baldwin and Murray (1977) approach (implemented in the SMART software system) which ascribes all the trade destruction effects to the particular country (China in this case) sgainst wihom protcctive barrier are differentially raised (see Annex 7.1 for details of the assumptions of the SMART model). Scenario I calculates the trade destruction effect but then allocates it across all suppliers according to their respective shares or the importing country's trade. Trade diversion amongst suppliers is calculated using a constant elasticity of substitution formulation in both Scenriaos. Sensitivity analysis was underaket using a range of values for the parameters involved (ie., elasticity of US importdemand, elasticity of Chinese expor supply, and elasticity of substitution between Chinese expots and thcuae rar competing suppliers) in the computation of both Scenarios. The results presented here from Scenarios I and nI represent the lower and upper bound, respectively, or the estimated impact mn China's exports tof MFN removal by the US. /e Projections based on the assumption that the decline in all inports fiom China would match that of the I Sfour-digit SaC carc products listed above. - 158 - in the US market could be on the order of about $7.0 to $15.2 billion, a decline of between 42 and 96 percent.l5/ Chinese exporters are not the only ones that would lose. According to one estimate, US consumers could end up paying as much as $14 billion per year in higher prices resulting from a combination of costlier substitutes from alternative supply sources, and higher tariffs on the products that would continue to be imported from China.J16/ It appears, therefore, that the dislocation in trade flows likely to result from withdrawal of China's MFN privileges by the US would range from the dramatic to the disastrous, with the associated costs being high for both parties. C. PERspEcnvEs ON FuTuRE DiRECTIONS FOR CHNA'S EXPORTS Diversification or Markets The analysis of the preceding sections would suggest that China may wish to reduce its vulnerability to trade barriers from major OECD trading partners. One way to pursue this objective is to diversify export markets. While China is not more dependent than Korea, Taiwan (China) or Singapore on the US market (see Table A1.6), its current export structure makes access to this market more difficult than for the others. Opportunities for diversification exist. China's penetration of EFTA country markets is currently negligible, and its exports to the Japanese and Canadian markets are still underrepresented. Sweden, Norway and Switzerland, for example, account for almost 4.8 percent of world imports of manufactures, and Canada for another 3.6 percent. Yet China ships less than 0.6 percent of its manufactured exports to the former countries and less than one percent to Canada. At 23 percent, the combined share of Germany, France and the UK of world imports of manufactures is more than 1.5 times that of the United States. Yet China exports only 13.1 percent of its manufactured exports to these countries, while it exports 25.6 percent 171 to the United States. Over time, the Eastern European market is also likely to present China with important opportunities for the geographical diversification of its exporls. Product Diversification and Comparative Advantage Another way for China to reduce its vulnerability to protection in OECD markets is to diversify its export structure. The objec'ive of product diversification is hardly new for China. The question is how this diversification should be pursued.. In addressirng this question 151 It should be noted that this analysis is focused only on dhina's exports to the US. It is possible that China will find alternative export markets to make up for these losses. However, the switching of $7 to $15 billion worth of goods from one market to another cannot be done without imposing appreciable costs on Chinese exporters. 161 'The costs to the US economy that would result from removal of China's MFN trade status," International Business and Economic Research Corporation, September 1992. This report also argues that retaliatory action by China could firther jeopardize $8 billion in US exports to China and $5 billion in US investments. 171 After adjusting for reexports of Chinese products from Hong Kong. - 159 - it is useful to draw lessons from the experience of other countries and evaluate China's evolving comparative advantage. Korea and Taiwan (China) provide useful comparisons. Both these economies have followed a classic export development pattern. Over time, as their respective industrial structures have become more sophisticated, they have seen the share of manufacturing exports grow. Moreover, as real wages and the costs of labor have grown, they have both seen their manufactured exports become progressively more capital intensive. Korea began its manufacturing export drive concentrating on traditional labor- intensive products, prominent amongst which were clothing and footwear. In 1970, these sectors alone accounted for 36 of Korea's manufacturing exports and 28 percent of its total exports. The capital intensity of Korea's exports began to rise sharply towards the end of the 1970s, and reflects in part the influence of the country's heavy and chemicals industry drive. Tlus, in the by the early 1980s, although traditional footwear and garments sectors retained a respectable share of 21 percent, exports from the heavy sectors of the economy had grown very substantially. In 1982, shipbuilding accounted for 13 percent, and iron and steel for 9 percent and chemicals for another 6 percent of total exports. Since then, the striking feature of Korea's export development has been the rapid growth of high value exports, that are more or less wholly manufactured within the country, not just assembled. The most spectacular growth has been in passenger car exports, which scarcely existed before 1984, and now account for about 3.5 percent of exports. The other main area of growth have been the electronics and electrical equipment sectors. In these sectors too, Korea has progressed steadily up the learning and value curve, from reliance on the assembly of imported components, to the complete design and manufacture of a range of products. Office machinery (mainly personal computers), telecommunications equipment (including radios, TVs and VCRs), and other electrical equipment (SITC 729) now account for just 20 percent Korea's total exports. Their share in total exports is now substantially larger than that of the traditional footwear and clothing sectors, which have seen their importance decline progressively uver the last few years. Taiwan (China) has followed a pattern very similar to that of Korea. During the early stages, i.e., during the early 1970s, Taiwan (China) had a much greater dependence on primary sectors than Korea. Over a fifth of exports were accounted for by the processed food and the wood industries. By the mid-1980s the share of these sectors had fallen to- under 10 percent. As in Korea, garments were a critical sector for Taiwan's (China) export drive, accounting for 15 percent of exports in the early years. The share of this sector remained fairly stable right up to the mid-1980s, but thereafter declined rapidly to its current levels of under 6 percent. Over recent years Taiwan (China) has diversified very rapidly into higher value exports. The most dynamic sectors have been exacdy the same as in Korea, namely, office machinery, telecommunications equipment, and other electrical equipment, which together accounted for 22 percent of exports in 1990. As in Korea, these products are now more or less entirely manufactured within the economy, and not assembled. Although China's export structure has been following a path that looks similar to that of Korea and Taiwan (China), there are some interesting differences. Similar to the case of Korea and Taiwan (China), the share of manufactures in China's exports has climbed extremely Last (Table 7.8). Unlike Korea and Taiwan, however, China's manufactured exports have not as yet shown any sign of becoming more capital intensive. In fact, as was noted in Chapter 1, a key feature of China's exports in general, and also of its manufacturing exports, - 160- Table 7.8: CROSS-COUNTRY COMPARISON OF TRENDS IN AVERAGE LABOR INTENSITY OF EXPORTS Exporter 1970 1980 1990 Change over last decade (points) Average labor intensity index of exports (US average = 100 La) China 89.6 87.7 77.5 -12.1 Comparators Republic of Korea 73.1 81.5 85.6 12.5 Hong Kong 74.0 75.3 75.9 1.9 Singapore 113.2 108.8 102.4 -10.8 Taiwan (China) 79.1 80.0 85.0 5.9 Share of manufacturers b in total exports (%) Memo Item Korea 76.5 89.6 93.5 Hong Kong - - 94.5 Singapore - - 71.7 Taiwan (China) 75.8 87.9 92.5 China j - - 79.7 La The libor intensity is an inverse indicator in the sense that the higher the index the less labor- intensive the production process. An index value of 100 means ca the average labor intensity was exactly the same for all United States manufacturing activity. Values above 100 indicate the process was more capital intensive. Lb SITC 5 to 8-excluding 68. & Based on partner country data. Source: COMTRADE. over the past decade has been their growing labor intensity. In 1979180 China's average labor intensity index for all manufactures was 87.7 (indicating they were approximately 12 percent more labor intensive than the United States average for all manufactures), and the index actually fell almost 10 full points by 1989190 (Table 7.8). This is not altogether surprising given that China started with a highly distorted economy. The decline in the capital intensity of China's manufacturing exports is, no doubt, the result of less distorted prices and the progressive reduction of export subsidies to capital-intensive exports from state-owned enterprises and the decline in export planning in general. This suggests that China has been exporting more and more along the lines of its natural comparative advantage in low-wage labor. Thus, not surprisingly, the share of clothing, footwear, toys and sporting goods, and travel goods has risen dramatically from 16 percent in 1985 to over 35 percent of total exports in 1990. More - 161 - significantly, China's share of world trade in these products has gone from an average of 4.9 percent to 19.4 percent over the same time period, just as that of Korea, Taiwan (China), Singapore and Hong Kong, i.e., the more advanced East Asian economies, has declined (Table 7.9). Clearly, as real wages and unit labor costs in the latter economies have risen, an important niche has been created for Chinese exports of traditional labor-intensive goods. Table 7.9: SIARE OF CInNA AND On=li EASr ASIAN COUNTRIS IN wn. WoRw EXPORTS OF SELECTED PRlODucS SITC Advanced East Other East Code Commodity title China Asian Exporters Asian Exporters 1985 1990 1985 1990 1985 1990 724 Telecommunications equipment 0.8 5.9 11.9 15.0 1.' 4X 725 Domcstic elcctric equipment 0.8 8.8 11.3 9.6 0.2 1.6 831 Travel goods, handbags 12.3 30.6 21.6 17.0 0.7 2.5 841 Clothing not of fur 8.0 14.4 23.7 17.2 2.9 4.7 851 Footwear 2.4 13.3 13.3 16.7 0.7 4.7 864 Watches and eloceLs 3.0 9.2 19.8 20.4 0.9 2.5 891 Sound recorders, producers 0.3 4.0 6.9 12.4 0.2 3.6 894 Toys, sporting goods, ctc. 6.5 22.3 21.8 13.0 0.9 3.0 Note: (1) Advanced East Asian Economics: Korea, Taiwan (China), Singaporc, and Hong Kong. _) Other East Asian Counties: Indonesia, Thailand and M' Zysia. This picture of China's competitive advantage is reinforced using a revealed comparative advantage (RCA) ' analysis of China's exports over the lasL decade. Figure 7.2 indicates the changes in China's RCA for 18-product categories over the decade 1979/80- 1989/90. The three most dynamic sectors in terms of rising RCA indices are clothing, footwear and miscellaneous manufactures (which includes such products as toys and sporting goods). Aside from these, China still appears to have a comparative advantage in textiles, yarns and fabrics, although the RCA index of this product category has seen a sharp decline over the last decade. All the other categories have RCA indices either below unity, or at any rate, not significantly higher than one. The story of China's evolving export structure is more complex, however, than the above might suggest because of dhe role of the machinery and electronics sector exports. The share of these sectors in China's exports has grown very rapidiy, no doubt due in part to the generous fiscal incentives and other targeted assistance that have been provided to promote the exports of high technology products. Two points are rnoteworthy in this context. First, China still shows no sign of developing a comparative advantage in most subsectors of the machinery and A!ectronics sectors. Thus, for example, the RCA indices for China's exports of nonelectrical machinery and transport equipment are still way below unity. Second, the performnance of electrical equipment exports, the one subsector for which China's RCA has grown very rapidly, has relied primarily on the explosion of assembly operations (Chapter 1) in such product categories as radio receivers, telecommunications equipment, electric space heaters, and domestic electric goods (refrigerators and washing machines)- These products now account for about 75 percent of all China's exports of electrical equipment. F lAi t. 7.2 Analysis of China's Revealed Comparative Advantage In Broad Groups of Manufactured Products 1979-1980 and 1989-1990 5.0 1* Note: 5.5 - * S 5 - ffi A The revealed corrparatlive advantage index Is a measure x 5.0 : - .used to determine if a country has a coniparalive advantage 5D J.U - ' ^^ | _ igag-go RCA in a product. Index values above unity are taken lo Indicate I -I1 has a corrpafaive advantage while values below one Indicate. 4.5 - :Z : 11 does nol. .5ee Annex I in Ihls reporl for Chinese revealed lm 4.0 - * / coLnparalive dvanlage Indices for Individual three and lour-digit ~~~~ 4.0 ~~~~~~~~~~~~~~SIT C products. ffi 3.5 - - 4.0 - a 3.0 - E 2.5 - o ' ¶-0 179.19DRCAc| z ~~ ~~ p. 5^§U3 fd xg3 ootX Xi s° uO 2.5- 0 2. : 1.5 1.0 - -2.5~ ~~a cm cou;i co 0m 0 E -u 2.5 0 -J cu z .~2.0- x 1.57 *1.0 co 0.5 0)C *-1.5 -2.0 : -2.5 EKW5~2782I - 163 - What this indicates is that China may not yet be ready to move into the exports of heavy industrial equipment or of high technology products that cannot easily be assembled locally. If the experience of Korea is any guide, significant upgrading of Chinese industry is still required before China can break into the export markets for these kinds of products. On the other hand, it is not just cheap labor that constitutes China's comparative advantage in export markets. China's competitive strength derives from low wage labor with reasonable skill levels. Given that China's real wages today are still substantially lower today than they were in Korea in the early 1980s, when the latter's export structure changed decisively towards the heavy industrial and high technology products, and given that unit labor costs in China are likely to remain competitive with those in such countries as Malaysia, Thailand and Indonesia, there should still be room, at least over the medium term (three to five years), for China to exploit its natural comparative advantage. Thus, a shift towards heavy industrial and/or high technology exports (except those that can be assembled locally) just as yet does not appear to be of critical importance for China. What is important, however, in view of international uncertainties, is for Clhina to be able to reduce its dependence on clothing and textile products in order to reduce its vulnerability to trade barriers in major OECD markets. This can be achieved by exploring (i) the potential for China to improve the unit value of its exports through quality upgrading and (ii) the opportunities that still exist for China in a range of other labor- and skill-intensive exports that do not require very sophisticated technological inputs (see Boxes 7.3 and 7.4). The Potential for Upgrading China's Major Exports Table 7.10 below lists the 10 largest two-digit SITC manufactured product groups currently exported by China to the EC, Japan and United States (these items account for T:ble7.11k RaAtw sz es REstv,W C Cum AND Ots ExKomt TO lU EC. JAPAN Anm Utt STmiu IN 1990 Chins Aver- Expoa 1990 Jmpens br the EC Priee Relative to OE(C and Asian NEl n (%i Japa and Unitd Stas EC - Japan United Suka SITC Deacra fm Ch (S Milo.) OECD FaurLIEw OECD Four MNE OECD Faur INE 54 Clhbing B.489 -53.6 -15.2 -31.1 -37.0 -58.2 -17.5 19 lkic. manucOutz.sn m 6.736 .37.6 -21.5 -61.6 -27.5 -39.2 -17.3 72 Eketricl tuhinz 5.359 -26.3 -23.7 -59.9 0.0 41.5 -22.0 65 Tcxtle mad clting 2.335 -11A. -6.3 -50.2 -9.6 -36.5 -14.1 aS Foodwear 2.000 -55.0 -44.5 -45.2 -11.5 -76.8 -32 5 S3 TmveI gooda b 1.417 -55.3 -6.4 -59.9 -23.3 U.S. La. 5 Chcaialdelemenz 901 -9.7 -5.3 -13.0 -20.6 L.A -13.3 69 Mldetlmanujictun SS5 -40.8 41.6 -70.1 -17.3 47.8 -IS.0 71 Machinery manc3octric 657 -31.9 -39.3 -75.2 -31.5 -57.2 *25.3 S6 Seistirac sw -cu 555 -41.5 -27.1 -9.5 -227 -64.0 -2Z0 ARl Manufaear 29,801 -45.6 -21.6 -55.9 -26.5 -52.2 419.9 Nca: Witin esch bo.digitgrp tSe 'buake' of comae fie-digi prods exposed by bodt China so OECD countries -y dlfer fro thsa epored by Chin ad the four NI.E. Forth reason the ahoav dat do not accurey ref relative NIE-OECD prces. Ia Chia venge xoatce reie n rwo-digtsrrc pr rlaio thep- received by OECD or the advancdAi meohen (Hoo Kon. Sigap Taiwan (Chin. and RepubEc of leis. lb Sie hc SrIT mys doe not dingua fiv-diiprodu ror t group tc conp wc wcm d thc fourdigit leveL Computati col not bc madc far the Unitd Stat sines this cony fa lD rpoat nquied quantity informaouen eaicd to cempu unt valus. about 90 percent of all manufactured exports) in order of declining importance. The table also shows the average price for China's five-digit componentproducts in each sector relative to those -164- received by two groups of comparators: (a) all developed countries exporting comparable five- digit products, and (b) four advanced East Asian developing exporters, namely, Hong Kong, Singapore, Korea, and Taiwan (China). If price differentials between similar products are any indicator of quality differen:es, the general message that emerges from the table is that there exists considerable potential for upgrading China's exports in a wide range of products, irrespective of whether the comnparisons arc with OECD countries or the four East Asian exporters. In the case of footwear, for example, China's exports to the EC, Japan and the United States are on average 50 to 80 percent cheaper than OECD exports, and 30 to 45 percent cheaper than exports of similar products from the East Asian NIEs. Likewise, for miscellaneous manufactures (SITC 89), China's export prices are 35 to 60 percent lower than OECD exports, and 15 to 30 percent cheaper than East Asian exports of similar products. Even in the case of the key clothing sector China's average export prices fall more than 50 percent below those of similar five-digit items originating in developed countries, while the price differential falls between 20 to 26 percent in the Asian NIE comparisons. For many products, but particularly for clothing and travel goods, price differentials between Chinese exports and those of other countries appear to be the widest in the Japanese market. This suggests that, unlike OECD or other East Asian exporters, China has still not raised the quality of its exports to the generally higher standards that can be absorbed in the Japanese market. 18/ opportunities ror Diversification Despite rapidly increasing developing country exports of labor-intensive products, their share of total US and Japanese imports of such products is still only 40 percent, while in the EC their current share stands at about 12 percent. Within the EFTA countries, like Norway, Sweden and Switzerland, import shares are even lower ranging from 5 to 10 percent, while for all developed countries combined, developing countries now account for about one fifth of total imports. The share of China in total OECD imports of such products is at present 3 percent, while that of Korea, Taiwan (China) and Singapore, together is 9 percent. Even if it were assumed, as an extreme case, that further import penetration of such products by developing countries was impossible without retaliatory trade barriers in OECD markets, for China to be able to sustain a 10-percent export growth rate over the next five years, it would only need to expand its own share of OECD imports of such products to 5 percent by 1997: a goal that would probably not be too difficult to meet. Given that rapidly rising real wages are forcing countries like Korea and Singapore to move out of such products, and that China's unit labor costs are likely to remain competitive with those of countries such as Indonesia, Thailand and Malaysia, there would not appear, even under this worst case scenario, for there to be serious difficulties of market access that might prevent China from meeting its ambitious export growth targets by continuing to focus on not very high technology, labor- and skill-intensive products. Although future trade performance in individual products is difficult to predict, Figure 7.3 explores potential directions for future diversification of China's exports within the category of labor-intensive products. The items identified inl this figure have five common 18/ While the above confirms that the potential for upgrading China's exports exists in almost all sectors, it must be bome in mind that the costs of achieving this upgrading are likely to vary considerably from sector to sector. - 165 - Value of Developed Country 1990 Irnports (Share of aevelopmg counines and China rellectad in shaded poron ol tre value bar) o tt OI UlOl C,. C ! I ~ ~I I ! {IA Sound reccrders (891) Furniture (821) _ Plastic articles (993) P-umnps & centeriuges (7192) CD C- Machine tools for Metal 17151) CL Photographc ecuipmerit 8616) C . _ _~~~~~~~~~~5 Atctes at paper (642) c Cocks and valves (71992) . '1 Hand tools (695) Power toolst (7195) c Medical instruments (8617) x G. Textile machinery (7171) _ _ _ E ? 0a Mg -4 - Other base metal (a manuiactures (6989) .. Dcmestlc electncal [ UV equipment (72505) g . -oL Watch rrovements (8641) Automotive electrical equipment (7294) Metal nails nuts. etc (694) Locksmith wares (69e1L) -166- characteristics: they all use at least 10 percent more labor per unit of value added than the US average; a major market exists for each item, with developed countries importing at least $5 billion annually; they are currently manufactured in China, but constitute a small share of Chinese exports; developing countries have not as yet made important irnroads in toe trade of these goods (they supplied 20 percent or less of total OECD imports), and finally, none of them are currently subject to hard core NTHs. In total, the items listed in the figure accounted for more than $220 bil;ion in 1990 OECD imports, with developing countries (including China) accounting for only about 10 percent of this trade. This illustrates the range and depth of the export potential in relatively labor-intensive manufactures, requiring technology that is not overly sophisticated, and that China could still tap fairly easily and with relatively quick payoffs, before it makes the switch towards more capital- and technology-intensive exports, along lines similar to that of the East Asian NlEs. Conclusions China's export structure has, over recent years, evolved increasing;y in accordance with its comparative advartage. This is a healthy sign. However, due to their heavy focus on the United States market and their concentration in such products as clothing, China's exports are more vulnerable to market access problems than most other developing countries. This does not imply that China's exports prospects are poor, nor does it suggest that China needs to reorient its export structure rapidly towards higher technology or knowledge based products. The analysis of this Chapter indicates that, even in today's global trade environment, there exist opportunities, both in terms of markets and in terms of other products, that China could pursue (a) without trying to go against the nature of its comparative advantage which, for a few more years, will lie in products that are relatively labor and/or skill intensive and in higher technology products that can be assembled locally, and (b) while reducing the risk of problems of market access. Firzlly, the analysis suggests that withdrawal of MFN status by the United States could have severe consequence for China's exports, at least in the short term. Trade diplomacy will need to remain a part of China's future trade strategy, although it should be noted in this regard, tiat&the conclusion of a successful Uruguay Round of negotiations would be by far the best ouMome for China. - 167 - Endnotes 1. World Bank (1992a). 2. World Bank k1992a, Table 2.6) indicates that the coverage of OECD countries, NTBs on developing countries' exports increased only slightly (from 205 to 21.8 percent) over the last decade. rhese figures are also consistent with the proposition that no basic change occurred in general levels of protection against China and other developing countries' exports. 3. See Tuong and Yeats (1981). 4. The two main elements of the general proposal for reducing NTBs relate to clothing and agriculture. Mr. Dunkel's draft textiles and clothing agreement would eliminate the Multifiber Arrangement (MFA) in three stages over ten years. T stipulates minimum quota growth rates during the phaseout such that half of the quotas need not be eliminated until the end of the tenth year. The text also allows governments the option to introduce a discriminatory safeguard mechanism during the transition to full fledged MFN treatment. The proposed agreement in agriculture commits governments to specific reductions in levels of barriers to market access (a simple average reduction of 36 percent, witi a 15 percent minimum reduction on all tariff lines), in domestic support measures (a 20 percent reduction on support measures affecting prices and production decisions), and in export subsidies (a reduction of 36 percent on subsidies and 24 percent on subsidized quantities). It also commits them to replace nontariff barriers with tariffs, but introduces a safe{uard mechanism that would adjust for changes in world product prices and exchange rates up to a specified level. 5. World Bank (1992a), p. 22). 6. Ihere is a further reason why the export expansion in textile and clothing products is so large. OECD countries' UFA quotas apply only to developing countries (the US imposes some barriers on Japan) while the intra-trade of developed countries in these products does not face similar restrictions. As such, liberalization of the MPA quotas would cause a substantial amount of developed country intra-trade to be diverted to developing countries. These gains are in addition to the sizeable trade creation that would result from the high textile and dotiing tariffs. 7. The wreveaIed' comparative advantage (RCA) index is a measure Aeveloped by economists to help identify products in which a country does or does not have a comparative advantage. Specifically, if X.. is the value of country i's exports of j and X. is the country's total exports of manu&actures its revealed comparative advantage iniex for the product j is, (1) RCA.. = (X where the w subscripts refer to world trade totals. That is, the index relates the share of the product in the country's exports to the share of the product in world exports. The index may take values from zero to infinity with those above unity indicating the country has a comparative advantage in the product. See Balassa (1965) (1979), Yeats (1989) - 168 - (1992) for illustrative examples of the use of the concept. It has been a general practice not to compute RCA indices for farm gate agricultural products since international trade in these items is so heavily distorted by high levels of border protection and subsidization of exports. - 169 - REFERECES Almanac of C7zina's Foreign Economic Relations and Trade (1991/92). Amsden (1989). "Asia's Next Giant, South Korea and Late Industrialization" (Oxford University Press, New York). Anderson, J. and Neary, I.P. (1992) "Trade Reform with Quotas, Partial Rent Retention, and Tariff," Econometrica 60(1):57-76. Anderson, K. (1989). "Changing Comparative Advantage in China: Effects on Food, Feed and Fiber Markets (Center for Interational Economic Studies, University of Adelaide for the OECD Development Center). Armington, P. (1969). 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(1992). "The Rise of China's Nonstate Sector," World Bank, mimeo. -178 - ANNEX 1.1 DIFFERENTIATING LABOR- AND CAPITAL-INTENSIVE MANUFACTURERS This report distinguishes between labor-intensive and capital-intensive manufacturers. It uses an approach developed by the US National Bureau of Economic Research for identification of labor and capital-intensive products (see Lary, 1968). This analysis uses the criteria of relative value-added per employee, both in the United States and other countries, to identify the degree to which products are capital or labor intensive in production. Products whose value-added per employee falls at least 10 percent below the national average for all US manufacturing activity are classified as labor intensive. Capital-intensive goods consist of products whose value-added per employee is above the United States average. Note that although the two classifications are mutually exclusive, they do not cover all product categories-some that fall close to the US average in terms of value-added per employee are excluded from both classifications. Table 1 of this annex shows the distribution of labor- intensive industries within broad aggregate groups. As indicated, textile and apparel products are almost exclusively produced with labor-intensive processes, and chemicals and petroleum refining are almost exclusively capital intensive. -179 - ANNEX 1.1 Table 1: ANALYSIS OF TIIE RELATivE IMPORTANCE OF LABOR- AND CAfITAL-INTENSIVE INDUSTRIES WITIIN BROAD STANDARD INDUSTRIAL CLASSIFICATION (SIC) PRoDUCT GRours Share of component four-d±gtt industries that are labor and capital intensive (2) Labor intensive la Capital SIC Description Very high High Moderate Total intenslve 20 Food products 9.5 1.2 0.0 10.7 89.3 21 Tobacco products 0.0 8.8 14.3 23.1 76.9 22 Textile mill products 70.2 17.5 0.0 87.6 12.4 2211 Cotton mills 100.0 0.0 0.0 100.0 0.0 2221 Artificial fiber mills 100.0 0.0 0.0 100.0 0.0 225 Knitting mills 73.5 24.5 0.0 100.0 0.0 226 Nonswool textile finishing 20.0 79.9 0.0 99.9 0.1 228 Yarn and thread mlle 100.0 0.0 0.0 100.0 0.0 23 Apparel and textile, 78.7 18.9 0.3 97.9 2.1 2311 Hen's suits 100.0 0.0 0.0 100.0 0.0 232 Mun'a clotbing 67.3 32.7 0.0 100.0 0.0 233 Women's outerwear 80.1 19.9 0.0 100.0 0.0 234 Women's undergasments 83.1 16.9 0.0 100.0 0.0 236 Children's outerwear 91.6 0.0 0.0 91.6 8.4 24 Wood products 42.7 51.5 5.8 100.6 0.0 25 Furniture and fixtures 48.3 22.6 20.9 91.8 8.2 26 Paper and products 1.8 7.2 6.1 15.1 84.9 27 Printing and publishing 2.0 14.1 25.4 41.4 58.6 28 Chemicals 0.0 1.6 0.0 1.6 98.4 29 Petroleum and coal products 0.0 0.0 0.0 0.0 100.0 30 Rubber and plastic products 2.6 0.0 83.4 86.0 14.0 31 Leather and product. 82.2 17.8 0.0 100.0 0.0 32 Stone, clay and glass 2.5 3.5 18.4 24.4 75.6 33 Primary metal industries 0.3 2.7 28.4 31.4 68.6 34 Fabricated metal products 0.0 11.2 29.3 40.5 59.5 35 Nonelectrtcal machinery 0.0 1.4 19.6 21.0 79.0 36 Electrical equipment 2.7 3.5 6.2 12.4 87.6 37 Transport equipment 0.0 5.3 10.4 15.7 84.3 38 Instruments 0.0 2.7 14.8 17.5 82.5 39 Miscellaneous manufactures 1.9 34.7 25.5 62.0 38.0 la Products with very high labor intensities arc thosc where the factor proportions ratio is at least 40 points below the aveage for all US manufacturing. Products with high labor intensities are those whose factor proportions ratios fall betwcen 0.60 and 0.74 while te modcrately labor-intcnsivc products have factor proportions ratios beween 0.75 and 1.00. See Yeats (1989) (1991) for detailed information on how the labor-intensive industries wem identified and an analysis of trade trends in thesc products. Source: World Bank staff estimates- -180- ANNEX2.1 CRITERIA FOR ACCESS TO FEACS Although the role of the swap market price in allocating foreign exchange expanded in 1991, the state continued to control access to the market in order to prevent the spread between the official and swap market rates from widening too greatly. The regulations in effect in 1991 established three categories of access to the market, depending on the intended use of the foreign exchange. The highest priority, guaranteed access to the market, was for purchasers who intended to use the purchased foreign exchange for one of the following: * to import chemical fertilizers, agricultural pesticides, plastic sheeting fbr agricultural use, diesel fuel for agricultural use, and other materials used to support agriculture a to import grain, sugar, edible vegetable oil and other raw materials necessary to support the living standards of the people * to make principal and interest payments on external debts denominated in foreign currency * central and local key point construction projects * items needed for expors that will earn foreign exchange * foreign-invested enterprises repaying foreign exchange loans taken out abroad and repatriating of profits * to introduce advanced equipment and technology If the above priority uses for foreign exchange could be guaranteed, would-be purchasers who had the following proposed uses of foreign exchange would also be allowed to enter the market: to purchase raw materials and supplementary materials needed for industrial production for business needs of foreign invested enterprises for equipment, instruments, reagents, and books and reference materials needed by scientific research, educational, cultural, medical, and health departnents to repay principal and pay interest on the foreign currency loans from domestic financial institutions and to pay leasing fees to import critical miscellaneous fittings needed in state key-point factories producing household electronic goods -181 - ANNEX 2.1 Under no circurtanccs would purchases of foreign 'schange with the following purposes be allowed: * for importing tobacco, wine, alcohol and nonalcoholic beverages, garments, shoes, clocks, small household appliances, vacuum cleaners, aluminum cans, color film, photo paper, cosmetics, interior decorating supplies, toys, vegetables, fruits, meats, seafood and aquatic products, and other food items * for importing cars, motorcycles, and household appliances * for the purchase of gold and silver used for producing jewelry to be sold on the domestic market unless it has been approved by the PeDple's Bank of China * for the purchase of machinery and equipment, electronic products, or instLuments and meters that can be produced domestically * for capital fumds for domestic or foreign investment * for the purchase of products by friendship stores and foreign exchange stores * for the purchase of commodities remited by overseas Chinese by overseas remittance shops * for capital to be used by the branches of various specialized banks to start foreign exchange businesses -182 - ANNEX 2.2 OPERATIONAL MECHANISM OF FEACS At the end of December 1992 there were over 100 FEACs. There are no central directives on operational procedures for FEACs or their structure. Thus in Shenzhen, Shanghai, Qingdao and an increasing number of the larger cities, authorized dealers and brokers can participate in the trading floor where US and Hong Kong dollars are traded. Typically, in these centers, there is a large electronic board which displays the bids and offers of buyers and sellers with the opening bid being the closing price of the previous day. The market matches buyers and sellers ou the principle of price priority and time priority. Prices are allowed to fluctuate within a smali band during each trading session.11 The PBC generally does not intervene in the trading but reserves the right to do so in order to keep trading orderly. A trading session may be split into two smaller sessions, one for retention quotas and another for foreign exchange. Each subsession is closed when either all the sellers have sold out or all the buyers have bought their requirements. In the smaller centers, the trading session is opened only once or twice a week for a limited duration of time. Buyers or sellers who are unable to satisfy their requirements during the trading session can either wait until the next session or apply to the FEAC to arrange bilateral deals. In most other places, the FEAC is an office in the SAEC which matches written applications to supply or buy retention quotas. Applicants must appear in person at the FEAC with the requisite documentation. Operations in the FEACs on behalf of individuals have been allowed since early December 1991 provided that the transactions are conducted by authorized banks. Each center is orgaiized to match buy and sell orders under local SAEC authority; the centers are not yet integrated into a unified national market. The FEAC verifies the documentation of the applicant and executes transactions. Initially, a relatively small volume of transactions took place in these markets, but the volume has increased rapidly with the recent change in the retention scheme and as access to the cenLers has been expanded. Total transactions was reported at about $25 billion in 1992, equivalent to about one half of the value of all cash imports. As noted above, the FEAC processes buying and selling orders and attempts to match them. If there is excess demand, as happened frequently in certain provinces such as Guangdong, preference is given to transactions established by central and provincial priorities. The FEAC may also split large orders over several days or authorize access to the PBC's reserves on a discretionary basis. Increasingly, the SAEC will try to obtain excess foreign exchange from other centers in the province or arrange transfers from excess centers in other provinces. The enterprise may also try to purchase directly from an excess center in another 11 In Qingdao, exchange rates axe allowed to increase or decrease by 15 fen per US dollar which implies a band of about 5 percent -183 - ANNEX 2.2 province or through a broker. Alternatively, if a center has an excess supply of foreign exchange, for instance in Wuhan, the enterprise may sell their foreign exchange directly or through a broker in another center outside the province. Initially, the volume of transactions between FEACs was low because the provincial authorities were reluctant to let foreign currency leave their pmvinces; however, it appears that such administrative barriers are breaking down and the volume of inter-FEAC transactions has risen to over $6 billion in 1992. - 184 - ANNEX 2.3 UNDERSTANDING CBINA'S FOREIGN EXCEHANGE SYSTEM China's foreign exchange system exerts a pervasive influence on the free market prices of goods and hence on resource use and the allocation of goods and services. In contras; with the tariff system, which imposes a wide range of differing levies on particular goods, the foreign exchange system affects the price, at the margin, of all imported goods by the same amount and imposes the same level of effective export taxation on most goods. The Chinese foreign exchange system is a two-tier pricing system, with an official exchange rate which has typically been held constant for extended periods and a secondary market rate which is determined by supply and demand factors in legal secondary markets called Foreign Exchange Adjustment Centers (FEACs). The official exchange rate has consistently been overvalued, with the margin between the two rates varying considerably over time. When the margin is small, the foreign exchange system can be expected to have only minor effects on trade while it can be an important distortion when the margin is large. An extremely important advance in the development of China's foreign exchange and foreign trade system was the development of a large system of secondary markets for foreign exchange in 1988. Since that time, considerable effort has been devoted to improving the performance of this marketing system. At an early stage in the development of this marketing system, there were many imperfections. One important manifestation of these problems was the existence of substantial price spreads between markets. While there is still scope for improvement in the system, its operation has improved considerably and the spread between markets in any period has dropped to relatively low levels. Overvaluation of the official exchange rate depresses the returns received for exports and hence reduces the amounts which exporters are willing to supply. This reduction in supply diminishes the amount of foreign exchange available in the secondary markets and hence drives up its price. These effects are illustrated in Figure 1 In this diagran, a general equilibrium supply curve for foreign exchange is represented by the curve SS while the corresponding demand curve is shown by DD. The 'equilibrium' market exchange rate consistent with these supply and demand relationships is e, with foreign exchange earnings and spending of o% at the fixed, world prices of imports used as numeraire. This "equilibrium" exchange rate is conditional on the commodity specific interventions such as import tariffs and export taxes which affect the position of the supply and demand curves. Overvaluation of the official exchange rate at e0 reduces the supply of exports from qc to qD and, at a fixed world price of exports, reduces the supply of foreign exchange proportionately. Because of the induced scarcity of foreign exchange in the economy, its price is bid up to e, The effects of the overvaluation in this static context are equivalent to the imposition of an export tax of (e,-e.) or, equivalently, an import duty of the same magnitude. -185 - ANNEX 2.3 Figure 1: Foreign Exchange SLpgy, Demiand and Pdoes Exdcag D S Rate l~~~e S.~~~~~~S 3 qn q1 q*y F I ~~ * * I I~ ~ ~ Qm*o F* In either case, there is a reduction in trade volumes of (qtq0) and in government revenue generation of (e,-eo.qo. The incidence of the overvaluation tax depends upon the relative slopes of the export supply and import demand equations. In terms of its incidence, the overvaluation can be decomposed into a tax on exports equal to the difference between the official exchange rate, e0 and the "equilibrium' exchange rate, e and an import tax of (e1-e). 6. The adverse effects of overvaluation of the official exchange rate for Ch-ina's trade and welfare are offset to some degree by a system of foreign exchange retention. Instead of having to surrender all foreign exchange earnings to the State Administration of Exchange Control, exporting enterprises are now required to surrender only 20 percent of their foreign exchange earnings at the official exchange rate. In terms of Figure 1, the effect of a foreign exchange retention scheme is to increase the supply of exports and hence of foreign exchange. The general equilibrium supply curve for foreign exchange is represented by the kinked curve - 186 - ANNEX 2.3 S'S, which is shifted to the right of the undistorted supply curve at all foreign exchange prices below e'. The increase in the supply of foreign exchange lowers the secondary market price from e, to e2, lowering the effective level of taxation on exports. The effective price received by exporters (not shown in the diagram) rises from eO to a weighted average of the official and secondary market rates, with 80 percent of the weight on the secondary market rate. At a retention rate of 100 percent, this price is identically equal to the secondary market exchange rate; at any lower retention rate, the supply of foreign exchange will be constrained, implying a weighted average export rate lower than the "equilibrium" rate. A partial foreign exchange retention scheme such as China's is, at best, a partial offset to the trade reducing effects of an overvalued and controlled exchange rate system. In the diagram, this is evident from the fact that the introduction of the scheme increases trade, but to a level lower than the 4 which would result from removal of the foreign exchange distortion. In this respect, it is equivalent to a devaluation of the official exchange rate which partially removes the initial exchange rate overvaluation. Another feature of retention schemes evident from Figure 1 is that the supply of exports will be less responsive to the official exchange rate in the presence of a retention scheme than otherwise. As the official exchange rate is increased, the secondary market rate can be expected to decline, reducing the stimulus to exports. In the extreme case of a 100 percent retention rate, devaluation of the official rate has no impact on exports, which already generate 4i in exports. A consequence of the decline in the elasticity of export supply with respect to the official exchange rate is that the gap between the official exchange rate and the equilibrium exchange rate increases relative to the gap between the secondary market rate and the equilibrium rate. The foreign exchange mechanism with retention can be viewed as equivalent to either a uniform export tax or import duty. The magnitude of the tax in this case is the difference between the marginal (and average in this case) exchange rate paid to exporters and the secondary market exchange rate which represents the marginal cost for imports, that is (E'- EI) where E" is the weighted average of the official and the secondary market exchange rates using the retention ratio as the weight on the secondary market rate. The magnitude of the trade tax imposed by the foreign exchange regime has been calculated using the available data on official and secondary market rates, and foreign exchange retention rates, and the results are presented in Table 1. For the period prior to 1991, the foreign exchange retention rate was assumed to be 44 percent, which Lardy (1992, p. 54) estimates to have been the average rate of foreign exchange retention in the late 1980s- Since the streamlining of the retention rate system, effective January 1, 1991, an effective retention rate of 80 percent has applied to most exports except for machinery and electronics for which an effective rate of 100 percent is available. For simplicity, a uniform retention rate of 80 percent has been assumed from the beginning of 1991. Since late 1989, there have been two extremely important developments in China's foreign exchange system. The first was the substantial reduction in the margin between the official and the secondary market exchange rates brought about by devaluation of the official exchange rate and a related appreciation of the secondary market exchange rate beginning in the fourth quarter of 1989. The second was the very substantial increase in the foreign exchange retention rate from the beginning of 1991. -187 - ANNEX 2.3 Table 1: EXCILINGE RATE AND TRADE TAX RELATIONSInipS UNDER CIUNA's EXCIANGE RATE SYSTEM Official Secondary Implied Weighted Implied Year- exchange market export exchange rate "equilibrium" quarter rate ratw tax for exports rate (Yuant$) (Yuanl$) (%) (Yuan/$) (Yuanl$) 1987-I 3.72 5.25 20 4.39 4.60 1987-II 3.72 5.3 20 4.42 4.62 1987-rn 3.72 5.46 22 4.49 4.71 1987-IV 3.72 5.61 23 4.55 4.79 1988-1 3.72 5.7 24 4.59 4.83 1988-H1 3.72 6.3 30 4.86 5.13 1988-E 3.72 6.6 32 4.99 5.27 1988-V 3.72 6.65 33 5.01 5.29 1989-I 3.72 6.65 33 5.01 5.29 1989-H 3.72 6.6 32 4.99 5.27 1989-E 3.72 6.55 32 4.97 5.25 1989-TV 3.89 5.9 24 4.77 5.02 1990-I 4.72 5.91 1J 5.24 5.42 1990-11 4.72 5.81 12 5.20 5.37 1990-r 4.72 5.8 12 5.20 5.36 1990-IV 4.97 5.7 8 5.29 5.41 1991-I 5.22 5.8 2 5.68 5.72 1991-11 5.31 5.84 2 5.73 5.77 1991-E 5.36 5.87 2 5.77 5.80 1991-NV 5.39 5.87 2 5.77 5.80 1992-I 5.46 5.95 2 5.85 5.88 1992-11 5.5 6.25 2 6.10 6.14 1992-mn 5.5 7.0 4 6.70 6.78 1993-1 5.73 8.41 7 7.87 As is evident from Table 1, the foreign exchange system imposed a very substantial tax burden on Chinese exports during the period from 1987 to 1989, with the implied rate of export taxation plateauing at around a third in 1988 and 1989. The recognition of this problem led to an important policy responses, including a series of devaluations of the official exchange rate from late 1989. Other policy responses at this time appear to have included increases in some tariff rates and in the tightness of nontariff barriers, which merely shifted the burden of protection from the foreign exchange system to commodity-specific trade distortions. The combined effect of these measures was to reduce the effective export tax imposed by the foreign exchange system substantially, to only 11 percent by the final quarter of 1990. The increase in the foreign exchange retention rate to nearer 80 percent caused a further, dramatic, fall in the implied export tax rate, to only 2 percent from 1991-I to 1992-11. Even with the surge in the secondary market exchange rate in mid-1992, unaccompanied by any - 188- ANNEX 2.3 devaluation of the official exchange rate, the implied export tax remains relatively small. Because of the of the high retention rate rfow applying, weighted average exchange rate applying for exports has increased almost as much as the 'equilibrium" exchange rate, with the result that the implicit export tax has increased only to 7 percent, despite the growing gap that has emerged between the official and the swap market rates in the first quarter of 1993. The high foreign exchange retention rate implied by the current foreign exchange system is an important safety valve for the trading system. As is evident from the experience of 1992, even a quite sizeable margin between the official and the secondary market exchange rates no longer results in the imposition of a large tax on exports. Even if the secondary market increased to 10 YuanJ$, the resulting export tax would be only ten percent. Some significant practical problems would be likely to emerge before this point however, with such a large incentive for arbitrage between the two markets, and with some activities such as tourism where market participants are currently restricted to dhe official market. The development and refinement of the foreign exchange retention scheme has been an important stage in the reform of China's foreign exchange system. However, there are good reasons to question whether the time has come for further reform of the system. With a foreign exchange retention rate as high as 80 percent, the system can raise only a very small amount of revenue, making the usefulness of such a complex and restrictive system somewhat questionable. Now that enterprises and even individual have become used to the operation of a free market in foreign exchange, there seems a good case for moving to a completely market determined system for foreign exchange. Such a system might initially be restricted to current account transactions to reduce the likelhiond of fluctuations resulting from changing assessments of future prospects. A move to a fully market oriented system would remove the possibility of the foreign exchange system again becoming a significant source of distortions in foreign trade. -189 - ANNEX 2.3 TECHNICAL ATTACHMENT ESTIMATING THE EFFECTS OF CHINA'S FOREIGN EXCHANGE SCHEME As is clear from the foregoing discussion, the effects of a two tier foreign exchange system such as that operating in China depend upon whether enterprises are allowed to retain foreign exchange, or must surrender all of it to the state at the official exchange rate. For simplicity, the case in the absence of a retention scheme is analyzed first. Once the nature of the solution to this problem has been established, the incorporation of a retention scheme is then considered. In the Absence of a Foreign Exchange Retention Scheme. For this analysis, it is useful to define a general equilibrium supply curve for foreign exchange as: S-cc 4 (1) and a corresponding general equilibrium demand curve as: D=y.E, (2) where : S is the supply of foreign exchange derived from imports (defined as foreign exchange receipts from exports and other sources less withdrawals for accumulation of foreign assets); F. is the official exchange rate; El is the parallel market exchange rate; D is the demiand for fbreign exchange; ex is a parameter summarizing the economy's factor endowments and the extent of foreign asset accumulation; , is the general equilibrium supply elasticity for exports; -y is a shift parameter toc foreign exchange demand and 6 is the general equilibrium elasticity of demand for imports. The general equilibrium supply and demand curves for foreign exchange depicted above can be identified with the export supply function and the import demand function since world prices of traded goods have been normalized, without loss of generality at unity. The general equilibrium specification maintains market clearing in the markets for factors and for nontraded goods, so that the supply and demand for foreign exchange can be expressed solely in terms of the relative prices of domestic and foreign goods, which changes as the nominal exchange rate changes. Removal of the foreign exchange distortion requires that the official exchange rate be depreciated from EF to Es while the parallel market exchange rate appreciates from E1 to r while maintaining the equality between the supply and demand for foreign exchange. Using lower case variables to denote proportional changes from the initial situation to the undistorted equilibrium, this implies that: Since both the official and the secondary market are equalized in the undistorted equilibrium: - 190 - ANNEX 2.3 EV=(l+eo).Eo = (1+el).El Solving (3) and (4) for the proportional change in the official exchange rate required to reach -the undistorted equilibrium yields: El-O (5 Substituting the result obtained in (5) into (4) yields an expression for the tequilibrium' exchange rate in the absence of the exchange rate overvaluation: E-= A~ (6) -=EE ( Thus, the equilibrium' nominal exchange rate required to remove the exchange rate overvaluation can be expressed as a fimction of the obserable official and parallel exchange rates and the general equilibrium elasticities of export supply and import demand. In the Presence of a Foreign Exchange Retention Scheme. The approach outlined above needs to be modified slightly to take into account the effects of a foreign exchange retention scheme. With a freign exchange retention scheme, the supply curve for foreign exchange becomes a function of a weighted average of the official and the secondary market exdcange rates with the weight on the secondary market rate equal to the share of foreign exchange earnings which enterprises are permitted to retain. In tis case, the supply curve for foreign exchange becomes: S=64a7 where E, is the weighted average of the two rates defined as EK =(6.E +(1-O).E). The proportional change in k, resulting from any given proportional changes in F. and El can be defined as: dE E =C 6F Eo d)c E) (S) -191- ANNEX 2.3 Clearly, the coefficients on the proportional changes in each of the exchange rate variables are clearly not constant in this case, and allowance needs to be made for changes in these as the two exchange rates converge on the equilibrium rate. One obvious approach, which will give exact results as long as the model is linear in percentage changes, is to utilize the averages of the initial and final values, that is: ew = (E + Ew ).e. + t + E(I gl-e).e, (9) For notational convenience, equation (9) may be simplified to: e, =h00.e0 + h1(1-0).e1 (10) Since export response depends upon the weighted average price in the partial retention case, rather than merely upon the official exchange rate, equation (3) must be modified to: D.C - 6.e1 (11) Substituting from equation (10) and rearranging yields: [8 -hi (1-0)] (12) If (12) is rewritten for notational convenience in the form: = / f at)(13) a, = p/e then exactly the same steps as were followed in the case of no retention can be used to obtain an explicit solution for E. The result analogous to equation (6) is El-( E (14) E'= 5/ 1E Equation (14) may be used to calculate the equilibrium exchange rate given only information on the initial official and secondary market exchange rates, the foreign exchange retention rate and the general equilibrium structural elasticities of the economy. As discussed earlier in this annex, it seems reasonable to take 0.44 as a representadive foreign exchange retention rate during the period from 1987 to 1990 during which the secondary markets for foreign exchange were operating and a wide range of retention rates applied to different commodities. For the period since the beginning of 1991, a retention rate - 192 - ANNEX 2.3 of 0.8 is a similarly representative rate. Data on the official and secondary market exchange rates obtained from the International Monetary Fund are presented in Table 1 of this annex. Using estimates of the general equilibrium elasticity of import demand of -1.0 and of export supply of 2.0 based upon the empirical estimates marshalled by Goldstein and Khan (1985), estimaes of the equilibrium exchange rate under both the pre and post 1991 foreign exchange regimes were made using Equation 14 and are reported in Table 1. -193 - ANNEX 3.1 EFFECTIVE RATES OF PROTECTION CALCULATIONS: A MEETHODOLOGICAL NOTE Effective rates of protection provide an indication of the extent to which protection policies influence the allocation of resources towards, or away from, particular activities or sectors. Where nominal rates of protection are different across commodities, the effective rates approach takes into account the fact that protection on intermediate inputs may offset, or overwhelm, the benefits provided to an import competing industry by protection on its output. While this application of the technique frequently produces useful insights into the effects of particular combinations of protection rates, it provides little in the way of perspective on the overall consequences of the protection regime. In principle, the approach can also be applied to more broadly defined sectors such as those incorporated in Input-output tables of the economy. In this way, an indication of the broad intersectoral resource pulls within the economy might be obtained. In contrast with model-based approaches, the methodology is extremely simple, easing the computational demands and avoiding the need to specify a wide range of parameters. An important limitation of the approach, however, is the assumption that domestically produced tradable goods and imported or exported goods are homogeneous products. The first step in applying the procedure is to obtain the rates of protection applying to particular sectors. In the case of China this must include import tariffs; import tariff equivalents of Nontariff Barriers; export taxes and the export tax equivalents of export licensing. The tariff rates were obtained from the import tariff schedule of China and trade weighted to obtain trade weighted average rates of tariff protection to 16 important traded goods sectors. Given the relatively minor use made of export taxes, only one important export tax was considered: the export tax of 40 percent applied on coal. Estimates of the effective impact of nontariff barriers applying in addition to tariffs and export taxes were made using the information contained in the price comparisons reported in Table A3.7. Since the ERP approach requires a single estimate of protection for each commodity, a judgement must then be made in those cases where there is more than one trade barrier applying (e.g., export licensing and an import tariff) as to which barrier is the effective one. The estimated rates of assistance in each category and the single rate chosen as representative for the calculation of effective rates of protection are presentud in Table 1 of tLs annex. Based on the representative nominal assistance rates presented in Table 1, effective rates of assistance to value adding factors in each sector were calculated by converting the price of each traded good to international prices. Under the assumptions of the Effective Rate of Protection approach, the domestic price of any traded good is equal to (1 +t) times its world price. Thus, the undistorted domestic price can be obtained simply by dividing the (distorted) price of each good by (1+t). After performing this adjustment, the residual return available for payment to domestic value adding factors can be recalculated with all tradable -194 - ANNEX 3.1 Table 1: TRADE DISTORTIONS ON IVe TRMAED GooDs SEcFoRs (percent) Weighted Tariff Export Represen- avcrage equiv. tax equiv. tative import of import of export Export distor- tariff NTBs licensing tax tion Crops 19 0 40 0 -40 I .rmal husbandry 36 0 30 0 -30 Metals 24 0 40 0 -40 Electricity 0 0 0 0 0 Coal 15 0 70 40 -82 Petroleum mining 0 0 85 0 -85 Petroleum refining 36 0 18 0 -18 Chemicals 24 0 0 0 0 Machinery 33 10 0 0 47 Building materials 41 0 0 0 31 Wood & pulp 31 0 0 0 31 Food Processing 59 0 0 0 59 Textiles 55 0 0 0 55 Apparel 90 0 0 0 90 Paper 38 0 0 0 38 Miscellaneous manuf. 45 0 0 0 45 goods prices at world prices. The effective rate of assistance simply compares the value added at (distorted) domestic prices with the residual return to value adding factors at world prices. A summary of the results used in the calculation of effective rates of protection is presented in Table 2 of this annex. The first column of the table gives the representative rates of assistance used in the calculation. The second shows the value of gross output at distorted prices drawn from Martin (1992) while the third column contains the calculated residual retumrn to value added when international prices are received for outputs and paid for inputs. Where value added at international prices is positive, the effective rate of assistance to domestically oriented firms is presented in column (5). - 19S - ANNFX 3.1 Table 2: EFFECrrvE RATES OF AssiSTANcE TO INDUSTRY, CHINA 1991 Gross Value Value Nominal output at added at added at distor- distorted distorted world Effective tion (%) prices prices prices rate (%) Crops 40.00 312.62 246.60 436.85 -43.55 Animal husbandry -30.00 61.95 20.76 21.46 -3.25 Metals 40.00 73.16 30.18 48.82 -38.18 Electricity 0.00 18.82 5.57 -33.99 n.a. Coal -82.00 24.99 13.60 120.01 -88.67 Petroleum mining -85.00 51.61 44.30 324.37 -86.34 Petroleum refining -18.00 44.86 10.39 -167.27 n.a. Chemical 0.00 127.23 56.37 26.44 113.17 Machinery 46.62 158.37 51.59 -17.84 n.a. Building materials 30.85 34.82 16.29 -5.45 n.a. Wood and pulp 30.85 16.48 6.90 -0.26 n.a Food processing 59.19 98.78 14.93 -63.99 n.a Textiles 54.97 106.95 28.11 -17.60 n.a. Apparel 89.59 49.06 6.31 4.10 n.a. Paper 38.45 21.92 3.34 -5.34 n.a. Misc. manufacturing 44.90 24.92 6.71 -6.32 n.a- Construction 0.00 108.90 24.67 25.68 -3.93 Freight transport 0.00 31.50 15.63 10.60 47.47 Pass. transport 0.00 8.29 2.30 1.46 57.37 Commerce 0.00 57.36 24.32 22.44 8.36 Misc. services 0.00 11.99 9.80 9.68 1.24 Education/health 0.00 78.92 40.42 42.20 -4.21 Pub. administration 0.00 12.70 12.70 12.70 0.00 Housing 0.00 13.97 11.24 11.54 -2.58 - 196 - ANNEX 4.1 A COMPUTABLE GENERAL EQUILIBBRIUM MODEL OF THE CHINESE ECONOMY The computable general equilibrium model of the post-reform Chinese economy utilized in this study draws on the recent theoretical analyses of the two-tier price system in China [Sicular (1988), Byrd (1987, 1989), Wu and Zhao (1987)] and earlier work on foreign exchange mechanisms in centrally planned economies [Desai and Bhagwati (1979)]. The model is based primarily on a World Bank (1985a p. 55-6) input-output table extended to production, consumption and trade for 24 sectors, and updated to 1991 patterns of trade. Given the importance of foreign trade for the development and modernization of China, particular emphasis is placed on the foreign exchange and foreign trade systems. Dervis, de Melo and Robinson (1981) have demonstrated the feasibility of using such a model in the presence of foreign exchange constraints while Kis, Robinson and Tyson (1986) have previously applied models of this type to post-reform socialist economies. In developing a model of the Chinese economy, a number of adaptations of the techniques used in modeling other developing countries [Robinson (1989)] were required. The more important of these adaptations were: - adapting the input-output and price data to reflect secondary-market rather than official prices for material inputs; e modeling the effects of the foreign exchange system. Given the evolving policy changes in the Chinese economy associated with rapid economic growth, any modeling exercise can lead, at best, to a highly stylized representation of the economy. Despite this constraint, modeling can provide many useful insights. It provides an explicit framework for analysis, frequently leading to the discovery of important, but otherwise overlooked, causal linkages. Broad Features of the Model The model used in the analysis covers the data and structure used of the model and the specification of the equalions. For more details of the theory underlying the specification and of applications, see Martin (1993). Like most computable general equilibrium models (e.g., Dervis, deMelo and Robinson 1981, Dixon, Parmenter, Sutton and Vincent 1982), this model focuses on the real side of the economy, with particular emphasis on the response of the economy to trade policy changes. The behavioral assumptions of the model involve cost minimization by producers and utility maximization by households, and the assumption that there is sufficient competition for unit profits (at market prices) to be driven to zero. As discussed below, the crucial - 197 - ANNEX 4.1 assumption is that economic agents respond to marginal market prices for inputs and outputs, rather than official prices. Although it is recognized that the income re-distribution induced by divergences between official and market prices may have an impact on demand behavior, this second round effect seems likely to have a relatively minor impact on resource allocation and hence has not been incorporated in the model. While enterprises and consumers are assumed to respond in a manner consistent with neoclassical theory to the market prices which they experience, these market prices are affected by distortions such as overvaluation of the official exchange rate, the foreign exchange retention system and import tariffs and licensing, all of which can be incorporated in the model. The model as specified is fimdamentally nonlinear and it was linearized in percentage changes and then solved for each experiment in one, two and four steps, witi database updating to allow exact solution via Euler's extrapolation [Pearson, 1991]. Following Armington (1969), domestic and imported products are treated as imperfect substitutes. A standard simplifying feature of CGE models adopted in this model is a two-level representation of technology in which intermediate inputs and a composite primary factor input are demanded in fixed proportion to output. Changes in output levels thus require changes in the composite primary factor input levels which, in the presence of any fixed factor, require substitution between factors. Following standard practice in this type of model, this substitution is represented using constant elasticity of substitution (CES) technology. For many goods, there are marked diffierences between the product produced for the export market and that produced for the domestic market: both in the product's physical characteristics and in its less tangible marketing requirements. To capture these differences, it is assumed that products sold on the domestic market are differentiated from those sold on the export market. These differences are represented using a constant elasticity of transformation (CET) functional form [Robinson (1989)]. The model is short-riu in character, with capital assumed to be fixed in each sector. It would be possible to build a longer-run version of the model in which the capital stocks in each industry were endogenous, although investment behavior in China seems likely to be difficult to model adequately. In the absence of a well-developed theory of investment for China, investmnent in each sector has been specified as simply changing in line with total real absorption. As is common in short-mn models, investment does not add to the effective capital stock. The underlying time period is assumed to be sufficiently long for new equipment and machinery to be produced, but not brought into production. Given the complexities of the government revenue and expenditure system in China [Blejer and Szapary (1989)], an explicit set of fiscal accounts was not incorporated in the model. Implicitly it is assumed that the authorities make whatever adjustments to fiscal policies are needed to keep real absorption at an exogenously determined level. A skeletal monetary sector is incorporated to allow determination of the aggregate price level as a numeraire. This allows the user to specify either complete control of the money supply or any given degree of "slippage' and consequent monetary expansion. -198 - ANNEX 4.1 Data and Structure The initial source of data for the model was the World Bank (1985a pp.55-6) table for 1981, the latest available at the time the model was initially constructed. This table has the advantage of having been prepared using the SNA conventions, rather than the material product system (MPS) used in most Chinese input-output tables. A Chinese input-output table for 1981 [State Planning Commission and State Statistical Bureau (1987)], was used to split the combined 'Textiles' sector in the original database into separate textiles and clothing sectors. Details of the construction of the complete data set are given in Thompson (1990). As discussed in the main study, the trade data used in the model were updated to reflect 1991, rather than 1981, shares in the economy and the 1991 tariff rates, and exchange rate distortions were incorporated as wedges between trade values at domestic and foreign prices. The remainder of the final demand matrix was then adjusted using the Richard A. Stone (RAS) procedure to reflect the 1991 structure of output demand and the (assumed unchanged) structure of gross output at domestic prices. In the development of standard computable general equilibrium (CGE) models, it is assumed that the economy is in equilibrium in the benchmark year. Clearly, the conventional approach of assuming that the value shares in the model were in equilibrium would not be appropriate since the flows in the input-output table are valued at official prices rather than the market prices required for the analysis. To make the model operational, it was assumed iat the (largely) planned system operating in 1981 resulted in the same set of quantity variables as would have resulted from a market system in equilibrium. Some support for this (admittedly strong) assumption is provided by Anderson's (1989, p.70) conclusion that the pattern of development in the Chinese economy since 1949 has been consistent with tfie predictions of Western economic theory. A data set corresponding to a market equilibrium was obtained by adjusting the prices in the original input-output table using a set of relativities between official and secondary market prices-obtained primarily from studies by Lardy (1983), and the Research Institute of the State Price Burea of China (1988). The industrial sector price relativities were for 1988 when a well developed set of secondary markets was in operation, while the agricultural price relativities were based on a relatively complete set of estimates for 1982, updated where later estimates were available. The exchange rates used in the model data base were based on those prevailing in early 1991, 5.32 YuanlUS$ for the official role and 5.845 Yuan/US$ for the secondary market rate. The actual price adjustment factors used to convert the model from official to secondary market prices are presented in Table I of this annex. The price adjustnent factors are large for raw material inputs such as oil, metals and coal, where official prices are reported to be substantially below secondary market levels. They are also quite high for agricultural products, reflecting substantial differences between quota and secondary market prices. By contrast, the adjustment factors were low in sectors such as textiles and clothing and in most services sectors, where official prices did not appear to be so widely out of line with market prices, or where underpricing bad been alleviated by the adjustments made in construction of the table [World Bank (1985a, p. 51)] The price adjustments changed the gross output value of the industries to which they applied. Since two-tier pricing is not generally used in the labor market these output value -199 - ANNEX 4.1 Table 1: PRICE ADJUSrMENTS USED IN TIRE ADJUSTED CIDNESE INPUr-OuTPUr TABLE Commodity Adjustment Commodity Adjustment factor factor Crop 1.78 Textiles 1.00 Animal husbandry 1.51 Apparel 1.00 Metallurgy 1.60 Paper 1.10 Electricity 1.00 Miscellaneous manufacture 1.30 Coal 1.50 Construction 1.45 Petroleum mining 4.00 Freight transport 1.35 Petroleum refining 3.00 Passenger transport 1.28 Chemicals 1.98 Commerce 1.10 Machinery 1.40 Miscellaneous services 1.00 Building materials 1.50 Education and health 1.45 Wood 1.50 Public administration and defense 1.32 Food processing 1.40 Housing 1.00 changes were assumed to cause changes in profits. This assumption seems reasonable in the light of the widely held proposition that the official pricing system leads to major distortions in the relative profitability of different industries in China [e.g., Chen (1988)]. The resulting estimates of factor intensities [Thompson (1991)] appear to be more consistent with expectations, and with the range of estimates observed in market economies, than the set of estimates obtained in the nonadjusted table. Following standard practice in CGE models, relatively parsimonious functional forms, such as the Constant Elasticity of Substitution (CES), the Constant Elasticity of Transformation (CET) and the Linear Expenditure System (LES) were adopted throughout. The necessary elasticities of substitution in demand, transformation in output supply and the parameters of the consumer demand system were obtained from econometric studies of China where these were available and for other countries where Chinese studies were not available. The specific values chosen for these parameters, and the justification for these parameter values, are discussed after the equation specification in the next section. Equations and Parameters of the Model The set of equations making up the model is presented in Table 2 of this annex, together with the definitions of the variables and coefficients. The first six sets of equations specify the final demands for goods and the demands for intermediate goods by each sector. The first set of equations specifies the demands for each good by households as a function of household disposable income and the (marginal) prices of each good. In the absence of any elasticity estimates based on the appropriate marginal prices, the set of elasticities was calculated using expenditure elasticities for each good [World Bank (1985b)], budget share data at market prices, and an estimate of the Frisch Parameter - 200- ANNEX 4.1 (-6.9) obtained by interpolating from the international estimates provided by Lluch, Powell and Williams (1977). By virtue of the method used in their construction [Dervis, de Melo and Robinson (1981, pp. 482-5)], the resulting estimates satisfy the theoretical constraints on demand systems: homogeneity of degree zero in prices and income, symmetry and adding up. Equation sets (2), (3) and (4) specify proportional changes in fixed investment, investment in stocks and government consumption demands for each commodity as equal to the proportional changes in gross real absorption in the economy. This behavioral hypothesis was chosen as a neutral benchmark given the considerable uncertainty about how these categories respond to relative prices. Equation set (5) summarizes China's trade environment. China's exports of each commodity i are represented using a CES function (Linearized in percentage changes) consistent with the Annington (1969) model. The demand for exports of good i is determined by the prices of China's exports relative to exports from the rest of the world, and the total demand for exports of that commodity. In tLrn, world import demand was specified as a linear (in proportional changes) function of the weighted average price for good i, where the weights are the shares of China and the rest of the world in total exports of good i. The supply of imports is specified as a function of the world price of imports, allowing for the possibility of China being 'large' in particular markets. Equation set (6) specifies the demands for intermediate inputs of commodities in the production process. For simplicity, and for consistency with most models of this type, intermediate inputs are assumed to be used in fixed proportion to outputs, that is according to a Leontief technology. Equation set (7) aggregates intermediate usage, household stocks, consumption and govemment demand into a total absorption variable for each good. Value share weights are used to convert this linear identity into percentage change form. Because export and domestic products are differentiated, export demand is not a component of total absorption of i. Equation set (8) specifies imperfect substitution between domestic and imported products consistent with the Armington (1969) model. Equation set (9) specifies imperfect transformation between domestically produced products supplied to domesLic and expoc.t markets. This equation is a linearization in percentage changes of the constant elasticity of transformation (CET) function discussed in the context of CGE models by Robinson ('1989). Equation set (10) specifies the demand for primary factor iaputs by industry i as a function of the output level in industry i and the relative prices of each of the primary factor inputs (and, labor and capital). It is assumed that these inputs can be aggregated into a composite primary factor bundle using a CES function, and the demand equations are obtained by imposing the first order conditions for cost minimization and linearizing in percentage changes. The market clearing conditions for commodities are specified in equation block (11). In l1(a) domestic demand for good i from domestic sources (q-2 is equated with domestic production of good i for the home market (xe). Similarly, export demand for good i from China must equal Chinese production of good i for export (xJ. - 201- ANNEX 4.1 Equation set (12) deals with market clearing for primary factors. Equation 12(a) embodies the assumption, standard in models of this type, that labor is able to move between different industries in response to changes in the demand for labor. While this is undoubtedly a strong assumption given the constraints on the physical mobility of labor in China, the explosive growth of the lightly regulated rural industries in China has greatly increased the opportunities for labor to move between agriculture and industry, and between industrial sectors. The stock of capital in each industry, and the stock of land in each agricultural industry, are specified exogenously in 12(b) and 12(c). Equation set (13) imposes the condition of zero pure profits on activities conducted at marginal (free market) prices. In production, this condition involves the inherent assumption of constant returns to scale - reasonable given the very large number of enterprises involved in most industrial (and certainly agricultural) activities in China. While the two-tier pricing system generates large profits and losses, these are assumed to be infra-marginal and hence irrelevant for short-run resource allocation. The zero-profit or arbitrage conditions in exporting and importing are of vital importance and thierefore are examined in some detail. The condition for the import market is simply a linear in percentage change version of: 2 = Pr(1 + TJ 42 where P, is the landed, domestic currency price of imported good i, Pi is the 'wc 4d' price for imports of good i, Ti is the rate of tariff applying to imports of i (plus the tariff equivalent of any import quota) and t2 is the secondary market exchange rate. At the margin, it is assumed that the opportunity cost of all imports involves the secondary market rate. If an enterprise has less foreign exchange than it demands, it must purchase additional foreign exchange in the secondary market. If it initialy has more foreign exchange than it requires, its opportunity cost of using foreign exchange is also the secondary market rate. In exporting, the nominal returns per unit exported depend upon the foreign currency price received, the rate of any export tax or the export tax equivalent of export licensing, and a weighted average of the official and secondary market exchange rates. The higher the rate of retention allowed to enterprises, the larger the weight on the secondary market, and hence the higher the domestic currency price of exports. Equation 13(d) shows the effect of changes in official and secondary market exchange rates, and in the foreign exchange rate for each sector, on the weighted average exchange rate for exports. Equation set (14) includes identities to form aggregate Gross Domestic Product and absorption in current and constant prices. Equation 14(c) is used to make aggregate real absorption an exogenous variable in the model. Equation 14(d) requires that total household consumption, and the spending associated with investment and govermnent purchases add to total absorption. Equation set (15) defines the balance of trade, and equation set (16) includes identities for trade volumes and values. Equation (17)(a) is a demand for money equation, with a unitary income elasticity of demand imposed, is used to determine the model's numeraire price -the composite price of Gross Domestic Product. - 202 - ANNEX 4.1 Equations 17(b) to 17(e), define the price of each of the composite goods (import plus domestic sources goods) consumed domestically, and the price of composite goods (export plus domestic destination goods) produced domestically and composite prices for total absorption and total Gross Domestic Product. Equation 18 provides a money measure of welfare change, the Hicksian Compensating Variation, which takes into account the effects of shocks on consumer and producer welfare, and on revenues ftom tariffs, export taxes and the trade taxes imposed by licensing and exchange rate over-valuation. It allows evaluation of the second best ronsequences of partial liberalization (Martin 1992; Anderson and Neary 1992). In addition to the input-out data discussed above, the model requires that a number of elasticity parameters be specified. The elasticities involved were: * consumer demand elasticities; * elasticities of substitution between domestic and imported good i (base value 2.0); 3 elasticities of transformation between domestic and export good i (base value 5.0); 3 elasticities of substitution between Chinese exports of i and the exports of other countries (base value 10.0); * the elasticity of demand for total world exports of i (base value -2.0); * the elasticity of supply of import i to China (base value 100); and * the elasticity of substitution between primary factors in industry i (base value 0.5). As previously discussed, the consumer demand elasticities were derived using expenditure elasticities, budget shares and the Frisch parameter. It seemed unlikely that reasonable estimates of the elasticities of substitution and transfornation for each commodity could be esfimated satisfactorily using the available data for China. Time series of the relevant market price data are extremely scarce and, in any event, the time period over which enterprise managers have been free to allocate their resources in response to relative Drice changes is short. Accordingly, the approach taken was to impose selected base values chosen on the basis of the evidence from other countries, leaving open the option of examining the sensitivity of the results obtained to these assumptions. The base value of 2.0 used for the elasticity of substitution between domestic and imported commodities is within the range of values used for this parameter in CGE studies. While the values used in the Grais, de Melo and Urata (1986) study range only from 0.4 to 1.2, the corresponding parameters are larger in many other CGE studies. If one accepts the weight of empirical evidence marshalled by Goldstein and Khan (1985 p. 1076) that the aggregate elasticity of import demand is in the range -0.5 to -1.0 and believes that own price elasticities for individual commodities are likely to be higher than the aggregate elasticity, then an elasticity of substitution of 2.0 at the individual commodity level would seem entirely reasonable. Unfortunately, the anpirical evidence on the elasticity of transformation between domestic and export production is extremely limited. The estimate of 2.90 cited by Tarr (1989, p. 5-6) provides some indication of the order of magnitude, at least for manufactured products. While well below the value of infinity implicit in models constructed without explicit - 203 - ANNEX 4.1 transformation in production, it is well above the values of 0.5 and 1.5 assumed by Grais, de Melo and Urata (1956). The evidence that the aggregate supply elasticity of exports may lie in the range from 1.0 to 4.0 [Goldstein and Khan (1985 p. 1087)] also seems to point to higher values for this parameter than those chosen by Grais, de Melo and Urata (1986, p. 74). The value of 5.0 for individual conunodities used in this study was subjectively set somewhat above the empirically estimated aggregate values given the well-known downward bias in these estimates resulting from the pervasive problem of measurement errors. The elasticities of substitution between exports from China and other export products were set at 10.0 in the belief that Chinese exports of many products are close substitutes for other products in world markets. This assumption is higher than the few available direct estimates of the elasticity of export demand for China's exports but the likelihood that such estimates are biased downwards is well known [see, for example, Leamer and Stern (1970, p. 56-74)]. For conmmodity exports, at least, the value of 10.0 does not seem unreasonable, and is broadly consistent with values used in many other CGE modeling exercises (e.g., Dixon et al. 1982). The base value elasticity of demand for total world exports was set at -2.0 in light of the relatively low elasticity of substitution between domestic and imported goods assmed in the model. Since the focus of the model is on a relatively short time period, supply adjustment in other countries may be fairly low, placing the major burden of adjustment on world demand. Given China's small share of world exports, the elasticity of demand for her exports would generally be expected to depend more heavily on the elasticity of substitution than the overall market elasticity of demand. The very high base value for the elasticity of supply of imports to China was chosen to make China essentially a price taker in the market for imports. Given China's small share in most markets this does not appear unreasonable as a working assumption. The elasticity of substitution between primary factors was set to a base value of 0.5. This value was selected by Dixon et al. (1982) after an extensive literature search. While it is substantially below some of the estimates presented in the developing country literature [e.g. Limskul (1988)] it does not seem unreasonable as a short run estimate, particularly when the effects of any constraints on adjustment resulting from the operation of the planning system are considered. The model is a flexible and adaptable instrument for the analysis of a wide range of policy issues and exogenous shocks in the post-reform Chinese economy. In the past, it has been applied to policy issues including: the impacts of exchange rate policy on the demand for imports of commodities (Martin 1991); the adjustment of the Chinese economy to major shocks, such as the oil price decline of the mid 1980s (Peng and Martin 1991) and a number of macroeconomic shocks (Martin 1993). Now that the critical trade database has been updated, the ability to handle large changes incorporated, and a theoretically consistent measure of welfare changes added, it can readily be applied to the analysis of a wide range of shocks to the Chinese economy. - 204 - ANNEX 4.1 Table 2: MODEL EQUATIONS AND vAALES 1. Household Consumdtion Demands 11. Product Market Clearinc qjM , ca * r tl (a) Domestic nmrkt clearing 2. Fixed Investment Demand (b) ExpoLt market clearIg q, -a, 5 q4' -X1 xg, 3. Investment in Stocks gsp - a, g 12. Factor Market Clearing (a) q"g L t Li v - Labor I 4. Govcrnment Demand e1 az B (b) qV - k1 -capital ini g 5. Traded Good Denmand/Supply (a) Expon Demndfrom Chins (c) q,I-1 -Landini 5 (4) q - ( (v-:E ES, pj g 13. Zero Pure Profits at the Margin (b) World Demand (a) in Production 2 3 qw,") - P, (i ES. e 2 J.*,p. - E, HP,4 P E mvr pP, C*s=l, China 2, of Wor3a) I,) In Importing tc) Empo supplyto Cbina Pn ' P *o~~~~~~~~~~~~~~~~~~~~, u D pi g i- q (c) In Epoting 6. Intemnediate Denmnd pa - pi - p, + wj.q+ eŁ g (d) Expont exchange rate 7 Domestic Absorption of Good i from all Sources E , (t *B1 c - a, E. *BSrw gs)i' - B,Qg q0 q?S M-E () Ai , r S. Domesticllnport Substimuion (s=1.gR -pa4 2G, Pde) 2g 14. GDP. Absomroon and Household Absorvfion C0=1, haport: 2, Am)e E1 (a) gdpr ESK.4.jq,5 9. Prinmarv Factorlputs XA X aui +g P 2g (q) Ld, - p P(q.pr) (d=1, ewpa 2d omesC) 10. Prinmarv Factor Inuts (a a-, - SNj qM - " SNr g q,-d' = xi - ep, (, - Ł p,> 3g | EjSNIaa + SN - SN , a a- gS a' + IC; SgN0, (p * 1* + 5, SN0 Cps + q5. + Ł, SN, (pf + qsp 15. Balance ofTrade Condition s= SZe +Sun I -205 - ANNEX 4.1 16. Balance orTmde identities 19. CompensatinsVariation (a) Total Export Value c o (Pa * Vj + s) cv = -"Za * an- - _-5TS1(rn1.pr..+eq 1 1) I (h) Total Inport Value E s ,Ss(J4t + gr +Pf + 92 + 4u) " "M4PZ* 1P r u - 5vs,31,( + pU + .8 +C') (c) Toald Export Volume exF - l q VJ =1 V1 -s VESS(w , VI .P + , * qf' + 4) - IE; - Xa'K * e,, (d) Total Impor Volume + EE, X,'R * w 1 - - E* C It 17. Composite Priec Variables (a) Price Level Determination P5 U8 -4Dr 1 (b) Price Deflator for gdp P,z -S SF.'Fpq 1 - I Total Number of Equations 8 * 298 14 (c) Price Deflator for Told Absorption p4F - F.W p 1 (dl Price Deflator for final Absorption of i 2 p7 - : A.6p,. g s=1 (e) Price Deflator for Output of i 2 d=1 18. Pmvonrional Trade Taxes r, - TWQ + T) n, ml tqi - 7f;1(l + ZN; * ie, g vI - VI(1 3 Y * vu g vq5-VEj(1.VE. .ve, I -206 - ANNEX 4.1 Endorenoum Vriables (Perenhue Change) No. qw World Dernndtfiodi gw, WoerW Dentd fdorgodi g a Noninral absorption I Govenmnt demnd for i g a ' Household noenal *ahaqtion Demand for I from aource a 1, imnport; 2. domedtic 2g cv Conpemdirg Variation chamge - a qjg Demand for primary factor v by ahue of bane GDP 1 industyj (v= 1, bbor. c Export Value 1 2, capitl; 3, lund) 3g c,, Export Volume 1 Retention rate for good i Real gdp 1 r, Power of the tariff on inVor of i (I + nonani tariff rate) g gdp Nominal gdp I rq Power of the arifr equivalent of NTBa. g PR Impost Value I V1 Power of the expon tax on exports of i m, Impont Volume I (I - nominal export tax) g Foreign currency price of exvqr Power of the export ux equiv. on i g Pk, Forcign currcncy price of cxpont i, a=1, Cia g = I,Ciai Output level of industyj g -.u.or : fco X Supply orgood ito destinationt; iu induat i 28 +1 expn (1) or domesde (2) 2g *to Foreign currencyprice of inmp i g w Balanc of tade.s a sbare of gdp 1 P1f ConWomitc price for absmption 1 02 Secopdaiy markat exchage rate I e,,o Weighted exchange rate for exports p, Price for absowlpion of of godg ofgood i g PR Pice of i in 1, export; 2 inlpot; 3, domestic 3g Total No. of Fndolenous Variables g2 4 29g + 14 Ps Price for production of i (composite of domestic and expodt) g Exceenous Vriables (Percentane Change) P5 Aggregate price of output (gdp defl) I a, Real absorption q, Total absorption of i g 4 Capital stock in industryj qlm Intermediaeuseofibyindusryj g2 t L [And usc by inday]j at~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' 9., .q; Stockdtemand for good i 2g onyupl C} Houwhold demand for i PI Foreign currency price of good i. s=2, RO.W. 4e F LExpoa deund for i from Cbins e, Tariff equiv. of NTBs on i in Tariff rae on i qp Totl labor force rrI Foreign exchange rtention rate for exports of i JD. Export tax on i we1 Expoet tax equiv. of NTBs on i - 207 - ANNE 4.1 el Osffu0il exchange raic (Yuan/USS) Value Sbare Coefl:cicnts SM Imports as a abatre of nominal g4p A Final absorption AA, Share of aborption of i derived from SNv Share of end-use demandj for commodity; goure a in final absorption Bg~ Share of intermediate uwe by industry XX Expota ai abate of nomina glp j in total aba ton of i VI Sbare of i in totl expons B,M Sham of investment in tal absorption WI Sbare of good i in toal absorption of comnodiLy i cn~~ Share of stock demand in ta~ ~X' Expon value of good i in foreign currency B,80 Share of swck dcmnr intloud aborption of commodty i Bjm Share of household consumption in tota Easticity Paameetra ahsorption of commodity i Bir) Share of government in total ahaorption of pi Global easticity of execsa demand for good i El Exchange Rate (= 1, officiad; 2. rke- el Household expenditure elasticity for goodi wi, export weighted for commodity i) weowgdd1; Price elasticity of household demand for good i S_41 Share of China and RO.W. in world export with spect to pricc j markets for i a Elassicity of substiuon bctween import ad Share of intusetrete good i i to al costs domestic products of good i Share of primry factor v in total costs Elasticity orsubatitraioubcLwcanprimay fator of industyj inputs in sctor i JAd Share ;of good i pmduction to destination or Elasticity of ransflrmation between domestic 1, export; 2, donmsic and expoft production of good i K GOP at factor costn ac Elstcity of subsitution between Chinese and Kj Share of factor i in indusy j in total GDP RLO.W. products in world mrket for i at filclor prices L shame of industryj in total employment fi Elasicity of import supply for good i to Chins Ml, Share of i in totl imports 4 ~ Bae retention rate for good i SfJ Share of primary factorv in primary factor inputs of j - 208 - ANNEX 6.1 DEVELOPING BUYER-SELLER LINKS: THE INTERNATIONAL EXPERIENCE There is a growing body of literature on international trade that focusses on the nature and importance of buyer-seller links.1/ On the one hand, direct links between an exporter and an overseas buyer have been shown to be an important conduit for the diffusion of knowledge and information. It is through such contacts that an exporter learns the nature of his market, that the buyer exercises direct quality control, and often will also transmit valuable design, packaging and production know-how. This tends to be important for consumer goods. On the other hand, it is also true that international trade has become a very complex affair, Accordingly, intermediaries can play the important function of bringing buyers and sellers together. In general, though, the appropriateness of a distribution channel for international trade will depend on the nature of the product, volumes involved and ihe characteristics of the market. Looking in to the future, the most important concern fbr China as it seeks to sustain its export drive is to draw lessons about how to access developed country markets for manufactures. It is useful to briefly examine the perceptions of developed country buyers of manufactures and the challenges facing new sellers. The Developed Country Buyer's Perspective iTere is a whole range of buyer types that an exporting country is faced with. Large retailing chains in developed country often buy products directly from manufacturers. For this purpose many retailing chains maintain networks of international representatives and buying offices worldwide. It is estimated that about 20 percent of developing country exports of manufactures are sold through such a channel. Then there are the wholesale importers who buy for resale to retailers or other intermediaries. Finally, there are producers themselves in the importing country who buy either for resale to retailers, or for use in their own production process. There is a growing trend for large manufactures to takeover independent importing firms to buy for them. Indications are that developed country imports by manufacturers exceed those through buying offices of retailing chains. Price is only one of three elements that buyers in developed country markets look for-the other two equally important elements are quality and timely delivery. Buyers like to develop their relationship with sellers incrementally on the basis of trust. Increasingly, they seem to be willing to nurture long term relationships with "ideal suppliers." Buyers sup-ly information on marketing, styling, packaging and technology via such relationships to e.rsure that products adhere to quality and delivery standards- Buyers often provide in-plant training and arrange for short-term worker training. This is particularly the case for buyers that are manufacturers. Buyers prefer to work directly with suppliers, they do not like to work through 1/ This section draws substantially on Egan and Mody, 1992. - 209 - ANNEX 6.1 middle men. Even where buyers use trading companies to identify suppliers, they tend to deal directly with the suppliers when it comes to handling defects and problems with specification and quality control. Although there is this willingness to invest in stable and reliable supply SOL...S, not all buyer-seller relationships are long term. The key is the development of trust between the two parties. The seller's reputation plays an important role in sparking the initial interest of a buyer. Even in ihe best of relationships, buyers almost always seek to retain a minimum anmount of flexibility over their choice of sources. They often seea to restrict the maximum proportion of a seller's output they will buy and/or maintain one or several parallel source of supply. The Seller's Perspective While direct links with buyers bring obvious benefits to sellers, there are clear limits to how much buyers are willing to do for their suppliers. The evidence indicates that buyers are not motivated to transfer information that might help suppliers bypass them in the distribution channel or enter the market as competitors. The onus is on the supplier to proactively break new ground on the basis of contacts and information gleaned from the buyer. This may not be easy. More importantly, accessing marketing channels in order to even develop a relationship with a buyer is getting increasingly difficult. Not only do channel structures vary greatly by industry, but even within industries they have become fragmented.ZI Negotiating this maize of channels requires sophistication, and above all, information, which is the single biggest barrier to entry for the exporter. For neophyte exporters, the more generic problem is a lack of understanding of how to interest importers or meet their requirements. An empirical survey of Chinese exporters found that the perceptions of new exporters, being rooted in their own domestic experience, were quite different from the expectations of developed country buyers, and an irmportant phase of learning about supplier selection criteria was in order.21 Unfortunately, there already exist a cadre of experienced suppliers in Asia from whom importers can buy similar products without teaching. New exporters must take more responsibility for their own learning, than did the Four Tigers during their export drives. In any given industry, access for new exporters has become more challenging, not only because of barriers relating to learning and information, but also because of the shrinking windows of opportunity. The very fact that buyers, in an ever more quality conscious 2/ In thea bicycle and shoe industries in the US, for example, market segments are delineated by price range, and each segment has its own marketing channels. The sales and imports of discount bicycles, at the low end of the price-scale, are handled by the large retail chains such as Sears, while bicycles for the premium market segment are handled through over 6,000 independent dealers. Within each segment, there are several subsegments defined by size, user (adu'lLkhild), and end-use (leisure, running, etc.). The shoe industry is similarly complex. 31 Vemou-Wortzel et al, 1988. Thus, for example, Chinese exporters were found to systematically attach less importance to product quality than American importers. Even in cases, where both parties attached equal degrees of importance, such as timely delivery, differences of interpretation were vast-the Chinese thought that delivering at least some part of the order on time was acceptable as long as this was due to circumstances beyond their control, wherecs for the Americans on time delivery meant the whole order not some part of it. - 210 - ANNEX 6.1 market, are seeking to maintain long-term relationships with their best suppliers, of itself limits opportunities for new exporters. Moreover, as developed country manufacturers come to rely more on external vendors for technology and design, and as manufacturing processes become increasingly based on just-in-time inventory management, buyers are looking to reduce the number of suppliers they deal with. In consequence the barriers to entry to new exporters are becoming even higher. Finally, in an environment in which buyers are becoming more selective, country reputation has become an important factor to the success of exporters. It is quite common for developed country buyers to assume reputations in direct proportion to the level of economic development of the country. Such perceptions aggravate buyer inertia in moving to new suppliers-buyers are more relucant to invest in learning about a new country's sources when the general impression about that country is chat it is technologically less advanced than their current suppliers. This seems to be the case even for the simplest of consumer goods, with the possible exception of garments and selected textile products. C. DEvELoPING BUYER-SELLER LSNKS: THE ROLE OF TRADING COMPANIES In the context sketched out above, organizations specializing in export-import can play a useful role in supporting the export drive, particularly of new entrants into world markets. In fact, the continued existence of such organizations in market driven economies not only in East Asia, but also in North America and Europe, suggests that they meet real needs of even well established and experienced trading communities. There is a great variety of trading companies in the market and different forms have come to predominate in different countries. The role of the giant trading houses of sogo sosha in Japan is legendary. Korea is one country that set out deliberately to replicate the Japanese sogo sosha moddl and has done so successfully. Taiwan (China) and Hong Kong on the other hand have relied on small trading companies or on trading companies from other countries. The Japanese and Korean Experience Six of the ten largest non-US companies in the world are sogo sosha. There are essentially nine sogo sosha in Japan. In 1990, their combined value of their transactions account for 30 percent of Japan's GDP-4/ The sogo sosha have their origins in Meiji Japan. They were created, with active encouragement from government, to provide an indigenous alternative to foreign merchants then handling the bulk of the Japan's trade. Not only did the sOgO sosha come to dominate Japanese trade, they have proven to be a most enduring institution that has adapted to the fast paced development of the Japanese economy. Over the years, the sogo sosha have evolved into complex institutions with distinctive features. First, sogo soshas are not merely a marketing intermediary. In fact, their principal function is that of coordinator of whole product systems or production chains. Their involvement extends to multiple stages and multiple functions. Domestic marketing, provision of logistical support, and procurement of imported materials and equipment is thus as important, 4/ Terutomo Ozawa (ed), 1987 and Y. Aao in me. -211- ANNEX 6.1 if not more important a part of their functions, as is the marketing of finished products overseas. In addition, finance is a particularly important service that sogo sosha provide to their clients. Smaller client firms rely heavily on sogo sosha for working capital and trade credits for purchase (and/or sales).51 Sogo sosha also provide a range of other financial services, including guarantee loans and equity investments, but these are always in direct or indirect support of some sort of trading activity, which after all is their primary activity. Second, their function of coordinator is filfilled within the framework of complex links with a vast client base comprised of members of industrial groups. Sogo sosha have maintained strong links with the giant sister firms of the prewar zaibatsul and have also created linkages with keiretsu, new and less structured, yet quasi-captive, networks of small and medium-sized firms. The relations between sogo sosha and their clients are not rigid nor are they mutually binding. This gives both parties some bargaining leverage which is critical to maintaining a balance between the interests, as perceived by the sogo sosha, of the product system as whole and of the welfare of the individual clients.7/ Third, the sogo sosha operate on a large scale, and must rely on large volume business for their profitability. While fixed costs of maintaining a worldwide marketing/ information network and a large well trained cadre of personnel are high, sogo sosha have to rely principally on low trade commissions SI for their income. High turnover is, therefore, of critical importance to them. Finally, not only are they functionally diversified, but they are all also general trading companies each dealing in a great variety of products. In fact, diversification has been a key to their success and it has enabled them to spread risk.9/ 51 Typically, as much as 60 to 70 percent of a sogo sosha's assets are committed to financing suppliers and customers (Yoshiro and Lifson, 1990). 6/ The largest existing sogo sosha developed as the trading anns of prewar zaibasu (Mitsui, Mitsubishi, Sumitomo). The zaibatsu, which were groups comprised of hierarchically arranged subsidiaries reporting to single family held holding companies, were formally dissolved at the end of World War 11. However, links, .beit less formal, between constituent firms resurfaced ia the postwar era. The postwar esa also saw the emergence of a second kind of industrial group, centered around banks (Sanwa, Dai-Ichi Kangyo, Fuyo), linking together new actors on the industrial scene such as Hitachi and Matsushita (Lifson, 1990; Onwa, 1987). 7/ There is, however, an asymmetry of power between the sogo sosha and their smaller clients. Size, financial power, information and alternative sources of supply invariably favor the sogo sosha, which are in a position to apply tremendous pressure on these clients. In the case of declining industries, such as textiles, such power has been misused by the sogo sosha to squeeze higher margins through reduced prices, delayed payments, etc. 81 Typically, 2 percent of sales. 9/ Even though some sogo sosha may have started out specializing in certain product groups, such as textiles and raw silk in the case of Mitsui and Mitsubishi, they all very rapidly expanded their product coverage. Sogo sos5a use their multiproduct approach to hedge and to cross-subsidize when necessary. Profits on imports have been used to subsidize losses on exports, and high profits in certain market segments have been used to finance entry into new ones. -212- ANNEX 6.1 The great value of the sogo sosha to their clients is that they help them to limit uncertainty, and to reduce costs. Leaving system links to the sogo sosha enables clients to allocate scarce resources to investment in plant and equipment rather than in distribution networks, and thereby to reduce production costs. On the other hand, the profits of the sogo sosha depend on their ability to exploit the economies of scale that accrue to them through managing the procurement and marketing activities for their systemwide client base. In any given industry, therefore, sogo sosha and their clients, complement one another and recognition of this complementarity encourages the maintenance of long-term relationships between them. Although the relationship between the two is not mutually binding, client firms, linked together in a production system by their sogo sosha, do not behave entirely in an atomistic manner. This framework tends to maximize the efficiency of production systems as a whole, and arguably has helped Japanese industries achieve greater cost reductions than either under a more rigidly integrated, or a more atomistic framework of industrial organization. 10, There is no doubt that sogo sosha have contributed to the development of numerous production systems in Japan and to the successful penetration of Japanese products into global markets. One of the earlier successes of the sogo sosha managed product systems was the Japanese textile industry. By the 1920s, sogo soshas were handling over 70 percent of Japan's exports and about 90 percent of the country's imports. The 1960s marked another high growth period for the sogo sosha, which proved to be ideal institutions for supporting Japan's diversification into heavy and processing industries such as steel, chemicals, petrochemicals, and synthetic fibers.2111 As successful as the sogo sosha have been, there are limits to their performance, and these have becorne increasingly apparent over recent years. Over the years, the dependence of Japanese manufacturing industry on the sogo sosha has been declining and by 1990, their share of Japan's exports and imports was down to 50 and 67 percent, respectively, much lower than their shares in the early 1960s. At least two factors account for this. First, the sogo sosha's comparative advantage lies in coordinating multiprocess systems and handling large volumes-they are not suited for marketing consumer goods that are manufactured in differentiated and small batches. Moreover, because the sogo sosha deal with a highly diversified portfolio of goods, their personnel tend to be generalists. Products whose marketing requires specialized technical knowledge or sustained after-sales support are also not their strong suite. Thus, as Japan's more traditional industries such as textiles and chemicals have faced maturity and decline, and as the country's exports have diversified into consumer goods, automobiles and high technology products, the sogo sosh/a's dominance has naturally diminished. Companies like Sony, Matsushita and Hitachi, whose products now account for a major share 10,' See Lifson, 1990, for more on this. 11 Of these, steel has been a particularly striking success. It is difficult to imagine the Japanese steel industry without the involvement of sogo sasha. Here the sago soshas' invol ement includes the procurement of iron ores and coking coal for the large steel mills, the marketing of intermediate iron and steel products abroad and to smaller downstream manufacturers, and the marketing of finished products of downstream industries. In addition, the sogo sosha manage inventories, operate specialized loading and unloading docks, provide other transportation support, mnaintain storage facilities and are piominent members of consortia in exploration and development of coal and iron ore. Such a management system has helped make Japan the second lagest producer of crude steel in the world, with steel exports accounting for over 10 percent of the country's export receipts. - 213 - ANNEX 6.1 of Japan's exports, have never relied on sogo sosha for marketing their products. Likewise, the sogo sosha have not been able to become part of the automobile production system. Second, older clients have been growing out of their dependence on sogo sosha as they themselves have grown in size and gained exposure to international markets. Thus, for example, although the Mitsubishi Automobiles first started to market its cars through its affiliated sogo sosha (Mitsubishi Shoji), this relationship was terminated as soon as it had built up sufficient sales volume. As a result of these trends, the 1970s saw the profitability of sogo sosha plummet, with gross margins being cut in half. Sogo sosha have responded in various ways. They have tried to hire specialized and technical personnel in a bid for the business of high technology industries, but with mixed results.12/ More importantly, they have been entering new fields of activity. Plant and project exports, real estate, large scale foreign direct investment and third country trade are activities that the sogo sosha have pursued aggressively through the 1980s. While these activities provide new opportunities for the sogo sosha, they also present new risks. Looking into the future, it seems clear that the sogo sosha's traditional activities have reached their limit, and it is likely that only those sogo sosha with sufficient resources to absorb the costs breaking into risky new activities will survive and grow. Unlike Japan, the history of trading companies in Korea is rather short. In fact, the development of the Korean general trading company (GTC) or chongap sangsa (a direct translation of sogo sosha) is the result of a deliberate government policy, instituted in 1975, to replicate the success of the sogo sosha in expanding Japanese exports. Although the Japanese government did sponsor selected trading companies deemed likely to succeed, 131 such assistance was not critical to the success of the sogo sosha. In the case of Korea, govermnent support was the key to launching the GTCs. The government established minimum criteria-one of the most important being minimum size in terms of paid-up capital and exports-for designation as a GTC.141 Generous incentives were offered to firms meeting these criteria. Incentives included, priority access to government agency trade and foreign exchange, tax reductions and exemptions, and concessionary export loans. Besides, the Korean GTCs were treated as national champions with the government deliberately conferring high visibility and prestige to their managers, while competition from foreign trading intermediaries, particularly the Japanese sogo sosha, was systematically restricted in the early years. Although the creation of Korean GTCs was inspired by the Japanese experience, the focus of Korean GTCs, unlike their Japanese counterparts, was intended to be restricted to export development. Thus, Korean GTCs were not encouraged to enter such activities as trade financing, which was reserved for the state-owned banking sector, or transport services. 12/ Despite a more specialized workforce, sogo sosha still have not made significant inroads into the marketing of electrical machinery, electronics and automobiles. They have had notable success though in the case of aircraft, military hardware and ships, or products whose sale requires excellent contacts (Lifson, 1990 p. 73). 131 Chalmers Jobnson, 1982. 141 These included minimum size in terms of paid in capital and annual exports, minimutn number of overseas branches and number of products handled, minimum of overseas markets and the condition that the firm offer public stock. By the early 1980s, the only criteria that were maintained were export targets and the requirement of a public offering. See Karl Fields, 1989. - 214 - ANNEX 6.1 Consequently, Korean GTCs are much less functionally diverse than sogo sosha. They do not operate as system coordinators and handle a relatively much smaller share of even the import business-less than 15 percent of Korean imports were handled by the GTCs in the mid 1980s.15/ A total of 13 companies won designation as GTCs after 1975. Of these nine survive. 16/ These GTCs started out handling less than 14 percent of Korea's trade, but by the early 1980s, their share of Korea's exports was up to 50 percent. The minimum limits for GTC designation were set at high levels in order to encourage only the very largest of firns. It is no surprise, therefore, that all but one of the existing GTCs are affiliated to a chaebol, 17/ the Korean version of the zaibatsu. Each Korean GTC depends much more closely on its affiliated chaebol, than does the postwar sogo sosha on their respective keire:su. Indeed, Korean GTCs function as exclusive export agents for their respective chaebols. 18/ As was expected of them, the Korean GTCs did make an impressive contribution to the country's export growth. They helped Korea diversify their exports, in particular by marketing the products of the heavy and chemical industries-almostthree quarters of the exports handled by GTCs in the mid-1980s were from these industries. However, much of this performance can be attributed to active government support and the GTCs' very close links with their respective chaebots. The focus of the FTCs in the early years was on expanding business, without regard to cost. In effect, the GTCs competed fiercely for government assistance tied to export targets. In so doing they became over-extended and slashed their profit margins. When, in the wake of the second oil crisis, the government cut off all subsidies, the GTCs found themselves in deep financial trouble. They managed to overcome their worst difficulties only because of access to the vast resources of their affiliated chaebols. Relative to their Japanese counterparts, Korean GTCs still remain weak financially and dependent on the chaebols. Moreover, their share in Korea's exports has stagnated at around 50 percent since 1982.121 The Korean GTCs have been trying to enter new activities such as project exports and third country trade, but face a harder challenge then their Japanese counterparts, because of their greater financial vulnerability. The Experience of Taiwan (China) and Hong Kong Impressed with the Japanese experience with big trading companies and with Korea's successful efforts to create their GTCs, Taiwan's economic planners also attempted to develop their own da maoyithang or Large Trading Companies (LTCs). In 1978, the Taiwanese government announced incentives for firms designated as LTCs, such designation being contingent upon the satisfaction of a set of minimum criteria. Taiwanese LTCs, however, never 15f Duk-Choong Kim in Ozawa, 1987. 16J They are Samsung, Ssangyong, Daewoo, Hyosung, Lucky-Goldstar, Sunkyong. Kumbo, Hyundai, and Koryo. 171 he ninth, which is also by far the smnllest GTC was created by the government to help organize the exports of small and medium scale Korean firms. 181 Karl Fields, 1989. 191 Fields, 1989. Japanese sogo sosha account for roughly 8 percent, foreign retailers for another 10 percent, and other direct and indirect channels for the remaining 34 percent of Korea's exports. -215 - ANNEX 6.1 really took off. Of the seven firms that were awarded LTC status in 1978, only two remained in 1986, accounting for about 1.5 percent of Taiwan's exports and less than a tenth of one percent of the country's imports. Part of the explanation lies in the nature of the government's LTC policy. Taiwanese incentives to LTCs were very modest compared to what was offered to their Korean counterparts. Nor did Taiwan's LTCs get the type of protection from foreign trading intermediaries that the Korean GTCs enjoyed. Besides, unlike Korea, where the interests of the GTC were promoted irrespective of the implications for small firms, Taiwanese policy towards LTCs was decidedly ambivalent-LTCs were eligible for incentives only if they had small-scale firms as partners.20/ Lukewarm government policy is not the only reason why LTCs failed in Taiwan (China). LTCs faced much greater competition than their Korean counterparts. Roughly half of Taiwan's trade (exports and imports) is handled by Japanese sogo sosha. Foreign retailers, local manufacturers and government agencies each control an estimated 10 percent, leaving only 20 percent to be handled by local trading companies, of which there are reportedly about 40,000, or 20 times the number in Korea and about 4 times that in Japan.211 Second, Taiwan's LTCs got little or no support from local business groups,22/ which while not as important as those in Korea and Japan, could still have given the LTCs a significant boost. The multiplicity of small trading companies is a trait that Tai;v22 (China) shares with Hong Kong. However, in Hong Kong, the small trading company is the most important form of trade intermediary. There are about 38,000 registered trading companies in Hong Kong, and 99 percent of them have less than 50 employees.23/ These firms account for 80 to 90 percent of Hong Kong's total exports. Unlike in Taiwan (China), the role of foreign trading companies is negligible. Hong Kong trading companies tend to be specialized, both in the type of services they provide and in the number of products they handle. They are either involved in exporting or importing or reexporting. Rarely do they mix these activities. Most Hong Kong export wading companies (ETCs) handle one, or at most, two products. Hong Kong import trading companies (LTCs), likewise tend to specialize in very few products. Hong Kong does have a few large general trading companies such as Jardine or Hutchinson, that are also involved in shipping, financing and insurance. Unlike, their Japanese counterparts, however, their role in Hong Kong's exports is negligible, and they import goods only on an agency basis, on behalf of some of the larger local manufacturers and retailers. Hong Kong, therefore, offers a model that is markedly different to that of Japan and Korea. Despite their small size, Hong Kong ETCs do not operate on a simple agency or commission basis. They function as fully fledged intermediaries, assuming the risks associated with taking title to goods. While they tend to specialize in one or two products, they 20/ They were restricted just to offering duty free access to imported inputs to the extent that were to be used for exports, export guarantees and permission to establish bonded warehouses. 211 Fields, 1989. 22/ There are two kinds in Taimn: qiyejituan or "enterprise groups," and guatnri qiye or "related enterprises" (Fields, 1989). 231 iUhee, 1989. The remainder of this section relies on this paper for information on Hong Kong's trading companies. - 216 - ANNEX 6.1 are always on the look out for new opportunities and will frequently switch the products they deal in, depending upon the needs of their buyers. Being small, though, they do not maintain a large worldwide network of marketing offices or representatives. They rely more on stable relationships with a limited number of overseas buyers. Their relations with their local clients, on the other hand, tend to be more flexible. Typically, they deal with a vast enterprise network developed and maintained often through strong personal relations. They turn to groups of firms within this network depending upon the requirements of the buyer. This framework, combined with their light administrative structure, makes ETCs very responsive to buyers and enables them to have fast response times. They are particularly well suited to handle small and frequent orders, an important requirement for success in light industrial goods, the mainstay of Hong Kong's exports. An important role of Hong Kong ETCs is to serve as a risk buffer between buyer and seller. They guarantee quality and on time delivery to the buyer. In many instances, ETCs pay for a certain percentage of defective items, or in case delivery deadlines are not met, they assume the cost of packaging the merchandize themselves or of making alternative transportation arrangements. In the rare case of buyer nonpayment, they absorb the financial consequences. From the point of view of local manufacturers, ETCs also serve an important technical assistance function. They carry out rigorous preshipment inspection and in certain cases, inspect the goods at various stages of production, and thereby provide manufactures valuable information on the quality, packaging, and styling requirements of buyers. Where manufacturers require advice on production know-how to help them meet buyer specifications, ETCs pay for expert assistance, which often comes from importers of machine tool and equipment. Finally, most ETCs provide some kind of preshipment financing to local manufacturers-mosdy this financing takes the form of credit for imported inputs or advance payments. Unlike the ETCs, Hong Kong import trading companies play a more limited role. They function primarily as marketing agents for name brand overseas manufacturers, with whom they attempt to establish exclusive relationships. In general the relations between ITCs and their local clients are not as close as between ETCs and their local clients. For some products such as machinery and equipment, however, ITCs do provide after sales services and advice on production techniques. The nature of Hong Kong's trade intermediaries reflects in large part the nature of Hong Kong's industry. Of the estimated 50,000 manufacturers in Hong Kong, 94 percent have fewer than 50 workers, and three quarters of their output is light consumer products. It is not surprising, therefore, that Hong Kong's trade is dominated by small trading companies that rely on large and flexible networks of small firms, rather than, as in the case of Japan and Korea, being comprised of giant traders with close links to giant local manufacturers. D. DEvELOPING BUYER-SELLER LINKS: THE ROLE OF PUBUC SUPPORT SERVICES Given the difficulties that neophyte exporters can face in establishing links with foreign buyers, many countries have turned to public intervention of various kinds to try to facilitate the process. Thus, govemments have attempted to provide assistance for export marketing for quality control and for other export supply services, with varying degrees of success. - 217 - ANNEX 6.1 Public Support for Export Marketing Amongst developing coantries, the so-called Four Dragons have undoubtedly had the most effective public export marketing institutions. The Hong Kong Trade Development Council (HKTDC) was set up in 1966; in Taiwan (China), the China External Trade and Development Council (CETDC) was set up in 1970; the Singapore Trade Development Board (STDB) became operational 1983; and the Korea Trade Promotion Corporation (KOTRA) was established in 1962, in imitation of its Japanese counterpart, the Japanese Export Trading Organization (JETRO) which was set up a few years before. The experience of these countries in managing export marketing organizations (EPOs) is quite distinctive.24/ In all four cases, EPOs have had strong private sector participation. Typically, they are managed by b jards or councils that include representatives of the private sector. HKDTC, for example, is an independent statutory body managed by a council comprised in part of representatives from the chamber of commerce, the territories leading manufacturers' associations. CETDC, on the other hand is a foundation, half the capital of which was provided by the chamber of commerce, exporters' associations and other major business associations. The EPOs in all these countries are financed at least in part by their users. KOTRA gets about 70 percent of its funds from the government. The rest comes from the Korea Trade Association. Likewise, the bulk of CETDCs funds are donated by exporters who pay a voluntary minimal levy on their exports. All four EPOs have been kept snall and inexpensive. On average, these EPOs spend less than one dollar per thousand dollars of manufactured exports handled. Yet they maintain a fakirly large network of overseas offices and tend to employ staff that are sophisticated and well educated.251 These institutions handle two basic functions: trade related information and inquiry services, and trade promotion (trade fairs, publicity, etc.). In some cases, assistance is also provided in the form of market analysis and development, advice on product design, packaging, and training. Of the four, HKDTC has the narrowest role and it regards itself essentially as a 'matchmaker" relying for this on its computer data bank. This data bank reportedly carries essential information on more than 26,000 local manufactures and some 96,000 overseas traders. Foreign buyers are persuaded to divulge detailed information on themselves in exchange for free publications and services. The Council publishes 2.2 million copies of trade publications every year and these are distributed free of charge in 173 countries. An important role for HKDTC is to foster an image of high quality for Hong Kong's products. Overseas offices play an important role. Much of their work consists in organizing trade fairs and shows. They also generate buyer inquiries through direct mailings to buyers, press releases, etc. Promotion events tend to be specialized and organized in the main importing countries, although some events are also organized in Hong Kong. There is an important element of subsidy involved for participants. The EPOs in the other countries each have roles that are wider in varying degrees than that of HKDTC. They all play a fairly proactive role in terms of market 24/ See Keesing, 1988, for details on the experience of EPOs in these four countries. 25f KOTRA has about 80 offices abroad and STDB about 20. The number of staffing ratio in all cases is low, and staff typically have postgraduate degrees. - 218 - ANNEX 6.1 development. In the case of STDB, for example, an important function of their overseas offices is prospecting for Singapore companies. At any given time, each office works for a select list of firms, for which it prospects up to the stage of the initial order. Then it monitors its successful delivery before moving onto to other firms. Another function undertaken by these institutions is assistance for product development to local manufacturers. KOTRA collects samples of products from leading retailers around the world and furnishes these to various local industry organizations to help them with product design. CETDC, on the other hand, provides grants to hire export consultants, and sponsors design and packaging training and seminars. The service provided by EPOs overlap quite considerably with those provided by private trading companies in all four countries. Unlike many trading companies, however, some of the EPOs take tite to the exports that they handle. Their comparative advantage does not lie in their ability to absorb risks, but rather in their ability to help local firms develop direct contacts with foreign buyers. Thus, in all four countries, EPOs have been most effective in serving the needs of small first time exporters or rising firrns just becoming established as exporters, but who want to learn how to trade directly, rather than go through a trading company. While the experience of these four countries demonstrates that appropriately designed and managed institutions can be effective agents of export promotion, it must be borne in mind that in all cases, the private sector still handles the vast bulk of information flows between buyers and sellers. EPOs in these countries compete vigorously with private trading companies and other marketing intermediaries. The key to their success has been the strong involvement of the local business community in their activities and their ability to occupy a market niche- Public Support for Quality Control The importance of product quality is often underestimated by new exporters, who are used to a less demanding domestic market. Intrafirm quality control capabilities are lacking in such cases, and there may be need for developing alternative systems for ensuring product quality. Quality is an important consideration not only for the individual buyer seller- relationship, but also for the exporting country's reputation. Positive national reputations can help a country peretrate markets for new products that it has not previously exported. Conserving country reputation is all the more important, considering that buyers tend to follow a "herd" instinct, based on general perceptions about the country and on information from other buyers.26/ Considering the externalities involved, therefore, public intervention in the area of quality control can play an important role in export development. Quality control can be conducted at several stages of the export chain, ranging from the preshipment stage, to the manufacturing process itself. The experience of several countries shows that while quality control merely at the preshipment stage can have an impact on the export quality of certain industries in the short run, a wider approach -to the problem is inevitable in the longer run. Ultimately improvements in export quality cannac- be sustained without upstream effbrts to control the quality of components, upgrade the level of technology, and even to improve management practices. Moreover, no quality control measures can be 261 Tumbull (1977) and Egan and Mody (1992). - 219 - ANNEX 6.1 effective in improving product quality by themselves, in the absence of a sound overall policy environment. The experienice of Japan is an example of a "multistage approach" to quality control. Japan's dramatic success in developing a reputation for quality has been the result of a concerted and sustained effort by the government and representatives of die private sector in developing quality control systems at various levels nationwide. The role of the government in this domain goes back to enactment of the Industrial Standardization Law in 1949. This law provided the framework for developing the industrial standard system in Japan and is also the basis for administering the certification system linked to the standard. The certification has reportedly been an important motivating factor for the introduction of quality control systems ii' Japanese industry. Second, the govermnent started the scheme of prize grants to the best certified factories in 1953 and has provided technical assistance to enterprises planning to introduce standards. Third, the government has provided an effective export inspection scheme dating back to 1955. Finally, the government has provided extensive support fbr the diffusion of technology in the form of fully funded regional and national testing and research institutions, fiscal and financial incentives for the adoption of new technologies, and training facilities for technical and managerial staff of small firms. Tfhe application of quality control systems in Japanese industry spread at a remarkable rate. Whereas in 1945, only 5 percent of Japanese factories were preparing to introduce statistical quality control, by 1969, 91 percent were practicing it. Public intervention alone did not help Japan achieve these results. An important lesson from the Japanese experience is the importance of private sector initiative and of the involvement of the work force i mplementing successful quality control systems. In this context, the role of Japanese business associations has been particularly significant. The Japan Productivity Center, the Japan Management Association, and the Operations Research Society of Japan are private nonprofit organizations that have been very effective in introducing modern management methods in Japanese industry. Likewise, the Japanese Standards Association and the Union of Japanese Scientists and Engineers have helped spread quality control systems to all levels of the manufacturing process through their influential research activities, and their technical consultations. In fact, the concept of Quality Control Circles (QCC) was first introduced and popularized in Japan by the Union of Japanese Scientists and Engineers in 1962. In Taiwan (China), the government's role in the area of quality control has been particularly noteworthy for the effectiveness of its preshipment inspection for exports. Not many countries have succeeded in providing an efficient preshipment inspection service. In India, for example, the Export Inspection Agency has a reputation for inefficiency and red tape. Moreover, its capacity to provide diagnostic assistance is limited, and more importantly, foreign buyers appear to be skeptical about its the value of the Agency's certification. Taiwan's Bureau of Commodity Inspection and Quarantine, on the other hand, is well respected, although it too has taken some time to develop an efficient scheme for export quality control. An important feature of the Taiwan's scheme is that it is low in inspection intensity. Not all secturs are subject to inspection. Only those sectors are identified for this purpose in which the number of complaints from buyers are disproportionately large. All exporters dealing in these commodities are expected to have their quality control systems graded by the Bureau. Those firms not making the grade are not allowed to export. Those permitted to export are subject to periodic evaluation of their quality control systems, and their product shipments are inspected on a - 220 - ANNEX 6.1 random basis. From a peak of about 60 percent of exports in 1976, less than 25 percent of Taiwan's exports were subject to export quality inspection in the late 1980s. As in the case of Japan, however, the Taiwanese government's efforts at quality control extend way beyond the provision of preshipment inspection. Taiwan (China) has taken the question of its international image as quality exporter very seriously. Recognizing the "public goodo nature of country reputation, the Taiwanese government has itself paid compensation to buyers for defective export products originating in the country.27/ More importanly, Taiwan (China) has invested heavily in a dense network of publicly funded technology assistance and testing centers. These centers work closely with exporters and the Commodity Inspection Bureau on quality related issues at various stages of the manufacturing process. On the one hand, they are used extensively by the Comrnmodity Inspection Bureau to undertake certification and inspection on its behalf. On the other hand, they provide valuable technical assistance to manufacturers in specific sectors. Thus, the Taiwan Electrical Testing Center and the Taiwan Plastics Development Center, for example, are designated by the Ispection Bureau to undertake export quality inspection for most electronics and plastics products. Aside from this, the centers are a much valued resource for manufacturers in the two sectors who use thern for advice on product design and technology imports. 271 The government is reported to have paid return shipment for 300,000 bicycles rather than let them be sold in the United States (see Egan and Mody, 1992). - 221- ANNEX 6.2 CHINA'S SEZ POLICY-AN EVALUATION A. INTRODUCTION The 'Spring Wind" speeches of Deng Xiao Ping early in 1992 focussed national and international attention on China's five Special Economic Zones (SEZs). After the events of June 4th 1989 conservative forces who had always been opposed to the SEZs became more vocal in their attacks on the zones. They described them as 'bastions of capitalism," and called for them to be abolished. Deng Xiao Ping's intervention was a direct response to these attacks and was aimed at maintaining and increasing the pace of "opening up and economic reform' in China by drawing attention to what he sees as the remarkable success story of China's Special Economic Zones. As it was observed that overseas Chinese had taken a major role in the economic development of three of the four Little Dragons, and of other countries such as Malaysia and Thailand it was decided to locate the SEZs in places where advantage could be taken of concentrations of such people. In fact, the initiative for the establishment of the first zone came from a Chinese-owned firm in Hong Kong, China Merchants Steam Navigation Company. China Merchants wanted to expand its operations by taking advantage of low cost land across the border in Bao'an County, developing an area of land from which they and other foreign investors could take advantage of the Chinese market and also develop export activities. Acceptance by the State Council of the proposal led to the establishment cf the Shekou Industrial Zone in 1979. The area around Shekou was quickly, also in 1979, established as a zone in which advantage could be taken of the proximity of Hong Kong. The new zone was Shenzhen. later to be established as a municipality with its own government This expanded zone became the first SEZ in China, the Shenzhen Special Economic Zone. The second, in Zhuhai, the area contiguous with Macao, was also established early in 1979, quickly followed by the third, also in Guangdong, at Shantou which has a large and extensive diaspora. The first outside Guangdong, at Xiamen in Fujian was established in 1980. The fifth SEZ, Hainan island, was established in 1988, but by that time there had been many developments in the opening up policy. The apparent early successes of the SEZs led to a conceptual expansion from the model of South East Asian export processing zones to something more ambitious in terms of policies, activities and physical dimensions. As awareness of the developmental impact of foreign investment and market mechanisms grew, the scope of operation of the zones was extended and the application of the opening up process was extended to other areas, initially to fourteen designated cities and then to whole coastal delta areas and peninsula. This geographical expansion of the areas opened up has continued since 1979 without a break; in t992 it is being extended to the border areas with the former USSR, and Viet Nam. However, although the application of the opening up policies is being extended to an ever widening area, the "special" nature of the SEZs continues. - 222 - ANNEX 6.2 What has always distinguished the Special Economic Zones as "special' is their role as economic 'laboratories." The SEZs are seen as areas within which the local authorities, under the guidance and overall control of the central government and subject to supervision by provincial governments, can encourage foreign investment and also domestic inwestment from hinterland authorities by allowing them to operate in a policy environment based much more on market mechanisms than elsewhere in the economy. The effects of these experiments on foreign investment, foreign management techniques, and foreign technology, and the general awareness of developments in markets economies they encourage, are to be watched by authorities and enterprises in the hinterland. By using the SEZs as "windows" in this way the hinterland authorities and enterprises can decide which experiments it could be useful to move over the "bridge" into the greater Chinese economy. In his 1992 'Spring Wind" speeches Deng Xiao Ping reiterated that the function of the SEZs was to continue to carry out such experiments with market mechanisms and to be the windows and bridges for the hinterland to the outside world, and for the outside world into China. He also said that he had made a mistake in not extending SEZ treatment to Shanghai from the outset. This position is reflected in the fact that apart from the SEZs the Pudong development area of Shanghai is the only other place in which a market mechanism experiment has been introduced into China. The experiment in question being the permission given to foreign companies to engage in trading activities, including retail trade This annex focuses on the special nature of the Special Economic Zones. First it examines the innovations and experiments which have been carried out in the zones and assesses the extent to which they have crossed the bridge into the hinterland. Second it reviews the progress of the SEZs in terms of their economic achievements. It then identifies problems which the SEZs have faced and assesses their overall effectiveness. Finally, recommendations are made for future policy developments. B. THE ExrErmEnIS Introduction Not all of the policy initiatives which make up the "opening up and economic reform" program have begun as experiments in the SEZs. Many reform measures hzve been introduced on a nationwide basis, for example the "household responsibility system" in agriculture, price reforms, reforms in the management of state enterprises, the development of free commodity markets, the establishment of a private sector, and the decentralization of the management of foreign trade. This section, however, addresses only those reforms which began as experiments in the zones; other policy reforms are referred to in the paper so far as they have affected developments in the SEZs. Some of the experiments represent the removal of obstacles which prohibit, or used to prohibit, certain activities in China, for example the establishment of foreign-funded enterprises (FFEs). And some represent incentives to encourage certain sorts of activity. They can be categorized as those which relate to the characteristics of the economic management system itself and those which relate to specific factor markets. They are covered below according to this categorization. - 223 - ANNEX 6.2 System Experiments (a) SEZs us Experiments with the Economic Manangement System The establishment of economic zones represents acceptance by a government that there are some economic objectives which it cannot achieve by relying on the domestic economic policy frame. Thus the very existence of zones represents a major experiment in the reform of Chinese economic policy. Initially at least, the model was the export processing zones of South Korea, Taiwan and other Asian countries with successful export records. The single objective approach of export processing zones, was however, quickly dropped in favor of a multi-objective strategy. This was partly in recognition of the fact that China could not at that time attract investment from the sort of firms which had been responsible for the successful development of export processing zones in other countries. It was considered that to attract firms other than those solely interested in labor-intensive processing activities, China would have to trade access to its domestic market for inflows of capital, managerial skill, technology and access to international markets. It was also quickly discovered that there was a vast pent up demand among overseas Chinese, especially in Hong Kong and Taiwan, for holidays and real estate in China. The zones, especially Shenzhen and Xiamen and later Hainan were quickly geared up to meet this demand. The initial industrial estate type of export processing zone development, represented for example by Shekou in Shenzhen and Huli in Xiamen, was quickly added to and the size and scope of the zones enlarged. As their name implies, export processing zones have a single objective: the development of exports. Within them compr t%ies benefit from incentives under various policies not available to companies elsewhere in the country. They are usually relatively small in area, do not include residential arvas and have management powers delegated to them which give them a high degree of autonomy, especially with respect to the treatment of investment applications. By contrast, China's Special Economic Zones cover large areas, including agricultural as well as industrial districts. They have multiple objectives and are run by local governments which have to carry the full range of local government responsibilities at the municipal level (except in the case of Hainan which is a province), as well as running the SEZs. (b) Extra-Plan Investment Perhaps the most important factor differentiating the SEZs from other areas of China is that investment decisions taken there are to some extent outside the State Plan. As long as they can raise the extra funds from taxation, profits from enterprises they own (wholly or partially) or from banks ir the zones, the local govemments involved can establish their own infrastructure development and commercial investment planF. And enterprises in the zones, including state enterprises-owned locally or by hinterland authorities, joint-ventures and wholly foreign-owned firms, can make their own investment, production and marketing decisions. This gives the local authorities and state enterprises involved much more autonomy and flexibility than their counterparts elsewhere in the economy and is a major factor in attracting hinLerland investment into the zones. The SEZs authorities have been delegated powers, within limits, to approve investr.ent proposals, although this right has been extended to other audtorities covered by the open coastal city and area policy. - 224 - ANNEX 62 tc) Preferential Tax Treatment FFEs in the other economic zones, such as Economic and Technological Development Zones, now receive the same tax treatment as FFEs investing in the SEZs. The higher corporation tax rate which obtains outside of the zones is 33 percent. The rate in the zones is set at 15 percent. This is the rate which obtained in Hong Kong at the time the policy was formulated-the aim being not to impose a tax disadvantage on investors compared to Hong Kong, while not giving away tax revenue unnecessarily. The tax holiday of "2 plus 3"-i.e., the first two years in profit are tax free and for the next three the tax rate is only 7'2 percent-is also available to FFEs in all zones anywhere is China. There are various special rates depending on the type of activity, for example if after the expiration of the tax holiday a firm is exporting more than 70 percent of its output then the tax rate is only 10 percent. With respect to tax incentives, of far more significance than the treatment of FFEs is the incentive given to Chinese state enterprises. In the SEZs (and the Economic and Technological Development Zones) they also pay only 15 percent compared to 55 percent elsewhere (this is to be reduced to 33 percent by the end of 1993). They still have to remit a share of their profits, if any, to their "owners" of course and in the case of Xiamen for example this 'dividend" is set at a rate which gives the Xiamen Municipal Government a total return of approximately 55 percent (the actual rate being negotiable, depending on the performance of the company). The lower tax rate means that for hinterland owners of state enterprises there is a substantial incentive to invest in the zones. (d) Trade Policy Since the establishment of the SEZs firms investing there (FFEs automatically and Chinese state enterprises after approval) have been exempted from import licenses on their imports. This covers capital goods specified in the investment plan and intermediate goods and raw materials needed in production. Duty free imports of intermediate goods and raw materials are subject to approval by the Customs service, usually via the registration of an import plan on a six monthly basis. The SEZs are treated as separate customs areas and in addition to being free of import licensing these approved imports also enter duty free (in addition, duty free items are also exempted from all indirect internal taxes). If the products of enterprises in the SEZs are exported they are free of all duties and indirect. taxes, as they also are if sold within the zones. If they import items which are sold in the zones without further processing then they pay 50 percent of the full duty and indirect tax rates. If they sell their products onto the Chinese hinterland market, after having obtained approval as import substitutors, they pay full tariffs and indirect taxes. These duty concessions were later extended to enterprises in the ETDZ of the Open Coastal Cities and to those in Science Parks, however, in these cases they are limited to capital goods in general and to all imports when they are being processed for export. There is no exemption or reduction in duty or taxes for imports or output sold in the ETnZ as they are not separate customs areas As the population of the SEZs increase this conc ssion to firms operating there becomes increasingly important. The ex post collection of duties and indirect taxes sales in the SEZs and to the hinterland parallels the practice in most EPZs around the world. However, in other countries there is either tight control by the customs service on imports of raw materials and intermediate goods held in bond in the factories or strictly controlled by a customs policed perimeter fence around the zone. Only Shenzhen operates such a fence, the "second management line," with all - 225 - ANNEX 6.2 other zones operating on a basis of trust plus occasional random checks. Firms are required to report sales into the zenes or hinterland; private individuals are free to carry their purchases out of the zones without further payment of duties or taxes. Hainan being an island it has a natural barrier, although it is not strictly policed. The other three hinterland zones operate strict surveillance over stocks of imported raw materials and intermediate goods held in bond. A new development is the establishment of free trade zones. Two have been set up in Shenzhen. One is already operating (the Shataojiao Processing Zone) and a new one with a bridge directly into Hong Kong (the Futian Free Trade Area) is under construction. Residential developments and retail trading are prohibited in Shataojiao while Futian allows both. There are other privileges for firms operating in these subzones, including the freedom for enterprises to lease their land direct from the municipality instead of via the subzone authority and to develop that land in whatever way they please, free from interference from the subzone authority. They can also recruit their labor direct without reference to the Labor Bureau. This free trade area initiative was quickly copied in the hinterland, with a bonded zone with equivalent privileges being set up in Tianjin in 1991 and a new one, the Waigaoqiao Free Trade Area due to come into operation in Pudong in Shanghai in 1992. In Waigaoqiao FFEs can also, uniquely in China, engage in trading activities. (e) Foreign Exchange One of the first and most important of the policy experiments introduced in the SEZs was the establishment of foreign exchange swap centers. Originally, all enterprises in the SEZs could retain 100 percent of their export earnings. Later, by 1985, this rate was also applied to firms in development zones in Hainan (before it became an SEZ), Huangpu, Guangzhou, and Xijiang. Enterprises in Tibet were also allowed to retain 100 percent of the foreign exchange earnings. FFEs which were allowed to sell in the domestic market, however, originally had no facility to obtain foreign exchange unless they were one of the few with State Plan allocations, whereas some of those with 100 percent retention needed to sell foreign exchange rights in order to obtain Chinese currency for their local costs, although they were reluctant to do so at official rates. The foreign exchange transaction center established in Shenzhen in 1985 was intended to allow these two types of company to balance, or swap, their foreign exchlange market requirements at a mutually agreeable rate. Since then the range of entities allowed to operate in the market has increased and the sums involved have increased as retention rights have been extended. The number of swap centers was increased to meet the increased demand and now approaches 100. As far as the foreign exchange market is concerned, the only remaining advantages for firms in the SEZs is easier access to foreign banks, including in the case of Xiamen to a foreign-funded, joint-venture bank which can also deal, within limits, in local currency. In the case of Shenzhen, firms may also benefit from the unique situation that a foreign currency, the Hong Kong dollar, is a major component of the money supply and plays an important role in day to day business. Apart from the establishment of foreign banks, which is beginning to take place in the hinterland, these experiments-joint-venture banks and the local use of foreign currency-are unlikely to spread inland in the near future. - 226 - ANNEX 6.2 (f) Nature of Enterprises With respect to enterprises, the main feature of the policy experiment in the SEZs relates to the extent of the multi-ownership forms allowed there. While the three forms of foreign-funded enterprise (wholly foreign-owned, joint-venture, and cooperation agreement), private enterprises, state enterprises and collectives, are now found throughout China, the ratio of wholly publicly owned firms is much lower in the SEZs than in the hinterland. This is true even in Xiamen where there are a large number of state enterprises which predate the formation of the SEZ. On the whole, however, Chinese private enterprises are restricted to restaurants and other retail outlets. The growth of the joint stock sector has also progressed faster in the zones than elsewhere. Foreign ownership participation through the medium of B shares has been taken further in Shenzhen than anywhere else, although in the spring of 1992 one B share was quoted on the Shanghai exchange and more were expected to be introduced. Similarly, although branches of foreign banks are now found elsewhere in China, having been first introduced via the SEZs, the only joint-venture bank China is located in the Xiamen Special Economic Zone: the Xiamen Irnternational Bank. (g) VLsas One experiment still restricted to the SEZs is the more relaxed methods for issuing visas for entry into China. For entry to Hainan foreigners and residents of Taiwan and Hong Kong require no visas at all prior to arrival. Visas for up to two weeks can be issued at the port of arrival and these can be extended for a further two weeks without difficulty ur delay. In all four of the other SEZs visas can be issued at the point of entry, as they can when leaving Hainan for the mainland. In all five cases investors in FFEs and their expatriate management staff can be granted multiple entry visas. It is proposed to extend the practice of issuing multiple entry visas to Waigaoqiao Free Trade Zone in Pudong. While seemingly a small matter in itself, this easier access to visas can be an important psychological factor, as obtaining visas abroad can be a time consuming, frustrating and expensive process. (h) Delegated Government Authority The four mainland SEZs are governed by their own local governments, each having responsibility for neighboring areas as well. The original, more direct, responsibility of the provincial governments of Guangdong and Fujian has been devolved to the municipal level with their associated peoples' congresses. Hainan was established as a province, being separated from Guangdong, soon after its establishment as an SEZ in 1988. In principle the governments of the zones have a great deal of delegated power. However the operation of that power is subject in many ways to influence and control from the provincial governments in the case of the four mainland zones and from the central government in the case of all five. At an early stage powers to approve investment in the zones were devolved to their governments, although this was true for nonzone governments too. Currently the zone governments can approve investments by Chinese companies up to limits of 100 million yuan for nonproductive investment (such as hotels), 50 million for heavy industry and 30 million for light industry. In principle there are no limits on approval of foreign investments, but in practice as joint ventures involve investment by Chinese partners, and even investnents by wholly - 227 - ANNEX 6.2 foreign-owned firms involve domestically financed infrastructure investment, the 100/50/30 limits apply in these cases as well. Above these limits central government approval is required, from the State Planning Commission. Approval is also required from the central Ministry of Foreign Economic Relations and Trade (MOFERT) if the investment involves imports or exports of any items covered by quotas or licenses. The SEZs have considerable freedom of manoeuvre in the area of taxation. The rates set by the central govermment appear to be maxima and the local governments running the SEZs appear to have the flexibility to set different rates and apply different exemptions and reductions on a firm to firm basis. The only constraint appears to be the need to raise revenue for its own purposes and to make any remittances to provincial and central levels of government, although even here there appears to be some flexibility as Shenzhen has not remitted any tax revenues to the central government for three years. Hainan, as a backward area, does not remit any revenue to the central government but is a net recipient of fiscal transfers. Dependence on the central government for transfers limits the independence of any authority. For instance, Hainan has bpzn trying to reduce the size of its government, using the slogan "small government, large s ciety." It had reduced the number of government departments to 27, about a third of the number of departments and bureaux in the central government. However, central government departments and bureau which did not have direct counterparts in Hainan began to make difficulties, including refising to pass on grants on the grounds that without specialized offices there was no way of ensuring that the grants would be used for the purposes for which they were given. In principle the SEZs have the right to legislate the enactment of rules and regulations for governing the practices of economic agents in their zones. But this freedom is severely curtailed by the "grandfather clause" that any such rules and regulations have to be consistent with central govermment legislation or position, as interpreted by the bureaucracy of the central government. For example, two "approved" stock exchanges now exist, although there are no centrally established detailed rules and regulations for the day to day operation of such exchanges. The local branches of the People's Bank of China in Shenzhen and Shanghai are "regulating" the two exchanges but have no centrally established regulations to enforce; the operations of the exchanges are being governed by rules and regulations devised by the local governments. And although there is no central govermnent law preventing the establishment of stock exchanges, the initiative of the provincial government of Hainan in setting one up early in 1992 ran into strong resistance from the center, forcing its closure. The Chinese principle of a strong central government working with local governments and peoples' congresses to modify central policies to suit local conditions is being severely tested in the case of SEZs governments which are supposed to be the pioneers of economic experimentation. The three largest SEZs, Hainan, Shenzhen and Xiamen, are now pressing for more genuine autonomy by being allowed to convert themselves into free ports, following the call by Deng Xiao Ping to establish several "socialist Hong Kongs" in China. These moves are being resisted by the central bureaucracy. On a different level, but related to the delegation of powers issue, is the issue of "zones within the zones". The first economic zone to be created in China was the Shekou Industrial Zone. Although it was incorporated into Shenzhen Special Economic Zone soon after its establishment it kept its status equivalent to that of a county, uniil the end of its first ten year lease. Even now, it has kept many of the considerable delegated authorities set out in its original - 228 - ANNEX 6.2 "lease" of the Shekou area. The China Merchants Shekou Industrial Zone Investment and Management Company was given many of the powers of a local government, including the rights to tax, approve investments, develop land and infrastructure, license imports for use in the zone, borrow abroad, issue visas and even experiment with economic reforms. The housing reforms and labor market reforms, and flexibility of controls over land use rights were taken further in Shekwo than anywhere else in China. For example, with respect to labor laws the Company has labor bureau status and apart from being able to hire and fire at will, it is not bound by any of the national rules on wage scales. Anyone moving into the zone loses their standing in the national scales and has to work their way up again; elsewhere workers moving from place to place keep their place in the national scales. Pay scales in Shekou are about 30 percent above those in Shenzhen. Evaluation methods have also been introduced which link more clearly enterprise performance and individuals' wages, boniuses and management's income. Managers contracts are voted on annually by the workers, and can in principle be cancelled by democratic vote. Housing contracts tied to fixed term work contracts were also first introduced in Shekou, and rents are also market determined. The Company's power over land use is sufficiently strong that it was able to block a proposal of the Shenzhen municipal government to locate a power station in Shekou. The Company is the monopoly supplier of utilities in the zone, keeping the land use fees as income. It has an equity stake in many of the 380 companies in Shekou. It kept all tax revenues for the first ten years and now keeps a share of tax revenues in excess of 160 million yuan. Its reported capital rose from 60 million to 1.3 billion yuan over its first five years, all from reinvested profits. When its lease was renewed in 1990 Shekou was incorporated as a subsidiary unit of Nantou county, although it kept many of its quasi- government functions, some only on 'license" from the Shenzhen municipal government. There are frequent arguments between the authorities of Shenzhen and those of Shekou, most recently over land use fees. The proposals for the Yangpu Free Trade Zone in Hainan involve delegated powers similar to those obtaining in Shekou, except that the responsible agency will be a devolved branch of the provincial government. This agency will also have powers to approve investments, up to $50 million, subject only to the need to report to the State Planning Commission, and powers to license imports and export from the zone. It will supervise the activities of the joint-venture company, to be established by Hong Kong and Japanese property development companies, which would have the responsibility to develop the land, attract investors to establish there and to manage the zone on a day to day basis. Experiments with Markets (a) Commodity Markets Commodity prices in the SEZs are mostly market determined. The development of commodity markets is not unique to the SEZs, but it has gone further there than in the hinterland. There are few, if any, controls on commodity prices (other than the small quantities of rationed items), or on services, in the SEZs. Recent years have seen an extensive development of free markets and private, collective and joint-venture shops, and tertiary sector establishments such as restaurants and hairdressers in all of the SEZs. Locally produced goods are sold free of duty and imported items are only subject to half the standard rat. Imported intermediate products and capital equipment, as already noted, are duty free to producers in the - 229 - ANNEX 6.2 zones. Markets in producer goods have developed in which commodities are competitively priced. Competition is limited, however; foreign retailers have not so far been allowed to establish in China. The first experiment with foreign retailing has now been approved for Pudong, with Sino-Japanese joint venture having been given permission to open a department store there. Prices in the SEZs are higher than in international markets but lower than elsewhere in the Chinese economy. In addition, in Xiamen there are many state enterprise companies which were in existence before the creation of the zone and while they benefit from the tax preferences and other incentives they are still subject to planning controls. (b) Factor Markets Factor markets in the SEZs are more developed than elsewhere in China. They are still more subject to controls than markets forces and still much less well developed than commodity markets. Since 1978 several experiments have, however, been introduced into the rudimentary markets for capital, labor and land. All were quickly transferred to the rest of the economy. There are currently no experiments in force in the factor markets in the SEZs which are not also operating in the hinterland, although in most cases the extent of application has gone further in the zones. (l) Capital The experiment in the capital market with potentially the most far reaching effects has been the development of the joint stock system. This was first tried in Shenzhen Special Economic Zone. State enterprises established there which passed strict criteria relating to capital structure, profitability and accounting practices were allowed to sell shares to the public. Outside of the SEZs, firms were allowed to convert themselves into joint stock companies but were only allowed to trade stock on a horizontal basis among similar companies. On the basis of the lessons learnt from the early development of the stock market in Shenzhen the Government of China decided to consolidate the experiment with the establishment of stock exchanges in Shenzhen and Shanghai in 1991. Initially only three stocks were approved for listing in Shanghai and seven in Shenzhen. The experiment was further extended early in 1992 with the introduction of B shares on both exchanges, B shares being shares which only foreign istitutions can deal in and for which settlement has to be in foreign exchange. By March 1992, however, only one B share was traded on the Shanghai exchange and tlhree on the Shenzhen exchange. The adoption of regulations requiring firms wishing to be listed to subject themselves to accounting and auditing practices based on Hong Kong rules, and the requirement that firms wishing to issue B shares should be audited by foreign accounting firms, also represented a significant extension of the joint stock experiment. The number of A and B shares traded on both exchanges, and the number of brokers accredited to each exchange is expected to increase during 1992, including foreign brokers for the first time. Although formal stock markets on which the general public can deal have not been approved elsewhere, informal markets have developed in many cities. In the case of Hainan the Provincial Govermment, following the advice of Deng Xiao Ping to act boldly, established a stock exchange in Haikou in March 1992, with three shares being traded. Central authorities forced the closure of exchange a few months later, meanwhile several other cities, - 230 - ANNEX 6.2 including Guangzhou, Tianjin, Xiamen and Beijing are seeking approval to establish stock exchanges. Enterprises accepted for listing are currently not allowed to sell a majority of their shares and, except for the foreign participation in joint-venture companies, Boards of Directors and managers continue to be official appointments with "iron armchairs". Forthe time being, the experiment is simply an additional method of raising finance for the companies and a vehicle for speculation, or simply gambling, for investors. The significance of the reforms represented by the introduction of the joint stock system and stock markets and exchanges is limited. The introduction of western style accounting and auditing practices and disclosure rules are probably the most significant reform elements. These reforms will restrict the number of firms willing to seek listing or which could qualify for listing. To be of significance to the economic management system the experiment would have to continue to develop regulations setting out criteria for listing on the exchanges and to develop enforceable company law, with enforcement being through an independent judicial system. In addition, companies and shareholders should be able to appoint directors, directors should be able to appoint and fire managers, and takeovers through share purchase, subject to takeover codes, should be introduced. Apart from the limited accountancy requirements for listed companies, the reforms so far have not made any significant change to the Chinese socialist characteristics of the system under which state enterprises operate. With respect to banking, there have been very few experiments either in the zones or the hinterland in the opening up and economic reform process. The banking system remais basically a centrally planned capital allocation mechanism, even though the details of its administration has changed. Ihe only real experiments have been with foreign banks. Early on, overseas banks were allowed to set up branches and representative offices, initially just in the SEZs and later also in the hinterland. The scope of their activities has been heavily restricted, being limited to business in foreign currency within the regulations affecting such business. At first their business was largely limited to arranging trade finance. Subsequently they have been allowed to extend their business to include raising overseas loans for import finance, within the limits set by overseas debt surveillance procedures. Two experiments in banking are still restricted to the SEZs- The first is the existence of a joint-venture bank, the Xiamnen International Bank (XIB) in Xiamen. In addition to the range of activities allowed to foreign banks the XIB also operates in the Xiamen foreign exchange swap center, arranges mortgages on property and, uniquely for banks with foreign funding, carried out business in local currency, albeit as yet only on an agency basis. The XIB is currently testing the limits of economic reforms by seeking a bankruptcy order in the courts against a defaulting state enterprise. In Shenzhen, where the Hong Kong dollar operates as a parallel currency, the Hong Kong and Shanghai Bank is able to operate more or less as a full service bank, including acting as a note issuer. It provides its own currency notes on demand, including via cash machines to cash card and credit card holders. It is probably the only instance anywhere in the world where a bank issues foreign currency through its cash machines; this is one experiment which is unlikely to be spread to the hinterland. -231 - ANNEX 6.2 Banks in Xiamen and Shenzhen are now providing mortgage finance although this is still limited and restricted to the residential housing market. This development is possible because a secondary market in residenLial property is now developing and foreclosing no longer necessarily means writing off the loans. Despite the small amounts of capital raised through the stock market and that brought in from the hinterland by state enterprises investing in the zones the largest share of domestic capital formation is financed by the banking system. This financing is not allocated according to market determined commercial principles, but according to plan directives and political power. Investment in fixed assets and working capital is financed by the banks even where firms have been making continuous losses and show no signs of ever recovering. This is because in the absence of an effective bankruptcy law any attempt to refuse additional credit would result in nonperforming loans being turned into bad debts on the books of the banks. Profitable firms, being mainly those able to exploit import and export quotas and other monopoly positions, finance part of their operations with reinvested profits, but they also tend to be fully loaned up and maintain the high bank debt to asset ratio now common throughout China. (ii) Labor In the case of the labor market the main experiments introduced into the zones have been: the extensive replacement of life long tenure with short term contracts; the ability of firms to recruit some categories of workers on a national basis and to fire unsatisfactory workers; in Shenzhen, the abolition of guarantied government placement of graduates; and the development of government run social security systems. Experiments with labor practices have gone further in the SEZs than elsewhere in China, but the labor market is still more characterized by controls than by market forces. The iron armchair of the cadres remains more or less unscathed. The iron rice bowl has, however, been broken for laborers. With the exception of workers in preexisting state enterprises, mostly in Xiamen and Hainan, the majority of unskilled and semi-skilled workers in the SEZs are on two to three year contracts. They never obtain rights of residency. The iron pot, out of which workers take the same regardless of what they put in, is cracked but not broken. National wage scales are enforced as minima in the SEZs, however labor shortages, artificially engendered by restrictions on labor movement, ensure that wages, inclasive of bonuses and piece rates, are substantially higher than workers receive in the hinterland. Hiring and firing practices are controlled by the labor bureaux. Firms are free to recruit skilled workers and managers from anywhere they want, although in practice the guanxi system applies. For unskilled and semni-skilled workers a more restrictive system applies, with tight limits being applied to empioyment of workers from outside the zones. In the case of Hainan the restricted market is intended to protect the interest of the island's minorities and encourage their absorption into the modern labor force and in Xiamen it is intended to protect the interests of existing workers and their children. In the green field SEZs, Shenzhen, Zhuhai and Shantou, the restriction is mosdy now intended to prevent the reliance of the zones on unskilled labor-intensive industries. The result is the extensive development of labor-intensive industry, on a more or less unregulated basis, close to the zones but outside their jurisdiction. The experiment of allowing more freedom of mobility of workers between firms has been taken much further in the zones. This is partly because firms are free to fire workers - 232 - ANNEX 6.2 and workers are free to leave firms, either at the end of their contracts or during them with the permission of their employers (with compensation often being paid to the firm if training has been provided). Such flexibility is possible because workers' welfare benefits are not tied to an individual firm. In the first quarter of 1992, 470 of the 1037 labor contracts signed in Xiamen were for workers changing firms, some having been fired and some simply seeking better jobs. Experiments with government run social security have been taken further in the SEZs than elsewhere in China, with the scheme, for urban workers, being more highly developed in Hainan. Most firms also run supplementary welfare, especially health, services which are available to contract staff, who have no access to free health services provided by the local government. The ease with which finns can fire surplus or unsatisfactory labor depends on whether they are state enterprises or FfEs, the latter having little difficulty once they have shown good cause, whereas the former are still expected to hold on to redundant staff and even to take on workers they do not need to help keep unemployment down. The main difference for state enterprises operating in the SEZs as against the hinterland with respect to labor practices is that the greater reliance on the use of contract labor reduces the burden of their having to provide the welfare services expected of state enterprises in the hinterland. Workers with permanent resident rights in the SEZs prefer to work for state enterprises in order to gain access to the welfare benefits, whereas contract workers prefer to work for FFEs because higher wages compensate for the more restricted welfare benefits. The gap between the average wages of state enterprises and FFEs in Xiamen early in 1992 was roughly 25 percent, the difference between the 3600 yuan per year in the state enterprises and the 4,300 in the FFEs. In addition to the wages, the FFEs also have to pay a percentage of the wage bill to the Labor Bureau to cover the government provided social security benefits; different rates apply for whoily foreign-owned enterprises, joint-ventures, and FFEs based on cooperation agreements. In Xiamen, outsiders are not allowed to work in the state enterprises. Skilled workers and graduates on the other hand prefer to work for FFEs as they do not need the same job security and are attracted by the higner skill premia. Contract labor recruited from outside the zones are second class citizens. They have no right to rations of subsidized food, to housing, to free health care provided by the local government or to protection by the civil authorities. If they stay in zones when the contracts end, in the hope of getting a new job then they join the growing army of illegal residents. Illegal residents are present in large numbers in all zones. They are estimated to number around half a million in Shenzhen alone, or a quarter of the total population. Without any access to official or firm provided housing they survive in illegal sublets or, at the bottom of the market, on the streets and in shanty towns. Many, if not most, of the contract workers are young women who work on the shift system in the labor-intensive assembly and processing factories. The gender imbalance this represents has generated some social problems, especially when the womer. reach marriageable age. Their productivity is alleged to decline as they fail to find partners or they create demands for more expensive housing and social services if they do marry and have children. The Shekou Industrial Zone in Shenzhen has an agreement with the Shenzhen municipal authority that the authority takes over the contracts of women as they reach marriageable age while Shekou recruits replacement teenagers. - 233 - ANNEX 6.2 The experiment of removing the placement system for university graduates is still only found in Shenzhen, where graduates have to find their own jobs. Excess demand for graduates in Shenzhen means that this is no real problem; most register as cadres in the hope of avoiding the vagaries of the market later in life. The experiments in the labor markets have been taken further in the SEZs than elsewhere in the Chinese economy, where the three irons still hold sway. The contract system is being extended slowly, especially in the joint-venture and private sector but progress is slow. In contrast most workers in the SEZs are now on fixed term contracts, except for cadres, who continue to sit in iron armchairs. Experiments with social security systems have crossed the bridge into the hinterland, but are still at a very early stage of development and limited to small area. (iii) Land The main experiments in the land market have been the sale of land use rights, the development of secondary markets in land and property built on it, and the granting of rights to develop land commercially to foreign companies. All of these were first tried in the SEZs and all have been extended to the economy at large, although not on the same scale as in the zones. The concept ot property rights in land use was introduced in the contract responsibility system in the rurat sector in the early days of opening up and economic reform. However, the sale of leases giving the right to use and devel,v land covering several years, initially ten to fifteen and later thirty, fifty and even seventy yens, including to foreigners, was an experiment introduced into the SEZs. The leases covered uses in the primary, secondary and tertiary sectors. Initially the prices for the leases were set by the municipal authorities, altLhough later the more market oriented pricing methods of auctions and tendering were introduced. Secondary markets in the leases exist in principle, although the short time period in which they have been available means that little use has been made of it except in the residential market, particularly in Shenzhen and Xiamen. Extensive buying of land for speculative purposes, especially in Shenzhen and Hainan by investors from Hong Kong, Taiwan and Singapore, threatens development planning and may produce a backlash in the form of regulations covering the practice of speculative investment in land use rights. The practice of leasing land for development and commercial subletting by foreign companies was the earliest experiment with land use rights, with the granting of a ten year lease for the development of Shekou to the China Merchants Steam Navigation Company, a Hong Kong company even if owned by the Chinese government. Resistance from conservative elements in the government prevented other such leases being granted until 1992, following the "Spring Wind" speeches of Deng Xiao Ping. A small experiment with such commercial development leases was tried, successfully, in 1987 in Tianjin where part of the Economic and Technological Development Zone (ETDZ) was leased to an American company to develop and exploit. More recently, the State Council finally approved the proposal to lease the Yangpu area of Hainan to a consortium of foreign firms led by two Japanese and Hong Kong firms. Under the terms of the head lease the company would finance the development of the infrastructure and service facilities and then sell, for its own profit, the subleases for the use of the developed land for other companies to build factories or other commercial facilities on. - 234 - ANNEX 6.2 The leasehold ownership of land use rights has spread beyond the SEZs, especially for FFEs to the ETDZ and science parks in other open cities and areas. The use of auctions and tendering processes to establish the price of leases has also been extended to the hinterland, but an institutional framework for the development of a meaningful secondary market in leases and commercial buildings is not yet in place. Chinese Characteristics The two previous sections focussed attention on the policy experiments which have been introduced in the SEZs. Even though, as we have seen, the SEZs are more market oriented than the hinterland, the markets there are still constrained and distorted. The most constrained markets are the factor markets, with the allocation of factors of production more often reflecting political priorities than market signals. Although some market elements have been introduced into factor markets, connections still dominate. Labor markets are constrained by dejure restrictions on freedom of movement and by de facto restrictions due to the lack of housing markets and centrally managed social security systems. Wages are higher in the SEZs than they would be in a market system, some firms, especially state enterprises, have excessive labor forces and inappropriate appointments are made under the guanxi system. There are no capital markets. The stock market is likely to play only a very minor role for years to come. The main source of funds is the domestic banking system which has not been effectively reformed and does not follow commercial principles. For borrowers, capital is artificially cheap; for some firms it is free. In the land market, while auctions have been introduced for some land use rights, the strength of the bidders at them is partly a function of their access to artificially cheap capital from the banking or planning systems. In addition. some land use rights are allocated without charge or at discounted rates, in some cases because of the presumed existence of externalities, in other cases not. Inadequate leasehold law also means that the 'freeholders" can and do sometimes harass lessees for surcharges to land use fees. In sum, factors are not allocated, in the SEZs as in the rest of China, in accordance with expected marginal productivity. Commodity markets, including the markets for services, are more developed, but again there are serious impediments to their efficient operation. In the first case, access to them from the supply side is obviously affected by the distortions in the allocations of factors of production. Second, there is still substantial protection for many products and services which maintain some prices at artificially high levels. Third, the markets themselves are inefficient, partly because of the remaining presence of controls, partly because of the prohibition of foreign involvement in managing markets and partly because the institutional frameworks for wholesale markets and markets in producer goods are still underdeveloped. And fourth, some producers are simply exploiting monopoly rights granted to them by the central government, in particular import and export quotas, without which they would in many cases be unable to survive without even greater cross subsidies or infusions of cheap or free capital. In order to work efficiently markets need to be regulated in order to ensure tha market exchanges take place between economic and legal equals and to prevent cheating and corruption. The legal and regulatory framework of markets in the west has developed over hundreds of years. It is also in a constant state of change as it needs to respond to changing circumstances. In China it is still very much in an embryonic state, as the process involves the devolution of power from the political and bureaucratic machines to the legal system. Laws to - 235 - ANNEX 6.2 protect the interests of consumers, workers, capitalists and other economic agents hardly exist and the development of the regulations and enforcement mechanisms needed to ensure the effective and efficient application of government policy has only just begun. The result is that even within the constraints already listed, the markets which have been developed in the SEZs, as in the rest of China, are not working as efficiently as they could. C. ACIEVEMEENTs: TuE EXPERIMENTS It is easy to be impressed by the physical development of the SEZs over the last twelve years, or four in the case of Hainan, especially if one has been watching them grow throughout that period. In t'ie three zones in Guangdong modern cities have sprung up on what was farmland, in the case of Shenzhen a city, with adjacent areas of Bao'an county, of more than two million inhabitants, compared to less than sixty thousand before the SEZs policy was announced. In Xiamen, large industrial estates have mushroomed on land hacked out of the mountainside by hand. Hainan gives the impression of a dynamic modem economic frontier, with Haikou a boom town. From the physical perspective the SEZs have indeed made great strides. In economic terms, the growth rates of gross output, exports, foreign investment, and economic and social infrastructure are the stuff that dreams are made on. However, in assessing this performance, attention needs to be devoted to the cost of all this development, in particular the opportunity cost of the resources crammed into the SEZs. The preceding subsection on the Chinese socialist characteristics of the zones gives some cause for concern about the specific forms of opening up and economic reform being used to develop the SEZs. The existence of policy distortions and market imperfections suggest that some of the developments may represent a wasteful misallocation of resources. Some of the development may well have taken place in any case in response to the opening up and economic reform in general, as previously prohibited activities were allowed. The question is, how much of the development is based on comparative advantage and accurately reflects the locational advantages of the SEZs, and how much represents an inefficient use of resources, attracted by the rents created by the distortions and imperfections. When assessing the significance of the SEZs it is also necessary to keep in mind their laboratory function. Not all experiments succeed and the costs of any failures should be put down to the national reform process and not directly against the internal benefits of the SEZs. On the other hand, benefits accruing in the hinterland as a result of policies successfully tested in the SEZs and transferred 'over the bridge' should also be taken into account. Tlhere are two sources of misallocation inducing distortion. The first is the intentional distortion, the preferential policies intended to attract investment, but which in some cases may be redundant and only result in misallocation. The second is the interface of the two economic management systems, the socialist and the market, which generates rents which attract rent seeking activities. The logic of incentive policies derives from two arguments, The first is the classic infant industry, or infant economy, argument. Th:e second is the level playing field argument, according to which China has to offer incentives to potential investors similar to those available in countries competing for the attention of those investors. The first is used to justify tax holidays and reduced tax rates and also discounted input prices. The second is also used to justify these cost reducing incentives, but in addition it is used to justify their continuation well - 236 - ANNEX 6.2 beyond the time at which the steep part of the slope of the learning curve peters out. The level playing field argument is also used to justify the extension of the incentives to Chinese enterprises investing in the SEZs. For some foreign companies the tax incentives are redundant because of double taxation agreements between their home countries and China. For others they are redundant because just as they avoid and evade taxes in their home countries, they will also seek to avoid and evade taxes in China. In addition, for many of the labor-intensive, low-skill, industries which represent the majority of enterprises set up in the SEZs there are no significant learning curves; factoring set up costs into the investment dec'sion would have little impact. As far as Chinese enterprises are concerned the incentives are unlikely to encourage any significant increase in total investment, they will only distort the locational distribution of that investment. The opportunity cost of investing in the hinterland is artificially increased and as a result some factors of production are inefficiently moved to the SEZs, drawn by the incentives rather than by economic logic. Trickle up rather than trickle down is at play as capital, skilled labor and management talent move to the zones out of the hinterland, attracted by the artificially high returns. Food and raw materials are also attracted into the SEZs out of the hinterland, by the higher prices they can obtain there in the uncontrolled markets. The interface between the socialist and market economic management systems is also a source of resource misallocation because of the rents it generates. The socialist economic management system in China, despite the years of opening up and economic reform, is still characterized by extensive de jure and de facto controls. The dominance of controls over the movement and use of factors of production has already been noted. Rents created by the restrictions on the movement of labor and the artificially low price of capital and land attract rent seeking activities. Those enterprises and individuals with the best connections, or guanxi, are the most successful at capturing these rents rather than the individuals and enterprises which are most likely to use the resources efficiently. Despite access to the distortion rents it is still estimated that one third of state enterprises in the SEZs are loss making and only sustained by access to continual injections of cheap finance by the banking system. Others survive, or increase their profits, by forming joint ventures with mainland Chinese companies operating in Hong Kong, sometimes even set up by themselves in order to gain access to the privileges available to FFEs. To these economic costs must be added the social costs of illegal activities encouraged by the freer, more flexible, environment which prevails in the SEZs. Smuggling, fraud and theft are all allegedly growth industries in the SEZs, attracted by the greater market determined rewards and also by the greater range of goods and assets on which to spend them. It is difficult, if not impossible, to quantify the these costs associated with SEZ development. Similarly, it is difficult to quantify tne benefits to the national economy of the foreign investment which has taken place in the hinterland after having successfully tested the water in the SEZs, or the benefits from the adoption of policies on a national basis after they have been successfully experimented with in the SEZs. The acceptance of foreign investment at all was one of those experiments, but, as we have seen, there are many more: the adoption of competitive bidding for construction contracts; improved access to foreign exchange via swap markets; the development of a private housing market; moves towards a centrally organized social security system; the joint stock company system with associated stock markets and stock - 237 - ANNEX 6.2 exchanges; and the establishment of foreign banks. All of these policy innovations were first introduced into the SEZs and later crossed the bridge into the hinterland. The other major innovation to cross over was the zone approach itself, according to which preferential policies are restricted to specific areas, such as the ETDZs, the Science Parks, the Pudong Development Area, and the northern border towns. The "zone with a zone" approach has also crossed over, with specialized zones being set up within the Pudong Development Area. D. ACIEVEMENTS: THE DATA The Zones The original Special Economic Zone was Shekou Industrial Zone, but as we have seen this was quite quickly incorporated into the larger Shenzhen Special Economic Zone, although as we have also seen it continued to benefit from special privileges. The two other original zones in Guangdong Province also expanded the areas they cover, as Table 1 shows. The small original area of the fourth SEZ to be founded, Xiamen in Fujian Province was also expanded and now covers the whole of Xiamnen island and parts of the neighboring mainland. Proposals are in hand for a further expansion of all four zones. The fifth SEZ, Hainan island was part of Guangdong Province when it was set up in April 1988, but it was quickly given Province status, in August 1988. Table 1: BASIC DATA Shenzhen Shantou la Zhuhai Xiamen Hainan Original size (kum2 327.5 6.8 1.6 2.5 34,000 Current size (kin2) 327-5 234 23.4 130.0 34,000 Population (10,000) 100.98 826 85.64 37.0 639.0 /a Data on Shantou from L.C. Reardon, "The SEZS Come of Age." Source: The China Review, November/December 1991. The whole of Hainan island was established as an SEZ but the provincial government there has followed a policy of establishing zones within the zone, partly on an industrial estate type basis and pardy on a special ize, basis such as the tourist development area at Sanya, the free trade area at Yangpu and the zone in Haikou which is restricted to investors from Macao and Hong Kong. This zones within zones approach has also been followed by the other SEZs, especially the larger zones in Shenzhen and Xiamen. All five include farmluand where investors have been invited to develop commercial agriculture. All five have also developed a tourism industry and a residential housing market aimed primarily at overseas Chinese, especially compatriots in Taiwan, Macao and Hong Kong and residents of Singapore. Indeed, the locations of three of the original zones were determined by proximity to these Chinese communities, Shenzhen being contiguous to Hong Kong, Zhuhai to Macao, Xiamen the closest mainland town to Taiwan (and one with many connection with people on that island). - 238 - ANNEX 6.2 Shantou was selected because of its extensive links with overseas Chinese communities, particularly in Indonesia and Singapore. Hainan is also close to Hong Kong, but is also easily accessible from Taiwan and Singapore, and also Japan. All five SEZs are in the south eastem coastal area in which the opening up and economic reform program has been emphasized. Investment The bulk of the investment in the zones comes from China itself. As Table 2 shows, in the four mainland zones investment in capital construction, including infrastructure, Table 2: INVESTMENT Shenzhen Shantou Zhuhai Xiamen Hainan Total Investment in Capital Construction in 1990 (Y billion) 4.943 0.68 1.099 0.468 2.2 Foreign Funds Used ($ billion) 0.51 0.084 0.108 0.073 0.075 Total number of enterprises established (no.) 1,632 1,082 795 746 n.a. in 1990 (Y million) la 14,690 5,825 4,146 7,247 n.a. of which: Foreign funded 945 226 194 171 n.a 10,028 1,786 1,873 1,099 n.a. State and collective 1,252 615 390 461 n.a. Enterprises 4,112 4,039 2,273 3,632 n.a. Others tb 13 241 211 125 n.a. 28 - - 1,809 n.a. la Millions of yuan commited. Lb Others includedjointventures between SOEs and collectively owned enterprises (COEs), and between SOE with private entrepreneurs and private enterprises. Sources: Beijing Review, April 8, 1991. has been financed mainly from Chinese sources. In recent years the bulk has come from local government out of locally raised taxes, much also coming from reinvested profits and bank loans. Support from the central and provincial governments was limited to the early years, although with an as yet much lower tax and banking base, Hainan continues to depend on subventions from the center, through the planning system. In the case of Hainan especially, but - 239 - ANNEX 6.2 also the other four, funding for infrastructure development has also been obtained from the international financial institutions and bilateral donors, although details are not available. In addition to the investment in infrastructure, Chinese funds are also invested in enterprises in all three sectors, primary, secondary and tertiary Chinese state enterprises and collective enterprises are the dominant form of enterprise in all five SEZ (Table 2). These data underestimate the proportion of Chinese funds in the total as in addition to the wholly owned state and collective enterprises and domestic joint ventures, there is considerable Chinese funding in the figures for investment in joint-venture and cooperative FFEs. It is also now, accepted, but difficult to document, that some of the so called foreign investment in joint-venture FFEs is actually Chinese, coming into China from Chinese-owned enterprises abroad, especially in Hong Kong. Some of this is perfectly legal, the Chinese: enterprise abroad being well established banks or other enterprises. Some, however, are reputedly firms established abroad illegally with the purpose of building up foreign exchange balances, partly with the intention of funding joint ventures back in China in order to benefit from preferential treatment, in particular lower taxes. It is difficult to quantify such flows, but their existence should be born in mind when assessing gross flows. The other data problem is that much of the "investment" made by Chinese partners takes the form of bank loans, about 90 percent of their total investment in Shenzhen being financed in this way, according to local officials. Table 3 shows that wholly foreign-owned FFEs have become a significant factor in the opening up process. In the early years of opening up there were very few such Table 3: FoREIGN DiReTa INVEMENT BY TYPE OF ENTERPRisE Shenzhen Shantou Zbuhai Xiamen Total fund used (1990) (S million) 349 61 55 73 of which: Joint ventures 260 8 10 13 Joint cooperation 30 14 16 4 Wholly foreign-owned 59 39 30 36 Source: Mission interviews. enterprises, partly because of an unwillingness on the Chinese side to accept them and partly due to caution on the part of foreign investors. They now account for a significant share of total investment. Xiamen differs from the other SEZs in that it already had a significant state enterprises based industrial sector when it became a SEZ. So in addition to encouraging new investment Xiamen Municipality is also encouraging investment aimed at rehabilitating and technologically upgrading these enterprises. This included inviting foreign investors to take over individual production lines. - 240 - ANNEX 6.2 As Table 4 shows, most of the foreign investors come, and most of the foreign investment comes, from Hong Kong and Macao, and Taiwan, with Hong Kong dominating in Table 4: SOURCE OF FOREIGN INVESTMENT, 1990 Shenzhen Shantou Zhuhai Xiamen Hainan Contracts Approved (1990) 796 n.a. 375 262 261 of whlich: Hong Kong/Macao 699 n.a. 326 86 n.a. Taiwan 45 n.a. 28 147 n.a. Singapore 5 n.a. 2 3 n.a. Japan - n.a. 4 7 n.a. Foreign invesunent agreed in above contracts ($ million) 693 n.a. 89/a 485 162 of which: Hong KonglMacao n.a. n.a. 64 139 93 Taiwan n.a. n.a. 4 221 6 Singapore n.a. n.a. 3 8 1 Japan n.a. n.a. 8 8 67 La Data relates to funds utilized, not committed. Source: Mission interviews. four of the five SEZs, the exception being Xiamen where Taiwan is the main player. Much of this investment is in processing and assembly and tertiary sector activities, and the average investment is lower than the averdge. Investment has been growing rapidly in recent years. Sectoral Disposition Leaving aside the govermment financed investment in infrastructure and social investment, there have been three waves in the sectoral disposition of investment in the SEZs. The initial emphasis was in the primary (agriculture and aquaculture) and tertiary (construction) sectors. The shift was then to the manufacturing sector, while more recently the tertiary sector has regained prominence (Table 5)- Contrary to the hopes of central and local governments, there is very little investment in high-tech industry in the manufacturing sector. There is no data which allows us to scientifically categorize firms by level of technology, but the large proportion of firms which are involved in simple processing and assembling activities, simple labor-intensive production, or are predominantly involved in trading activities suggests that low-tech is dominant. Many high-tech products are produced in the zones, sometimes with high-tech equipment, but that - 241- ANNEX 6.2 Table 5: SECTORAL ALLOATION OF FOREIGN INVESTMENT, 1990 Shenzhen Foreign Investment Agreed ($ million) Agriculture, forestry, husbandry & fishery I Industry 559 Construction 1 Communication 4 Trade & Catering 52 Housing and resident services & public utilities 38 Source: Mission interviews. actual processes which are carried out are only low-tech processes. Many enterprises are simply screwdriver factories. A factory in Xiamen "producing" state of the art video recorders is a good example. All of the inputs are imported, including the labelling and packaging, (which is carefully designed to suggest that the recorders are imported as finished items), and the only processes which take place in the factory are assembly, testing and packaging. The imported testing equipment is high-tech. Production Table 6 shows what all the investment has resulted in. Gross output in the zones has increased rapidly, as suggested in the Table. The growth rates remain high, the gross output Table 6: OUTPUT IN THE ZONES Shenzhen Shantou Zhuhai Xiamen Output in 1990, Y billion (Overseas Prices) Primary 0.78 0.20 0.37 0.28 Secondary 6.68 1.59 1.33 2.42 Tertiary 6.04 1.13 1 47 1.67 GDIP Total, 1990 13.50 2.92 3.17 4. 34 1991 17.40 n.a. n.a. 6.25 GNP 1980 0.27 n.a. 0.24 0.64 Sources: People's Daily (Overseas Edition), Februrary 17, 1992, and mission interviews. - 242 - ANNEX 6.2 of the three zones for which data is available for 1990 and 1991, Shenzhen, Xiamen and Hainan, show annual rates of increase of 29 percent, 44 percent and 15 percent respectively. Foreign Trade Table 7 shows that the four mainland zones for which relevant data is available have seen a remarkable growth in exports since the early years of their foundation, even though Table 7: ExPORTS FROM SEZS Shenzhen Shantou Zhuhai Xiamen Hainan Current Prices ($100 million) 1981 0.17 2.72 2.22 1.41 1989 0.78 2.99 3.65 - - 1990 29.96 4.19 4.56 7.82 4.71 1991 59.90 8.20 11.10 12.70 - Secoral Breakdown for 1990 Agriculture 3.47 0.18 0.73 n.a. - Industry 24.57 n.a. 2.92 5.20 - Tertiary 1.92 n.a. n.a. n.a. - Exports by foreign-funded enterprises in 1990 ($100 million) 16.62 1.74 1.91 2.36 - 8 or % of 2 55% 42% 42% 30% - Exports carried out by municipal FTCs 11.30 n.a. 2.17 3.92 1.391a /a Provincial FTC. Source: People's Daily (Overseas Edition), February 17, 1992, and mission interviews. the incomparability and incompleteness of the data do not allow accurate rates to be calculated. The most rapid rates have been in the most recent years, as the foreign investment has grown and matured Table 7 also show that FFEs now play a major role in the export performance of the SEZs, although it is still a little smaller than the share accounted for by the Foreign TLrade Corporations owned by the Special Economic Zone authorities themselves, except in Shenzhen where FFEs now dominate exporting. As Table 8 shows, Hong Kong is by far the most important destination for the exports of the Special Economic Zones, with the exception of Xiamen where it accounts for less than a third. In the other four it accounts for more than three quarters. Some of this trade is - 243 - ANNEX 6.2 Table 8: DESTINAnON OF EXPORTS FROm SEZS Shenzhen Shantou Zhuhai Xiamen Hainan Hong Kong 85.07 86.79 n.a. 30.20 79.83 USA 3.17 1.47 n.a. 6.10 2.45 Singapore 1.39 2.80 n.a. 2.47 0.77 Japan 1.32 6.09 n.a. 11.33 7.08 Germany 0.48 n.a. n.a. 10.45 1.38 Russia n.a. 0.54 n.a. n.a. 0.77 Thailand n.a. n.a. n.a. n.a. 1.45 Source: Mission interviews. entrepot trade, being reexported from Hong Kong, but inadequate data do not allow us to put a reliable estimate on how much this accounts for. It should be borne in mind when interpreting SEZ trade data is that it not only includes exports produced in the zones but also exports made on behalf of inland provinces on an agency basis. The data on this trade is difficult to come by, but that which is available suggests tat almost 30 percent of the exports of Shenzhen is such agency trade, while the figure for Xiamen is even higher. at 42.1 percent. This is an important point when trying to assess the balance of payments position of the zones. E. CONCLUSIONS AND RECOMMENDATIONS The Special Economic Zones have played an important role in China' opening up and economic reform process. They have been windows for the Chinese to see into the outside world which was for so long closed for them and for foreigners to see into China, for most a totally unknown quantity. The SEZs have also been important bridges over which foreign capital, technology, goods, managers and ideas have crossed into the hinterland and over which the products of the hinterland have access to world markets. They have been important economic laboratories in which some of the features of western capitalism could be experimented witi and when found appropriate to Chinese conditions allowed to cross the bridge into the hinterland. Some of the remarkable growth in China's income and trade since 1979 can be attributed to the lessons learnt from loDking through the window and from learning from the experiments carried out in the SEZs. Now, as pressure to create zones of various kinds mounts across the country, is a good time to assess to roles of the SEZs and to decide that future roles they could usefully be asked to play- The hinterland no longer needs SEZs as windows to the outside world nor does it need bridges connecting to them. As more of the country is opened up, as more foreign investors settle in the hinterland, as access to television expands, and as more Chinese travel abroad there is no need for special windows. And as other open cities develop connections with the outside world and as their infrastructure develops, especially in Guangzhou, Shanghai and TIanjin, and as the time for Hong Kong's reintegration into China fast approaches resources and - 244 - ANNEX 6.2 knowledge can flow directly into and out of the hinterland without the need for special arrangements with the SEZs. The role that SEZs must continue to play is that of economic laboratories. Experiments with market mechanisms are still in a very early stage and much remains to be done. As long as there is fear and political resistance to the introduction of market practices into China and as long as much of the hinterland remains bound up in a centrally controlled economic management system, then the SEZs will have an important role to play as locations where experiments are accepted and where conditions are more likely to ensure that the experiments can be carried out meaningfully. The distortions we have drawn attention to are the result of incomplete experiments. Partial removal of barriers to market mechanisms may well have dramatic effects, but this does not mean that the changes are efficient, or even represent a welfare gain. The steps along the path of liberalization in the SEZs have been based on misconceptions as to the nature of markets, they have allowed remaining distortions in the system to become more profound in their impact, and have unfortunately created groups with vested interests in the partially reformed system. It is widely believed in China that creating a situation in which prices can be freely deternined by the part;cipants in the exchange process represents the introduction of western style markets. However, the price formation process itself is only part of the market process. and a relatively unimportant one on its own. Of much more importance is the determination of access to the market and the establishment of working rules and regulations for participants in the market. All of the markets which have been created in China, even in the SEZs, are limited access markets and have not had rules and regulations established adequate to prevent the abuse of market power. The result is that the markets which exist simply create rents for those with access to them and participants with power ensure that those rents accrue to themselves. People with good guanxi are able to award themselves or their connections privileged access to markets and thus ensure that the rewards of the market do not necessarily accrue to those who can make the most contribution to it. We have seen some examples of this in this paper: the distribution of trade quotas and licenses, the allocation of land use rights, the granting of residency rights (with, for example, the associated privileged access to private housing markets for speculative purposes), the allocation of bank credit, and access to supplies of intermediate producer goods. The possibilitv of market failure and the abuse of market power are fully appreciated in the west. Many forms of regulatory mechanisms have been devised over many years to help overcome them. An important new role for the Special Economic Zones would be to experiment with the introduction of such checks and balances. The System Reform Commission could be asked to develop a program along these lines in cooperation with the Special Economic Zone authorities. Many experiments will need to be introduced, covering codes of practice in various markets, backed up where necessary with the force of law, which itself would involve an experimental introduction of an independent judiciary. Among the innovations needed are laws to protect consumers and workers rights, to require enterprises to be subjected to audit and to make full and public disclosure of their accounts and the interest of their directors, and antimonopoly legislation and fair trading laws with associated watch-dog bodies and ombudsmen. In some cases what is needed is the political will to ensure that existing laws are provided with the necessary enforcement mechanisms to ensure their effective implementation, one example being the bankruptcy laws. - 245 - ANNEX 6.2 One of the main problems with the development of markets in China is the lack of a cohort of Chinese citizens with knowledge of how markets operate. In particular, there is a lack of awareness of the importance of regulations. Much more attention needs to be given to the training of market operators, perhaps in new colleges established in the SEZs. In the meantime, and while sucri trainees gain experience, much more reliance will have to be placed on foreign investors with the necessary experience, possibly on management contract arrangements. A major step forward would be the acceptance of more widespread foreign involvement in the commercial infrastructure of development. Experiments allowing foreign banks into the domestic currency market in the zones are believed to be at the planning stage. The coverage of this experiment should be expanded to include, not only foreign retailers, as has been done in some cities, but also travel agents, estate agents, labor recruitment agencies, freight and forward agencies, and insurance companies. The potential benefits from expanding competition in these markets in this way are enormous, certainly far in excess of the benefits of the existing experiments with fast food outlets-although they have established that the principle is politically acceptable. The additional benefits from the inflow of capital and know-how would be pure externalities. Another important reform which could be introduced to improve the efficiency with which the SEZs operate would be for the government to remove as many as possible of the policy distortions for which it is currently responsible. The most important measure here would be the removal of tax and other incentives given to firms which invest in the SEZs. Firms should be encouraged to locate where it makes most economic sense and their decisions should not be distorted with tax breaks. Support for locations on regional development grounds can be effected by intergovernmental transfers, such as those already in place. As a minimum, the preferential tax treatment which induces Chinese state enterprises to locate in the SEZs should be abolished, but better still would be the adoption of a standard national corporation tax. Serious foreign investors will not be affected by this due to the existence of tax sparing arrangements in most western countries; others who would complain because it interferes with their tax avoidance and evasion practices will find other ways to avoid and evade taxes. The 50 percent reduction in import duties for imports sold in the SEZs, and for locally produced goods, should also be abolished. All other incentives which induce enterprises and individuals to locate in the SEZs for artificial reasons should be abolished. Only firms for which the SEZs are efficient locations would then be attracted. For these firms there is still a great deal of scope for support through the removal of obstacles to their efficient operation: freedom from production controls and reduction of bureaucratic procedures, simpler import/export procedures plus the continuation of the existing effective duty drawback system, and secure access to utilities and infrastructure are among the more important ones. Finally, plans to increase the number of SEZs should be resisted, although the de facto SEZ nature of the Pudong Development Area in Shanghai should be formally recognized. The new SEZs being mooted for such places as Lhasa and Tumen should be resisted. They do not have any locational attractions for the role of economic laboratories. Similarly, proposals to develop Hainan, Shenzhen and Xiamen as freeports should be resisted, at least until they have demonstrated that they have developed the necessary administrative and enforcement mechanisms for managing the rules and regulations needed to sustain a more efficient market based economic management system. - 246 - ANNEX 6.3 ECONOMIC ZONES IN CHINA: A TAXONOMY A. THE ZONES Zoo The original motive for establishing economic zones in China, in Shekou and the four pioneering Special Economic Zones, was to geographically restrict activities for which there was strong political opposition. Later, as opposition to foreign involvement in the Chinese economy became muted, th}e logic of the zones came closer to that of export processing zones in other countries: the gwgraphical restriction of more liberal economic policies than the government is prepared to see apply in the whole of the economy. The muting of opposition to foreign involvement in the economy led to the establishment of open coastal cities, open de]tas and peninsulas, and most recently open border towns and areas, including Tibet. "Open" simply means that economic activities involving foreigners are permitted; the policy frame within which firms in open areas operate are nationally defined, available to any firm operating in an open area. In addition to the Special Economic Zones and open areas China has also established other forms of economic zone, in some cases simply to reap industrial estate type agglomeration economies-the economies of scale of infrastructure or the external economies of common specialized services. In other cases the intention is simply to restrict the application of preferential policies. In terms of national policy, the Economic and Technological Development Zones (ETDZs) and the Science Parks are examples of the first type of zone and the Free Trade Areas and Export Processing Zones examples of the latter. While the application of national taxation across the zones is common, using their delegated powers local authorities can vary the benefits of operating in the zones under their jurisdiction, for example by varying local taxes, land use charges and charges for utilities and infrastructure. In some cases the application of national commercial policies is modified between the different type of zone. A brief readers guide to the different type of zone follows. Special Economic Zones (SEZ) There are five SEZs: Shenzhen, Shantou, Zhuhai in Guangdong Province, Xiamen in Fujian Province, and Hainan itself a province, carved out of Guangdong in 1988. The main distinguishing feature between the SEZ and other types of zone is that they are more or less coterminous with levels of local govermnent, municipal in the case of the first four and provincial in the case of Hainan. In addition to the local administrative authority Hainan and Shenzhen have powers to make laws (as long as they are consistent with national laws) and all are separate planning entities-i.e., they are directly linked to the national plan and not through the provincial plan (except in Hainan, where they are the sarne). In the four municipal cases, the local government area is larger than that designated as SEZ so that the governments have to manage SEZ policies and non-SEZ policies in the same jurisdicticn. The SEZ areas, including all of Hainan, are separate customs areas and all movements of goods into and out of the zones are subject to license or administrative approval, although most imports are eligible for preferential treatnent. For export oriented, "high-tech" and foreign-funded enterpriscs the - 247 - ANNEX 6.3 preferential customs and tax treatment is now the same that such enterprises receive elsewhere in China, except that imported goods sold in the SEZz are allowed a 50 percent reduction in tariffs, and as from early 1992 imports into Shenzhen are only subjected to ex post approval by customs. The two main operational features of the SEZs which distinguish them from other zones in China are the greater freedom for enterprises to manage their firms' activities and the encouragement given by the central government to the SEZ authorities to experiment with economic and social policy. Free Trade Areas (FrA) Free trade areas are a relatively recent innovation in China. Three are now operating, or expected to come into operation in 1992: The Waigaoqiao Free Trade Area in the Pudong Development District of Shanghai; the Tianjin Harbour Free Trade Zone in Tianjin; and the Futian Free Trade Area in Shenzhen. In the Spring of 1992 the State Council approved the establishment of the Yangpu Free Trade Area in Hainan. The Yangpu zone in a special case in itself in that the right to exploit it has been leased to a foreign company (the only precedent for this being Shekou, but in that case the foreign company is owned by the Chinese Government while in the case of Yangpu it is a Japanese/Hong Kong joint venture). Candidates for early approval by the State Council for free trade area status are zones in Dalian, and Guangzhou. Proposals are also before the State Council, or are expected to arrive there soon, from the authorities in Hainan (the Jingpan zone), the SEZs of Xiamen, Shantou, and Zhuhai, the municipalities of Yantai and Qingdao in Shandong Province and Ningbo Zhejiang Province. As understood in China, a Free Trade Area is a fenced off zone where imports and exports can be made freely without any tariffs, duties or taxes being imposed as long as the products are not sold into the domestic market in which case all domestic impositions are payable. Enterprises, including foreign funded enterprises, are allowed to establish trading firms and bonded entrepot activities as well as export oriented export production units. Beyond these basic principles the administration of the FTAs can reflect local conditions, for example the Waigaoqiao zone prohibits residential development and retail trade while the Futian FTA allows both. Export Processing Zones (EPZ) Only two zones designated as EPZs are currently established in China: the Jinqiao Export Processing Zone in Pudong and the Shataojiao in Shenzhen. They are similar to Free Trade Areas except that permitted activities are restricted to production activities, trading and other commercial activities being prohibited. Shataojiao is a fenced, bonded zone with a strong emphasis on foreign investment and on export orientation, with a bridge direcdy linking it to Hong Kong. Jinqiao on the other hand is an unfenced zone with individual factories being bonded and there is less emphasis on both foreign investment and export orientation. Financial and Trade Zones There is as yet only one Financial and Trade Zone, the Lujiazui zone in Pudong, Shanghai. This zone is intended to rebuild Shanghai's status as a regional financial and commercial center. Wholly foreign owned and joint venture banks, finance companies, insurance companies and trading companies are to be established there. The first foreign funded enterprise involved in the retail trade (other than boutique shops in hotels) in China is being built in this zone. This is a joint venture between Shanghai's No. 1 Department Store and the Yaohan International Company of Japan. Directly across the Huangpu River from the Bund, the zone - 248 - ANNLX 6.3 will have office blocks and the tallest TV tower in Asia dominating the new Shanghai skyline. Existing facilities such as the stock exchange and futures markets will move there as facilities are developed. Pudong Development Area In his Spring Wind speeches in South China in 1992 Deng Xiao Ping referred to the failure to include Shanghai as one of the centers of opening up to the outside world, along with the Special Economic Zones, as a mistake. The mistake was partly economic in that it failed to take advantage of Shanghai's comparative advantage. In an attempt to correct the mistake and allow Shanghai to catch up with the south, the State Council began, in 1990, to extend preferential policies to Shanghai to encourage the opening up and reform process there. One part of the new initiative is the development of a 350 kmF area of land across the Huangpu from the old Puxi area of Shanghai and between the Huangpu and Yangtze rivers. It is a massive development plan, the first phase alone, covering the five years from 1990 to 1995 is estimated to cost Y 10 billion; of this only about 40 percent has been raised so far. As much of the land was farm land, the bill for turning it into an international city, complete with roads, bridges, tunnels, airport and all utilities will be enormous. It is the single most ambitious development project in China today. So far most of the investments are by Chinese companies and local governments, with increasing signs of large-scale involvement of foreign enterprises. Apart from the specific arrangements for the Waigaoqiao Free Trade Area all of the preferential policies available in Pudong are also available in the rest of Shanghai, and foreign investors have so far demonstrated a preference for locating there, especially in the Minhang, Caohejing and Hongqiao ETDZs. Initial development in Pudong is concentrated on the three specialized zones of Waigaoqiao, Jinqiao and Lujiazui. Economic and Technological Development Zones (ETDZs) The ETDZs were originally restricted to the 14 Open Coastal Cities, although initially Wenzhou and Beihei were not included in the list of those permitted to establish an ETDZ. The original list of 14 ETDZs, approved by the State Council in 1984 and 1985, included the three in Shanghai. Subsequently, as the "Opening Up" process has spread inland many more cities and towns have established, with and without State Council approval, what they call ETDZ in which the same policies apply, sometimes on a more favorable basis than in the original 14. The most recent additions to the list, which is now estimated to include more than 200 sites, include Nansha in Guangzhou, Shenyang in Liaoning, and Guiyang in Guizhou. In 1992 Wenzhou, one of the original 14, was granted permission by the State Council to establish an ETDZ. High Technology Development Zones (Science Parks) As with the ETDZ, High Technology Development Zones (HTDZs) can be set up by any authority and national policies applied to firms investing there. And as wJ: the ETDZ many local governments have done so, and again there is no definitive list of all such zones in operation. By the middle of 1991, 27 HTDZs had received approval from the State Council. One, Caohejing New Technology Development Zone in Shanghai is counted both as one of the 27 HTDZs and one of the 15 official ETDZ. - 249 - ANNEX 6.3 B. ZONES WITIN ZONES All of the Special Economic Zones have developed subzones within their jurisdictions. In some cases they are simply industrial estates where land clearing efforts and utility provision have been concentrated, such as the Huli District in Xiamen and the Jingpan zone in Haikou, Hainan. In at least the three largest zones, Shenzhen, Hainan, and Pudong, specialized zones have also been developed. In Shenzhen, apart from the unique Shekou Industrial Development Area there is also eight subzones including a science park (a second one is planned), one free trade area and one export processing zone. Hainan has five development zones: Haikou Economic Zone based on Haikou Port, concentrating on light and tertiary industries; Sanya Development Zone which will concentrate on tourism; Yangpu, a free trade area with mixed industrial development and also tourism and services; Qinglan Development Zone, based on agriculture and food processing; and Bashu Development Zone based on mineral exploitation, refining and smelting and metal working. The three zones of Pudong, Waigaoqiao Free Trade Zone, Jinqiao Export Processing Zone and Liujiazui Financial and Trade Zone, have already been described. The smaller SEZs also have speJialized subzones, such as the export oriented agricultural district in Zhuhai and the Longhu, Zhuchi and Donghu industrial districts in Shantou. All of the SEZs also have areas being developed as tourist spot and districts for the development of apartments and villas for overseas Chinese. Zhuhai also has plans to develop a Formula 1 racetrack. C. THE PoLicy PACKAGE The Chinese Government is in the process of moving away from a system of regional variations in economic incentives, particularly those which have favored the coastal provinces. The move is towards sectoral incentives regardless of location. The process, however, is not yet complete. The 1991 revisions to the foreign exchange retention system removed all geographic differential except two: all foreign exchanige earned by Tibet enterprises can be kept within that province and all newly generated foreign exchange in ETDZ can be retained by the local authorities in the first five years of the zones' establishment. Apart from a small number of exceptions, the general rate for the share of foreign exchange earnings which does not have to be remitted to the central authorities is now 50 percent, in the form of foreign exchange for foreign-funded enterprises and foreign exchange quotas for Chinese enterprises with direct trading rights. Of the 50 percent transmitted to the government 30 percent is at the official rate and 20 percent at the swap rate. Preferential tax rates do exist in the zones, but these are the sane in tne SEZs, the ETDZs, HTDZs and Pudong. All foreign-funded enterprises outside of the zones pay 33 percent after their tax holidays expire, while in the zones all enterprises pay 15 percent. The rate of 55 percent for Chinese enterprises not in the zones is in the process of being reduced to 33 percent. For these enterprises, the "dividend" collected by the owners is at least is seme cases being adjusted so that the total "take" remains at 55 percent. Foreign-invested manufacturing enterprises in all zones are exempt from taxes for the first two profit making years and pay tax at a 50 percent reiuced rate for a further three. In the SEZs only, service sector enterprises with foreign investment are tax exempt for the first profit making year followed by two years at 50 percent. And foreign banks in the SEZ and Pudong, but not the ETDZ, also have one year exemption and two years at 50 percent. but only if their capital - 250 - AN-X 6.3 exceeds $10 million. All foreign firms are exempt from profits tax on those profits which are remitted abroad. To be eligible for any of these exemptions and reductions the investment involved must be for a contracted period of at least 10 years. Additional exemptions andlor reductions are available to foreign funded enterprises in all zones if they introduce high technology production processes, if they export more than 70 percent of their production, or if they are 'nvesting in infrastructure facilities. In addition to the exemptions and reductions of profits (or business) tax, there are also exemptions and reductions of other taxes, mainly local taxes. Apart from total exemption for foreign-funded enterprises and refunds for other enterprises of value-added tax or its equivalent, the rates of local taxes which apply vary from zone to zone, often being negotiated on an individual enterprise basis. Duty drawback is, however, payable on exports from all zones, and all zones exempt most firms from property taxes. The treatment of imports and exports does not vary according to wheLher a firm is located in a SEZ or other form of zone. No tariffs are charged on any item imported or exported by firms in the zones for use in production, although imports which companies sell in the SEZs fbr local consumption attract 50 percent of the listed duty. Such sales are not allowed in the other types of zone. Export duties are not levied on products imported into any type of zone and then reexported with at least 20 percent value-added having been added by processing in the zones. Other forms of preferential treatment which used to be restricted to the SEZ are also now available in other zones and open coastal areas. Land use rights can be assigned, sold and transferred for periods up to 70 years in all zones. Priority access to lending from Chinese banks is also now available to all foreign funded enterprises in all types of zone. D. CONCLUSIONS In sum, compared to other types of zones, the Special Economic Zones are no longer so special as far as preferential policy treatment for enterprises located there is concerned. Equally, the reduction in (although not absence of) planning control and in other forms of government interference which is claimed as an important benefit by all types of enterprise in the Special Economic Zones, is also found in other zones such as the ETDZs and in Pudong. The SEZs would become 'special' again in policy terms if the current pressure to have them designated as free ports, or at least free trade zones was to be accepted as part of a strategy to develop several "Socialist Hong Kongs." The SEZs have argued they are such Hong Kongs, though in the germ, and that allowing them to become free ports would enable to compete with Hong Kong on a level playing field. At the moment there is no freedom of movement of goods, services or factors of production into and out of the SEZs, except on a limited basis into the Free Trade Areas. All such movements are subject to control or appioval. In a free port all movements into and out of the port are free from any restriction (apart from the usual run of basic prohibitions such as drugs and felons) or fiscal imposition. Enterprises allowed to establish in such free ports would be free to source there .aw materials, labor and capital requirement from the cheapest source available and be able to sell in the highest priced market available. - 251 - ANNEX 6.3 Even to turn the Special Economic Zones into Free Trade Areas, in which there was freedom of movement only of goods, would be a major change and make them more attractive as offshore producLion centers, competing more equally with Hong Kong and the export processing zones; allowing free movement of capital would enhance that status. But in both cases the administrative problems associated with policing the borders in order to ensure that movements of goods and capital from the zones into the mainland were subject to domestic commercial policy and capital controls would be a major undertaking fraught with difficulties. Smuggling is already a major problem. With unrestricted movement of duty free goods into the zones, the lack of an enforceable barrier between the customs zones would be certain to increase the severity of the problem. Free movement of people, the other requirement of a free port is unlikely to be acceptable to the present government of China for the foreseeable future. The limited openness of Hainan, where foreigners can be granted visas at the border for two weeks, renewable for a further two, led to considerable resistance, any more liberal treatment appears inconceivable. The development of the three existing and currently proposed free trade areas, particularly those in Yangpu, will provide interesting tests of the feasibility of running free trade zones in China on a limited basis, particularly with respect to movements of products into the mainland customs area. - 252 - ANNEX 7.1 DESCRIPTION OF THE SMART TRADE PRODUCTION MODEL USED TO SBIULATE THE EFFECTS OF A THIRTY AND FIFTY PERCENT LIBERALIZATION OF NONTARIFF BARRIERS AND TARIFS The Model The model used for this report's trade liberalization projections is described in UNCTAD/World Bank (1989). It is a partial equilibrium model of the same type as that used by Cline (1978) in evaluating the Tokyo Round.l/ Two reduced form equations are estimated to calculate trade creation and trade diversion separately for each market at the most detailed tariff-line level. Trade creation is the increase in imports due to lower prices as a consequence of reduced protection. Trade diversion, on the other hand, does not increase total trade, but leads to substitution among suppliers. The summnatior. of trade creation and trade diversion gives the total trade expansion effect. In the MFN-based liberalization analyzed in this report, exporters who previously enjoyed preferences suffer an erosion in them, while those who had no preferential access make a gain. In other words, trade is diverted toward those suppliers experiencing only MFN treatnent. The preference margins of developing countries-for example, the African Caribbean, and Pacific (ACP) countries of the Lomd Convention, the Generalized System of Preferences (GSP) and other special schemes-are eroded on products where they are applied and this may dampen the gains connected with the overall MFN liberalization. Elasticities The key inputs to the model-besides trade flows, tariffs, preferences and the existence of nontariff barriers-are the three elasticities used. These are as follows: (a) important (pnce) demand elasticities, (b) supply elasticities, and (c) the cross (price) elasticities of substitution. Import Demand Elasticities. For these, the best available estimates were used.2/ This was not a consistent series in terms of estimation methods and the market and it See also IMF (1984) and Sapir and Baldwin (1983) for similar model applications. Page, Davenport and Hewitt (1991) employ a similar model for analyzing preliminary Uruguay Round results. 21 See Cline (1978), Laird and Yeats (1986) and Stem (1975). - 253 - ANNEX 7.1 specific years they pertained to. Despite these shortcomings, they broadly reflect the differences across products and area bener alternative than the use of simple assumptions. Supply Elasticities. These were assumed to be infinite in the projections across the board. As long as increases in exports are incremental, this is a valid assumption. For large increases, especially in the case of small countries, this is obviously not realistic. Cross-Elasticity of Substitution. This is a critical input that determines the scope of trade diversion. This elasticity was assumed to be 1.5 for all products. Estimates of this elasticity are extremely sparse, and in any case, as any estimate is specific to the product and the pairs of countries (or groups of countries) in question, there are a large number of combinations. This value was based on a survey by Cline (1978). The Treatment or Nontariff Barriers Various technical problems prevent direct estimation of nominal equivalents for many nontariff barriers that are applied in developed country markets. This report used several compendia, including IMF (1984) and Laird and Yeats (1990), to compile as much information as possible on the ad valorem equivalence of these measures, and these data were employed in the projects. Two points should be noted. The liberalization simulations understate the effects of nontariff barriers because only partial information on their incidence is available. Also, some of the estimates that were available may have fairly wide margins of error due to technical difficulties in deriving these data. Time Horizon A static model measures the effect of an exogenous change-in this case a preferential liberalization-resultingfrom shorter-term adjustments. These adjustments typically exclude installments of new capital and x-efficiency gains. It is customary to assume that the time horizon for these shorter-term adjustments is not much longer than one to three years. Shortcomings of the Simulation The following shortcomings of the simulation model used should be borne in mind while interpreting the results: * The model is a partial equilibrium model, omitting economy-wide interactions through production factors. * It is a static framework;, excluding investment, capital accumulation, technological changes. * Because it is a static model, it provides a shorter-term analysis. * The crucial elasticities used are rough estimates. In spite of these limitations, national and international organizations have widely used such models for analyzing the first round effects of a trade liberalization. The World Bank and UNCTAD have worked jointly to make the model used in this study's simulations available to developing countries in order to quantify the effects of the Uruguay Round on this own exports. - 254 - ANNEX 7.2 AN ASSESSMENT OF CHINA'S CHANGING REVEALED COMPARATIVE ADVANTAGE IN LABOR-INTENSIVE MANUFACTURES The present analysis of China's export profile employs measures of a products' labor intensity that were derived by the World Bank (1992) and earlier by the United States National Bureau of Economic Research (see Lary, 1968). The analysis uses the criteria of relative value added per employee, both in the United States and other countries, to identify the degree to which products are either capital or labor intensive. Products whose value added per employee falls below the national average for all US manufacturing activity are classified as labor intensive while capital-intensive goods consists of products whose relative value added is above the US average.1I While there is a strong theoretical basis for postulating a positive relationship between labor intensity and developing countries like China's exports, there are certain products where other factors may be more important determinants of manufacturing activity. Some production processes tend to locate near areas of raw material production, particularly if transportation costs for manufacturing inputs greatly exceeds those for higher state (semi-finished or fabricated) goods. If China were not endowed with the required natural resources this could negate the positive attractive effects of high labor intensity.2t In other cases, transport costs might dictate that manufacturing activity be located closer to centers of consumption. Thi' would be the case where nominal transport costs are relatively low or. production inputs, but are more important for the final manufactured good. Aside from these locational factors, there are I/ The factor intensity index for industry j (L.) is defined as follows: J L. = (V. N-.)I(V Ni x 100 j j jtr where V. and V represent value added in industry j and all United States manufacturing respectivhly, while N. and N represent the number of workers in the industry and in all manufacturing activity. There Is an inverse relation between the numeric value of the index and the labor intensity of a given product. That is, the lower the value the higher the labor intensity of the product. (See Annex Table 1). It also follows that products with very high index values are capital intensive in production. The selection of items based on value added per employee in the United States was supplemented by detailed examination of mnnufacturing imported by developed countries from their trading partners to see if additional products needed to be taken into account. On this basis, several items such as batteries, lamps, and miscellaneous mnufactures were added to the labor intensive list since relative value added in other countries appeared below the United States average. 2/ Krause (1984) provides a detailed list of products which have these natural resource based production characteristics. - 255 - ANNEX 7.2 other reasons why a country like China may not be a major exporters of some labor-intensive products. Trade barriers in major markets can be one such important constraint. Many empirical studies habe documented the restrictive effects of trade barriers developing countries often face in textiles, clothing, foodstuffs, footwear and other products. Production incentive like subsidies, procurement practices, and tax and tariff regulations may also distort trade patterns. However, in spite of these offsetting effects numerous studies have shown that labor irntensity is a most useful guide for analysis of past trends and predicting the future composition of developing countries' exports (see Lary, 1968 or Yeats, 1989 for illustrative examples). Table I of this annex provides a list of those manufactured products which employ labor-intensive techniques and also indicates the index value for each product.l/ In addition, the table also indicates China's average exports of each item over 1979-90 and 1989190 period as well as its revealed comparative advantage (RCA) index at the two points in time. Two years of data were used for the computations in order to reduce the influence of any "unusual" factors in a single years statistics. Finally, the table also shows the 1979/80 share of each product in world trade as well as the share change that occurred over the decade. This latter information was given to indicate whether China's comparative advantage was generally in products of increasing or decreasing global importance. The results are slightly biased toward the former as 53 percent of the products in which China had a revealed comparative advantage in over 1989/90 experienced an increase in their share of world trade over the last decade. One important point that should be noted is that in 1989/90 China had an aggregate RCA index of only 0.24 in items that were identified as capital intensive in production and this value actually fell from 0.41 in 1979/80. There were about 5 to B individual capital- intensive products with RCAs over one in the two periods but all were cross-classified in the "natnral resource based' production group. The implications are that, for the near term, China's major export opportunities mainly lie within the labor-intensive products listed in Table 1. 31 The index has been computed at two points in time (1965 and 1982) to help identify production processes that were changing from labor to capital intensive or the reverse (i.e., accounting machines (SITC 714.2), toilet articles (SlTC 899.5, etc.). It could not be computed for the exact same penod for which the trade data were compiled since the required production data are only cormpiled over irregular intervals. Ia general, most of the products classified in the labor intensive group in 1965 also fell in that same category in the 1980s. Due to problems in establishing a direct concordance between the SIC based production data, which were used to estimate the labor intensity indices, and the SITC system used for tabulating trade data, some labor intensity indices for the latter had to be expressed as a range. See a World Bank study (Yeats, 1989) for details concerning these computations. Table 1: CmNA's REVEALE CoMPARAIm ADVANTAGE IN LAoR-ImNS1VE PRODUCIS, 1979180 AND 1989/90 Labor inten- China's exports Product's share in China's revealed sity index (S million) world trade (%_ comaraltive advantage SITC Description 1965 1982 1979/80 1989/90 1979/80 1989/90 chng. 1979180 1989/90 032/a Fish, tinned or prepared 93 102 49 252 .00173 .00078 1.89 0.84 052 Dried fruit 90-100Th 134 48 72 .00107 -.00050 2.87 1.07 053 Fruit prescrved 90-100 116 161 406 00431 -.00030 2.40 0.85 055/a Vegetables preserved 90-100 116 487 1,461 .00743 -.00545 4.19 6.21 0621a Sugar preparations 84 140 16 27 .00095 -.00031 1.07 0.29 081.4 Meat or fish meal 93-1021h 120 3 8 .00109 -.00171 0.17 0.08 099 Food preparations, nes 108 182 68 171 .00256 .00240 1.70 0.52 122.1/i Cigars and cherools 80 60 0 0 .00040 -.00023 0.00 0.52 243 Wood shaped 44-65/h 70 26 301 .01406 -.00760 0.12 0.28 411.1 Oil of fish or whales 102 120 0 0 .00004 -.00008 0.00 0.00 551 Essential Oils n.a./i n.a. 107 248 .00210 -.00065 3.26 1.44 611 Leather 80 69 42 295 .00369 -.00030 0.73 0.62 612 Leather manufactures 50-551h 53 5 182 .00093 -.00033 0.34 1.21 613 Fur skins tanned or dressod 100 n.a. 201 121 .00122 -.00072 10.54 2.04 621 Materials of rubber n.a.li n.a. 14 19 .00185 -.00018 0.49 0.10 US 629.9 Other rubber articles, nes 76-96/h 76-96/h 5 42 .00137 .00023 0.23 0.22 631.1/a VeneerSheets 68 55-57 1 8 .00101 -.00036 0.06 0.11 631.21a Plywood 68 55-57 27 23 .00285 -.00029 0.61 0.07 631.4/a Reconstituted wood 48-80/h 44-80 0 1 .00105 -.00012 0.00 0.00 631.8/a Wood simply worked 44-65 55 3 55 .00121 -.00039 0.16 0.56 632 Wood manufactures, nes 48-80 44-80/h 71 534 .00327 -.00060 1.39 1.16 633 Cork manufactures 48-80 65 5 11 .00037 -.00006 0.86 0.29 642/b Articles of paper 73-88 80-125/h 87 520 .00489 .00035 1.14 0.E4 651 Textile yarn 60 49 544 2,500 .01206 -.00223 2.89 2.15 652 Cotton fabrics 60-67/h 49-51&b 1,322 3,396 .00745 -.00070 11.36 4.24 653.1 Silk fabrics 67-75 57-67 347 1,657 .00077 .00077 28.84 12.24 653.2 Woven wool fabrics 71 62 49 139 .00244 -.00103 0.24 0.83 653.3 Linen, etc. fabrics 81-87/h 57-67/h 1 293 .00013 .00019 0.46 7.72 653.4 Jutc fabrics, woven 63 49 3 1 .00047 -.00038 0.40 0.00 653.5 Syntihetic fabrics 67-75/h 57-67/h 351 1,479 .00754 .00414 2.98 2.16 653.6 Woven regencrated fabrics 67-75 57-67 115 445 .00163 .0CG'8 4.52 1.70 653.7 Noonclastic knit fabrics 81-87 57-67 11 749 .00205 .00000 0.34 3.07 653.9 Woven fabrics, nes 81-87 57-67 2 22 .00222 -.00214 0.59 2.34 654 Lace, ribbons, tulle 57-85 51-68 60 219 .00113 -.00007 3.40 1.73 ...continued Labor inten- China's exports Product's share in China's revealeod sity index ($ million_ world trade (%- _ comparative advantage SITC Description 1965 1982 1979/80 1989190 1979180 1989190 chng. 1979/80 1989190 655/c Special textile products 57-85/h 51-68Lh 89 268 .00408 .00001 1.40 0.55 656 Textiles products, nes 57-85 51-68 974 2,489 .00389 -.00090 16.02 7.01 657 Floor covers 78-80 37-62 474 1,155 .00497 -.00156 0.39 2.85 661.31a Building stone worked 57 65 30 195 .00101 .00042 1.90 1.15 661.8/a Mineral building products 84-86/h 83-861h 2 6 .00063 -.00022 0.21 0.12 662La Clay refractory products 71-75 76 54 77 .00419 -.00127 0.83 0.23 663/a Other nonmelal products 82 85 36 100 .00360 -.00068 0.64 0.29 664 Glass 139/j 128 32 280 .00387 .00007 0.30 0.60 665 Glassware 84-94/h 107 54 136 .00321 -.00052 1.08 0.43 666 Pottery 69 48-721h 234 993 .00022 .00175 6.82 4.25 667/d Pearls and precious stones 55-87/h 84 60 92 .00190 -.00030 2.02 0.48 678.5 Iron tube fittings 92 101 18 182 .00196 -.00054 0.59 1.07 693 Wire products 82 73 31 117 .00209 -.00057 0.95 0.65 694 Steel, copper nails, etc. 100 88 110 429 .00354 -.00047 1.99 1.18 695 Hand tools 98 102 157 712 .00627 -.00128 1.60 1.20 696 Cutlery 73 121 51 329 .00145 -.00035 2.25 2.52 697 Base metal household goods 82-99/h 79 103 556 .00331 -.00039 1.99 2.02 4 698.1 Locksmiths wares 90 n.a. 99 403 .00233 .00043 2.72 1.23 698.3 Iron chains and parts 91-102h 82 22 113 .00078 -.00026 1.81 1.83 698.5 Pins, hooks, etc. 80 120 14 64 .00037 .00000 2.43 1.46 698.8 Misc. base metal goods 91-102/h 82 11 30 .00110 -.00020 0.64 0.28 698.9 Other base metal goods 91-102 82 24 226 .00418 -.00034 0.37 0.49 712/c Agricultural machinery 100 122-124/h 10 47 .01129 -.00534 0.06 0.07 71417 Accounting machines 89 122-134 4 541 .00197 -.00011 0.13 2.45 714.4 Statistical machincs 89 122-134 0 226 .01176 .01932 0.00 0.09 714.9 Office machincs, nes 89 122-134 6 419 .00746 .00433 0.05 0.30 715.1 Machine tools for metal 97-105/h 92 67 349 .00758 -.00046 0.57 0.41 715.2 Metal working machinery 97-105 92 1 6 .00208 -.00079 0.03 0.04 717.1 Textile machinery 76 76 97 183 .00664 -.00002 0.95 0.03 717.3 Sewing machines 99 71 52 116 .00162 .00013 2.06 0.65 718.1 Paper mill machinery 87 99 5 26 .00206 .00065 0.30 0.08 718.3 Food machincry 105 96 10 19 00170 -.00007 0.38 0.10 719.2 Pumps and centrifuges 108 113 IS 205 .01270 -.00023 0.09 0.14 719.5 Power tools, ncs 89-103/h 80-113/h 6 65 .00487 -.00005 0.08 0.11 719.6 Nonelectric machines, nes 89-103 77-88 8 82 .00507 .00057 0.10 0.12 719.8 Other machines, nonelectric 89-103 77-88 27 124 .00918 .00256 0.18 0.09 ...continued I Labor inten- China's exports Product's share in China's revealed sity index (S million) world trade (%1j comparauive advantage SITC Description 1965 1992 1979/80 1989190 1979180 1989190 chng. 1979/80 1989190 719.91 Foundry molds, etc. 89-103Lh 77-88/h 0 80 .00103 .00054 0.00 0.46 719.92 Cocks, values, etc. 89-103 77-88 11 89 .00541 -.00023 0.13 0.14 722 Electric power machinery 72-107 95-100 94 2,103 .02374 .00102 0.25 0.72 723.2 Electric insulating equipment 80-104 72-107 9 20 .00068 -.00008 0.85 0.28 724.2 Radio receivers 98 96 43 3,591 .00585 .01521 0.47 1.43 724.9 Telecommunication equip. 95-102/h 105-120/ 26 2,335 .00147 .00048 1.13 2.73 725.03 Domestic electric goods 98 92 39 1,424 .00168 .00027 1.49 6.1S 725.05 Electric space heaters 101 90 10 1,630 .00253 .00128 0.25 3.61 729.1 Batteries, accumulators 121 110 56 210 .00198 .00023 1.81 0.80 729.2 Electric lamps, bulbs 130 132 43 158 .00188 -.00018 1.46 0.78 729.3 Transistors, values, etc. 80 95 3 196 .01451 .01272 0.01 0.06 729.4 Automotive electrical machinery 72-107dh 102 7 51 .00287 .00032 0.16 0.14 729.9 Other electrical machinery 72-107 102 33 524 .00264 .00681 0.80 0.47 731 Railway vehicles 101 100 11 143 .00283 -.00137 0.25 0.82 732.8 Motor vehicle parts 103 120 15 82 .03044 .00089 0.03 0.22 732.9 Motorcycles and parts 73-781h 72 14 11 .00320 -.00167 0.28 0.06 co 733.1 Bicycles and parts 73-78 72 85 438 .00188 .00041 2.89 1.61 812.4 Lighting equipment 90 96 78 718 .00189 .00072 2.64 2.31 821 Furniture 63-74/h 48-70/h 222 1,142 .01070 .00196 1.33 0.76 831 Travel goads and handbags 46-57 48-3 150 5,230 .00289 .00132 3.32 10.46 841.1 Textile clothing not knit 42-55 36-64 1,379 15,768 .01935 .00514 4.56 5.42 841.2 Clothing accessories not knit 42-55 36-64 204 1,000 .00164 .00025 7.96 4.45 841.3 Leather clothing 39-67 43-61 246 1,576 .00171 .00112 9.20 4.68 841.4 Clothing accessories knit 42-55 36-64 597 9,658 .00695 .01009 5.50 4.77 841.5 Headgear 42-55 36-64 33 470 .00051 .00030 4.13 4.88 841.6 Rubber clothing 79-96 82 7 85 .00029 .00007 1.55 2.00 842 Fur clothing 97 90 122 264 .00144 -.00081 5.42 3.52 851 Footwear 46-63/h 46-54/h 331 5,703 .01112 .00069 1.90 4.07 861.2 Spectacles and frames 73 79 1 116 .00102 .00024 0.06 0.78 861.3 Optical instruments 96 109 4 154 .00097 .00063 0.27 0.81 861.4 Still cameras 108 210fi 4 369 .00265 -.00051 0.10 1.45 861.6 Photographic equipment 108 21011 0 39 .00403 .00153 0.00 0.06 861.7 Medical instruments 95 117 8 109 .00282 .00108 0.18 0.24 864.1 Watches, movements, cases 63-89/h 66 66 1,597 .00048 .00376 8.79 3.17 864.2 Clocks and parts 63-89 66 50 600 .00206 -.00053 1.55 3.30 ...coainued Labor inten- China's exportU Product's share in China's revealed sitv index (S million) world trade (% comparative advantagz SITC Description 1965 1982 1979/80 1989/90 1979/80 1989/90 chng. 1979180 1989/90 891 Sound recorders 74-106&h 64-160/h 40 2,SSO .01005 .00619 0.25 1.32 892ff Printed matter 74-81 71-82 13 135 .00652 -.00048 0.13 0.19 893 Asticles of plastic 76-96 81-87 40 2,278 .00789 .00381 0,32 1.64 8941g Toys and sporting goods 55-74 86 191 10,692 .00771 .00378 1.50 7.83 895.2 Pens and pencils 72-81 92-94& 45 132 .00096 .00005 3.00 1.09 897.1 Real jewelry 55-87 79-84 85 322 .00341 .00088 1.60 0.63 897.2 Imitation jewelry 62 65 15 258 .00068 .00009 1.41 2.82 899.1 Carved goods 62-671 s0 32 30 .00023 -.00013 8.92 2.50 899.2 Brooms and products 85 71 494 1,070 .00102 -.00009 30.99 9.68 899.3 Candles, matches, etc. 59-71 80 41 203 .00087 -.00027 3.01 2.85 899.4 Umbrellas, canes, etc. 72 s0 31 669 .00039 .00011 5.08 11.26 899.5 Toilet goods 62-67/h 272/l 26 170 .00113 -.00028 1.47 1.68 899.6 Hearing aids 99-102 99-116/ 0 3 .00079 .00042 0.00 0.02 899.9 Other manufactures, nes 62-67 80 96 1,637 .00087 -.00034 7.06 11.39 Note: The values shown for the labor intensity index are Inverse indicators. That is, the lower the value the higher the labor intensity for the product. ' A value of 100 indicates the item has the average labor intensity for all US manufacturing activity. /a Identified by Krause (1984) as a product that is also natural resource intensive in production. Lb Includes 641.7 handmade paper. Ic Excludes 655.1 felt and articles n.e.s. and 655.5 elastic fabrics not knit. {d Excludes 667.2 nonindustrial diamonds not set. Le Excludes 712.3 dairy ftrm equipment. Tr Excludes 892.2 newspapers and periodicals. {e Excludes 894.3 nonmilitary anns and 894.5 amusemenls for fairs. /h Due to the fact that the SIC classification of the Unitcd Slates has undergone a number of major revisions, and the fact that an exact concordance to the SITC system does not exist, it has been necessary to express some of the factor proportions indices as a likely range rather than a specific average for the SITC group. See Lary (1968, pp. 191-2 for a SIC concordance relating to the 1960s). /i Although factor intensity indices could not be computed for these products they were included in the original NBER list on the basis of data drawn from non-United States sources. Li The corresponding SIC product is 3861 'photographic ecquipment and supplies" which employed 119,300 workers in 1982 and produced a value added of $14,059.1 million. As such it moved from about average to very high capital intensity in production over 1965-82. Lk Available concordances between the SITC and SIC place this product in SIC group 2844 "toilet preparations." In 1982, this SIC group and 60,400 > employees and produced $7,130.6 million which accounts for the ver high values added per employee raio.Z M - 260 - STATISTICAL ANNEX LIST OF TABLES AI. 1 China's Exports as Reported by Partner Countries ................ 262 Al.2 China's Exports as Reported by Itself ........................ 263 A1.3 The Relative Importance of the Thirty Largest Markets for China's Exports, 1984-90 . 264 A1.4 Reexports of Chinese Products from Hong Kong to the Rest of the World (Selected Years) .265 A1.5 Commodity Composition of Reexports of Chinese Products from Hong Kong to the Rest of the World (Selected Destinations, 1990) .266 A1.6 The Geographic Diversification of China's Manufactured Exports, Compared with Other Countries (1990) .............................. 267 A1.7 Exports of TVEs ..................................... 268 A1.8 China: Structure of Imports (CIF) Customs Basis ................. 269 AI.9 Structure of China's Imports (CIF) Customs Basis (A Comparison with Other Countries for 1990) ................................ 270 A1.10 Origin of China's Imports: A Comparison with Other Countries of East Asia (Selected Years) ...................................... 271 A2.1 The Changing Number of FTCs .......... .. ............... 272 A2.2 China: List of Products Subject to the Mandatory Planning .... ....... 273 A2.3 China: List of First Category Imports ........................ 277 A2.4 China: List of Second Category Imports ...................... 287 A2.5 China: List of First Category Exports ........................ 288 A2.6 China: List of Second Category Exports ...................... 292 A2.7 List of Products Subject to State Price Control ................... 296 A2.8 Trends in Exchange Rates ................................ 299 A3.1 Average Tariff Levels ................... 300 A3.2 China Average Tariffs (by SITC 2-Digit Codes) .................. 301 A3.3a China: Structure of Production, Imports and Exports [by two-digit SITC (Revision 2) Category, 19851 .............................. 303 A3.3b China: Structure of Production, Imports and Exports [by two-digit SITC (Revision 2) Category, 1990] .............................. 304 A3.4 China: List of Products Subject to Import License (as of August 1992) 305 A3.5 China: List of Products Subject to Import Control (as of August 1992) . . 317 A3.6 List of Harmonized System Categories Subject to Export Licensing ... ... 320 A3.7 Estimates of Protection Based on International Price Comparisons .... ... 323 A4. 1 China: List of Products for which Import Licenses andlor Controls are to be Maintained at the End of Announced Liberalization Program .324 -261 - ST-ATISTICAL ANNEX A6. 1 Organizational Structure of Ministry of Foreign Economic Relations and Trade (1992) ................................. 327 A6.2 China: Selected Indicators of the SEZs and 14 Open Cities .... ...... 328 A6.3 China: Foreign Direct Investment by Provinces, 1983-91 .... ........ 329 A6.4 Regional Distribution of China's Exports (1989) ................. 330 A7. I The Fifteen Largest Three-Digit Export Products of China, Republic of Korea, Taiwan (China), Hong Kong and Singapore .331 A7.2 China's Share of World Exports by Sector . . .................... 332 A7.3 China and Other East Asian Countries' Share in the World Exports of Selected Products (1985 and 1990) .334 - 262 - STATISTICAL ANNEX Table AL.!: CEINta's Exrtms As REPoRTED Iv PARTNER CouNwnws (S million) Commodity 1985 1986 1987 1988 1989 1990 1991 00 Live animai 303 282 300 314 316 346 379 01 Mea andprepaamon 283 339 316 314 383 376 365 02 Dairy products nand asp 69 81 95 74 67 68 67 03 Fish and preprantiona 376 667 956 1,482 1,479 1,716 1,663 04 Crcmll *nd preparation 662 530 359 403 541 329 924 05 Frueal vprepgebl 920 1,280 1,439 1,91S 1,973 1,940 2,143 06 Sugar and preps honey 90 118 152 121 139 268 108 07 Coffe tea cocoa spices 466 542 436 488 487 492 346 01 AniamI reeding uuff 222 '71 500 816 638 533 699 09 Misc food prepartions 70 77 91 62 74 103 126 10 U.N. Specml Code 0 0 0 0 0 0 0 11 Beverages 81 93 135 158 193 203 241 12 Tobacco and unfr 28 38 43 72 121 152 199 20 U.N. Special Code 0 0 0 0 0 0 0 21 Hides,mkinsfurnundrnod 153 141 177 232 161 170 106 22 Oilaceds,nuts,kerncla 413 498 538 575 511 591 676 23 Rubber crude,synthede 2 2 1 8 9 13 17 24 Woodlumberandcork 19 29 48 113 121 116 149 25 Pulp and waa paper 3 4 7 7 7 9 7 26 Textile fibre 1,179 1,146 1,SS9 1,635 1,594 1,054 1,177 27 Crade fertkr.mnia nea 302 338 38S 488 630 613 595 28 Metalliferoua ores,acrap 183 202 286 442 432 322 222 29 Crude animal,veg mart 452 544 720 16 961 904 874 30 U.N. Special Code 0 0 0 0 I) 0 0 32 Coal, coke, briqueensc 250 282 352 427 544 580 763 33 Petroleum and products 6,904 3,378 3,878 3,604 3,437 4,333 4,097 34 Gaaatuml and manufatd 4 2 3 3 2 12 3 35 Electric cergy 0 0 0 0 5 7 6 40 U.N.SpecialCodc 0 0 0 0 0 0 0 41 Animal oils and fats 0 0 0 0 1 1 1 42 Fixed vegeable oil, fat 96 96 95 78 64 109 96 43 Proced anml veg oil, ec. 2 3 3 3 5 13 5 50 U.N. SpecialCode 0 0 0 0 0 0 0 51 Chem. ulcien-, compounds 648 350 1,103 1,445 1,624 1,630 1,710 52 Coatputroleuntetc chime 31 16 31 37 53 102 109 53 Dyes jannng,colurprod 68 120 IS 182 244 284 272 54 Medicinal etc products 257 304 364 449 497 542 S10 55 Perflame,lcanmgcaprd 109 113 139 138 201 21S 206 56 Feutilizir manufctured 3 7 12 IS 21 24 22 57 Explosivces,pyrtechpmod 143 166 134 134 237 243 244 58 Plastic matenals etc 47 70 99 132 197 28S 304 59 Chemicals nes 134 172 209 260 258 267 267 60 U.N. Special Codc 0 0 0 0 0 0 0 61 Lathcrdress fiur,ctc 71 84 129 208 246 370 433 62 Rubbcr manufactures ncs 39 62 59 B0 106 98 95 63 Wood,cort n.nufact, ncg 53 69 105 177 263 375 467 64 Papcr,paperboard and mfr 166 217 277 320 391 440 440 65 Textile yarn,flmbric etc 3,626 4,721 6,406 6,934 7,S94 7,422 8,654 66 Non-ctal minerml af nes 295 393 521 723 927 1.171 1,890 67 [mnandsted 102 151 339 945 895 1,235 1,761 68 Nonl;numezals 279 218 522 909 '81 610 631 69 eteul manufacresnem 473 638 846 1,182 1,444 1,771 1,913 70 U.N.SpecialCode 0 0 0 0 0 0 0 71 Machinery, monclecuzic 282 332 676 1165 1638 2113 2443 72 Electrical machinery 536 1,015 2,191 4,049 6,430 8,749 10,448 73 Tranapoa equipamen 8B 113 270 309 449 S88 833 80 Unspecal code 0 0 0 0 0 0 0 81 Plumbg, beautg, Ihtng equ 44 61 84 161 277 460 700 82 Furniue 157 130 234 41S 510 635 375 83 Travel goods,handbags 451 684 1,170 1,72S 2,245 2,989 3,696 34 Clotbing 3,689 5,826 7,761 9,470 13,118 16.044 13,625 8S Footwear 330 450 717 1,227 2,135 3,701 S,904 86 Jnwtnnt,wtch,clcks 254 423 596 1,082 1,435 1911 2,354 39 Mwcmnufdgoods an 1,545 2,336 3,997 6,118 8,998 11.648 13,647 90 Unspeacu0 0 0 0 0 0 0 91 Mal nd clased by Iin 1 I 1 2 1 1 1 93 Special transactionas 276 30B 401 501 419 454 476 94 Zoo animals,peus 5 7 8 6 6 7 8 95 War firearrns,anmunitioa 3 2 7 5 10 12 11 96 Coin nongold, noncurrmnt 4 2 3 5 6 3 2 Total 27751 31.903 42.93 5 68.402 37 96.001 Source: UN COMFRADE Databae. - 263 - STAImIICAL ANNEX Table A1: CiIIINS EDaORnS AS REPORTED BY ITSELF (S million) Commodity 1985 1986 1987 1988 1989 1990 1991 00 Live animals n.m. n.a. 347 386 395 430 439 01 Meat and prepantions n.a. n.m. 520 585 657 791 906 02 Dairy products and egs nBa. n.m. 90 96 90 79 82 03 Fish and preparations n.a. n.a. 721 969 1039 1370 1181 04 Cereals and preparations na. na.. 579 681 719 614 1169 05 Fuil and vegetables nBa. nUa. 1290 1618 1623 1760 1946 06 Sugmrandprepshoney n.a. n.S. 156 111 237 318 202 07 Cotree tea cocoa spices n.a. n.S. 488 524 568 534 491 08 Animul fecding slull n.a. n.A. 585 917 B64 758 8aS 09 Misc hod prepmrations na.a nU.. 47 S8 74 82 116 10 Unspecial code n.a. n.s. 0 0 0 0 0 11 Bevcrages na.. n.a. 116 143 173 171 218 12 Tobacco and mrr n.a. n.a. 58 93 141 170 311 20 Unspecial code nBa. n.s. 0 0 0 0 0 21 Hides,skinsjfurs undrsad u.. n.J. 137 176 122 153 77 22 Oil aeda,nuts,kerncls n.a. n.a. 674 684 645 619 741 23 Rubber crude,synthetic n.a. n.s. 3 7 12 20 13 24 Wood lumber and cork n.a. n.J. 35 99 96 89 112 2S Pulp and wasepapr n.s. n.a. I 5 4 2 1 26 Textile fibres n.a. nA.. 1509 1672 1546 1096 1126 27 Crude ferizr,minrrm nes n.a. n.N. 361 446 544 516 512 28 Metalliferous oreu,scrap n.m. ra. 265 380 329 17S 119 29 Crude aniwnal,veg at nes na. n.a. 645 724 "4 809 700 30 Unspecialcode o a. am. 0 0 0 0 0 32 Cola.cokc,briquettes n.a. n.a. 536 594 680 755 829 33 Petroleum and products na. n.s. 3976 3319 3594 4393 3830 34 Gas naturl and manufczd n.a. na. 3 3 2 3 4 35 Electric energy as. n.a. 3 3 6 8 13 40 UnApeacil code Na,. a.s. 0 0 0 0 0 41 Animal oils nd fats n.a. n.a. 0 0 0 1 1 42 Fixed vegetable oil,at ana. n.s. 79 72 83 ISS 144 43 Proeesd nml veg oil,etc n.a. na. 2 2 3 5 5 SO Unspecial code n.a. n.a. 0 0 0 0 0 5: Chem elements,compounds n.a. n.a. 1073 1394 1541 1716 1560 52 Coal.petroleuzn etc cherns na. n.a. 26 31 39 79 78 53 Dyes,tauuing,colourprod Ua.. n.s. 175 229 288 366 335 54 Medicinal etc products a. n.a. 421 484 566 643 774 55 Perflrme,clesning etc prd nu. n.a. 136 193 235 319 220 56 Fertilizers naunufactred na. na. 12 15 17 25 25 57 Explosives,pyrotechprod u.a. U.S. 185 300 248 214 163 58 Plsszicmaerul etc ns. n.a. B1 131 151 277 251 59 Chemicals Dn n.a. n.a. 186 234 239 240 283 60 Unspcci code nAs n.a. 0 0 0 0 a 61 1.shcr,dreued fur,etc B.s. n.c 91 102 104 183 192 62 Rubber rmnufactures nos n.. n.J. 101 213 147 194 237 63 Wood,cork manufacn n act n.a. nsc. 89 143 209 297 414 64 Paper,paperboard and mfir A.m. na. 253 271 290 294 3 22 65 Textile yam.fubric etc n.a. n.m. 5945 6603 7191 7202 7993 66 Nonmetal mineral mfs nes n. a n3. 439 579 793 1316 1668 67 bron mnd steel n.a. n.m. 422 1010 709 1282 1669 68 Non-ferrous metab nJ. n.a. 591 820 461 601 566 69 Metal manufactures nes n.s. a.s. 792 998 1198 1429 1693 70 Unspecialcode nJ. n.m. 0 0 0 0 0 71 Machinery,non-electric nJ. U.. 578 1395 2089 2721 3521 72 Electrical machinery a.m. n.m. 1367 2129 2855 3957 4858 73 Transpon equipment nJ. ns. 1726 2367 3072 4065 5431 80 Unspeciul code n.s. B.n. 0 0 0 0 0 81 PIumbg,heatngjghtngequ uJ. U.S. 60 77 106 129 187 82 Furiture nS. a .a. 177 235 272 322 465 83 Tavel goodsjhndbsgs U.S. n.m. 253 348 401 385 492 84 Clothing na. n.5. 5322 6613 8131 9610 12749 S5 Footwear n.s. a. 528 81S 123 1957 2320 86 histnvnts,watches,clocks nJ. n.r. 5S8 828 976 1304 1490 59 Misc znsnufctrd goods nes n.s. n. . 1945 2500 3334 3919 4706 90 Unspecial code n.s. c na. 0 0 0 0 0 91 Mail ot classed by lind U.. na. 0 0 0 0 0 93 Special transactions nc. n.s. 2631 2193 496 1I60 723 94 Zoo animis,peri nJ. a.s. 7 5 7 11 13 95 War firearms,armmunition naa. a. 0 0 0 0 0 96 Coin nongold,noncur a.. na. 0 0 0 0 0 Total 0 0 39437 47516 538 62091 71942 Source: UN COMTRADE Database. - 264 - SIA1ISTICAL ANNEX Table A1.3: Tim RELEATIV IWORTANCE OF nEz TuhTY Lsuosr NILurrs FOR CiINA'S EXPORTs, 1984.90 All foods (SITC Manufaclurcrs (SITC All products (SITC 0+1+22+4) share 5 lo Slams 68) share 0 to 9) In share of 1iw cxirorbLf%) of ple cxnorts (%1 of till eSBnWUts L :984 1984-90 1984 1984-90 1989/90 valuc or 1984 1984-90 change change exports (S mill.) changc Hong Kong 33.3 -6.7 38.6 14.4 42,252 26.5 16.4 Japan 19.5 2.1 9.2 -1.0 7,149 20.5 .6.0 United Statcs 2.5 2.3 11.7 -3.0 7,072 9.3 -1.0 USSR 7.0 2.3 1.9 1.2 2,300 2.4 1.2 Singaporc 3.5 0.1 2.8 -0.9 1,516 5.0 -1.8 Gcurany, Fed. Republic 3.0 4.1 4.1 -0.9 2,547 3.1 -0.1 Korna, Rep. 0.0 3.9 0.0 1.3 699 0.0 2.0 Ncthcrlands 2.2 0.2 1.5 -0.2 1,037 1.3 0.2 Italy 0.8 0.3 1.1 0.2 1,083 1.2 0.1 Unked Kingdom 2.0 -0.9 1.5 -0.4 580 1.3 1.0 Tailnd 3.0 -1.5 0.5 0.8 885 1.0 0.3 France 1.1 0.2 1.3 -0.3 817 0.9 0.1 Macau 1.3 -0.4 1.9 -1.0 752 1.2 -0.4 Korea, Dan. Republic 0.3 0.6 0.2 0.1 227 0.9 -0.3 Czechoslovakia 1.3 -0.6 0.3 0.3 505 0.5 - Malaysia 2.0 -1.0 0.9 -0.4 399 0.8 -0.3 Pakistan 0.4 0.8 1.8 -1.3 544 1.0 -0.4 Indonesia 1.0 0.5 0.1 0.3 252 0.3 -0.2 Saudi Arabia 0.6 0.7 0.9 -0.4 435 0.5 - Ronaaiia 0.7 -0.3 0.8 -0.5 354 1.2 -0.8 United Arab Emirates 0.0 0.2 0.0 0.6 458 0.3 0.1 Cuba 0.7 0.4 0.5 -0.1 306 0.4 - 1.4 0.8 0.1 0.1 171 0.9 -0.6 1.1 -1.0 0.5 -0.4 356 0.5 -0.4 Y|iq, Chjna 0.0 0.6 0.0 0.5 264 0.0 0.5 0.0 0.3 0.1 0.3 286 0.3 - 0.2 0.3 0.4 -0.2 178 0.4 -0.1 re;di; 0.1 0.3 0.1 - 116 0.2 0.1 0.0 ('.2 0.0 0.4 . 269 0.6 -0.3 - 265 - STATISTICAL ANNEX Table A1.4: REEXPORTS OF CIMNESE PRoDucrs FROM HONG KONG TO THE REST OF T7E WORLD (SELECTED YEARS) ($ bllion) Value of reexports Export market 1984 1990 Japan 0.27 2.10 USA 1.10 10.50 EC n.a. 6.20 Other 1.95 12.10 Total 3.32 29.00 Source: Hong Kong Review of Overseas Trade, Census and Statistics Department, Hong Kong, various years. 19&! 1990 Memo Items: Average Excdhange Rate (EII to $) 7.818 7.709 Reexports of Chinese products back to China 0.27 1.80 - 266 - STATISTICAL ANNEX Table A15: CoMMODn CoMposmoN OF REExPORTS OF C}INESE PRODUCFS FROM HoNG KONG TO TIE REST OF TIE WORLD (SELECTED DESrINATIONS 1990) (HK$ billion) SITC (Revision 2) Category Country of destination USA Germany Japan Misc. manufactured articles (mainly baby carriages, toys & sporting goods) 24.0 4.4 2.1 Articles of apparel & clothing accessories 15.0 6.3 6.0 Footwear 9.0 - - Telecommunications & sound recording 8.4 - - equipment Textile yam fabrics - - 0.9 Travel goods - 1.5 - Electrical machinery, apparaus & appliances 6.4 0.9 0.8 Total Reexorts 81.7 21,4 1.Q Source: Hong Kong Review of Overseas Trade in 1990. Census and Sttistics Dept., Hong Kong. - 267 - STATISTICAL ANNEX Table A.6C: TiE GEOGRAmc DVERSKF[cAION OF CHNA'S M iNUFACTRED Exvoins, COMPARED wiLi OIR COUNTRms (199O, Exporters and Share or Trade Destined from Speciric Markets USA EEC China la Rep. of Taiwan, Singapore Hong Import market (10) Korea China Kong Japan 9.6 2.3 11.5 16.8 9.2 5.5 4.9 United States - 7.8 25.6 31.6 34.4 28.1 30.7 Germany 5.2 11.8 7.6 4.6 5.1 5.2 8.4 Fn1nce 3.8 11.2 2.2 1.8 1.8 2-1 1L7 United Kingdom 6.7 7.9 3.3 2.8 3.1 4.1 6.2 Itay 1.9 6.5 1.3 1.2 1.6 1.6 0.9 Nethcrlands 3.2 6.2 1.3 1.6 3.0 2.6 2.3 Bdurn-Luxcmnbourg 2.3 6.5 0.6 0.7 0.8 0.9 0.4 Canada 23.5 0.9 2.0 2.8 2S 1.1 2.4 Sweden 1.0 2.4 0.3 1.3 0.6 1.0 6.4 Taiwan, China .7 05 1.7 1.8 - 4.5 1.8 Switzerland 1.1 4.1 0.2 0.6 0.6 0.6 1.3 Spain 1.2 4.1 0.7 0.7 0.9 0.6 0.6 Australia 2.6 0.7 0.9 1.5 2.0 2.3 1.6 Saudi Arabia 1.0 0.7 05 1.2 0.7 0.5 0.2 Norway 0.4 0.9 0.1 0.2 0.2 0.3 1.4 Hang Kong 1 5 0.7 6.2 5.6 13.6 4.9 - KCoreaReJgp.Of 3.1 0.6 2.7 - 1.6 2.2 0.8 AustriP 0.3 2.9 0.1 0.4 0.4 0.3 0.7 DenmErt 0.3 1.3 0.5 GA 0.3 0.2 0.4 Yugoslavia 0.1 0.9 0.1 - 0.1 0.2 0.1 Mexco 7.7 0.3 U .1 0.8 0O5 0.2 0.3 Singapore 2.4 0.6 1.9 Z27 3.3 - 3.1 Fnland 0.3 0.9 0.1 0-2 0.2 0.2 0.3 Indonesia 0O5 0.3 C4 1.7 1.8 - OS5 India 0.6 0.7 0.1 0.6 0.3 1.4 0.2 Malaysia 1.0 0.3 0.5 1.1 1.7 13.5 0.7 Israel 0.8 0-6 - - 0-2 0.1 0.1 South AfiiCa I O5 0.6 - - - - 0.4 Thailind 0.8' 0.4 1.3 1.5 2.1 4.7 0.9 Brazil 1 5 0.4 - 0.2 0.2 - 0.1 China 1.2 O.S - - - 1.1 20.3 Kuwait 0.1 0.1 0.2 0.2 0.1 0.1 - New Zcaland 0.3 0.1 0.1 0.2 0.3 0.4 0.2 Venzucla 0.8 0.2 - 0.1 0.1 - - Memo R2Cm Share of exports going to the EC - - - 19.2 13.8 16.6 17.3 /a Adjusted for rCxports Uru Hong Kong. Source: UN COMTRADE and staff estimates. -.268 - STATISTICAL ANNEX Table A1.7: ExPORTS OF TVEs TVE Export Earnings by Region-(Y billion) Export % Share 1988 1990 1988 1990 TVE Total 29.87 - 100.00 East China 26.38 - 88.32 Central Chma 2.72 - 9.10 West China 0.77 - 2.58 National Total 176.67 298.58 100.00 East China 26.38 - 14.93 Central China 2.72 - 154 West China 077 - 0.44 Source: China TVE Yearbook, 1989; China Statisical Yearbook 1991. Composition and Growth of 7VE Exports Composition by Average Growth Value, 1988 1986-88 Chemicals 5.25 16.31 Electrical 3.83 19.36 Minerals 4.57 12-04 Foodstuffs 9.16 13.63 Traditional products 1.63 10.77 Animal husbandry 4.05 15.64 Textiles 15.53 11.19 Clothing 12.63 17.00 Arts and crdfks 13.51 12.78 Other 29.87 15.89 Source: Township and Village Enterprise Yearbook, 1989. - 269 - STATISTICAL ANNEX Table ALL CWNA Snucn oa I&wroRms (CIF) Cwwun &#s (S mElon) Commodity 1934 1987 1918 1989 1990 1991 FOOD SO+SI+S4 2,362 3,109 4.256 5,382 4.596 3.384 Fod S0 2.169 2.496 3.541 4,305 3.458 2.96S Bevew e S1 1 16 263 346 201 157 200 Anima fat S4 77 349 369 875 982 719 PETROLEUM (MineI! Furs) D3 132 529 775 1647 1269 2.105 L%nEIEDIATE S5+S2 +D61+D63+D6Sto D63 12.961 13.6S4 2S.506 25.439 21,041 23.427 Chemica od reld poducts SS 4.005 5.09( 9.234 7,745 6.390 9.498 Cnzdenuscrdhl (own-food) 52 2.404 3.38S 5.237 4.971 4.041 5.053 L,azher+Cok=D6ltD63Ligh=Lg -D64to D61 234 729 342 747 933 1,267 Leathr D61 53 154 224 230 374 642 Cock D63 131 544 613 467 56S 625 extile Yam (yam. thbrics ccc.) D65 913 3,S77 4.201 4533 5276 3637 Notntallicnminel D66 213 342 430 5o 453 443 Ironm ad Steel W67 4.124 4,7S7 4.624 5797 2352 2694 Noeenuoa mtals D63 1.063 741 387 1125 590 330 CONSUMER GOODS D64+SD62+D822, D39 556 1.953 2259 2,1.15 2.516 6.115 Paper (perad relael prodflus) D64 2Z7 727 610 634 74S 969 D62+D2+DS33+1DS4+DSS 43 120 163 14 201 3317 Rubber D62 13 45 51 50 50 76 Fumtaec D82 20 42 61 68 72 49 Tavelgoods oD83 1 3 a 6 6 7 Clodig D14 6 30 46 SS 63 3173 Foota M5 2 1 2 3 9 11 Photo aupplim Dag - - - - - Mbaclineom D89 237 1,105 1.431 1.356 1.570 1.329 Capil goods (s7+a3+a9-d6L.D6d32.D85.d8B1d89) 3,070 13.779 22.153 24.23S 23.639 23.044 of whkh ranpot equpml S73 1.865 4.058 4.J11 5.296 5,957 7.25 MSSCELLANEOUS 59 o 192 316 213 285 217 Totd 24.082 g2L6 55.263 59.140 53.345 63.791 Source. Tade Da (SIT Rcvi 1). ChioasCu Qgs Sw9. o lya - 270 - STATISTICAL-ANNEX Table A1.9: SmUCTLUE OF CHINA'S INMPORTS (CIF) CusTous BA5S (A Comparision with Other Countries for 1990) (S milon) Commodity China Korea Taiwan Brazil India Malaysia (China) Food S0+S1+S4 4,596 3,612 2,921 2,091 768 1,882 Food S0 3,458 3,240 2,527 1,963 569 1,693 BEverages Si 157 188 297 52 6 108 Anmal fat S4 982 184 97 75 193 81 Petroh um (Mineal Fuels) S3 1,269 11,001 5,896 6,009 6,496 1,485 Intermediate S5+S2 +D61+D63 +D65 to D68 21,041 25,309 18,465 6,121 9,619 6,763 Chcmical and rdated products S5 6,890 7,413 6,947 3,561 3,076 2,452 Crudr mnterias (nonfood) S2 4,041 8,627 4,368 1,195 2,246 943 Lcathcr D61 374 769 277 198 83 23 rCork D63 564 407 314 15 7 26 Textilc Yarn (yarn, fabrics, etc.) D65 5,276 1,967 1,018 252 238 950 Nonmetlc minerals D66 453 889 620 168 2,176 309 Ion and Steel D67 2,852 3,300 2,885 295 1,166 1,466 Nonferrous nutals D6S 590 1,936 2,036 437 627 594 Consumer goods d64+d62+d82 to d89 2,516 2,388 2,805 1,066 550 1,763 Paper and relatcd products D64 745 443 659 278 249 552 Rubber D62 50s 186 183 123 57 91 Furniture D82 72 129 114 9 3 44 Travel goods D83 6 15 54 5 0 14 Clothing D84 63 151 291 59 1 77 Footwear D85 9 21 70 21 0 21 Photo supplies D88 0 0 0 0 0 0 Miscellaneous D89 1,570 1,443 1,434 571 239 965 Capital goods (S7+SS+S9-D61.D68- D82.D85,D88,D89) 23,639 26,965 22,029 7,168 4,890 15,884 of which: Transport equip. S73 5,957 2,721 3.828 786 916 2.784 Misccllbacous S9 285 311 1,299 2 1.476 65 Total S3.345 69.585 53415 2,458 23.799 27.841 Source: Trade Data (SITC Revision 1), China's Customs Statistic, 1990. - 271 - STATISTICAL ANNEX Table A1.10: ORiGiN oF Cmwas Iwmomn A CoMrAnIsoN Wrm Oin CouTRE OF EAr Asu (SELECT YEA" (S milions) Thailand Indoncsia Taiwan (China) Korea China Year Origin of Value of Value of Value of Value of Value of Imports Imports Imports Imports Imports Imports 1984 World 10,418 13,865 22,062 30,609 26,18i Japan 2,833 3,308 6,464 7,613 8,194 USA 1,409 2,562 5,093 6,861 3,871 EC 1,317 2,123 1,975 2,790 3,335 Other 4,959 5,872 8,30 13,345 10,78S of which- Hong Kong - - - - 3,142 1990 World 33,129 21,837 53,415 69,585 53,345 Japan 10,138 5,299 16,015 18,566 7,587 USA 3,600 2,520 12,633 16,938 6,571 EC 4,806 4,061 6,952 8,399 8,018 Olher 14,585 9,957 17,815 25,682 31,169 of which: Hong Kong - - - - 14,403 Sourcc United Nabons COMTRADE Database and China's Customs Staistcs, vanous years. - 272 - STATISTICAL ANNEX Table A2.1: TIE CWN4GING NUMBER OF FitCs Peak Number Number Jurisdiction number eliminated surviving (1988) (1991) Provincial, municipal or other local 2,956 1,083 1,873 Special Economic Zones 1,293 200 1,098 National 826 119 707 Totl 5.40 470 Source: MOFERT. - 273 - STATIST[CAL ANNEX Table A2.2: CIIAh Lur or PatoDucn Sunzucr To htmA DmTMY PLA (Anraged According to Hannonked Coanmodiy Dcunptiod and Coding Syscm) Scrial HS Code number number Dmewiptin CMrny I IWII0 Dunun mono - M 2 100190 Whaetnrs and mlmin M 3 100200 Rye M 4 100300 Barky M 5 100400 Oat U 6 100510 Maize (corn) mcl M 7 100590 be (corn no M a 100610 Rkie i the bu k pdy or rough) M 9 100620 Rice, hukd (bww.) M 10 100630 Rice. asui-mled or wholly milla. whedher or nmt poliahed or glazd M I1 100640 Rice, broken M 12 100700 Grain sorgha n 13 100I 10 Buckwheat M 14 1oo20 millet M is 100I 30 Canny mend M 16 100990 Ceral um;rlke ca M 17 110100 WhVeaornmnlnflaur M IS 110210 Rye flbu- M 19 110220 Mkize (com) flour M 20 110230 Rice flour M 21 110290 Ceretlourams M 22 110311 Wheatgroand.mal M 23 110312 Oat goas as!d mel M 24 110313 Maize (corn)gromsadmeed M 25 110314 Rice groats ud meal M 26 110319 Cereald es and meal mm M 27 110321 Wheat pllcta M 2S 110329 Cerlt pdkb DneM M 29 110411 Barley. mlleaor flakedg gaia M 30 11D412 Oats. nOednor Ek gains M 31 1ID419 Ceemb, rolled or flakd gasu. am M 32 110421 Baey. ull!, pearl.d!. icud or kibbled M 33 110422 On, hallsed. pears!k mlecd orkibbled M 34 110423 Maize (conr), hulled. perked. dricd or kibbled M 35 11D429 Cerel. htul., pLark. aked orhabbled an M 36 11D430 Germ of cr whak. rolled, flaked orground M 37 120100 Soys berna M 33 260111 Iron arm & oneenat, aoter than rosa iron pyrites. nomagglacrsted M 39 26D112 Lon re & conoentrata. came tha roamsted iro pyritae.aggloeacred M 40 26D120 Roased ion Fyrita M 4 1 310210 Urea. whetdh otin aqucoum mohnion in packags weighing moxc ta 10 kg M 42 310221 Ammnnni nulphatc, in package weighingmore dba. 10 kg M 43 310229 Amonis maulphazlniate mixueldoublelis in pk weighing > 10 kg M 44 310230 Ammonia nitre whether or in aqueous aohktion in pack weighing > 0lkg M 45 310240 Ammaniu unitate mixed wI al cub o non-frL subta in pack weighing > 10 kg M 46 310250 Sodin niLrase, in packages wegbing more dun 10 kg M 47 310260 Calcium ost,eausion"iummiLsemx =or double sans in pack of> 10 kg M 4S 310270 Calcium cyanamide in packagea weighing more than 10 kg M 49 310280 Urammoniumnitnue mx inacquucouslamsoniealaol in pnck of > 10 kg M SO 310290 Minezl or ekes fedlkm nitrogenouia,ea.in pack weighing> 10 kg M 51 310310 Supcrphosphate. in package wcighing xmre dhno 10kg M 52 310320 Doamc mag. in packnga wcighing morc than 10kg M 53 310390 lincl/chcsical fenrilfrzo.phnphaic.neajnpackags weighing > 10 kg M 54 310410 Canuallhe. sylvite & otber enle potumis mdalusj package weighing > I0kg M 55 310420 Potsai chloride. in packagem webiing more tbha 10kg M 56 310430 POtUsiDxaaIC. in packagem weighing morec han 10kg M 57 310490 MinemUcbcheical fceulzapotaic.ne.in package weighing> 10 kg M 53 _l0510 Fertilizers in abnlet o amisi-r famea im pckage not ceeding 10 kg M 59 310520 Feriti entg nitrogen. phophoraus&potaasium in packs weihing <1= 10 kg M 60 310530 Diammoniumphoaphate, in packago weighig mare than 10 kg M 61 310S40 Manosmaiumphompaaec& mx thereofwi diamnium plaphatein pack <= 10kg M 62 3105SI Fedilenr conaning niamee & phamphatea.es.in peck weighing < I = lO 4 M 63 310559 Fcrtlizerm conaining nirgc & phompbrua.uc,inopnk weighing 6 mm M 195 740819 Wire of rfined copper of which the m-x cross sectins dimesion 1=6 mm M 196 740821 Wie. copper-zincbase alloy M 197 740S22 Wie. coppr-nickd base alty or copper-nickel-zi base alloy M 198 740829 Wire copper aloy, em m 199 740911 Pla, ahet& strip of refimed copperim coiL exceeding 0. 15 mm thick M - 276 - STATISTICAL ANNEX Seriat HS Code aumber number Dscrplipin Category 200 740919 Plate, sheet & sirip of rerin copper,o oi coil. exereiug 0. IS tnn hIck M 201 740921 Pliae, sheet & strip of copper-zine base alloys, in coi. >01S mm thick N 202 740929 Plate.sheet&abripofcopperzincbssaULoya,atinaoil, > G,l5mmmtbck M 203 740931 Plate, et & ship of copper-ti bse sloys, in coil, > 0.lS mm Lhick M 2(l 740939 Plate, sheet& strip f cppr-tin bse ailoyes,ot in coil, > 0. 15 mm thick M 205 740940 Plate, sheet & ship of copper-NUcop-Ni-zincbse alloy, > 0. 15 mn thick M 2116 74990 Plate. she & strip of copper alloy. am M 207 741011 roa or rerine copper, noltbscaked 20i 741012 Foil, copper allay, not bucke tf 209 741021 Foil of refind copper, backed dM 210 741022 F.l copperestby, bcked -M 211 741110 Pipes and tubs, refiued copper M 212 742121 Pipes sad tubes, cpper-zinc base ally M 213 741122 Pipes sdo tubes, opper-nickel bue alloy or copper-nickel-zinc bse alloy M 214 741129 Pipes sad tubes, copper alley. nso M 215 741210 Fiingp, pipe or tube. of emrid copper P 216 741220 Fmuings.pipcortube.coppcrulloy M 217 741300 Stand wire, cable. plaid bhas & the like of copper not etec insulated N 218 741410 Ellcbonds ofcopperwimeformscbinesy M 219 741490 Cloth, gri sad netting of copper wire d exptaed meta of copper M 220 741510 Nsiis. tas. ddmwing pLirstspklt &aim 'a of vopper or is w copperhesds M 221 741521 Whchm. copper. including spring wasben P 222 741529 Artice of coper. nDot tread,nam. sin o those of bedg 7415t.10&21 Pd 223 741531 Screws. coppCr. for WOWd ', 224 741532 Screw. bolts ne nutl of copper excluting wood screws Pd 225 741539 Anric of copper teaded ane similr io bolt, out aW crws P 226 741600 Sprngs copper P 227 741700 Cooking or heating apparau. dometc. nonelectrie & pars derof of copper P 22S 741810 Tsble. kichen or olher housebold aricts and paus thereof of copper P 229 741820 Snity re sad pas teeof of copper u 230 741910 Chain and pans thereof of copper P 231 741991 Anies of copper. ot funther worke duan east, molded, damped or forgeod P 232 741999 Articl of copper. nca P - 277 - STATISTICAL ANNEX Tanle A2.3: Climu Lu'r OF FRT C.mcoRY INWUmm (Arnnged Acconling to HurmonIzed Commodiy Dcriplion an Coding System) Scrial . HS Cada number nmber Description Categosy I 100190 Wheat nes a memnl F 2 100200 Rye F 3 100300 Barley P 4 100400 O0. F 5 100510 Mattc (con) aced 6 100590 Maizc (cum) c e 7 10619 Ricc in the husk (paddy or rougb) F a 100620 Rice, hukckd (bown) F 9 10Obttu Rice, semi-milled or wholly iUlcd, whelher or not polished or glazed F l1 100I1'40 Ricc, brokac P 11 100700 Gmain sorghum F 12 100310 Buckwheat p 13 100S20 Millet F 14 100830 Conayaced F 15 100990 Ceranl umld r F 16 110I10 Wheat or malin flour F 17 110210 Rye flour - IS 110220 Maize (com) flour F 19 110230 Rice {bur F 20 110290 Cereal flourra c 21 110311 Wbeatgroatsmmead P 22 110312 OatgroesSd mIeal F 23 110313 Maizc (co) graaand meal P 24 110314 Rice groan ad meal P 25 110319 Ceral grorta mb meal ea F 26 110321 Whcat pelkeu F 27 110329 Ccreal pcr,cDe ta P 28 110411 Barly. rlled or fisk grains P 29 110412 Oas, roUed or flaked gains F 30 110419 Cerclb, mLed or flked grain - P 3-1 110421 Baricy.hullcd.pearled.flicedor kibblal P 32 110422 Oats. hulledpearlodjaiced or kibbted F 33 110423 Maize (cn). hulled. pearled, slicd or kibbed F 34 110429 Ceres, hulled, pearsd, sliced orkibbled nes F 35 110430 Geam of cerecal. whoe. raeild, faked or ground F 36 120100 Soya beaa F 37 170111 RaW sugar, canc F 33 170112 Raw sugar. bect F 39 170191 Rcrmd augar.in solid fonncontaing added Ilavaurg or coloug m r F 40 170199 Rerrnd sugar. in solid form, fes F 41 240110 Tobacco. uomsiufacuared. not steamud or dripped F 42 240120 Tobacco. unmufactured. party or wholly stmmed or striped F 43 240130 Tobacco rcfue F 44 240210 Cigas, chroolt uud cigurbes. containing tobacco F 45 240220 Cigarts containing tobacco F 46 240290 Cigar. cheroto. cigsalos and cigattes. en4 tobacco subaikuum F 47 270900 Petroleum os and oils obtained from bitauuinoiu inerls. crude F 48 271000 Petrolum oil&oila obtaind frm bituminou tomnerals,ojths crude ctc F 49 310210 Urc.wthr/uloin aqucau solution in packa ge weighg morCthsb 10 kg F SO 310221 Aznmoniumsulphate. in packages weighing more thn 10 kg F Si 310229 Aanim sulpbs Cnitratcmixtirce/doudlalts in PeCk wCighg > 10 kg F 52 310230 Ammnium ntratcwbetherornotin aqeuou sol inpack weighg > 10 kg F 53 310240 AnmoniumniUstrncmxdw a aeabonoe-futsubts inpwakweighBg >10 kg F S4 310250 Sodium nitwct, in PackageJ weighing morc than 1D kg4 F 55 310260 Calium ntate/ammoniumtitmate mx or double alts in pack of > 10 kg F 56 310270 CalCium cysnn4mnde i package weighing more tal 10 kg F S7 310230 Urea/ammnoium nitrate mx in aqueoualsimonisculsol i pack of > 10 kg F SS 310290 Mineral or dem fcilizezr itrogenuua.nc.in pack wcighing > 10kg F 59 310310 Superphsphates. in paekageo weighing mor than 10 kg F 60 310320 Basic slag. in padkgea weighing mon: than 10 kg F 61 310390 MimeraUlacemicalfrtilizeru.phospbstic.nm packages wcigg > 10 kg F 62 310410 Carrallitcsylvit&otla crude potsium sksl.in package wcihg > IO kg F 63 310420 Potasium chloride. n packagco weighing more than 10 kg F 64 310430 Potasium sulphate. in packages weighing more thn 10 kg F 65 310490 Mineamlch beEaicerilr.pataicnad.iapackagaweighing> lOkg F - 278 - SIATISICAL ANNEX Serial HS Cede nmber aumber Dsption Ceoy 66 310510 FcnlUe In tabt sa se ilar foams o i packalge not exceeding 10 4 F 67 310520 Ferdllre en nitrogen. pbaphonas& potmaiu In packs weihting el.Okg F 61 310530 Dh.mmonkmphoaphite, packsguwaweghing morn t 10kg F 69 310540 Moneuaenolphosphbt& imx thareomw dimonlum phoshate, In pwck-Ju 10kg F 70 310551 Pfillum containing ndit & phaplal,nm,in pack welihbig (/-10kg F 71 310559 Feutlkeuw ea ing nltrogen & phospho.,no,hn pack welghig 4)- 10kg F 72 310560 Frilizracminlngjphbphoman& poatimalInpackqu weighing cIo 0kg F 73 310590 Railka m, in packges m xceedIng 10kg F 74 310810 lnetacildWc, packaged for reta mk or fornulited F 75 310820 ruagichlm. packaged ror rtail mak or formulated F 76 30830 BHerbIcide, snd'sprausg prod & pla growh regs. peckd f retal/lformid F 77 3O1,40 Diblnf_ctn. packaged for retad; me or fonnuled F 71 305BO9 Pescidcs IncludIng rodentckle, ea, packd for reaU aukformuabl F 79 390110 Polyeihylehving a w4ic gravity or tea ta o.94 F SO 390120 Polyethylkenhaving a specific grvity of 0.94 or mreo F St 390110 Elhylue-vnylcetate copolymere F 82 390190 Polyme of ethylene ne. In primay fonrm F S3 390311 Polysyrem expanslble F 34 390319 PolyureneRnn p as 39032D Styrene-scryloluile(SAN) copolymea F 86 390330 Acrylorilehbulsdknc-atyrec(AiS) capolymeas F 87 390390 Potyma of utyrnc ma, in primnsy forn F as 390410 Polyvinyl chloridc, ot mixed with y other muhstncea p 39 300421 Polyvinyl cbloridcem, not platicid F 90 390422 Polyvinyl choride ncs. pbtscisd F 9"1 390430 Vinyl ohode-vinyl wasen copolyma P 92 390440 Vinyl chloride copolymer e F 93 390450 Vyldeme cchlore polymet F 94 390461 Polytetsufluroethylaee F 95 399469 Flworo-polyimene F "6 390511 Polyvinyl aceate, iL aqueou dispersio F 97 390519 Polyvinyl actate ac F 95 390520 Polyvinyl sieolt.whetheror na ConssIng unhydrolysal acetate group. F 99 390590 Polyvinyl cts nrc; other vinyl polyrnen is priuy forr F 100 391510 Polyethykenewm sd crp F 101 391520 Polystyrene waste nd scmp F 102 391530 Polyvinyl chloide wst md sup F 103 391590 Plasic wast aid mcup na F 104 391910 Self-adhesive plsteshiects.fidm etc,of plmc in rolls c20 cmn widc F lOS 391990 Self-uahesivc plates, sheets. flm cic, of pltic se F 106 392010 Fdm sad sbeet, etc.. nom-cellulr. ec.. of polymr ofcthylee F 107 392020 Flm mad sheet, ec., non-cellular. tc .. or polyam of propylenc F 101 392030 Film ad abcet. ect.. non-cclular. ctc., or polymc of styrcre F 109 392041 Film & s etc. cnon-cUuhr, cc..,of polymer of vinyl ehloride.rigid F 110 392042 Fadm&sbetc. esc.nooan-ceular. tcw..oI polymer of vinyl hblode,le F III 392051 Fm and shee. etc.. noaneellulr, etc.. of polymelhyl mneterylwe F 112 392059 Film ad sheet, etc.. nucellublr, etc.. of acrylic polymers ac F 113 392061 Flm ad sheet. etc.. onacellular. etc.. of polyeuzxans F 114 392062 Flm ad sbeet. etc.. monellunlr. etc., of polyethyleneterephslstcs F 115 392063 Flm and shet. etc.. nonccilular. ec., of unaturted polyesters F 116 392069 Film sd shee. etc.. noncellular etc. of polyesters am F 117 392071 Flm ad sheet, etc.. uonccllular. ec.. of rgerated celulsee F 118 39207 Fdm d shcet. etc.. nonclIular. etc.. of vuined rubbcr F 119 392073 Fil md shee etc., noncellular. tcc.. of cellulse eetate F 120 392079 Fdilm d sbeet, etc., noncellular, etc.. of cellulose derivatives no F 121 392091 Film ds etc c.c.. nonceluutar. etc.. of polyvinyl bumyal F 122 392092 Fim Lad sheet et., nn-cellular. etc., of polyamide F 123 392093 Fdim ad shect. oe., na-cellular. tc .. of smino-rins F 124 392094 Flm ad shee.t etc.. non-cellular, ec., of phenolie realm F 125 392099 Flm nd a c cil c shee .. non-ccllular, tc.. of plastics am F 126 392111 Flm andl sheet, a. ellular of polymnea of syrme F 127 392112 Film aid sbeet, etc.. celular of polymas of vinyl chloride F 121 392113 FIDm sl sbeet. ec .. celulr of polurehaen. F 129 392114 Fm and sheet, etc.. celular of regenracd cellulose F 130 392119 Fdn and sheet, tc.. cellular of plstics am F 131 392190 Film andhe etc., ne of p bties F 132 400110 Natdl rubber laex, whether or mm prvuklnisod F - 279 - STATISTICAL ANNEX Seriil HS Code number number Desrptio CatGoy 133 400121 NMuul nibherin maked hcele F 134 400122 Technicaly peciied stual rubberCfNNR) F 135 400129 Nsual nrbberin other faon no F 136 400130 SaWs, gutltapewdh. gusyi. dlchick ad sinilar gum. F 137 400211 Styren.butmdien mbbe(SBRYcaboxyldatryren.budieu rbrXSBIl blacx F 131 400219 Styrnbutdie rubba(SBR)/I-uzboswjldfrbrcuad rubbaXSBR) us F 139 400220 BuladieacruhberrBIR) F 140 400231 Ibabutam>-iopna(butyl) rubber MM) F 141 400239 Haloi4obutcao.iaopreacruhber (CER or BIll) F 142 400241 Chloampren (dlomobuitiene) tubber (CRQ. blat F 143 400249 Chlormprencchlomhbuldiec)ruAbber (CIO nr F 144 400251 Aciyloritll-buladieieubber (NuI). blax F 145 400259 Ac.ylonorileuhsidienerubber (NBR) rn F 146 400260 koprenerubber(IR) F 117 400270 ElBylcn.pmpylen-oconjugaleddiene nabber(EPDM) F 148 400210 Mixtu of ny product of bcodg No 40.01 w m produc of thi headg F 149 400291 Synthetc rubber and facLic derived from oil... ec.. laex F 150 400299 Syntheic rubber and facLice derived from oil... tc. nao F 151 400300 Reclaimed tbber in prima,; ilmo or in plates. ahet or atrip F 152 440310 Pole. tgead/psintod. etc F 153 440320 logs. pole. cocifercns F 154 440331 Logs. MenuL USgIA & dark red A a F 155 440332 Log wouhite LPi. Memanti Serys yelow Memnu & Aln F I16 440333 Lg. Xenning. Rrmin. K Cpur. Teok. Jongkong. Merbnu.. etc. F 157 440334 Lag. Okatn. Obeche, Si,pi. Sipo. AcmjouduAfrqu. etc F US1 440335 Lop. r_. Mhioni,. LIJumba, Dib-u. Lima and oadb F 1S9 440391 Lop. Oak F 160 440392 Lop, Beech F 161 440399 LAp, 0m1-COoiCIa MUC F 162 440610 Tier. raAwayllanuway. wood not impregmatd F 163 440690 r. =1 Imnway . wood mco F 164 440710 Lumbr. coiufroa.(softwood) 6mm and Sicker F 165 440721 Lumbr. Mei rea (lighL & dadk). Merai Bakau. Wite [I_an ec F 166 440722 Lumber. Okoum. Obeche, Sapeii. Sipe. Aeajou d'Afrne, Makors. ec.; F 167 440723 Lmber, Babon. Mahogany (Swxz= app). lmbuim ad B1ba F 16B 440791 LAumber. Oak F 169 440792 Lumber. Beech F 170 440799 LuIer, non-coniferouanca F 171 440110 Veneer, coniferous (aoftwoed) la ta 6 mm thck F 172 440820 Veneer, troical woods l, ktha 6 mm thick F 173 440190 Venecr, noo-coifcm um. km tn 6 mm thick F 174 510111 Gray bahm owool. nota cdd or coed F 175 510119 Geasy wool (othier tha abom woo not earded or combed F 176 510121 Degreaed shom wool, nol esesd. combd Oat cubonisd F 177 510129 Degreacd wool (other dtn ehon woo).oa encwd.eoned or easbonjd F 178 510130 Carbanid wool, not cadd or combed F 179 510310 Nails of wool or f re animal hair F 180 510400 Gaiced stock of wool or of Fme or come a har F ISI 510510 Carded wool F 182 520100 Cooae. co caded or conmbed F 13 520210 Cottn yam wae (including thured wte) F 114 520291 Gametted sock of cotou F MI, 520299 Ceon waste. ea F 1I6 520300 Cocoa, carded or combed F 117 520411 Cotton mewg freud > 1=SS % by wSht ofcoatonoLpUt up for reil sk F ISS 520419 Cocoa acwg du-ad.< RS% by weight of conoanot put up for retail ask F 119 520420 Coton aswing thread, put up for rectaie F 190 520511 CoutonY >an>1=5S%.singlicuncombd. >/=714.29dttz ont put up F 191 520S12 Cottonyrnk.>l=SS%.singlewumombed.714.29>dtex>b .232.56.notputup F 192 520513 Cottn yan,>)=1S%.aingleune_ncbd,232.56>diex> = 192.31lot put up F 193 520514 Couosym .>I=15 .aingle,uneoabed,192.31>dtex>=125. not put up F 194 520515 Cottn yam. > )= S5 %,ingBuncowbd, < 125dtcx.nt put up f retail ak F 195 520521 Cotton y > >1=15%. ainge comed, >/=714.29.nat par up F 196 520522 Couyon yn>I=15%.siogikcombcd.714.29 >dicx>/=23256.notxputup F 197 520523 Cottonyazn.>I=15%.single, combed.23256 >dtex>I=19231.ruotputup F 191 520524 Cooysan>1=85%.siqgle, combed. 19231 >dtcx>J=123.noLputup F 199 52052S Coton yzn. >I=S5%.sihgkcotmbd. C]2dtx.no put up for retal mc F - 280 - STATIST[CAL ANNEX Saw HS Codc tunber number Docription Calegmom 200 520531 Cuon yar,>I=85 %.mu.timuncombed.>/=714.29dux. not put up. wn F 201 520532 Cotta yam. > /= S%.tmul.uncembed.714.29>dtx> 1=232.56.ntput upne F 202 520533 Cnontyasn.>/=95%.muhunceambed.232.56>dtcz>/=12.31.ntpw up.nea F 20J 520534 Coanyam.>t=tSS.mnuli.uncombcd.192.31>dierx>i125.ntputup. nc F 204 520535 Cone. yan,> =B5%.jnutiuncombed.c 125 dex, not put up. in F 205 520541 Coatonyaru.>=BS%.mu4hiple. combed.>1=714.29slex. noaputup. mei F 206 520542 Cottnayas.> =h5%,muhi.cantd.714.29>dtex>1=232.56.ntputup.nei F 207 520543 CatUnyarn. >=iS% ..mdcambed,232.56>dlx> =19Z.31.ntput up.nue F 205 520544 Coaanyarn.>I=15%.mulipl.cembod.192.31>dtma>1=125.natput p.nec F 209 520545 Catnon yan. >1=3 %. mwliplk, combed. c 125 dIce. not put up, no F 210 520611 Canon yarn. <35%. single. unecmbcd.>1=714.29.not put up F 211 520612 Canonyam. <85%. mingk. uncoanbal.714.29 >dtex>I=232.56.utputup F 212 520613 Ctton yam. <85. single. uncornbad.232.56 >dxz>l= 192.31.nat put up F 213 52D614 Canyas. <95%. single uncombed. 192.31 >dtex>/=125.nputup F 214 520615 Can youmn<.<85%.single.uncambd,d< 125dtex.not put up for retail ale F 215 520621 Con yan. <15%. mingle. cembcd.>=714.29dtex.ntputup F 216 52062Z Ciontnyarm, <5%. single, combed. 714.29 >dtex>"=232.56.notput up F 217 520623 Coutanyau. < 95 %. mgle, combad 232.56 >dtx> f=192.31.nat put up F 211 520624 Coum'yamn. <85%. singl. combed. 192.31 >dtex> 125.nratputup F 219 520625 Conca yan. <85 %.iugle,combad. <12Sdtex,not put up for nail sale F 220 520631 Conanyw. <5. multiple. uncembed.>1=714.29.not put up. nm F 221 520632 Cofaoyan. dtex>1=232.56.ntput up.ncs F 222 SJ0633 Conan .<85%.,mtipk.uncomhae.232.56>dc>1= 192.3 l.ntput up.fc F 223 520634 Cnanyawn.<85%jnulLiple,ncombed.192.31>dtcx>= 125.ntput up.na F 224 520635 Conen yin. < 85%. multiple. uvconmbd. < 125 dex. not put up. sea F 225 520641 Canonywo. < 35%. multiple. combed,.> f=714.29.ntput up. uoc F 226 520642 Cnonmysn.dex>1=237-56.natpt up.ncn F 227 520643 Canonyurn.<15%,mudtip.ceal,732.56>dtex>1=192.3 L.ntput upnes F 228 520644 Coutyon.<5%..multiplc.combe.192.31>dtex>1=125.ntput up.ei F 229 52064S Cown yin <85%. multiple, combed. <125 dIx. not put up. no F 230 520710 CnDnnyumn (oit.wing tbad)>I=35 % by weight of caton. put up F 231 520790 Cmom yam Co(tewg thdre) c85% by wi t coabon.put up f relt sale F 232 520111 Plain weave cotan fabric. >I/S= . not maeo than 100 gIm2. unbleacaed F 233 520812 Plain wawe couon rabnc. > I = .85 > 100 gIm2 to 20D gIm2. unbnchd F 234 520813 Twill weave cta fabric. > 1=85 . not more tlim 200 imZ2. unblchad F 235 520319 Waves fab0i of cs on. > I = 5S%. not mare thin 200 gfm2.unblecched.nea F 236 50821 Plain wcve conoa fabrc. >I= 5 . not arm thanl 100 gI?. bklched F 237 520522 Pbain wesve eonm fabrc. > f =85 %. > lOO g/m2 to 200 glm2. beacbed F 238 520323 Twill weave ca fibuic.>11=59%. not more tan 200 gIm2. bleached F 239 520829 Wove. fabrics of ecten.>f=35%. nt mazc than 200 gkn2. bicached. am F 240 520331 Plain weavc cona fabric. >1=85S% am more than 100 gfm2. dyed F 241 520832 Pli wi.weave conest fabc.1=8H5%.>l0gnm=io 200gm=. dyed F 242 52033 Twill wavc cotln fabrics. >1=85 %. not more than 200 grm2. dycd F 243 520B39 Woven fabric of can.>l=35%. an nore ta 200 Sgim2. dyed. ne F 244 520341 Plainwave caionfabric.>/'=9S%,notmore than 1OUginZ.yarndyad F 245 520342 Plain weavecanon fihrica.>4=85%. >l00gIm2xa200 Im2.yarudyed F 246 520343 Twill wavcna i fabric. >/=85%. ntmat tbian 2 a0 g yn2. n dyed F 247 520349 Wovenfobicaolfanoo.>/3=5%.n moretn200 gIm2. yardyed.n F 248 520851 Pliweaveconfabriea.>-gSt%.tat more h100g/m2.printed F 249 520852 Plin wcvc coon fabsie. >I=S5%C. >100 gfm2 to 200 g/n2. printed F 250 520853 Twll wave comon fabric. >I35 %. not moe thn 200 gIm2. printd F 251 S20959 Woven fabrix of canon.>3=S5%. not more tha 200 gSnm2.printed. no F 252 520911 Plai enve conon fabric. > I =5 %. mare than 200 gIm2. unblzcchad F 253 520912 Twil weave canon fabric. > 1=85 %. mnor ta 200 gIm2. unblachad F 254 520919 Wowvs fabrics of collo. >I =35 %.moretn 200 gSn2. umbeached. nes F 255 S20921 Pla wavce cotton rabi. >/I=5%.morm than 200 g/m2. bleachd S 256 520922 Twill weave conan fabric. >/=5%. more than 200 g/m2. bkachW F 257 S20929 Wovy brics of conao.>i=s S. mare tha 200 Sim. bleached. no F 258 520931 Ploin weavc coatn fabrues.>I=85%.moret an 200 g/m2. dyed F 259 520932 TwviI wev cdan fabice. > I=85 .morc than 200 gh2.dyed F 26D 520939 Woven fric of coflon, > r=985 C. moe thad 200 gIn2. dyod. nee F 261 520941 Plain weavec coaon fabric. > I=5 . more thn 200 gim2. yarn djsd F 262 520942 Denir fabrc of eotton. > I = SS . more than 20 gnsna F 263 520943 Twill wcv cafcao fiab.o/z denim. >/=95%.more than 200 F_:n2.yarndycd F 264 520949 Woven fabrks ofcon, > &'35 %. more thn 20D grm2. yan dycd. nm F 265 520951 Plsin weave caon fobric.>=h55%. tnorc thn 200 gIm2. printed F 266 520952 Twill weave con fabricc.>I=35%. nmre than 200 gsns2. printod F - 281 - STATISTICAL ANNEX Serial HS Code number number Decription Ctory 267 520959 Woven fabru.s of couan. >t=SS%.nwre than 200 g/in2. printed. ns F 268 521011 Pla weave cotton fab. <85% mixd w m-rn fib.rmtsore than 200 g/lm2.unbl F 269 521012 Twill weave cotton rub.CCSS% mixd w m-m fib,not more than 200 g/m2.unbl F 27( 521019 Woven rab of Coaon, C<85% mixd with m-rn frob.C2I=00gIm.unbl.nee F 271 521021 Plin weave coaon fb.6C <85% mixd w m-m fib.nat more haim 200 grnm2.bl F 273 521022 Twille eavc caonFa b. C 5 % mLxd w rn-m rb.not more than 200 g/m2.bl F 273 521029 WVoven f.brics ofcuon. <:1% mixo with a-r fib, 200gtm2.yamdyd F 295 S21149 Woven fabrics of contonA l5% mixd wiLh m-rn fib.>200 g/r2±jurndyed F 296 521151 Plain wcave conan fab, < 85 % mixd w m-m fib,more dun 200 gIrn2prpntd F 297 521152 Twill weavc comTon f1b, <185% mixo w rn-m fib.mre than 200 grn2.printd F 298 521159 Woven fabrics of conan. cUS mxniixd w m-m fib,mor thn 200gIm2.printd.nea F 299 521211 Woven fabric of conon,weighing not me thimn 200 gm2unableachcd.&e F 300 521212 Woven fabric of cona.weighing not mare than 200 gm2.bl .che F 301 521213 Woven fabrcs of conon. weighing not more thn 200 g/mr2. dyed. no F 302 521214 Woven fabric of eoton. 200 g/m2 of yamarofdiferet colours, nes F 308 521225 Woven fabrics of coaon. weighing more than 200 gVm2. printed. nee F 309 540210 High tenacity yam (oat sewg thread).aylon/otpolysmucd fi.nt put up F 310 540220 High tensaciy yarn (alt sewg thread) .of polyoraer filamca.not put up F 311 540231 Tedxunyamnes.ofnylantothpolyanzidcarC<=50texs.y..notput up F 312 540232 Textund yarn ncs,of nyloaloth polyenidcs fi. > 50 tcxh.y..not put up F 313 540233 Texured yar ns.of polyaer fibunaents.not put up for retail sac F 314 540239 Tcxuvdyaiu of snthetic filamens. ae. not put up F 315 540241 Yarn of nylon or other polyamides fi.aingle.untriated.nes.not put up F 316 540242 Yarn ofpolyeatcrramealnts.partiallyotrictod.ainglc.ns.notputup F 317 540243 Yarn of polyestcr ramtent. singl. untwised. no. not put up F 3 1 540249 Yarn - f synthetic frlamentn. singk, untwiated, sa,. not put up F 319 540251 Yarn ofyTlortorotherpolyamida ri. single. >50 tunus not put up F 320 540252 Yan of polycater fr.nta. oinglc. >50 turn per metrc. nt put up F 321 540259 Yan of synthetic filammnta,ingle. > 50 tun. per mctrc.ne..not put up F 322 540261 Yn of nylon or other polyrnicd fi. 1multiple. Pse. pot put up F 323 540262 Yn of polycter filamcts. mnutiple. nao. not put up F 324 540269 Yar of synthtic fiLamcna. multipk. nmo. not put up F 325 550110 Fiament tow of nylon or other polpmidca F 326 550120 Flament tow of polycter F 327 550130 Filamet tow of acrlic or modactylie F 325 550190 Synthetic filsmcnttow. nca F 329 550310 Stapk fiber of nylon or othcr polyanudes. not caded or combod F 330 550320 Staplc fibr of polycatc . not carded or combed F 331 550330 Saple fibcn of acrylic or modacrylic. not caded or combed F 332 5S0340 Staple fber of polypropyken. not carded or combed F 333 550390 Synthetic stapk fibhct. not carded or combed. na F - 282 - STATISTICAL ANNEX Serial HS Coed number numbe Descriion Ctqgoly 334 550610 Stapl iberr of nylon or othecr polyamidem. crded or comgbt F 335 5iO620 Stpk lfiber. of polyarem. cuded or combtd F 336 550630 Staple cibc of crylilc or modacvylic. carded or combed F 337 550690 Syntheic staple fbe, cald or combed. Do P 338 550911 Yn,>/=U5S% ylon or other prlyamides aple fiber..ingle.otput up F 339 550912 Yun,> 1=5% nylon e o h polym idc. ampl fiberm.multi.noLput up.aes P 340 550921 YTan,> /S ofpolyeatcrtapcfibers. augle, noetput up F 341 55092Z Yam,r>/15=5 of polycrmalpk fiben., multiple. got put up. ese F 342 550931 Yam >I=5 % of lk or nrodaylic atple fibe. sngkl na put up F 343 550932 Yan,>135% cscylimedactylic aple fibezainuultipi.cnotputtup.ncs P 344 550941 Yan, > 1 =S 5% of ether qsnthetic apk fibu, anglk. not put up P 345 550942 - un, > 1=35 S of oter ayeuc tplc fib. Sultiple. nol put up,eer F 346 S50951 Yan of polyester amp fiber. slid w/ utii Map fib.not put up.ao P 347 550952 Yan of polyer ample fib slid w wooulrie ani heir.t put up.na p 341 S5WS3. Yarn of polyser aple fibe mxd with coto not put up. -e F 349 550959 Yarn efpolyer asmple fiber. O put up, e p 350 S509C1 Yt of eylic ample fib inxd w wooUfine anal hair,wot put up.nm P 351 55092 Tn of acrylic Maple fibers med with cttoun, not put up. n P 352 550969 Yomnf Lacyc uapl fibemrs. not puL up. -o P 353 550991 YTn of t synthbeic ample riber mfixed wiwoofne anmal bairne F 354 s550992 YTn of other myntheticstaple fiber. mixed with eonolnoet put up.ncr F 355 550999 Yam of other synthetic ampk fiberci. no put up. r,o F 356 720110 Pig iron,non-aycoaaingby wght c1=0.5% phosphorus inpriay fonn F 357 720120 Pigiron,non-alloy.contgby wgbt>0.S%ofposphorunsinprimnyformi P 358 720130 Pig iron. aloy in priny foms F 359 720140 Spiegekism in prmary formi F 360 720211 Frrv-msgneaew, conwaing by weight more tha 2% of carbon F 361 720219 Fcr_-nuagane uneo F 362 720221 Fem-ilicon. contang by weight more than 55S% of siicon F 363 720229 Fer-asiWca.n no F .364 720230 Fcr-uMlico-gee F 365 720241 FNro-duriuneontainingby weight more chn 4% .afrbon F 366 720249 Ferm-chronium.am F 367 720250 Ferro-.llco.hroumium F 365 720260 Ferro-niekel F 369 720270 Fcm- olybd-n F 370 720280 Fem-tagtenand ferro-smricoutnuacn F 371 720291 Frno-litnium and fero-sirco- tiwtnium F 372 720292 Ferro-vndium F 373 720293 Fcrn-niobium F 374 720299 Ferro-altoys. ns F 37S 720310 Fercrm product obuicd by direct reduction of iro ore, n F 376 720390 Spog ferrou prod.or iron baag a mienum purit y weighl of 99-94 X F 377 7210 Wade and acmp. east imro F 378 720421 Wat e ad scap. atancs sted F 379 720429 Wdse and nip. of alloy eel. her than atinn F 3B0 720430 Wast a scra. oftinned ro or Ieel F 3S1 20441 FPs wste & acrapi or a.fromn the mechanical working of mtaner F 3B2 720449 Fr- -a waste ad scrap. iron or stdeel o. F 383 720450 k_ nelting p ingota. of iron or sied F 3S4 720O10 Granus of pig io or apiegelisn F 3S5 720521 Powdt stoy steel F 386 720t29 Powde ir or catled, oher than aloy F 3S7 720610 Inget.. iro or non-alloy stecL of a purity of lea than 99.94% iron F 382 720690 Primny florus.iro/non-alloyacel.na.ofa purity < 99.94% iron F 389 720711 Semi-rus prod.i/nartcvq cross-ee crAg by wgt<.25% cwdthd=600mmwide.>10msnthk.myp355 mp. F 394 720312 Fht told prod.ilorA.incoilbrw>1=600om.4.75<1=thk=600mui3m3mm<=bk<4.7Smm.355smpa F 396 720514 Flat rled prod. ir . in col.hr.>I=6t0mmwide.,3md thkmyp 275 mps F 397 720821 Flst olled prod. inas. in coil. hr. >/=600nmwide. > [num tlk. ncr F 398 720822 Flat oecdprod.Ui.rncoilJr.w>I=600mm.4.7Snm1=600mmmwide,Sm /=S00mmwide.ea than3mmhknjse F - 283 - STATISTICAL ANNEX Serial HS Code number munbier Deacription Caery 401 720831 Flt rolled prod.iL,m,nic.hr.G6Omm cI =12SOmm..>1=4mntk.355m; F 402 720832 Fla rail prod. ina.. mi. Jr >/E=600Om wide, > 10mn dil myp 355 Ps 403 720833 Flat roiled prod.Uoa.nic,hr.w>O=6500ui4.75mme/=tki =6IDU .3mn/=60ommn.ebmhm 3nmn thkmyp 355 Unpi F- 406 720341 lat ralspro!d. na.nie.hr.600mm1=4mshk.ncs F 407 720U42 Flat reoled prod. Uinm. not in coil. hr >/=600mn wide, > lOnsmi, mma F 403 720343 Flat raid prod.i/nas.cia iLhr.w>/=600.4.75/=600.3mm /=600mn. <3mu tldIc ace F 411 720390 Fbit roll prod. ibm. no further worked than hot rolled. - F 412 720911 Flatroloedprod.ina.incoiLcrw>)=600nmn.>>=3mnmthksyp355spa F 413 7Z0912 Flat mid prod.inaa.in coil,cr.w> l= 6Sumlmm < thk C3mm.myp27S zmps F 414 72D913 Flat olid prd.inu.mnecoiLcr.w>=600ounthk>1=0.Smaxlmm.myp275nmp F 415 720914 FlrtaroDed prod.itna.in coier. >1=600mm wide.< 0.5mmthk,myp 275 nps F 416 720921 Flat roled pmod.ilnam.in coil.cr, > I =600mm wide.3mm or more thk.nes F 417 72D922 Fl mrold prod.Ias,incoiL,r.n>I=600mm widc1mm< =thk<3nm,nrn F 413 720923 Fat roi prod.iSaa.incoil.cr.w>/=6Om360.51=60mm.leatn 0.5un mthkne F 420 72031 Flt romld prod.i1a.nxtin coilcr.w >1=500sm.>I=3mjnLk,myP355 mps F 421 720932 Flt romid praodjm.ntin coilcr,w>/=600m.lmm=600thk>/=0.Smaxlmmmyp35Smpa F 423 720934 Plt roid prod.ila,nain caiLcrw>1=6W0tdk=600iemm wide,>I=3rn taa F 425 720942 Flat r eild prodjit.aanotin calLr >/=600amwide.i.s I=600numn.0S <=Ihk1=60thk< 0In5nmmnn F 42- 720990 Fblt roLi prod. Unus. not incil, cr >1=600mwie, no F 429 721O11 Fbi mtdl pradji/n1a.plador eosd wth tiaw>/=60fmS u>h=0Smmthk F 430 721012 Fa romld prod ,il.plaid orcosid with tin. >/=600m wide. d=600mmnwidc.incladg te-splate F 432 721031 Flat nild pod,teel/lecpltdwied w zinc,thk<3mmn yp275.>1=3nyp3SS F 433 721039 Flt roll.d prod,iJnaelketopLd or cd w zi e. > /=600mm wide. n F 434 721041 Flat rolled prod.ifu.phda r ctd w zircorrga4d. >1=60knwideaoe F 435 7mo49 Fat mled prod.inplaScd or coaed with zinc.>/6=ODminwide. na F 436 721050 Flat md prod.i/n.phlcd w dchain omxiductn&chwuzmxdd.>/=6EOmmn F 437 721o60 Flt rolld prod.ilns.plaed or cotd with aluninitum. >J=00mnmwide F 438 72o70 Fat rolld prod.i/mapainzed.vwniahedorplat cenmed.>I=600ms wide F 439 721o90 Flat iro prod. i/n, clad, plated or coaed. >)=600ma wide, am F 440 72111l Flt mild pvod.ilna,hr,roldon4 facc.10/4n4n.myp35S F 441 721112 Fhat roied prod. ilna. hr. C600mmwide >/=4.75mtbk, myp355pas F 442 721119 H3a mod prod.inaa,br.w<6D0,hkc3mnunyp27S.hl>/M3mmmyp 355.nes F 443 721121 Fhtmild prod.Inss.lmraUdon4 frce,iSOnmCw<6OOms.>I=4nthk,am F 444 721122 FHat roled prod. i1na. hr. <600m wide. >/=4.75mm thic noa F 445 721129 Flt roled prod, ilna. hr. C<6d nawide no F 444 721130 Flatmild pxod/nas.cr.wC600.tbk<3mmyp275.>=3m smnyp35S F 447 721141 Fl mUd prodVnaa.cr.wc600mmcntg bywght lk tIan 0.25% carbon F 448 721149 Fat rled prod. i/n. cold rolled or cold sduced. .>=3m thk myp 355 F 452 721229 Fla ld prod. ilna. <600mm wide, clad. plted r coased uee F 453 721230 Ft roUed prod, i/na. <600ma wide, ow plaed or cotd wih zinc F 454 721240 Fat rled prod.i/nas c<600mmwwide.painted.vanihaedorplut coated F 455 721250 Flatrxlod prod, itena. <600mm widc, patecd or coaed. no 456 721260 Fbit roLW prod. i/nas. <600mm wide. clad F 457 721310 BaA&road.i/aa.br. inizeg wound colla.cntg indentib.ete prod d ip F -458 721320 BD & rodr. iJrn. hr. in ieg wood coA. of free cuning dccl F 459 721331 Banakrod.il/ajr.inirmtg wad coil of circ e aecLk < 14n.acg<0.25%C F 460 721339 BDt & roda.inhr.caatningby weighs le than 0.25% carboamne F 461 721341 Bra&rod,ifIoaa.hr.ofciirc cram set <14mmdi.ctg by wt.25% I=5Dmm F 482 721650 Anglcshapc&sccl.nfirfhn hot roldid1rrwnextrudd.ght>=SUmm F 4S3 721660 Angle.shspes and sectiona.i/ira.ufiv thand cold f(orad or cold raishd F 454 721690 Angle. daha and section. iron or non-lloy steel. nac F 4S5 721711 Wrei,ilapolislid or motbut not plaid or cscdctg by wgbt c0.25%C F 486 721712 Wire.ifnaa.platd or coatd whit zinc.conta'ng by wgIt less than 0 251GC F 487 721713 Wre.ifra.plr o costd with oth be metal ne,cftg by wrght < 0.25 XC F 4S8 721719 Wure. Usi. conaining by weight Ie1 darn 0.25 % carbon. cm F 489 721721 Wrc.inns.polhbd1Lot.butot pltctd.cig by wght 0.25% IC <0.6%S F 490 721722 Wrc,ionsplad o cosd w zinc cntg by wght 0.25% < I=crbon < 0.6% F 491 721723 Wirei,;aphbd fcW oth bae met nes.cntg by wght 0.25% c1= C <0.6% F 492 721729 Wire,im or con-alloy steel.sea coning by wgbLt 25% 1=0.6%C F 494 721732 WuV6I/rn.pWld o could with ziec containg by wghl 0.6% o more carbon F 495 721733 W irn.splid o cSd w oth bas met nra.cntg by wght >1=0.6% carbon F 496 721739 Wiriroc a mo-alloy steel.s couhing by weight 0.6% o more carbon F 497 721310 Ingots and odher primuy fornu. staitless sictl F 49H 721890 Semi-nF d product. ainles stcd F 499 721911 Flat roU prodAtainlcssteel.br.iucoiLw>/=6EOmm.tbk> lomm F 50W 721912 Fbt roOd prods.abiessaicchr.in coil.w>/I=600mm.4.75 c lh=tkC e11m F SOl 721913 Flat roOd prodstailcaa stel.br in ceil.w >/=600om.3 C I = thk <4.75amn F Su2 721914 Flat rold prod.adalesatecl.hr iu coilww>/=600sunuhkcC 3mm F 5D3 721921 Flat rolled prod,stainlkes stcelhr.nic. >I =600mrmwidc.over 10mm dhick F 504 721922 Flatroadiprod.asinls iccl.br.ic.w>I=600mm.4.75-/=600mm.3mm600mwide.k than 3mm idc F 507 721931 Flat roled prod s-taasatecl,cr.>600nmwidc.4.75maor mruthick F SS 721932 FhltroUld prod. atnlcsale . cr.w>)=60I mm.3mmc<=thick <4.75mn F 509 721933 Fat rolled prod. oedska skeLac. er. 6OOmiWde. 1mm 1=60&m.0.SC 600mnm w;id.lc than 0.5nm thick F 512 721990 Flst roUed prod. tainlcam atcC'. 600Or or more wide. nc: F 513 722011 Flatrollprod.ainla tccLhr C600Enwde.exceeding4.75m nthick F 514 722012 Flt roled prodnlaa stel.hr C600mmwidc.eka thn 4.75lm thick F s1s 722020 Fiat rLled prod. tainlec steel. <600mrwde, cold roied or redueed F 516 722090 FLat rtoed prod. a stinl dteet. cr <600Wm widc. ce F 517 722100 Bus & rods, staitlea steel hot roled in irregularly wound coils F Si1 722210 Bat & rods.stainIca steel.nfw than hot rolled.hs dr,x n or exnuded F 519 722220 BDa & rod. staines stee. nfw than cold formed l -cold finished F 520 722230 Bats & rods. stinless atcd. m F 521 722240 Angl shapes sd ectn sainl steel F 522 722300 Wire of stainless seel 523 722410 goab & other primary forms of alloy stcel. oh sainles F 524 722490 Scni-rihbd produn of ally steel oil stainlss F 525 722510 Flat rolled product of ailiconlccciclstel >1=600mm wide F 526 72520 Flu rolUed products olrhigh qsecd teel >=600mm wide F 527 722530 Fla rolled pod.aa.o/tsirlcsa.im coiL.fw LhiU hr.w > t1600nu.na F 528 722S40 Flat roLed prod.as.o/tshiuleessnc nfw tha hr. > /=00mmwide. DCm F $29 722SSO FIst roUd prod.a,oh stainleas.ofw thi cold oUd.>I=i60mma widecnea F 530 722590 Flat roied prod. -. /stinlrs. >1=600mmwide. cm F 531 722610 Flat roUed prd. of silicon elarialt steel, 406.4mm F 568 730512 Pipcl6ine.UsMngibudinslIywld w intexteirc c seext din>406.4anm F 569 730519 Pipe.lineri or sint/ext cir cro sec,wld,extdin >406A4nmu e F 570 730520 Csaiepg.il.imlextcire c sewld ea din >40064zmn.olligs drilLno F 571 730531 Tubes a pipe. or s.loegimudinallywelded.eenrualdim >406.4mm.ncs F 572 730539 Tube A ipe.i ors.weldod.rive:cd or sim cloedcxt din >406Ammnne F 573 730S90 Tubes & pipe. i or .. rivcted or sirn closel. ext din >406.4mm. em F 574 730610 Pp.linc.i or s,weldd,rived or aim closd.scs.foroil or ga pipeline F 575 730620 Cssioghubing.icrsvwedoed.rivetedor sim esd,nes.for oilga dril4 F 576 730630 Tuhc,pipe & hollow prorsesironor na.wwelded.of tire cros sectnes F 577 730640 Tube.pipe&hollowprolile.stainless eeweldd.of circ cross sectcne F 57S 730650 Tubes.pipe&hollow profales.lss.(o/t sai wldof circ cros sectocs F S79 730660 Tubea.pip:& hollow prolle,i/s.weldedlofnon cir cr seetnes F 580 730690 Tubes, pipe & hollow profie. iron or steL welded. en F 581 730711 Fiming. pipcor abe. of non-mallesblemst iron F 582 730719 Flinp. pipei o tube, ca. of iron or steel. c F S83 730721 FLages staianes sted F 584 730722 Threaded elbows. bcads and sleeves of stanl steel F Ss 730723 Fitings. bul welding. tales teel F 586 730729 Fttings pipe or tube of sai sed, nem F 587 730791 Ranges. iron or steeL nem F 588 730792 lbTerdon elbwms bcnd od skeves, iron or stel. nes F 589 730793 Fittings, but welding. ion orted. ne F 590 730799 Fming. pipe or tube. iron or steel, nos F 591 730810 Bridger sd bridgesections. ironr secl F 592 730820 Tower aanl latic minn, iron or steel F 593 730830 Door .windows & their frame & resbbolds for doom of iron or sted F 594 730840 Propa&ainilsr equipment for affoldig,abuttecrgpit-propping.ih F 59S 730890 Stn:ea&porstructarc.ii (cx prefab blidgs of hindg no.9406) F 596 730900 ctsrissa.vstJ&is cap > 300Li o a (ex liqfcomprgs type) F 597 731010 Tsnka.essu.dnrs.cmn.boxes&simcoatr.i or scapc >I=50L but < 300L F 598 731021 Cairon o steecp < 50 litres,to be clod by crinmpg o .oldering.nea F 599 731029 C a. iron or stel, capacity <50 litres ne F 600 731100 Containem for compremed or qumelled gas of irko or sI F 601 731210 Strded wire.rope&sblem of iron cr*tcdlnot lekrically inued F - 286 - STATISTICAL ANNEX Srl HS Code annber number Dlcriptio. Caulery 60Z 731290 Paited a.ingp and t like of iron or stcl.not elc aiatud F 603 731300 Varw,obadwdrw6hoop.gle fl a twiu idoubleof i or ,for feng F 604 731411 Woen prducs. stainltss rt 605 731419 Woven products. im or der, other dua stinles F 606 731420 Grl,un4g.fcg.io .wddilwer-cnmsadim >t=3nu,m >i=I0Oaa2 F 607 731430 GdXlnecuingAmaninm. r tcrueelweld al the iteameioo.on F 606 731441 GrilL neuing. fencing. iron or ed, plad or coated with zinc F 609 731442 GrilL ein. feociig, iron or seel. platic costed F 61D 731449 Grill neuig. fcnig iron or iel. mm F 611 731450 Expinded mad. irn or stel F 612 732510 Cast skticlec of no-msjeable caas ira nes F 613 732591 Balk. grdiog d dsmir rickl of ira or atedl cas far milk F 614 732599 Ankcles of iron or suel. cs. ne F 615 732511 BIlUsgAndgS&sillsramkcl of i or ..forg or tsumpd.onaf/wewoe F 616 7326L9 AJicklmofiorsued. forcdar astmpul.butnoitfurihcrwwekcd F 617 a2620 Aicdce of win. iron or stecl. oo F 61S 7326 Asticks iron or seel. mas F S5e GATr (1992b). - 287 - STAT[STJCAL ANNEX Table MAL ClWiu LsUT ot Swcme CAmcvRY I&uvOlm (AnUged AccOrding to Hanizd COZWiy Dacmripdon and Cod ing Systm Serild HS Cad number umbet Descipion Caiqoty 1 281511 Sodium bydroxide(caurticmad) solid S 2 390210 Polypropylc-e S 3 390220 Polyiaobutyle - S 4 390230 Piapylene copolyn . S 5 390290 Polyme ofpropylene a or oflakm no, in pimmy forms S 6 390610 Polymezbyl meIIIe7ylae S 7 390690 Acylc polyn sc n prsiy fon S 8 391211 Cluto acclam. inaplaiciad S 9 391212 Cellos accam. plasudani S 10 39122D Celulosnisulc (lcl collodliw) S 11 391231 Carboxymbyklclulosead ib mls S 12 391239 Ceuluc cibbe am. in primay fores S 13 391290 Celulose derivative ac. in primazy foan S 14 441211 Plywood, at kea I outer ply of topical woods (ply' <6 m) s Li 441212 Plywood. at Jrm I oaterply ofusaacnircroeu wood m (p's <6 mm) S 16 441219 Plywood nra. at est 1 outcrplfrconferouwood (ply's <6 mm) S 17 441221 Paacl.e I uter ply nocconiferu & I ply of parnicle bosad S i 441229 PNo., I culerpy acnifeocms wood am S 19 441291 FPnds, I outer ply cifurou wood. & 1 pbl of panicle board S 20 441299 Peols. I uter ply conifcm'us wood cnc S 21 470100 MacIuic wood pulp S 22 470200 Ch-ical wood pulp. disolving gndas S 23 47C311 Chemicel wod pulp. sod or sulhate. conerous. unbksched S 24 470319 Chunk! wood pulp. aeda or sulpbhte. nocooferous. unhlcb&cd S 25 470321 Clscanel wood pdlpsoda or ulphatceeoiferousiacmi-blor bkacbha.no S 26 470329 Chemicl wood pulp.ohdaupbar.moooifeoua.cmibllhleacd.aes S 27 470411 Chuicrl wood pulp. salphlt. caofwusoamblceasdd S 25 470419 C ;mual wood pudp. siphite aonoierou. unbleached S 29 470421 Chan;del wood p be e mi-blclad or bScachcdnca 30 470429 Cbemicalwood lnoafea.mb 1coblachcd.aca S 31 470500 Sami-cbaical wood pulp S 32 470610 Cdone Eaten pulp S 33 470691 Mclmi pulpa of otber fth material (oh coco Eaters) S 34 470692 Chemical pulp ofdoer fibru matera (olt coms Eine) S 3S 470693 Smni-cbe malpulpa of other fibrow maerial (olt cot micra) S 36 470710 Wast amd scrap of oalckced kaLft or coirugatd paper ad pypcbard S 37 472720 Wast- and amp of ape/psperbordmaule of bl darnc pulp.notcolrd.ncs S 33 470730 Wawa mod scrap of paspcrbdm lcadc mainly of mechanical pulp.n S 39 470790 Waecipe of ppr o pmerbosdn(cludg unsoervd wat&srp) S 40 840410 Awiuy plant for uc with sam or vapour geceamting boiler nao S 41 540420 Condenser for steam or vapour power umn S 42 b40490 Phe for wailsy plaat&camdczaerfor sam/vapour gcnertg unUit n S 43 540110 aaine propulincenginm. dicaed S 44 352810 TclevigioY nxcivem includg video monior & video projcczor.eolour S 45 852820 TV mcsci an indudg videosonia&videcoprojecus mnoochrmc S 46 854011 CaI od-gay telcvisioa picem subcs.inc video mrkor subca.clour S 47 854012 Cathode-my TV picture aeic dvideo monitor tubcB,&W/odt moaochrom S Sa= GAT (1992b). - 288 - STATISTICAL ANNEX Table A2.5: CImnA Lisr OF FIRST CATEGORY EXPBORTS HS 6- Line digit number code Label 1 90210 Green tea (not fermented) in packages not exceeding 3 kg 2 90220 Grcen tea (not fermcented) in packages exceeding 3 kg 3 90230 Black tea (fermented)&partly fermentd tca in packages not cxccedg 3 kg 4 90240 Black tea (fermented) & parly ermcented tea in packagcs exccdg 3 kg 5 100510 Maize (corn) seed 6 100590 Maize (corn) nes 7 100610 Rice in the husk (paddy or rough) 8 100620 . Rice, husked (brown) 9 100630 Rice, semi-milled or wholy miLld, whethcr or not polished or glazed 10 100640 Rice, brokcn 11 120100 Soya beans 12 230400 Soybean oil-cakc&oth solid residucs,whether or not ground or pcllet 13 240110 Tobacco, unmanufactured, not stemmed or stripped 14 240120 Tobacco, unmanufateured, partly or wholly stemmed or stripped 15 240130 Tobacco refisc 16 240210 Cigars, cheroots and cigarillos, containing tobacco 17 240220 Cigarettes containing tobacco 18 240290 Cigars, cheroots, cigarillos and eigarettes, entg tobacco substitutes 19 240310 Smokg tobacco,whethero not cntg tobacco substitutes in any proportion 20 240391 Homogenized or reconstituted tobaceo 21 240399 Tobacco extracts and cssences 22 261100 Tungsten orcs and concentrates 23 261710 Antimony ares and concentrates 24 270111 Anthracite, whether or not pulverised but not agglomeated 25 270112 Bituminous coal, whether or not pulverised but not agglomerated 26 270119 Coal nes, whether or not pulverised but not agglomerated 27 270120 Coal briquentes, ovoids and similar manufactured solid fuels 28 270210 Lignite, whether or not pulverised, but not agglomerated 29 270220 Lignite, agglomerated 30 270300 Pcat (ncluding peat litter), whether or not agglomerated 31 270900 Pctroleum oils and oils obtained from bituminous minerals, crude 32 271000 Petrolcum oils&oils obtained from bituminous minerals,olthan crude, etc. 33 282580 Antimony oxides 34 284180 Metllic tungstates (wolframates) 35 500100 Silk-worm cocoons suitable for rceling 36 500200 Raw siJlk (not thrown) 37 500310 Silk waste, not cardcd or cnmbed 38 500390 Silk waste, ncs 39 500400 Silk yarn (other than yarn spun from silk waste) nt put up f rctl sale 40 500500 Yarn spun from silk waste, not put up for retail sale 41 500600 Silk yarn&yarn spun from wilk waste,put up f retail sale;silk-worm gut 42 500710 Woven fabrics of noil silk 43 500720 Woven flbrics of silkl/silk waste,olt noil silk,85%Imore of such fibers 44 500790 Wovcn fabrics of silc, ncs 45 520100 Cotton, not carded or combed 46 520210 Cotton yarn waste (including thread waste) 47 520291 Garnetted stock of cotton 48 520299 Cotton waste, ncs 49 520300 Cotton, carded or combed SO 520411 Cotton scwg thread >1=85% by wght of coton,not put up for retail sale 51 520419 Cotton scwg thrcad, <85% by weight of cotton,not put up for retail sale 52 520420 Cotton sewing thread, put up for retail sale - 89 ^ STATIST!CAL ANNEX HS 6- Line digit number code Label 53 520511 Couon yarn,>/=85%,singlc,uncombd,>/=714.29 dtcx, nt put up 54 520512 Cotton yarn,>/=85%,singlc.uncombcd.714.29 >dwcx>/=232.56. not put up 55 520513 Couon yarn,>/=85%,singlc,uncombed,232.56>dtex>/=192.31, not put up 56 520514 Cotton yam,>/=85%,singlc,uncombcd.19-.31 >dtcx>/= 125, not put up 57 520515 Cotuon yarn, >/=85%,singlc.uncombd, < 125 dtcx,nt put up rctail sale 58 520521 Cotton yarn, >1=85%, single, combed, >1=714.29, not put up 59 520522 Cotton yam,>/=85%,single,combed, 714.29 >dtcx > /=232.56, not put up 60 520523 Cotton yarn,>/=85%, single, combed. 232.56 >dtex>/= 192.31, not put up 61 5205Z4 Cotton yarn, >/=85%, single, combed, 192.31 >dtex>/= 125, not put up 62 520525 Cotton yarn, >/=85%,singlc,combed, <125 dtex,not put up for rctail sale 63 520531 Cotton yarn,>1=85%, mulLi, uncombed,>/=714.29 dLex, not put up. ncs 64 520532 Cotton yarn, >/=85%,multi,uncombcd.714.29 >dLcx >1=232.56.nt put up,nes 65 520533 Cotton yarn, >/=85%,multi,uncombed,232.56 >dtex>/=192.31.nt put up.nes 66 520534 Coton yam, >/=85%,muki,uncombed,192.31 >dLcx>I=125,nt put up, nes 67 520535 Cotton yam, >/=85%,multi,uncombcd, < 125 dtex, not put up, nes 68 520541 Cotton yarn, >/=85%, multiple, combed, >1=714.29 dtcx, not put up, nes 69 520542 Cotton yam, >/=85%,multi,combed,714.29 >dtex>I=232.56,nt put up,nes 70 520543 Cotton yarn, >J=85%,multi,combcd,232.56 >dtcx> 1=192.31,nt put up,ncs 71 520544 Cotton yam.>/=85%,multple.combed,192.31 >dtcx>/=125.notputup,ncs 72 520545 Cotton yarn. >1=85%, multiple, combod, < 125 dtex, not put up, nes 73 520611 Cotton yarn, <85%, single, uncombed,>/=714.29, not put up 74 520612 Cotton yarn, <85%, single, uncombed, 714.29 >dtcx>/=-232.56, at put up 75 520613 Cotton yarn, <85%, single, uncombed,232-56 >dtcx>/=192.31, not put up 76 520614 Cotton yarn, <85%, single, uncombcd, 192.31 >dtex>/=125, nt put up 77 520615 Cotton yarn, <85%,single,uncombcd, < 125 dtcx,not put up for retail sale 78 520621 Coaton yarn, <85%, single, eombed,>J=714.29 dtex,nt put up 79 520622 Cotton yam, <85%, single, combed, 714.29 > dtcx>b=C32.56, not put up 80 520623 Cotton yam, <85%, single. combed, 232.56 >dtcx>/= 192.31, not put up 81 520624 Cotton yarn, <85 %, single, combed, 192.31 >dtcx>/=125, not put up 82 520625 Cotton yam, c S5 %,single,combed, < 125 dtex,not put up for retail sale 83 520631 Cotton yarn, <85%, multiple, uncombcd,>f=714.29, not put up, nes 84 520632 Cotton yarn, <85%,multiplc,uncombed,714.29 >dtcx> /=232.56.nt put up,ncs 85 520633 Cotton yarn, <85%,multiple,uncombed,232.56 >dcx>/ 192.31.nt put up,nes 86 520634 Cotton yarn,<85%,multiplc,uncombed,192.31 >dtex> =125,nt put up,nes 87 520635 Cotton yarn, <85%, muliplc, uncombcd, < 125 dLex, not put up, nc: 88 520641 Cotion yarn, <85%, multiple, combed,>/=714.29, nt put up, nes 89 520642 Cotton yarn, <85%,multiple,combed,714.29 >dtcx>I=232.56,nt put up,nes 90 520643 Cotton yarn,<85%,multiple,combed,232.56 >dtcx>f=192.31,ntput up,ncs 91 520644 Cottonyarn,<85%,multiple,combed,192.31 >dtcx>f=125,nt put up,nes 92 520645 Cotton yam, <85%, multiple, combed, < 125 dtcx, not pu: up, ncs 93 520710 Cotton yarn (a/t sewing thread) >/-85% by weight of clton, put up 94 520790 Cotton yarn (olt sewg thread) < 85% by wt of cotton,put up f retl sale 95 52081Ol Plain weave cotton fabric, >J=85%, not more than 100 gt'm2, unblcached 96 520812 Plain weave cotton fibric,>/=85%, >100 gdm2 to 200 g/m2, unbicached 97 520813 Twill weave cotton fabric, >/=85%, not more than 200 glm2, unblcached 98 520819 Woven fabrics of cotton, > 1=85%, not more than 200 g/m2,unbleached. nes 99 520821 Plain weave cotton fabrics. >1=85%, not more than 100 g/m22, bleached 10 520822 Plain wcave cotton fabric,>/=85%, >100 gIm2 to 200 gIrm2, blcached 101 520823 Twill wcave cotton fabric,>/=85%, not more than 200 glm2, bleached 102 520829 Woven fabrics of coton, > 1=85%, nt more than 200 gIm2, bleached, nes 103 520831 Plain wcave cotton lbric, >/=85%, not more than 100 gfm2, dyed 104 520832 Plain weave cotton fabric,>/=85%, > lOOgm= to 200glm=, dyed 105 520833 Twill weave cotton fabrics, >1=85%, not more than 200 gln2. dyed - 290 - STATISTICAL ANNEX HS - Line digit number code Label 106 520839 Woven fabrics of conon,>1=85%, not more than 200 gIm2, dyed, nes 107 520841 Plain wcave cotton fabric,>/=fS%, not more than 100 g/m2, yarn dyed 108 520842 Plain weave cotton fabrics,>I=85%, >100 g/m2 to 200 glm2, yam dyed 109 520843 Twill weave cotton fabric,> /=85%, not mor than 200 gWm2, yarn dyed 110 520849 Woven fabrics of cotton,>/=85%,nt more than 200 g/m2, yarn dyed, nes 111 520851 Plain ve.avc cotton fabrics,>1=85%, not more than 100 grm2, printed 112 520852 Plain weave cotton fabric,>/=85%, >100 gIm2 Lo 200 gIm2, printed 113 520853 Twill weave coton fabric.>/=85%. not more than 200 g/m2, printed 114 S20859 Woven fabrics of cotton,>1=85%, not morc than 200 g/m2,printcd, nes 115 520911 Plain weave cotton fabric, >1=85%, more thun 200 g/m2, unblcached 116 S20912 Twil weave couan fabric,> 1=85%, more than 200 g/m2, unblcached 117 520919 Woven fabrics of cotton,> 1=85%,morm than 200 gIm2, unbleaclied, ncs 118 520921 Plain weave cotton fiLbric, >185%, more than 200 g/m2, bleached 119 520922 Twill weave cotton fabrics,>1=85%, more than 200 g/m2, bleached 120 520929 Woven fabrics of couton,>l=85%, more than 200 gIm22, bleached, nes 121 520931 Plain wcave coton fabrics, >/=85%, morc than 200 glm2, dyed 122 520932 Twill weave cotton fabrics, >=85%, morc than 200 gIm2, dyed 123 520939 Woven fabrics of cotton,>/=S5%, more than 200 g/m_, dyed, nes 124 520941 Plain weave cotton fabrics,>1=85%, more than 200 gJm2, yarn dyed 125 S20942 Denim fabrics of ootton,>/=85%, morc than 200 Wm2 126 520943 TwIl wcave coton fab,okt denim, >/=8S%,more than 200 g/n2,yarn dyed 127 520949 Woven fabrics of coaon, >1=85%, more than 200 gtm2, yarn dycd, nes 128 520951 Plain weave cot fabrics, >1=85%, more tharn 200 gIm2, printed 129 520952 Twill weave cotton fgbrics,> 1=85%, more than 200 gdm2, printed 130 520959 Woven fabrics of cotton,>1=85%, more than 200 g/m2, printed, nes 131 521011 Plain weave cotton fab,<85% mixd w m-m fib,not more than 200 gIm2,unbl 132 521012 Twill wcave cotton fab,c85% mixd w m-m fib,not more than 200 gmn,2unbl 133 521019 Woven fab of cotton, <85% mixd with m-m fib, <1=200 gIm2,unbl,nes 134 521021 Plain weave cotton fiLb,<85% misd w m-m fib,not more than 200 gIm2,bI 135 521022 Tw1i weave cotton fab, <85% mixd w m-r.n fib,not more than 200 gm2,bl 136 521029 Wavelt fibrics of cotton, <85% mixd with in-m fib, <1=200 g/m2, bl, nes 137 521031 Plain weave comon fab,<85% mixd w m-m fib,not more than 200 gm2,dyd 138 521032 Twill wcave cotton fab. < 85% muxd w mn- fib,not morc than 200 glrn2,dyd 139 521039 Wovcn fabrics of cotton, <85% mixd with m-rn fib, 200g/m2,yarn dyd 158 521149 Woven fabrics of cotton,< 85% mixd wilh rm-m fib, >200 gIm2,yan dyed,nes - 291 - STATISTICAL ANNEX HS 6- Line digit number code Labcl ISP 5211SI Plain weave cotton fab,C85% mixd w m-m fib,more than 200 ghm2,printd 160 521152 Twill weave cotton fab, cR55% mixd w m-m fIb,more than 200 g/m2,printd 161 521159 Woven fabrics orcoton,<8S% mixd w m-m fib,mor thn 2OOg/m2,printd,ncs 162 521211 Woven fabrics or cotton,weighing not more than 200 g/ar2,unbleached,nes 163 521212 Woven fabrics of cotton,weighing not more than 200 g/m2,blcached,nes 164 521213 Woven fabrics of cotton, weighing not morc than 200 gim2, dyed, nes 165 521214 Woven fabrics of cotton, 200 g1m2, of yams of different colours, nes 171 521225 Woven fabrics of cotton, wcighing more than 200 g/m2, printed, tcs 172 580410 Tulles & other net lhbrics,not incl woven,knirted or crocheted fabrics 173 580421 Mechanically made lace of man-made fib,in the picc,in stripslrotifs 174 580429 Mechanically made lace of oth tex mat,in the piece,in strips/in motifs 175 580430 Hand-made lace, in the piece, in strips or in motifs 176 581010 Embroidery without visible ground,in the picce,in strips or in motifs 177 581091 Embroidery of cotton, in the piece, in strips or in motifs, nes 178 581092 Embroidery of man-made fibers,in the piccc,in strips or in motifs.ncs 179 581099 Embroidery of oth textile materials,in the piecc,in strips/motifs,nes 180 710110 Pearls natuml whether or not workcd or graded 181 710121 Pearls cultured unworked 182 710122 Pearls culured worked 183 710210 Diamonds unsorted whethecr or not workcd 184 710221 Diamonds industrial unworked or sinmply sawn, clcaved or bruted 185 710229 Diamonds industrial nas excluding mounted or set diamonds 186 710231 Diamonds nonindustrial unworked or simply sawn, cleaved or bruted 187 710239 Diamonds nonindustrial nes excluding mounted or set diamonds Source: GATT (1992b). - 292 - STATISTICAL ANNEX Taible A2.6: CIIINA: LISr OF SECOND CATrIGORY ExPORTS HS 6. Line digit number code Label 1 10310 Swine, livc pure-bred breeding 2 10391 Swine, live except pur-bred breeding wcighing lcmn tlhan 5U kg 3 10392 Swine, livc cxccpt pure-bred breeding weighing 50 kg or morc 4 20210 Bovine carcasscs and half carcasses, frozen S 20220 Bovine cuts bonc in, frozen 6 20230 Bovine cuts boncless, frozen 7 20321 Swine carcasses and half carcasscs, frozen 8 20322 Hams, shoulders and cuts thercor, of swinc, bone in, frozen 9 20329 Swine cuts, frozcn nes 10 20721 Fowls, domestic, whole, frozen 11 20722 Turkeys, domesLic, wholc, frozen 12 20723 Ducks, geesc and guinea fowls, domcstic, whole, frozen 13 20810 Rabbit or hare meat and edible mcat offal, frcsh, chilled or frozen 14 30613 Shrimps and prawns, frozen, in shell or not, including boiled in shell 15 30619 Crustaceans ncs, frozen, in shell or not including boiled in shell 16 40900 Honey, natural 17 50210 Bristles, hair and wastc o, pigs, hogs orboars 1B 50400 Guts, bladders and stomachs of animals except rish whole or in pieces 19 50510 Feathers uswed for stuffg&down cleaned,disinfected or treated for prosV 20 50590 Feathers&down nes cind,disinfectd prcsvd,fcatherd pts&skins pdr&waste, 21 71190 Vegetables nes&mixtures provis prcsvd but nt f immcdiatc consumptn 22 71290 Vegetables and mixtures dried, but not furLher prepared ncs 23 71320 Chickpcas, dried, shclled, wheLher or not skinned or split 24 71331 Urd,mung,blackJgreen gram beans drid shclid,whether/not skinnd/split 25 71332 Beans,small red (Adzuki) dried,shelled,whcther or not skinned or split 26 80231 Walnuts in shell, fresh or dried 27 80232 Walnuts, frcsh or dried, shelled or peeled 28 80240 Chestnuts, fresh or dried, whether or not shellcd or pecied 29 90420 Fruits of the genus Capsicum or Pimenta, dried, crushed or ground 30 100810 Buckwheat 31 120210 Ground-nuts in shell not roasted or otherwise cooked 32 120220 Ground-nuts shelld,whether or not broken,not roastd or otherwise cookd 33 120740 Sesamum seeds, whether or not broken 34 130190 Natural gums, resins, gum-resins and balsam, exccpt arabic gum 35 140420 Cotton liners 36 151540 Tung oil&its fractions,whether o not refnd,but not chemicaUy modifid 37 170199 Rcfined sugar, in solid form, nes 38 200310 Mushrooms prepared or preserved other than by vinegar or acetic acid 39 200560 Asparagus prcpard or preservd,o/t by vincgar or acetic acid,not frozen 40 200590 Veg nes&mix of vecg prep/presvd o/t by vinegarlacetic acid,not frozen 41 200811 Ground-nuts ncs o/w prcp or prcsvd,sugarcd,sweetencd,spirited or not 42 250100 Salt (includg table salt&dcnaturd salt) pure sodium chloridc&sea water 43 282590 Inorganic bases nes; metal oxidcs, hydroxides and peroxides nes 44 234610 Ceriurn compounds 45 23469O Compds of rare-earth met nes,of yttrium/scandiumtmx of thesc metals 46 330124 Essential oils of pcppermint 47 330125 Essential oils of other mints 48 360410 Fuirworks 49 330610 Rosin SO 380620 Rosin salts or resin acid salts 51 380630 Estcr gums 52 380690 Rcsin acids&derivs nes;rosin deriv ncs;rosin spirit&rosin oils;run gum - 293 - STATISTICAL ANNEX HS 6- Line digit number code Label 53 410110 Bovine skins, whole, raw 54 410310 Goat or kid hides and sldns, raw, nes 55 410710 Swine Icather, nes 56 420329 Gloves mittens&mits,o/t for sport,of leather o of composition lcather 57 430110 Raw mink furskins, whole 58 430211 Tanned or dressed mink turskins, whole, not assembled 59 440310 Poles, treated/painted, etc. 60 440320 Logs, poles, coniferous nes 61 440331 Logs, Meranti, lght & dark red & Bakau 62 440332 Logs, white Lauan, Mermnti, Scraya yellow Meranti & Alan 63 440333 Logs, Keruing, Ramin, Kapur, Teak, Jongkong, Mcrbau,, etc. 64 440334 Logs, Okoumu, Obeche, Sape11i, Sipo, Acajou d'Afiquc,, etc. 65 440335 Logs, Tiama, Mansonia, Llomba, Dib-tou, Limba and Azobs 66 440391 Logs, Oak 67 440392 Logs, Beech 68 440399 Logs, noneoniferous nes 69 440610 Ties, railway/tramway, wood not impregnatcd 70 440690 Ties, railway/tramway, wood nes 71 440710 Lumber, coniferous (softwood) 6 mm and thicker 72 440721 Lumber, Merani red (light & dark), Memnti Bakau, White Lauan, ete. 73 440722 Lumbcr, Okoumm, Obeche, Sapclli, Sipo, Acajou dAfrique, Makors, etc. 74 440723 Lumber, Baboen, Mahogany (Swietenia spp). Imbuia and Balsa 75 440791 Lumber, Oak 76 440792 Lumber, Beech 77 440799 Lumber. nonconiferous ncs 78 440810 Veneer, coniferous (softwood) less than 6 mm thick 79 440820 Veneer, tropical woods, less than 6 mm thick 8o 440890 Veneer, nonconiferous nes, less than 6 mm thick 81 460120 Mats, matting and screens of vegetable plaking materials 82 480510 Paper, fluting (corrugating medium), in rolls, semi-chemical, uncoated 83 510210 Fine animal hair, not carded or combed 84 510530 Fmc animal hair, carded or combed 8'5 520821 Plain weave comon fabrics, >1=85%, not more than 100 im2, bleached 86 520822 Plain weavc cotton fabric, >1=85%, > 100 g/m2 to 200 g/rn2, bleached 87 520823 Twill weave cotton fabric, >1=85%, not more than 200 glmn2, bleached 88 520829 Wovcn fabrics of coLton, >J=85%, nt more than 200 g/m2, bleached, nes 89 520921 Plain weave cotton fabric, >1=85%, more than 200 gJm2, bleached 90 520922 Twill wcave cotton fabrics, >1=85%, more than 20D ghm2, bleached 91 520929 Woven fabrics of cotrn, >I=85%, morc than 200 gIm2, bleached, nos 92 521021 Plain weave cotton fab, <85% mixd w m-rn fib,not more than 200 gIm2,bl 93 521022 rwMill weave cotton fab,<85% mixd w m-m fib,not more than 200 gln2,bl 94 521029 Woven fabrics of coton, <85% mixd with m-m fib, <1=200 gIm2. bl, nes 95 521121 Plain wcave cotton fab, < 85% mixd w m-m fib,more than 200 glm2,bleachd 96 521122 Twill weave cotton fib, c85% mixd w m-m fib,morc than 200 g/m2,bleachd 97 521129 Woven fabrics of cotton,<85% mixd w mn- fib,mare than 200 gtm2,bl,ncs 98 530310 lute and other textile bast fibers, raw or rced 99 530390 Jute and other teax bast fib,not spun,nes;tow and waste of thesc fibers 100 531010 Woven fabrics ofjute or of other textile bast fibers, unblcached 101 531090 Woven fabrics of jute or of other extile bast fibers, oft unbleached 102 570110 Carpets of woot or fnc animal hair, knottd 103 570241 Carpets of wool/line animal hair,of wovn pile construction,made up,nes 104 570291 Carpets of wool or fine animal hair, wovcn, made up, nos 105 570310 Carpcts of wool or fine animal hair, tufted - 294 - STATISTICAL ANNEX HS 6- Line digit number code Label 106 S70500 Carpets and other textilc floor coverings, nes 107 700311 Cast glass sheets nonwird colourd, etc. havg an absorbg/reflectg laycr 108 700319 Cast glass shects nonwired nes 109 700320 Cast glass sheets wired 110 700330 Cast glass profiles 111 700410 Drawn glass shccts.coloured, etc. havg an absorbg or rcflectg laycr 112 700490 Drawn glass in sheets nes 113 700510 Float g-s, etc. in shects,nonwird havg an absorbent or renlectg layer 114 700521 Float glass, tc. in sheet, nonwired coloured throughout the mass, etc. 115 700529 Float glass. etc. in shedes, nonwired nes 116 700530 Float glass, etc. in shcets, wired 117 720110 Pig iron,nonalioy,Containg by wt <1=05% phosphorus in primary form 113 720120 Pig imn,nonoaloycontg by wght >0.5% of phosphorus in primary fnn 11S 720221 Ferro-silicon, containing by weight more than 55 % of silicon 120 720229 Ferro-silicon. nes 121 720280 Ferro-tungsten and frro-silico-tungsten 122 730110 Shect plilingi/s whetherlnot drillcdlpunchd/made from assem elements 123 730120 Angles, shapes and sections, welded, iron or steel 124 730210 Rails, iron or steel 125 730220 Sleepers (cross-tics), iron or steel 126 730230 Switch blades,crossing frogs,point rods & othcr crossing pieccs,i or s 17 730240 Fish plates and sole plates, iron or steel 1 n730290 Rail or tramway consuction material of iron or steel, nes 129 730300 Tubes, pipes and hollow profiles of cast iron 130 730410 Pipes,line,iron or steel,smls,of a kind used for oil or gas pipelines 131 730420 Casings,tubg & drill pipe,i or s,smls,for use in drillg for oil or gas 132 730431 Tubcs,pipc&hollow profiles,ilnas,smls,cd/cr,of circ cross section,nes 133 730439 Tubes,pipc & hoElow profilcsi or nas,smls,of circ cross section,nes l34 730441 Tube,pipe&hollow profile,swain stccl,smls,cdJcr of circ cross sect,nes 13S 730449 Tubc,pipc&hollow profiles,stainless steel,smls,of circ cross sect,nes 136 730451 Tubes,pipc&hollow profilc,as,(olt stain) smls,cdlcr of cire cross sect 137 730459 Tubcpipc&&hollow profile,as,(oat stanless) smls,circ cross sect,ncs 138 730490 Tubes, pipe & hollow profiles, iron or steel, smIls, nes 139 730511 Pipeine,itslongitudinally subm are w1d,iutlext cc sect,dia >406-4mm 140 730512 Pipefineilslongitudinally wid w intlext circ c scct,cxt dia >406.4mm 141 730519 Pipeline,i or sjntfext cire cross sectwld,ext dia >406.4mnm.ncs 142 730520 Casings,ils,intlext c:re c scetwld ext di& >406.4mm,oil/gas driU,nes 143 730531 Tubes & pipei or s,longitudinally weldcdcxternal dia >406.4mm,nes 144 730539 Tubes & pipe,i or s,wclded,rivctcd or sim closed,ext dia >406.4mm,ncs 145 730590 Tubes & pipe, i or s, riveted or sim closed, ext dia >406.4mm, nes 146 730610 Pipc.linc,i or s,wldd,rivctd or aim closd,ncs,fbr oil or gas pipeline 147 730620 Casingltubing,i or s,wcldd,riveted or sim clsd,nes,for oillgas drillg 148 730630 Tubespipe & hollow profilesiron or nas,welded,of circ cross scct,nes 149 730640 Tubc,pipc&hollow profile,stainless stel,wc1dd,of circ cross soct,ncs ISO 730650 Tubce,pipe&hoUow profiles,al/s,(oht stain) wld,of cire cross sect,ncs 151 730660 Tubes,pipe & hollow profiles,i:s,welded,of non circ cross sect,ncs 152 730690 Tubes, pipe & hollow profiles, iron or steel, welded, ncs 153 790111 Zinc not alloyed unwrought containing by weight 99.99% or more of zinc 154 790112 Zinc not alloyed unwrought containg by weight less than 99.99% of zinc 155 790120 Zinc alloys unwrought 156 800110 Tin not alloyed unwrought 157 800300 uim bars, rods, profilcs and wire 158 810110 Powders, tungsten (wolfram) - 295 - STATISTICALANNEX HS 6- Line digit number code Labd 159 310191 Tungstn (wolfiam) unwroughtiJnc bar&rod simply sintd;watc/scmap 160 310192 Tuagsten profile,plate,shcctsip&oil,inc bareod nt simply sintetd '61 010193 Wire, tungsten (wolfiam) 162 510199 Tungst5n (wolfam) and ardes rherof nes Source: GATr (1992b). - 296 - STATISTICAL ANNEX Table A2.7: LIST OF PRODUCTS SUBJECr TO STATE PRICE CONTROL Tariff lines Descriptions A. List of Agricultural Products Subiect to State Pricing by Tariff Lines The category subject to state-fixed purchasing prices: 1006 Rice 1001 Wheat and meslin 1005 Maize (corn) 1201 Soybeans, whether or not broken 5201 Cotton, not carded or combed 2401 Umnanufactured tobacco, tobacco refuse, tobacco, not stemmedlstripped 50020010 Steam filature silk 50020020 Tussah silk 0902 Tea, whether or not flavored The cateeory subject to state-fixed retail prices: 11010000 Wheat or meslin flour 1006 Rice 1005 maize (corn) 120l Soybeans, whether or not broken 4403 Wood in the rough, whether or not stripped of bark or sapwood, or roughly squared 23040000 Oilcake and other solid residues, whether or not ground or in the form of pellets, resulting from the extraction of soybean oil 3. The category subject to state-fixed retail prices: 4403 Wood in the rough, whether or not stripped of bark or sapwood, or roughly squared 44039990 Other wood 4407 Wood sawn or clipped lengthwise, sliced or peeled, whether or not planed, sanded or finger-jointed, of a thickness exceeding 6 num. 4412 Plywood, veneered panels and similar laminated wood - 297 - STATISTICAL ANNEX Tariff lines Descriptions B. List of Manufactured Products Subject to State Pricing by Tariff Lines Products of Light Industry (1 items) 25010010 Salt 34022010 Synthetic detergents in power form 8528 Television receivers (including video monitors and video projectors), whether or not incorporating radio-broadcast receivers or sound or video recording or reproducing apparatus 4801 Papers 4813 Cigarette paper, whether or not cut to size or in the form of booklet or tubes 48114010 Insulating paper and paper board 47014705 Wood pulps 4707 Waste and scraps of paper or paperboard 28353100 Sodium triphosphate (sodium tripolyphosphate) 2902 Cyclic Hydrocarbons 2827 Chlorides, chloride oxides and chloride hydroxides Textiles and itted fabrics (7 items) 5205-5207 Cotton years 5208-5212 Woven fabrics of cotton 5111-5113 Woven fabrics of carded wool or of carded fine animal hair; woven fabrics of combed wool or of combed fine animal hair 5109 Yarn of wool or of fine animal hair, put up for retail sale Pharmaceuticals and medical equipment (2 items) 3003-3006 Pharmaceuticals 9018-9023 Medical equipment Syntfetic materials (8 items) 39074000 Polycarbonates 39052000 Polyvinyl alcohols, whether or not containing unhydrolysed acetate groups 39021000 Polypropylene 20337100 6-hexanelactam (espilion-caprolactam) 39094000 Phenolic resins 29212210 Nylon-66 salt 29161400 Esters of methacrylic acid 3901 Polymers of ethylene, in primary forms - 298 - STATISTICAL ANNEX Tariff lines Descriptions C. List of Products of Heavy Industry Subject to State-Fixed Prices The Category Subject to State-Fixed Ex-factory Prices (21 items) 2701-2705 Coal and fuels manufactured from coal 2709-2711 Petroleum oils and gases 2501-2530 Mineral products for chemistry 3101-3105 Chemical fertilizers 2801-2851 Inorganic chemicals 2936-2941 Organic chemicals 3901-3914 Plastics and copolymers 3203-3215 Pigments and other coloring matter 4001-4017 Rubber and articles thereof 3701-3707 Cinematographic films and goods 2515-2530 Building materials 4403-4418 - 6801-6811 - 7001-7008 - 7201-7205 Pig iron and granules and powers thereof 7208-7216 Steel and articles thereof 7218-7229 - 2601-2621 Ores and semi-product of iron and nonferrous metals 7401-7406 - 7501-7504 - 7601-7603 - 7801-7804 - 7901-7903 - 8001-8005 - 2704-0010 Coke and semi-coke 7407-7419 Products of nonferrous metals 7505-7508 - 7604-7616 - 7805-7806 - 7904-7907 - 8006-8007 - 8101-8113 - 8501-8505 Electric motors, generators and parts thereof 8901-8905 Ships and boats fir civil use 8802 Aircrafts for civil use 3601-3603 Explosives and device thereof Thbe Category Subiect to State-Fixed Retail Prices (3 items) 2701-2716 Mineral fuels and products of their distribution 3102-3105 Chemical fertlizers 3808 Herbicides and others Source: GATT (1992b). - 299 - STAT ST!CAL ANNEX Table A2.: TRENDS IN EXCIIAGE RATES Real Rcal Nominal Nominal Weighted effectiec cffcctivc cffeclivc effctive Official Secondry exchange exchange exchange rate exchange exchange nte Year- exchangc mart rte ror rate (secondary ate (secondary quarter rate rate eoxota (official) mart) (offcia) T (Yuan/S) (Yuani$) (YuanS$) 1980=10 (1980=10) 1980=10 1980=10 1987-4 3.72 5.25 4.39 4.05 2.87 5.41 3.84 1987-U 3.72 5.3 4.42 3.96 2.78 5.31 3.73 1987-r 3.72 5.46 4.49 4.07 2.78 5.44 3.71 1987-NV 3.72 5.61 4.55 3.97 2.78 5.24 3.48 1988-1 3.72 5.7 4.59 3.97 2.64 5.17 3.38 1958-l 3.72 6.3 4.86 4.13 2.59 5.23 3.09 19S81m 3.72 6.6 4.99 4.67 2.44 5.60 3.16 1988-V 3.72 6.65 5.01 4.72 2.63 5.48 3.07 1989-1 3.72 6.65 5.01 4.95 2.64 5.67 3.17 1989-1i 3.72 6.6 4.99 5.23 2.77 6.06 3.42 1989-II 3.72 6.55 4.97 5.24 2.95 6.36 3.61 1989-NV 3.89 S.9 4.77 4.86 2.98 6.16 4.07 1990-1 4.72 5.91 5.24 3.93 3.21 5.26 4.20 1990-11 4.72 5.81 5.20 3.96 3.14 5.45 4.43 1990-r 4.72 5.8 5.20 3.70 3.22 5.27 4.39 1990-V 4.97 5.7 5.29 3.33 3.08 4.84 4.24 1991- 5.22 5.8 5.68 3.19 2.92 4.75 4.33 1991-1 531 5.84 5.73 3.33 2.91 4.95 4.33 1991-r 5.36 5.87 5.77 3.30 3.03 4.93 451 1991-V 539 5.87 5.77 3.15 3.02 4.79 4.36 1992-1 5.46 5.95 5.85 3.12 2.87 4.80 4.37 1992-U 55 6.25 6.10 3.13 2.75 4.84 4.26 1992-r 5.5 7 6.70 3.07 2.46 4.76 3.81 1993-1 5.73 8.41 7.87 3.16 3.17 4.88 3.35 Source: Intmational Monebty Fund and Staff Estmas. - 300 - STATISTICAL ANNEX Table A3.1: AvERGE TARmFF LEVELS (Percent) HS Chapter Trade weighted Unweighted 0 34.7 44.4 1 24.8 42.7 2 18.8 27.4 3 18.6 40.1 4 23.2 35.1 5 60.1 66.2 6 71.1 79.9 7 18.9 27.6 8 32.2 34.1 9 42.6 48.9 otal 31~~~~~4.6 2w Note: These trade weighted tariff levels have been estimated using first quarter import data for 1992 at the six-digit HS level, and information on tariff rates at the nine-digit level of disaggregation, both provided by the Customs Directorate. Source: Chinese Customs Directorate and staff estimates. - 301 - STATISTICAL ANNEX Table A3.2: CIUNA AVERAGE TARIFF RATES (by SlTC 2-digit codes) Line SlTC Rev 2 Simple avg Weighted avg Difference number 2 digit tariff rate Tariff Rate simple-weighted 1 0 0.00 0.00 0.0 2 1 54.62 50.46 4.2 3 2 57.18 31.43 25.8 4 3 38.88 32.36 6.5 5 4 36.86 6.96 29.9 6 5 53.12 45.17 7.9 7 6 52.14 39.95 12.2 8 7 44.54 48.01 -3.5 9 8 22.33 6.84 15.5 10 9 65.40 73.15 -7.8 11 11 126.25 88.48 37.8 12 12 116.67 143.44 -26.8 13 21 36.53 15.69 20.8 14 22 46.56 50.15 -3.6 15 23 22.06 26.94 4.9 16 24 11.84 14.96 -3.1 17 25 2.00 2.00 0.0 18 26 31.80 27.62 4.2 19 27 27.21 18.95 8.3 20 28 6.32 4.76 1.6 21 29 35.29 30.99 4.3 22 32 15.00 15.00 0.0 23 33 18.37 10.64 7.7 24 34 30.00 59.00 -29.0 25 41 41.25 36.17 5.1 26 42 29.12 25.83 3.3 27 43 46.00 45.35 0.7 28 51 19.59 18.71 0.9 29 52 21.26 21.51 -0.3 30 53 31.54 31.51 0.0 31 54 22.37 31.06 -8.7 32 55 85.35 50.22 35.1 33 56 5.38 5.05 0.3 34 57 39.33 30.15 9.2 35 58 33.37 32.09 1.3 36 59 30.38 32.62 -2.2 37 61 47.95 27.85 20.1 38 62 36.53 35.87 0.7 39 63 31.50 22.05 9.5 40 64 36.66 34.27 2.4 41 65 70.73 66.17 4.6 42 66 44.79 28.74 16.1 43 67 14.97 13.45 1.5 - 302 - STATISTICAL ANNEX Line SITC Rey 2 Simple avg Weighted avg Difference number 2 digit tariff rate Tariff Rate sinple-weighted 44 68 15.69 14.24 1.5 45 69 45.56 50.69 -5.1 46 71 21.86 21.79 0.1 47 72 21.65 21.08 0.6 48 73 24.60 22.01 2.6 49 74 31.62 38.45 -6.8 50 75 41.82 34.82 7.0 51 76 52.16 34.80 17.4 52 77 37.74 28.37 9.4 53 78 61.97 78.69 -16.7 54 79 10.11 6.95 3.2 55 81 57.02 53.16 3.9 56 82 81.67 80.12 1.5 57 83 80.00 80.00 0.0 58 84 87.45 84.60 2.9 59 85 7852 70.36 8.2 60 87 21.33 19.14 2.2 61 88 49.26 52.63 -3.4 62 89 60.23 60.11 0.1 63 95 60.00 60.00 0.0 64 97 0.00 0.00 0.0 Overall average 40.3 36.62 Source: Chinese Customs Directorate and stff estimates. - 303 - STATISTICAL ANNEX TIAk AU.3u CaWt Simian or Nomiow,, JmR - EoRn [by twa-dI ETC (reIde 2) category, 19151 Serial SIlt 2 label GVIO GVIO Impan Expn Share of Impod Expos O code 1995 1935 19H5 199S GVIO IGVIO JOVIO (Curfiw) (Curnt) (Cunt) (Curtis 19K! CY il.) (s nM) (Sta ml) (SKUL) (% tmo (S) (S) O Lve Lu fyforr fo - - - - - - I 1 Mra and prpaaudcsa 11.577 3.942 6.3 431.1 1.4 t2 10.9 2 2 Dairy product.h bid' g 1.179 402 29.1 53.1 0.1 7.2 13.2 3 3 Fab ad pripamdam 1.067 363 41.3 .267.9 0.1 11.4 73.3 4 4 Crae md pnpumda. 26.443 9.004 902.7 1007.5 3.3 10.0 11.2 S 5 Vcgerabo ad Init 4.011 1.366 47.5 731.6 0.S 3.5 57.2 6 6 SVWarmdp.pa.huey B.119 2,765 263.1 74.1 1.0 9.5 2.7 7 7 Coffee. , caca, apce 3.407 1.160 38.S 414.7 GA 3.3 35.7 3 3 FecS huff far anmLael 2,487 U47 73.7 224.6 0.3 9.3 26S 9 9 Uiw. edibk pmducd 2.253 767 21.4 6LO 0.3 2.1 3.1 10 it BDee 13.713 4.669 20.2 67.5 1.7 0.4 1.4 11 12 Tobac ad mnuacls 20.226 6.837 173.3 32.9 2.5 2.5 OS 21 Olceda and okaginous fas - - - 22 WAS, uia fiuaka - - 12 23 Rubber, caade 371 126 205.5 3.5 0.0 1625 2.8 - 3 24 Co* and wood S.069 2,741 312S5 .9 1.0 29.6 0.3 14 25 PUp ad w_s paper 53 20 20B.S 0.2 0.0 1056.3 1.2 1S 26 Teme fibea and wmk 13.539 6330 1.031.8 1.076.6 23 16.3 17.0 16 27 Calc fcnilh. nmcoealnew 5.173 1.762 5L.4 25.3 0.6 2.9 14.2 17 21 Me radlim am. nap 3.640 1.239 520.7 214.3 0.4 42.0 17.3 13 29 Cane animal veg. cmoca 4.662 1.583 91A 377.0 0.6 5.3 23.7 19 32 Col, colt a briquua 24.393 3806 59.7 32SA 3.0 0.7 4.0 20 33 Pdromkunad p oduct 45.990 15,657 46.4 6.300.5 5.7 0.3 40.2 21 34 Gas. natnal and anufacua 1.556 530 1.9 3.1 0.2 0.4 0.6 22 35 Ekctic curet 29.195 9.941 53.9 2.6 3.6 0.5 0.0 23 41 An6-aoils and fat - - - - - 24 42 Fed vgutableel,l fat 6.313 2.320 B3.4 125.5 0.3 3.6 5A 25 43 P1omu eaiml eg oiL etc. 197 67 2.8 0.9 0.0 4.1 1.4 26 51 Orgaic chemicala 3.974 3.056 64B.9 291.7 1.1 21.2 9.5 27 S2 nrgpnic diwnicak 9.067 3.083 296.5 270.3 1.1 9.7 3.8 23 53 Dyes. toning. color prd 6.191 2.110 131.2 72.7 L.B 6.2 3.4 29 34 Medickual, pham puducta 3.07S 2.751 96.1 280.3 1.0 3.5 102 30 55 Pcrfiume clkanimg.sc.. pnl S,612 1.911 24.1 103.5 0.7 1.3 SA 31 56 Ftiize. musufactured 13223 4.503 1,375.6 1.7 1.6 30.5 0.0 32 57 Expoaive. spyrotch peed 332 233 IA 106.0 0.1 0.5 37.4 33 SS Phat uaerials .tc. 11.705 3.936 1,346.4 39.1 IA 33.1 1.0 =4 59 Chemical mlciaa n 7.446 2.536 236.3 114.3 0.9 93 4.5 35 61 lebar. dread fir. etc. 4.037 1.375 135.6 42.1 0.5 9.9 3.1 36 62 Rnblcrmanufacburanm 10.646 3.625 14. 41.7 1.3 0.4 1.3 37 63 Wood.orksoazfacsuresaa 2,639 893 244.5 23.9 0.3 27.2 2.7 33 64 Paper, pabard ad mfr 15,9S9 5.444 407.2 142.1 2.0 7.5 2.6 39 65 Tetile yam. fabrcs, etc 97.651 33.252 1502.3 3,051.7 12.0 4.5 9.2 40 66 Nametatineml Mag mm 41.542 14.146 303.3 213.1 5.1 2.2 1.5 41 67 kn andl ala 5.054 18.747 6.650.0 1103 6.3 35.5 0.6 42 6S Naducnn meals 20.220 6.83S 1.532.7 193.6 2.5 22.3 2.3 43 69 hkel nmahficru *nc 214021 7.153 32S.5 400.0 2.6 4.6 5.6 44 71 Powerringequip t IS.1U4 5.160 302.0 46.3 139 5.9 0.9 4S 72 Macb forapcia ndhutim 26.965 9.132 4.902.6 142.6 3.3 53.4 1.6 46 73 Ml wawokingmnachiey 11.634 3.962 287.8 27.1 1.4 7.3 0.7 47 74 Goene induarl machincay ca 13.933 6.447 910.6 47.9 2.3 15.2 0.7 4S 75 OfrEc machines. adp. equiacut 1.532 S22 956.6 9.3 0.2 183A 1.9 49 76 Tdeem. aornd equipmt 13.103 4.700 2.339.5 36.3 1.7 50.3- 1. so 77 Electuic macbkeamm. etc. 36.746 12,513 1,249.4 111.4 4.5 20.0 0.9 51 78 Radl veicks 29.775 10n139 3.063.0 545 3.7 30.2 0.5 52 79 Odrrana paequ mcat 7.330 2.666 1,366.7 193.3 1.0 51.3 73 53 31 Plmbig, heating. lig&ieqipto 1.625 553 35.6 35.2 0.2 6.4 6.4 54 32 Paibre,. pau dtiereof 4.735 1.612 32.7 353 0.6 2.0 5.3 SS 33 Tmvd goods.bandbsp 860 293 2.5 79.0 0.1 0.9 27.0 56 34 Clohing ad a ai 16.301 5.551 13.3 1935.9 2.0 0.2 34.9 S7 35 Footwear 9.801 3.337 7.0 242.3 1.2 02 7.3 53 37 Precision i _nanmncn 7.06B 2.407 335.1 31.3 0.9 34.7 1.3 59 33 PTo mrq. opdca gooda.cs. 3.950 1.345 371.0 60.3 0.5 27.6 4.5 39 Mimc mamfacuadrgooonca 21.640 7.369 500.1 31339 2.7 6.8 11.0 95 Not dcaiiod clacwhere - - - - - _ - 97 Not claied clehere - - - - - - - Total U.1463 Sl,1463 37371.2 21619.0 100.0 Seurce: Gb.a Sratsicd Ywrhot 1991 p. 360 for 1990 daa on GVIO. NVIO. China Induaial Co for 1935 data - 304 - STATISTICAL ANNEX TaM. A3.3hi CunNu Smucnm oF flooucnon, EWMOS, go EOR'S [by 2-digiL SITC (Revisian 2) Cagory, 1990] Serial SlC 2 Label GIOIO CYIO Imports Expol ShaFo!f Impors Expels I CODE 1990 io 199o 1990 aviO IGVIO ICVIO (Cufnft) (CuteA) (Cre) (Current) 1990 1990 1990 Yua mil. SMU1. S Wi. S mil. (%tnta (%) (%) 0 Uve aniuaachicly for food - - 0.0 - I I Meat nd prepamnioa 23.205 4.851 54 791 1.2 1.1 16.3 2 2 Dairy prodcts,bi'nugs 2.364 494 SI 55 0.1 16.3 11.1 3 3 Fob and prepmnio 2,138 447 102 1,370 0.1 22.9 306.4 4 4 Cesb m4 prepartions S3,004 11.081 2,353 614 2.8 21.2 5.5 5 5 Vqegabls wad rfil 8,274 1.730 U3 1,760 0.4 4.3 101.7 6 6 Sugru d prepsjoocy 16.273 3.402 389 318 -0.9 11.4 9.3 7 7 Coffeaa.ocoa.spice 7.933 1.6SS 30 534 0.4 1.5 32.2 3 8 Feding stuff firanimi 12.352 2.582 305 753 0.7 11.S 29.4 9 9 Misc edible prdeuct 4.530 958 46 107 0.2 4.8 11.1 10 11 Brveraes 34.739 7.273 27 171 1.9 0.4 2.4 11 12 Tobwacos and rnace 51.199 10.704 130 170 2.8 1.2 1.6 21 Hies.ski aud furscins - 0 0 0 0.0 - - 22 iod and oleaginous i - 0 0 0 0.0 - - 12 23 Rubber. aude 883 185 365 20 0.0 197.9 10.7 13 24 Cokand woo 13.604 2.844 509 112 0.7 17.9 3.9 14 25 Pup dwuase Par 147 31 237 2 0.0 934.8 6.S 15 26 Taxilefibr aod wte S0.359 10.528 1.841 1,096 2.7 17. 10.4 16 27 Crude feulzr.ainrb ma 13.133 2.746 34 516 0.7 1.2 18.3 17 28 Metaflifemus aom.mp 13.862 2.89S 950 210 0.7 3218 7.3 13 29 Crudesclnmavegmatnc 13.031 2.724 81 8W9 0.7 3.0 29.7 19 32 CoaLcokc.ud bdiquee 51,693 10.807 74 7S5 2.8 0.7 7.0 20 33 Petrokum d product 90.662 18.9S4 1,054 4,472 4.9 S.6 23.6 21 34 o.amml and nmufctd 3.440 719 27 3 0.2 3.8 04 22 35 - ecik currct 67.663 14.146 117 b 3.6 0.8 0.1 23 41 Anic alos d faa - - - 0.0 - - 24 42 Fan vegetble oil. fi 13.657 2.855 947 155 0.7 33.2 54 25 43 Procm saalveg oil, er- 534 112 2 5 0.0 1.6 4.7 26 51 Orgnic dcmia 24.131 5.045 1,131 838 1.3 22.4 16.6 27 52 Inorgiccmical 24.626 5.148 215 E42 1.3 4.2 16.4 28 53 Dycranningc.lonrprnd 16.332 3.519 244 366 0.9 6.9 10.4 29 54 MedcinaLph-apndupo 22.604 4.726 417 643 1.2 L.8 13.6 30 55 Prfhee,cklnig. etc. pul 15,242 3.187 87 319 0.8 2.7 10.0 3-1 56 Feallizeasmuuctuwd 35.912 7.508 2.603 25 1.9 34.7 0.3 32 57 Expouivm.pyromeprod 1.997 417 0 211 0.1 0.0 50.6 33 58 Plasic naterini. cc. 30.051 6.233 1.499 265 1.6 23.9 4.2 34 59 Chenical niterimi nes 19.524 4.032 474 240 1.0 11.6 5.9 35 61 Ither.drmsal fur,. cc. 9.686 2.025 374 183 0.5 18.5 9.0 36 62 lPbbtzr msnuacarcne 22.623 4.730 50 194 1.2 1.1 4.1 37 63 Wxod.corkmanazfactsanes 4.832 1.010 564 273 0.3 55.8 n.0 33 64 Paper.pspeoard and nfr 40.141 8.392 745 294 2.2 8.9 3.5 39 65 Textilcysn.fsbrics.ic 212.175 44.358 5.426 7.219 11.4 12.2 16.3 40 66 Nonmnetamindmmfnfn 87.580 18.310 453 1.316 4.7 2.5 7.2 41 67 lie and stel 131.755 27.545 2.8527 1.2,22 7.1 10.4 4.7 42 63 Noafenusmetas 55.990 11.706 579 597 3.0 4S9 5.1 43 69 mdewmalanufscursrnes 48.316 10.206 540 1.437 2.6 5.3 14.1 44 71 P-wer geoeig equipmt 32.120 6.715 1.730 271 1.7 25.8 4.0 45 72 Maths for mpel indushtys 55.284 11.558 5.936 1.480 3.0 51.4 12.3 46 73 MCnIlWIwoog .achbery 23.947 5.007 791 261 1.3 15.8 5.2 47 74 Genrl indusrlmacbynea 38.934 8.150 1.732 536 2.1 21.2 6.6 48 75 Office mchnes, adp equip 3.675 768 772 j75 0.2 100.4 48.3 49 76 Tecomm, mon equipmet 34.627 7.239 2,540 2.623 1.9 35. 1 36.2 50 77 Elncues mebury mm. etc 84.729 17.714 2.050 1.219 4.6 11.6 6.9 51 72 Road vehicle 68,819 14.388 4,284 3.814 3.7 29.8 26.5 52 79 Owtrsponteqnipeas 18,333 3.937 1.610 252 1.0 42.7 6.4 53 81 Paubg. hctng. Ightag equ 3.657 765 59 128 0.2 7.7 16.7 54 32 FwEmituzuaef 1.137 1.701 72 322 0.4 4.3 13.9 55 33 Tmvel gooda. handbags Z.037 426 6 385 0.3 1.5 90.5 56 84 aCotigaedaccensoic 39.298 8.216 48 9.669 2.1 0.6 117.7 57 85 Fotwear 22.661 4,738 9 1.957 1.2 0.2 41.3 53 87 Precisio istnuuss - 13.344 2.790 738 193 0.7 23.3 6.9 59 S3 Phoweu. optdegdsecm 8.450 1.767 580 1.149 0.5 49.3 65.0 89 Mismc uautd good zn 49.671 10.334 1,456 3.726 2.7 14.0 35.9 95 Noet difed 1sewhere - - - 0.0 - - 97 Not dasiricd dwhcrc - - - - a.O - - Totbs l61572 3S9.90 5 59,713 C0. 0 13.6 15.3 Nale: Exchage Rat or 1990 u $1 = Y 4.7832. Mcmo Item- (1) his rprna GVIO of cnteqpri wih indepeslentwcounsing. Secmoml shrs ar basedo eoocordmaneeben eex SlTC Rcvision 2 ad Cuinse ledinial ChaliEidon - obtained from 193S industrial Cemus. Source Staff estima (2) Total GVIO for the oversll Chinace economy for 1990 ws Y 2.392.436 biUion. - 305 - STATISTICAL ANNEX Table A3.4: CiA-: LIST OF PRODucTs SUJECT TO IMrORT LICENSE (as of August 1992) (Arranged According to Hannonized Commodity Description and Coding Systcm) Scrial HS Code number number Description 1 30559 Fish nes, dried, whether or not salted but not smoked 2 50690 Bones & horm-cores dgcglatinisd,unwk,dcfattd o simply prcpr,powdcr&waste 3 50790 Whalebonc,homs,ete unworlkd or simply prepard,unshapd,and powder&waste 4 51000 Ambergris, castoreum etc., bilc dridlnot&animal gland&prod for pharm prep 5 80290 Nuts edible, fresh or dried, whether or not shelled or pcclcd, nes 6 90111 Coffec, not roasted, not decaffcinated 7 90112 Coffee, not roasted, decaffcinatd 8 9012 Coffee, roasted, decaffeinated 9 90700 Cloves (whole fruit, cloves and sans) 10 90830 Cardarnoms 11 9102o Saffmn 12 121120 Ginseng roots usd primly in phann,pcrf,insecticide,fungicidclsisn purp 13 121190 Plants & pts of plants(incl sed&fruit) usd in pharm,perf,inscct cde nes 14 130190 Natural gums, resins, gum-resins and balsam, exccpt arabic gum 15 210110 Coffee extracts, essences & concentrates and preparations thereof 16 390740 Polycarbonates 17 720410 Waste and scrap, cast iron 18 720429 Waste and scrap, of allay steel, othcr than stainless 19 720441 Ferrous waste & scrap,i or s,from the mechanical working of metal,nes 20 720449 Ferrous waste and scrp, iron or steel, nes 21 720450 Remelting scrap ingots, of imn or stel 22 720711 Semi-fin prod,ifnas,rect/sq cross-sect cntg by wg t<.25% c,wdth <2X thk 23 720712 Semi-fin prod,irontn-al stcel,retsq cross sect,cntg by wgt<.25% carb 24 720719 Seni-fin prod, iron or non-boy stecl, cntg by wght <.25% carbon, nes 25 720720 Semi-fin prod,iron(non-alloy stel,containg by weight .25 %/more carbon 26 720811 Flat rolled prod,i/nas,in coil,hr,>1=6COmm wide,>lOnmm thk,myp 355 mpa 27 720812 Flatroldprod,ilnas,incoil,hr,w>/=600mm,4.751=600mm,3mm<1=thk <4.75mm,355mpa 29 720814 Flat roiled prod,i/nas,in coil,hr, >/=600mm wide, <3mm thk,myp 275 mpa 30 720821 Flat roiled prod, i/tnas, in coil, hr, > 1=600mm wide, > 1Omm thk, nes 31 720822 Flat roled prod,i/nas,in coil,hr,w>/=600mmn,4.7mmn>/600mm wide,3mm l=600mm widc,less than 3mm thk,nes 34 720831 Flat roied prod,i/nas,nic,hr,600mmf =4mm thk,35Smpa 35 720832 Flat rolled prod, ilnas, nic, hr >=600mm widc, > 10mm thk, nayp 355 mpa 36 720833 Flat mlled pzod,i/nas,nic,hr,w> 1=600mm,4.75mm < /=thk /=600mm,3mm /=600mmj1css than 3mm Lhk,myp 355 mpa 39 720841 Flat roled prod,ilnas,nic,hr,600mm/=4mm thk,ncs 40 720842 Flat roiled prod, i/nas, not in coil, hr >1=600mm wide, >10mm thk, ncs 41 720843 Flat rold prod,i/nas,ntin coil,hr,w>/=600,4.75<=tlzkC<=lOmm,ncs 42 720844 Flat rolled prod,i/nas,nt in coil,hr,w>/=600,3mnm /=600mm, <3mm thk, ncs 44 720890 Flat rolled prd, i/nas, not fuwther worked than hot rolled, ncs 45 720911 Flat rolled prod,ifnas,in coil,cr,w>;=600mm,>/=3mm thk,myp 355 mpa 46 720912 Flat rolld prod,i/nas,in coil.cr,w>1=600mm,lmm 1=600mm ,hk>/=0.5 maxlmm,myp 275mpa 48 720914 Flat roLed prod,i/nas,in coil,cr,>l=60rnm wide,< O.5mm thk,myp 275 mnpa 49 720921 Flat rolled prod,i/nas,in coil,cr,>/=6Oxnm wide,3mm or more thk,nes 50 720922 Rat roled prod,i/nas,in coil,cr,>/=60rnm wide,lmm/=600mm,0.5 /600mm,lcsu than 0.5mm thk,nca 53 720931 Flat rolled prod,i/nas,nt in coil,cr,w >/-600mm,>/-3mm thk,myp 355 mpa 54 720932 Flat rolled prod,iinas,nt in coil,cr,w>i=6OOmm,lmm iinG,thk>ImO.Smaxlmm,myp 3SSmpa 56 720934 Fla roiled prod,iinas,not in cofl,cr,w>/=600,xhkc0.Smm,myp 3SSmpa 57 720941 FIat rolled prod,iinas,not in coil,cr >O-600mm widc,>/=3mm thk,ncs 58 720942 Flat roiled prod,iinas,not in coil,cr >/=600mm widc,lmm Cthk c3mnm,nea 59 720943 Flat rolled prod,iinas,nt in coil,cr,>/-600mm,0.S/=600,thkc 0.Smm,nes 61 720990 Flat rolled prod, i/ans, not in coil, cr >I=600mm widc, nes 62 721011 Flat rolled prod,iias,plbad or coatd wLh tin,w>/=600mrnm, >=O.Srmm thk 63 721012 Flat rold prod,ilnas,platd or coatd with tin, > (=600mm wide, < 0.5mm thk 64 721020 Flat rolld prod,platd o coatd w lead,> I600mm wide,includg terre-plate 65 721031 Flat rold prod,steel,clec pWd/old w zinc,thk<3mm mypV75, >/=3 myp355 66 721039 Flat roied prod,iinas,dectro phd or ctd w zinc,>/=600mm widc, nas 67 721041 Flat rolcd prod,i/nas,pltd or ctd w zinc,corrugated, >1=600m wide,nes 68 721049 Flat rwLd prod,i/nas,plated or coated with zinc, > f = 600mm wide, na 69 721050 Flat roid prod,iInas,pItd/ctd w chrom oxid/chrom&chrom oxid,>/=6Wmm 70 721060 Flat roLd prod,i/naa,plated or coated with alumninium, > I=600mm wide 71 721070 Flat rolled prod,iinas,painted,vamished or plawt coated, >/=600mm wide 72 72109 Flat rolled prod, i/nas, clad, plated or coated, >=G600mm wide, nes 73 721111 Fla; rold prod,i/nas,hr,rold on 4 fcc,150I=4mrn,myp 355 74 721112 Flat rolled prod, ilnas, hr, <600mm wide >/=4.75mm thk, myp 355 mpa 75 721119 FRat roLd prod,/nas,hr,w<600,thk<3mm myp27S,thl>/=3mm myp355,nes 76 721121 Flat rold prod,i/nas,hr,rolld on 4 Iaces,lSOmzncw<600mm,>f=4mm thk,nes 77 721122 Flat rolled prod, ilnas, hr, <600mm wide, >/=4.75mm thk, nts 78 721129 Flat roLled prod, ilnas, hr, <600mm wide nes 79 721130 Flat rolid prod,i/nas,cr,w<600,thk<3mm myp 275,>/=3mm myp 355 80 721141 Flat rold prod,ilnas,cr,w<600mm entg by wght less than 0.25% carbon 81 721149 Flat rollod prod, i1nas, cold roled or cold reduced, <600mm wide 82 721190 Flat roLled prod, i/nas, <600mm wide, not clad, plated or coated, nes 83 721210 Flat roLled prod, i/nas, <600mm wide, plated or coated with tin, nes 84 721221 Flat romd prod,steel, <600mm wide, <3mm thk myp 275,>/=3mm thk myp 355 85 721229 Flat roLled prod, i/nas, <600mm wide, clad, plated or coated, ncs 36 721230 Flat roiLd prod, i/nas, <600mm wide, olw plated or coated with zinc 87 721240 Flat rolled prod,i/nas, <600mm wide,paintcd.varnishcd or plast coated 38 721250 Flat roUed prod, i/nas, <600mm wide, plated or coated, nes 89 721260 Flat roled prod, i/nas, <600mm widc, clad 90 721310 Bars&rods,i/nas,hr,in irreg wound coils.cntg indent.ribs,etc prod d rp 91 721320 Bars & rods, ilnas, hr, in irreg wound coils, of free cutting stecl 92 721331 Bars/rod,ithas,hr.ia irreg wnd coil of circ c sect,dia < l4mm,ctg<0.25%C 93 721339 Bars & rods,i/nas,hr,containing by weight less than 0.25% carbon,nes 94 721341 Bars&rods,i/nas,hr,ofcirc cross sect < 14mm dia,ctg by wt .25% /=8Omm 115 721650 Angles,shapes§,/nas,nfWthn hot roflddrawnfextrudd,hght>I=S0mm 116 721660 Anglcs,shapcs and sections,iinas,fiv than cold formed or cold finishcd 117 721690 Angles, shapes and sections, iron or non-alloy stecl, nes 118 721711 Wrienasxpolishd or not,but not platd or coatcd,cntg by wght <0.25%C 119 721712 Wirc,iInas,platd or coatd with zinc,containg by wght less than 0.25%C 120 721713 Wire.inas.platd o coatdL with oth base mctals ncs.cntg by wght <0.25%C 121 721719 Wire, i/nas, containing by weight less than 0.25% carbon, nes 122 721721 WV,rcjinas,polishd/not,but not pkd/ctd,cntg by wght 0.25% /=0-6%C 127 721732 Wire,i/nsa,platd o coatd with zinc contuing by wght 0.6% o more carbon 122 721733 Wire,ilnas,pltd o cid w oth basce mt nes,cntg by wght >:=0.6% carbon 129 721739 Wixe,iron o non-alloy stecl,nes containg by weight 0.6% o more carbon 130 721810 Ingots and other primary forms, stainless steel 131 721890 Semi-finished products, stainless steel 132 721911 Flat wLd prod,stainless steel,hr,in coil,w>/=600mm,thk> 10mm 133 721912 Flat wild prod,stainless stecl,hr,in coil,w>/=600mm,4.75<1=thk<10mmn 134 721913 Flat rolld prod,stainless steel,hr in coilw>/=600mm,3 1=600mm,thk< 3mm 136 721921 Flat rolled prod,stainless stel,hr,nic, > 1=600mm wide,over 10mm thick 137 721922 Flat rold prod,stainless sted,hr,nic,w>/=600mm,4.75mm/=600mm,3mm600mm wide,less than 3mm thick 140 721931 Flat rollcd prod,stainless steel,cr,>600mm widc,4.75mm or more thick 141 721932 Flat roUed prod, stainless steel, cr,w>J=600mm,3mm/=60Omr,O.Smm600mm widc,less than 05mm thick 145 721990 Flat roUed prod, stainless stecl, 600mm or more wide, nes 146 722011 Flat roled prodsainless stecl,hr <600mm wide,exceeding 4.75mm thick 147 722012 Flat roUed prod,stainless stecl,hr <600mm wide,less than 4.75mm thick 148 722020 Flat rolled prod, stuinless steel, <600mm wide, cold rolled or reduced 149 722090 Flat roled prod. stainless steel, cr <600mm wide, nes 150 722100 Bars & rods, stainless steel, hot rolled in irregularly wound coils 151 722210 Bars & rods,stainless steel,nfw than hot rollcd,hot drawn or etrudcd 152 722220 Bars & rods, stainless stel. nfw than cold formed or cold finished 153 722230 Bars & rods, stainless steel. ncs 154 722240 Angles, shapes and sections, stainless steel 155 722300 Wirc of stainless steel 156 722410 Ingots & other primary forms of alloy sted, olt stainless 157 722490 Semi-finished products of alloy steel o/lt stainless 158 722510 Flat rolled products of siliconletical stcel, >=600mn wide 159 722520 Flat rolW products of high speed steel >1=600mm wide - 308 - STATISTICAL ANNEX Scrial HS Codc number number Description 160 722530 Flat rolled prod,as,olt stainless,in coils,nfw tin hr,w>l=600mm,ncs 161 722540 Flat rollcd prod,as,olt stainlcss,nic nrw thn hr, >I o600mm widc, ncs 162 722550 Flat ro11d prod,as,oht stainicss,nrw thn cold rolld, >/=600mm widcncs 163 722590 Flat rollcd prod, as, ofI stainless, >1=600mm widc, ncs 164 722610 Flat rollcd prod, of silicon electrical steel, 406.4mm,nes 191 730539 Tubes & pipe.i or s,welded,riveted or sim closed,ext dia >406.4mm,nes 192 730590 Tubes & pipc, i or s, riveted or sim closed, ext dia >406.4mm, nes 193 730630 Tubes,pipe & hollow profiles,iron or nas,wcldcd,af circ cross sect,ncs 194 730640 Tubc,pipe&hollow profile,stainLess stccl.wcldd,of circ cross sect,nes 195 730650 Tubes,pipe&hollow profidcs,alIs,(oh stain) wld,of circ cross sect,nes 196 730660 Tubes,pipe & hollow profiles,i/s,welded,of non ciue cross sect,nes 197 730690 Tubes, pipe & hollow profiles, iron or stecl, welded, ncs 198 731210 Strandcd wire,ropes&eablcs of iron or sLeel,not clectrically insulated 199 810510 Cobalt,unwrought,maUe&oth intermodiatc products,waste,serap&powders 200 844520 Textile spinning machines 201 847989 Machines & mechanical appliances ncs having individual functions 202 852031 Magnetic tape. rec incorporatg zound rcproducg apparatus,cassctc-type 203 852039 Magnctic tape recordcrs incorporating sound rcproducing apparatus, ncs 204 852090 Magnctic tape -ccorders and other sound recording apparatus, ncs 205 852711 Radio broad rece capable of op w/o an cxtcrnal source of powcr&Lcombind 206 852721 Radio recc nt capabl of op wlo cxt source of powcr f motor veh,combind 207 852731 Radio broad recc combind with sound rccordg or reproducg apparatus ncs 208 852820 TV receivcrs an includg video monitrs&vidco projectrs monochrome 209 854012 Cathode-ray TV picturc tube incl video monitor tubc,B&JW/oth monochrom 210 880211 Helicoptcrs of an unladen weight not cxceeding 2.000 kg 211 880212 Helicoptcrs oFan unladcn weight exceeding 2,000 kg 212 8802-0 Aircraft nes of an unladcn weight ntL exceeding 2,000 kg 213 880230 Aircraft ncs of an unladen weight > 2,000 kg but not cxcecdg 15.000 kg - 309 - STATISTICAL ANNEX Serial HS Code number number DesCriplion 214 880240 Aircraft nes of an unladen weighL exceeding 15,000 kg 215 890800 Vessels and other floating strucLures for breaking up 216 900610 Cameras or a kind used for preparing printing plates or cylinders 217 901210 Microscopcs oLher than optical microscopes and diffraction apparatus 218 283711 Cyanides and cyanide oxides of sodium 219 360200 Prepared explosives, o/A propeilent powders 220 360300 Safctyidetonatg fuscs;percussn/detonatgcaps;igniters;clec detonatra 221 390330 Acrylonitrile-butadiene-styrenc (ABS) copolymers 22'2 400211 Styren-butadien rubber(SBR)/carboxyltd styren-butadien rbr(XSBR) latex 223 400219 Styren-butadien rubber(SBR)/carboxyltd styren-butadien rubbr(XSBR) ncs 224 40D220 Butadiene rubber (BR) 225 400231 Isobutene-isopreac (butyl) rubber (IIR) 226 40D239 Halo-isobutene-isoprene rubber (CUIR or BIIR) 227 400241 Chlormprene (chlorobutadiene) rubber (CR), latex 228 400249 Chloroprene (chlarobutadiene) rubber (CR) nes 229 400251 Acrylonitrile-butadiene rubber (NOR), latex 230 400259 Acrylonitrile-butadiene rubber (NBR) nes 231 400260 Isoprene rubber (IR) 232 400270 Ethylenc-propylcne-non-conjugated diene rubber (EPDM) 233 400280 Mixtures if any product of headg No 40.01 w any product of this headg 234 400291 Synthetic rubber and factiee derived from oils. etc, latex 235 400299 Synthetic rubbcr and factice derived from oils, et. ntes 236 440310 Poles, trcatedfpainted etc 237 440320 Logs, poles, coniferous nes 238 440331 Logs, Meranti, light & dark red & Bakau 239 440332 Logs, white Lauan, Meranti, Seraya yellow Meranti & Alan 240 440333 Logs, Keruing, Ramin, Kapur, Teak, Jongkong, Merbau, ete 241 440334 Logs, Okoums, Obeehe, SapeHli. Sipo, Aeajou d'Afrique, etc 242 440335 Logs, riama. Mansonia, Llomba, Dibutou, Limba and Azob- 243 440391 Logp, Oak 244 440392 Logs, Beech 245 440399 Logs, nonconiferous nes 246 440610 Ties, railway/tramway, wood not impregnated 247 440690 Ties, railway/tramway, wood nes 218 440710 Lumber, conirerous (softwood) 6 mm and thicker 249 440721 Lumber, Meranti red (light & dark), Meranti Bakau, White Lauan etc 250 440722 Lumber, Okoum-, Obeehe, SapeUi. Sipo, Acajou d'Afrique, Makor" etc 251 440723 Lumber, Baboen, Mahogany (Swictenia spp), Imbuia and Balsa 252 440791 Lumber, Oak 253 440792 Lumber, Beech 254 440799 Lumber, nonconiferous nes 255 440810 Veneer, coniferous (softwood) less than 6 mm thick 256 440820 Veneer, tropical woods, less than 6 mm thick Z7 440890 Veneer, non-coniferous nes, less than 6 mm thick 258 470100 Meecharical wood pulp 259 470200 Chemical wood pulp, dissolving grades 260 470311 Chemical wood pulp, soda or sulphate, coniferous. unbicached 261 470319 Chemical wood pulp, soda or sulphate, non-coniferous, unbleached 262 470321 Chemical wood pulp,soda. or sulphate,conifcrous,scmi-bl or bleached,nes 263 470329 Chemical wood pulp,sodalsulphate,non-coniferous.semi-bllbleachd,nes 264 470411 Chemical wood pulp, sulphite, coniferous unbicachcd 265 470419 Chemical wood pulp, sulphite, nonconiferous, unbieached 266 470421 Chemical wood pulp,sulphite,conifcrous semi-blraehed or bleached,nes 267 470429 Chemical wood pulp,sulphitc,nonconifcraus,scni-bl or bleachcd,ncs - 310 - STATISTICAL ANNEX Serial HS Code number number Desription 268 470500 Scmi-chemical wood pulp 269 841810 Combined refrigrator-freezers, Oiled with separate exLernal doors 270 841821 Refrigerators, household type, comprcssion-type 271 841822 Rcefigerators, household type, absorption-type, electrical 272 841829 Refrigerators, household type, nes 273 841830 Freezers of the chest type, not exceeding 800 I cpacity 274 841840 Freezers of the upright type, not cxceeding 900 I capacity 275 841850 Refrigerating or firezing display counters, cabincts, show-cases, etc 276 841891 Furniture desigred lo receive refrigerating or freezing cquipmcnt 277 240210 Cigars, cheroots and cigarillos, containing tobacco 278 240220 Cigarcttes containing tobacco 279 240310 Smokg tobacco,whether o not cntg tobacco substitutes in any proportion 280 270900 Pcetleum oils and oils obtained from bituminous minerals, crude 281 271000 Petroleum oils&oils obtained from bituminous mincrals,o/than crude etc 282 291737 Dimnethyl terephLhalate 283 292122 Hexamethylcncdiaminc and its salts 284 293371 -hexmnelactam (epsilon-captolactam) 285 390210 Polypropylene 286 390230 Propylene copolymers 287 390760 Polyethylene terephthalatc 288 441211 Plywood, at least 1 outer ply of tropical woods (ply's <6 rnm) 289 441212 Plywood, at least 1 outer ply of non-conifcrous wood ncs (ply's <6 mm) 290 441219 Plywood ncs, at least 1 outer ply of conifcrous wood (ply's <6 mm) 291 441221 Panels, 1 outer ply non-coniferous & I ply of particle board 292 441229 Panels, 1 outer ply non-coniferous wood nes 293 441291 Panels, 1 outer ply coniferous wood, & 1 ply of particle board 294 441299 Panels, 1 outer ply conifcrous wood nes 295 540210 High tenacity yarn (ont scwg zhread),nylon/oth polyamides fi,nt put up 296 540231 Tcxturd yarn nes,of nylonloth polyamides fi, 50 tex/s.y.,not put up 298 540239 Tcured yarn of synthetic fhlamcnts, nes, not put up 299 540241 Yarn of nylon or other polyamuides fi,single,untwisted,nes,not put up 300 540242 Yan of polycstr filaments,partialy oriented,single.ncs,not put up 301 540243 Yarn of polyester filaments, single, untwistcd, nes, not put up 302 540249 Yan of synthetic filaments, single, untwistod, ncs, not put up 303 540251 Yarn of nylon or other polyarnides fi, single, >50 turns/m, not put up 304 540252 Yarn of polyester fllaments, single, >50 tums per metrc, not put uF 305 540259 Yarn of synthctic filaments.single, >50 turns per metre,nes,not put up 306 540261 Yarn of nylon or othcr polyamides fi, mulsiple, nos, not put up 307 5402'62 Yarm of polyester filaments. multiple, nes, noL put up 308 540269 Yarn of synthetic filaments, multiple, ncs, not put up 309 540310 High tcnacity yarn (oft sewg thread),of viscosc rayon filamt,nt put up 310 540320 Tcxtured yarn nes,of artificial filaments,not put up for retail sale 311 540331 Yarn of viscose rayon filamcnts, single, untwisted, nes, not put up 312 540332 Yarn of visese rayon filaments,singlc, > 120 turns per m,nes,nt put up 313 540333 Yarn of cellulose acetate filaments, single. nes, not put up 314 540339 Yarn of artificial filaments, single, nes, not put up 315 540341 Yarn of viscosc rayon filaments, multiple, nes, not put up 316 540342 Yarn of cellulose acetate filamcnts, nmv!tiple, ncs, not put up 317 540349 Yarn of artifcial filamcnts, multiplc, acs, not put up 318 540410 Synthetic mono,>I=67dtcx. no cross scetional dimension exceeds 1 mm 319 540710 Woven fab of high tenacity fi yarns of nylon oLh polyamideslpolyesters 320 540720 Woven fab obtaind from stnpithe lilke of synthetic textile materials 321 540741 Woven fab,>/=85% of nylon/olher polyamides filaments.unbl or bl,nes - 311 - STATISTICAL ANNEX Serial HS Code number numbcr Description 322 540742 Wovcn fabrics, >1=85% of nylon/other polyamides flamenls, dyed, nes 323 540743 Woven fab, >1=85% of nylon/other polyamides fClamcnts,yarn dycd,ncs 324 540744 Woven fabrics, >1=85% of nylonfoLher polyamidcs fldaments, printed, nes 325 540751 Woven fabrics, >=85% of textured polyester filaments, unbi or hi, ncs 326 540752 Woven fabrics, >1=85% of textured polyestcr filaments, dyed, nes 327 540753 Woven fabrics, >/=85% of tcxtured polyestcr filaments, yam dyed, nes 328 540754 Woven fabrics,>/=85% of textured polyester filaments, printed, ncs 329 540760 Woven fabrics, >=85% of non-textured polyester miamcnts, ncs 330 540771 Woven fab, >/=85% of synthetic filaments,unbleachcd or bleached.nes 331 540772 Woven fabrics, >1=85% of synthetic filaments, dyed, nes 332 540773 Woven fabrics, >/=85% of synthetic filaments, yarn dyed, nes 333 540774 Woven fabrics, >/=85% of synthetic filaments, printed, ncs 334 540781 Woven fabrics of synthetic filamcnts, <85% mixd w couon,unbl o bl,nes 335 540782 Woven fabrics of synthetic filaments,<85% mixed with cotton,dycd,ncs 336 540783 Woven fabrics of synthetic fillmnts, c85% mixd w cotton,yarn dyd,nes 337 540784 Woven fabrics of synthetic filaments, <85% mixd with cotton,princod,ncs 338 540791 Woven fabrics of synthetic filaments, unbleached or bleached, nes 339 540792 Woven rabrics of synthelic filaments, dyed, nes 340 540793 Woven fabrics of synthetic filamcnts, yarn dyed, nes 341 540794 Woven fabrics of synthctic filaments, printed, ncs 342 540810 Woven fabrics of high tenacity filament yarns of viscose rayon 343 540821 Woven fab, >J=85% of artificial fi o strip of art tex mat,unbl/bl,nes 344 540822 Woven fiab, >1=85% of artificial fi or strip of art tex mat,dyed,nes 345 5408E3 Woven fab, >J=85% of artificial fi or strip of art tcx mat,y dyed,nes 346 540824 Woven fab, >1=85% of artificial fi or strip of art letx mat,printd,nes 347 540831 Woven fabrics of artificial filamcnts, unblcached or bleached, nes 348 540832 Woven faibrics of artificial filamcnts, dyed, nes 349 540833 Woven fabrics of aiEficial filaments, yarn dyed, ncs 350 540834 Woven fabrics of artificial filaments, prined, nes 351 550110 Fllament tow of nylon or other polyainidcs 352 550120 Filament tow of polyesters 353 550130 Filament tow of acrylic or modacrylic 354 550190 Synthetic filament tow, nes 355 550200 Artificial filament tow 356 550310 Staple fibers of nylon or othcr polyamnides, not carded or combed 357 550320 Staple fibers of polyesters, not carded or combed 358 550330 Staple fibers of acrylic or modacrylic, not carded or combed 359 550340 Staple fibers of polypropylene. not carded or combed 360 550390 Synthetic staple fibers, not carded or combed, nes 361 550410 Staple fibers of viscose, not carded or combcd 362 550490 Artificial staple fibers, ott viscosc, not carded or eombcd 363 550610 Staple fibers of nylon or other polyamides, carded or combed 364 550620 Staple fibers of polyestcrs. carded or combed 365 550630 Staple fibers of acrylic or modacrylic, carded or combed 366 550690 Synthetic staple fibers, carded or combcd, ncs 367 550700 Artificial staple fibers, carded or combed 368 550911 Yamr,>1=85% nylon or othcr polyamides staplc fibers,singlc,not put up 369 550912 Yarn.> =85% nylon o oLh polyamides staple fibers.multi.not put up.res 370 550921 Yarn,>/=85 * of polyestcr staplc fibers, single, noL put up 371 550922 Yarn,>1=85% of polyester staple fibers, multiplc, not put up, nes 372 550931 Yarn,>1=85% of acrylic or modacrylic staplc fibers, single, not put up 373 550932 Yarn,> 1=85% acrylic/modacrylic staple fibers,multiplc,not put up,nes 374 550941 Yarn,>1=85% of oLher synthetic staplc fibers. single, not put up 375 550942 Yarn,>1=85% of olhcr synthetic staplc fibers, multiple, not put up,ncs - 312 - STATISTICAL ANNEX Serial HS Code number number Dcscription 376 550951 Yam of polyester staple fibers mixd w/ arti sLaple fib,not put up,nes 377 550952 Yam of polyester staple fib mixd w woollfine animl hair,nt put up,nes 378 550953 Yarn of polyester staple fibers mixed with eoUon, not put up, nes 379 550959 Yarn of polyestcr staple fibers, not put up, nes 380 550961 Yarn of acrylic staple fb maixd w wool/fne animal hair,not put up,nes 381 550962 Yam o, acrylic staple fibers mixod with cotton, not put up, nes 382 550969 Yam of acrylic staple fibers, not put up, nes 383 550991 Yarn of oth synthetic staple fibers mixed wlwool/fine animal hair,nes 384 550992 Yarn of other synthetic staplc fibers mixcd with cotton,not put up,nes 385 550999 Yarn of other synthetic staple fibcrs, not put up, nes 396 551011 Yarn,>/=85% of artificil staple fibcrs, single, not put up 387 551012 Yam, >/=85% of artificial staple fibers, multiplC, not put up, nes 338 551020 Yarn of artiice staple fib mixd w wooUfitne animl hair,not put up,n=s 389 551030 Yarn of artificial staple fibers mixed wiLh cotton, not put up, nes 390 551090 Yan of artificial staple fibers, not put up, ncs 391 551219 Woven fabrics,eontaing >1=85% of polyester staple fibers,o/t unbi or bl 392 551221 Woven fibrics,eontaing>i=-5% of acrylic staple fibers,unbleached or bl 393 551229 Woven fabricseontaining>1=85% of acrylic staple fibers,o/t unbl or bl 394 551291 Woven fabrics,eontaining>/=85% oFoth synthetic staple filbers.unbUbl 395 551299 Woven flbricsoeontaing>/=85% of other synthctie staple fib,oft unbllbl 396 551311 Plain weavepolyest stapl fib fab, <85 %,mixd w/eottn, 170g/m2,unbl/bl 413 551412 Twill weavc polyest stapl fib fikb,<85%,mixd wlcotton,Z>170g1m2,unbl/bl 414 551413 Woven fab of polyester staple fib, < 85% mixd w/cot, > 170glm2,unbUbl.ncs 415 551419 Woven fabrics of oLh syn staple fib. < 85%,Mnixed w/cot, > 170 gJm2,unbl/bl 416 551421 Plain weave polyester staple fiber fab, < 85 %,mixd w/otton, > 170gIm2,dyd 417 551422 Twl weave polyester staplc fiber 1kb, < 85%,mixd w/cctuon, > 170gIm,.dyd 418 551423 Woven fabrics of polyester staplc fib, < 85% ,mixed w/cot, > 170 g'm2,dycd 419 551429 Woven fibrics of oth synlhetic staple fib, <85 %,mixd w/cot, > 170g1m2,dyd 420 551431 Plain weave polyester staple fib fab, <85% mixd wlcot, > 170glm2.yarn dyd 421 551432 Twill weave polyestcr staple fib fab, <85% mixd wlcot, > 170g/m2,yarn dyd 422 551433 Woven fib of polyester stapl fib, <85% mixd wlcot,> l7g70:!,yamn dyd nes 423 551439 Woven fabrics of oth syn staplc fib, < 85% mixd wlcot, > 170 g/m:!,yarn dyd 424 551441 Plain weave polyestcr staple fiber fab, <85 %,mixd w/cot, > 170g1m2,printd 425 551442 Twill weave polyester staple fiber fab, < 85%,mixd w/cot,> 170g/m2,printd 426 551443 Woven fib of polyester staple fibers <85%,mixd w/cot,>l170glm:,ptd,nes 427 551449 Woven fabrics of oth syn staple fib, < 85 %,mixcd w/cot, > 170 g/m2.printed 428 551511 Woven fiab of polyester staple fib mixd w viscose rayon staplc fib,ncs 429 S51512 Woven fabrics of polycstcr staple fibers miixd w man-made filamrrcs,nes - 313.* STATISTICAL ANNEX Scrial 11S Code number number DescripLion 430 551513 Woven fab of polyester staple fibers mixd wlwoollfime animal hair,nes 431 551519 Woven fabrics of polyester staple fibers, nes 432 551521 Woven fabrics of acrylic staple fibcrs,mixd w man-madc filamnents,ncs 433 551522 Woven fab of acrylic staple fibers,mixd w/woollfine aninal hair,nes 434 551529 Woven fabrics of acrylic or modacrylic staplc fibers, ncs 435 551591 Woven fabrics of oth syn staple fib,mixed with man-made filamcnts,nes 436 551592 Woven fabrics of oth syn staplc fib,mixd w/wool o fin animnal hair,nes 437 551599 Woven fabrics of synthetic staple fibers, ncs 438 551611 Woven fabrics,containg>l=85% of artificial staplc fibers,unblcached/bl 439 551612 Woven fabrics, containing>1=85% of artificial staple fibcrs, dyed 440 551613 Woven fabrics, containing>1=85% of artificial staple fib, yarn dyed 441 551614 Woven fabrics, containing>/=85% of artificial staple fibers, printed 442 551621 Woven fabrics of artificial staple fib, 50 cc but nt more 250cc 522 840733 Engines, spark-ignition reciprocating displacing > 250 cc to 1000 cc 523 84734 Engines, spark-ignition reciprocating displacing more than 1000 cc 524 840790 Engines, spark-ignition type nes 525 340820 Engines, diesel, for the vehicles of Chapter 87 526 841430 Compressors of a kind used in refrigerating equipmcnt 527 841510 Air conditioning machines window or wall types, sclf-contained 528 841581 Air cond mach nes inc a ref unit&a valve f rev of the coollheat cyclc 529 841582 Air cond mach ncs, inc a refrigerating unit 530 841583 Air cond mach ncs, not incorporating refrigcrating unit 531 846910 Automatic typewriters and wordprocessing machines 532 847010 Electronic calculators capable of oper wlo an external source of power 533 847021 Electronic calculaling machincs, ineorporating a printing device. ncs 534 847029 Electronic calculaling machincs, ncs 535 847110 Analogue or hybrid automatic data processing machincs 536 847120 Digital auto data process mach cntg in same housg a CPU input&output 537 847191 Digital process units whetherlnot prcsentd w thc rcst of a system etc - 315 - STATISTICAL ANNEX Serial HS Codc number number Description 538 847192 Input o output units,whether o not prcsentd w the rcst of a system ctc 539 847193 Storage units, whethcr or not presented with the rcst of a system 540 852110 Vidco recording or rcproducing apparaLus magnetic tape-type 541 852290 Pans and accessories of apparatus of hcading Nos 85.19 to 85.21, nes 542 852530 Television cmeras 543 852810 Tclevision reccivcrs includg video monitors & vidco projectors,colour 544 854011 Cathode-ray television picLure tubes,inc video monitor tubCs,colour 545 870120 Road Lractors for semi-trailers (truck tractors) 546 870210 Dicsel powered buses with a scating capaciLy of > nine persons 547 870290 Buscs with a seating capacity of more than nine persons nes 548 870310 Snowmobiles, gcIf cars and similar vehicles 549 870321 Automobilcs w reciprocatg piston engine displacg not more than 1000 cc 550 870322 Automobiles w reciprocatg piston engine displacg > 1000 cc to 1500 cc 551 870323 Automobiles w reciprocatg piston engine displacg > 1500 cc to 3000 cc 552 870324 Automobiles with reciprocating piston engine displacing > 3000 cc 553 870331 Automobiles with dicsel enginc displacing not more than 1500 cc 554 870332 Automobiles with diesel engine displacing more than 1500 cc to 2500 cc 555 870333 Automobiles with diesel engine displacing more than 2500 cc 556 870390 Automobilcs ncs including gas turbine powered 557 870421 Diesel powered trucks with a GVW not exceeding five tonnes 558 870422 Diesel powerd trucks w a GVW cxc five tonnes but not exc twenty tonnes 559 870423 Diesel powered trucks with a GVW exceeding twenty tonnes 560 870431 Gas powered trucks with a-GVW not exceeding five tonnes 561 870432 Gas powered trucks with a GVW excecding five tonnes 562 870490 Trucks nes 563 870510 Mobile cranes 564 570520 Mobile drilling derricks 565 570530 Fire fighting vehicles 566 570540 Mobilc concrete mixers 567 570590 Special purpose motor vehicles nes 568 570600 Chassis fittd w engines for the vehicles of headg Nos 87.01 to 87.05 569 870710 Bodies for passenger carrying vehicles 570 870790 Bodics for tractors, buses, trucks and special purpose vchicles 571 870850 Drive axles with differential for mnotor vehicles 572 871110 Motorcycles with reciprocating piston cngine displacing 50 cc or less 573 871120 Motorcycles with reciprocatg piston engine displacg > 50 cc to 250 cc 574 871130 Motorcycles with reciprocatg piston engine displacg > 250 cc to 500 cc 575 871140 Motorcycles with reciprocatg piston engine displacg > 500 cc to 800 cc 576 871150 Motorcycles with rmcipmcatg piston engine displacg more than 800 cc 577 871419 Motorcycle parts nes 578 900640 Instant print cameras 579 900651 Cameras,single lens &ecx,for roll film of a width not exceedg 35 mm 580 900652 Cameras for roll film of a width less than 35 nun 581 900653 Cameas for roll film of a widLh of 35 mm, nes 582 900659 Photographic, other than cinematographic cameras nes S83 900911 Electrostatic photo-copying apparatus, direct process type 584 900912 Electrostatic photo-copying apparatus, indirect process type 585 900921 Photo-copying apparatus, incorporating an optical system, nes 586 900922 Contact type photo-copying apparatus,nes 587 900930 Thermo-copying apparatus S88 901819 Electro-diagnostic apparatus, nes 589 902211 Apparatus basd on the use of X-rays f mcdical,surgical,dentallvet uscs 590 910111 Wrist-watches w mechl display,battcry powerd&wilh case of precious met 591 910121 Wrist-watches,with automatic winding & with case of precious metal,ncs - 316 - STATISTICAL ANNEX Serial HS Code number number Dcscription 592 910129 Wrist-watchcs, with a case of precious mclal, nes 593 910211 Wrist-watches,battery/accumulalor powcrd w mechanical display only nes 594 910221 Wrist-watchcs with automatic winding ncs 595 910229 Wrist-watches, ncs 596 910811 Watch movements, assembled, battery powered with mechanical display 597 910820 Watch movements, complete and assembled, with automatic winding, nes 598 910B91 Watch movcmcnts,compicte and asscmblcd,mcasuring 33.8 ram or lcss,nes 599 911011 Complete movements of watches, unassembled or partly assembled 600 911012 Incomplete movcmcnts of watches, assembled 601 911019 Rough movemcnts of watches Source: GAT (199Ca) and Office of the United States Trade Rcpresentativc (1992). - 317 - STATISTICAL ANNEX Table A3.5: CHINA: LIST OF PRODUCTS SUBECT TO IMPORT CONTROL (as of August 1992) (Arranged According to Harmonized Commodity descripLion and Coding System) Serial HIS Code number number Dcscription 1 391810 Floor, wall and cciling covcrings etc. of polymers of vinyl chloride 2- 680221 Monumcntal/buildg stone,cutdsawn flat/cven,marble/zraverLine/alabaster 3 680911 Plaster boards ctc not ornamental facd o reinfored w paper/paperboard 4 690790 Tile, cubes and sim nes, unglazed ceramics 5 700529 Float glass etc in shects, non-wired nes 6 701990 Glass fibers (including glass wool) and arLicles thereof ncs 7 731100 Containers for comprcssed or liqucfied gas of iron or stcel 8 761010 Doors, windows and their frames and thrcsholds for doors of aluminium 9 940120 Machinery and apparatus for isotopic separation and parts thereof 10 840619 Steam and vapour turbines nes 11 840810 Marine propulsion engines, diesel 12 841360 Rotary positive displacement pumps nes 13 841370 Centrifugal pumps nes 14 841391 Parts of pumps for liquid whether or not fitted with a measurg device 15 841410 Vacuum pumps 16 841451 Fans: table,roof etc w a scif-coat elc mtr of an output nt excdg 125W 17 841480 Air or gas compressors, hoods 18 841710 Fumaces&ovens n-lec f the roast,mclt/h-treat of ores.pyrites.mctals 19 841960 Machincry for liquefying air or gas 20 841989 Machinery,plantllaboratory cquip f treat of mat by change of temp nes 2-1 Ł42119 Ccntrifuges ncs 22 842129 Filtering or purifying machinery and apparatus for liquids ncs 23 842230 Mach f fil/clos(scaletc.btle/can/boxf bagfctnr ncs,mach f aeratg bev 24 842240 Packing or wrapping machincry nes 25 8423S9 Weighing machinery, nes 26 842511 PuUey tackle/hoists dlectr (exc skip hoists/hoists f raisg vehicles) 27 842520 Pit-hcad winding gcar winches speciaUy designed for use underground 28 842539 Wmches or captsans nes 29 842620 Tower cranes 30 842649 Derricks,cranes or work trucks fited wiLh a cmanc,self-propclled nes 31 842710 Scif-propeled works trucks powered by an electric moLor 32 842720 Self-propelled works trucks nes 33 842790 Trucks fitted with lifting or handling equipment, non-powered 34 842810 Lifts and skip hoists 35 842820 Pneumatic elevators and conveyors 36 842832 Cont-action clevators/conveyors for goods/mat, bucket types nes 37 842833 Cont-action elevators/conveyors for goods/mat, belt type nes 38 842911 Bulldozers and angledozers, crawier type 39 842920 Graders and levellers, self-propelled 40 842930 Scrapers, self-propelled 41 842940 Tamping machines and road rollers, sclfpropclled 42 842951 Front end shovel loaders 43 842952 Shovels and excavators with a 360 revolving superstructure 44 842959 Self-propelled excavating machinery nes 45 843031 Coal or mck cutters, self-propeled 46 843039 Coal or rock cutters, not sclf-propclled 47 843041 Boring or sinking machinery nes, sclfpropelled 48 843143 Parts of boring or sinking machincry, whether or not self-propcled 49 843230 Seeders, planters and transp1miters 50 843351 Combine harvcster-threshers 51 843910 Machincry for making pulp of fibrous ccllulosic matcrial - 318 - STATISTICAL ANNEX Scrial HS Codc number number Dcscription 52 844110 Cuuting machincs for paper pulp, paper or paperboard of all kinds 53 844180 Machinery for making up papcr pulp. paper or paperboard ncs 54 844210 Phototype-setting and composing machines 55 844311 Reel fed ofrset printing machinery 56 844350 Printing machinery nes 57 844400 Machines for cxtruding, drawing, text or cutling m-m textile materials 58 844621 Machincs f weavg fabrics of a width cxc 30 cm,shuttic typc,power loom 59 844630 Machincs for wcavg fabrics of a widLh cxceedg 30 cm shutticless typo 60 844790 Mach f makg gimpd yarnltullcllacce/mbroidery/trimmgs/braid/ncL/uLRg 61 845110 Dry-clcaning machincs olt hdg No 84.50 62 845140 Washing,blcachg or dyeg machines (oit machincs of hcadg No 84.50) 63 845180 Mach f wringdress/rLnishglcoatg/imprcg tcx yarns ctc(oIt hdg No8450) 64 845229 Sewing machines, other than book-sewing machincs, nes 65 845290 Pans of sewing machincs, ncs 66 845521 Hot or combination hot & cold metal rolling mills 67 845819 Horizontla lathes ncs for removing metal 68 845899 Lathes nes for rrmoving metal 69 846019 Fl-surf grindg mach in which pos of 1 axis acc to 0.01 mm ncs rem met 70 846029 Grindg mach in which pos of 1 axis to an acc to O.Olmm nes f rem met 71 846r90 Mach-ools for deburring polishing etc for rm mct nes oilt hdg 84.61 72 846140 Gear cutting,gear grindg or gear rmishg machines by rcmovg metal 73 846291 Hydraulic presses for working metal 74 846410 Sawg mach f wrkg ston/cerammiconcr/asb/ceeanat ctctfor cold workg glass 75 846420 Grindg/polish mach f wrkg stornccramlconcr/asblccm ctc/f cold wrkg gls 76 846593 Grindinglsandg o polishg mach for workg woodkork/bone/hard rubber etc 77 847410 Sorting/screening/separatg or washg Mach for stone/ores or ath min etc 78 847520 Machines for manufacturing or hot working glass or glassware 79 847710 Injection-moulding machines for working rubber or plastics nes 80 847720 Extruders for working rubber or plasLics nes 81 847730 Blow moulding machines for working rubber or plastics nes 82 847751 Mach f mouldingiretreadg pneu tires/for moulding/formg inner tubes nes 83 847780 Mach for workg rubber/plastics/for the mir of prods form these mat nes 84 847930 Press f the mfr of part/fib board/f treat wood etc nes hvg indiv func 85 848010 Boxcs, moulding, for meLal foundry 86 850220 Generating sets with spark-ignition internal combustion piston cngincs 87 850230 Electric gcnerating sets, ncs 88 850423 Liq dielectric transf havg a power handig capacity exceedg 10.000 KVA 89 850440 Static convcrters, nes 90 850450 Inductors, electric 91 851521 Electric maehlapp for resistance welding of metal fully or partly auto 92 851531 Elee mach&app for arc (inc plasma arc) weldg of met fully/partly auto 93 851580 Electric/laser/ultrasonic mach etc f weldicut nes/for hot spray of met 94 851710 Tcelphone sets 95 851720 Teleprinters 96 851730 Telephonic or telegraphic switching apparatus 97 851740 Apparatus, for carrier-current line systens, nes 98 851840 Audio-frequency electric amplifiers 99 852510 Transmission apparatus for radio-teleph radio-broadcastg or tclevision 100 852520 Transmission apparatus, for radioteleph incorporatg reception apparatus 101 852910 Aerials&aerial reflectors of all kinds;parts suitable f use therewith 102 853530 Isolatg switches & make-and-break switches,volznge exceed 1,000 volts 103 853540 Lighing arrestersvaltage limiters & surge supp volhagc > 1,000 volts 104 853720 Boards,panels,includg numerical control pancls,for a voltage > 1,000 V 105 854320 Signal generators - 319 - STATISTICAL ANNEX Scrial HS Code number number Dcscription 106 854420 Co-axial cable and other co-axial elcctric conductors 107 860110 Rail locomotives powcrcd from an extemal source of cIectricity 108 860610 Railway tank cars, not self-propelled 109 870110 Pedestrian controlled tractors 110 870410 Dump trucks designed for off-highway use 111 900711 Cinema cameems f film of less than 16 mm width/for double-8 mm film 112 9D1180 Microscopcs, optical, nes 113 9D1520 Thcodolilcs and tacheomnters 114 901540 Photogramnetrical surveying instrumcnts and applances 115 901580 Surveyg,hydrogmphic,oceanographic,metcorologic/geophysicalinst ncs 116 901600 Balances of a sensitivity of 5 cg or bettcr with or without weights 117 901811 Blectro-cardiographs 118 901832 TubuIar metal needles and needles for sutures 119 901849 Instruments and appliances, used in dental sciences, nes 120 902229 Apparatus basd on the usc of alpha betalgamma radiations,for oth uses 121 902410 Machines & appliances for testing thc mechanical propertics of metals 122 902680 lnstrumcnts&apparatus for measurg o check variables of liq o gascs,nes 123 902710 Gas or smoke analysis apparatus 124 902720 Chromatogmphs and clcctrophoresis instrumcnts 125 902730 Spectrometers,spctrophotometer&spectrographsusg optical radiations 126 902750 Instruments and apparatus using optical radiations (UV.visiblc,IR),nes 127 903020 Cathodcrmy oscilloscopes and cathoderay oscilographs 128 903031 Multimctrs 129 903039 Inst & app,for measurg or checkg voltage,current,ctc wlo a record dev 130 903040 Instruments & apparatus,specially designed for telecommnunications nes 131 903031 Inst & app for measurg or checkg elec qty.with a recordg device,nes 132 903089 Instruments & apparatus for measurg or checkg electrical quantities nes 133 903140 Optical instruments and appliances, nes 134 903180 Measuring or checking instruments, appliances and machines, nes 135 903289 Automatic regulating or controlling instruments and apparatus, nes 136 930690 Munitions of war&pts thereof & other ammunitions&projectilcs&pts thereof Source: Office of the United States Trade Representative (1992). - 320 - STATISTICAIL ANNEX Table A3.6: LIsT OF I-IRMMONIZEI) SYSTEM CATEGORIE:S SUBJECT TO ExPINoRT LICINSING HS No. 0207 4300 0802 3200 1211 9015 2008 1120 2617 1090 0208 1000 0802 4000 1211 9016 2008 1130 Ch. I 0210 1110 0805 2000 1211 9017 2008 1190 Ch.27 0102 9000 0805 4000 1211 9018 2701 1100 0103 9110 Ch. 3 0807 1020 1211 9019 Ch. 22 2701 1290 0103 9120 0301 9210 0808 2011 1211 9021 2206 0000 2701 1900 0103 9200 0306 1321 0813 4030 1211 9022 2208 9000 2702 1000 0104 2090 0306 1329 1211 9023 2703 0000 0105 9190 0306 1400 Ch. 9 1211 9024 Ch. 23 2704 0010 0105 9991 0306 2391 0902 1010 1211 9025 2304 0000 2707 1000 0105 9992 0306 2491 0902 1090 1211 9026 2707 2000 0106 0021 0306 2499 0902 2010 1211 9027 Ch. 24 2707 3000 0902 2090 12119028 2401 1010 2709000 Ch. 2 Ch. 4 0902 3010 1211 9029 2401 2010 2710 0011 0201 1000 0407 0020 0902 3090 1211 9031 2710 0051 0201 2000 0407 0022 0902 4010 1211 9049 Ch. 25 2710 0012 0201 3000 0407 0023 0902 4090 1211 2020 2501 0010 2710 0013 0202 1000 0407 0091 0904 2010 2504 1000 2710 0021 0202 2000 0407 0092 0906 1000 Ch. 13 2508 3000 2710 0031 020 3000 0409 0000 0906 2000 1301 9040 2511 1000 2710 0032 0203 1100 0401 0020 1302 1200 2519 1000 2710 0052 0203 1200 Ch. 10 1302 1910 2519 9090 2711 1100 0203 1900 Cb. 5 1005 9000 2523 1000 2712 2000 0203 2100 0502 1010 1006 1000 Ch. 14 2523 2900 0203 2200 0504 0011 1006 2000 1401 9090 2526 1020 Ch. 28 0203 2900 0505 1000 1006 4000 1404 2000 2526 2200 2804 7000 0204 1000 0506 9010 1007 0000 2529 2100 2805 3010 0204 210W 0507 9020 1008 1000 Ch. 15 2529 2200 2805 3090 0204 2200 1508 1000 2530 9020 2811 1900 0204 2300 Ch. 6 Ch. 11 1508 9000 2812 0204 3000 0601 1090 1103 1300 1515 4000 Ch. 26 10002815 02044100 1104 2300 2601 1100 1100 0204 4200 Ch. 7 Ch. 17 2601 1200 2815 1200 0204 4300 0703 2000 Ch. 12 1701 9910 2601 2000 2825 8000 0204 5000 0709 5100 1201 0000 1701 9920 2602 0000 2825 9011 0206 3000 0710 8000 1202 1000 2603 0000 2825 9012 0206 4100 0711 9011 1202 2000 Ch. 19 2604 0000 2836 2000 0206 4900 0711 9090 1207 4000 1902 1920 2607 0000 2836 6000 0207 1010 0712 3020 1208 1000 2608 0000 2841 8010 0207 1020 0712 9020 1211 10W Ch. 20 2609 0000 2841 8020 0207 1030 0712 9040 1211 1000 2001 9000 2610 0000 2841 8090 0207 2100 0713 3100 1211 2090 2003 1010 2611 0000 2845 1000 0207 2310 0713 3200 1211 9011 2005 6010 2612 2000 2846 1010 0207 2320 1211 9012 2005 9020 2613 1000 2846 1090 0207 3900 Ch. 8 1211 9013 2005 9030 2613 9000 2846 9011 0207 4100 0802 3100 1211 9014 2005 9050 2617 1010 2846 901 - 321 - STATISTICAL ANNEX 2846 9020 Ch.39 4403 3500 Ch.51 5206 3500 Ch. 56 2846 9030 3902 1000 4403 9100 5102 1010 5206 4100 5601 2900 2846 9090 3902 3000 4403 9200 5102 1020 5206 4200 2849 1000 4403 9910 5105 3010 5206 4300 Ch. 57 2849 9090 3903 1100 4403 9920 5105 3021 5206 4400 5701 1000 2851 0090 3903 1900 4403 9930 5105 3029 5206 4500 5701 9010 3903 3000 4403 9940 5207 1000 5701 9090 Ch. 29 4403 9990 Ch. 52 5207 9000 5703 1000 2904 2090 Ch. 40 4406 1000 5201 0000 5208 1300 5703 2000 2906 'l10 4001 1000 4407 1000 5203 0000 5208 1900 5703 3000 2907 1500 4001 2100 4407 9100 5204 1100 5208 2100 5703 9000 2918 1400 4001 2200 4407 9200 5204 1900 5208 2200 2920 9000 4001 2900 4407 9910 5204 2000 5208 2300 Ch. 58 2932 1200 4011 1000 4407 9920 5205 1100 5208 2900 5801 2100 2932 1300 4011 2000 4407 9990 5205 1200 5209 1100 5801 2200 2935 0020 4011 3000 4412 1100 5205 1300 5209 1200 5801 2300 2936 2700 4011 4000 4412 1200 5205 1500 5209 1900 5801 2400 2934 9090 4011 9100 4412 1900 5205 2100 5209 2100 5801 2500 2939 4000 5205 2200 5209 2200 5802 2939 9090 Ch. 41 Ch. 46 5205 2300 5209 2900 11005804 2941 4000 4101 1000 4601 2000 5205 2400 5210 1100 3000 4101 2100 4601 2230 5205 2500 5210 1200 5810 9100 Ch. 30 4101 2200 5205 3100 5210 1900 5810 9200 3001 9010 4101 2200 Ch. 48 5205 3200 5210 2100 5810 3004 9052 4101 2900 4801 0000 5205 3300 5210 2200 99005811 3004 9053 41013000 4803 0000 5205 3400 5211 1100 0010 30049055 4103 1010 4808 1000 5205 3500 5211 1200 3004 9090 4103 9010 5205 4100 5211 1900 Ch. 60 41042210 Ch.50 5205 4200 5211 2100 6001 2100 Ch. 32 4106 1200 5001 0000 5205 4300 5211 2200 6001 9100 3204 1500 5002 0010 5205 4400 5211 2900 6002 1010 Ch.42 5002 0020 5205 4500 5212 1100 6002 2010 Clh. 33 4203 2910 5002 0090 5206 1100 5212 1200 6002 3010 3301 2100 5003 1000 5206 12G0 5212 2100 6002 4200 3301 2500 Ch. 43 5003 9000 5206 1300 5212 2200 6002 9200 3301 2930 4301 1000 5004 0000 5206 1400 5212 2900 3301 2940 4302 1100 5005 0010 5206 1500 Ch. 61 5005 0090 5206 2100 Ch.53 6104 3200 Ch. 34 Ch.44 507 1010 5206 2200 5303 1000 6104 3300 3406 0000 4403 1000 5007 1090 5206 2300 5305 9110 6104 3900 4403 2000 5007 2011 52062400 5305 9911 6104 4200 Ch. 36 4403 3100 5007 2019 5206 2500 5305 9912 6104 4300 3604 1000 44X.3 3200 5007 2021 5206 3100 5308 9010 6104 4400 4403 3310 5007 2029 5206 3200 5310 1200 6104 4900 Ch.38 4403 3390 5007 2031 5206 3300 5311 0011 6104 4900 3806 1000 4403 3400 5007 2039 5206 3400 6104 5200 - 322 - STATISTICAL ANNEX 6104 5300 Ch. 70 7214 2000 7306 2000 7606 9100 8471 2010 6104 5900 7004 9000 7214 3000 7306 3000 7606 9200 8471 2020 7005 2900 7214 4000 7306 4000 7608 1000 8471 2030 Ch.62 7214 5000 7306 5000 7608 2000 8471 9110 6211 3200 Ch.71 7214 6000 7306 6000 8471 9120 6211 3300 7101 1000 7215 1000 7306 9000 Ch. 78 8471 9130 6211 4200 7101 2100 7215 2000 7312 1000 7801 1000 8471 9210 6211 4300 7101 2200 7215 3000 7317 0000 7801 9100 8471 9230 6213 2000 7102 1000 7215 4000 7801 9900 8471 9310 6213 9000 7102 3100 7215 9000 Ch.74 7802 2000 8471 9390 7102 3900 7216 1000 7407 1000 7803 0000 8482 1000 Ch.63 7216 2100 7407 2100 7804 1100 '82 4000 6302 2110 Ch. 72 7216 2200 7407 2200 7804 1900 J482 5000 63023191 7201 1000 7216 3100 7407 2900 6302 3110 7201 2000 7216 3200 7408 1100 Ch.79 Ch. 85 6302 3210 7201 3000 7216 3300 7408 1900 7901 1100 8505 1110 6302 3921 7202 1100 72i6 4010 7408 2100 7901 2100 8528 2081 6302 4010 7202 1900 7216 4020 7408 2200 7901 2000 8528 2082 6302 5110 7202 2100 7216 5010 7408 2290 7902 0000 8528 2083 6302 5210 7202 2900 7216 5090 7409 1100 7903 1000 8528 2084 6302 5310 7202 3000 7216 6000 7409 1900 7903 9000 8528 2090 6303 1100 7202 4100 7216 9000 7409 2100 7903 0000 6303 1200 7202 4900 7217 1100 7409 2900 7905 0000 Ch. 87 6303 1900 7202 8010 7217 1200 7409 3100 7906 0000 8712 0010 6303 9100 7204 1000 7217 1300 7409 3900 6303 9200 7204 2100 7217 2100 7409 4000 Ch. 80 Ch. 96 6303 9900 7204 2900 7217 2200 7409 9000 8001 1000 9601 9000 6304 1110 7204 3000 7217 3100 7411 1000 8001 2020 9603 4011 6304 1921 7204 4100 7217 3200 7411 2100 8003 0000 9609 1010 6304 1931 7204 4900 7229 1000 7411 2200 6304 9110 7204 5000 7229 2000 7411 2900 Ch. 81 63049210 7206 1000 7229 9000 8110 0010 6304 9310 7207 1100 Ch.76 8110 0090 6304 9921 7207 1200 Ch. 73 7601 1000 8101 1000 6305 1000 7207 1900 7304 3190 7601 2000 8104 1100 6305 3100 7207 2000 7304 3990 7602 0000 8104 1900 6305 3900 7208 1100 7304 4190 7604 1000 8104 2000 7208 1200 7304 4990 7604 2900 8104 3000 Ch.65 7213 1000 7305 1100 7605 1100 8104 9010 6505 9010 7213 2000 7305 1200 7605 1900 8110 0010 7213 3100 7305 1900 7605 2100 $1110090 Ch. 69 7213 3900 7305 2000 7605 2900 6911 1010 7213 4100 7305 3100 7606 1110 Ch. 84 6912 0010 7213 4900 7305 3900 7606 1190 8408 1000 7213 5000 7305 900 7606 1210 8408 2090 7214 1000 7306 1000 7606 1290 8471 1000 Source. GATT (1992a). Table A3.7: EsntAts oF PROTECTION BASED ON INTERNATIONAL PRICE COMPARISONS Free Interna- Import Export Licensing HS Product Official market national Tariff NTB tariff Export NTBtax status code dscription pc ric rate eauiv. tax wuiv. ExporL Import (1) (2) d(3) (Yuanlt) (g/Aon) (6) (9) (7) (8) (%)(9) (4) (5) 0202 Pork (frozen) 5,400.15 4,641,31 1,076C00 0.50 -51 0.00 25 Y N 0203 Beef (frozen) 6,542.87 6,990 .80 2,660.00 0.50 -70 0.00 54 Y N 0902 Tea 18,535.41 25,051.52 1,853,00 0.00 131 0.00 -136 N N 1001 Wheat - 789.14 128.00 0,00 5 0.00 -7 N N 1005 Maize 329.28 354.11 107.48 0.00 -44 0.00 43 Y N 1006 Rice 550.82 996.88 287.17 0,00 -41 0.00 40 Y N 1101 Wheat flour 524.54 938.48 162.00 0.06 -6 0.00 -1 N N 1201 Soybeans - I t888 42 239.60 0.00 35 0.00 -37 Y N 2611 TunSsten 127,69.18 13,954.51 6,763.30 0.00 -65 0.20 55 Y N 2701 Coaf 47.70 64.51 39.70 0.00 -72 0.40 53 Y N 2709 Crude oil 200.79 109.22 130.00 0.00 -86 0.00 85 Y Y 2710 Refined petroleum 842.57 1,050.93 223.50 0.10 -27 0.00 18 Y Y 281511 Sodium hydroxide 1,918.85 1,842.83 322.00 0.03 -5 0.00 0 Y N 310210 Nitrogenous fertilizer (urea) 532.29 843.16 172.00 0.05 -20 0.00 IS N N 310420 Potassium fertilizer (KCI) 783.09 783.09 108.90 0.05 17 -25 N N 390210 Polypropylene 4,949.80 5,625.91 844.00 0.00 14 -16 N Y 390311 Polystyrene 4,766.65 7,168.23 572.00 0.00 114 -118 N N 401110 Rubber tires for cars 1,710.00 1,640.00 300.00 0.60 42 0.00 5 N Y 440319 Wood logs, coniferous 236.20 284.31 70.00 0.00 -31 0.00 29 N Y w 440391 Wood logs, oak 349.44 555.77 221.00 0.00 -57 0.00 56 Y Y N 440710 Lumber, coniferous 500.43 647.26 110.00 0.00 1 0.00 -3 Y Y w 440791 Lumber oak 549.85 549.85 471.00 0.00 -80 0.00 80 Y Y 441212 Plywood nonconiferous 2,349.00 2,631.00 500.00 0.80 -50 0.00 8 Y N 441219 Plywood coniferous 1,941.00 1,941.00 150.00 0.80 23 0.00 -125 Y Y 4702-5 Chemical wood pulp 4,950.00 4,295.34 550.00 0.02 31 0.00 -36 N Y 5101 Wool 64,541.88 63,618.23 3,530.00 0.00 203 0.00 -214 N Y 5509 Yam of synthetic staple 11,493.61 11,240.83 1,000.00 0.70 13 0.00 -96 N Y 720450 Steel in ingots - 1,057.44 539.00 0.00 -66 0.00 66 Y Y 720711 Semi-finished steel 1,055.99 1,168.47 469.00 0.00 -57 0.00 57 Y Y 7208-12 Flat-rolled products of stecl 1,069.01 1,621.97 469.00 0.00 41. 0.00 40 Y Y 7210-16 Bars & rods of iron &steel 1,368.83 1,493.69 383.00 0.15 -42 0.00 32 N Y 7312 Wire cables of stecl 2,911.13 2:581.90 383.00 0.60 -28 - -17 Y Y 7403 Refined copper 10,296.17 15,893.43 2,339.00 0.12 4 0.00 -18 N N 840731 Petrol engine, 50 cc - 860.56 100.00 0.80 -18 0.00 -47 N Y 841821 Refrigerators, domestic 1,592.72 1,623.76 300.00 0.20 -23 0.00 7 N Y > 845011 Automatic washing machine 514.44 454.48 150.00 1.00 -74 0.00 48 N Y 847120 Personal computer (PC-XT) - 14,239.99 1,000.00 0.20 103 0.00 -144 Y Y 852031 Cassette recorder 410.88 455.87 60.00 1.00 -35 0.00 -30 N Y 852110 VCRs 3,000.00 3,000.00 200.00 1.00 28 0.00 -157 . Y 852810 Color TV 2,000.87 1,903,62 197.38 1.00 -18 0.00 -65 N Y > 852820 Black and White TV 277.86 348.51 80.00 1.00 -63 0.00 25 Y Y r 854012 Cathode-ray TV 83.83 88.70 15.00 0.30 -22 0.0) -1 N Y > 870324 Petrol automobile 101,314.00 101,314.78 12,000.00 1.20 -34 0.00 -44 N Y Z z Note: Price comparisons in this table wex based on prices in China supplied by the Development Research Center of the State Council. International prices were X obtained from a variety of sources, including World Bank commodity price estimates and unit values of exports or imports from China as reported to the UN COMTRADE system. The avemge secondary market exchange rate utilirznd was 5.845 and the export weighted exchange rat was 5.74 for all commodities except machinery (HS 8) for which full foreign exchange retention applies and the secondary market rate of 5.845 was therefore applied. - 324 - STATISTICAL ANNEX Table Ad: CnuN LtsT or Nolluc FOi mt m ciOwaRT iacma-3 Am/tl CoNmoLu AsE To ne hbtUrrAu AT Tme Er OF ArNnwowCarn IntmIATI.aoN NIOCwtM (AmugcdAcconline to HurmunizxedCumdiy Decription and Cuding Syica) Serial 1S Code nUmiber ncmber Description ctgory 1 391510 Flo.r wailed CCig coverings. ci., of polymen of vinyl chridc C 2 700529 Flot gla. de.. in shed. mnowind -t C 3 70199M Gl fibes (inclding gla wool) and atidea themre ac c 4 731100 Conteinen for cmprssd or liquefied gs of iron or stcci C 5 761010 Doom. widow awd teir fnus sd threcoids for dooni of slamimium C 6 S40120 Machiny sd appash for lOpic separation san pai thereof C 7 S41451 Fan: tshlc,roof etc w a sclf-coat ek atrerf output atexcdg 125W C S S42230 Madh f filfcldscalctctlebdcebobnoknnajcr mach f acng bhe C 9 S42520 Pit-bId whaing er wincebs speily dcigna for we underground C 10 842710 Self-propelld work tcks powerd bysa electrik motor C 11 842790 Tracka frned with ifting or handli equipment, no apowered C 12 842120 Peumic eleustos and coveye C 13 842930 Scapers. self-propelled C 14 842940 Tmping machine amd rand woli. sefpoplcd C 15 843910 Mnchiesy formaing pulpof itroucefulosic material C 16 544350 Printing machinr nr C 17 845319 Horizotal ibaes am for rmoving mel C 13 846410 SewS MaC h wrkg f stooccensu/coacrdsslbecusca:cte/for cold wokg glS C 19 34642G Grindgtpolis h f wfk aton/eeem/concrtsb/ebmetldf cold wrkg jgl C 20 347751 Mac f mouldingrctzcdgpneu dimfor mnulg/fong inner tubes - C 21 847930 Pr f the mfr of padhib booerfftret wood etc a bvg iadidI fiac C 22 350423 riq dieectic rsf 4vg a powerbandlg apcity exemdg 10.000 KVA C 23 s51720 Telepr ;c C 24 351340 Aio-frequencyekcric amplfies C 25 SS 2910 Aeils&a reflctor of all kids;pn suitable f ue jherwih C 26 354420 Co-axial cable ad other co-ial electic condom C 27 370410 Dump buck designed for off-bighway ue C 23 90D711 Ciema camc f film of l1 gbs 16mm widrhrfordouol4 m r- c 29 901340 Thoogmm ctrical sureying rirainis sad pplian C 30 901530 SuneygSrydrogrpbic,ocognpbl eorlogic/cphysic nea C 31 901332 Tubular metas neledsand necdle for sares C 32 901349 nmtumt d ppliances. sed in dial eeience, ner C 33 902630 pu afor mnsurg check vabhls of liq o gm,ns C 34 903040 Indrstument & apprnspecially dsincad for telcomnunicationsn mc C 35 903140 Optical inamancan sod appliances, nm C 36 17011l Raw sugar.cowc L 37 170112 Raw sugar, bet L 33 170199 Retald sugr. in solid 6on,. -m L 39 210690 Food prpwratloina na L 40 400110 Naut ribber tex. whether or not prvulcanied L 41 400121 Natural rubber in smoked sxhees L 42 400122 Tcldicaluy specified naual rubber (ISNRJ L 43 400129 Nturd rubber in otbhr (nma ane L 44 401110 Pneumatic tire new of ubbecrf motor car incI station wagoArascg car L 45 401120 Pneumaic tin new of rubber for buxa or lories L 46 401191 Pneumatic tir new of nrubbbe nershsving a 'hcring-boae or sim tread L 47 401210 Rereaded tir L 41 40120 Pbeunic tire ud L 49 401290 Solild cuahiod tirca.itrcbantagbictire readsire flopa of ebr L 50 401310 Inner tubes of rubbcr for motor camn Sc bue or lrries L 51 510111 Greasy saor wool. not canded or combed L - 325 - STATISTICAL ANNEX Seril- HS Codc numbcr rumber Deacripti. Categomy 52 510119 Gay wool (othcr than .rm wool) not cantdd or combed L 53 510121 Degred shorn wool. not cane d, coe or cabonisod L 54 510129 Degrease wool (other thn shom wool),notscaatd.combedorcarbosaicd L 55 510230 Carbanisod wool. non cauded or combed L 56 510310 Noilsofwoolorof ft .nannAlbir L S7 510510 Caded wol L 51 S10521 Combed wool ik f rgment L 59 51OS29 Wool tops and oter coned wooL other hu cmbe wool in frtnn L 60 540220 High tciy yar (oh ewg thrad),of polyeter filomenta,not put up L 61 540233 Tcxtrd yarn nceofpolyeatcr rssneuts.notpot tsp for rtil se L 62 340731 Engincs, spark-iguition reoip;lpg, displacing not more ton 50 cc L 63 S40732 Enginespak-ignkionrecprocating.dispblcg >5O cc but at more 250cc L 64 840733 Engine, spark-ignit reciprocating displacig > 250 cc to 1000 cc L 65 840790 Engines. a-iniion tpo tes L 66 540S20 Enginm. dies for the vehicleo of lptcr 87 L 67 541510 Ar comndioniingm window or wall types, sel-onuined L 6i 41531 Air cond asch - inc a ref unit"a vslve f rev of the coolniht cycle L 69 541532 Air caod macl nes, inca refrigeraig unit L 70 546910 Aulomaic typewritue snt wosdpocaig machinec L 71 547010 Elctrmicancklatoms capble of operw/o an external oure fpower L 72 547021 Electrokic clculating m ohincs, incrporating a printng device. se L 73 547029 Electronc calculaing nuchines. -o L 74 541110 Anlogue or hybrid sdomatic data procraing mchinea L 75 552210 Video reoding or reproducing appaatus ma-gnetic t ype L 76 B52290 Par and accsories of sppartus of biding Kn S5.19 to 5.21, ea L 77 S52530 Tclevision canmc L 71 B52810 Telvion receives inchuig video monitor & video projctors.colour L 79 B54011 Cathode-my leivision picturtnbe,inc video onimtortubes,eolour L so 570120 Road traco for aemi4-iles (truck urao) L 31 570210 Diesl powered bumes with a sating capacity of > ninc perons L 82 7290 Bues with . sating capeity of morc tha ni persons am L S3 570310 SowmobI, golfear ad similar vehidc L S4 B70321 Automobils w rcprocatg pInstongine displueg no-t than IOOcc L 85 870322 Aulomobis w reciproaig piston egiuc displcg > 1000 c to 1500 cc L 36 570323 Automobile w recipoag pisn engie displcg > 1500 cc to 3000 cc L S7 870324 AutomobIle with reiprocating pica engine displcing >30W0cc L 5S 570331 Autumobiks wilt disel engine displacing not more than 1500cc L 59 870332 Automobiaes with diesel engine displacing more thao 1500 cc to 2500 cc L 90 570333 Aulomobib with dies engine displacing m- tha 2500 cc L 91 870390 Automobiles na including gas tubine powerad L 92 870421 Diesel powered trucks with a GVW noL exceading GivC tooums L 93 B70422 Diesel powed intc w a GVW cxc rive ton bue t mt exe twenLy tonDes L 94 B70423 Dicel powerd truck with a GVW acceding twent ton L 95 570431 Gas powered tucks with GVW not exceeding fve L 96 570432 Gsm powered tucks with a GVW ex. noding five tame. L 97 870490 Truccks nD L 95 870510 Mobile cnes L 9° 870520 Mobile drilling derricks L 100 870530 F6c fighting vchicles L 101 870540 Mobile concnete mixer L 102 870590 Special purpose motor vehicks no L 103 870710 Bodice for passeger carrying v yhice L 10$ 871110 Motorcycles with reciprocating pistn engine displacing 50 cc or km L - 326 - STATISTICAL ANNEX Scrild HS Code number number Deiptin Cseloy h71120 Motorcycles wit recipocnig pinkw engincdiskpleg > 50cc to 250cc L 106 '1130 Motorcyces wilt eciprocatg piston coginedispeg > 250 cc to 500cc L 107 871140 MotoArcyls with rciprocatg pitlon engiue diplecg > 500 cc in S00 cc L 108 871150 Monorycles wilh .rciproesLg pio engine diplseg mome tan 800 cc L 109 371419 Motorcycle p nec L 110 900651 Cncstsingelens rmflex.forroll remof a width not cxccedg 35 mm L 111 9DW652 C for roUl rlm of ( width les tha 35 mm L 112 900653 C es for roU r of a widi of 35 mm. ne L 113 9D0659 Phbotogmphic. other than cicmntographicsmncmsn mc L 114 9013I1 Eect-dingno.tic ppsumn. no L 115 910111 Wrist-wathces w mech dimplay.banety powcni&wihcsse of peims nu t L 116 910121 Wrist-watches.with sutomatic winding & with ces of precioku mctsl,nes L 117 910129 Wrist-watcbes, with a mac of precis mctal, - L 115 910211 Wrist-wstchcs.butry/ccumutltorpowcrd w mechnica display only Dee L 119 910221 Wrist-wache with suomsk winding nc L 120 910229 Wrist-watches. ncm L 121 910311 Wstch movemnts. asembld. bcacry powered with medaical d4play L 122 910320 Wsch moveimenta. compkte snd assembled. with automaitc windig. nm L 123 910B91 Wstcb movmncut.compltc and aembkd.mcsuring 33.8 mm or kcs. L 124 911011 Complet movemnt of walches unasetmbled or panty assmbled L 125 911012 Incomplete movements of wathes. ssdhlcd L 126 911019 Rough movement of watce L Note: C Ilmport Conol: L = Import Liceme. Sourme Orrzea of the United Sistes Tnde Rcpresentaive (1992). Table A6E1. ORGANIZATIONAL STRUCTnRE Or 1MISTRmY oP FOEMGN E;CONOIC KMAnOMs AND TRADE cim)g State Council Ministry of Foreign People'. Ooverntent Economic Relations------------------ of every province, and Trade autonoous region, m nicipalityo city - - _ _--- witb separate list in the state plan Special comissioner's Organiations of Subordinat Enterpries bis Camncil for th offiets in major ports Funetional Reeareb, Consultation of roreign Economic Promotion of Interne- ___ _ _ _ and key cities departments and Servie IRelation. and Trade tional Trado iAministrative Office I of Electronic & Ma- Department (coa isaLon eneral Office International Trade Research Macbinery Product or bureau) of Foreign -Department of Policy ReseArch Institute Export Economic Relations end System Reform International Economic Cooper- Adainiscracive Office and Trade -Department of Personnel eduestion ation Research Inscitute _ of Electronic 9 and labor China Rational Foreign Trade Machinery Produet -Department of General Planning Transportatien Corporstion Imporee -Financiul mnd Accountant Depsrtmnt Chins Consultation Corporation mueral Adminis- Foreign Trade Administration for Econoie Ralatinoe and tratias of Customs L-Import and Export Department Trade Vdmiiaitration Bu- -Enterprises of -Department of Economic and Chins International Advertising reau for Industry foreign economic Trade Relations with Taiwan Corporation & Comerce - relations and trade -Department for European Affairs -Chins Trust and Irvestment -State Administratton Organizations of -Departmsnt for Asian and Corporation for Foreign Economic of Foreign Exchanges research, consult- African Affairs Relations and Trade -State Administration ation and srrvice -Department for American and Creat Vall Lawyar'a Offies for Inspection of research, consul. Oceanic Affairs -Varlous Nsispapere,Puolieations, Import and Export tation and service -Departent of Aid to Foreign and Publishing louses of Foreign Coadities LSubordinate organi- Countries Economic Relations and Trade (20) actione of foreiLn -D*partment of Foreign Economic economic relations Cooperation W and trade, and -Department of Relations with .4 eduestion International Organizationa Organizations of Educational Organisationa Overseaa Organizations -Tchnology Import and foreign Economic Export Deportment Relations and Trade -Foreign Investment Administration -Foreign Financing Administration -Department of Treaties and Lava -Protocol Department -Administrative Dspertmnent -Accountant Institute of Foreign Univarsity of Interna- -Cercisl Office Economic Relations and Trade tiumsI Business and -Economic Counsellor's -China Association of International EconoLices Repreeentative'a) Office Advertising -Shanghai Foreign Trade -Representative office -Chins Administrative Association College to UN Organisatione of Enterprises of Foreign -Guaugthou foreign Trade Concerned Economic Relations and Trade Trade College -Enterprises conctrned -Chssber of Commeree of Import and -Tianjin Foreign Trade Export Comoditese College b-in Association of International Trade -Chins Institute of International Economei Cooperation -Cbins Association of Enterprises with Foreign Investmoet > bChins Chamber of Corce of I Foreign Contract Engineering -Specialty of Interational Projecta Zeonomeis and Trade in over 50 Comprehenslve universitiea Z 1I This slnctzre Is ekbe ebaged folowing remet Initiativesta rcmucr thel govencL The Mhit of Forcign Economic Reltions ad Trade i now elie the Minity F Foreip Tr ad Economic Coopcein. - 328 - STATISTICAL ANNEX Table A6.2: CINA: SELEcTED INDICAotRS OF lllE SEZs AND 14 OvN CI1D3 1984-90 1984 la 1990 Annual Indus- 1990 Indus, 1990 1990 indus- 199D trial Popu- trial 1990 Forcign F.C., trial Exports/ output lIlion output Exports capital GDP rate GDP (Y bln) (ton) (Y bln) (S muln) (S mln) (%) (%) (9) Dalian 7.05 2,396 24.14 6.54 393.63 13.57 15.83 2.30 Qinhuangdao 0.80 501 2.64 1.18 19.39 2.60 15.16 2.17 Tianjin 24.54 5,771 59.69 4.25 332.96 56.37 9.43 0.36 Qingdao 6.87 2,058 1630 1.73 52.29 9.43 8.98 0.88 Yantai 1.68 805 5.98 0.33 5.56 1.65 16.62 0.96 Lianyungang 1.09 521 3.14 0.33 73.58 2.01 12.55 0.78 Nantong 2.86 457 7.69 0. 27.74 2.96 11.26 0.36 Shanghai 56.05 7,835 117.18 8.66 779.70 51.17 6.70 0.81 Ningbo 3.13 1,085 10.71 0.63 66.13 5.40 15.86 0.56 Weozhou 1.16 562 3.71 0.06 1.39 2.14 14.51 0.13 Futzhou 2.84 1,292 9.96 0.63 65.25 4.99 16.28 0.60 Guangzhou 11.89 3,579 35.59 7.07 189.67 25.86 13.28 1.31 Zhanjian 0.60 1,060 3.65 0.62 17.63 3.23 27239 0.92 Bdihti 0.16 370 1.41 0.09 10.52 0.69 36.03 0.62 14 cities 120.73 28,292 301.79 32.34 2,035.44 182.07 9.93 0.85 Percent of all China 16.11 2.47 12.61 52.08 19.78 5.77 68.48 0.29 S-henzha 1.47 395 16.39 5.05 476.54 10.76 40.96 2.24 Zhuhai 0.34 366 4.67 1.67 96.05 3.52 46.33 2.27 Shantom 1.00 856 5.91 1.16 110.80 2.92 26.96 1.90 Xlamen 1.42 603 8.11 0.96 72.73 4.59 26.16 1.00 4 SEZs 4.23 2220 35.08 8.84 756.12 21.79 34.27 1.94 All China 749.34 1,143,330 2,392.40 62.09 10,290.00 1,768.60 14.5D 0.17 Notc: F.C. Foreign Capital utfiization, which includes foreign loans, actual FDI and other foreign investments. /a Both industrial output values of 1984 and of 1990 arc at current prices. To calculate growth rates ovcr 1984-90, an industrial output deflator of 1.4166 is used to adjust 1990 industrial output vuluc into 1984 pricas. Source: Ma Jun, China's Regional Policy and hiL Macroeconomic Implcadorns, IMF, mirneo, August 1992. - 329 - STATISTICAL ANNEX Table A6.3: CHNA: FOREIGN DIRECr INVESrMENT BY PROVINCES, 1983-91 ($ million) Pledged Actual 1983 1984 1985 1988 1991 All China 3,430.2 1,956.2 1,956.2 3,193.7 4,366.3 Beijing 34.8 118.7 88.8 502.8 244.8 Tianjin 3.2 105.7 55.9 31.9 132.2 Hebei 2.6 11.2 8.2 16.7 44.4 Shanxi - 1.1 0.5 6.5 3.8 Inner Mongolia 3.0 3.0 2.6 3.4 1.1 Liaoning 24.7 45.7 24.58 115.3 348.9 Jilin 0.8 1.4 4.9 6.2 18.0 Heilongjiang - 5.2 4.0 40.1 9.4 Shanghai 46.0 430.8 107.5 233.2 145.2 Jiangsu 4.6 56.5 33.5 103.0 212.3 Zhejiang 7.4 31.5 26.6 29.6 91.6 Anhui - 3.6 3.0 11.5 9.5 Fujian 59.5 236.2 118.6 130.2 466.3 Jiangxi - 6.9 10.5 5.2 19.5 Shandong 22.0 116.9 35.6 43.1 179.5 Henan 0.1 6.0 8.3 64.2 37.9 Hubei - 49.9 8.0 22.3 46.4 Hunan - 34.6 27.3 7.7 22.8 Gungdong 582.0 1,411.1 651.3 957.9 1,822.9 Guangxi 16.2 26.7 30.7 20.7 25.3 Sichuan 4.6 28.9 28.7 23.6 24.4 Guizhou - 2.9 9.8 4.4 7.3 Yunnan - 1.5 1.6 3.1 3.0 Tibet - - Shaanxi 10.3 1.6 15.6 111.7 31.6 Gansu - 0.3 0.6 2.0 0.9 Qinghai - 23.5 - 2.7 - Ningxia - 3.0 - 0.3 0.2 XMinjiang - 3.3 - 5.0 0.2 Hainan - - - 114.2 176.2 Source: China's Statistical Yearbook, various issues. - 330 - STATISTICAL ANNEX Table A6.4: REGIONAL DISTRIBUTION OF CIIINA'S EXiORTS (1989) Guangdong 20.12 Shanghai 12.41 Liaoning 10.91 Shandong 7.49 Jiangsu 5.99 Zhejiang 4.60 Tianjin 4.17 Hebei 4.07 Fujian 4.07 Others 26.17 Source: Central bItelligence Agency, July 1992, "The Chinese Economy in 1991 and 1992: Pressure to Revisit Refbrms Mounts." As reported in Yusuf's "The Rise of China's Nonstate Sector," World Bank, mimeo, October 1992. - 331 - STATISTICAL ANNEX Table A7.1: TME lFrEa LARGEST TinUmDIGIT ExPoRT PRODUCTS OF CIUNA, REPUBLIC OF KOREA, TAIWAN (CmNA), 1lONqG KONG AND SINGAPORE Share of the 15 LargedL Three-Digit Manuracturina Items in Total Exmorts (WI Rep. of Taiwan Hong SITC Duscription China Korea (China) Kong lb Singapore 512 Inorganic chemicals 2.0 581 Plastic materials - 1.6 2.2 2.0 1.7 599 Chemical malerials, nes - - - - 1.0 651 Texdlc yarns 1.4 - 2.2 - - 652 Cotton fihbrics 2.1 - - 3.1 - 653 Woven textile articles 3.0 5.9 4.2 2.5 1.2 656 Made-up textile ticles 1.6 - - - - 674 Iron and steel universals - 2.5 - - 0.9 711 Power mnachiney 0.9 714 Office machincry - 4.1 9.9 6.4 17.4 718 Machines for special industries - - - - 1.0 719 Machinery, not elsewhere specified - 1.9 3.4 1.5 3.7 722 Electrical power machinery 1.5 - 3.1 3.2 2.8 724 Telecommunications equipmcnt 5.9 7.1 6.3 6.3 9.4 725 Domestic electrical equipment 2.1 - - - 8.4 729 Other electrical equipment - 9.4 5.7 3.3 - 731 Railway vchiclc - 1.6 - - 732 Road motor vehicles - 3.4 - - 0.8 733 Nonmotor road vehicles - 2.6 - 735 Ships and boats 4.3 - 821 Furniture - - 2.2 831 Travel goods 3.7 1.7 - - - 841 Clothing 19.6 12.1 5.9 31.0 3.0 851 Footwear 4.5 6.4 3.7 - - 861 Scientific apparatus - - 1.6 2.7 1.5 864 Watches and clocks 1.6 - - 8.1 - 891 Sound recording equipment 1.8 4.3 - 2.1 3.2 893 Articles of plastic 1.7 - 3.6 2.3 - 894 Toys and sporting pods 7.5 1.8 1.3 2.4 897 Jewelry - - - 3.0 - 899 Other miscellaneous manufactures 2.6 - - Memo Ifem Share of the largcst item 19.6 12.1 9.9 31.0 17.4 Share of 5 largest items 41.2 40.9 32.0 55.1 41.7 /a Shares are shown only for the 15 largest items. The country may export a product for which no tade shares are given in this table. Ib Based on 'artncr country data. Ic Excludes recxports. Source: UN COMTRADE Database- - 332 - STATISTICAL ANNEX Table A7.2: CINA'S SILRE OF WORLD EXrORTS BY SECTOR Commodity 1985 1986 1987 1988 1989 1990 00 Livc animals 6.1 4.8 4.7 4.4 4.2 4.6 01 Mcat and preparations 1.7 1.6 1.3 1.2 1.3 1.2 02 Dairy producLs and eggs 0.6 0.6 0.6 0.4 0.4 0.4 03 Fish and prcparations 2.2 3.0 3.4 4.6 4.5 4.7 04 Cereals and preparations 2.6 2.3 1.4 1,3 1.6 1.0 05 Fruit and vegetablcs 3.2 3.7 3.7 4.3 4.3 3.6 06 Sugar and preps honcy 1.5 1.7 2.1 1.4 1.5 2.4 07 Coffee tca cocoa spices 2.1 2.0 1.9 2.2 2.3 2.4 08 Animal fecding stuff 2.5 4.3 4.1 5.2 4.0 3.5 09 Mise food preparations 1.9 1.7 1.7 1.1 1.2 1.4 10 Unspecisl codc - - - - - - 11 Bevcragcs 0.8 0.8 1.0 1.0 1.1 1.0 12 Tobacco and mfrs 0.4 0.5 0.5 0.8 1.2 1.3 20 Unspecial codc 28.4 54.1 0.0 1.2 0.0 0.0 21 Hidcs,skins,furs undrssd 3.0 2.4 2.4 3.0 2.3 2.5 22 Oil seeds,nuts,kcrmcIs 4.5 5.8 5.5 5.1 4.7 5.3 23 Rubber crude,synthetic 0.0 0.0 0.0 0.1 0.1 0.1 24 Wood lumber and cork 0.1 0.2 0.2 0.4 0.4 0.4 25 Pulp and waste paper 0.0 0.0 0.0 0.0 0.0 0.0 26 Textile fibers 7.5 7.5 7.9 6.9 6.4 4.6 27 Crudc fcrtlzr, minrls nes 2.8 3.0 3.3 3.6 4.4 4.0 28 Metallifcrous ores,scrap 0.7 0.8 1.1 1.2 1.2 0.8 29 Crude anirnaLveg mat nes 6.0 5.8 6.2 6.3 7.3 6.1 30 Unspecal code - - - - 32 Coal, coke, briqucues 1.4 1.6 2.1 2.3 2.7 2.6 33 Petroleum and products 2.4 2.1 1.9 1.9 1.S 1.7 34 Gas natural and manufctd 0.0 0.0 0.0 0.0 0.0 0.0 35 Electric eneWr 0.0 0.0 0.0 (0.u 0.1 0.2 40 Urspecialc ode 0.0 0.0 0.0 - - - 41 Animal oils and fats 0.0 0.0 0.0 0.; 0.0 0.1 42 FLxed vegetable oil,fat 1.2 1.5 1.4 1.0 0.8 1.2 43 Procesd anml veg oil, etc. 0.1 0.2 0.3 0.2 0.3 0.8 50 Unspecial code 0.2 0.6 0.2 0.0 0.0 0.0 51 Chem elemcnts,compounds 1.1 1.3 1.4 1.5 1.7 1.6 52 Coal,ptroleum, ctc., chews 2.0 1.1 1.6 2.4 2.3 3.5 53 Dyes, tanning, color prod 0.9 1.1 1.1 1.2 1.5 1.4 54 Medicinal, etc., products 1.6 1.5 1.5 1.6 1.8 1.6 55 Perfume, cleaning, etc., prd 1.4 1.2 1.1 1.4 1A 1.2 56 Fcniaizers manufactured 0.0 0.1 0.1 0.1 0.2 0.2 57 Explosivcs,pyrotcch prod 18.7 17.1 16.9 17.6 21.4 20.0 58 Plastic materials, ete. 0.2 0.2 0.2 0.3 0.3 0.4 59 Chemicals ncs 0.8 0.9 0.9 0.9 0.9 0.8 60 Unspecial code - - - - - 61 Leather,drcssed fur, ete. 1 2 1.1 1.3 1.9 2.1 2.8 62 Rubber manufactures nes 0.3 0.4 0.3 0.4 0.5 0.4 63 Wood,cc,rk mfanufactrs nes 017 0.7 0.8 1.1 1.6 1.9 64 Papcr,papcrboard and mfr 0.6 0.6 0.6 0.6 0.7 0.7 65 Textile yarn,fabric, etc. 7.7 8.1 8.6 8.6 8.9 7.7 66 Nonmetal mineral mfs nes 0.8 0.9 1.0 1.1 1.4 1.6 67 Iron and steel 0.2 0.3 0.5 1.0 0.9 1.2 68 Nonfcrrous metals 0.8 0.5 1.1 1.4 0.8 0.8 - 333 - STATISTICAL ANNEX CommodiLy 1985 1986 1987 1988 1989 1990 69 Metal manufacture. nes 1.5 1.7 I.9 2.3 2.6 2.8 70 Unspocial code -0.0 0.0 0.0 71 Machincry, nonclectric 0.1 0.2 0.2 0.3 0.4 0.5 72 Electrical machincry 0.4 0.6 1.1 1.7 2.5 3.0 73 Transport equipment 0.0 0.1 0.1 0.1 0.1 0.2 go UnspeciAl code - - - 0.0 0.0 0.0 81 Plumbg, hcatng, Ightng equ 1.2 1.3 1.4 2.2 3.4 4.8 t: Furniture 1.3 1.1 1.4 1.8 2.0 2.1 83 Travel goods,handbags 12.3 14.4 18.7 23.4 26.9 30.6 84 CloLhing 7.9 9.5 9.9 11.1 13.8 14.4 85 Footwear 2.4 2.7 3.5 5.5 9.2 13.3 86 Instrmnts,watchcs,clocks 0.7 0.9 1.1 1.5 1.B 2.1 89 Misc manufcLrd goods ncs 24 2.8 4.0 5.2 6.9 7.6 90 U.N. Special Codc - - - 0.0 0.0 - 91 Mail not classed by kind 0.1 0.1 0.1 0.1 0.1 0.1 93 Special tansacions 1.2 1.2 1.3 1.1 1.0 0.9 94 Zoo aiimals,pets 3. 4.2 3.9 2.6 2.5 2.4 95 War fircanns,ammunition 0.1 0.1 0.3 0.2 0.3 0.4 96 Coin nongold,noncurrent 0.8 0.6 1.0 2.9 2.6 4.3 Total exports by China (S mU) 27.751 31,903 42,593 55,228 68,402 82,104 Total world cxports (S mU) 1,744,612 1,921,583 2,266,577 2,603,785 2,816,779 3,197,968 Pcrcentage share into world cxports (%) 1.6 1.7 1.9 2.1 2.4 2.6 Source: UN COMTRADE Database with Reportcr: World; Partncr: China; Flow of Trade: Imports. - 334 - STATISTICAL ANNEX Table A7.3: CIIINA AND 071ER EAT AsiAN COUNTRINES SIIAwE IN 111 WoRiD EXPoRTS OF SscTm PIRODUCTS (%) Advanced Olher Easl Asian Eust Asian World SITC China exportcrs xorcrs (S billion) code CommodiLy 1iLe 1985 1990 1985 1990 1985 1990 1915 1990 China's Top 15 Exports 651 Tcxtie yam and thread 6.2 5.0 9.9 12.0 1.1 1.7 12,300 22,321 652 Cotton fabrics, wovcn 13.6 10.7 13.7 26.3 2.9 2.5 7,171 15,735 653 Wovcn texlfes noncoLton 6.4 8.0 16.5 22.2 2.0 2.4 14,374 31,095 656 TcxtUc, etc., products nes 15.7 18.9 13.5 9.8 1.9 2.3 3,730 6,894 722 Electric power machine, switchgear 0.4 2.1 7.6 9.6 0.8 1.7 25 205 59,505 724 Telecommunications cquipmcnt 0.8 5.9 18.0 17.3 1.5 4.9 32,825 80,167 725 Domestic Ecctric Equipmcnt 0.8 8.8 15.0 11.6 0.2 1.6 9,156 19,711 831 Travel goods, handbags 12.3 30.6 46.2 26.0 0.7 2.5 3,720 9,771 841 Clothing not of fur 8.0 14.4 31.9 20.7 2.9 4.7 45.448 110,151 851 Footwear 2.4 13.3 32.1 25.7 0.7 4.7 13,633 27,857 864 Watchs and clocks 3.0 9.2 21.4 21.3 0.9 2.5 6,197 13,913 891 Sound recorders, produccrs 0.3 4.0 8.0 13.6 0.2 3.6 19,778 37,167 893 Articls of plastic nes 0.9 4.9 14.2 11.6 0.7 1.8 9,355 27,642 894 Toys, sporting goods, ctc. 6.5 22.3 39.6 25.2 0.9 3.0 9,983 27,232 899 Other manufactured goods 10.2 16.5 21.4 16.5 1.0 2.4 S.228 12,597 Possibilities for Future Diversification 821 Furniture 1.3 2.1 11.0 7.7 0.7 2.7 12,119 29,548 7192 Pumps, centrifuges 0.1 0.4 5.4 2.9 0.1 0.5 13,457 29,087 7151 Machine tool for metal 0.4 1.2 4.6 5.6 0.0 0.1 6,763 17,267 8616 Photographic equipmcnt nes 0.1 0.2 0.9 2.9 0.0 0.0 5,566 12,669 71992 Clocks, valves, etc., nes 0.1 0.4 3.0 3.9 0.1 0.2 5,738 12,345 695 Toob 1.8 3.4 7.9 8.3 0.1 0.2 5,921 11,711 7195 Powcred-tools nes 0.1 0.3 3.7 5.4 0.1 0.1 4,718 11,581 8617 Medical instruments ncs 0.1 0.6 2.1 2.9 0.7 1.2 3,932 9,368 7171 Tcxtile machinery 0.3 0.8 1.8 4.3 0.0 0.0 5,669 15,805 6989 Other base metal manufactures 0.8 1.5 9.2 8.4 0.3 0.9 4,579 9,254 7294 Automotive electric equipment 0.1 0.4 3.1 4.2 0.2 0.4 3,223 7,241 694 Steel, copper nails, nuts, etc. 2.9 3.2 10.9 13.7 0.2 0.8 3,621 7,037 6981 Locksmiths wares 2.2 3.6 11.2 10.6 0.1 0.3 2,806 6,399 Note: (1) Advanced East Asian Countries-Korea. 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