Repoit No. 11568-CHA China Foreign Trade Reform: Meeting the Challenge of the 1990s June 18,1993 MICRMXGRAPHICS Country Operations Division China and Mongolia Department East Asia and Pacific Regional Office Report No: 11568 CHA FOR OFFICIAL USE ONLY _. * .2 .aA0 i 04 wa- J E9z*^t A 6 Th&~~ets a ., . - . D ,* ^i 'ia .e -sdi -cpe . - .~, -. , f __dwes.ts.ci4tan ofeir, ,fl da,,;es - ,,contertsma bof, erWise, ~' _ " CURRENCY EQUIVALES Currency Unit: Yuau (Y) $1.00 = Y 5.73 Y 1.00 = $0.175 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ACRONYM AND ABBREVIATIONS ACP African, Canbbean and Pazific (Countries of the Lomb Convention) BESD (World) Bank Economic and Social Databse BOC Bank of China CES Constant Elasticity of Substitution CET Constant Elasticity of rransfonution CGE Computable General Equilibrium (Model) CCPIT China Council for the Promotion of interatonal Trade CETDC China External Trade and Development Council CNC Computer Numerically Controlled COEs Collectively Owned Enterpises COFERT Commisin of Foreign Economic Relations and Trade COMTPRADE Commodity Trade (System) DIP de facto import promotion DLUC Domestic Leers of Credit EC European Commission EP Export Promotion EPOs Export Promodon Office ERP Effective Rate of Protection ETCs Export Trading Companies ETDZs Economic and Technology Development Zones ETE Export Tax Equivalent FDI Foreign Direct Investment FEACs Foreign Exchange Adjustment (Swap') Centers FFEs Foreign-Funded Entepris FlEs Foreign-lIvested Enterprises FT Free Trade FrA Free Trade Area FTCs Foreign Trade Corporations GATr General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross National Product GSP Generalized System of Preferences FOR OMFCIA US ONLY ACRONYM AND AREVIATONS (conu GTCS G en Trading Companies GVIO GOs Value of Idustri Ougtp RKDTC Hong Kong Trade Deveopmt Cou RS Harmonbed System HTZ ih Technology Devopment Zon Interlatdonal Moeary Fund iS Imp Subston I lSO Itraional Stdards Orgizaton nr.s Import Trading CompaniS JETIRO Japanese Exp Tradig Ogizato KOTRA Korea Trade Promoton Corpratio LES Lie ExUre Systm LTCs Lage Trading Compaes MFA Multfiber Anrrgemen )tFN Most-Favored-Nation (sus) MOFERT Miltty of Foreign Economic Relations & Trade MOFTEC M sry of Foeig Trade and Ecoom Cooperation WPS Maes Product System NAFTA North Ametican Free Trade Aea NIBs Newly Industrialized Economies NTB NoIatlftarer OECD Oranizain for Economic Coopation and Deveopm PBC Pl n of China PEPed Pmoon sNEs Prdbton lheworks for Expors PTA c ydride QCC Qualit t rol Circle RS Richar4 A Stone (algoritm) RCA Redaled Comparative Advanage REER kee1 fifeve Exchage Rate RMC ftlde* Mission in ChIna SCEIMO Stae Council Maciey and Elecomnics Import Offic SCETO Stte Council Econmc and lTae Offi SCETC &St C cil Economic nd Trade Commiso SAECs Stae Administration of Exdcange Ccntol SEZ Specia Economic Zones SITC Stndad ineratona Trae Classfication SMART Softwae fr Mare Analysis and ResriP o on Trade SOPs Ste-Ofted Etepis SPC Stae Planig Commision SRC System Reform Cmmision STDB Singpore Trade Devdopmen Board TVEs Towhip and Viae E Dntises UN United Nations UNCrAD Uned Nations Conferce on Trade and Deveopment US Utd States USSR Union of Sociist Soviet Rebics XTB XMamen Intenaonl Bank This document ha a rsictod distribution and may be used by recipients onl in the p:-"ce of their ofcal dutioL Its contents may n othewise be disclosed wihout Woi Bar. .ruthor, on. CONTENTS Contributors ......................................... Xvi Execlutve summary ............................................ Ix 1 ChIuns Mcndie Trade-Trends and Persp"wv . 1 A. htrduction ... . ... ... 1 B. Trends in theTraelae .. ...................... 2 C. P spctv u sonChlnsnCposPpor Pff.nian.n. 4 ThI hChaig Composition of Chns Exports .... 6 TbeRoleofAssemblyOpeatons .......... . ... 11 Marets for Chins Expors .. 12 leRole oftheNonstateSectwo ..... 13 Th RoloeofHongKong . .... 15 D. Trends In China's Mercadise rinports ........ ... 15 The Strur of Mrandiso Imports . 15 E. Tradein Chia Econy: SomeCowludingObsvatons ...... 20 Endnotes ...............................,. .. . . 23 2 The Tra Plnnig and Foripn Eap Systm-Managg Refms Throuh A Period of tlodnon .................... 24 A. Forign Tade Pbnnig, Foreign Trade Corrations, and Subsidies . ............................ 24 The 1988and 1991 Re nm s ........................ 26 B. Ihe Exchge Rate Regime ........................... 28 Foign ExchZe Plan ........................... 29 ReentonSceme ............................. 29 Foreig Exhang Murks ............. ........ 31 C. Brad pact of Recet Deeopmens .. .................. . 34 Impa of DevdopmentsintheBxdmp PeatRegime 34 impat ofRf inTrade Planni.ng 38 D. Rmaining Problem and ot Future R rm 39 Export Phlnning d the Foreign Trade Cona .39 import Plai .g. .. ....... 40 Exdage.RaIes ..ues .......... .. .. 41 Enidwts ...................... 45 -il 3 Ch 's System f Foreign Trade Controb: A Qbnitadve EvLuaton .... ................................ 47 A. Objecdvs and Instrments of Chs Sys"m of Foeign TradeControls ................................... 47 B. Tarlb ......................................... 48 TariSticture ...... .................. 48 Conlusions .... ...................... 56 C. TariffReveesandExemptions ... ............ 57 Admnistraonand Revenue Raising: Implication of Chis prDuty Sysm ..................... 57 Inpact of Exemptions on Exports and Economic Performance ... 60 Condusions ............................. 62 D. Nontaiff Buders to Trade ............................ 63 Types, Aninration and Coverge................... 63 he Stuctr of NTBPnoecn .............P n......... 66 Concusions ............................... 67 E. Export Cotrol and Taxes ............................ 67 F. InpatofTdeControk ............................. 69 Inteaional Price Compaisos ...................... 69 Eflectv Rates of Protection ....... 73 Evidence fom Secoral Analyss ............. ..... 75 Conus ...... ... 78 EAdnotes ........ '. 79 4 Priorities and Pwrspectives on Reforindg China's Trade Regime....... 80 A. TrafdStrategyandTradeRegime Orletaion ... 80 B. RdormPrPioritiesfortheImmediateTerm . .82 Canalized bIorts and Products Subject to Mndaoy Import Planing ......... 82 Import Lcensing d Quotas. 82 Import Controls ... . 83 NTBs and Bane of Paymens Managemet.. . 84 TariffExemptions .... .. .... ...... 85 Export Controb and Taxes.. ... ... ... ... 85 C. Priorities for the Medium Teer .... ...... . 86 ReducingProtectiononConsumerGoods . . 87 Reducing Protction on bItmediae and Capital Goods ..87 Redcclg theBian apingtRaw aMeias ......... 88 D. Altenative Approwaes to Reform . ... .. .... 88 TI Ba Case: Effects of a 50 Percent Rai Cut in EffdveTa....... 91 ImnpactoftheOtherRefom Scenarios.. 94 Summary ........ ..... 97 Emdiotes ................................. ... 98 S Towards a Program for Trade .aio .. .. .... 100 A. Timing, Sequening and Iages with Other Reorms .10......... I Trade Rem and Reform of the Plmning System .......... 100 Trade Reform, Reform of the Exchamge Rate Regime and _ icrwnonilcPolicy . . ... .. ...... 101 TradePolicy andPriceReform ... 102 Trde Liberalization and Enrpre Reform 102 Trade Liberal on, Support for EWxp and nustrial Policy 103 Tade . * m and the Inteational Envionment .104 B. Recen Refbrm inltatiavs.. ... 104 Tanspvey ......... . 104 LlerEafzaoo t o thegime. .. R. g.. 105 C. c.... . . .. ... 106 Recmmendations for the Tmiteerm.m . .. .106 Recomendatbonsfor the Mdum Term .107 Endnotes ..................................... ..... 109 6 PolIie for Export Devielopnnnt: A Critical Evialuton ....... .. 110 A. Istroducion ... ...... ...... .. 110 B. Develping Buyer-el Lnbs: Te Role of Trding Companies .... 110 The netona Eperience . .... ... . 111 Ie Experience of Chinas FMC ..... .............. 113 Lesons fo FTCPolic i China .. .. ... ..... 118 C. Developing Buyer-Seller Links: The Role of Public Support Sevices . 120 PublicSupportfbrExport Marketig . ................... 120 Pubflic Supportol .................rtforQualityContr... 122 Puoic Suppo for Odher Nofinnci Export Support Seavices . . 125 D. EVpo Findwg ................................................. 126 RB ^e m ............................... :::.......... 129 E. Produc Tagetlng frEpo . . .... .......... 129 Conclusions ... ................................ 134 F. (eogaphical Targedg .... .......................... 134 PoHlies foCoastlDevelopment .................... . 136 AmssisgthiePaomanceofSEZsandOpenCities ...... 137 Leons and R nd...................... 139 Endes . .......................................... 141 - iv - 7 Etlernal Markets and China's Exp ...................... 143 A. Patecon AgansChiin'sExports: Theacts .. ............. 143 B. Evolving Extnl Markets and Inplications la Chias Exports .... 150 mplications of the Uuua Round for Chins Expors . ...... 150 he Potential Effec of Regioadism on Chines Expots. ...... 151 Implicatios of a LossofChiasProvwonal nFN Status in the US 155 C. Perspecdves on Future Dhldeos forrChina'sExpots ... ........ 158 Divrsification of Markeft .......... ........................ 158 Product Divasification and Comp"ive Advantage ..1....... 58 MhmPotentldaforUpgradingCh na'sMijo Exports ......... 163 OppountesforDiversificadon .......... ........... 164 Condudons ................................... 166 Endnotas .......................................... 167 Referenc ... . . . . . . .. 169 1.1 D ating Labor- and Capita-hI sivebMnu& ours- ......... 178 2.1 Crteria for Access, to FEACs .................... .. -. . 180 2.2 Operational MIebanism of FEACS .... . ....... . 182 2.3 Ugnd Chin'sForgnExchaSystem . . 184 3.1 Effective Rat of Protection Calculatons: A Metodolo N . 193 4.1 A Computable Genea Equillbrlum Modd of the CineseEconomy . 196 6.1 Developing Buyer-Seller Links: The International Expetience .208 6.2 Cines SEZPolkcy-AnEvauation .221 6.3 EcnomicZonesinCh ad ATaxnomy .246 7.1 Descrwiption of the SMART Trad Pmducdtn Model used to Side the Effects of a 30 and 50 Percent Liberdizaon of Nontariff Barriers and TxariM ........................................ 252 7.2 An Assessment of China's Changing Revealed Comparative Advantage in Labor-lIensive Manuacu ....... ..................... 254 Statdstcal Annex .................. .. . 260 .-V TAmLES IN Tgr 1.1 Structr Changes in Cina Major Exports: Selected Years from 1965 to 1990 .......................... S 1.2 The Value and Share of Major Tr-Digi STC Products In Chin's Exports-Selected Years from 1965 to 1990 .............. 7 1.3 nhe Value and Share of Various Types of Produ I Chin as Exorts: Sdected Years 1965 to 1990 . .................. . 9 1.4 ConnatIo oChia's snd Comparator Country Export ........... 10 1.5 Export from Assembly Opeaton .... ...................... 12 1.6 Marks for China Expors, 1990 .................. ....... 13 1.7 Townshipand VilgeEnterpriseExpoms ...................... 14 1.8 Chin Stmetural Change In Chinas Imports (CIF) Custm Basis ...... 16 1.9 Strcture of Chins Iorts (CI') Customs Basis (A Compwion wth Oder hIpoers fbrl990) ................................... 18 1.10 Origin of Cheinas Ihpos: A Compario with Other Econmies of East Asia (Selected Yea) .. 19 1.11 ShreofMerdhadLseTrade nGDP: SeectedCounries ........... . 20 1.12 China The Structure of Producion, Imports and Exports, 1985 and 1990 ...................................... 21 2.1 Losses of Foreign Tade Corporations Finced by CeM Uovetn,nnBudgeew. ............. 26 2.2 Forep ExchangeRetntlon Rates, 1991 ..................... 32 2.3 Exdage Rate and Trade Tax Rlationships under Chin's Exchage Rate Systen ............................ 35 3.1 AvegeTarffLevelsbyBroadRS Category ................... SO 3.2 Average Tariff Levelby HSSecin ........................Sn. 51 3.3 IT Tariff Sptemsof China and Other Large Developing Countries ..... 56 3.4 The Commodity Pattern of Taiff Sym in China and Other Lage Dvelping Counties (Unweighted Avage TariffRe) ............R . S7 3.5 ImportsbyqprtDotyCConcesionCagwy ................... 59 3.6 ValueoflmportandReveriesf rom mpottDuties ................ 60 3.7 Covege of Notaf Bariers by Sector ad Type( ) ............ 61 3.8a Estimat of Protecton to Importables based on Intenaional Price Comparw (1iM)f ................................... . 71 3.8b Esmates of Exort Taxaon (1992) .... 71 3.9 Efective Rates of Protection to Cnse Industry (1991) . . 74 4.1 Efcs of Rducdons in Ptection Valous Scenaios. 90 4.2 Effecs of Reduction of Foreign Excage Retention Ratios for the Machnery Sector ..... 93 4.3 Nontade Barriers before and afe Import Liberalization Proposed byChina . ..95 6.1 ForudeCredk ................... . 127 6.2 Exrs of Tageted Seor, 1978-91 ......................... 131 -vi - TABLus IN TEhr (contd) 7.1 Avea Level of Tariffs Chines Exports Encounter In Nine Major OECD Mrx .............................................. 146 -7.2 AnalysIs of the Rdative Importance of Nontaiff Barriers on Exports from China and O Developiag Countries .................... 147 7.3 Sectoral Coverage of China's Exports by Nontariff Barriers in the UuItedStatesJapannd EuropeanllCommunW ...... .. ... .. . * . . 148 7.4 EstImated Effet of a 50 Peroe Lberukaon in Trad Bariers by the EC, United Stateand Japnon mportsfromChina ............... .. 152 7.5 Estimats of Trde Diversion in the Uitd Stas due to a Meim- US Fre Trad Arngement ................... . .... * ..., 153 7.6 Ars of Potntial Dp nof Cha's Exports to Canada due to theU dSas n FTA .......................... 154 7.7 Projections of the Trade Effects of Applying United States General Tariffs on MajorChineseExportProducts ........................... 157 7.8 Crss-Country Comparison of Trends In Average Labor ntensity ofExports ......................................... 160 7.9 China and Other East Asian Countries Share in te WodddExportsofSelected Poducs ............... 161 7.10 Redave Prices Recived by China as Other Exporters to the EC, Japan and UntedStatesinl990 ........... ............ ....... 163 Bo=0 IN Tz1 3.1 TheConstructionofThreeSmallPolyesteFactodesin Ckengdu . ...... 76 3.2 Supply bflances wihin the Refrgator Industry: Asymmetric lJvestmnent ReqrenmInt ................ . 76 6.1 Forep Trade Corportio niChina Two Examples .116 7.1 Can Imternational Markets Accommodate a Major Chinese Trade Expansion? 144 7.2 Current Protectionism and China's Trade Prects: Some Compaisons with an Earlier Period ..145 IGURES IN TEX 1.1 China: TrendsinTrade,1978-91 ............................ 3 1.2 Broad Money and Impots ................................ 6 2.1 Trends in the Officia and Swap Market Exchange Rates .... ......... 36 2.2 Trends in Reai Effective Official and Swap Market Rates .... ........ 37 2.3 TheWeighted Average Excmge Rate and Exports ..... ........... 38 3.1 Tarlf Structure-Food, Bverae an Tobacco ....... ............ 53 3.2 Tarff Structure-Raw Mvaterias..54 3.2 TifStume-Ra Ni"hW ........................ : . ... .... 5 3.3 Tadf Structure-Man ....u cture.. .. 55 3.4 Strucre of NTB Coverage, 1992 ............................ 66 -ii- FIGUI IN TEV (coned) 7.1 Nomal PM i Aganst Cias Tile and Clothing Exort to the Uia Statem In 1988: Taft, Nonuiff Bale, ad ComXbind Protec18eEffet ........................... - .. . . . 149 7.2 nalysis of ChWis Revealed Companaive Advatag in Broad Groups of t Products, 1979f80 an d 198999 <.......... 162 7.3 Selected Labor-bn Ma urud Products In which China may have a Meor Fu Expt Potential .... ....... ............ 165 - Viii - CONThIBUTORS This report and its annexes are based on the findings of a mission that visited China duaing may-Jue 1992. In addition to interviews and discussions In Beijing, the ission visited Jinan and Qingdao (andong Province) and W%ha (Hubei Province). The mission consisted of Peter Harrold (mission leader), Rajiv Lall (dep mission leader, export developmnt and trade refom strategy), Alexander Yeats (expon prospets, Will Martin (tariff ad nonutiff barrier (NrB) regime, protective effects of exchange rate regime), Nizholas Lardy (rcent rfoms), David Wall (special economic zones) Hoe Ee Khor (MF) (fweign exchange reie), Sona Zhao (RMC) and Chen Xingdong (tMC). Research eas in Washington wa prvided by Teja Raparla. Rajiv Lall is the principal and coordinatg ato of the Report The mission reived valuable collaboration from a team headed by Mr. Yuan Wenqi, Director of the Research Deament of Chisa's Foreign Trade at the Instue of Finance and Trade Economics of the Cbinese Academy of Social Sciences. This team was comprised of Massrsi. Chen Jaqin, Li aoxi, Yag Shangxiag, Yu Lixin, Feng Yuan, Zhang Li and Lu Shenglibng. Spec ths are owed to Mr. Ji Chongwel, Senior Resech Fellow of the Devedopment Reeatch Center, Mr. Liu Xiangdong, Assistant Minise, Mnstry of Foreig Trade and Economic Cooperaton (MOFTEC), and Mr. Song Halpeng, Deputy Director General Of the State Admion of Exchange Control (SAEC) for their guidance and suggestions. Ackowledgements are also due Mr. Qlu Xichun, Deputy Division Chief, Department of Policy and Delpment, MOFTEC and to Mr. Wang Qin Hua, Division Chief, Depament of Foreign Ttrde, State Council Economic and Trade Commission (SCETC) for their commes. The mission grateful to the Mistry of Foreign Tra6e and Economic Coopaon (MOFTEC) for facilitadg is work in Beijing, and for helping to make the visits to Shandong and Hubei provinces frit. Finally, the mission extends its gratitude to all the officials from the various government agencies, trading companies and enterprises with whom it met. EXECUTIVE SUMARY A. OvERmvLw i. Since the launhg of the refrm program In 1979, the prmotion of aeral trae9 has bn centra to Chinas ef to modriz its eonmy. The policy has met with rearable success, wh expors having hceased nnd and Impots morve t sevenfold over the period. This has been accompmnied by rtpid chang in the tiinal support system for foreign tade and in the incentive framework. But, China has a long way to go In replacwing direct de Imnerventon with indirect price based isruments for managing its trade policy, and much i still unclear about the functioning of Chia's ade regime. in. Histodrcally, Chinas appoach to trade policy has been aimd at chig export growth for th k^ of genferatng foreip exchange wkhout sufficie regard to Is O, while import policy has frtured contols to regulate pmt growth. Although as a sult of the 'open- door policies- of the 1980s, deci oncenag exports hwbecome casi y ddtmind by the mrket rather ta adminitrave fat, reform of th import egim has, by comparis remained neglected and is now taking on some urgeacy. The report addresses y Ius in import a well export policy for accelratg te county's transrmai Into a market basd econloy. Four imta concusions emerge. I. F, uhile the rle of planming in Chis foreign trade sector has been declg, several problems of transition remai. The repor t reoms that would enable China to tasform what rema of its rade and fign exchange plamg systems Into Instrments for the Idire maagement of trade policy. hv. Second, the tr t finds tht depito a complex aray of taff and nontarff barrien to trade, China has bme relatively open economy, with evidence of cosiderable taf rdudancy. It demonts t the present is, not les for this reon, an opporn dme fr China tD embark on a substanve program of trade liberalizatkioL mott competi would be an imo instument for helpig China make its sta owned sector mor responsi to market forces-an issue of mounting concern for the ooury. Import liberaliztion would also con to the growing momem of China's drve to become a fuil member of the internional trading commuIty. Moreover, In view of its remakable export perfrmane so far and its comftable reserves position, Chin would appear to be well positioned to launch such a progam at tis tim. v. iW, sdi the dinishing rlac on export planng, th Chnose gover has been actively involved In export development Aside from financi l o and incenv, the governm has directly provided a variety of other suppor secs inud maeting and qualit conr. Such spport dsould be maintind. Howev, as China conus Its drive wards a market economy, the way in which export as _t is deliveed will need to be refimed. 'Me report proposes a programn of action for making the institutional support sucture for exports, a public support for export developmen In gnedr, more effective. vi. FLwily, the success of China's continued reforms in the area of foreign trde depend on its abllty to sustain a healthy rato of export growth. Ile report finds,tbat, ein today's uncertain global trading enviroment, China should be able to mainin its eport perfmance through quality improvement and some product amd market diversification. On the othr had, there is litlo doubt that the successfil conclusion of the Uruguay Round would be very helpful for China, or that the discontination of China's Most-Favored-Nation (MFN) status in the United States would lead to significant trade dislocation. B. MAIN FBAMM OF CINA'S TRADE PWRFORMANCE vii. Over the decade of the 1980s, Chinas exports outrfomed those of most other countries, including such newly industrialized economies (NEs) as Malaysia. Ihe only economies tat resred average anmalized export growth rates higher ta China were Thailand (13.2 percent), Korea (12.8 percent), Taiwan (China) (12.1 percet ) and Portgal (11.7 percent). China is now the eleventh largest exporting nation in the world. It exports about 17 percent of the gross value of indus output (GVIO) of its overall m sector. Institutional decentraization, foreign investment (especily from Hong Kong), depreciation of the real effeve exchnge 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 FrCs compete increasingly fiercely for export business. From no freign 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, almost two thirds of China's manufactrg exports are now based on processing actvity tat utilizes duty-free imports. viii. Another development which has had a bearing on China's export performance over the decade of the 1980s has been the delining importance of trade planning. Direct subsidies for exports have been more or less phased out, and export targeting has become progrsively more macro in naure (now operag essentially only through the foreign trade contract sysem-pma. xlii). As a result, the composition of Chinas expo has been allowed to evolve increasinly along the lines of the count's comparative avantage, with te cntributdonof nonste and foreign-invested enterprises also growing very fast. Nonstate and foreign-funded enterpises account now for at least one third of China's exports. Manufactures as a whole constitte 80 percen of exports, with labor-intensive manuf6ctures contributing almost thre fourths of total exports. As in many other East Asian economies, clothig, toys, sportig goods and footwear have emerged as amongst the most dynmic of Chineas export sectors. ix. Unlike exports, imports seem to have remained subject to a much stronger hand of government management. Over the 1980s, import trends closely followed trends in planned domestic economic activity, and appear also to have been sensitive to changes in administave contols such as foreign exchange retention and import licensing. Overall, the patern of Chinas imports renained very stable and reflected the ountry's import strategy of asu g supply of key raw mates and acqrig embodied technology, while minimizin imports of consumer -xi- goods. The degee of central government control over imports has been dimiishing, but even today, over 50 percent of the country's foreign exchange eaing are subject to central governmen contrl (para. xv), and 50 percent of imports are subject to some form of nontaiff barriers (NtBs) (paras. xxii-xxvi). X. On the whole though, Chia's economy has become increashgly open. Most remarkably, the share of merchanise trade in Chias gos domestic product (GDP) went from 10 percent in 1978 to 31 percent in 1991, with Imports acountg for 15 pecent4/ Based on this measure, China appears to be more a twice as open as 1di and Brazil, and significanly more open than the United States or Japan. Moreover, Import peration in certain sectors is extremely high. For example, in 1990, Imports amounted to an estmated 28 percent of GVIO in China's machinery and transport equipment sector. xi. While the growing openness of the Cbhinese 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 penepration and rising export rstios over the same period. Itus, the respective shares of light Wd heavy industries in total industrial output rmaine viruly unchanged at around 47 and 53.percent between 1985 and 1990. Likwie, the sbare of consumer manufactur (with such heavily export-orented sectors as clothing, footwear and travel goods) has also stayed remarkably stable at around 8 percent of GVIO. Tbis suggests tha investment in China remaned heavily directed, at least until the late 1980s, such that the allocadon of investment across sectors went largely unaffected by the county's changing patems of exten trade. As open as the Chinese economy is today, trade still does not appear to play a sufficient role in domestiq resource allocation. C. TRADE AND FOEGN EXCHAG PLANNiNG: Tm REMAI G ISWS Trade Pbnnig: What Next? xii. . China's trade system has moved from one in which, at the start of the reform period, almost all trade was planned and carred 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- ra&mg ibsidy and cross-subsidy, to one in which, in 1992, only import subsWes remain, and these are really enterprise subsidies. Such export planning as exists now takes place through the foreign trade contract system in the form of value targets for export enings. xiii. The present foreign tade contract system, although intended to be fixed on a bttom.pu basis, still takes on a compulsory quality for several reasons. irst, the value txgets negotiated in the contract for exports and the amount of foreign exchge to be remanded to the cee are still mandatory. Second, fulfillment of the tagets in the contract is a precondition for awarding bonuses to officials responsible for carying out the export plan. Each X1 liis fig needs to be treate with cauo First, Chinas GNP is likey to be Second, customs statistes an exports include the fill value of exports based on processing of imp huts, wbich tends to exage the role of trade in to Chinese economy. Excluding the latter woldd reduce the value of Chinas expts in 1990 by about $11.9 billion, and th trade to GDP share to about 28 paceaL Depeniag up what estima of hd's GDP is take, the trade to GDP share could be anywhere betwoee 18 and 26 percenL -xi prvc contully detemined targets are n tti disaggregated and asigned as targets to various prvia trading companies. Thi, rebates for domestic taxes levied on export goods have now boee linked to fDfill trges for expors. The problem is a te targts hv to be met by FTCs that are not enirey free to choose what goods they can tade, and are no longer digiblo fr subidies to covct their loss making exports. As a rsut, FTCs an pay fll ateni to profability whle at the sae time meedtig thei obliations ur the forgn excan contract. Avablo eviden suggests the incidenc of bad bank loans to FTCs bas gone up shaply sinc the contract responsibility system was introduced and subsidy paymen begato be phased outin V188. xiv. In order to address tils problem, the authorites neod to take the reforms of the exPot planning system to their logical conusion as soon as pssible. The trade cona responsibility system should be abolished and Fs should be allowed to work towards maimizig profits rather thad foreign exchange earnings. inkg bonuses to profits, insbad of to forei exhanp tirgets, would motiv FSCs to market only profble exports, thereby genating export eaigs for tie country without concomitant domestic currency loss. Such measures will, however, not b effective witout further Istuional rform of the FTCs themseves. FTCs need to be d greater autnomy (along the lines of the rec eulatons p tining to the opert mechns of stat-owned entes) so at they c ction as truy independent profit centers. At a minimum, FTCs must be grand the right to iwooa their own product scope. Xv. On the Import side too, as noted above, the hIportance of plannig has declined, with the coverag of the trade plan having fallen to under 20 pecet of al Imports (from 40 percent In 1988), and this trend can be expected to coniue. However, a large pwopotton of nonan plan imports continues to be subject to ad e regulaton through tg tol of foreig exchang allocations. Ihe cetal gov erm stll onols 50 pet of all kfeig excge eanings. Fudn for key projects and for their associaed imp Is aready allocated as part of the gverme investmont program and the state indu policy. It is, tihefor, redundant to also administatvely assig foreign excage for th purpose of procn these imports (which acoun for more ta 30 perce of all imors). All concened SOEs or pvernm t agencies ought simply to purchase the forei exchange they need In the fored exchango adjustmet Cswap") cenes (EACs) ntead of having loc e surrender 30 percent of their foreig exchag eanins to the cetal government at the swap rate, and dte having these funds allocaed to them administr ly (para. xix). MheEhang late Reghw Towards Convertibmty xvi. Since the establiment of PEACs in 1986, whh created an offici two-er exchage rate system, thirk volume of transactions has gw rapidly, and reached $25 billion In 1992, ar about one half of all cash Imp . The FEAC system has serted two key functions: it has proved critica relief to exporters in maintaining export incetives, and it has frced the governmen to move the officia rate to more maket mined levels. Nevertheless, important deect remin xvii For one, the exst system of quota retention is flawed. Quota are monopolized by FTCs, with most local mn etprises being left wi ltle or ne of the fig exchge they help genert. Since FTCs thmsves do not have any diect Import le nts, they have tendd to hoard retention quotas for spelative purpos. More -xi - imortnly, the system of tadig predom lyin quotas stead of cash has deied the Peoples Bank of China (PBC) an Instrument for intrveing in the foreigp exchange market for pupos of stabilizing the exchdage rate. xviii. Second, although 80 percen of foreign exchange earni are now priced at the swap rtme, the market for foeip excage remains thin and fragmted, in large part becse the govnment stll does not purchas its foreign excbange requimens through the PEACs. Bedides, the differtil between the swap market and the officiat exchange rate, down to uder 10 pct in 1991, has once again become significan The differential exceeded 45 percent at the end of the first quater of 1993 (despie atempts, later abandoned, to enforce price ceiings in the FEACs). xix. Structal reform of the exchange regime has theefore become urgent. is the sated objective of the autrites to unfy the exchange rates and make the renminbi a convertible currncy. Ihis process needs to be accelerated trugh the speedy impl ation of the following rommended measures: (a) Replacement of the system of retenton quotas with a system of cash retention tha would allow entr to retain their foeig exchange in resident bank account, reduce the incidence of hoarding and allow the PBC to intvene, if neceary, to stabilize the swap market rate; (b) Elimination of remaining restrictons on access to FEACs (reflecting either the status of the purcha or the purpose of the trasation), and paralle creation of an integrated national swap market; (c) Wiening of the scope of FEACs to cover all curret account transactions (includin nontrade tansactions), and parallel abolition of all remaining surrender requements, with the govenment having to purchase al its uaret accn fo exchange needs ncluding for mandatory Imports) through the swap market; and (d) Abolition of adminitred foreign exchamge allocation for pririty investment projecs, and phasing o 7t of that for mandatory imports. xx. The dbove measures would make the renminbi convertible on the currt account, strengthen the links between the monetary and the etnal sector of the economy, and thereby placo a greater burden on monetary policy as an Instrumat fur Influencing the balnc of paymenu outcome. It is important, pardculrly in light of the recent trends in monetay aggregate, ta the authorities adopt a disciplined monetary policy stance while these mear are being implemented. xx Finally, as concerns the question of moving towards full convertabiity on the capital acount, although ther a some exceptions, the experience of other counties in gener sugges that a measred pace b advisable. Generalized opening of the capia ac:ount often leads to exchange rate inality. As such, the prudent cowse of acdon woul *'e to leave libalization of the capital account until after ipoat remaining structural 4Joi as, such as tho rdadtg to the Import regime have been implmented (par. xli4). xiv . D. REFORMING CINA'S TIADE REGME Prorities and Perspectves an Reform xxii. Despite the declinn importac of trade plannig, China still operates a relatively complex trade regime. Apart from conthmed reliance oni the mandatory iport plan, and the use of controls over the allocadon of, and access to, foreign exchange, impors are reuaed through tariftf, canaizaon (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 mandary plan coverig 18.5 percent of import. The Import regim, therefore, bears the marks of considerable government management. In addition, licenses, quotas and taxes are also maintained to regulate the exports of a variety of products. xxiil. Aftr seeing a substa increase over the last few years, China's weighted average tariff ui I992 was back to its pre-19S7 level, with a trade-weighted average of 32 percent. On average, however, Chinas tarffs remain higher, more numerous and more dispere than most other lae developin countres, with 69 ras and a standard deviation of 30 pere, compared with, for example 34 rates and 17 percent for Brazil at an identical average tariff rate. The multiplicity of objectives seems to account for the high dispersion of nas tariff structure, with both a desire to protect sectors in which domestic production is significant, and also to penalize nonasental consumption. This has kept import penetration in certain sectors very low and has provided high margins of protection to local production. xxiv. Ihe most important method of nontaiff control of Imports is to assign import rghts to one or a few FTCs, such as for timber, cement and fertilizers. This process we label canaliation An esImated 32 percent of total Imports are subject to control through cnalization. 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 instument for controlling import demand for reasons tgat have nothing to do with the trade plan. xxv. In addition to canalization, import licemes are used to serve multiple objectives. On the one hand, licensing is used as an administrative device to allocate a fixed quanty of planned imports and centrllylprovinciAly contolled foreign exchange. Here it functions as a quota allocation mechanim. On the other hand, licensing is also used for protecting domestic economic activity as well as for regulating, for balance of paymens purposes, the demand for imports fiaced through retined foreign exchange. In all, there are presny 53 broad categories of products subject to import licensing. These accounted for 12 pet of all RS tauiff lines in 1992 and covered 25.1 percent of Chinas total imports. Of these imports, however, more than half were aso subject to canalizadon and there appears to be some redundanq. In 1992, ftose ipot for which licek ig requiements applied in a nonoverlapping manner accounted for an estimated 11.7 percen of China's total imports. xxvi. Import controls (distinct from import licenses) are primarily used to protect the maciery and electronics sector, through the State Council Machinery and Electronics Import Control Offive (SCEMIO), and such controls cmrenty apply to about 7.7 percent of total imports. The combined effect of licensing and controls serves primarily to control three groups of products: agricultural raw materis subject to domesdc price control; critical domestic production such as steel and texiles; and nonessent consumer goods. -~~~~~~~~~~~~~~~X - "x%v - xxvii. Export qotslicenes covered 15 percent of China's exports In 1992. A large set of commodities subject to epott licensing was agricultural goods, such as beef, pork and vegetables, expord to Hong Kong. Her the objdctive of the liening arrangements is to increase the pries received for these commodities by conolling supply. Tho same is true for exort licensing in the case of such commodities a tugsten, in wbich China has a very large share of the innation market (40 percent). On the other hand, expor conts on such producs as rie and maize have been used to ensure the adequate avaiability of these goods domestically. The scope of export controlswas reduced somewhat this year. Even so, 38 broad categoties of products still remain subject to export qus/licenses. xxvii. The use of export licemses to increase the domestic avaiabiity and/or depress the price of a variety of key planned commodities has, however, been more signficat. 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 though 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 eail. XXix. In summary, China's import and export regimes appear to operate essentially to aise the price of final consumer goods reladve to producer intermediates, mirroring basic biases in Chia's general industrial policy. 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 m, such as coal, oil and thnber, are likewise depressed. On the other hand, the price of most inemediate and capital goods are maintained above import par. The prices of some intmedite inputs, especilly petrochemicals and texte yarns, that account for a sigifcant proportion of China's toWal industrial output, are eeptonally high. Ibis no doubt penalizes the competveness 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 Incrming effect of even higher tariffs on a selection of hbigher-tech nm cired goods. xxx. Notwithaing the foral regatory system that survives de jure, China's import regime is de faCto more open than the above descdption might suggest. First, despite the 32 percnt average nominal tariff rate (which is not dissimilar to average tariff levels in other developing countries), China's actual duty collection ratio is only 5.6 percent (more akdn to the situation in developed countries). The gap oetween 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 trated as 'concessional' in this sense. In addtion, it seems that a range of imports for "priority projects" are 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. Ihe rapidly decining duty collection rtios are in fact cause for some concern to the extent that they are caused by (a) increasing evasion on ptoducts for domestic consumptio r (b) increasing exemptions on import for use on domeic (as opposed to export) production. On the other hand, the small revenue contbution of Chinas tariff endows it with much gaer flexibility than most other developing countries. In parti, it enhances Chioa's optons with regard to the sort of fiunameal restructuring of its tariffs suggested by the report's analysis. - xvi - Dxxi. Second, price compaison data suggest that such proctive dices as hig nomnal tariff and nontariff barriers (NTBs) e, for many products (patcularly for a rango of mature consumer mufactres), not binting, i.e., their domestic prices, aldtough stl high than world prices, are nevertheless below the duty-inclusive prices of competing imports. For thes products, import licenses are redundant as a protective isrument and there would also appear to be considerable 'water in the tarifr caused In part by smuggling. Examples of such products include automobile tires, small petrol engies, cassette recorders, televisions and domestic refrgerators. In the case of cassette recorders, domsic prices are stll close to two- thrds above import parity, although they are 35 percent below the duty-inclusive price of competng import. Likewise, domestic prices of color and black and white televisions are between 80 and 40 percent above import parity, but between one-fifh and two-thirds below the duty-Inclusive price of imports. mxiid The foregoing analysis of the trade regime underlines the need for subs_taive refom. Aside from simplification, and reduction in the mber of instruments of control and tie dispersion of tariff rmtes, significant overall lowerig of tariffs (but with fewer exemptios, except for export production) would seem to be In order. There could be number of strategies for such a reform effort, and the report examines six alternatives through a simulation exercise. xxxiii. The resudts of the simulations provide severa useful points. Frst, they suggest that China should be able to undertake deep cuts in tariffs and NTBs without t resulting in any major contraction of even the most protected sectors such as textles and machinery. In a country of China's size, domestc consumption relative to imports can be expected to remain large and domestic dislocations are likely to be limited because of the considerable di tation between imports and domestic production. Import liberaizati should improve Chinas export perfmance, particularly of its macinery sectors. The condition for succe liberalizadon, however, is that acdvities within each sector should be allowed and able to switch to the more export-oriented segments and that macromanagement rmain discplined. Second, it seems that radial import liberalization (e.g., a 50 percent across-the- board reduction in nomina tariffs) is a superior option to selective liberalization limited to the currently most protected sectors. Nonetheless, amongst the possibilities for selective liberadization, the option of reducing import protecton on only the machinery sector is likely to produce the best rests for the least effort and dWocation. Third, not possible dlocation to downstream Industries, significant gains could be derived from the reduction of export controls and taxes in addition to the reduction of import protection * iming, Sequci and Linkges xxdv. It is evident thattrade reform on its own is unl.kely to yield the desired results. For It to succeed, progress in, and coordination with, other ars of policy and reform wiUl be essential. This does not mean, however, that reform of Chinas trade regime should wat Whie it is true that trade reform needs other reforms to make it fully effective, it is also trme tha progress in trade itself is likely to generate importat momentum for reforms other areas. Moreover, a number of factors relating to both the domestic situation and the intenadonl trdit evironme, suggest that the dme is indeed ripe for China to enbark upon a bold program of trade liberalization. xxxv. Trade reform in China cannot proceed without the further dismaning of th outry's trade and investment planning apparatus. In addition to the elimintion of the current - xvii - system of frei excnge plaing and allocation (para. xll-xv), the system of fJreign changecontrating needs to be replaced with onv In which FTCs are frea to purue profis rather than foreigp exchange targets. Further, k s imratve ta netment (especilly 1pian vestmen) be allocated in accordance with market signals. One step ta should be tk immediately In this context is to subanty raise the miimm le of Ivtment requiig cetral gove approval. xxxVI. Trade policy Is an intgr part of overall onomic policy. The evidence from other counties is clear about the importance of a real depreciation of the currecy for the succe of progms of trade liberaization. It is critical that steps mmeded above for unifying the exchange rate and making the currency convertible for all curent account transaction(s para. xix) be implemented as quicldy as possible, and certainly befor trade liberalization proceeds too far, not least so that the impact of reduced protection on the domestic Industri sector can be moderated through an apropriate depreciation of the exchange rate. Action on reforming the exchange rate regime is all the more importat now given the most recent tendency of the gap between the official and the swap market exchange rate to widen again Te experience of odter countries also indicates that trade reform will go much better if caried out during a period of relative macrostability. At the same time, by acting as a safty valve,' a more liberal trade regime can itself contribute to the management of aggregate demand. his a pertit consideration for China. With its comfortable level of international reserves and a cumet account surplus, China is weli placed at prent to use trade liberalization as a Meas to addre the threat of ovetheatig and the emerging shortage of essentalIndustri raw materials. mnvii. An Important objective of reforming the trade regime is to rationalize the sructe of inctives for domestic economic activity and thereby imprve resource allocaton If domestc price contros reman in place, however, the traderegime would be of lltthelp in accomplshing this objective. This is not to say, in the case of China, that trade libeaization should await finther price liberaization. China has aleady made very considerable progress wh regard to price reform. Ihe incidence of subsidies for imported commodities has declined y. 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 circmstances, import liberalization can be expected to be effective for an important segment of the economy even without removing such price controls as still remain. xxxviii. Enterprise efficiency is not only a micro but also a significant macro problem In China. Losses equivalent to almost 5 percen of GDP, and financed in good part through loans fom the banking sector, statowned e prises (SOEs) are the largest contbutors to the government's fiscal and quasi-fiscal deficit. Trade liberalizaton can be a valuable tool reform for altering the behavior of enterpries and improving the efficiency of resource allocation. To be sumcessfbl, it requires enterprises to be able to shift patterns of production and investment in response to chaging incentives. In this context, the growing volume and importance of nonstate epre and the Increasig flexibility being accorded to SOEs are encouraging trends which sugesat the time is righ for Iniilating trade liberalization. Indeed, import li zatn should not wait because once initated, it can play a key role in exerting competitive pressure an SO0s nd In maintaining the momentum for enterprise reform. mix. It should be emphaized that izaonof Chinas Industry wl require much more ta just import liberization. Parallel efforts wil noee to be made in such areas as - vill - support for export development (see pam. Iiii), quality control, worker training, technology polcy 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 meaniAgM indusial policy, then these two policies will have to become the mirror image of each other and be very closely coordinated, preferbly withn a single agency (see also para. liv). Id. Finally, as China's presence in global markets coninues to grow, it must become increasingly responsive to the demands of trade diplomacy. In its bid to attain fuil meership status of the General Agreement on Tariffs and Trade (GATT), China has already made significant efforts in trying to conform to the expectations of the International community in general and the United States in particular (para. xlii). However, the requirements for GATT membership are not precise and are a matter for some negotiation. If the treatment of recent applications to the GATT is any guide, China is likely to be called upon to go futher in relaxing its import regime. From the perspective of the emerging international trade envirnent too therefore, this appears to be an opportune time for China to pursue a substantive program of trade liberalization. Deflning a Bld Program of Trade Liberon xli. Over the last decade and a half, China has achieved a phenomenal upsurge in exports and trade. Most recently, however, its success is raising investment, growth and trade supluses, has raised the specter of overheafting and inflation. Besides, enterprise inefficiency remains an important micro and macro problem for China, and its dramatic entry into export makets has raised concerns amongst Its major trading partner 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 is that, given (a) its comfortable reserves posion, (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 redundanc and the de facto opemness of the economy, China is paricularly well positioned to implement bold measures in the area of import liberalization at this time. xlii. China has begun to move in the right direction. Recent import liberalization initiatfves undertaken as part of China's bid to attain ful membership status of 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 have yet been made on import planning, canalization or phased taiff reduction Considering the opportunit 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 recommendaons: xliii. Phase Out of Canalization. The distinction between Category I and H 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 FMs or enterprises with direct trading rights. Beyond this, as reliance on import planning declines, China should phase out the practice of canalization altogether. -xix- xliv. Phm Out of Ucesing and Control. Nonbinding NTBs (as in the case of a range of consumer n ) should be removed immedtely. ithe discretionary element of remaing import liceses and controls should be reduced by easuring that all decisions with regard to import licensing and controls are made only by central govement authorities accordig to criteria that are uniform and transparent. idv The Memorandum of Understanding (MOU) that China recently concluded with the Utd States is an ort initiave intended to reduce NTB coverage significaty by 1997. Chin must implement this agreement on a multlatera basis. Only then would this iniative conStitute significant progress. xIvi. Tariff Simplification and Reduction. Ihe number of rates and the level of tauiffs applying to consumer goods should be reduced right away. Immediate steps could taken on a ange of mau consumer products for which there is evidence of 'water in the tarifP (i.e., a partially redundant level of protection). On the basis of avaiable data, it appears that reducdons 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 currentily beig used as a way to discourage consumption, these tariff reductions should be accompanied by tho Imposition of an appropriate sales tax. x1vii. In parallel with the Impleion, on a multilateral (not merely bilaterl) basis, of the program of NTB reduction agreed to in the MOU with the United States, China should pursue an equaly bold program of tariff reducton. A reomnable 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 sucture Into line with that for Korea, for example, wih average rates on consumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, ricltural goods to 17 percent and ming to 10 percent. Idviii. 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 negoiations with trading partners, most notably within the context of GAT. xix. Tariff Exemptions. It is recommended that all tariff exemptions (mcluding those to 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-stram should be phased out over the shortest period possible. 1. Reduction in Export Controls. Wherever China's existingprice control policies neessitat the use of export regulation, export taxes should be used in place of licenses because th latter allow the few PTCs designated to handle such products to capture sizable rent which would more appropriately accrue to the Goverment budget. Such export reguatory devices as remain, should in any case be eliminate progressively and in tandem with ongoing price reform efforts. E. POLIces FOR ExpORr DEVELopmeNr. PRItoRUEs FOR TB 19908 li. China's past export support strucute, cetered on national foreign trade corporations, a very active and inteveationist Ministry of Foreign Economic Relations and - xx - Trade (MOFERT),2/ and some foreign paers, such as entrepreneurs from Hong Kong, dt were alowed to play an actve role In the export sector, has seved it very well during the firs decade and a half of reform Its eprience has provided nowther emple of the lesson observed lsewhere In East Asia ta appropi public intervention In export developmen and provsio of explict public support to the export sector can yield substanti dividends. While succl refom and continud success In export markets may require a cage in the way in which China provides this support, it does not Imply the removal of this support. Rather, it requim rorm in idie way support is provided in such areas as marketing, quality control, xport pr n, export credit and the fostern of pp iate trade inmediaries. 11 Inenational experience offers a rich set of options frm which China can lern In drawing up futur reform plans in tis rgard. Ihe most Important issue will be how to deepen the reform of FTCs, which are likely to remain at the cmor of Chinas export support structur, wit losing the considerable body of epertise that has been accmulated over the past In order to meet Its diverse needs, China should encourag the development of a variety of trad fims, rnging from the small, fleible Hong Kong tpe trading companies (best suited to hane its rapidly growing export segments such as garments and light industrial goods), to lr trading companies similar to the Japase sogo sosba or Korean chabl (suitable for developing efficient production systems or promoting the trade of affliated conglomerato grups). To help achieve this objecdve, the report offers the following suestions: subject FTCs to greater competition by removing remining barriers to cross-provincial transactions, grang more producing enterprises the right to trade directly, and allowing entry to foreign tain firms; make FTCs operate as independentproJft centers, with bonuses linked to profits ratier than to foreign exchang targets; eliminate all restrictions to the product scope of FTCs and pmit them to particpate in domestic commerce; allow ailing PTCs to exit and permit megr bvete FTCs and, for eample, emearing enterprise groups. 3iii, At the same time as FTCs are being converted Into compettive enterprises, the governnt should also assist manufctrng enterprises to export diredy if they so choose, giv the well-accepted benefts of direct contact between producers and overseas buyers. There are four esst elements in such support: (a) Export Markedig. At present, direct trading rights are not ofte ganted to domestic manufacting enterpis themselves on the grounds that they are inexperienced in matters peraining to lnt£enational trade. Public support for export marketing (similar to that pvided in Hong Kong, for example) could help ensure not only that those domestc entprises that wish to export directly lean how to establish direct contact with foreign buyers, but also that FTCs compete more vigorously to earn the business of local entepris. 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 cnel information services to small firms that would otherwise be denied the opportuity 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 Il Now cled t Ministry of Faieip Tiade and coomic Co% i (MOPTE). fo Import and Export Commodity Inspction, but despite this effirt, it appes that ecton rates remain hg. Success in tis area will depend on more gene economic refrnm, but progress could be acheved, a in Taiwan (China), by making the preset Inspectin system le extensive, iile Increaing the Innit of theo Ispecwdons. At the same tm, te goveet coud encoua the creation of qwuaity cool ostIous by business associons and by accredite gaquaity corl agencies, Inludig fre ones, and it coud then f&cu its atenon on hapecting thee. In short, China should focus on the efcacy of Its quality control apparatu, rather th Its coverage. (c) Other Support Services. The general promotion of an efficent, competitive service sector, which Is now a key element of Chinas development strategy, wil do most of what Is required. Care must be taken to avoid mnopolies in services for export and restrictions on the use of fomrei service suppliers should (as has already begun to happen) be dlmanded. (d) Export El_ayn. The Bank of China aready provides a large volume of credit to support China's exports. Four measures seem necesry t improve the efectveness of the export finafng system. First, steps must be taken to nsu that firms wh irect trading rights anjoy the same acce to trade credits as FTCs. Second, for the initiative of having FITCs take responsibility for their own profltsid losses to work, they s--t not be allowed to benefit from a soft budget constrint by tapping without restraint into the banking sector. Third, eport insur should be made available to al local entepre as a way of mcourasi and enabling them to acquire and exercise direct trading right. Finaly, plans to set up a spcized expo-import bank should be resisted. iV. Product selecon has been an inherent part of China's export strategy, with special scme and incentives being used to promote the exports of spedfic sectors. Tho experience of Korea gest that export selecdon is a risky busine and success requies that it be accompanied by an active and focussed policy of assistance for industrial restructuring to the targeted sectors. Unlike Korea, however, where decision maldng on trade and industrW policy issues has been highy centalized, the focus of China's Industrial policies has been diseed. hi is partdy due to the involvement of a large number of agencies, and pardy to differences in priorities across provices. As a result, Chins efforts at export selection do not appear to be adequately supported by matching initiaves 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 perhps for a few strategic sectors. In such cases, greater national coordination between trade policy meures and assista for industrial restructuring would seem to be warrted. lhe establishment of the State Council Economic and Trade Office (SCETO) in early 1992 (and its subseque elevation to the staus of a Commission), and ongoing efforts to create enterprise groups, free from multiple channels of supervision Xd control, could prove to be import itiatives in this regard. Iv. A hndamentl fate of China's past success in attraing FDI and generatig exports fa been its policies towards geographical tagetig in genera and the Specal Economic Zones (SWZs) in particular. A key lesson is the importance of the policy environment in atracting export-oriented FDI. In this context, Pudong is potentily an important new iive. As long as Pudong can offer a policy environment that is as flexible as the SEZs, it can be -xxii- expected to atract moinvestment flows and Inject an important meaure of vitality In the grea Sha_ga area. Ivi. The policy environment, though important, has by nO means been the odly atraction for export-oriented FDI. Thus, despite their new open cites, inland provinces would seem to offer limited prospects for arcting FDI flows, becau of the relatively longer distne of these provinces from international markets. By the same token, provinces such as Liaoning and Shandcng, on the other hand, should be actively encouraged to exploit their proximity to Kore and Jan along liner similar to wbat Guangdong has done wlth Hong K}on and MaC8o, and Fujian is pursuing with Taiwan (China). Ivii. The tax and import duty concessions of China's SEZs and open cities have served their purpose in helping genera a momentum for export-oriented PDI flows. Their application has now become counterproductive. ITe ubiquitous use of such incentives has resulted in serious resource misalocation, with numerous domestic firms changing location merdy to reduce their tax burden. These incentives sh ald be phased out at the soonest possible and a standard natonal corporate tax should be adopted with local and foreign-invested enterprs being accorded equal treatment in the future. htead, SEZs should focus on expanding their role as economic laboratories. Expermet with market mechanisms in China are still at an early stoa, and adequate rules and regulations to prevent the abuse of market power and ren seeking are conspicuously absent. SEZs should be at the forefont of experimion 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 mumber of SEZs should be resisted, and proposal to develop Hainan, Shenzhen and Xiamen as free ports should not be pursued. rTe creation of free port would only exacerbate the problem of smuggling which is already quite severe with regard to goods from Hong Kong and those being chamneled through exsting SEZs. F. TMM INT1RNATONAL ENVIRONMENr AND C=WS EXPORT PROSP1s lviii. 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 prospect 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 importace 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 towards higher technology or knowledge based products. Ihe report finds that even in today's global trade environment, there exist opportunities, both intem of markets, and intms of other products, that China could pursue in order to sustain high export grwth rates. lix. Althou It can In general be concluded that import penetration issues will not act as a constrait to Chiea's exo, two extnl factors could have an enormous impact: (a) the outcome of the Uruguay Round of the GATT; and (b) the possible loss of MFN status in the United States. -)xxii- lx. Most observers acipae that a successfiul Urqg Rod could reduce protecdon levels In th Europe Commission (EC), the United Stes and Japan by up to 50 pen. In such an event, Chinas epo would increase by an estimated 38 perce or $11.4 bUlion in terms of 1988 prices. Moreover, China would fiae considerably better th other developing coutries, the exports of which are projected to dse by only about 15 pecet from a Uruguay Round libizatio. This is because the Uruguay Round tarM cuts would erode the preference margins that exp from other countries curtly enjoy (through schemes such as the Genalized System of Prderences) and that China does not receive. China wouid benefit frm trade dtwtd away from those countries. In additin, China would gain a lot due to the relatively high sae of textes and clothing products in its total epots. China has thus a lot to gain from the successfil condcusion of the Uruguay Round. Ixi. Although Chinas MEN sta in the United States has, by executive order, been renewed for anther year, uncerainty mains about its ure and of the impact of its possible discontiuation. The report finds tia complete MFN loss would lead to severe dislocation of China's eots to the United Stat. For example, the increase of roughly three-and-onealf imes in the clothing duty (from an MFN rate of 15.3 percent to a general rate of 55 percent) would significndy reduce, if not eliminate, exports of this key product (fts projected dedie Is between 50 and 100 percent, epding upon the assumptions, from its prest level of $2.2 billion). Overall, Chn's anual export losses to the United States are likely to be from anywhere 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 estmate, United Stat consumers could end up paying as much as $14 billion per year in higher prices, resuting from a combination of costlier substes 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 slocationof trade flows likely to result from withdrawai of Chias M8N status by the United States would range from the dramatic to the disastous, witi the associated costs being high for both parties. Lxii. Other aspects of China's export prospects remain entiraly within its own hands. Revealed compartive advantage calculations suggest that Chinas expons have been moving in line with its comparave advantage, which lies in labor-iotensive (and especily in scilled labor- intensive) expor as well as In higher techology exports that can be assembled locally. Over the medium term (threo to five years), Cn's prsent comparative advantage is unlikely to camg significantly. The ret's analysis indicates that China does not yet have a broad-based cmparwtve advantage in manery and electronics, despite all the progms of supportto this sector, and it is unlikely to develop, for a few years yet, any signficant advantage in the c-ports of heavy indusi equipment or In hig technology exports that cannot be assembled k;.ally. On the other hand, the report finds that there exist both underexplolted geographical markets and new products, that China could pursue without trying to alter the nature of its comparative advantage, and while reducing the risk of market access problems. lxiii. in conclusion, therefore, priorities over the next few years should lie in upgrading quality, diversifying into other skilled labor-intensive products and assembly-type expons, diveifying into underexploited geographical markets, and participating as fully as possible in iniatives to promote multilater trade liberalization. 1. CHINA'S MECHANDISE TRADE-TRENDS AND PERSPECTIVES A. INraODUenON 1.1 Since the ititionm of its -opendoor policy In 1979, the cotibuto of ign trade to China's economy has grown at an extraordInay pace. For the last futee yeas, China's average annualized rate of export growth has been about 17 percen and its import have grown at over 15 percent per ye. Over the period, Chin's ttal exports (on a customs basis) incrased almost ninefold and in 1992 were estmated at $85 billion, whle mpts grew more ha sevenfold, and stood at $80.6 billion. In 1991, China was the teenth largesext nation in the world and it ranked as the sixteenth largest importer; its trade accounted for 1.8 perceent of world merchndise trade.1 1.2 'he World Bank analyzed Chins trade regime in 1987. Ihe objective was to assess the status of Chinaes foreign trade and capital system and make suggestions for improements. Since then, much has happened. On the one hand, there has bee an ncrease In trade ficdons the world over. China itself has been engaed in blateral trade negotiations wit the United States, even as it has been pressing its ca for rr ming its memb ip of the General Agreement on Tariffs and Trade (GATT). On the other hand, after see a temporay slowdown in 1988, China's trade has picked up momentum again. The fast paced growth in China's merchdise trade s8iCe 1988 is in part explaed by the ecnomy's recovery tt has followed the austrity program of 1988/89, but two major spurts of foreign trad system refom in 1988 and 1991, respectively, have no doubt also contruted to It These refonrs have been far reaching in scope and substance, and their implications are still unfolding. China's *Hong Kong connecdtoa has also developed very rapidly over this peiod, and is another contributing factor to the country's impressive trade perfoance. Given these deelopmemns, China's reign tade regime and prospects merit a second in-depth looL This report takes stock of the rapid changes that have ocred in Cbina's trade performance and evauates the counDtrs emerging trade policy and the prospects for its exports. It is also the rtport's objective to propose direcdons for fture policy. In order to do so, It seeks to address a mnmber of qusios that have not as yet been tacided. 1.3 Pst, Cns connuing shif from a planned to a market economy poses iport challenges for the ountr's foreign trade policy. Of pardcular relac is the quesdon of how Cina1's trade and foreign exchange planning systems should evolve so as to allow the use of indiect as against direct instuments of trade policy. Second, Chinas apprach to trade policy so far as been *mercantilist," i.e., motivated by achieing export growth for the sake of genrt foreigl exchange without sufficient regard to its costs and linked with atsemp to contain import growth. China has not used Its trade regime as a well defined insrument of industral policy and, as a result, reform of the import regime has hithro been neglected. Much is still unclear about the functioning of China's impott rgime. e isue Is 2 - not merely to exmine the ext of market access that the regim provides, but also to define an approach for (i) maidag the import regime more rational from the point of view of Incentives to domestindustry; and (ii) liberalizing the regime over ti, and thereby exposing a greater cross-section of domestic economic activity to inteatonal competiton. 1.4 Thid, so far the Chinese government has played a very active role in providing swpport for exports. Aside from regulating trade activity and providing financial assistance for exports, the govement has also directly provided a variety of other spport services including maretig and quality control. As China continues Its drive towards a market economy, an import question that needs to be addressed is the fire role for public interventio in export development. Finaly, growing unceaies In world markets and a marked trend towards regionalism in inational trade relations make the question of the prospects for China's exports a prtne one. Whether world market can absorb China's exports, and how vulerable 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 tade. 1.5 With these issues in mind, the report is structured as follows: this chapter reviews the trends in Chins merchandise trade, and provdes an apprai of the evolving composition and ca er of China's btade with the rest of the world. Chapter 2 traces the recent evolution of ChinaOs trade and foreig exchange planning system and analyzes the remaining problems. Chapter 3 provides a quantiave evaluation of China's currnt 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 seks to elaborate a program of trade libeaization for China. Chapter 6 focusses on export support measures. Lessons are drawn from the exeience of other East Asian countries for defining the future role of public iervention for export development in China. Finally, Chapter 7 examines future prospects for Chinas export and issues relating to access to inteaional markets. D. T1ND IN THE TRADE BALANCE 1.6 Altuoh trade grew over the 197989 peod as a whole at very high rates, it is since 1984 tha the most impressive growth has been observed. In 1983, total trade was only $43.6 billio.t k then exploded over the next two years, to reach almost $70 billion in 1985 (Figue 1.1). Since thn, bade has more than doubled, reaching $149.6 biflion 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 tha exo, except when the government has intervened. Thus, over the last decade, a trade defici has been recorded in every year except 1982/83 and 1990/91, the years immediately following the two retrenchment progrms 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, exs were driven by the trade plan. Export performance was, therefore, largely explained on the basis of the avability of an exortable surplus. Excess aggregate dem translated into a poore export performance and a larger trade deficit. This provoked the govemment's first retrenchment program, which involved scaling down import requirement through the import plan ad other ae controls. The results of this program manifte themselves in the form of a temporary trade surplus of 1982/83. - 3 - 1gure 1.1: CIA*: TRNS IN TRADE, 1978-91 Exports/imports In $ billions Trade Balance In $ billions 100 10 60 -~~~~~~~~~~~~ 80_________----------------- - t 5 -0 -10 20 ---- -- --- -___________________ - 15 0 -20 1978 1980 1982 1984 1986 1988 1990 1992 Year -Merchandise exports +Merchandise imports NTrade balance Nofe: In current prices and on customs basis (exports are f.o.b. and imports are c.i.f.). 1.7 Sin then, China's macroeconomic management has remained plaged by sharp cycles. While the reform of the countys trade regime has progressed consideraby, the government has connued to resort to all manner of adminitive conols in order to address macro _balace. Ita 1984/85, major trade reform initiatives were imptemented.l/ These had the effect of liberalizing imports and the forignl exdcage allocation system, and reducing the imporace of the trade plan. As a result, a greater proportion of China's imports and eWports were left to be detmined by maket forces. lhe very rapid growth rates dat China expeiencd in 1984185 were accompanied by a deiorating trde balce. The trade balance reahed a remcd deficit of $15 billion in 1985, as ep"or remained stagnant, while imports sged by over 50 percet In respon, the government resortd to sticW contol. Credt was tightened, and heavy use made of adntive cotrols such as import bans, quotas and license, the importance of such Isruments having gone up as that of the import plan had diminished. As a result of these various measures, import rowth was stabilized. Meanwhile, exports finay *took off,* growing at the dizzying pace of 20 percent per annum, and by mid- 1988, the trade balance was viraly restored. At that time, controls were rdaxe d imports were alowed to pick up again. However, the underlying macroeconomic trends were such that expor growh, ough rapid, could not keep up with imports. A major austy program was 11 T Mm nsty of Forew Economic Relatons and Trades (MOFERr) tepot an the refom of the tade sysem ppred by th State Council in Sptembr, 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 ausrity program of 1989. As on previous occasions, the trade balance responded, but with a lag. Thus, although in mid-1989 the trade deficit was sti $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 patten, with exports contiuing 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 sutplus on the trade balance in 1991. 1.8 All the evidence sugge tat over the decade of the 1980s, export peuformance has become increasingly independent of the level of within-plan domesdc economic activity. Ihe 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 bee 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. TIis trend is likely to continue, and it is safe to assume that export performance will depend much more on such factors as the exchange rate, policies for export development, and the prospects for world trade.21 1.9 On the other hand, imports appear to be explained by a combination of three factors. Recent analyses (Figure 1.2)3I have confirmed a strong correlation between broad money and currency, industri production and imports. The level of domestic industr activity appears to be the most important detrminant 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.4/ Finally, the trend in the trade balance discussed in para. 1.7 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 stiil distort the country's Import regime. / C. PECIIVE ON CHN'S EXPORT PRORMANCE 1.10 Over the decade of the 1980s, China's exports outperformed those of most other economies, including such Newly Industriaized Economies (NlEs) as Malaysia. The only exporters that registered average annualized export growth rates higher than China were Thailand Chapter 2 xamnes the evin link b n the exchage rate and export performance, Chapter 6 explor hna's polies of export development, and Chapter 7 examines the prospects for Chin' expoL / Intenational Monetay Fund (MP) (1991). 1 MmTh renminbi recorded an effective dvaduation in the swap makt rate of over 13 perce between the third quarter of 1989 and end 1990, whie access to swap cantesn nhed new heights (the volume of transactions an the foeigp exchon adjustment centers (ACs) rose 53 pocet to reach $13 bilion in 1990). Imports fell by around 10 peent in 1990. See Chapters 3 and 4. -5 - Table 1.1: STRutrUtAL CHANGES IN CinNA'S MAJOR EX1PORw: SELECrTED YAnE FROM 1965 TO 1990 a Commodity group & 1965 1975 1980 1985 1990 (value of tade in teWms of $ milon) Total expors 1,718 6,303 18,237 27,764 80,541 All foods 642 2,088 3,272 4,073 6,862 Agriculturd raw materials 189 450 1,170 1,810 2,198 WMneral fues 32 897 3,974 7,158 5,290 Crude petroleum 13 778 2,572 5,347 3,654 Refined petroleum 7 92 i,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 Textles and clohing 364 1,140 4,089 7,304 23,204 Nonelectric machinery 20 107 248 282 1,930 Electrical maciery 14 78 240 536 8,666 Transport equipment 15 74 71 88 574 Ores, minerals and matas 68 212 560 760 1,486 iscellaneous goods 4 24 740 303 485 (as a percentage of totd exports - %) Total exorts 100 100 100 100 t00 All foods 37 33 18 1S 9 Agriculu raw materIa 11 7 6 7 3 Mieral fuels 2 14 22 26 7 Crude petroleum 1 12 14 19 5 Refined petroleum - 1 7 6 1 All mYuat 46 42 47 49 80 Chemicals 4 5 6 5 4 Textiles and clothing /A 21 18 22 26 29 Nonelectric machinry 1 2 1 1 2 Electrical machmery 1 1 1 2 11 Transport equipmet 1 1 - - 1 Ores, nmerals and netals 4 3 3 3 2 Msucellaneous goods bd - 4 1 1 La Data used here are based on impoSrt of patner countries from ChIna. Thds procedure ws necessittedby the fa tChina diSd nt begin rportng epors to the Unied Nadons until the mid-1980s. l Totd exorts consit of all products dassified In Standard Inernational Trade Classficaton (STC) to 9; foods are goups (0+1+22+4); cural raw nmatril (2 less 22,27,28); minerd fuels (3); cruderleutr (331); refnedpetoleum (332); mnufacts (5 to 8 less 68); chemicals (5), texies and dothing (65 + 84); noneectic macinery (71); eecticl machinery (72); transrrt equpment C73); ores, minerals and metals (27+28+268); miscelaeu ods() Lj The share of cLthlng lone went from 13.1 percen in 1985 to 19.6 in 1990. kM The share of footear went from 1.2 percent in 1985 to 4.5 percent in 1990. Sourc:. Statstics are compiled from the Unted Nations Commodity Trade System (COMTRADE) database. -6- ngre 1.2: BROAD MONEY AND IMpoRTs X Oily. Change In Impods X Ofly. Change In Broad Money 60 16 40 --14 -12 20 10 0 -20 6 4 -40 2 -6 0 .l 1234123412341234123412341234 1986 1 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 (BESD). (13.2 percent), Korea (12.8 percent), Taiwan (China) (12.1 percent) and Portugal (11.7 paCent).2 tional decenaizadon, depreciation of the rea effective exchnge rate, foreign iNvesn (especially from Hong Kong), and duty free access to imported inputs for expot sembly, all seem to have contributed to this strong performance. MI& Changin Composition of China's Exports 6/ 1.11 Table 1.2 shows the value and share (m total trade) of Chineas major export products for selected years from 1965 to 1990 (on the basis of import data from partner it Unle stted otwise, all daa peaing to actord compotion of twade am pr ted throughout the rapot per cassificatons of Stdard iteraanl Trde Classfication (SITQ R 1. This was done for the pupose of historical continut. TAdk 12t Tuw Vam An Sam ow MU= TuUmt STC P1!m_ at Cm&% Ra=-mmw 1km mmol 196 To 199M Prode t (Snc) 195 1975 it960 IS5 1190 965.90 Value Sbare of ales She ef Val" shere of Val"e ShreOf V.1*. Share Of AMe ( dll.) ttal () (S mu.) total (I) (S Wi.) total (2) (5 IlL) total (1) (O dll.) tota (2) chew votw tade (0 to 9) 1,718 100.0 4,303 100.0 16,2U7 100.0 271 44 100.0 00,541 100.0 - Clotbir (641) 54 3.1 268 4.3 1,5m2 6.7 $,629 13.1 15,760 19.6 12.3 Tepe an Sporttug ooda (694) 14 0.8 38 0.6 L 0 0.6 653 2.4 60409 7.5 6.7 Tel.commmicatl.ae equ4seut (724) 1 . 11 0.2 51 0.3 256 0.9 4,715 5.9 5.9 Crod petolm (331) 13 0.6 776 12.3 2,572 14.1 5,347 t9.3 3,654 4.5 3.7 Footwee (651) 16 1.0 60 1.0 201 1.1 $30 1.2 3,632 4.5 3.5 Travel goods ("1) 1 . 23 0.4 92 0.5 *58 1.6 2I97 3.7 3.7 other aiealiaeou saunfactmee (699) 22 1.3 135 2.1 403 2.2 534 1.9 2,060 2.6 1.3 Vovutextls, attila O3 53 3.1 14 8 1.3 500 2.t 92 3.3 2,443 3.0 -0 1 Deticetrisi awum t eo s(725) I - 6 0.1 32 0.2 74 0.3 1,725 2.1 2.1 Cottea labt.a (652) 174 10.1 327 5.2 607 3.6 9ts 3.5 1,652 2.1 4.0 Fresh flab (031) 44 2.6 150 2.4 347 1.9 46 1.3 1,53 2.0 -0.6 Sau4 r"trwin O"I"at (H91) 2 0.1 6 0.1 2S 0.1 61 0.2 1,472 1.0 1.7 Artole of plastlc (0931 1 . 6 27 0.1 67 o.J 1,347 I.? 1.? Node-up textihe artia). (656) 43 2.S 11 2.9 5S4 3.0 56 2.1 1290 1.6 -0.9 Vat*o au clcke (8644) 3 0.2 18 0.3 76 0.4 164 0.7 1,270 1.6 1.4 Elsetric poer maiery (722) 2 0.1 24 0.4 54 0.3 102 0.4 1,233 1.5 1.4 Textile yar (651) 24 1.4 1I7 1.9 276 1.5 753 2.7 1,101 1.4 - Dflms petrolem proteto (332) 7 0.4 92 1.5 1246 6.6 1,556 S.6 1010 1.3 0.9 Oreantc emial. (312) 8 0.5 52 0.8 2B5 1.6 334 1.2 605 1,0 0.5 Other electrial macary (729) B 0.5 30 0.5 7 0.4 64 0.3 746 1.0 O.S Prepare or presretd weetable. (055) 14 0.6 nS 1.5 2" 1.5 338 1.2 713 0.9 0.1 tiehary -A appliene, mea (719) 4 0.2 22 0.3 66 0.S 111 0.4 703 0.9 0.7 Offie ahie (714) - - 2 - 8 . 51 0.2 694 0.9 0.9 purnitue (321) 0.2 29 0.5 127 0.7 157 0.4 633 0.6 0.6 Vegetable. fresh or from (054 45 2.6 97 1.5 311 1.7 298 1.1 631 0.8 -1.6 ScutIfic Instwuta (861) 12 0.7 10 0.2 27 0.1 43 0.2 563 0.7 - floor coveri (651) 6 0.5 54 0.9 270 1.5 277 1.0 565 0.7 0.2 Oil $0eda a--t (221) *2 5.4 135 2.1 165 0.9 413 1.S 55S 0.7 -4.7 Coal and coke (S21) 1i 0.- 26 0.4 155 0.6 249 0.9 547 0.7 -0.1 Pottery c" rale ("666) 15 0.9 71 1.1 140 0.6 147 0.5 546 0.7 -0.2 Total of ebov item, 99 40.? 3,013 47.6 10,767 59.1 19,554 69.7 42,00 76.0 37.3 Other tbree-dIit euports 1,019 59.3 3290 52.2 7I450 40.9 8,410 30.5 17,736 22.0 .37.3 8oumue. .~Im ....yi en ... .li 7MP. get "lom ChI -8 - countries).2/ The top half of the table indicates that Chinaes total exports roughly tripled thre times over this period; between 1965 and 1975; from 1975 to 1980, and thirdly betwee 1980 and 1990. In the early years, China's exports were guided by the philosophy of exporting only smplus commodities. Thus initially Chiana's export growth was dominated by crude petoleum 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 admnistered export quotas. As the reforns have progressed, the structure of Chinas exports has changed dramakicaly. Most importantly, the share of China's traditional exports, foods, agricultural raw materiais 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.y What is noteworthy Is that China's manuf g exports did not take-ofr until after 1985. Just within the five year period 19P5-90, the share of manuactures in total exports rocketed by 31 percenge points. Ihe explanation for this sudden upturn in the performance of manufacturing exports lies undoubtedly in two facts: (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 exportes; and (ii) the quantum jump in the udlization of foreign direct investment.4 The steady depreciation of the swap market exchange rate certaidy provided a strong boost to exports in general and to exports of sectors entiled to higher retention rates in particular.2/ The sector whose share in Caina's expot grew the fastest over the 1985-90 period was electrical machinery (SlTC 72), which recorded a 10 percentage point expansion of its share, going from 1 percent of Chinas 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 ta double that of the share of electrica equipment. 7l China did not officially begin reportin trade data to the United Nations until 1984. HEstorical saistics on aChinaes m wer, therefr, reconsucted fiom reported impoa from Chia by other countries. Several points need to be bome in mnd when imlnte g the data Firs, parte country data on Cn's exports are systemically higher than the value of exports reported by Chbina, becws the former are in most cases based on the c.i.f value of partn coutry imports from China, whera the latter ae based on the f.o.b value of China's exports. TIus, wile Table 1.1 shows Chine'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 Al.2)-the differe betwen the two being in large part the value of transport and insnce payents. Second, for some product categoies, the diffeece between pater country and Chinese data is difficult to exl In the case of transport equipment (SITC 73), for example, Chin's exports per partner country records were $0.6 billion in 1990, whereas Chinese data indicate a total export value of $4.1 billia Third, some of China's trading partns-patcuarly the (former) socialist countries of Eastern Europe-did not report to the United Nations (UN) durng the fil 196504 peid so some of China's trade (perhaps about 10 percet) is not accounted for in those year 1in geneal thoug, s cs on impots are thought to be maoe acuate than thos for expors (particurly since the forme are used for applying import tariffis) so the pater count (impoit) inform n should provide a more accurate profile of Chin's exportl ,1 Based an Chinese reported data, t share of manuatures readhed 71 peret in 1990 and 80 pcet in 1992. 2/ Betwe 1985 and 1990 the red effecive exchange rate (RER) applying for exp dcpreted by over 120 percent (measured in yuan per dollar, see Chapter 2). -9 - 1.12 Table 1.2 provides a more detailed look into the fats underlying Chinas changing export structre over 1965 to 1990 by ranking the 30 largest thee-digit SITC products (in terms of 1990 values). Crude petroleum ranked as China's most important export as recently a 1985, when it was replaced by clothing. Clothing more than doubled Its share in ten years to accoun for 19.6 percet of China's total expos In 1990. Toys and sporting goods were the second most Importan export item for China in 1990, followed by footwear, accounting for 7.5 and 3.7 percent, respecdvely, of China's exports. Both these subsectors saw their shares more than treble between 1985 and 1993. The rapidly expanding share of electrical equipment in Chinaes exports seems to be accounted for in large part by telecommunications equipment (compred 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 1.3: Mmi VAuA mD SHRm oF VAuous TYIm Or foDucrs 1 CUIINvA' MWPACW EXFORM SELCTD YEAR 196 To 19, Grwth rt (%I Pfodiut category 1965 1975 1980 1985 1990 1965-90 1980-90 (Value of Chinaes export in tWrms of $ millons) TOta export 1,718 6,303 18,237 27,764 80,541 16.6 16.0 Labo-intns ivozaafictures S70 2,253 7,168 12,319 59,787 20.5 23.6 Unskiled labor-uxtensive goods 454 1,5S7 SZ54 9,742 41,222 19.8 22.9 Cmit4aJ4nDludwai"Jfaw turs 1,113 3,128 6,353 7,984 14,978 10.9 8.9 human capitalisiwo goods 148 473 1,292 1.708 12,325 19.3 25.3 Natumalresoue.baseodproduct 961 3,665 9,116 13,339 16,585 12.1 6.2 Coal. petoem and gas 32 897 3,974 7,157 5,290 22.7 2.9 (as a share of totl exports - %) Totalexpors 100 100 1k I 100 100 - - Lbor-ntemnive manufacwrs 33 36 39 44 74 - - Unskiled lhbor-nh sive goods 26 25 29 35 51 - - Cagptd-alnsive manufictures 65 50 35 29 19 - - Human capiWtintenive goods 9 8 7 6 1S - - Natusal resourac-4sed prodt 56 58 50 48 21 - Coalpt roeun anWgPs 2 14 22 26 7 - - The proceduies used for idenifying labor and capital-intensive goods (as wll as a broad lit of these Items) can be found in Annexi.1. Un ld abor intensive, humun capital intensive, and natural resourcbased producs arm defined in Lawrece B. Kause, United Ssa EFonomic Policy Toward the Assocdaon of Soudes Asian NaIos (Wahingto tookp Insdtion, 1984). MM1.1 to this report provides a compflete tabultion of all the SITC codes that ar incded in the ctegory of labor-intensive manufactures' product groups. 1.13 The sectors that have emerged as China's most dynamic exports appear to conform well to the country's natural comparative advantage. The analysi of Table 1.3 confirms thimpreion. Ihe important point that emerges is that the composition of China's -10- exports has become increasingly labor intensive 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 perct.JW 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 resor- based eports was more than halved, declining from 56 percent in 1965 to 21 percent in 1990. 1.14 A second point to note is that, within the category of labor-intensive manufactured exports, the share of products using unsd labor has been declining since 1985. Ihat China has begun to turn to products requiring higher skil levels for its exports is evident from the rapid rise in its exports of relatively simple tele"ommunications equipment and domestic electricals since 1985. 1.15 Table 1.4 compares changes in the concentration of Chinese exports (i.e., the range of products involved) over the years with tha of selected East Asian economies. Some Table 1.4: CONMMcUnIRAON OF CRNgA' MD COMPARATOR COUN=tY Expoms No. of threedish uroduts exwored (Hinchmann index in qarentheses) 1962 (Rev. 1) 1972 (Rev. 1) 1980 (Rev. 2) 1988 (Rev. 2) Sinapore 144 (0.324) 176 (0.234) 232 (0.235) 231 (0.143) Rep. of Korea 30(0.245) 162(0.262) 207 (0.08S) 215 (0.098) HonS Kong 91(0337) 128 (0.374) 164(0.164) 173 (0.141) Taiwan, China 44 (0.429) 57 (0.401) 210(04117) 217 (0.093) ChIna 47(0.411) S8(0.390) 190(0.156) 211(0.120) maw 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 Natons Conference on Trade and Devlopmenmt (UNCrAD) Handbook of International Trade Stastics, vadous issues. bxdices for China esmated by the World Bank. To be counted a threnodigit product must have exports of more than $50,000 in 1980 or $100,000 in 1988 or be more than 0.3 percent of tol expots. The 1962 and 1972 statstics are based on SITC Revision 1 data while 1980 and 1988 empoy Revision 2 data. About 180 tbedigit podu ar definedi athe former and 240 in thet later. indication of concentration is provided by the number of three,digit SlTC products exported by each country. Another indicator used is the Hirschmann concentration index.' This index ranges between 0 and 1.0, with higher values representing more concentrated exports. 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 JIW See Anne 1jI to this report for an explanation of how thes products were identified and defined and fer a comple tabulao of aU STC codes xt compns each product categoy. It shd bo noted that tho groups are not necessarily mutually exclusve and some double countn i involved in the tabuo shown in Table 1.3. ' 11.- appreciably (or In the case of Korea was even reversed) over time as the expott drives of these countries each maturity. China appeas to be following the sane trend. After its Hirscbman conentraion Index more than halved over the 1970s, th idex regiter a decline of only 20 percent ovcr the 1980s. Second, Chinas exports have shifbed from being fir more highly concentrated than those of the East Asian NIEs to a point where they are no longer signiflcantly more or less concentrated than other East Asian economies. In 1988, China's Hirsluman concentrion index was smaller than that of Hong Kong or Singapore, but somewhat bigher ta that for Taiwan (China) or Korea. The Role of Assembly Operatio 1.16 In 1984, the State Council approved two schemes desigped to facilitate expots based on processing or assembly type activity. The schemes are known as 'processing with supplied materils' and 'processing with imporWd materials,' respecively. The former entitles a ocal 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 9ail raw matedals that it uses to manufacture its exports.ji/ These schemes have proven to be enormously successful. Ihey have contributed in a major way to the marked rise in manuf ed exports from China since 1985, and have helped China move into product cagories such as telecommunications equipment, whose exports appear to have grown in arge part based on assembly type operations using cheap yet resonably sklled labor. Exports based on processing of imported or supplied materisb accouned 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.1l 1.17 Although a substauni propordon of exports based on processing activity was generated in Specia Economic Zones (SEZs), over the years such activity has spread to firm6 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 pecent in 1991. 1.18 Complete data-on the sectoral composition of exports based on processing actvity were not available. It is esmimated, however, ta 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 appes, therefore, that processing-based exports of machnery and electronics were in the order of $10 billion or almost 80 percent of all Chinese exports ftom these sectors in 1991. Much of this activity is clearly low in domestic value added. Tis is evident from estim of the import content of exports based on processing activity. In W The deils of thew schms and how iey operate are discussed in Chapter 3. It should be noted tXt thee scheXm are ditn from compenstin trade. trade is simila to proce_ng xwith mippL;ed raw materas, except that the locd firm gets m d in Idnd and does not receive any forign exchan. Mhe value of exports under comnsation trde schemes in 1991 was $221 nmillio (Soure: Customs Diretorate). 1. ased on export data reported by China. Mm sbare of manuictured expots on this basis was 70.9 percent in 1991, as opposed to an estimated 80 percent based on partner cotry data. - 12 - Table 1.5: EORTS FtOM ASSLD LY OPERATIONS ($ 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 eports 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 Itm Totl mer rdise eports 47.5 71.8 Total merhndise impotts 55.3 63.8 Source: Customs Directorate. 1991, imports for procesing activity represented 77 percent 11/ of the value of processed exports. markets for China's Exports 1.19 China would appear to have experienced a marked increase in the geographical nrato of its ewport markets (Table At.3 1/), due to the more dtan doubling of Hong KongWs share and the disappearance of Eastern European markets&. J However, this is miseading because Hong Kong has served increasingly as a conduit for Chinese exports rather th 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 Cina's eports to Hong Kong is due to d fast growth in reexports of Chinese goods to other countries-only a small and rapidly declining proportion of Chinas 1/ Ibis is likely to be some_w of an oveestimae of do import content of processed exports. Tim. lagp in the utilizaion of imports mua t not all inputs impord in any one year are likely to be used in the export prduction for that year. IV Th statistics in Tabl 1.7 are based on data reported to th United Naions by China A longer tim perpctive was not possible since China did not rport trade to the UN prior to 1984. 1 While, in 1984, fiv Eastern Eure countries, including te thed Union of Socialist Soviet Rpublics (USSR), vwr amongst Chin's top thity makets, absorbing a littl under 5 percent of its exports, by 1990, and not sutpriingly, their share of China's exports had become nehglgbl -13 - exports to Hong Kong is actually consumed In Hong Kong. Of the $6.9 billon that China exported to Hong Kong in 1984, $3.3 billon was reexported. In 1990, of the $32.9 bilion exportd fiom China to Hong Kong, $29 billion was reexported to countries other than Chin. ,re major markets for these rexports were tie United States, which in 1990 absorbed 36 pcent, followed by the Eurpean Community E) (17 peren), and Japan (7 percnt). Taig into accoun the fia detnation of Hong Kong's reexports of Chinese products (ale 1.6), it tus out that Hong Kong's share of Chinese exports has in fact declined from about 14 percent in 1984 to only 6 percent in 1990. The fastest growing market for Chia bas ben the EC, whose she more than doubled to reach an estma 19 percent in 1990, followed closely by the United States (US) whose dse went from 13.6 to 25.6 percent between 1984 and 1990. As the share of the US and EC marksts has grown, that of Japan has dunkL Japan wen from beig the largest Impoter of Chinese produc in 1984, to beg the thi largest In 1990, after the US and the EC. All these changes have made the market structure for China's eport very simlar to that of other East Asian economies. For each of these counties the US Is the largest export market, absorbing anywhere from 28 to 34 percent of their eports, followed by the EC and then Japan (Table A1.6). Table 1.6: MA1 FMR CHINA ExrOm 1990 Sbare of Cina exM o () Export market Adjusted for Unadjusted for reexport thul reexport thru Hong Kong Hong Kong Japa 11.5 8.2 USA 25.6 8.7 EC 19.2 9.2 Oter of which: Hong Kong 6.2 53.9 Memo Ait Value of China's expots to Hong Kong (S billion as reported by China) 32.9 Value of Hong Kong reexports of Chinese products to the rest of the World ($ billion as reported by Hong Kong) 29.0 Value of China's total merchandise exports 62.1 Source: United Nations COMTRADE data base, Chin's Customs Stistics and Hong Kong Review of Overseas Trade, various years. The Role of the Nonstate Sector 1.20 Deini issues pertig to owneship make it difficult to pin down th ibution of China's burgeonng nosta sector to eports. However, data available on -14- crtain type. of nonse entrprises.I/ The share of township and village entrprises (rVEs) in total eWports, for example, increased fivefold between 1985 and 1990 (rable 1.7), and their sh was etmated to have exceeded 25 percent by 1992. An estimated 90 percent of TVE expors are manfacue products, of which a little less than half are spread evenly between textiles, clothing and arts and crfts. Also, not surprisingly, almost all TVE export arings (88 percont in 1990) are generated in Eastern China, with the coastal provinces of Ouangdong, Jiansu, Shangi, Zhejiang, Shandong, Tianjin and Hebei accounting for the lion's share. Table 1.7: TOWNSHP AND VIAGE ENERPRUSE EXIOR2n 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 n.a. 1989 10.00 19.1 n.a. 1990 12.5O0a 20.2 56,000 La Betjing Revew, Vol. 24, No. 4, Jamnay 24, 1992, p. 29. Source: For exports 1985-88: A. Ody (1992). 1.21 Data for foreign-invested enterprises (FlEs) indicate that the contribution of these to China's exports has also been growing. The share of FIEs 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 coa provinces in 1990.6 1.22 It can be concluded from the above that the contribution of the nonstate sector to Chinas exports has become very importat. The share of this sector, taking account only of the exports of TVEs and PEs, stood at a minimum of 40 percent of China's total expors or WI Body speing, to nonstt sector is cosidered to onjrnse urban collectives, nur collectives, privae eterrises, individual busnese and foreign-invested firms. See Yusuf (1992). Township ad va etepdr (TVEs) are disinct from foreign-invested entises or ubn colletives, but constitue a subset of the other categories. Foreign-invested enterprises includo quy joint vnures, wholly foregn-owned venues, coopertve opats and coapetve devdlment venur See Khan (1991). - is - 50 percen of its ma ring exports,l7/ with the bulk of the contribution of nonstate ent-rprises originating In the coastal provinces. The Role of Hong Kong 1.23 China's "Hong Kong connection" has been vital to the success of its export drive. It wa; 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 conttion to the development of China's exports goes much further. Most importandy, 70 percent of the cumulative value of $58.1 billion in foreign direct investment (F1)) comitments_ to China has come from Hong Kong and been mosdy directed to export-oriented joint-venures in the coastal provics, Guangdong in particular. Guangdong has attcted an estmat 50 percent of all the country's foreign investmen comnnitments and the province acunted for almost 40 percent of China's total exports (and cera y a much higher proportion of exports) in 1992. Hong Kong's involvement in export-oriented production in Cha is not just limited to joint ventures. A lot of Guangdong's export producton is supervised under contrct by partners in Hong Kong. Much of Gungdong's success with processing using suppled or imported matrials is based on partnrhips with counteparts in Hong Kong. It is no wonderthat Guangdong recorded $16.6 billion in exports from processing advity or about 70 prcet of the county wide total for such exports in 1991.' All evidence suggests that the economies of Hong Kong and Guangdong are becoming increasingly inbtegted with one another. As exports of certain products such as toys and clothing, from Guangdong have increased, those of simlar products from Hong Kong have declined.9 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 iterdependence between Guangdong and Hong Kong is working to their mutual benefit, and to the benefit, of course, of China's overall export performance. D. TRNS IN CHIN'S MERCHANDE liPORTS The Stucte of Merchandise Imports 1.24 The story of China's merchandise impors since the "open-door' policy is much simpler than that of its merchandise exports. Three tendencies are noticeable trable 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 tntal imports. Second, the share of intermediates and raw materias, although smaller now ta in the eary 1980s, appears to have stabilized at a little over a third of total imports. And third, capit 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 sart of the reforms. The share of mineral fuels has increased somewhat, while that of cosumer goods did not exceed 5 percent at any time during the decade of the 1980s. ill Piybula (1992), pored in Yusuf (1992) estimates that about half of Chinaws otal expots og m the nostatactor. - 16 - Table 8: CmN: STRucruRAL CHNGz vi CmA's IhOaS (CM) CuoMs DAS (% sha to Total) Commodity 1984 1987 1988 1989 1990 Food 9.8 7.2 7.7 9.1 8.6 minal dels 0.5 1.2 1.4 2.8 2.4 ntwmediate 53.8 43.2 46.1 43.1 39.4 of which: Chemicals 16.6 11.8 16.7 13.1 12.9 Crude materis 10.0 7.8 9.6 8.4 7.6 bon and steel 17.1 11.1 8.4 9.8 5.3 Consumer goods 2.3 4.5 4.1 3.7 4.7 Capit goods 33.5 43.5 40.1 41.0 44.3 of which: Trsport equIpmen 7.7 9.4 8.7 9.0 11.2 MIcellanous 0.0 0.4 0.6 0.4 0.5 Source: Chinese Trade Data (SrrC Revision 1), Customs Direcorate. 1.25 In the earlier years of reform, the import plan explained much of China's import scture. The plan has been used, by and large, to ensure minimum Imports of key foodstuffs, Itermediae goods and raw matecialsjl The products most subject to planning have been typically ones with the largt domestic prce distorions. Quantities to be imported have been detemin through a ap-Bflling exercise, rather than on the basis of relative prices or quality. The Importance of the plan has been declining, however. Less a third of imports are now subject to madaty planing or to canaization, 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 pecent of the imports of food and intermediate goods came under the plan, by 1991, only half of food imports and only two td of intmediat good imports, respectively, were compised of planned commodities. Within the category of foodstuffs, cereals remain by far the most important planned commodity. Chemical fertilizers, plastic materials (mainly plastic sheetIo, textile yar, iron and steel and wood are the largest intermediate goods imports ta remain subject to Import lanning. Meat and dairy products, along with animal feed, account for the bulk of the growth in nonplanned commodides in the food group. Within the category of intwmediate goods, chemical elements and paper products have underpinned the rising share of nouplanned Imports. Tbis changing composition of imports suggests that an increasing proportion of food and raw material Imports has become market driven. 1.26 Although the share of import planning has declined progressively, China's import stuctre still bears the mark of management. Thus, although capital goods are not part of the impt plan, the steady rise in their import share is due in large part to a systematic IV Almost none of theno malid commodities fail into the categor of consumer or capital Soods. hU nly e s teians, cadwde ray tubes and de engines. - 17- government strategy of using imports as a way of importng embodied tecnology for modernczation. Over the last decade, China has imported the equivalen of about 3 percen of GDP In capital goods, accounting for about 7.5 of all investment, and about 15 percent of all investment In equipment.10 The growth in such imports reflecs, more than anything els, trends in directed domestic investment, and has been supported by controlled access to forein exchange. The central government still directly controls over 50 percent of the county's forin exchange earnings, which are allocated to planned imports and impots of materials and equipment needed for priort projects (Chaptr 2). 1.27 The inconsequential share of consumer goods in Chineas total Imports also suggests the use of administive 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 yeas of relaxed controls. The manage natre of China's import struture Is reflected quite clearly in recent shifts in Import shares. Over the 1985187 period, which was a period of retenchmet following the buUd up of domestc 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 frtilizers, and textle 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. 1.28 China's import structure thus clearly reflects a conscious Import strategy, which has been to ansure the supply of key raw materWials and to acquire embodied techology 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 impors is somewhat larger. What is significant is the relative openness of China, lie Korea, Taiwan (China) and Malaysia to the imports of capital goods. In ft, 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 NlEs apart from other lge developing countries such as India and Brazil, where the share of capital goods impots Is significanly smaller. 1.29 Finally, 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 propordon (45 percent) of Chinese impons comig in as reexports through Hong Kong are from Taiwan (China) and Japan. Untl the normalization of diplomatic relations earlier this year, Chins imports from South Korea were also handled in this manmer. Taking account of the country of origin for products reexported from Hong Kong, Japan emerges as the single largest supplier of Chs imports accounting for one fifth of total imports Crable 1.11). In this regard China i hadly differe from other East Asian economies although overall, Chins dependence on Japaneso imports is markedly smaller than for the other countries of the region and appears to be decling 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 oter East Asian countries, such as Thland, and Indonesia, but It remain substally lower than in Taiwan (China) and Korea. The EC is the only bloc of member counies of the OrganIzation of Economic Cooperaton and Development (OECD) countries at has posted even modest gains in its share of ChinaWs imports. Between 1984 and 1990, the EC's share of - 18 - Table 1.9: STRUcMuR OF CmNA'S IMoroT (CIF) CUsroMs BASS (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 Petoleum (mineal fuels) 2.4 15.8 11.0 26.8 27.3 5.3 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 materias (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 (yamr, fabrics, etc.) 9.9 2.8 1.9 1.1 1.0 3.4 Nonmetaic minerals 0.8 1.3 1.2 0.7 9.1 1.1 Iron 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 aCothnIg 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 Mdiscefllaneovus 2.9 2.1 2.7 2.5 1.0 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 Source: United Nations COMTRADE Data (S1TC Revision 1). -19- Table 1.10: ORGIN OF CEWS WORM A COWA"M WI On= ECOMI Cu EaS AIA SeD YORS (O) Year Idand h knd h ligwan Kona. Chdna la Origin of Share of Shar of Shm of Shan of Shae of Show of inpol imps iws inpois impotls impols (a*ded for (unadjusted fo eX=posts dtru rexoozts amr Hong Kong) Hong Kong 1984 Japan 27 24 29 2S 35 31 USA 13 18 23 22 16 1S BC 13 1S 9 9 13 13 Other 47 42 39 44 29 41 of which: Hong Kong - - - - - 12 1990 Japn 31 24 30 27 21 14 USA 11 12 24 24 15 12 EC 1S 19 13 12 1S 1S Oher 44 46 33 37 49 59 of which: Hong Kong - - - - 4 27 Dsreancie b e thes and figures repoited by China possle because of topt magns and peod d~ inrmation rposting lW . Source: China's Customs Stais, Hong Kong Review of Oversas Trd, vadous yeo, ad United Nations COMTRADE data base. 19w 19 Mmo AM. Value of China's imports from Hong Kong (S biion as rportd by China) 3.1 14.4 Vale of Hong Kong's reexport to China from other pae (S billioa as repoted 3.3 12.4 by Hong Kong, of which: Sharm of reeport originating in Taiwan (Chins) (%) 13 23 Shae of epo t orinatig in apan (%) 36 22 Share of reexpots onating in USA (%) 11 9 China's imports went from 13 to 15 percent lit appears iat the more advnce East ASin economies re e ones at have made the largest inroads into Cinas maket bY expoting through Hong Kong. Ihe John share of Taiwan (China) and Souh xorea Chinas impots went from an estated 4 percent in 1984 to over 9 pecet in 1990. -20- Table 1.11: SHuRE aF TR IN GDP: SELECreD COUNrjEs (%) China 31 USA 16 Japan 18 India 14 Brazil 12 Mexico 36 Turkey 34 Source: Data for China are ft 1991 (see World Bank, 1992c). Data for other countries are from the General Agrement on Tarifs and Trade (GATT) (1992b), Volume 1, Appendix Table S. L TRD IN CmNA'S EcoNoMr: So=E CONCWuDG OEVA sONS 1.30 The trends in exports and imports discussed above illustate how for Ch8's approach to trade has evolved since the open door policy was first announced. Taditionaly, China viewed exports as a sutplus over domestic production, to be sold in order to generte f0_icg for ihe purchase of commodeits, such as grain, in short supply at bow^, ad of Vorted techology for purposes of mo i This philosophy of "gap filliqg" led to an autnrkic approah to trade, with the handfl of foreigp trade corporations WMT) grnted permission to carry out enal trade operaig an airlock' between the outside wald and the domestic conomy.u Since then, the number of FrCs has gone from 12 tD a peak of 6,500 in 1989, and 3,600 at the present dme. From no forign investment in 1978, the total has risen to over 29,000 joint ventures with a contacted value of $45 billion. And most remarkably, the shre of merchandise in China's Gross Domestic Product (GDP) went from 10 percent in 1978 to 31 peren in 1991.192 This is a significant and permanen chage in th face of the Chinese economy. As compared to other large countries, China has become a very open economy Crable 1.11)-by this measure, China appears to be more than twice as open as India and Brazil, and significanly more open ha USA or Japan. China now exports about 17 pece of the gross value of industrial output (GVIO) of its overall man t sector, and imports an estimated 28 percent of the GVIO of its machiney and transport equipment sector Crable 1.12). IV Ths fiue needs to be teaed with cauo Fust, Chinls Goss Nanal Produt (GNP) i widey regarded as Second, customs sasis an expors indi te fai value of expo based an processing of inmgAed inputs, which tends to exaggerate t role of trad ian o Chi-eseconomy. Excludig the ler would reduce the value of Chia's expors in 1990 by abou $11.9 bin, and th uad. to GDP dh8 to about 28 peat Depding upon what esmae of Chnas GDP is taken, the asde to GDP share could be anywhe bee 18 and 26 petL -21 - Table 1.2: CMNA: THE STRUCTURE OF ftODUCION, IMPOSrs AND ExPoTs, 1985 AND 1990 Share in total Imports/GVIO ExportsIGVIO Sector lmjm1O (%) , IYE) (% 1985 1985 1990 1985 1990 Food, beverages 11.6 11.6 S.0 8.0 10.6 14.7 & tobacco Raw materials 20.8 20.9 8.2 8.4 15.4 10.8 Manuftctures 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 Macinery & 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 Meo Items Light Industry 49.1 47.0 Heavy Industry 50.9 53.0 lothing 2.0 2.1 0.2 0.6 34.9 118.0ta 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 Ia An export share of greater than 100 percent indicates large export volumes from outside the independent accountg sector of the Chnese economy. Source: Based on Table A3.3. GVIO shares pertain to output of fims with independent accountg only. These firms accounted for 77.8 percent of total GVIO in 1990. Data on light and heowy industry are from China's Stadstical Yearbook, various years. 1.31 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 benefie from the use of updated technologies and exposure to the demands of consumers in exernal 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 eqort 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 ta, while impot penetatio tatios have remaned more or less stable across sectors, the share of exports in GVIO has grown more than threefld in the case of manufacg in general, and almost fourfold in the case of consumer m res. Despite these very substandal increases in export ratis, 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 virully unchanged. While it is probable that capital-outpu ratios in the more export-oriented sectors have faUen during this period, it appears that the allocadon of investme -22 - has remained unaffected by the growing opemess of the economy. Investment is evidently stil heavlly directed, resuting in a "planing" phenomenon, such that investable resources are divided more or less equally amongst all sectors instead of being channelled to the most efficient ones.2/ As open as the Chinese economy is today, trade stfll 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. 2W See L L. Siao (1992). -23 - Endnote 1. GATT (9I2b). The figures for shares in world trade include exports, imports and reexports and the trade of Eastern European countries. 92. World Bank (I992e). 3. MOFERT's report on the reform of the trade system was approved by the State Counci on September 15, 1984. The system of foreign exchange retntion, though first introduced on an experimea basis in 1979 was formalized in January 1984, and was subsequendy modified In January 1985 such that the retention rights were shared equally between the exting enterprise and the province. See World Bank (1987). 4. FDI annua utlization, 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 anmm thereafter till 1989. See Khan (1991). S. Hirshmamn index normalized to make values ranging from 0 to 1 (maamm nentration), accoring to the following formula: g1 1-113 I - rl)i3- where: j = cunrAy index; 239 xj = value of exports of commodity i; x xi z I-i and 239 = number of products the tbreed-git SrIC, Revision 2 level. 6. Almanac of China's Foreign Economic Relations 1991/92, page 88. 7. See Yun-Wing Sung (1991). 8. Almanac of China's Foreign Economic Relations 1991/92, page 88. 9. While Hong Kong's domestic ets of toys declined from $1.5 to $1.3 billionbetween 198S and 1988, reexport of toys, almost all originating in China, tose 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 declinedfom over 40 percent 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 Bankc (1992c). 11. See World Bank (1987a). -24 - H. TE TRADE PLANNING AND FOREIGN EXCHANGE SYSTEMS-REFORMS THROUGH A PERIOD OF TRANSMTION 2.1 Untl receady, the fundmeal feature of the Chinese foreign trade system was the planning mecasm 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 signdificant chge. In general, the thrust of successive waves of system refbom has been to reduce the importance of the plan. Although remarkable in its impact on Cbina's foreign trade, the process has not been an entirely smooth one. Numerous difficulties have arisen along the way, most stemming from the unique cirumstc of China's transition from a rgidy 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 export and the use of foreig exchange, and to reduce the burden of financial subsidies imposed by the eernal sector on the state budget. This chapter takes stock of the reforms of the trade planning and foreig exchange management system that have occurred since 1986 and makes recommendations for the fute. A. FOREIGN TRADE PLANWNGI, FOREIGN TRADE CORPORMAONS, AND SUBDIS 2.2 Foreign trade planning has entailed not only formulating the ewport and import plans, but also defining the role of China's foreign trade coxporations that have been used as an institutional vehicle for implementing the plans. The orinal objective of trade planning was to identify the key raw materals and commodities 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. 2.3 Following approval of the reform plan of the Ministry of Foreign Economic Relatio and Trade (MOFERT), now called the Ministry of FoQeign Trade and Economic Cooperaton (MOFTEC in 1984, the foreign trade system was decentized very considerably, with the provcial branches of national FTCs allowed to become independent financa and opeatg bodies, and each province allowed to create its own PTCs. By 1986 there were lready 1,200 FTCs in operation. he foreign trade plan alo 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 constrins implied by this target. The export plan was split inoo two components: the command plan and the guidance plan. Ihe command plan was mandatory, fixed in quantitative terms, applied to specific products, and was accompanied by an assured supply of necessary inputst the producing enterprises. In contraS, -25- the guidan plan contained value targets assiged to provincial authorities, which were accorded cosiderable flexbility in deteming how to achieve them. Products subject to the command export plan were in trn split into two lists: the list of so-aled Category I exports, comprising products that could be handled only by a few designated aional FTCs, and Category It eport that could be handled by a wider range of FMCs, including local and provincial ones. An stimated 60 percent of exports were subject to the mandatory export plan and 20 percen to the gudac plan In 1986, with the balance being 'above plan' expors. 2.4 Ihe Import plan was comprised of three components: a madty plan for key raw materias, the steady supply of which was considered essntial-these Imports were to be handled only by desigted national andlor provincial FTCs (see lso Chapter 3); a system of fOre exchange allocation for imported raw mials 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 niports that could only be handled by a few designated national tCs; and Category 11 imports that could be handled by several FTCs, including local and provincial ones. In 1986, an estimated 40 percent of imports fl under the mandatory import plan, and another 30 percent were procured under the foreign exchange allocation mechnsm for priority projects-the remaining 30 percent, financed either out of retained foreign exchange or foreign borrowing by noncentra autorities, were subject to selective import licensing.' 2.5 All procrement for the mandatory export and import plans took place at fixed prices. For the export guidance plan, the price could be fixed, foating or free market, depending on the how each province decided to meet the value targets of the guidance plan,Z and on the nodating position of producing firms vis-k-vis the proing FTCs. Given that all export taactions still had to be routed through FTCs, which in many cases were designated, the link between intational prices and the procuremnt price offered to exporters was still not systematic. On the other hand, such a link was much better established for nonmndy import . The widespread use of the so called agency system for imports meant that importes were fret b oose any TC for procuring nonmand ioryimports and would pay the import price plus the FlC's costs. 2.6 Under such a system, with pevasive domestic price distortions on the one hand, and FTCs bound by obligations of the mandatory export and import plans on the other, domestic curre losses on some iterational transactions were inevitable. FTCs incurred financial losses meaured in doestic currency each time they were required, under the import plan, to procur imports of such products as food grains and chemical fertilizers, which were purchased at intational 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 tpes of machinery and electronic products, and then to sell them on the inrnionAl market.2 In 1986 direct fiscal subsidies to foreign trade companies to cover their losses were 1/ lThis imlude imports of complet pant for indusial expaon, and centraly funded genal unvesten proects. 2/ Som provis esentially converted the guignce plan intoaptovip a commd plan wit ied quanMities and pricoe -26- more tha Y 24 billion, more than two percent of Chinaes gross national product and larger than the size of the official budget deficit. By 1988, total fiscal subsidies to FTCs had reached an amual level of over Y 26 billion (Table 2.1). Table 2.1: IOSSES OF FOREIGN TRADE CORPORATIONS NMANCED BY CENRAL GOVERNT BuDGEr (Y 100 mIllion) Year 1986 1987 1988 1989 1990 1991 Losses 249.6 282.1 268.5 336.4 224.4 176.1 mbno item Total losses of SOEs wihin budget 417.1 481.7 520.6 749.6 932.6 931.1 Source: Industrial and Commercial Department, Ministry of Finance. Ue 1988 and 1991 Reforms 2.7 The Foreign Trade Contract. The key institutional iature of the 1988 reform of the foreign trade system was the contract system. Every provincial level administrative unit and all spedalized natonal FTCs signed contracts with MOFERT. These specified three targets: the amount of foreign exchange eaninpgs; the amount of foreign exchange to be remitted to tne 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 jointy determined the values of each of these trgets and the State Council approved these numbers before they were incoporated in the signed contracts.? The conuract was the key policy inshtrument the central government used to control indirectly the incrasing amount of decentralized trade that was to be undertaken by local government while, at the same time, cotrolling the magnitude of export losses for which the central government was responsible.' 2.8 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 thre years.3/ Also, the process of setting targets, though still involving some negotiation, has become "bottom up." Typically targets are proposed by enterprises and local authorities based conservatively on gowth trends from previous years. / 1In tdie cam of contots between the cenr and ntion PTCs specidalized in Categoy I exports, qu_ntstive tart we stl specified. -27 - 2.9 iseal Subsidies. One of the importat features of the foreig trade coacts inoduced in 1988 was its atempted limitadon of the size of the fiscal subsidies tt the central government would provide to offset domestic currency losses incurred on the sale of expot. Natioly the aggegate amount of export subsidies was fixed at an amount equal to four percen of the value of eports in 1988 or around Y 7 billion. his total was divided among all of the conracts signed so that each provincial level government received a fixed amount of export subsidies. 2.10 Not only did the govenment try to put a cap on export-related subsidies, but In 1991, it went fiuthr and eliminad such subsidies altogether. The key proviion of the 1991 reform made all specialized national foreign trade companies and all provincial-level adminstive unitS responsible for their own domestic currency profits and losses, at least on exports. Central government fiscal subsidies for moneq-losing expots were said to be cut to zero beging in 1991. 2.11 In paralel, the cenural govemment has also moved to reduce the burden of fiscal subsidies to offset money-losing impor transactions. If the cap of Y 7 billion on export subidies was in fact respected in 1988, Table 2.1 suggests that central govenment 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. 2.12 During the course of 1989 the state raised the domestic prices of steel, nonfrrous 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 Imports, 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 domestic price. To this the authorities added Import duties, port fees and other costs. The reorm me 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 impored products were fully inslwated from these changes. These changs reduced the value of import subsidies paid by the ceal government by Y 2.5 billion in 1989. Overall, however, subsidies on import traisactions went up substantily in 1989 owing to the devaluation of the renminbi which aggrvated FTCs losses on the imports of important item such as food grains for which no price adjustments had been made at that time. This presumably explains why total subsidies to PTCs reached a record Y 33 billion in that year. 2.13 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 fuly reflect intenationl market prices. That action reduced the value of import subsidies paid by the central government by Y 270 million. Action was also taken on Chineas single largest money-losing import product-food grs.5 In the sping of 1990, the ineal ditibutin price of Imported grain ireased by Y 30 per ton. The state followed this up in the sprxg of 1991 by raising the retail prices of edible vegetable oils, flour, and rice for the first dme in 25 years. The increases were large. The average price paid by urban resident for wheat flour, rice, and corn rose by 0.2 yua 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 incued on the reta sale of domestically produced output. But the reduction of subsidies on imported food grais and vegetable oils in 1991 was also significat-Y 1.27 billion. Even -28 - so, fiancW loss on import taactons are far from eliminated. 'Te internal distribudon price of fwod grains still rmis below the Import cost plus handling and transpo costs, and alithough overal subsidies to FTCs bave decliae substantially from their peak in 1989, they sil amouned to Y 17.6 billion in 1991. If all eport subsidies were indeed eliminated as clated stardng January 1991, all this Y 17.6 billion can be assumed to be on account of subidies on import transactions. 2.14 Tie Export and lmport Plans. Perhaps the most important feature of the reform Itoduced in 1988 was a reduction in the importance of the foreign trade plan. The number of socaUled Category I export products that were subject to mandatory planning was reduced to 21, roughly half the mber previously falling in that category.4 Category II exports, comprised an addidonal 91 commodities, down from 120 in 1986. The reform initatives of 1991 went A*ter 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 chaneled through a few designated FTCs if theq are classified as Category I or 11 exports. In the first quarter of 1992 about 15 percent of China's exports were either Category I or Category H. 2.15 The import plan has also been scaled down since 1988, although not to thf same seent as the export plan. Tne number of import products in Category I, largely under the contol of specialized national FTCs, has been cut almost in half, and was down to 14 in 1992. OIny an additional six imports now faU in Category II. In the fint 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. 2.16 The process of scaling down the plan has been accompanied by the deentralizatin 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. TiE EXCHANGE RAT REGIME 2.17 From 1981 unti 1984, China bad dual exchange rates: official and secondary. The officia 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 officW 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 (EACs) in late 1986. At present, the administered official rate is used for foreign trade and other exteral transactions included in the annual foreign exchange plan, including probably, debt trnsactions. A second, more depreciated rate is determined in FEACs, where enterprises are penritted to 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. -29 - 2.18 Betwen July 5, 1986 and Decmber 15, 1989, the official dhe ngt was pegged de fac at Y 3.72 per US dolar, leading to a re appreciton of the yua in the face of risig inflaion. At the same dme, the exnge rate in the FEACs deprociaed, allowing portig entpris to maintan thei profitability. The devaluation of the official rate by 21.2 percent (to Y 4.72 per US dollar) In December 1989 ad by a furher 9.6 perc In November 10 rtued the re exange rate to the level prvailing In 1986; the nomia bilatera was maitined at Y 5.22 per US dolar from November 1990 tl April 1991. 2.19 On Aprl 9, 1991, a new system of a managed float was adopted, under which the adminsered official rate is adjusted frequently through small periodic cages based upon several factors including: (a) development In the balance of paymen, (b) deelopments In foreig currecy markes, (c) developments i FEACs, and (d) chages In the domestic reour cos of earnig foreign excage. Although the rate has been adjusted in both dhections, it has tended to depeciate and, as of end-March 1993, had reached to Y 5.73 per US dollar. 2.20 In the FEACs, the averae exage rate depreciated by abou 21 pern to a peak of Y 6.7 per US dolar in ealy 1989. I appreciated to about Y 5.9 per US dollar n December 1989 in the wake of the devaluation of the offcial rate. Since then It apprected slihly to Y 5.7 per US dolar In December 1990, before depreciating to about Y 6.9 per US dollar towards end-Setembr 1992, and fAurter to Y 8.4 per US dolar, 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 substanal nd stood at over 45 percent. Foreg Exchane Pla 2.21 The anmal plan for foreig exchago receipts and expendiures has been, and continues to be, fomuat by the State Planing Commisson (P) and pproved by the State Council. The State Administration of Exchango Commissio (SAEC) is responsible for supervising te implen of the plan, which has traditionally taken explicit account of the frei exchange implications of the mandatory ewxport and import pla for trade in key products. Wifth the elimination of mandatory export planig in 1991, the freip exchange pla now tak acount of the foreign ea e targets negotiated with each province in the context of the foreig trade contracting sytem- Imporrs of goods included in the import plan are allotted quota accounts by the SAEC and a quota notie form that is required by MOFERT before iort licenses are issued. When paymet for the import is due, foreign exchange is made available to the importer upon suder of locl currency against the quota account in the SAEC. In addition, the foreign exchange plan is used to allocate foreign exchange to fiane part of the import requirement of prioritq investment projects. This would appear to be redundant given dtat funding for key pwjects and their associated imp is already allocaed as part of the govenme's investment program. Relentlon Scem 2.22 China taditionally combined an inconvertible currency with a rigid system of exchan control requging all exporters to turn over all of their foreign exchange receipts to a spealized bank, the Bank of China, in exchange for domestc currency. Exporters thus were left with no foreign exchange to finance their imports. Like any other would-be impor they had to depend on the State Plamning Commisso, which allocaed all foreign exchg earning via an l import pla -The govenmena began to deceralize the administraion of foreign -30- exchange enis In 1979 by allowlag loca auithorities, departmenu, and enterprises to retain the dghts to buy back a certain prwpoion of their foreigl exchange eanngs.4/ Initially, retention qwos,' which ae transferable between eatpises, were transacted at the adinistere excha rate, but by 1988, all PlEs and domic enterprises with retention quotas were peritted to operato i he FEACs. 2.23 Red foreign exdcange can be sold at the FEACs for rinbi or used to purchase Imports. Retention quotas can be traded in the foreign exchange ceners or used for acquiring foreg exchange at the offcial rate to purchase approved imports. Because of the premia hat swap market rates fetch over the official exchange rate, the right to retain foreign exchange has consttted an important financial inducement for beneficiary enterprises. 2.24 The original retention rates, or the proportion of its foreign exchange eanings dth enterpises can retain as their quota, were relatively low. In 1984185, local authorities and enterprises retained dis to only 25 percent of their planned export earnings while the remain g 75 pcent went to the central authorities. Over time, the government has adaed the freign exchange retent system to frther its industral policy objectives. Beginning in ealy 1988, corprtions trading In priority sectors-light industries, arts and crafts, cothing, machinery, and electrical products 5I-were permitted to retain considerably higher proportions (between 70 and 100 percent) of foreign exchange retention quotas in order to give greater incentives to those sectors.' A higher rate of retention was also allowed on foreign exchamge earings above planned targets.4/ Likewise, special higher retention rates applied to certain provinces such as Guangdong and Fujian, several of the autonomous regions populated by minority peoples, and the SEZs, the latter enjoying retention rates of up to 100 percent. 2.25 Althoughthe specific arrangements varied from locality to locality and depended on the typ of good involved, retaine freign exchange was in general split evenly between the FTC handling an export bt action and the firm producing the good. In the case of general commo xdies exponed fom ordiy provinices, for eample, of the 25 percent of foreign exchang oearnig that could be retained, 12.5 percent would normaly go to the FTCs and the remaining 12.5 percent to the producing entepriseO 2.26 Several importnt 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 unifom retention rate was set throughout the country.J/ For general commodities,I this .4 Mm fOl mamont of tho foreign exchange receipts was required to be surendered to the dste at th offici rate by e ters. 51 In h cma of light industry, ars and crmts, and clething this poviion seems to hav been a quid pro quo for thm having tan resposbility for their own profits and losses. g,/ 7Th disaeared in 1991, with the elimination of the mandaty exot plan. 21 Tibet, teo anly exepdon, was alowed to rta i 100 percet reteion quota for its modest expedm IV For commoditis such, as aude oil and petolem detivatives which are in effdct monopolies of the So, rntn ts are set very low (less than 5 paeent). - 31 - rate 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.21 2.27 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 foreign trade corporation. FlEs and joint ventures can stil retain 100 percent of their export earnings in foreign curreaq accouns in resident bans. The retained share of new foreign exchange earned in processing acdvities was pegged at 90 percent, up significandy from the 30 percent rate prevailing in 1985. 2.28 Third, although retendon rados were raised across the board, the central government ensured access to foreign exchange sufficient to meet its own requirements by reserving the right to purchase, albeit at the prevailing FEAC rate, an additionai 30 percent of the foreign exchange initiaUy 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 enterpriss was still appropriated by the central government, and producers of export goods were left with no retined foreign exchange (Table 2.2) with which to directly buy nonplan imports. If a firm producing export goods wanted to purchase imports outside the plan it had to seek access to the FEACs in order to do so.1Q0 2.29 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 enteprise would only be required to surrender a portion of their foreign exchange earnings to the SAEC and would be allowed to keep a portion of their foreign exchange earnings in resident bank accounts. Fordg Exchange Markets 2.30 As early as 1980, in some localities, companies with excess retained foreign xchnange were allowed to sell it to other firms who sought access to foreign exchange to purchase imports outside the plan. Intially the volume of transactions in these local secondary foreig 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 overalued the domestic currency. More regularized markes formally opened in several cities In 1985. However, fllowing a rundown in its foreig- exchange reserves in 1984, the cental government effectively froze the cumulative foreign exchange retention rights of exporters and used the underlying foreign exchange to fmance 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. 21 In the case of thow seected producing enterprises which have been ganted direct taing right (i.e., not required to deal through FTCs), the share of the foreign tade opotio accrues to the producig enterpnses. This also applies to producing enrs which ort under the agmeny system JW All of the freign exchange sold to the State is eventually ctedited to the stat reserVes at dte People's Dank of China (PBC), although large amOunts are in tst on the books of the Bank of Chia (BO) (the amount n trsit on the books of the speciaized baks a aggregatd in the PBC dat). -32- Table FORRN EXCANGB RErnON RAUB, IM91 Peret to Gool Of which Pernt governme mae nu reained fA Of which L Gena 50 30 SO psovincial ovt 2 mwu clpaloc 40 foreig tra 0 H. Mery & 30 30 70 5 provincial govt deetrolo - 6S foteigntmadeco and m and tehngy product JU P _bia (InchudiS crude oil and reined petoluam Uulied pla 9 0 4.0 2.7 local gpvt amoun" ~~~~~~~~~~~~~~~1.3 Sinochem ovar plan amounts 30 30 70 IV. Fee from 10 0 90 10 provincia govt -tomo 45 foreign tUad e conkuta 35 Wnteprise I& Mme dlsibutuon of retwnions is that prevailing ater the central govenment exercise the righ to purchas, at the swap maru" rafte, sme of the WnMia dbistiutin of retaind forig exchamg. 2.31 Th. 1988 reform linked expanded foreign exchage retenton righs with a ltibealzd foreilp exchange market. Liberaizaton of the FEACs was assured by several measures. First quota controls on the utilization of retaned foreign exchange, which had been Imposed by the central government in 1985, were abolished begining in 1988. Second, the number of authorized local foreign exchange markets increassed. Each province, autonomous region and centraly administere city was authorized to establish at least one foreign exchage swap cente 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 faciltat curmency transactions between central government agencies and to facilitate transactions between local swap markets in different administratve jurisdictions. Finally, the swap markets were opened fomaly not only to foreign-invested enterprise but to stat-owned and collectively owned enterprises as well. Thes reforms led to significant increases in the volume of foreign curncy transactions on secondary markets. Volume rose from $4.2 billion In 1987 to $6.3 bilion in 1988, $8.6 billion in 1989, and then $25 billion in 199. However, inter-market transactions appear still to be restricted, leading to nonnegligible differentials in rate acrosmarnkets In different parts of the country. -33 - 2.32 Crteria for Accs to FEACs. Sales of fbreign exchnge at the swap rat hae been virtualy unrestrictc since December 1991, when all domestic residents were allowed to start selling foreign exch *nge at the swap re at designated branches of banks . Sales of foreigp exchge consist V. sales of actual foreign exchange mainy by FIEs and of foreip exchange retention quotas by Chinese enterprises (the actud foreigl exchange having been surrenderedto the state). 2.33 By contrst, acces to FEACs to purchae foreigl exchange is subject to approva and is restricted mainly to enterprises which need foreign exzge eiher t sevice theik foe curreCY debt or to import goods which are nt inconsistent with the industdal policy of the state. Purchases of acta foreign exdcange are uually limited to sums needed by FIBs which, according to the terms of their contracts as approved by MOFERT, can be used for desiaed puFos incuding their own oprating needs, debt repayment, and remittances.fl Domestic enterpris, which are approved by MOFERT to import, can purcha retet quotas in the FEACs; the purchased quotas must be used withi a six-month period to acquire foreign excmge from the state rese at the prevailing official rate. SAEC auhorization is dePendet on conformity with the prioriy uses of foreign exne set out in current governamet regulaions. The priority list CAnnex 2L reflects plan objectives rerding key commodities, and it provides for favorable treatmet for exporting activity as well as for the acquition of advanced techology. On the other hand, requests for foreign exchange to face Imps of consumer durables, luxury goods or goods judged to be speclative in na are npmitted. 2.34 Two points are eent to ud ding the manner in which enteprs can have access to forei exchange to conduct import operations outside the plV First, applications for foreign exchange are checked by the local MOFERT office, th Commission of Forei Economic Relations and Trade (COFERT), for conformity with the pupoms of the enteprse, as spcfied in its busine licensej1/ Enterpdses are allowed to import product that ar not subject to import licensing, provided that COFERT verfies that they r wtin the scope of the enterprise's business license. Second, every enterprise awthorized in this manor has a foreign, exchange budget (or quota) assigned to it by the local SAEC based upon its export ets and expected demad for imports, debt service, and rmittanc. Each application for foreign exchage is also checked against the enterpris's foreign exchgo quota befre access to the FEAC is appwved. Only after te documetaIon of the applicant is checked and an import license is obtained, where re ed, are buy orders prcosed or the applcant allowed to trade in the swap marke. For applicants with reention quotas, the procedu are simpler, since only verification of the enterprise's foreign exchange retention quota is required. Ul in at leas local banch of dIe Bank of China, the a t which domestic rsdet a selU ther breign exa was fixed by the bank at about 3% perc_tAbow h rate preailn in the locd swap conter. 12V Also individuals allowed to purha forn exchng fo foeg trve and forp langu examinatao fees II/ See Ann&2.2 for more detil on the opeaion of PEACs. MI In eslishing an entepise, its basic licens se out its purposes and stipuates if it is allowed to import to cary out its activities which would be cead y s ed. MOFERT apro of thds ceem (or a ontac with a foreiveed entepse) is required. Auortn_ of th miit enible for thaat actvity is also required -34 - 2.35 These guidelines on access do not appear to have inhibited the development of the market in foreign exchange.1' It was noted earlier that transactions volume jumped more than 25 percent in 1992 to reach $25 billion. Equally significant, interregional transactios 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 tegulations on market access did lead to pent-up demand for many of the products for which foreign exchange could not be purchased legally..U 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, cigaretes and liquor. Estimates of the magnitude of smuggling are necessarily unreliable. But it appears that most transactions involving smuggled goods, at least at rvhat might be called the wholesale level, are carried out in Hong Kong dollars. By the early 1990s, an esdmated 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 IePAcr OF REcENr DEvELoA"PmTs Inpact of Developments in the Exchange Rate Regime 2.36 hnpact on Exports. In a dual exchamge rate system such as China's, the fctive 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 ratio.lI Overvliuation 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 Anex 2.3 for analytical explanation). Figure 2.1 illustates 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 secondary market rate was 79 percent above the official rate and the implied tax exports at the time was at a peak of .a/ In respoe to a deteoraing trade balance, the authorities began tightening up administrative measures to regulate swap market activity in Febmaiy 1993. In particular, attempts were made to onforce pr ceilngs by swverely resticting acoess to swap madrets. As a result, trade volumes in swa markets feU off and fth black makt became mor effective. These price ceilings wer, however, removed on June 1, 1993. , Th effective exchage rate ficing an exporter is detemined by a weighted averap of dte official and swap rate as follows: r*eswap+(1-r)*eoff, wheree is the retentnratio, eswap the swap cee rate and eoff the official exchng rat If the mawginal ntioan is high-as was o case for many export-t tho marginal excban rae fcing the expoer is coespongly higher. Prior to 1991, FTCs and direct exporte of most products had to surender mmze than 75 percent of iheir foreg exchangp earings, al valued at dth official exchange rate, to the centra govment and provincid authorities. Since 1991, not only ar these same exportes able to retain a higher sbare of foreign exdcange, but they also get compensated at the higher FEAC rate for a good part of the foreip exnge that they are required to sumnder to the centrl govermenLt. In effect, 80 pent of the export eanings of local enterses i now valued at the PEAC market rate, even though a substantil porn of these (30 prcentage points) is surndd to the centra govemet and does not explicitly go thrugh the sondary maret. See Anex 2.3 for deails. -35- Table 23: ExcHANGE RATE AND TRE TAx UNDER CHI'S EXCHANGE RATE SVSM Ofci Secodary Implied Weit Year- exchange market eport exchange quarter rate rate tax for expors (Yuan/$) (Yuan/$) (%) (Yuan/$) 1987-I 3.72 5.25 20 4.39 1987-1 3.72 5.3 20 4.42 1987-M 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 1988-1 3.72 6.3 30 4.86 1989-M 3.72 6.6 32 4.99 1988-TV 3.72 6.65 33 5.01 1989-I 3.72 6.65 33 5.01 1989-1 3.72 6.6 32 4.99 1989-r 3.72 6.55 32 4.97 1989-TV 3.89 5.9 24 4.77 1990-I 4.72 5.91 13 5.24 1990-1 4.72 5.81 12 5.20 1990-m 4.72 5.8 12 5.20 1990-TV 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-s 5.36 5.87 2 5.77 1991-TV 5.39 5.87 2 5.77 1992-I 5.46 5.95 2 5.85 1992-U 5.50 6.25 2 6.10 1992-M 5.50 7.0 4 6.70 1992-IV 5.66 7.11 4 6.82 Source: DIF and Staff esimaes. 33 percen (Table 2.3). During the same period the red effective (oftlcial and swap) exchange raes also saw a significant apprecaton (see Figure 2.2). Under these diffi circumances, the foreig exchange retention system appears to have provided criical relief to exporters. Fiure 2.3 suggests tat the effective exchange rate to exporters wccessfully iulated export performance from the overvaluaton of the official exhange rae. budeed, exports have foWlowed very dosdy the trend in the weighted avrae exchange rate since 1987. Thu, access of e rs to a moe depreciated swap maret rate has helped prerve the profitability of exprting. Moreover, it is probable that the availability of foreip exango has also been ehaced from a reduction in the Incidence of hoadg as exportes have been more willing to sell eir retention quotas and freig exchange at the more dqepated swap ae. -36- gmre 2.1: TD iN TME OMCLAL AND SWAP MAR r EXCHANGE RATES Nominal exchange rates (yuan/$) 10 10 8 ------------------------------------------- 18 6 -------------6 2-- 2 .0 123412341234123412341234123412341 85 86 87 88 | 89 | 90 1 91 | 92 03 Ouarter/Year *Official Rate +Officiol swap -Wtd. Rate for Export Soures: WIF 2.37 Ihoserles of devaluations of the official exchapge rae strtipg i 1989 had a igficant impact In reducing the burden on exporters of the oveauatlon of the currecy. The implied export tax due was brought down to 8 percent by the fial quar of 1990. However, the Impact on exports of official devaluations was aenuated by the accompanying appreciation of th secondary market rate. Ihe W between the official and secondary rates narrowed as much due to the dqredation of the former as to the appreciation of the latter. An inevitable conequence of having lntroduced the retention scheme for exporers has been to reduce the responsivens of eport to the offica exchange rate.ll/ 2.38 Impact on Imports. Unlike export, imports can be divided into hee categories. First there are the mports dat qual for the offical exdcange rate. These consist mday of madtoy Iports and Imports for key Invatment project andteir wolume is determned to a large ext by adminisative means and tey are not responsive to bages in dte swap market rate. 2.39 Second, there are the cenal govement importu th are financed from te 30 percenta poit of reained foreg exdchange t are bought back by the centra vem from local enterpis. These import, althughprked at the swap market rate, are not financed 171 In the extem cm of 100 percet aion, deluation of th offic ilate would have no - n eapots (Se AM 2.D. -37 Figure 2.2: TMns IN REAL Evn v OFMCIAL AND SWAP MANW RAT= REER (yuan/$) Index 1980 = 100 500- ……-500 400 ------------ _ ________________- -400 300 ---- -……- -300 a 0 200-~- __w_____ ________200 IOOQ-_____________________.-100 1234123412341234123412341234112341 85 1 86 1 87 1 88 1 89 1 90 I 91 1 92 03 Quarter/Year +reer yuan/$ * reer swap yuan/$ Source: IMF tugh t, and ar unUidy to be respie to rative prics, becae te a diven primariy by plan tage dand ad ministrv emes. 2.40 FInaly, dter fi noMan, nonpiorty projec impot tt e finacd throu the swap market Thee a al valued at the scndary maet rae ad a the most reponsive to cages in the rlativ pric of foreigange. It i estimated tat su ch kqp ccunted for 50 pecet of tal imports in 1991.11 2.41 Under tis situaton, the mo depredatd swap maret raze has, by Icaing their prce, helped to curtai the demand for at least 50 percent of totl iots, Le., the impot purdcased trug the swap market Wiot the FEACs, the demand for such bots would bh been much stonger, whie the avaIlability of fin excae would have beean less. Por the remaning import, the requirements of the investme plan a still the primay ddring forc d mining demad. Pricing at la a part of centr govem im ports at the swap rt s a tep in h right diroction, but as long as ere is no discipli imposed on the g m .l Bdmated as a ed" on the bass tbat (a) about 20 pent of impors ao subjec dto th madatoy pl and (b) percentge of impots npdto t proe is 30 penent, Le, has remaied ouhy th8 ON as 1986 and in pat fom he 30 peta points of freign chg nedbW ebyerrim (eqivl to toughy 3S pec of I s t s boug back by h cen overme at to sp te, ad in p frm he _oe n's hol}ng of fop ea e om of insi and fo frig lkan pruoseda ech valuedat do offica ecang rate. -38- Figure 2.3: 1Tu WEiG D AVERAGE ExCHANGE RATEAmD EXom Wtd. Average Rate (Yuan/$) Exports ($billions) (Thousonds) 7 25 4 -------- 15 …1~~~~~~~~~~~0 2 -- -------- 3 - ------------ _____ --------------- 10 2 _ _ - - ------------------- 123412341234123412341234123412 85 I 86 I 87 I 88 1 89 1 90 1 91 1921 Quarter/Year -Wtd. Rate for Export * Exports Source: IMF. BESD own import requirme, the secondary market will have only a lir-ied effect on hmort demand. 2.42 Overvauation of the official excne rate has had the impa of fvoring planned versus above-plan impons by making the former relatively cheaper. Ibis has only accentud the problem of insufficient discipline on admintratively driven import demand. Moreover, the presence of the FEACs has made the implications for overl import demand of a deprecation of the official rate more ambiguous. Depreciation of the official rate bas, as noted eadier, been accompanied by an areciation of te swap rate. ITe latter has lowerd the price of Im purased in the FEACs and has thereby increased the demand for nonplan imports, and athugh the fomr has raed the cost of planned Imports, it is unlikely to havo lowered demand. Under the cira, it has been difficult for the central govenmet to redst uning to administrative controls u a means of managing import demand, an n y outome from the point of view of the import regime (Chapter 3). Ipc d Reorms In Trde Plann 2.43 Mme effectiveness of the exchange rate in influencing the trade balne is dependent on its ability to affect the domestc pric of export and import products. lbe lin beween in onal and domestic prices of imported goods has become stroger over the years - 39 - because of the declining share of mandatory and priority Imports and the Increasing share of imports conducted through the agency system. 2.44 Unlike imports, the agency system has not taken hold as strongly in the export sector and the link between domestic and Intemational prices is still intermediated by the FrCs. In principle, there could sti be a strong linkage between International and domestic prices if FrCs 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 ceain 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 their profits and losses; as a result, it appears that there is increased corpetition among FICs, particularly at the local and provincial level. lbey 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 Fs bave become pressured into offering better prces to export suppliers12l D. REMUA.UG PROLEMS AND RECOMME)ATIONS FOR FUnU=E REIORM 2.45 As much as the reforms initiated in 1988 and 1991 have improved China's trade and exchange planning system, they have fallen short in certan critical respects. Certay, 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. Ihese need to be addresed immediately. Export Planing and the Foreign Trade Contract 2.46 While it may be true that mandatory export planning no longer exists, it must be recognized that such planning has essenialy been replaced by the foreign trade contract system, which has the effect of holding local authorities and FTCs to what are in effect mndatory export targets. 2.47 Foreign trade contracts, although supposedly fixed on a "bottom-up' basis, take on a compulsory quality for several reasons. First, the State Council docment spelling out the provisions of the 1988 foreign trade reform states categorically that the value targets negotiated in the contrc for expors and the amount of foreign exchange to be remanded to the center are mandatory. 2 There has been no official pronouncement to the contrary and provinal officials responsible for trade still clearly see targets in the post-1991 reform contracts as mandatory. Second, fulfUlment of the targets in the contract is a precondition for awarg bonuses to officials responsible for carrying out the export plan. Each province's con ually determined targets e min turn dsaggregated and assigned to various provincial trading companies. These targets too are treated as mandatory and the personnel of these fims are not W1 In som cass, howavw. FC ar stil able to commnd monopsny powr (we Chapte 6). XI Until 1991, to amount of losses on export transtons that would be covered by a cenra govenmnt bsidy was also fixed in the conOct -40- dible for wage bonus unles all export target have been fulfilled. Third, rebates for domestic taxes lvied on export goods, Introduced In 1990 as an auomatic benefit for exporte have now been linked to fulfilling targets for exports and the delivery of foreig exchanmgo to the central authorities. 2.48 lhe compulsory nature of these exort value targets Is of Itself not so problematic.- he problem arises because these targets have to be met by FTCs that are not entiely fr to chose what goods they can export, and are no longer eligible for subsdies to cover their loss makig expot. As a result, FTCs cannot pay sfficient ateion to profitabilty and at the same time mt their obligations under the foreign exchange contrcts. Some evidenc suggests tdat the Incidence of bad bank loans to FTCs may have gone up sharply sin the conutct rity system was Introduce and subsidy payment bean to be phased out in 19?8 C(able 6.1). f no changes are made to the rulesby which FMs operate, their lossesare likely to buid up and infect ihe portfolio of the banks, much like those of state-owned enterpris, many of which appear to survive becau of the soft-budget constraint t recours to the bankIng sector provides them (see para. 6.23). 2.49 Under prent circumstances, FTCs cannot be expected to take fll responsblity for their own profit and losses. The elimiaton of direct subsidies seems merely to have tranferred t burden of supportig FCs from the government budget to the bakIg sector. In order to address this problem, the authorities need to take the rdorms of the export planning systemo to heir logical conclusion at the soonest possible (see pa. 6.27). The trade contct responsibility system dsould be abolished and FICs should be allowed to work towards maximiing profits rather than foreign exchange eanings. Linking FTC bonuses to profits Istead of foeg exchange targets would motivate FMCs to market only prfitable exports, thereby geneat export earings for the country without concomitant domestic currncy losses. Such measu, however, will not be effective without fiuther instutional reform of the FTCs themselves. FTCa need to become truly independent profit centers. In effct, they need to be granted greater management autnomy along lines simlar to the July 1992 Regulations for Trnsf ormn the Operating Mechnism of Stte-Owned Enterprlses.ZIr In paicua, they mustas a flrst tep be gven thefiedom to choose theproducts theydeal with. 'npo- Panning W 2.50 Although the size of the mandaory Impt plan bas shrunk, in control over imports has not declined to a significant degree. A large propordon of no _ry plan imports contines to be subject to control through tight cont of freg ecage allocations. AU imports of Inputs for priority projects come uar this ca y. Tha regatsinae intended to protect, tough law, th autonomous r of SOEs ia 14 key stem Tbesohg (a) Production, -d d _1n s, (b) the rg to dec (c) ri to so d (d) th rg to puhe goods nd maedal, (e) import and export ights, () th dght to e investment decidons, (g) die rg todod nappicationof finds () the dig to dipos of ase, (i) tho dght to opeat joint vent or undertk merrs, Qj) the right hi wokes, (k) th rt to determi_ _wmmwlmanegeme~ _ Q) the ight to determ distributio of wage and bouse, (m) the drt to decide th orfiviow of ine units, and (n) the rg to refu prmtion (demad for roue frm govenment depawrtmen). 2 Th questio of impo lcensig is taed in Cbapters 3, 4 and S. -41 - ee still account fo an estimated 30 percent of imports over and above those under the mandato Ilmpott plan. In addition, the IVports that are procurd on an ageacy basis and financd with foreign ecange boutA In teit FEACs, ae controlled trough the sCrening of access of purchasrs to the FEACs (para. 5.33) and through the widespread use of dicretionaty Imort contros such as licenses. 2.51 Mmeuse of their rightto buy back an addion 30 percenage poit of retied foreig excage from local entere In order to fiac par of the Impoct requirents for pioriy projes represen one of the several cases of wdouble planning" by the central pvr nt d is niot necessary. Funding for key projects and for their assoced impots alrady alloc as part of the governmes invesment progrm and th stae Industrl policy. t is, therre, inappropriate to go one stOp fulrter and also adminiatively assip foreign exchange for the purpose of procuring these Imports by haig local enterriss surrender to the centra govenment an addIional 30 percent of their reaind foreig exang at the swap te. bis results In needless distortion of the forign exchage allocation system in the ountry. I would be more logical for the concend st-owned enteprses (SOEs) and govenm agencis to simply purcha the needed toreln exchauge in the FEACs (directly, or tough FMs) (see alo par 5.59). Not only woud this be less dsortonary, butIt would signicantly increase the volume of transactions handled through the PEACs, and help reduce the risk of voiity is often asoced with thin markets. Over time, as mandatory Imports are phased out, all administrative allocation of foreigl exchange should be eliminated. Eainge Ratesues 2.52 he reforms introduced in 1991, whch dramatically iased the share of oreig exdchange t actions ocurrig at the market price, are clearly a step in the dr diecdo However, significant problms remain lhe present system of tenon quotas has sverva def. First, the quotas are in effect monopolized by Fits, with most local ami_lb enterprise being left with little or none of e foreign exchango tiey help gerate rable 2.2). To the extt ta there is still ificiet competon between them, TCs have been able to approprt a disp nate sare of the beeft from exports, and have not fuly passed these on to the manu g entepr. 2.53 Second, since FTCs themselves do not have any direct import requiements, they have tended to hold onto retention quotas for specative purposs. Hoarding of foreign exchange by FMt bas been facilitated by he ft that rett quots held by exones have no expation date. Tbe very rapid rise in the swa rate in early 1992 and again in 1993, was probably fueled in part by an artificW shortage of foreign exchge cased by potent sellers, peciay FTCs, witholding their quotas in the expectation of fuither depreciation of the swap rate. 2.54 Third, and most importantly, the present system of tading predominandy in retention uotas instead of cash has meant that the Peoples Bank of China (PBC) has not been able to intervene in the foreign exchange market in order to stabilize a sometimes volatle ra. Moving to a system of cash retenion would provide the auhorities with an effecdve Instumet for exchane e sabiization. 2.55 As a transitional arragement FEACs have served the economy well becams the bave provided flexibility to an otherwe rigid exange and trade system. However, the FEACs -42 - hawe also resulted in a dual exchange rAe system. Altfiough only 20 percent of all foreign exchange eanings are now handed over to the central government at the official exchange rate, the coverage of transactions at tfie official exchange rate is considerably wider, and includes debt serice paymeats and all the central government imports that are financed from foreign loan proceeds, the draw down of reserves, or foreign exchange eamings from the export of invsibles. 2.56 The economic 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 betwen the two rates widened in 1992, and again in the first quarter of 1993, the distorng 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 15 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 sil 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. 2.57 -Although there has been an increase in the volume of transactions between different FEACs, intermarket differentis in swap market rates remain. In March 1993, for examle, swap mar)et rates across the country ranged from between Y 8.0 to Y 8.5 to the dollar. This suggests that signiflcant administrative barriers remain to interprovincial tansactions in the market for foreign exchange. In fact, as pressure on foreign exchange rources 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 demanld for foreign exchange and Impeding the allocation of excess funds to where they may be needed most. 2.8 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 neesary 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 quickly as possible so that it covers virtually all current account transactions in the economy and becomes the equilibrium market exchange rate. 2.59 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 extensio for certain valid reasons. This would reduce the incidence of hoarding of retention quotas for speculative purposes. 0) The system of retention quotas should itself be abolished as soon as possible and replaced with a system of cash reteton that would allow eteprises to retain -43 - thek forelg edchange earings in ident bank acco. This would povide an Important boos to exporters and foreig ilnvestors, whlUe tkdig the foreig exdcange regime a step closer to current account convertability. In addition, such a measure would enable the monetary authorities to intervene, should the neod arise, in swap markets to maintain an orderly and stable market for foreign exchange. (c) Access to FEACs should be liberalized by eliminating all resictions on entry to the swap centers.l/ In parallel, an integrated national swap market should be developed by abolishing all local restrictions on trading across different FEACs, i.e., enweprises should be able to trade in any FEAC without seeking prior permission fom local SAEC authorities.2A (d) The role of FEACs in the allocation of foreigl exchange should be expanded by channeling an increasing proporion of all arrent account transactions thrugh the swap markets, including nontrade transactdons such as travel and other services and taactions relating to the foreign exchage requirements of the cenr government. This would involve the elimination of the existng requirement for exportets to provide 20 percent of their foreign exchange to the state at the officia rate. Exporters should be allowed to receive rtt quos for 100 percent of their foreign exchange earnings,21I and the authorities should purchase all their curent account foreign exchange needs through th swap market, whether it is for imports of goods related to the mandatory plan or for priotyq state projects. This will eliminate a source of price distortion in the exisfing system and ensure that the domestic cost of foreign exchange is more accurately reflected in the costing of pkjects and the attendant decision to borow abroad to finance some pwjects. In this regard, there is no reason why the central govemment's noncurrent transactions sho%Ad 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 priorit investment projects through the foreign exch e plan should be elimnated (see also para. 2.51) and that for mandatory imports should be phased out. Only when SOEs and local authorities are faced with the prospect of ucessing the swap market whenever they need freign 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. 211 It appeas that, effective June 1, 1993, the authboities relaxed restictins inpoed eaier duing tho yer. W&1 One way to achieve this would be, as suggested by the Chinese authorites, to set up an elecoic 8t system likng al th PEACs. ¶I lbre autoie can sti maintain a 100 percet stder rquiem of export eanig at an officid te. However, to officil rate will bome of little relevace from an economic stdpot since vitaly alU transactions will be tadg place at the swa -44- 2.60 FullWI n of the above mures would be tnamount to achievig unificaton of the e ge rates and overtabUity of the remnlb for current account . Such limed convrtablity would stenhn the Holk btween the monetay and the extea sector and put a grtr burdea on montary policy to play an effectve e in inluencing the baance of payments outcom. 2.61 Finally, as conerC the queson of moving towards fill converabflity on the capital account, the experienco of other countries suggests that a measured pace is advisale. Genealized opening of the capital account often leads to exchage rinsutability. Without very efcdve strlion it could underm efotts to kee inflaton under contol at a time when the govament is moving towards freeing up the current account. As such, the prudent cours of action would be to leave liberalization of the capital accoun till aftr important remaining structual reorm, such as hose relating to the import regime (Chapter 5), have been lmplemented.2W 7 What dhs implias t oug te sstm of cash retention could hgeerablie d to all fop echng eains rsictions an who tis ca h can be held would need to rnain im pla. -45 - 1. World Bank (1987a). 2. lhbes loss ar from domestic pce dliorto, not a disWilibrium exchange ma. tus, a devaluation woud ot havo necesily led to a reductio of domestic curremy loss on trade t actions. Given the traditonal procedures used to price traded goods on the domesc market, currecy deauadon would have reducd losses traders Incwred on exports, but incresed tose incurd on imrt tnsactions. Pardally offsett thu loss wer profits ta FTCs Inced when they were able to purchase cetain goods, such as crude oil, that were undeifprced or the domestic market for resale on the inteiond 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 (1991). s. Domesic farngate prices of food grains and edible vegetable oiseeds were raised sgnflcay aft 1978. But the reil price of wheat flout, rice, and edble vegetable oils sold to the ura populin through the rationing system reanined fixed at close to the prices state had set in the mid-l950s. Inevitably finanial losses on these transactions os steadily. $he state incum d lo as well on the grain I Imprted for real to the urba population since the price of grain products sold through the rationing systm was ddcal rgrdless of whether the product orignated domestically or was 6. GATT (1991), p. 14. 7. However, the coverage of Category I and II imports was considerably larger. Category I and 11 impots accunted for 32 percent of total Imports and so included a good ptoportion of imports not subject to mandatory planning. (See Chapter 3). 8. The foreign exchange reention quotas are noninerest bearing quota accounts held at the SAEC or its local offices. A retention quota consttes a right to purchase foreign exchange in the future for renminbi at the prevailing official exchange rate. They determine the amount of foreign exchange each enterprise is entiled to obtain from the state at the official rate and are denomiated in US dollars. Retention quotas are transferable among firms. 9. Expore in the light industry, arts and rfs and gaments sectors were allowed to retn a relatively high 70 percent of their foreign exchge earnings; only 30 percent was rmitted to the centr goverment Because retained foreign exchange could be sold in the secondary or so-called swap maket where the exchne rate in 1988 was at a twothirds premium over the officl rate, the favorable retention rate boosted domesdc crency eags from exportg. Foreign change retention in the machinery and dectonic equipment satrs was more complex, reflecting both the heavy reliance of these sectors on Importd components and pars and an explicit state policy of promoting export of machiny and electonic equipment. Exporters of these goods were allowed -46 - tD rota the flst 30 pet of dier foregn exchage eamings to cover these imports. hen the remainn 70 percen was divided with half going to the central government and the other half to be reaind and di -ided among the producing enterprise, the local gsemnt and tie depaqm responsible for supervising the enterprise. However, ceran dectronics and vele enepr groups (not specifically identified) were allowed to rea all of the foig chane they earned in exporting. The ste also allowed expoRtersof miliry products to retain 1OO percent of their foreigp exchange eaigs. 10. in prtice the um _ appear to have been varied and complex with FTCs fiequeny agreeng to pay producers somewhat higher domestic currency prices than tq othetwise would, but then eta most or even al of the foreign exchange. 11. Some modificato wer made in I992. On the one hand, access to FEACs was libaid somewha, with ions enupdies and otier organiations being allowed to purchae freigln e_age to finance trips abroad to attend exbitions or carry out Inpecim. Audrized bas and nonbank financial instit can also now purchase fregp exchange for use as working caplta and management funds. On the other hand, sct controls were placed on the purchase of foreig exchange to import cotton and wool toxtiles, etylene, polyeser, sodium carbonate, sodium hydroxide, penicillin, vans, mail trws, photcp machines, calculators, color television monitors and receivers, video camerwa, mcwve ovens, meridian tires, compact discs, compact disc players, vido disc playas ad video discs. -47 - m. CHINA'S -SYSTEM OF FOREIGN TRADE CONTROLS: A QUANTITATIVE EVALUATION 3.1 Ihe instittional features of China's trade regime are relatively well undetood by now.1 Ihis chapter atempts to provide a detailed qunitve analysis of Chinas system of foreign trade controls, covering not only the tariff regime, but also the complem system of nontariff barriers to Imports, and export taxes and controls. A. OBJECI nD IAtaRME1 OF CNA'S SYSTM OF FORGN TRADE CoNr S 3.2 Prior to 1978, China's trade system was highly centralized and Is objective wore pursued in a relatively nontransparent way through the decions of planing and trade officials. The process of reform has involved the gradual development of intuments for indinct cool iad has resulted in a progressive restructuring of China's foreign trade system into one whose basic operation is more comparable to the foreign trade systems of developing market economies. 3.3 The desirable characteristics of any foreign trade regime depends heavily upon the objectives for which it is intended. China's system of foreign trde controls appear to have the following objectives: (a) stimulating national economic development and the growth of exports; (b) stimuat the upgrading of technology and the development of new industries through price incentives and foreign investment; (c) maintaining and developing particular industrial secto which may not otherwise exist at China's current stage of development; (d) redistributing incomes by insulating the prices of goods wnecesary for the peoples' livelihood- from world market pries; (e) improving Chinas tems of trade by restricting the export of particular goods; and (f) implementing international agreements such as the Multifibet Arangement Some of these objectives are a legacy of the prereform foreign tade 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 tdfiects a greater appreciation of the role of trade in the process of growth and development. -48- 3.4 Intengly, despite the conting pressures on the state budget, the role of the trade rem as a ure of govemt revenues does n appear to be widely viewed wthin China as an Important policy objective for the trade resime. Compared to most other developing coutris, the conttion of tariffs to total central govement revenues is small (ess t 5 pecent). Anothr significant omision from the stated objectives of trade policy is its potential ue for domenc stabilization, although as- In 1988/89, for example, it has sometimes been used for ths pupose. 3.5 Ih policy instmens used to pursue China's policy objectives Include the follow1n: (a) import taif and export duties; (b) the frei exchange regime; (c) te Mo plan and freip exage conacting; and (d) licensing, quotas, importlexport canalizaon, and other quantitave controls on imports and expots. 3.6 AIthoug there are our iuments, they cannot be used to achieve all the various objeciavs of Chinas trade regime simultneously because, to a large degree, they each affect trade flows in the sam way, i.e., by changing the domesdc price of traded goods. In this situatin, conflicts and overlap are vitable. One example of conflict arising from the use of *e existin set of Intrmen is the use of an import duty to raise the price of luxury conmer goods. While this discourages the cnmption of lwuxy goods, it also stimulates the ela t of assembly industries which are high cOst and import intensive, drawing resources away fom mpthive export Idustries and from the development of efficient, high techology production. In contrast, mntining low prices for essemil consumer goods through import s _u or an overvae exchange rate may inhibit the growth and upgrading of efficient local idustres. A hallenge of refom will be to ratonalize and reorient the objectives of the trade regim, with some of the objectives being reassigned to other, more appropriate, policy istumet. For example, redstributing incomes is not an appropriate objective for the trade regim. Instead, trade policy will need to be used more efectively as an instrument for enhancing domsic efficiency. B. TASM Taff Stuctue 3.7 The broad structure of the present tariff system is simila to what it was in 1987. Based on the 1992 Hamonized System tariff schedule, the average unweighted tariff rate was 43 percent, up 5 percent fom the corresponding avege reported in 1986 and 4 percent above the UNCTAD estmate of the unweigted average tariff rte in 1987.1/ When weighted by the mvau of trade in each ategoty (at world prices), the average tariff rate was 32 percent, approximatelythree perentabovethe 1987UNCrAD estimateof29 percent. Thecurrenttariff 1, WodiWd Bk, 1988, p. 149, ad UNCrAD, 1987, p. 77. -49 - structue would be higher n computed if not for (a) ths sizeable teductions in tariff evels on 225 tariff lines implemened on January 1, 1992,1/ and (b) the abolition, effcdve Marc 1992, of the Import Regulaory Duty. The latter, an Import surcharge of between 20 ad 80 percent, was introduced on fourteen product groups, Induding a range of textile products and elaboratytransfiomed mauactues. Unti these measures wer announced, th trend in the tauiff schedule between 1986 and 1991 was dearly to Increase the aveage r of proton. However, taking account of these recent reductions, the weighted average tariff In 1992 was back to the same level as the 1987 tariff indcsiw of the then stll applicable Import Reglaoy Duty.y/ 3.8 An Indication of the strucwe of the ff system is provkded by the avere rates of tariff prtection peented by Harmonized System (HS) section and chapter In Tables 3.1 and 3.2. resctively. For comparison pmposes, both the trade-weighted and the unwegted averas are presented. 3.9 Table 3.1 indicates tht the trade weighted verage tariff rate Is In general lower tn the unweighted average. Tbis may reflect in part tie substtuton effect of higher tari's on the composition of imports: higher taiff on Individual commodities reduce th demand fo those goods and hence their trade share. Another possible cause of ths difference might be the presence of 'water in the tariff; of situations where high tadff rates are applied on categori where there no, or very lHtle, trade. A look at the tarff strucre at a more di td level (Table 3.2) suggests that the latter may be the relevant explanton In the case of producs categories such as food preatons, perfume and cleaning products, leater product ad wood mancthures, t import shs of %hich are small or negligible. On the other hand, the form eplantion seems the valid one fr products with sizable import shares, such as office may, telecomications equipment and electrical machnery 3.10 In order to examine the stuce of protection Implied by the taiff schedules it is usefl to mabe tie data on tariff rates comparable to productio and trade data Figures 3.1 to 3.3 plot China's trade weighted average tarffs by 2 digit SITC (Revision 2) categodes, the share of eah caegory in th 1990 gross value of the industrl output (GVIO) of all Chns enterpris with accountig an is sare In Chin's merchandis bports In 1990. Frst, withn the broad category of food, beveragas and tobacoo products Fe 3.1), e taiff esclates as the products become les etial and so reprents a consumer focus. sential foodstuff basically cerals and animal fedstuff, both stll subject to mandatory planning) have the lowest tariff rates (under 10 percet). A cluster of noneeal foodmst including dairy products, fish preparatons, meat products, vegetables and frit, coffe and te, are subject to tariffs in the range of 20 to 50 percent. Finly, prducts consdered least ssetial are subject to high tariffs, reaching punitve levels of ove 140 percen in the aso of tobacco 2/ GOAT, 1992. Tlese item acount for 4.4 pecet of Cn's total iumt trff He. I W-ith ths smbarg icluded in additin to hedled twif, te UNCrAD w ave of tota imt chare in 1987 was 32 percent, do am the preosent esimt for M992taiff scedul. Sine Marh 1992, f tarff cub hae beea undetk I Docember 1992, tarf on 3,371 tiff lines (mosy agrcultural and raw n_iatls), bt_ing th avea uwed taiff down by 7 poit (see Cht S). / Te enteqis accout for about 80 percent of Cdnas total GVIO in 1990 (so Tabl A3.4)) -50- Table 3.1: AVzRAGE TARM LEVEIS BY BROAD HS CATGORY (Percent) ChN's tariff renime by HS section Commodity HS Unweighted Trade section average weighted tariff rates average tariff rates LUve anials and products 1 40 33 Ve"etable products 2 44 24 Animal or vegete fa & oilk 3 36 28 Prepard foods 4 66 47 Mial 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 pwer 10 28 22 TextHlesand textUeproducts 11 73 61 Footwear 12 86 78 Artcles of stone 13 47 33 Jewelry 14 - - Base metals 15 28 20 3ahiny and deectrI 16 32 28 Trsprt and motor vehicles 17 43 57 Precidson intruments 18 38 36 Arms and ammunion 19 60 60 Mcellaneous and manucures 20 67 74 Art and atques 21 30 2 T1A AM au Source: Customs Dihctorate and staff estimates. Ihe weighted average tariff rates have been computed using tariff data provided by the Customs Directorate, aggregated up to the sixdigkt Hamonized System level, and weighted by corresponding import data for the first quarWr of 1992, also proWded by the Customs Directorate. procts. Of all food products, the only one hat repreSents a sabstntW share of imports is cerals (4.8 percent) and Ihis prOduct group is also a significant contributor to domestic GVIO a2.8 percent). Of the others, the very high ariffs on beverages and tobacco, though apparently -51 - Table 32: Av ntAGE TAiW LvRL s BY US SWnaO )md Descitio HS ton Wehed Unwuht Liv anmab 01 0.0 0.0 Meat and odible meat 02 50.2 St3 Fish and cusucean, momuo and othe inverbrate as 30.9 33.6 Dairy products. oggs, honey 04 32.7 57.0 Products of animal onigin 05 31.0 32.7 Lv tree and other plant 06 55.1 52.4 Eble vegebles, toots and tubecs 07 28.7 45.5 dible fi and nuts 08 44.4 56.3 Coffe, tea, mat 09 50.5 46.1 Cores 10 3.0 3.0 Prod. mill nut; malt; strhes; insuin; whea ghlten 11 41.1 33.2 Oi seed, oleaginous fuits; miscll gain, seed, eot. 12 33.9 33.6 atex gums, reins & other vegelable saps & etac 13 30.1 41.2 Vegeable pig materials 14 25.2 38.2 AnimauUveg. fits & oils & their cleavae poduct, de. is 27.8 35.7 Prp. of meat, fish or cnueans, molucs, etc. 16 70.0 70.0 Sugar an sug confciony 17 39.9 51.6 Cocoa and cocoa pwparions 18 38.9 35.6 Prep. of cereal, flour, darch/milk poduct 19 60.0 60.0 Prp. of vegetables, fruits, nuto or other pats of plants 20 60.9 60.8 MiscellaneousedibleG praro 21 77.9 72.1 Bseeage, spirits and vinegar 22 88.2 118.0 Residues nd wasto fm food indury 23 6.8 22.1 Tobacco and manufctured tobaoco s _ub t 24 143.4 116.7 Salt; sulphur, eath & stone plstering mat; lime 25 21.8 29.2 Ore das an sh 26 0.9 8.4 Minl fuels, oils and poduc of thir distllation 27 13.2 21.1 lnorg. chem., compds of prec. met, rdLoclemet 28 184 15.9 Pharro pitical product 29 41.9 23.5 Fatioe 31 5.0 5.4 Tanningdyeing extacus; tanmin. & doinv; pigm., etc. 32 312 31.8 Eseti oils aid res 33 98.7 96.6 Soap, organic s -e v agents, washig pep. set. 34 35.3 49.6 Alumioidl substne. modified staes; le 35 64.8 39.8 E xpilosi, pyroteclude produd; matches; pytop. rBoy 36 55.5 65.7 Phowgmphivo oinaratog goods 37 53.2 41.1 soduncoluscemial pgoduab 38 275 25.9 Plastio ad aticls tof 39 32.8 37.7 Rubber and arles thereof 40 28.4 32.0 Raw bides and dkins 41 24.1 26.5 Artics of late 42 75.2 76.4 Fur skins and arficial fir 43 95.6 82.3 Wood and articles of wood 44 ISA 23.0 Cok and aricls of cork 45 26.8 23.0 Mnufatur o srw 46 74.2 74.0 Pulp of woodof ote fibrous celu material; waste, eC. 47 2.0 2.0 Paper ead papabod art of paper dp, etc. 48 34.3 36.7 Proed boobs, newspawer 49 14.6 18.8 -S2 - Table 32: (cont'd) Decti NS section Weghbed Unwegbted Silk so 9.0 61.4 Wooln coase animd baIr S1 24.2 57.0 Cotton 52 48.0 45.9 Otw vogtab textie bers; paper yan & woven fab. a3 48.1 32.5 m-moad filaments 54 78.5 74.4 Mandoe stap ibes 55 62.2 82.0 Wadding, felt and nonwoven; yans, twine, oordag, do. 56 61.1 64.1 Carpe andothe textUl oAor oings 57 85.7 933 Spend woven fabri; u textile. fb; laco; tpe s S8 80.0 73.5 Impregpated, coated, coverlmined teole fabr, etc. 59 49.7 49.2 Knoed or oochetd fibies 60 50.0 50.0 A*t of aparp & clothing aceo, knitedlcrochetd 61 93.9 90.8 Aft of appaeL & cloth, accesories, not knitted/cr 62 81.0 8S.8 Other made up t ails; sets; wou n clt , eto. 63 79.5 79.8 Footwear, and theW lok 64 70.4 78.5 Header and puts erof 65 82.8 88.9 UYbrel, walkig-sticks, seat-stks, whip, et. 66 100.0 100.0 Prp. haden & down; ad flowr; ait. hunan hair 67 98.4 97.1 Aicles of atone, plaster, cmt, sabos, mica 68 45.5 42.4 Ceramc poduot 69 30.1 53.1 Gls and glsswae 70 30.8 48.6 Natumllaukured pears, precious sones & meab, coin, eto. 71 45.5 45.8 kron anMd steel72 13.9 14.5 Atices of iron ad s73 19.5 39.6 Cor and ul therof 74 11.8 22.8 Niel and arol threof 75 12 11.3 Aluminm and ari threof 76 25.7 28.8 Lead and artsthereof 78 23.1 24.0 Zino aNd aricles thereof 79 19.0 24.0 Tm and aricles thereof 80 36.6 26.9 erbasmels 81 163 19.4 Tool Imp t, coutley, s & fo*, of bas ment, etc. 82 29.8 36.0 Misedlanus arice of base mal 83 573 54.6 Nucler rors, boiles, mohy. & mh. appiance; parts 84 25.5 27.4 etcdal many equip. part thereof; sound recorder 85 30.6 40.1 Itailwlbamw boom. ralling-stok & pats heof, eto. 86 9.9 9.9 Vehicle A rlwhnw. rl sock, pub. & aocesries 87 77.8 59 Aiataccat and patstherof 88 6.0 6.0 Ships, beat ad Boeing suures 89 8.9 13.6 Opil photo, cin, measum., checkin. preiion, eo. 90 26.1 28.0 Clocb and watbes and parb thereof 91 S7.6 62.6 Musal Intumets; part and aco. of sucb articles 92 58.6 54.2 Am ad ammunition; par ad aeord tereof 93 60.0 60.0 Puriture, bedding, mat mat wsuppot, ushion, e. 94 63.4 71.5 Toy, ame and orts equisit; puts and aceoss. theref 95 65.9 57.0 Musebneu manufatured articles 96 89.7 75.7 Work of att, colecto's piees and atques 97 2.2 30.0 Source: Custms Dir_orate and saff sates. *.PIuItqjV t I _ o_ gli ~ '% .| C CO Q B Ii Iii'% _ ZXoO '' t . o! 0tt 1tt tf l;|l | lS S3, " < , s > r g n Ii LI~~~~~I:a,~~~~ -~~ 0C ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~Z ........_ _ _ _ _-................ -54 - Flgwe 3.: TARF STiRuCR$ -RAW MATERALS Percentage Percentage Shore 70 20 60 _________________________ -- -------- 50 ---------- -- -- 15 40 t-t--------------- - 10 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 EShore in Total GVIO *Weighted Tariff lShare in Imports Year: 1990-92 caital goods, which rresent the heat of Chinats industria and import struct, are mostly subc to rates b n20 and 40 pecent, r tu t aro 5 to 15 percen higher than on mtm cridcal raw mateials petroleum, nonferous me and metallic ores). Rates on chemicals, wood m acu and spwciized idustial mahinery, including power genating equipment, aro los to 20 percen. e on poducts such as rubber ,mufactr, pidcs and se d and electical mchiney and telecomnications equipment are closer to 40 peret, suggesi that the interests of domestic producers a quite importan in these secors. ITwo Intem dia product groups, namdy iron and steel and chemical fertiles, stand out as excPtions e their tariff stuctures do reflect more the int_er of consums t producers. Low tariffs are applied on each of these (15 percent for iron and steel and 5 percent for chemical fertlizers). Both products have, however, been subject to mandatory planning in the past nd loca enterprises in each sector have no doubt benefitted from subsidies throug th planng system. On tie other hand, two intemediate/capital goods stand out for the Imp c tgat Is attached tD prowction for domestic production. Ihese are textile yams and fabrics (SI1C 65) and road vehices MC 78). Although tiese are both important pus in to downstm they are sibject to vay high average tariff of 66 and 79 percent, respectively. i is n altogether swprisg given ta these sectr together account for about 14 percen Of GYIO. Tetiles alone accout for 11 pecent of GVIO and ii by far the singe most Importnt sector of Chie Inustry. FIgm 33: TAXRF STRUcRE-MMAMFCruS Pereosbtae Percentage Share 100 12 80…~~~~~~~~~~~~~~~10 80 ------------------ i------t------- --- ----- -8 60 ------------------ - --- ; ------ 6 40 - - - - - - 4 0 0 SITC Sector EShare in GVIO *Weighted Tariff EShare in imports Year: 1990-92 3.13 Ras on fiihed cosmer products are markedly higher ta even the highest rtes on inamediae goods, rangg mostly over 60 percent, with products such as fuie, clothing, travel goods and footwear being subject to avenge ts that exceed 80 perceat Although these high rates are no doubt aimed to discourage consumers of nonessential imports (an objectve that is largely met as evidenced by the negligible import shares of these products), they have the effect of providing margins of protection to domestic manufuctring activity that are disproportionately large in relation to the rather modest share of these sectors in GVIO.1I 3.14 How do Chinas 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 aveage rate was equal to Brazil's,fi and was thir highest amongst large conties after India and Pakistan. In terms of the number of individual tariff rates, China has a larger number than any other developing country except nida, nd X neT demofSlTC 82 to S in total GVIO islIsdhan 4pez=cnt, ande sam of aliconmr goods(SflC Sto8+S) is 8 peremt {/ Bil has, howver, wecently embarked Wpn Wa s intended to be a far-reaching pogsm of trade libealization. -56- Table 3.3: TM TAhF Swmu OF CINA AND On= LAJG DEVELOIN Co rrMS Duty Trade cellected Unwoighted wdgted No. of Std value of Coutry Yar men men rates deviaon Imports (%) (%) (%) (%) Agina 1987 21.8 17.1 37 24.3 16.1 EBZi 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 HUnSy 1989 15.1 na 78 13.7 9.6 Idia 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 1S 41.4 30.8 ippine - 27.9 na 8 15.1 15.6 Sourc. Pritchet and Sethi, World Bak, unpubished (1992). amost twice as many a the country with the netlargest number, Argenia In term of th standard deviadon meaue of tariff rate dipesin, only Ildia and Pakstan had a wider diesionof taiff rate, wih China having a much higher standard deviationth Bra despite the las similar average taiff rates. The relaively higher rf res on consumer goods In China mirmr smil tariff structures in other developing countries (Table 3.4). Tariff ntes on manared intermediate and capital goods, whie lower In China ta in othorwise comparable Brail, and much lower than in India and Pakstan, ar sdll igh compared to such couties as Argendna, Egypt and Hungary. 3.15 After seoi a sbstatl increase over the last few year, China's weighbted aerage ariff In 1992 was back to its pre-1987 levd. On average, however, Chins tariff rema higher, more nmeU and more dipersed tha most other laW developing countri, acept India and Pkstan. The mutplcity of objectives seems to accoun for th high dispesion of in's tiff stucte. On th one hand, the desire to propea sec in which domestic proc is sfcant has mean tt tariffs on capita goods and i_ diare on the hgh side. In some cases, such as road vehicles and textile yar, the res ar excqtioaly high. Likewise, where the tariff is used to penalize nonessendal consmpton, as in the caso of tobacco, beverges, and cetain kems of clothing, for eample, ras awe vey .57. Tabb 3A: TH1 Camrv PATmN or TA=F Syms IN CNA AND On= LAI DEVEPWN COUNTAs (UNWEGHTED AVERAGE TAuh RAs) Couy Agicultui Mining Consumer intermediate Capitl Argentina 20.9 27.2 13.3 20.7 23.8 1razil 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 HUngy 11.7 5.4 16.8 9.3 20.7 India 76.6 84.2 101.8 111.0 83.2 Pakltan 62.7 3S.5 88.5 S7.0 44.0 Philippines 32.5 13.0 38.3 23.1 21.7 high. TM has kept import penetration In these sectos vay low and has had uninnd effet of prviding bhg margis of protecdon to local production. 3.16 On the other hand, where the tariff has been used to complement the objectves of the plan tarf have been vey low and this has created an inhere bia against cetainw matis and Itmediae inpu for whic dome ic prics havoe been kept ardficially dressed. C. TAw REVEwnES A Exnwnos 3.17 A ditncive feature of China's tariff regime s its rieladvdy minor cobn to reveue genalon. Compared to most other developing countries, Chinas Import duties accon for a very smal prporton of tot ctal govemet revenues. In thi respect, China Is more like a devdoped couwtry than a developing country. In 1991, China collected only 5.6 prcent of the c.L£ value of imports in duties. Of the other developing countries consideed, only Brazi has a duty collection rae anything like as low as China (ble 3.3). In large pat, it is China's extensive import duty exemptons and rbate system that accouns for such low collecdton ratws. The chaccs and implications of this system ae discused bdow. Administrton and Revenue Raisng: bnpilcadons of China's Import Duty System 3.18 A neessary condition for effectiveness of a sytem of duty exemption and rebatos aactory desig 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 Inolve I y more paperwor and impose higher costs on exporters than systems which provie e ptions or rff reducto at the dme of import Even exemption sytems, however, can impsubst compliance and administrtion, st on export enteprises. Further, rigid administratvere urm can make even exempdto schemes in smul ing trade. -58 - 3.19 The Chinese Customs Law provides relief from import duties primarily through the prvision of exemptions and duty reductions allowed at the point of import (Customs Gene Administration 1988), rather than through refunds of duties paid or duty drawback systems. Ihe exemptions and duty reductions are primarily allowed for export production although some limited additonal exemptions are allowed for imports required for technical upgrading, and for speclal categories such as goods donated by international agencies and by overseas Chinese. 3.20 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 fiished goods are exported.3 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 transfer.,g products from the initial importer to another processing entrise for futer processing .' The duty exemption and duty reduction arrangements appear to operate satisfactorily; the enterprises interviewed by the mission members generally expressed satisfction with the operation of the current arrangements. 3.21 The major categories under which import duty exemptions are provided are: (a) Inward processing with suppl.od materials; (1b) Inward processing with imported (purchased) materials; (c) Equipment imported by foreign-invested enterprises for invesmenet (d) Equipment for inward processing with supplied materials; and (e) Equipment for inward processing with imported materials. 3.22 In addition to the above, duty concessions of 50 percent are also provided for border tade 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 compensaton trade, but again, their share is not significat. 3.23 Detais of the value of trade covered by each of these categories are given in Table 3.5. Ihe table shows that concessional imports became much more important in China's toa imports over recent years. Ihe 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 substnti 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. 3.24 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 tariff revenues is considerably more rapid tan 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. Ibis means that the customs data -59 - Table 3.: IMPOS BY IMorr Durv CoNC ON CATzGORy (S mMo) National total 1988 1991 Processing with supplied materials 7,398 10,935 Proesing with Imported mateials 6,348 14,091 Equipment imported with foreign investment 2,842 4,690 Equipment for proc. widt supplied materials - 900 Compe_sation trade 373 293 Boder trade (50 percet concession) 289 314 Other cocasional categories 2,015 937 Totd concessional iUmpo 19.26 32.161 Nonconcessiondal imports 36,003 31,630 Tnorts w 57 63.?21 CoXncessions share of total imports (%) 34.8 50.4 Total Mconcessionalo exports 14,661 33,428 peci Economic Zones Prcesn with supplied materis 1,432 1,504 Processing with imported maeias 1,183 3,590 Equipment imported with foreipn investment 373 1,130 All ote concessions) 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 'covcessional expor pecn) 18.1 18.8 Sowre: Customs Directorate. on concessions) impons cannot alone explain the low collection ratios.2/ It is likely that other imports, especially 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 explanalion, V/ A colleci ration of 5.6 pecent represe only 17.5 percent of the trad weightd aver tariff of 32 pent far 1991. What this indicates is that, if impos wer just divided into two categowies, one that pays all duties and the other that is toy exempt, 82.5 percent of 191 imps dsuld hav etd te coutry completely duty fiee. Per Ta 3.5, hower, only 50.4 of 1991 import were concessional. lbus tho Custom data n concessina impors cannot aloneexplain die low colleton rtio for tht year. -60- Table 3.6: VAL=E OF IPeORTS AND REVENUES FROM IMPNORT DU= (S bilion) Total Rgldatoy Import Import duty Collection Year value dut compone 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 Diretorate declining duty collection raos is a matter for some concen to the exte that ki caused by an incres in exmpions on imports used for domestdc consumption or in domesdc production. Mme forer s a sign of tarff evasion and the ltte only serves to raise effecive rats of protecion to levels higher than they aready are. Impaed of Emptlons On Ekors and Economuc Perforance 3.25 Ibe two ms Ipnt catgoris of Import duty exemptions have been hose for maerlwWs used for export prOcesing with supplied maeils and export proessing with Imported maerials (rable 3.6). Betwen 1988 and 1991, the Importance of procesming with imported mterl where the Chinese enteprise puras Impotd inputs for processing into exports, incre to become the most mportant source of oncesional imort. From this, it appears that Cinese entpises took advantage of their grater experience in itoaonal trade and the reforms in the foreig exchange system which allowed them to increase their purchases of importd materials and to reduce their dependace on imported materials supplied by their tradig partnes. Import duty concessions for the import of machinery and equipment for outwad processing also grew vey rapidly, with imports unter these two concewsional categories douling over the three yea perod coveed by the table. 3.26 Access to concessona Imports has been ctdcal to the success of China's export drive. Total expors asocated witb concessional impott arangemes doubled between 1988 and 1991, and now acunt for about 64 percent of 0ines 8 rbl16gexpors. AsChnted in Chapter 1, thes expotu have so fo not genrated high leels of domestic value added. 'Me limited domedc content of Chins fastest growing expots is In part due to the structure of the existg tariff regime. The present tariff stuctre allows retively high cost production of intermete inputs to condtue for the domesdc market. As a result, exporters tend to favor imported over domesc intmediate bputs. It ppears, therefe, that attention must be devoted to resuctur the entire tadff sruc self if China wants to etend the benefits of Its export drive to h rest of the domesdc economy-import duty exempdons by themselves canmot help in thds rgad. -61 - Tle 3S.: COVUAGS OF NONTADM?F DADIUS BY SECTR AND TM (19) Line N 4dg t IJa_iB k SrC 2 eaaWopdu= ut PwoantWsh&mWd dii on nmber of lihes on ima se of 10_201 oodes L+C+M+P+S L+C M+P+S L+C+M+P+S L+C M+F+S 1 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 5 4 72.0 0.0 72.0 60.7 0.0 60.7 6 5 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 1t 11 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 i3 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 1s 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 S7.9 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 5.0 S. 5.0 6.7 6.7 6.7 24 34 0.0 0.0 0.0 0.0 0.0 0.0 25 3S 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 51 1.1 1.1 0.0 0.5 0.5 0.0 30 52 1.1 0.5 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 00 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 3S S7 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 13 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 23.3 233 41 64 0.0 0.0 0.0 0.0 0.0 0.0 42 65 53.5 30.0 30.0 S4.3 30.6 30.6 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 1A 20.2 ...cnUad -62 - Tabe 3.7: (con'd) Line h2Ri2dns lnd baUs NORDIMIMMin bas SITC 2 Pkroodap sham based Pacentag slum. based digit on number of lines on Irnxnt dhars of,1992 el codes L+C+M+F+S L+C M+F+S L+C+M+F+S L+C M+F+S 47 71 19.1 14.7 5.9 23.4 17.0 8.5 48 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 39d3 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 82 0.0 0.0 0.0 0.0 0.0 0.0 s8 83 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 15.9 0.0 63 89 0.4 0.4 .O O.S 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 Note: (1) Total number of HS lne - 5016 ; Total value of imports (1992 firs quanxr) S12,018 milion. (2) L - Inmpot License, C - Impxot Control, M - Mandatory Plan, P FoIr Caaepory Imprs, = Second Cagory Ipor. I& Peno#daw of totl number of HS anes or firt quarter 1992 inpors. Q2 Of which the hare of impors sutiect to just mandatory plan i 18.5 percenL Source: Office of the United Sttes Trade Represeative (1992), and Staff estimates. Concdons 3.27 Alftough China's tariff structure is typical of most other large developing countries, the r vely small revenues tha it gentes resembles more the situation in developed countries. ITe small revenue contribution of China's tariffs endows it with much great ltibiwt to restucte its tariffs than most other developing countries. Rapidly declining duty colltion ratios are, nevetheless, cause for some concern to the extent that they are caused by (a) increasing evasion on products for domestic consumption, or (b) increasing empions on imports for use on domesdc (as opposed to export) production. The bulk of duty exemptionsIn China havoe 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. lhe domestic content of such exports, however, remains limited, and this suggests the need for a more fimdamn_ -63- truting of the triff structure such that upstream domestic produedon becomes more competitive. D. NONTARW BARRRS TO TRADE 3.28 In addition to the comprehensive system of tariffs, a wide range of nontariff barriers (NTBs) to trade have been deployed in Chinaes trade regime. These barriers comprie a variety of aministrative instruments including the mandatory import plan, canalization of imports through designated national PTCs, import licensing, and import controls.3/ A lot of these mechnisms are in fat overlapping, and the exact manner of the applicadon of each is difficult to disentangle. The responsibility for implemening these measures Is widely dispersed whin central and local govenments. As a result, in some cases, the same import requires multiple stages of import approval from different agencies. bt is estimat tat 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 Schedue and account for 51.4 percen of total imports (Table 3.7). Types, Admitrn and Coverae 3.29 The Mandatory mport Plan and Canalization of mporwb. The madatory 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 gain, frilizers, iron ore, cotton, wool, plastic sheeting and wood pulp (An 2.2 has a complext list). Together thase accounted for 9.1 percent of all HS lines and 18.5 percent of total imports-21 3.30 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 Ctegory I imports. Ihe imports of these commodities are handled by only a few FTCs (Chapter 2).4W Canalization in such cases is understndable in that it facilitates the administration of subsidies nded to depress the price of many plan commodities. In 1991, ther were 648 FTCs authorized to handle Category I imports andtse had in effect the responsibility for implementing the mandatory import plan handed down by the central authorities. Ihe list of Category I imports is, however, not just restricted to plnned commodities. In 1992, it, in fact, covered 386 additional HS lines, comprised mainy of raw 1/ Aside from ths insuments, impo a also contoled through a complex qem of foeig exbang allocation, which was dscsd i Chapter 2. I It seom t as of 1993 there were oly five commodities stil sdject to the impot plan and assoiatd subsidies. Ji Woo pulp is under Categosy IL It is not clear how the impotts of iron ore (HS 26.01), copper (HS 74) and alminum (HS 76) are handed. Ihes commodites are nei in Categoy I wor in L -64- m ias such as Iron and steel products, textl yarns, and sugar, but also including some cosmerI goods such as Cgat. In such ca, It wold appear that c izadon is uset by the cera auhoriies to control the flow of imports either for balance of payments purposes or for potect domedc industry trugh the enforem of Import quotas handed out to 3.31 In addit, tore exst what are called Categorq 1 impo (Chapter 2). lTeso Imporp are also restied to certain FTCs, but the number of FTCs that can handle such product Iger. This, thereo, rprese a somewhat loomr form of impor contro hat which can be eercise over Categoty I imports. In 1992, Category I imports covered 47 KS lies Includig such Item a television recivrs and cathode ray tubes. 3.32 Overall, an estmated 32 percent of tolmpo were subject to control dirough canalization In 1992. Of these, two thirds were Imports under the mandatory plan. For the rmainIng 13.5 peceto of lmpots, therefore, canalization was used as an Inent for wontroling Import demand for reasons that have i tihing to do with the plan. 3.33 Import Ucening. Import liceming is administered by MOFERT, or what is ww called MOFTEC. Within ts system, goods are divided into two bmad groupins deined on the bas of the cteria used for their award and the authortes responsible for their n . These groupings overlap with, but do not correspond exacdy to, the 1 _-11- - of products for the purpose of the Import plan. Fis, Category I licenses are mpot licenas whose b is und kea only by the central office of MOFERT in Beiing. Crieia for the award of these lices are the most stringent. Such licenses are aw only to Impor that have foreign exchage allocated to them by #he centa govrnmet. In addition to cerdfication of ceontral government forei exchange allocation, the award of such lices reques approval documen from the conced ministry (e.g., Msy of texties In the case of imports of ya, etc.) and a valid Import contact. TypicaUy, Cory I licenm ar reservd for produc subject to the mandatry Import plan and/r Produts clasid as Category I Impo as descibed above. Not all Category I or mandatory Imp", however, are subject to Category I import licening, or any import licensing for tha matter. Products such as cotton and fertilizers are planned commodities whose impons are rstricted to speclized naonal FTCs and ae not subject to any import licensing requiremen 3.34 Second, Ctegory II licenses are licenses for which the criteria are somewhat less siaget and which are adminst eiher by Special Commissioners appointed by MOFERT and located in the regions, or by provinc or municipal Economic Commissions. To import products subject to Category II licenes, the importer must fuish evimence of foreigp exchange allocted by the provincial/local authorities or retaed foreigp exchange, an approval documen from the concened provinci minisry, and a valid import contract. Typically, most Category 1I Imports ar subjet to such licensing procedures. 1 In addition, Category II liceses ar requird for a large array of noncaalized and nonplanned itm. These include such products as boveages, food products, textie yarn and fabrics, machinery and appliances, sound recorders, road vehides and aircra. IV/ ltouhain,e Mot all Categor I imports seem to requir Categor U import hioeaw or any kind of iit Vm at A. Inoraic emica, fr exampl, o al de"i d as a Cao i Import, m mo subect to any impot cesing. -65-^ 3.3S It b appare from the above tht import lices ae used to srve mtultple objectves. On the one band, liceming seems to be used as an adminitt device to allocate a fixed quantity of planned Impo and centllyovincly controlled fored exchae to differet users. Here it functions as a quota allocaton mechanism On the other had, Ulcensing Is no doubt used for protcting domestic economic activity a wll as for regulatig, for bala of paymen puroes, tho demand for Imports fnaced oug retained obrde exhage. In all, the are presety 53 broad categories of producs subject to imort lIceni. Thss accounted for 12 percent of all S tarff lines 1992 and covd 25.1 pent of Cblna!s tot Imprts. Of these import, however, more than half wer elso subJoct to caalizao. T Impo for which licensin ruiremens applied In a nooverappig mannr acuoud for an esfimated 11.7 percent of China's total Import. 3.36 Anecdotal eviden sugges the award of Ipr liconss (paicury Categoy II licenses) is subjet to considerable administatve discreton. In some cas, the dktibution of lic es seems to be Ile tD FTC pefome. FTCs In fhina dwr hoae been known to be allocate impot liceWns to enable them to use the assocatd ret to improve der financial posion. In other istances, Import licenses re haged for favrs from othe prncial or national au ities. Not unepctdy, it appeas thg g,aw ,/ play an Important role In how licenses are ultimately allocated. 3.37 lhe diision of responsibliy betweea the central goveent and tho provic in the administraion of Import lices poses an additiond difficulty. mpt lcening has, It sems, been used by provinci and municipal thorities in accoAwe with the pioritias of their respetve locl plans. This segmet Chis trade regime and in ffct enables derent provins to admister foreip tade policies in different ways. 3.38 Import Contols. Compared to import licenss, which appear to be used both for bane of payments purpes as well as for protectig domestic industry, hmport cota ae used specifically for protecto I 1992, controls applied to a rng of goods In the machiney and electnics sector, for which Import could not be underakn wito IIIve approval from the Ste CounG Maciy and Ewes Imor Onol Offlc (SCEIO). This office reviewed proposas by various Chines units to Import machinery and electronic equipment and assesses to what extent these needs can be met domestically. For ths purpose It used lists of possible import substute provided to It by vaious indusi minstis as a soft of 'examination catalog.' Nominally these lsts were maintained as a souco of infor on so that would-be Importers were aware of the fll trange of domeclly produced macnery and electoic product. Anecdotal evdence, however, sugg ta once a product was on such a list, approval to import a foreign product was difficult to receive. 3.39 Recenty, the autortes have anced the abolition of Import substution lst and a phs dimhation of cntrls (seo Char 5). For he time being, however, controls apply to about 3 percent of HS taiff lines and cover 7.7 peren of total imports, noe of whic overlap with products subject t Import licenig. It appea, thef, tht a product can be subject to either import licensing requlemet or Import conols, but not to both. W hat is, social alations or connectons The Strcte of NTB Protecton 3.40 Figure 3.4 shows how import licenses and controls are distributed across poductive sectors. It plots the proportion of HS tariff lines subject to import licensing or Jlgure 3.4: STRUCrURE OF NT CO AGE, 1992 Weighted Tariff (X) NTB Cow. (% of HS lines) 160 100 140 ------- __________________________________-_ _ 80 1 ?0 ----------------------- 100- ------------------- 60 80 -------------- 60 ----- -------------- - -- __ 40 40-- 20 201: @ 20 d 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. 'wntrol? in each twodigit SYrC sector. The figure indcateshat import licenses and controls are nty conceratd in three broad groups: (a) agricultal raw marials subject to price conols and import plaig (rubber, cork and Umber, wood pulp and textile fibers such as wool and cotton); (b) criical ma ing sectors such as iron and steel products, te yarns and m qchinery where domestic production is significant; and (c) nonessentia consumer iems such as bverages and tobao. Ihese tree broad cagores correpd wuly to the three differet objectives of China's system of licensing and control that emerged from the dision above. Inthe case of (a) the high concentrtion of NTBM woWld seem to be expained by the need to allocate fixed quates of planned imports between different users.I In the case of (b), protection seems to be the dominant motive, whereas in (c), balace of payments control is likely ,a/ Tu sam motiatn accomt for t somewhat less, aldough stil sigficant, onmon of impost oinses in h case of cetain u, such as ubber preducts and wood ptoducts h at m subject to ptice controls and an canalized. - 67 - to be the prmary motivating factor. In practie, it Is of course very difficult to dis_ent e when import licensing or contols are used for balance of payments purposes and when they are not. It is likely that NTBs (wheh licenses or control) have on occasion been used for restricting access t forei exchpage no just in the case of noneseni conmer goods but also in that of the other prod groups on which they apply. 3.41 Comparing the structure of the coverage of import licenses with dat of tauiffs shows how the two insruments are used in a complementary fashion to achieve the government's objectives (Figure 3.4). For most planned or canaized commodities, because the objective is to keep domestic prices artificily 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 tha on NTBs. Thus, excepting tobacco and beverages, in other sectors such as nonesserial foods, apparel, tael and sporting goods, we find very high tariffs but a low or neligible NTB covere. Conduln 3.42 With the declning Importance of the plan, only 18.5 percent of China's imports ontinued to be subject to mandaty impo planng in 1992. Of the rest of the 51.4 percent of total impors that were subject to some form of aiminisatve import regulaion, 12 percent were subject to canalzation, 11.7 percent to nonoverapping impot cening and 7.7 percent t nonoverlapping import controls. 3.43 Aside from handling planned Impots, canalization is still used as a powerfl Instument for controlling the import demand of a range of nonplan commoiies either for balace of payments reasons andlor the protection of domestic Industry. Import licensing iS also used to serve the same range of objectives. There is considerable overap between canization and licensing, only some of i justified. Overlap between canalization and licensing seems undrstandable 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 yar, sugar and televisions on the other hand, at least one of the two, i.e., either canalization or licensing, would seem redundant. 3.44 Import controls are itended essentially for domestic protecion and are resticted to the machiney and electronics sector. Overall, the sectors that are preny subject to the highest of NTBs are iron and steel products, textile yarns and mahinery, i.e., critical mg sectors where domestic production is sinfican. Available evidence sggess that considerable discretion is Involved in tie administrto of import licensing and controls. FPCs and enterpris wih the best connections are likely to benefit the mosL E EXPORT CoNmois AND TAXEs 3.45 As in the cae of imports, the Chinese autorities have deployed a wide afrr of controls, manage their exports as well. However, over the yea, the role of planning for exports has become considerably less importa than for Impos. In prinple, al mandatory export planning was abolished in 1991, although some exports tused to be subject to such plann (about 1S percent of taexports) are stll canalized or channeled tough designated -68-b FCs, either as Category I or Category I1 eports (see Chapter 2). lhe more important remaing controls on exports are export quotas/icenses and taes. 3.46 As noted in the previous Wodld Bank study of aLaa's trade tegime,' export quotasA/icenmes and taxes appear to have two majorobjectives: to reduce the sly of some exports, in which China has a vey large akt share, nd to incr the domestic aviability of particuar goods needed for ecoomic development.A/ 3.47 In 1992, expott icnig was used for 676 HaronIed System commodity grW acountng for over 15 pece of ChWs exports. A largo set of commodiies subject to export liceming was agricultural goods, such as beetd pork and vgetables, eport to Honx Kong. Here, the objective of the licensing a Semn Is to incr the prices recivd for 1we commodities by ontrolling supply. em same i tue for port liensing lithe case of such commodites as ugstean in which China has a very larg share of the hnetona market (40 pcet). On the other hand, oontrols on such products as rice ad mae have baen used to osu the adeqt xavaibility of these goods dometcaly. As of Apr 1993, the scope of export conrols was reduced somewhatL Howevr, 38 brd categories of products sti remain subject to export quotas/licenses. 3.48 The use of export licemes to inease the domeic availalty or dpress dte price of a variety of key planned commodities has, however, been more signficant. Befor seconday markets wer allowed for planned commodites, export contls were used to prevent such leakao of hes products as might otherwise have been induced by the huge gaps between nterntiona and adminstered domesc prlces. Now that secondary markets are functioning for a wide ran of commodities, the govemets objectve seem to be to not only to fix official prics bdow intrnatonal level, but alo to maintain the seondary market price of selected exportable. suh as coal, petoleum, ma, and rice, below world p . t has been doing is by rest exports throug th wiespread use of export licenig. Such policies bias the hIentdvo structure for nonpan production against thae secwns and encourage exces cumption ofthi products. In the eeneW sectoro, for eamplo, where ditdortons e stil vey markd, depesed seonDdary market prices f cold and petroleum continue to make Chiendustry more energy iosive dth ought to be. lbe removal of such eport controls Is tied to progss in Cina's atems at price reform. Th rtionale for these controls will diapa as China phases out the Implicit subdies to consumers and industry that its policies of price corol i. 3.49 Meanwhile, aconequenceofesingwedgebetweenthedomescscondary market and intrnaonal prices of exportables is dt the few FTCs that aor desiated to han eir saes on the teatonal market are able to appropria important rents (see Chapter 6)Q.z A tempry, even if far from satisfactory, soluidon tOD this problem would be for export licenses to be replaced with export ta equivalents. At least in this way such rents as may accrue would be diected sematically to the central government, and not to individual jgi In addiion, hower, expot liceng is used to complywith intenatonal afsuch as t.* Multfe AranensL ill At 1resent, tEas gove_nment °elies on profit-sharing negotiated on a case.by-os basis inlordlr to . sao ptt of trentsaccring diidalFTC. As FTC bec om Du., lii ehnimi iey " to beoeI efcie -69 - enterp es. Over recet years, China has In fct expanded the use of export taxes-the product cateodes subject to epot taxes hav rien frm 19 in 1987 to 54 at the prestme. Expot taxes are used In pursuit of exaty the same objectives as export licemes. However, in the sectors where they bave been Itroduced, they bave not to date replaced export licenses, but merdy supplemented them,, F. JIACr OF TRlA CONrROis 1 _terat lprie Ceo ps 3.50 The wide rge of trade policies utlied by China, and the nontrasparent na of many of the polides used, mkes it very difficult to evaluate their co ees for eonomic per4'ormane. The most diate diffickty is that the presence of nontariff barie provides no Indicaton of thr trade hibiting effects. With a trade regime as diverse as China's, where some taff rata exmy hig, ther is also the possibility of swater in the taiff: that some tarff raes wM be so high as to eseiay oeiminat tade in the affected commodity, with dte gap between domesc and wodd prces being smaller tua die tariff. 3.51 GIven the structu of pmoction in China, the price comparison apch Is t only means by which ay es_t of th efect of protection can be obtained. Even in more explicity maret-orientd esonmies, ths approach is subJet to severe difficulties of obtaining price Iormation on sufficily hom products, and of adjusting for diffences in location and other att . 1 China, the pproach is fArther complicated by the need to adjust fo the two-tier exchange rt system. However, a fairly extensive analysis was possible on the bai of data on domes pries for a mrg of commodiies, most of which are subject to licens, x and/o planng. 3.52 Table 3.8 prens the results of rdondal price comparns for a slecidon of products.V/ Ihe secondr madret pdco is the one that has been used in making the price compaisons in each case. For clarity, the produ are classified as Importables or exportes, depndi on whether China was a not importw or exporter in that product category. This disicn is Importut in China because diferet average effective exchag rates apply for exports and import, whic necesit the calcuation of separate price differences for impores and exportable.. Given informaton on import tif and export taxes, it was posble to decompose the toa differen between Chieo prica and world prices hito componens due to particula trade policy isruments. hus, the tabloe presn computatio of the taif equivalents of Import licenes In the case of importables, and of export licenes In te case of exportables. Aposdti tariff equivalent in the case of an bqportable means that the import licens is bin and the domestic free market price of the product b above the sm of the intental price and the relevant import tariff. Likewise, apo4ive tax equivalent in the ca of an q,ornabk aso di . that the export licnse binding in the sense that the IV Svad prduts, sc as cogl, m sujedt to bodi export tas ad expot licenses 4V Ih completuft ae premed in T1Al. A3.7. -70 - domeic free market price is lower than the dffference between the Iternationl price and such export taxes as may apply-W 3.53 The price comparisons presented in Table 3.8 provide a number of important perspectves on the operation of Cias forig trade regime for a wide range of commodities. It is possible to assess, in broad tem, how effective the trade regime has been in achieving its the main policy objectives. 3.54 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 markets through the use of export taxes and licenses. In the case of tungsten, an export tax of 20 percent, in conjunction with a tax-equivalent effect of export licensing of another 55 nercentage points, seems to have raised the export price of tungsten relative to its domestic price such that the world price is more than 60 percent W2 above domestic prices. To the extent that China is a price maker in the international market, this would certanly have im,roved its terms of trade. Whether or not this has led to net gains for China is difficult to assess without information on world demand. 3.55 Second, the table reveals in what manner plamed commodities, both exportables and lnprtables, have been handed. Export taxes and licenses have clearly been effective in deressing the domesdc price of certain exportables considered to be critical for consumers. However, the table indicates that the resulting distordons have been very large. For coal, it apears that the substantl export tax, of 40 percent, is overshadowed by an NTB export tax- equivalent of roughly an additional fifty percent.?QI This distortion encourages the inefficient use of coal in the Chnese economy and conributes to pollution problems. For crude oil, the ditortion Is even greater, at 85 percent. The benefit of the enormous implicit export tar. on crude oil, however, appears to be largely confmed 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 percue. 3.56 Within agriculture, a similar policy has been pursued to maintain price distortions that benefit urban consumers at the expense of uril producers. For such exportables as maize and rice, the domestic prices were found to be substantially below the relevant export parity, 13/ Given the wodd psice, the tariff e and the assumpt that import pncing is based upon sondr maQket exchange ates a comrisoe between the domestc pnce and a tariff-iclusive mpot pnce ca be made uig the arbitr condition: (13 p4- (l+Q(l+0et).ep whoe p& is the domstic prce of tdo importb; is the tariff equivalent of the nontariff bTier affecting the import of tho good; t is the taiff levied an the good; e. is the exchanp rate applying to this t_anaio, and p. is the world pric of the good. Since we have informatio on every variable in equation (1) except the tarff eqivalent, it can be solved for this equaton. For export taxes, t and t, ae negative, deprsng the domestic price. 121 Computed per formla in footnote 18. 2QI This estimtae, based on data provided by the Development Research Council, is likely to exageat somwhat actul price differentials in cod. It should be treated only as a boatd indicator. -71 - T 3 Uo lbum oat muaouno 2 bgVR.a" l M ON If W_AwMw Putvs Coaw*araa,F b9l Fr Nlll uS Nodu 05.6 wA.i tmi Tomf w Code Dwa.. F" prif p.e ni e* (1) (2 (Yi (s) a(Yi) wwoe (6) (1s)(7 V R 1001 WVaa - 789.14 128.00 0.00 S N N 1101 VJbui1ou S24.4 938.4 162.00 0.06 4 N N 310210 Nogu.imbw (uuO S32.29 843.16 172.00 0.0Q -20 N N 310420 POul Fin gIW MCM 783.09 783.09 108.90 0.05 17 N N 59tl210 1prpyl 4,949.80 s.62s.n 844.00 0.00 14 N Y 390311 Poal4'm 4.76665 7.16823 S7200 0.00 114 N N 401110 Rbba rm for ca 1.71Q0. 1,640.00 300.00 0.60 42 N Y 4403.? Wood lop. eonlfom 236.20 284.31 70.00 0.00 -31 N Y 40391 Wod lop, .ak 349.44 55S.77 221.00 0.00 -57 Y Y 440791 IA=bw. ask 549.85 549.85 471.00 0.00 -40 Y Y 441212 PbaWod omo _frn 2,349.00 2,631.00 500.00 0.80 -50 Y N 441219 P3pwd, onWeo 1.941.00 1,941.00 150.00 0.80 23 Y Y 5509 Yrnef cn _isdop 11.493.61 1,240.83 1,000.00 070 13 N Y 720450 Sadi in Igu 1,057.44 539.00 0.00 *66 Y Y 120711 S#al4*budelal 1,055.99 1,168.47 469.00 0.00 *57 Y Y 1208.2 PFldI. cbpmduafaf 1,069.01 1,621.97 469.00 0.00 -41 Y Y 7210.16 wsn&R*dsfifma ed 1,38.83 1.493.69 383.00 15 -42 N Y 7312 Win able adead 2,911.13 2,S81.90 38#.00 0.60 -28 Y Y 7403 Rbdi.dqcpp 10,296.17 15,89S.43 2,339.00 0.12 4 * N N 840731 Pcdl _ga 50o 8 60.56 100.00 0.80 -18 N Y 841821 11dsemoa, d aod. 1,592.72 1,623.76 300.00 0.20 -23 N Y 4S501 A rnu ow .higa 514.44 454AS I50.00 1.00 -74 N Y 847120 Pe l w_c_br(PC-XI) * 14,239.99 1000.00 0.20 103 y y S52031 Camb G 410.2 455.S7 460.00 1.O -35 N Y 852110 VCiR 3,00.oo 3,000.00 200.00 1.00 28 N Y 852810 CooTrV 2,0087 1,903.62 19738 1.00 -18 N Y 852820 Bk* .d w W 277.86 348.51 80.00 1.00 463 Y Y 154012 CeaobswTV 83.83 88.70 1S.00 0.30 -22 N Y 870324 Pcdrmu ImobI_ 101,314.00 101314.78 12.000.00 1.10 -34 N Y T* 3.8s AD MMM Ow Ew TAxlN 099 NIBo uS PAdu 061.61 makie U.u Tea urf Code Du=%s PdA Fiat prim rwoiv. uItdon (1) (2) (Y11(3) (Y/ (4) (SA.0() (6) (%)0) DV" Ios 0202 PAk(&ON ) 5,400.15 4,6SI.31 10,76.00 0.00 25 Y N 0203 Bef(fiman 6,542.87 6,990.80 26.60.00 0.00 54 Y N S005 maim 329.28 11 07.48 0.00 43 Y N 1005 Ric 550.82 996.88 287.17 0.00 40 Y N 2611 T _M 12,769.18 13,54.51 67,63.30 0.20 55 Y N 2701 col 47.70 64.51 39.70 0.40 53 Y N 2709 C oueD 200.79 10.22 100 0.00 85 Y Y 2710 Rd.p Ima 842.57 1,00.93 223.50 0.00 18 Y Y 281511 3ollmbdmoize 1,918.85 1,842.83 322.00 0.00 0 Y N Now hPdcoloq ubmaihTbblua d 38 . b hl Ibwdbaeud imd C s l ppruleyd Wbi o D.VupUeMR Cen CSeot Swo CicL hg-e _mGC etqXoztadt.oUNCO3t l_ADBqui Thbav .aeso.dayam ke..suw lbedws5 1bmdIwopo.t weitd Sx p ot o 5.74 f l __conmmodM e. a t uaddny (M18) for wd full fosuia oban idetio m sod to cordey kt-rnof .845 w 1 mufoz.. a"ed. -72 - with po tax equivalets (MI) of around 40 perceLl Moreover, It sems t the policy of depressing the domestic prices of exportables has not, as one mih expect, boee retcd to Jun plnned commodie. The prices of unplaned cmmodities ike pork and beef appear to be markedly lower than internnal prices. For pork the ETE of the licenig retiCon was esdmoad at 25 percent. For beef, the EIE was oven higher, at 54 pecent.2V 3.57 Table 3.8 provides some inetg evidence regading comnmdie that are paut of the Import plan. It seems that the domestic plan and market prices of wheat wero both roughly at import parity in 1991, following a long period in which prices wer substantily below the releva impo parity valu.7 bis n&m the effect of recent Iatives to decontrol the price of ceas and has no doubt helped alleviate the burden of import subsidies cai by the centra govenment. Likewis, the table suggess tha Impr subsidies on potaium filer have been reduced, if not eliminaed-the domestc price for tee VW fmd to be about 20 percet ier thanthe world price. As such, the trade regie now has an Impot sustig eFe in thi sector with import licenses Impo a tariff equvalent margin of 17 percent above nominal tariffs of S percent. On the other hand, planned nportbles such as nitrogenous feiizer (urea) and tmber contimue to be subsidzed. Domesdc prices of the form were an edmatd 15 percent below import parity and domestic prices of dffrent tp of wood and lumber were found tD be between 30 and 80 percen below hmport parity. 3.58 Finally, the table dsows what protective impact the trad regime has had. lhe price comparion data conflim that China's trade regime provides substni proection to a seection of high cost sector. These include two kinds. Firt, there are selected high tecnology consumer products which would seem to be targeted by the autorities as *in-frot exporters. la this category, the domestic price of personal compa us, for example, appeas to be a good 120 percent above import parity, 20 percent points of which is atuable to the tarff, but an addiion 100 or so percent to import licenses. Likewise, VCRs enjoy a 100 pert tariff and almost an additional 30 percent NTB equivalent. Second, there ars a nmber of intamediat goods that represent significant domestic production shares. These icude such products as teaile yarns ( of synthetic staples) and certain piastics (polysyene). The domestic prices of the fomer were found to be more than 80 percent above import parky, with 70 percent points accounted for by the tariff and the rest by import licensing or contral.2y 3.59 An imporWtn findin from the price compaison table is that the domestic prices fo a range of products, although still considerably higher a wordd prices, ar nevertheless, below te duty-incluive prices of competing imports. For these products, import lices appear to be redundant as a protective instrunt, and there would also appear to be some 2l Th prices of maiz and rice rwe raised very substntially as put of tho last rond of pice libealinian in 1992 and are now closer to intemational piy. 2! While some pat of dhe price diffirece may, n fact, reflect qualty di_fece the finding of nsgtve pnr didotfif for ths commo_e is consist ith th results of a emial, di_d oytudy of Waicu commodity pricin by Webb (1992). W¶ Given lky compabit prbms, te em need to be located with some caufti -73- wae in the tatiff.'A/ Such products Include automobile tires, smal (50 cc) per egine, as ecorders, televisin and certqa types of automobiles. In the case of casset records for inste, domestic pdces are still close to two-rds above Impott parity, although they uar about 35 pecen beow the duty-inclusive price of competng Imports. Likeio, the domestic pdces of color and black and white televisions am betwoen 80 and 40 percent highe ta import parit, but between about one fifth and two-thirds below the duty-inclusive prico of Imp . 3.60 n the case of a handful of products, Table 3.8 suggests ttaruff and licensing are compltely redundn, as the prices of these produc seem to be competitive with impons. Although these Include some 'm r consumer products such as domestic refiigeatr, they are mostly basic sted products such as steel ingots, semi-finished steel, flat-rolled prduct of teld, nd bars and rods of iron and se. Most of these products ar cuntly subjec to low taff, but their Imports are canaized and have been subject to licensing requimeme. In all cases, domestic prices appear to be wl below-in the range of two thirds to one quaer below f-Inclusive import parui.' It i not surprising, thereore, that he uthorities have declared their Inteio of removig all remaining import llcenses on these products (Chapter 5). A Ikely explanation for Cins competivenes in this rively capial Intensive sector i the etremely low domestic plan price for coal. 3.61 lb summary, China's import d export licensing rme appears to renfrce one of the major biases imparted by the tariff and ewport tax regime: raising the price of final consumer goods relative to producer intermediates. Prices of many agriculural goods appear to be derse dtough f ut e of implicit export taxes and their equivalents. Prices of basic producer inpus to m such as oad, oil and timber, are likewise depressed. On the oter ba the pdces of mst Itmediae and capitl goods are mnained above importparity. The pdri of some Itermdat inputs, especially petrochemicals and textile yams, th account fo a significat proporion of Chinaes total dut output, are exceptionally high. ibs no doubt palizes the com veness of some downstream sectors, such as appae and footwear, In which China has obvious copwaratdve advantage and may alo help account for the low domestic contt of export processing activity. Import licensing is also used to reinforce the price ceasing effect of even higher tariff on a selecton of 'highertech' magoods. However, it seems that there is considerable 'water In the tariff' for a wide rage of mate consumer manuactures. Efectve Rates Of ProteCion 3.62 Effecthie rates of protection (ERPM ) provide an indication of the extent to which protection policies influence the allocation of resources towards, or away from, particulr activies or sectors. Where nominal rates of protewon are different across commoditeWs, the effective rates apprach takes into account the fact that protecion on Intmediate inputs may offset, or overwhelm, the benefits provided to an import competng industy by protection on is outpu 3.63 Table 3.9 presents a smmary of the results of ERP calculations for a selection of sects 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 31 Etimatd imnpat tiff cqvants are nsaive in suck cases, implyinS that taiff rates am higher ta would be eaied to estict the mrot of trade in hse co_nmditi -74 - regme's Implications for inentves in the Chinese economy. The first column of the table gives the representaive rates of nominal protection used for each sector. Tils s based on the analysis of intenaional price comparisons presented above. The second and tfiird show the value of gross output and value added, respectively, at domestic prices,9 while the fourth column conis the calcuated residual return to value added when itnatiol prices are received for ouUtpt and paid for inputs. Where value added at inational prices is positive, the effective rate of potectm to domestic producdon is resented in the fifh column. Table 339: EM=inrv RATES OF PROTEcIO N To CHIN INWsRY (1991) Gross Value Value Nominal output at added at added at distor- distorted distorted world Effective tion prices prices prices rate (%) (X) crops -40.00 312.62 246.60 436.85 43.55 Animal husbandty -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 42.00 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. Chemicals 0.00 127.23 56.37 26.44 113.17 Mac y 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 prcm_Ig 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 4.34 n.a. Misc. m 44.90 24.92 6.71 -6.32 n.a. Souce: Staff etmates. See Annex A3.1. 3.64 The results higlight the wide range of conflictfing 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 are curry severely deprewsed by trade policies, the ERP is fud 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 downsteam industries that use ese 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 outut. -75- 3.65 Effectve rates of protection are not meaningl when an industrv has negative value added at ienional prices. Under the assumptions outdined 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 setors for wbich rates were calculated, including petroleum ren, chemicals, machinery, building maals, wood and pulp, food processing, textiles, apparel, paper and miscellaneous g, 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 full trade liberalization. While ti is probably the case for some subsectors, such an interpretation of the reus cant be correct for the broad and highly heterogeneous product categorie used in the calculations of Table 3.9. The results are, however, indicatve of the highy distored nature of the Chinese trade regime and suggest that existing incetves exert a strong resource pull effct on a range of downsteam Industries as a result of depressed input prices and a cascading structme of nominal protecion. Evidence from Sectoral Analyses 3.66 Ite resuts of various sector studies conducted by the World Bank suggest that Chies industry is chaterized by four basic problems: (i) suboptima scale and fragmented production capacity; (ii) structr imbalance between downstream and upstream production capacity; (iii) high cost and low quality intermediate and capital goods; and (iv) shotage of certn raw materials. In what follows, we discuss how these problems relate to the structure of the existing trade regime. 3.67 Suboptmal Scale and Fragmented Production Capadty. Suboptima scale of production is a widespread phenomenon across a range of China's industries. Party, 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 teny for provinces to invest in a simiia set of nucleus indusWies. Wih decenaization, local priorities have inevitably taken preedece over naional ones, and provmcial auhoriides have tesoted to various techniques to avoid centrl government scutny, including repackaging investmen o smaller subcomponents in order to escape the investment approval process (see Box 3.1). The lack of capital mariets has also severely restricted the ability of local enterprises and governments to acquire the funds required to Invest in larger scale facflities. The trade regime has only accntuate this problem. Loca enterprises have benefited from parochially motivated iprovincal trade barriers and have used the high import tariffs to support investments in small plants catering to small and regionally segmented markets. Ihus, it is not surprising, for example, that 95 percent of the enterprises in the Iron and steel sector were found to be operatig below optimal age in 1989, and hat China had over 100 assembly plant in operation in that year.t 3.68 In some sectors, the trade regime bas also been used in conjunction with the investment apprval process1I 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 uaned sales through reserved market segments.n 3.69 St l mlane The trade regime has also encouraged the proliferation of investment by locd enterprises and govenmens in activities ta require little learning and involve low start up costs. This has resulted in excess capacity in assembly and processing -76- Box 3.1: TIh CoNS1UC}ON (F THII SMALL PoLvug FAcroum IN CMW.DU Three polyester fares wer established in Chengdu In Sichuan Province-one wihin the city limt, one in Guanghang County and one In Da County. Each Is wih 100 km of the other but is less than one thr of the estimated optimal scale. Each also tells a story about the drive of loaites for local self-sufficincy and the MEctvness of investme appo and icig pocedus. According to the TUe Ministry, t ditbutes a capacity quota for polyester prodtcdon to each province. Sichuan received a quota of 8,000 tons per day. Ihe povin chose to split up the quota. In addition, th mstry disbute guideimn o the opmal scale of production. These wer ignored. The Chgdu Polyester Fiber Factoy split up It invesmen program Io two projects of Y 30 miUon each, thus avoidin review by the SPC. The Provinc Planng and Eonmic Commison apoved the ptoject The Guanghang County Polyester Factory was established witout a lices but with the support of the county. Following the copledon of the tiaW nestment and with the upPOrt of top government leaders, the Mnistry of Texie ndustry eventuay reogized the fetory. t Source: Jefferson and Zou, 1989. Box 3.2: SULv ImLANCES WITI N RETET INDUSrY: Within China, there ae approxImatIiy 100 refiigeror aembly planu in operation. More thn one half of the industry's ctories ar operating outside the state plan The uncontrolled eaion of refriget aembly pla has caused refrigerator productio outtip the addiion of new capty fo compresor production. Domesdc produces can produce a m 2 million compresa year; but last year's demand exceeded produc by 6 milon, reuidg in my compresso being iorted, a figure that was double the state quota. Given h shortage of comp prduction, why have enterp and local gov not committed extrabudg fids to expand compresor production? A principal reason is tuht while the scae of investment and the tecologies required for establing an asmbly plant are limited, the construction of anopressorplant involvessophiscattocogical requiremet, commitents of large- scale InvestmeIt and long-tem ilvestment horizons. Source: Jeffeson d Zou, 1989. -77- capacity wbilo upstream componet and raw materil production capacity has not been able to kee pace (see Box 3.2). Producton in intrmedit secoors typically requires high capital hnwetment and longer learning peros. Centrl govenment assice, or involvement, is a more likely preequsite for investment in these seors. Not surprisingly, theraefr, footdoose provincial lovd ivestme has shied away from such sectors, a a the problem of structal imblance. Thus, for example, In the cams of consumer durables such as refgerator and televisos it is fiund ta the rapid owth in assembly capacity has not been matched by the need capacity in compressor and cathode ray tube capacity. 3.70 gb hCost of ntr Ia puts. Ihtermediate goods typically requir arr scale nvestmet for ecient producton. The teden noted above to fragment invesum and production capacity has invitably contributed to the high cost of intmediate goods in China. The problem seems to be more acute In certain segments of machnery and electronics. In electronics, for eample, componen such as capacitors and cathode ray tubes cost betwn 1.4 to 2.7 times the world price, in part due to the frgmented nate of domestic production capacity.0 This peralizes downteam lndustris, which cannot rey on domestc Inputs for their exot. The existing trade regime, by provWding high levels of tariff and nontiff protection. has not provided the right Incentive for rtonalizing productio capacity in the intemiate and capkal goods sectoos. WhUe it is tue that China Imprt subst volumes of intmediate and capital goods, these are In large part noncompetitive with local producdon. 3.71 Shortage of Certain llaw Materils. Aside from the high capital cost requirem s, the severe tproduction bias against raw mateis with controed prices has been an ortt reason why ootloose lnvestme finds are nOt used to expand raw mat producio wcpacity. In the case of the lron and stwel industry, for example, enterprises with autonomy have sifted production away from iron ore to steel products, the price strucure of helatter low ng considerably more fvorable. In ths situaion, sortag of crical raw materials have been avoided only through plamed investments, such as the Baoshan Complex in the ca of Iro and steel. However, when and where planed irvestmet have fallen behnd, supply botlenecks have invitably appeared. A case in point h the synthetic textiles sector, which uffer frm shortages of such raw materias as Phthalic Anhydride (PTA).' Unless the trade and price regie's existing bias against raw materidal production is eiminaed, raw material shortages coud become more widespread In the fue as eiance on planning declines. 3.72 The centra government has so far atempted to address these various problems by recours to a variety of administadve controls. lTus, the invetment approval system, the credit plan and the materls swpply system have been used to try and guide local and pwvica investmet into areas of national priority, and guidelines are used to try ad ensure that these investm trespccreriaforminimumproductionscales. Pricecontrolsandnegsaiveapproval lists have been used in an aempt to check excess capacity in the consumer durables sector. And programs of tenology imVorts and managed mergers have been used to tackle the problem of ineficicy in the intmediate goods sector. As the trend towards deceralization contines, such methods of intervention will become less and less effective. As has already been seen, the governmens investment approval system is frequenty circumvented with counterproductive results (Box 3.1). Under the cr , the governmen will have no choice but to rely on more indirect levers of contol. I is in this context tha the trade regime will have an impora role to play. -78 - Codusons 3.73 China's trade regime has served to reinforce certa basic biases and problems of Chins industi seor. 3.74 Fust, the elaborate system of export controls has helped keep the price of key primary goods and raw mateial imports depressed (this Is the case for petrodchemicals, fr example). This has created an antiproduction bias in these sectors that, to the extent it is not offset by plannod investments, can lead to shortages. 3.75 Second, the trade rerae has helped maintain inefficient and high cost intermediate and capital goods sectors. The key problem sectors, widt large production shares acoounted for by SOEs, appear to be certain types of machiry and synthetic textiles. 3.76 Third, the trade regime has accentuaed a strong resource pull effect into downsteam consumer goods industies that are now plagued with excess capacity. High tariff barier agait competing imports als appear to have helped parochi provcial governments sustain ubopilnvestments designed to meet the needs of a regionaly segented market 3.77 Finally it appears tat, Li several cases, mostly mature consumer products such as washing machines, televisions, and sound recorders, the existing combination of NTBs and tariffs is not binding, i.e., there is 'water in the tariff" and domestic secondary market prices, although stil high relaive to interaional prices, are lower than the tariff-inclusive price of competing imports. - 79 - 1. See, for example Lardy (1992) and World Bank (1987a). 2. World Bank (1987a), p. 146. 3. Customs Genea Admnisraion (1988), p. 201. 4. Customs General Adminisraion (1988), P. 197). S. World Bank (1987a), Annex 2, p. 35; Customs Genera Admnistraton (1988). 6. Development Research Center of State Council. 7. Garnaut (1992); Findlay, Martin and Watson (1992). S. s resut is consistent with that reported by Ma and Song (see Lardy 1992, p. 92). 9. This is drawn from Mardti (1992). 10. Jeffeson and Zou: China Sectoral Case Studies on Industrial Policies: Iron and Steel, Consumer Durab. and Chemical Fibers Industry, World Bank, December 1989. 11. See L 1. Singh (1992), for a comprehensive description. 12. World Bank (1991c). 13. See World Bank (1990a). 14. Jefferson and Zou (1989). - 80- IV. PRIORITIES AND PERSPECTIVES ON REFORMING CHINA'S TRADE REGIME A. T5 SuAWmY Am TA1 RuGEu ORnTAN 4.1 Coventdonal classifications of trae regimes have relied on three categories to try an depict the spectrum of trade staegies folowed in developing counties. These are: Free Trade (PT); Import Substution (IS); and Export Promotion (EP) regimes. While free tade regimes are optmal from the poit of view of stic resource allocation and efficieny, developing countries bave typically opted for some form of intvention. On the one hand, counie with strong incentives for domestic production 11 have been labelled import substitutn or inward oriented. On the other hand, the economies th have favored exports ov import ing act have been labeled port or outwad oriented. This bipolar classiicato assumes that i ives for exportables and impotables are negatively correated. Undedying tds classificaton is te standad two-sector trade model, in which one sector prodes exportables and the other importables, and the production of one cannot inr wducing the producon of the other. hus, this model, IS and EP are necessaiy mally exclusive and are supposed not to coexisL 4.2 A recety prposed expanded typology permts a more nmced, and more usdal, ndlba betwe altenativetrade regimes by indig a third sector in the modd, thataof nadeble.1 Under this modifiedparadigm, itkipfctlypossibleto pride strong nceives to expoales while slteouslyprotecng ortable-suchpolicies would attr resoue into both the exportable and importable sectors at once, but at the expense of ntdeables. Between the two extremes of pure IS and BP trade regimes, the new typology allows, aside from a fre trade regime, for two intermediate possibilities, these being protected export pomo " (PEP) and Vde facto import promotione (DIP). 4.3 A pure IS trade regime is one in which import substitution receives a positive inctive, while exports face a disincenive. India, Brazil and Argentika are examples of a such a regime. In the fce of ample evidencconceing their poor performance, the enthusiasm for such regim has waned. Both Brazil, and to a lesser exent also India, have tak stps to restoig some balac to the incenive strucrs of their respective trade regimes by reducing the pevive aniexport bia inheret In them. At the other end of the spectrum, pure BP regimes are ones in which support for exportables i positive, while protection for importables is negatv. Such regmes aro biased against domestic productin of import substitutes. The trade regim of Taiwan (China) in the late 1960s sems to fit this description? A fee trade regim Is one in which Incentives are in effect neutral between domestic import-situtng acdvt and exort promotion. The trade regimes of Singapore and Korea in the late 1960s are 11 That s, regiums in which incentves for impost subsftitton outweigh incentive for expoat P *UNWO0* -81 - examples of such a regime. The empirical evidence shows hat both the free trade or neutr trade regime ad the EP regme hae ben associated with rapid growth rates. 4.4 The forh em type, the PEP regi is of specil ites This rom allows for the coeitce of both IS and EP policies. It is a outwad-oriented stwagy, based on the infat exporter argument, its objective beng to promoto import subsduto In ordot to develop new exp . This regime capes the orientaio of the Kore trade regim of the 1970s. Whether such a policy can be implemed without failing prey to the proms of ren seeking and the development of inefficent, uncompetive industries behind protetive baries appears to depend heavily upon the ability of the govemment to adapt its policies and to remove assistance from Industries which fail to become competitive In inerational markis. Tbis general approach should therfore be used only with coasiderable caution and with a clear awareness of the demonstraed potentia rik. As succesful as Korea was in diversifying is export stmucr ito mor capital and knowledge based industes in the 1970s, it is well recde that Is Import-suitu heavy and chemicals idustry drive led to mtbn of resources and created serius macreconomic imbaances. bis In part is wat propelled Korea to adopt an importa program of import liberalization in the 1980s.3 4.5 The final regime type, the de facto inort promoting' or DIP regime, i a faldy acal one, and represents the case where strong disincentives for import-subsntng acty coexst with a bias against expordag acdvity. Such a trade regime minimi expors and maimismpot in order to provide the needed resources ad lnentives for domestic investmentand cons It is termed a 'do ficto' sttegy because most DIP regmes come about as unitntional results of economic policies. Examples of such a regk includ Colombia in the lae 1960s and Huga in the 1980s. 4.6 ChIna's prereform trade regime came closest to the pure IS paradigm As noted earlier, hisrically, China's preocpaton was with sdesufficiency. As such, the economy bad a pervasve aniexport bias built into it. and planned impors were used only to make up for domestc s 8ho . Over time, C s trade regime has evolved In the diecton of dte PEP paradigm. Cainy, allndicatons are tat the Chinese authories re atemptng to pursue a trade strategy simar to that of Korea. As in Korea In the 1970s, Chbina has been providig csiderabledirect and indirect, targeted and blahnket, suppot to exts, whe also maint strong incentis for Iwport subston In a number of scts. However, ChWs trade rveg is still fraught with incos ies that aise from the dual nat of its oveall policy roem. Conflicts between the priorites of the planning system and market set of the Chinese economy are in many cases reflected in the orientation of the trade regime. bus, the expor of numero products subject to plarming remain severely taxed, whils domestic price cntrols make importsut ing production in cetain sectors equaly unattractive. If not for planned investment, such a policy regime would resut in even more serious domestic shortages and import hunger In these ases, China's trade regime bears the marks of the DIP pardigm discssed above. 4.7 Additional reforms are needed before Chia's trade regime can be used efct y in swort of a PEP tpe strategy. And even the, the experence of Korea having den the assoced risks (Ch r 6), it is not clear how successful China can be in pug such a strategy. The remaider of tis chapter focuses on (a) priorities for fut trade regime reforms, and (b) the impications of altetve approawhes to reform. - 82 - B. MEFORM PRmEOuns FOR TM{EMAIMM TERM 4.8 Chaptr 2 and 3 demonstrated that the structure and I l on of Chias trade egime has been opaque and complex, although is is In the process of changing.2I The authi haem relied on an aTray of overlapping Instumts of direct administrative control to ac various objectives. Ithe tariff as an Instument of trade policy rmains underutilized and the ppes to be considerable redundancy In the system. The first priority for reform should be to make the sytem more transparent, simple and less depedent on discretionary policy i . Canaized imports and Products Subject to Mandatory import Planning 4.9 Canalization is understandable for products whose domestic price is maintained artlicWally below inteationa! leves and imports of which, therefore, need to be subsidized as they s 'd Into China's domestic economy. In such cases, canalizaton makes it easier to keep im; £.7 o0 within plan argets and to administer the ssocated subsidy. Iu principal, the impors of no commodities outside the mandatory Import plan ae eligible for subsidies. There is, therfors, no persuasive reason for calizing any commodities that do not figure as part of the mandaoy Import plan.I Yet a nmber of such products, Including sugar, cigarettes, textile yans and fabrics, and television, are to be found In Category I and II imports (Chapter 3). If the Intion in such cases is to provide prtecton to domewic activity, canaizat is not the most desirable instument 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 nalization is needlessly broad, and Its coverage could be reduced significantly without undemining the planning process. Of the 32 percent of imports that were subject to canaization In 1992, only 18.5 percent were subject to mandaty Import planning; :here is scope, therefore, fbr decanalizing the remaiig 13.5 percent. 4.10 Second, there is no clear disinction between Category I and Category , except that the nunber of FTCs authorized to handle the former are ra limited a hose auhrzud to handle the lat. Given that the number of FTCs with permission to import Category I products is already very large-as many as 57 FTCs bave authorization to import chemical fetlies alone (Chapter 3)-the distinction between Category I and U imports would seem to be redndant 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 e ses with direct tradi rights. mnport UAcesing and Q.otas 4.11 As dicussed in Chapter 3, import licenses and quotas are presently used for multiple purposes, and there is considerable overlap between imports subject to licening and those subject to canaizatio. 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 V See section in Chapr 5 on recent reform initiatives, asd Office of the Unitd Stat Trade _vosesmntativ (1992). 1/ Ih oly secepti to ths wou be the import of petroleum prodcts Which, thugh not subject to mndWatoy iVmot plannig, awe importe and subsidize. -83 - Iports subject to manmdaory planing. Licensing requirements for products subject to mandatory import planning would seem to be useful cnly as a adminisve dvice for ditributing a fixed amount of subsidized imports between various users Involved In planned activities. It follows dtu 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. 4.12 Ihe 11.7 percent of niport that were not canalized, but were subjectto import licensing requirements in 1992, fall into roughly two categories: those for which licenses are used for procting domestic manufacurdng activity, and those for which licenses are used essentially to restrict demand for nonessenti commodities (mostly tobacco products, beverages and nonesental foodstuffs). As concerns products for which Import licenses ar intended as a prtective device, Chapter 3 showed that there are some for which Ucensing Is in fact pardy reduant hus, exstg Import license on a range of road vehicles, for example, could be lifted Immediately without causing any dislocation. 4.13 In cases where import licenses provide binding protction, severalimrovements can be made. One possibility would be to replace import licenes and quotas with iriff eqivalents. This would allow the rents to be captured by the goverment instead of being allocated to indvidual enterprises or imports. Whether or not this is done, steps would certinly be tak to ensure tht import licensing procedurs do not penalize exporters. Specifically! the import of all capital equipment and materis could be exempted from import licensing requirements. 4.14 It is difficult, if not impossible, to detemine the extent to which the authorities have in the past used import licensing as a tool for controlling access to foreign exchange in ddton to te 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 nonessenial conumption items, fanced through retained foreig exchange. Import licening is not the appropria instument for controlling Import demand or allocating ceUrally controlled foreig ex e. As discussed in Chapter 2, administativo allocation of foreign exchange should be eliminated and the burden for reguating import demand should allowed to fall on indre polcy insruments 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 nonoverlappng uses: (a) tha of dinributing planned imports bween different user, and (b) that of prtcting certain Industries. 4.15 Finally, it is importat that incentives relating to Chin's import regime be made as unifrm as possible across the country. In practice, k seems that the admnistration of the import regime varies considerably across provinces. Part of the problem arises from the fact ihat eah province or autonomous municipality has some discretion over the application of import lIcense, in principle, no province or municipality sould have the authority to administr import licen per its own regional consideratons. Provin specific authoriy over import licensing dermies the integrity of China as a single customs teaitory and should be avoided. lmport Conrl 4.16 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 Machinay and Electronics Import Office (SCMEIO) in order to protect the production of .84 domesti Inty (Chater 3). As In the case of mport lcenses, Import controls on a rage of consumer products a to be pardy redundant. 'Me domestc pdc for cosume durables ad dectonics such as teeIsions, refigetaots, washing macble, sound recotding and equipme appea to be below tarff-indusive import prices. For such products, import contols could be removed immediately and the burden of proteedon should be allowed to fall entrely on tafs. The govmet has already taken some steps In ths direction and it Is also tying to make the whole prcs moe trspare (see Cht 5)-these are ourging signs. 4.17 Second, It Is unclear why the ditncdon between Import licensia and control i neceary, other than pehap to Indica t the former is admiised by MOPERT and the latter is te responsibility of SCMEIO. Different administrative ceners of decision making for the purpose of reuating Imp would seem to be a needless procedura complcation. it would be more ation to centraize the administaion of al import contros and licensn. NTB and Balnce of Pays Management 4.18 While there is no doubt about the desirabilty of doing away with all admnistered controls on access to, and the allocadon of, foreign exchange, the ability of the govenm to do so In practice will depend on the effectiveness of indirect Instruments such as mone1 y policy and the exchage rae I controlling Import demand. Given that 100 percent of sil noplan Imports, and at last 75 pcent of all imports, are now priced at the swap market exchgo me, and at impots coey folow trends in the money supply (Chaptes 1 and 2), Chn should no longer need to rely on discretionary Imort conols for balance of payment pupoes. Hower, to the extent that direct controls over access to foreign exchange prove to be neceary dug a period of tasition towards indirect macroeconomic manaement, they asod be used to contain the gove8rnents own plan rated import demand-which after all accoun for a good 50 percet of total import-rather a Interferig with Imports that are fnancd out of th retined forei exchange eaings of entepise. What this implies is that SAEC ought not to prent y enterpris from accslng FEACs, even in times of balance of payment distres. The cental goverment should instead rely oni indire instrums, and if nssy, on administratie controls on Its own imporU. Tariffs 4.19 The problems with the current tariff regime e the multplicity of rate, and their widedispersion and high (in some cases extremely high) rates. Given that the tariff is not ant important source of revenue for the government, China, unlike most other developing countries, has much greater flexibility in redesigning its tariff strucre fairly quicldy witout fear of major fiscal dislocations. 4.20 The primary objective of China's tariff is to protect domestic m cng activity ad its esing strcture is such that tariff aes on final products ar typically very high. Caper 3 showed that the average me on consme goods is 65 percent, with rates on items such as clotig, consumer durables, mi ll ma cted artdcles ranging from 80 to over 100 percent However, i r price comprisndicatethat in many of these cases thn I coi rble 'water In the tarff' applied on import-competing products. lbe domesic seconday market price for basic and mature consumer goods, including such Items as wahng machies, televisio, sound nrorders, etc., i8 below the tariff-inclusive import pariy price. Likwise, in the case of a wide vaiety of product groups such as apparel, footwear, toys, sporting requtes and miscellaneous manuactred itm, China has already achieved export - 85-' comtitiveness, and the high existing tariff rates would seem equally redundant. A substantW sImplificatIon of the taiff structue could therefore be achieved quite painlessly by reducing the level and number of rates ihat currently apply to conur goods. 4.21 Aside from providing protection, Chinas tariff are also used to slectively penaize the consumption of Items such as tobacco man es, and beveages. Tarif on these prduct categories are in excess of 115 percent and end up providing needlessly high margins of protection to domesc ac acdvity. The same appears to be the case for a variety of pressed nonssi fostuff. Where the objective of the government Is to tax Consumption, excise levies or luxury sales taxes shoud be used in place of the tariff. A sales tax penalizes consumption without distorting the trade regime because it applies equaly to both saes of domestic products and imports of import competing products. Tariff Empos 4.22 The analysis of Chapter 3 showed that the bulk of tariff exemptions are related to expor proceing acvity. However, it appears that substant exemptions are also being accorded for imported equlpment used in domestic production, and that foreign investots in particular, are able to benefit from such provisions. Exemptions for imports used in 'omestic production are distordonary ad encourage foin investors to set up capital-Intensive assembly type operations behind high tariff walls. Moreoer they represent a needless loss of reve. 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 related to export processing. Any measures that can raise tariff revenues in a nondistortionary way should, therefre, be implemented in the inmedit term. Eport Controls and Tam 4.23 China bas used export controls and taxes for improving its terms 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 eanings. There are two important crum s under which this might happen: (a) if China's trading parners retaliate by imposing their own trade restrictions (import or export); and (b) if the effective export tax is set too high. In practice, the pmal settiug of an export tax poses many difficulties because it requires knowledge of the long-run elasticity of expot demand. Ibis is not easy considering that estimates of such an elasticity must take account of the effcts of possible demand swching technological changes that might be induced by short- term price increases of the product in question Most counties have tended to levy too high a tax based on estimates of shorttem export demand elastiities. And in most cases, the long run elacit of export demand for their products has turned out to be much higher than anticipated resultg in dramatic losses of market share. Given the experience of other counties, it is not advile for China to rdy too heaily on export controls for terms of trade puposes. 4.24 As was nod in Chapter 3, the more important use of export cotols In China has been for keeping the domestic prices of exportables such as coal and petroleum, considered critical for the domestic conomy, below Ine ioa levels. Becase of its likely implications for some downstrem induies, the dismantin of export controls will have to be pursued in a phased manner in tandem with the ongoing process of domestic prce reform for these items. Menie, the use of export taxes should be favored over that of export licenses becse the -86- later allow the few FTCs designated to haAdle such products to capture sizeable and undeseved rent (see also Chapter 6). C. PjuoRmES FOR ThE MEDiuM T1M 425 The sectoral evience presented in Chbtr 3 suggests that four basic problems plague much of China's istrial sector: suboptmsl scale and fragmentaton of productive capacity, stuctura imbalances between downsteam and upstream activity, high cost and low quaity of a range of intermedia inputs, and shortages of certain raw materials. Until now, the central governent has attempt to address this situation through the ue of administaive controls. ITus, 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 dme than good in the current environment of transition. 4.26 Essentially, centrally administered controls cannot address a nunber of problems that have been the unintentional result of the process of decentralization. For one, with local prioriies assuming greater importance, provincial authorities have been trying to avoid ceral government scrutiny of locally financed investment decisions wherever possible. In this siuao, cenr government investment licensing may in fact have accenued the problem of suboptimal scale, as provinces have tuned 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 financi resources, they have become more responsive to considerations of financial profitability. Thus, the central government practice of administer pricing for key inputs is likely to depress provncia noplan 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 interprovincW trade. Ihe central government has not been able so far to prevent this type of market segmentaion. 4.27 Looking to the future, for the central government to be able to bring provinci investment priorities into line with national requirements, progressively greater use will have to be made of indirect controls. In ths contex, the trade regime wil have an important role to play. Ihe existing system of trade controls cannot help resolve the strctwal problems of Chinese industry-if anyting, it only reinforces the deficiencies of the trade regime. Chapter 3 showed that high and cascading protection to consumer goods, combined with the s eation 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 protecion th is in general accorded to intermediate and capital goods industres contributes to their high cost and penalizes downsteam industries that seem to be able to attain in ational 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 iterational prices and undermines the incentive for nonplan production in these sectors. 4.28 In the light of the above, China's trade regime will need to be substanily reoriened over the medium term, such that, as the importance of the plan declines, (a) pwtection to cosme goods production is reduced, (b) protection to intermediate and capital goods is reduced, and (c) the bias against the production of industial raw materials is reduced. 87 - Reduig Protecion on Consumer Goods 4.29 Under the preset Inceives structe, It is profitable for provnces or local entaprs to invest such finds as they conrrol into assembly type operans and light Industi actt, where the learin costs are low and the requ _ients for minimum plant size are reltively small. Rather tha tryig to address the problem of the prolferation of smal refrgerator and television assembly plants by withholding investment vs, subjecig these sectors to greater import competition would be a more effective way of rationalizing production caacity in these ;ectors. 4.30 Reducing proteion 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 efficient exporter. In such product segments as footwear and travel goods, and other light industrial goc Is, for example, Chinese firms should not have any difficulty adjusting to greater import competitiolL Second, the coutribution of these sectors to total GVIO is relatively small.&/ Third, a rapidly growing TIV sector promises to absorb a good proportion of such labor as may be displaced.3/ 4.31 Leaving aside a few exceptions such as personal computers and VCRs, none of the oDnsumer goods secors is subject to binding NTBs, and in many cases even the tariff seems to be pardy redundant An increase In Import competition will, therefore, come only from bstmldd cutS in existng tadff levels. Given the exceptionally high protection that is provided to fte macnery and textiles (mainly, synthetic texiles) sectors, bo (but especially the former), Importat inputs for downstream conmer goods, protecdion on the latter canmot be reduced wthout also reducing it on the former. Tariff cuts in clot and consumer durables, for eample, will tefore need to be accompanied by cuts in tarifts on the machinery and textiles sector. Reducing Protection on terediat and Capital Goods 4.32 The domestic content of many of Chineas fastest growing expots remains low because of the high cost and low quality of domestic tmediate inputs. Lberadizing access to imports of intermediate and capitad goods would reduce costs and help to make import sbstite more competitive. 4.33 As seen in Chapter 3, the two intemediate goods sectors that are likely to be the most problematic from the point of view of import liberalization are texties and machiney and electronics.fi Ihe bulk of the exising NTBs and the highest tariff amongst intermediate goods are concentaed in these two sectors, which together account for 26 percent of GVIO and employ about 28 pent of the labor force In independent accnting units. Import It hU swe of all cosunurg ods (iclung edibe prodcts, bverages and tobwo ) togedher in GVIO wJs under about 10 pose in 1990. Tobacco u constie only a subset of SlrC Category 1I Tlis is obviousy h cas for such sectors as clotng when TVBs account for about on quater of GVIO in i t accounting units But evn in sectora such as food processing and bevges wherte d share of SOEs in GVIO has ben very lWp (between 96 and 99 pelun) there are sig that TVBs arn mkg sapid inoads (Yusuf, 1992, p. 16). Defined to inlude SITC evision 2 categories 71 to 77. -88 - liberalization In these sectors would Involve not only the dismanding of NTBs, some of which are wot binding anyway, but also the reduction of tariffs over time. Given that existig protection is in many instances binding within these two sectors, some fom of assa will likely be needed to help them dtrough the transition to a less protected domestic market However, it must be noted that both sects mask a great deal of variety and not all their subcomponents are equally vulnerable. In the case of textiles, cotton and wool texies should be able to adjust to international competition with relative ease-it is essentially only the segment of synthedc textiles that s likely to face serious difficulty. In the case of machinery, it is the machiney for special industries and the higher technology segments of electical machinery, together accounting for about 6 to 7 percent of GVIO, that are likely to face the most difficult adjustmnt problems. In the other segments, TVE penetration is already high and growlag (telecommunications equipment for example) and/or the share of local production In total GVIO Is negligible (office equipmet includg personal computers). 4.34 Other vulnerable and currently highly protected inbemediate sectors include such apparely high cost product categories as petrochemicals ad placs (apter 3). The% however, are considerably less important from the point of view of GVIO shares. The product categoy of road vehicles does account for a significant share of GVIO (3.7 percent). As was seen In Chapter 3, it seems that for certin vehicle tpes Chinese domestic prices are not far out of line with intnational norms. However, this sector as a whole is far from being nternatioyally competitive.4 4.35 Finally, iron and steel, an importat intermte goods sector, seems to be very competive, with domestic secondary prices well below import parity. Ihe large concentin of NTBs on the imports of iron and steel products would, therefore, seem unwaanted. Indeed the Chinese authorities have already indicated their intention to remove most of the NTBs on this secto over the next two years (see below). However, Chia's current competitiveness In this normaly capital intensive sector is likely to stem from the low domestic price of domesic energy. As such, a reduction in protection alone is unlikely to motivate this sector to raise roductivity levels. Energy prices would also need to be adjusted upwards. What this serves to underline Is the Imporne of coordint trade and price reform. Reducing the Bias aainst Raw Mateias 4.36 ConsIderble progress has bee; made in price reform, and subsies on a range of Importables including chemical fertilzer and certain types of cereal have been reduced. However, price distortions remain for many others. As the role of planned isments dedines, dqeressed prices of these products could lead to domestic shortages. The most extensve 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 world.S It is in China's interest to adjust the domestic price of such products upwards through the phased di_mating of existing expor controls and taxes. D. ALTRMATIVE APPROACHES TO REFORM 4.37 A ful assessment of the consequences of trade liberalization requires the Iteractions between sectors be taken into account in a model which accounts for differ"t d4 m both betwoe domestic and imported goods, and between traded and nontraded goods. 7..r t s purpose, various possibilities for trade policy reforms are analyzed using an updaed version of -89 - a gneral equilibrium model developed by Marn (1992).Z ; Given the complexity of the CWhn econmy, the results of this analys need to be interprtd with due regad to its limitaons and simplifying assumptions. Such a modeliing exercie can be expected only to provide Insights into the broad poteial consequences of altrnave approaches to trade policy reforuL 4.38 Six reorm periments are considered. The frst, or the base case scenaio, assumes aradlal SOprcentreduction inthe level of all effective importtariffs, i.e., aSO pecet reduction in the effective cumulative protection provided by binding NTBs and taiffs. Ihis exm ent involves some 'flattening of the ta schedule since high tiff rat ar educed by substantially more than low tariff rates.jI Such a tariff cut would bring China's tariff structure roughly into line with that of Korea's, for exaMple, wilth average rat on coMumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, agricultural goods to 17 perce and ming to 10 percent. The second epeiment 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 negotiaons under te GAIT? Both these experiments represent a nonselective approach to reforming the import regime 4.39 Scenarios m, IV and V analyze alternative possibilities for selective import liberaizatioln Scenario m is a SO percent reduction in tariffs on machier only. The mahhiney sector is one of the largest sectors of the Chinese economy, large segments of which we high cost and penalize downstm industries. The exercise conforms witi China's objective to modenize its industri base and absorb new technologies. Scenario IV is a SO percent reducton In average taiff rates of consumer goods only (processed food, clodthg and miscelaneo us manufacturi). Consumer goods are presendy subject to the highest rates. This exerCis conforms to the concerting approach to tariff reform in which the highest rates are reduced sequentially.' The fifth experment involves a 50 percent reducdon of the tariff rates on cnumer goods and the two intermediate goods sectors with the highest prtection (texies and machiney). Finally, Scenario VI involves an equiproportional 50 percen reduction in the tiff equivalent of al 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 Intnational levels. Table 4.1 summarizes the results of the simulations. 21 The model utilized in tis analysis is based an dte logic of tho two-tier pricing model of the post- rdorm Chinese economy developed by Byrd (1987), Sicular (1988) and Wu and Zhao (1987). Th. model is satic and focss on entepis and consumer respone to chagw in sonday mare pries, with podulction and consumption deacns within the plan not affecting totl otut and demand loves, but opatig purely to achieve distibua goals. Given this simplifican, hde model takes into account the interactions betwee industies ummazed tho nputoput struct of the economy and the intacions beween etprs through competition f ues, priardy labor. While institutionl constrints on bor mobility exist, it is asumed that labor can stil move between sectors either through labor movig to find alteriative employment or tbrough expanding indusries moving to rual areas to meet their labor needs Consmes ar asumed to respond to changes in the reative prices, at theo gin, of paticua goods. The two-tier pricing systm enployed in the maket for frei exchg, wich afc tho retr from exporing and the co of impoftig is, hower, moded expicily. For example, a tariff rate of 100 perent is reduced by 50 peret under this experien whila a taiff rate of 10 peret is reduced by only S peent. -90- TA. 4.1: NFEUCTU 0 RUEUC1NN IN PRwvcuoN VAROUs SC9Awo8 (pe cmn fom basn) 14bae In IV v VI 50% swims m 50% triff SC*to"don 50% tariff foxmula 50% reda on fiv hih reduction reduc- WamilY redn on pue cons. b U lion rbeduton la hir d & goods& dsorton Export volume 11.0 15.2 2.4 1.3 4.8 22.8 Import vobm 11.6 16.8 2.9 1.1 5.4 33.2 Snu a exhng rte 4.0 5.4 1.0 0.6 1.8 -8.6 Redlincom 0.8 1.1 0.4 0.0 0.5 1.5 Roea wap 0.8 1.1 0.3 -01 0.4 -0.1 Crps -0.2 -0.1 0.1 0.0 0.1 0.2 L hivok 0.1 0.1 0.1 -0.1 0.0 0.8 Mehuy -0.2 -0.2 -0.1 0.0 0.0 -0.6 1lactracty -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 P1etm mining 0.0 0.0 0.0 0.0 0.0 0.7 Petrolem ining 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 403 -0.5 -1.0 0.1 -0.9 -3.2 Building materias Q0.1 0.2 0.0 0.0 0.0 -0.2 Wood 40.7 -1.1 0.2 0.1 03 -2.8 Food 0.1 -0.1 0.1 -0.4 -0.4 -0.9 Textes 0.4 0.4 0.1 0.7 -0.2 -1.5 Apparel 1.6 2.5 0.1 0.1 1.1 -0.2 -0.2 -0.5 0.1 0.1 0.2 -2.1 'i. 6011mal 03 03 03 -13 0.9 -6.8 Constucto 0.1 0.1 0.0 0.0 0.0 -0.2 Freigh tasport 1.0 1.3 0.2 0.1 0.4 -2.5 Pss. tisport 0.0 0.0 -0.1 0.0 -0.1 -0.4 Commerce 0.9 1.2 0.0 0.1 03 -1.2 WMis. serVie 0.0 -0.1 0.0 -0.0 -0.0 0.1 3ducatio1/health 0.0 0.0 0.0 0.0 -0.0 0.2 Public adminir 0.0 0.0 0.0 0.0 0.0 0.0 Housing 0.0 -0.0 0.0 0.0 -0.0 0.1 Cops 12.5 16.5 1.7 1.8 3.9 117.9 Liestock 12.3 163 1.8 1.9 4.0 59.6 Metallu 15.9 21.3 4.9 0.2 5.0 K6.0 lebtricity 8.1 11.1 2.1 1.5 4.0 -97.7 Coal 11.2 15.2 2.6 1.7 4.8 792.1 Peroleum minig 0.9 13 0.2 0.2 0.5 29.1 Peroleum reining 0.7 1.1 0.1 0.2 0.4 10.5 Chemical 165 213 0.1 03 0.7 7.6 Machinery 19.7 27.9 11.4 1.0 12.9 -10.6 Building materials 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 processi 12.9 17.7 1.5 2.9 4.8 -13.4 Textiles 9.3 13.8 0.7 0.7 6.2 -4.5 Appard 11.1 16.4 1.0 0.9 7.1 -5.6 Pape 14 19.5 1.6 1.4 3.5 -15.9 Mis. manuactuing 12.2 17.7 1.3 5.7 7.6 -17.1 La Utilie the Swis fomula frm the Tokyo Round of trade netion under GATr whoe T1=A.TJ(A+T.) whem To, b te c baw p vde of he tuiff and T, is its levd afte theform and A isset ata h F duction in las on proced food, iles, appal and miscellaneous manufiactwes. com goodsas in & and exsand mwbinr. compensangvariation for thre ange, takingInto accountthcoumpto benefit less any clanfa in GDP at tadx venues, and expresed as a share of base podiod GDvP. -91 - The me Case: Effects of a 50 Percent Radial Cut In Effeive Taiffs 4.40 The effects of a 50 percent tariff reduction on individual industries depend upon both the specific charctistcs of each industry and the broad macroeonomic consequences of each expedment. At the macroonomic level, t1ie secondary market exchange rate is a key vaiable. Following the projected liberalizain of imports, the demand for foreign exchange inceases and its price rises by an esmated 4 percent ilnthe case of ths experiment. ITis pariallyoffsets the reduction in the landed price of Impot goods and, very importanly, raises the retrns from exportig. With exports more profitable, and imports relatively less expeive, 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.? 4.41 Impact on Sectoral Output.2/ The impact of the base case reform scenario on sectoral output is, on the whole, quite small. What this indicates i that an important change in the relaive price of importables is likely to have only a limited impact on overall resource allocation between sectors. This i 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 differeation between mports and domestic production, so that a rise in the former would not lead to major dislocations in the latter. 4.42 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. Industies which are purely oriented to import substiution, with a relatively large share of imports in domesic consumption and a small share of output destined for export, tend to experience a decline in output. By contrast, sectors with a strong export orientation tend to xand their output, even in cases where there is a sizeable reducdon in the tarff applying on imports of the good produced by that istry. In general, the trade orientation of industries appears to be a more important influence on output effects than the initial tariff level: as an example, output of the more iport-competition-oriented crops sector falls while livestock output rises, even though the initial tariff rate on imports of livestock products was higher. 4.43 The apparel sector, not surprisingly, registers a large increase in output relative to other sectors, despite a high initial tariff reducdon and a consequendy large fall 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, expenence only small declines in output. This suggests that the adverse effects on wrofitability of increased import competition just barely outweigh the beneficial effects on profitability of higher export retms following the deprecaton of the secondary market exchange rate. These are both highly heterogenous sectors catized by large two-way trade. Import competition appears to help 2/ It shoul be that since the model is astatic one, changes to sect output take place any to the extent that ther is a rallocation of resources bvweea sectors-total national output is constained to remain o sme. Also, typicaly in such a model esfimates of welfar gains (ains in ia income) tend to be sml because ty captue only te stic effects of trade reforn. -92- restuctre these ors s at the become more export oriented. AMother significn finding is the rising outt levels of the textdles set. T sector, it was noted eatlier, is the largest conutor to GVIO and employmet in the Chinese conmy. k s also heavily ptcted, ad as in the case of the machinery sector, is cbarar by substan two way trade. The simulatdio results suggest that the effects of im peneaion in the texle sector are likely to be outweighed by the expansionry demand pul: of an apparel sector that can be expected to grow rapidly. 4.44 Within the services sector, the two trade related sectors of freight transport and commerce experience a significan increase in output from the projected liberalization. Output of other services sectors i vey slighdy afected, with the reduction in the price of servies relave to exportable goods appary having only a limited effect on domesdc activity in these sectors. 4.4S Impact on Exports. A SO percent reduction in import tariff rates (with the resuting exchange rate adjustment) is found to produce an expansion of epots from al sectors, as the Inreased profitability of export draws products from the domestic market. Ihe size of the inse in exports depends upon the initial export orientation of the sector, the size of the ouput response in the sector, and the Impact of the reform on the domestic demand for the output of the sector. Te model specfication reflects the fact that is is likely to be relavely difficult to achieve a large peentage expansion in exports here exports iily make up a larg share of output from the sector. This factor appears to explain why apparel exports rise only I lifne with the overall expansion in expors even though the apparel sector experiences the lrgest expansion in output. Increases in domestic demand for petroleum products as inemeiates appear to explain the very small expansion in the exports of petroleum and peleum products. 4.46 The machinery sector records the largest expansion in exports in the base case scenario. This reflects the special ment which this sector receives under the two-tier exe rate system. Alone of the sectors rqeesented In the model, this sector benefits from a 100 per retention rate on foreign exchange. Because of this, this sector responds to a grater degree than other sectors to the depreciation of the secondary market exchange rate noted above. Whfle the provision of different retenton rates across sectors introduces a distortion into the trade regime, the higher rate on this particular product does illustrate the importance of high scondary market exchage rates in fiauiiag the respone of exports to price signals. 4.47 To try and isolate just how iportant foreig exchange retention is to export perforance, a separate simlation was conducted to model the implicatons of brging the rention ratio to the machiney sector in line with that for the other sectors, i.e., reducing is to 80 percen These resuts are reported in Table 4.2. lhis table shows that elimiatng the positediscrimination in favor of the machinery sector has a sustti negative impact on the exports of this sector, as it sees a 1.7 percent apprion in the exchange rate applying to it-machinery ewxots would decline by almost frve percent Moreover, given the large size of this sector, this fall in expots would not be compensated for by the improved export perrmance of the remaining sectors. Also it shodd 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 sceario would no longer be the highest of all sectors, but would fall to fourth place, after chemicals, wood and metallurgy. -93 - Tle 42: IDuc OF RIDUCUoN Or FORUGN EXCENGR REJUrON RAIOS FMO me M=UNA Y KCTR -no -18 from base) EXPOrt volum 44 Import volume -03 Seoondary marke=thnp at. 0.1 Redlinwome la 0.0 Rol wag 0.0 Crops 0,0 0.0 LMvstck 0.0 Meuallurgy 0.0 lCStity 0.0 coal 0.0 Ptoleum mining 0.0 Petrlem relning 0.0 Ch _micals 0.0 Machinery .0.1 Building materials 0.0 wood 0.0 Food 00 TextIles 0.0 Apparel 0.0 Paper 0.0 Mis. Manucuring 0.0 onstruction T0.0 Frh Tansport 0.0 Pass. Transport 0.0 Comre0.0 Miscellaneous WM=ioe 0.0 0.0 PubBo adminisration 0.0 Houing 0.0 cmr 0.2 Livestock 0.2 Metalurg 0.6 ElctricitY 0.3 coal 0.3 Petrolem ming 0.0 Petroleum refining 0.0 Chemical 0.0 Machinery -4.8 Building matral 0.3 Wood 0.2 Food pocessing 0.2 Textiles 0.1 Appael 0.1 Paper 0.2 Misceine Imnacturing 0.2 &A Measured an the Hclokln cowpeasating vaiation for the change, taking ito, accont the cmouns ion bnfits Ies any change in GDP at domestic Prices and compensatd trd tax reve , and _esda a sare of base period GDP. -94- bnpat of the Other Reform Searos 4.48 he rests for lbeSraization following the Swiss fomula ap preseted in Tabloe 4.1 involve a larger reduction in average taiff rates, as well as a much greater degree of flatning of taiff rates an the simple proportional reduction of 50 percent The simple avenge reduction tariff rates with the version of the Swiss folrmula used In tis case is 71 pecent. The application of the Swiss fomula tariff reduction yields benefits which are broadly similar to, aoly larger tha hose, resuldng from the base case reform scenario. The volumes of both exports and imports expand, in this case by 15 and 17 percent respecively, as against 11 and 11.6 percent respecdvely in the base case. The secondary market exchange rate depredat by over 5 percent In order to constran the Increase in demand for imports and, in so doing, simuate exports through increases in returns at domestic prices. 4.49 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 conaction under this scenario, but the overall estmated impact is stil very small at 0.5 percent of current output levels. The radical tarifforerm exemplified by this tariff reduction does have a very marked impact on export volumes, however, with export from a number of sectors rising by over 20 percent Sigoificanty, machinery exports once again show the largest percentage increase, and under this sceaario, retain this peformnce even if the foreign exchange retention ratio is reduced to 80 percent 4.50 None of the scenarios for selective import liberalization yield results that are as favorabl a 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 setor. However, it results in by far the smallest overaU growth In exports across all sectors and points to the mportace of relieving downsteam industries of the burden imposed on them by high tariff protection on Intermediate and capital goods inputs. 4.51 Scenario V produces better results for export performance than Scenario IV, with machinery, texties and apparel exports recording significandy superior results. This is not surpring given that machinery is an important input for its own exports and that textles are the most important input for the apparel sector. On the other hand, the export performance under this scenario still remains substantily inferior to the base case or Swiss formula options. Besides, unlike the base case or Swiss fornula, Scenario VI produces a contraction of both the texts sector and the ma4hlnery sectors. Textiles seem to suffer because, while they are made subject to greater import competion, they seem unable to make compensatig adjustments in the absence of supporting Lberalzation in ott±r upstream sectors. This points to potental difficulties of approahing import liberizadon in a selective manner. 4.52 Scenario m, a 50 percent tariff reduction in just machiney, appears to be the most aactive of the options for selecive liberaization. Although its contrbuton 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 resuts, not surpisingly, in somewhat more .95- TdbN 43: NWcai 1A1M UUS AND AnSR IMP1 IJLUIOAW N PR D BY CNIKW WC 2 addes basedn Inm aof199201 uad di L+C+M+P+$ C o 1997 L.a. 1997 Y+F+* cods (auof A199SM) (auo997) I 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 s 0 .. 0.0 0.0 7 6 15.4 .. 7.7 15.4 8 7 16.7 .. 0.0 0.0 9 8 0.0 .. 0.0 0.0 tO 9 5.3 .. S.3 0.0 11 11 12.5 .. 12.5 0.0 12 12 100.0 .. 0.0 100.0 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 25 100.0 .. 0.0 100.0 i8 26 53.7 .. 121 46.3 19 27 1.6 .. 0.0 IA 20 28 36.0 .. 0.0 36.0 21 29 143 .. 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 28 43 0.0 .. 0.0 0.0 29 St OS .. 0.0 0.0 30 S2 0.7 .. 0.0 0.7 31 53 0.0 .. 0.0 0.0 32 54 0.0 .. 0.0 0.0 33 5s 0.0 .. 0.0 0.0 34 56 00.0 .. 0.0 100.0 35 S7 66.7 .. 0.0 SSA 36 58 6S3 .. 0.0 62.7 37 59 8.3 .. 6.7 83 38 61 0.0 .. 0.0 0.0 39 62 18.0 .. 18.0 0.0 40 63 23.3 .. 0.0 233 41 64 0.0 .. 0.0 0.0 42 65 543 .. 0.6 30.6 43 66 3 .. 0.0 0.0 44 67 100.0 .. 0.0 100.0 45 68 373 .. 0.0 36.7 46 69 20.7 .. 0.0 20.2 47 71 23.4 .. 8aS 8.5 48 72 24.7 .. 0.0 0.0 49 73 14.7 .. 0.0 0.0 SO 74 22.1 .. 3.3 0.0 51 75 393 .. 39.3 0.0 S2 76 426 .. 8.5 43 S3 77 12.2 .. 1.7 1.1 ...0010o -96- Tak 4.3 (oog' aIiC I Po.aio dms based on imoci dam of 199201 ULime diasw L+C+M+P+S C as of 1997 L asof 1997 I F+S ood.s (as of Au 1992 (s of 1997) 54 78 41.8 ., 41.8 0.0 55 79 4.6 .. 0.0 0.0 5s 81 0.0 . 0.0 0.0 57 12 0.0 .. 0.0 0.0 58 83 0.0 ., 0.0 0.0 59 84 8.7 ..0.0 0.0 60 85 0.0 .. 0.0 0.0 a 87 27.2 .. 0.0 0.0 62 88 15.9 . 1S.0 0.0 63 89 o0 ., 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 3a 51*4 LI E , NoW: L p bpost 1use, C -ipont Coad, m Mantoqr plan, P -ust Categoq Ipoa, S- Son Cagoy IUp@dL Baum: Offih ofo UAd Stas Tad Repaaat, Ooi 1992. limited domestic dislocadot In rich sectors as miscelianeous manufacturing and texiles. More impo tly, though, this option does not result in any significandy greater contraction for the machiey sector itsef, ncr does it undenrine its export performance-compared to Scenario V in which maciney exports grow by about 13 percent, they register over an 11 percent growth rat under Scenario m.ji/ This impressive performance of the machinery sector despite localized taiff cuts suggests that it is an adaptable sector, sufficiently diverse to be able to move to more export-odented activities following Import liberalization.lIl Compared to the other opdos for selectve liberalization, therefore, tariff cuts on just the machinery sector seem to yield the best results for the least dislocation and reform effort. 4.S3 Scenario VI, which involves reductions in export taxes and export tax equivalents of export controls in addition to reductions in import tariffs, yields interesting resuts. Since bariers to exports b heavily upon expos of primary commodWies, and especially coal and oil, and because some of these distortions are relatively large, this simulation shows significant effes on the structure of the economy.W The combination of reforms under Scenario VI result in a very sieable expansion of both exports and imports, with overall export volumes .lI Also, it shumld be noted tat this senario prduces almost 80 pera of the static welfare gains of Scenario V. IV Since the model m no impwoments in technology or productivity, increased expods of achiany implies the realiocatan of resoure within this sctor from its more tochnolokgy iaive segmt to its sophisticated segments in wich China aready bas a cowparative ZIV ITh dat on tho domesic prices of expqtbls need to be teted wm some caution and may in fact _ea rate tie exte of pric differntial in the coal sector, for example. 97- inreasing by almost a quarter and import volumes increing by almost a tirtd. The secondary market price of foreign exchange declines by around nie percent as the increase in export supply makes more foreign exchange available and drives down Its price.4I Somewhat surprisinly, there is a small negative change In real wages despite an overall move In the structur of output towards relatively labor intensive basic commodity production. It sems thd the direct price increasing effects of reductions in export taxes incre3se prices sufficietly to outweigh the positive effects of the increase in the demand for labor. 4.54 The effcts of this liberalization on outut pans is greater than the effet of the import tariff liberalization experiments. Ihe output levels of four commodities curdy subject to relativey high export taxation, coal, oil, crops and livestock a increase, whbe output of all other traded goods industries declines. The decline in the outputs from other se reflects a combination of higher input costs resulting from reduced export taes, ncreed conm tion f*om imported goods and the appeciatdon of the seondary market exchange rate, which reduces the cost of imports and lowers the res obtained from exports.O 4.55 Scenario VI yields a very different export resonse fom that observed with the other reform options. IThe most dramatic responses are in coal, crops, metallurgy nd crude petroleum which experience substantial reductions in the levels of implicit export taxation imposed by licensing. Other exports decline in response to the appreciaton of the excge rate and declines in their output levels. Tbis package of reforms would, therefore, appear to produce important shifts in China's export stucture away from m and towards resource based exports. 4.S6 The results of the simulations prwvide several usefil pointers. Pirst they suggest that China should be able to undeake fairly deep cuts in tariffs and NBs ithout this resulting in any major contraction of even the most protectd sectors such as textiles and machinery. In a county of China's size, domestic consumption relatve to imports can be expectd to remain large and domesdc dislocations are likely to be limited because of the considerable qualitative differentiation between imports and domestic productlon.1 Import liberalizaon should imprve Chias export pefomance, particularly of its madhnery sectors. Ihe Oondition for successful liberalization, however, is that activities withn eah sector shoud be allowed and able to switch to the more export-oriented segmens and that the autor remain disciplined about -am aemeIt Second, it seems that radW import liberlization is a superior option tO selective libeslization limited to the currendy most protected sectors. Nonetheless, amongst the possibilities for selective liberalizaton, the opdon of redcing import protection on only the macnery sector b likely to produce the best results for the lat effort and dislocation. lhird, notwostanding possle dislocation to downstrem induties, signfficant gains could be derived ftom tie reduction of export contols and taxes In addition to the reduction of import protecton. 13/ Tber is a largr gain in ra inoome fom Cis libaliztion thn frm ay of thebalions ncludin Only IMPort tarffs 1 It dod be noted, however, that given d_ffere in producvity levels acmss the coory, disocato in som rgions could be sigaMficantL IV An wrortma =mption of theomodelog ecse disat a absrptin a mu constat See Amum4.1 -98- See Lang, Mam and Battat, Foreln Trade Strateges- of Nations: A New JnterprtatlonIn Koves and Maer, (d.), 1991. 2. See Lang at a., in Kovs and Mw (Eds.), 191. 3. See Wodd Bank (1986). 4. See Wodd Bank (1991c). 5. LI. Sinh (1992). 6. The modd uid In 1is analysis has been updaed fom the model eportd in Mart (1992) in several Important respects. Firsty, the demand compone of the Iput-output table used in the malysis was updated to reflect the dramatic hanges in the structure of hinas fore trade whih hv ocured sic the early 198's. This was done by placig the vae of Imports and exports in 1981 appearing il the origina table with vlues of imports and expors for 1991 derived from the United Nations' COMTRADE dabas. Ihe compostion of final demand wa also updated using a Richard A Stone (OAS) algorithm to reflect chges in tho dtibution of demand between consumption, investmen and govenment demand since 1981 and to mainn balo In the nput- output table followig the adjustmens made to the stucture of trade and the explick incorporation of Chia's trade distorions in the model. stuctres of intemediate demand nd fctor demad were not updated in the sam way beca adaptig a standard input-output table of China for use in a genral equlbrum model requir very deted aDalysis of the reates between ma and sonay market pices alog h ines uetakn by Tomp (1991) and time and resourc did not permtk udert this task for this study. While it would have been desirable to update th strcture of output and Intmeda iput use in the same way hat final demands and trade we adjusted, it Is extrmely udikely that thi would mtally affect the rets since the sctur of industry out has h ged rmarkably litdo reladvo to the cages In trade and final demad ptern. Two other i o mtant anomens to te model were made in undertk ing s analyis. FlPty, the model's soluton algorithm was upgraded from a linear in percentage changes vrion, which is eac for small changes but suffers from unknown and potentially seiou rors for large changes, to a large change versio which elmiates these l rization rrors (Peas 1991). Th seoond h made was to incorpor the Balance of Thde Fuascdon or DI#ned Iade E gpendkw Fnwron to provlde a precie mony measure of the static welfae change (Hikan mg Variation) frm trade liberalizadon. This mere cat the wefare conseces of pardial liberalizionIn the real world contex of multiple distrtions and allows evaluation of wel&re changes even in the, second-best caso of pari trade liberalizatdon (see Anderson and Neary 1992 for detas). The model dmuatios were peformed with the comosite price of Gross Domestic Product held constant as a numeraire so as to facilitate expressing welfare changes as a pporton of base paiod GDP. o seondary mart price for ford chang is fte to adt t chages in the Wpply and demad for foreign exchange. agnrogae -99. measure of absorpdon, 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 finctions. The use of this particular closure means that the tariff revenues and quota rents appearing in the calculation are compensated trade tax revenues corresponding as specified by Anderson and Neary (1992). One other important feature of the experiments perfomed b the assumption that all protecton measures provide constant ad valorem levels of protection. Thus, it is assumed that the policy makers responsible for policy instuments such as import licesing 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 quandty targets for trade levels. 7. Laird and Yeats (1987). 8. Theoretically, It can be shown that partial trade liberlization involving the reduction of the highest tariff is welfare-increasing for a 'small country' as is a radia reduction in which aU tariffs are reduced equiprprtionately. 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) becse they capture only the changes in welfre associated with 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 tansmission of technological innovations to more open ecoomies (Edwards 1992); and gains from greater competition and uilization of size economies in more open economies (Brown and Stern 1988). 10. Te last of these fct Is similar to the booming sector phenomenon where rsing prices of resourcebaWsed 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 xpans in response to the higher relative price of nontraded goods. Ibis 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 -to 1- V. TOWARDS A PROGRAM FOR TRADE LIBERALZTION 5.1 Drawn on the anysis of preiou chpter t chapte seeks to defin a program for reformng Chins trade regime. Attention Is fit focssd on the tming ad sequencng of trade reforms in China and their links to other reform areas. Stock Is taken of the most recent reform initiates in China's trade regime, and based on an evaluation ereof, recommo dations are offered for futre reform. A. TIIG, SEQUENCNG m a S U OT R RM S 3.2 Ihe reform scenios analyzed in Chapter 4 are based on certain asumptis about how the Chinese economy will rea to changes In the trade regime. The modelling eecso assumes that the central govement is able to maintain mc stability trough the l hib zatio process and that rigidities In the economy would not significantly obstuct inter- and intraectocal resource reallocation. It is evident that trade reform on its own i unlikely tO yield desired rests. For it to succeed, progr In and coordination with ohier areas of policy and reform wil be eseal. lhis does not mean, however, that reform of Chinas trade regime houd wai In considering the linkages between trade re-form and other policy reforms, it shoud be bore in mind hat reating and sustining momentum is important to the success of any refom program. While It is true that trade policy reform on its own can at best have a limed Impact, it i8 also true that progm in one area of reform can help generate momentum for other roms. Mrmeover, a number of factors relating to both the domestic and the imdln trading environent suggest that the time is ripe for China to embark upon a bold program of tade lDization. Trade Reform and Reform o the Planing System S.3 Reform in China generally implies a reduction of planng. Trade refrm in China cannot proceed w ou the fiuther dismanling of the country's trade planing apparus. In particur, as discussed in Chapter 2, the existing system of foreign exchange planning and aocaton needs to be eiminated. All pote users, incding the goverament, must be made to bid for foreign exchange at a market-detmined price. In addition, the current system of foep excag contctng needs to be replaced with one in which FICs are forced to pursue profits rather than be bound by foreign exchange earning targets. Only then will the insttutions in Chna's foreign trade sector become tuly responsive to the market. S.4 Aside from the reduction in trade planning, success of trade reforms in China wil also depend on the phasing out of controls over investment decisions. AA Iortat concusion of Chapter I was that despite a high degree of import penetration w a Vapidly growing share of exports in ouwut of cetain sectors such as clothing and footwear. China's idusi structre has remaned remakably stable, at least through to 1990. Although, it seems tht invesment in sectors with the most rapid port growt has become more producdve over WA -W~~1 Ii ,1U2 S.8 As important as price stability is for the success of trade liberalization, liberalization itself can be used as an instrument for keeping inflaton in check by providing an extemal escape valve for domestic demand pressur. Given its comfortable reserve position and siete curent account suplus,j/ China is paicularly well positior^i at present to use trade liberalization as a means to address the threat of overheating am' die emerging shortage of essential industrial raw materials.3/ The time seems right, the, tore, for China to launch a serious program of trade liberalization. 5.9 Finally, as concerns the links between trade reform and management of the capital account, the experience of other counies indicates that the prudent course is to maintain coAtrol over the capital account while feeing up the curre account. Capital account decontrol frequently results in exchange rate unceainty. In the absence of effective sterilization, policy makers may lose control over the domestic price level, and hence the beneficia effects of dep-eciation 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 PoUcy and Price Reform -.1O An important objective of reforming the trade regime is to rationalize the structure of incentives for domestic economic activity and thereby improve resource allocation. Nf domestic price controls remain in place, however, the trade regime would be of little help in accomplishing this objective. This is not to say, is the case of China, ta trade liberalization should await further price liberaization. China has already made very considerable progress with regard to price refom The incidence of subsidies for imported commodities has declined substanlly. Moreover, the widespread application of the two-er pricing mecnsm has meant twh a large measure of price flexibility exists for much of nonplan domestic economic activity. Under the circumstances, import liberaization can be expected to be effective for an important segment of the eoonomy even without removing such price controls that still remain. On the other hand, without further price liberalization, it would not be possible to eliminte the mandatory import plan, and without abolishing the import plan, it would be difficult to do away with canaliztion and its attendant problems. 5.11 As concers the removal of export controls on products, especially coal, for which domestic prices are currendy depressed, the simuon analysis of Chapter 4 demonstrated that the elimnintion of such controls, although likely to result in some dislocation for downstream sectors, would nevertheless produce large net gains to the economy. In ftis 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. Trade Iberailton and Entwprise Reform 5.12 Enterprise efficiency is not only a micro but also a significant macro problem in China. Losses equivalent to almost S percent of GDP, and financed in good part through 2/ At the end of 1992, Cin's resves (IMP definition) were the equivlent of nine months of impods, and its curnt account surplus was 1.9 pcet of GDP. I/ For 23 of the 27 prducts caegrid as 'mea of production,' stok declined an averp of 10 prent over 1992. The stocku of steel fell S million tons, or 90 percen -103 loans from the banking sector, SOEs are the largest contibutors to the goverWnens fiscal and quasi-fiscal deficit. Jn tib situation, it is critical to raise enteprise efficiency. Import liberalization would be a valuable tool for this purpose. However, it can only work if domesdc eteprises are able to restructre their activities in response to import compettion. The analysis of Chapters 3 and 4, and particularly the simulation exercise, suggest the possibiity of implementing faidy deep taiff cuts without causing too much disruption, provided there are no significant obtucions to the inter- or intrasectoral allocation of resources. Wbile It Is true that there remain significant barriers to labor mobility within the state-owned sector, there is already a large and growing populaton of footloose workers that are geographically and sectorally mobile. Also, while numerous insttultional barriers remain to rationalization of productive capacity, enterpise mergers and the creation of industry grwps 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 liberilization in China. More important, however, in tis 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 that the process of import liberalization in China can be initiaed at this time. Indeed, import liberalization should not wait because once initae it is itself likely to generate pressure and momentum for further reform in the SOE sector. Trade Liberalization, Support for Exports and Industrial Poliy 5.13 Rationalizaton of China's industry will require much more than just import liberalization. Efforts wiUl need to be made in parallel in such areas as export development, quality control (see Chapters 6 and 7), worker training, thnology policy ad compedtion policy. In short, trade policy reform and inustr policy will need to be pursued in a mutually re rcing manner. The quesdon is: in what way should the two be coordinted? Korea was ale to combine trade policy with industria policy to often achieve impressive results in targeted sectors. The Korean paradigm has thus been labeiled the infant exporter' model of development. However, it is not clear to what etent sector selecd on was done on a raonal basis and to what etent it was the result of ad hoc decision making. What is certain is that the Korean authorities did make many mistake 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 genrized program of progressive trade liberalization.3 5.14 A priori, China's vast size, and its trend towards more decentralized decision making, would seem to preclude the possibility of finetming trade and industi policy coordination The problem is tbt, while trade policy necesrily requires a nationa perspective, idusal policy has become very much a provincial concer On the other hand, China could certainly benefit from closer national coordinadon between industi and trade policies than appears to exist at present. In the case of several key sectors, a national perspective is essena for being able to rationalize production capacity and for tackling the problem of suboptimal scales of production. In such sectors, a national stratey ought to be developed to complement a phased program of trade liberalization. The creation of the State Council Economics and Trade Office (SCETO) Xl is a potentially important initative from this point of view (see Chapter 6 for more on this). i ibis ofire has recdy bcome the Stat Conil Becnomic and Tad Conmision (SCEC. X104- Trade Reorm and he nternaional Envrment 5.15 China has evolved very rapidly into a major intnati trading nation. For it to sustain this mome 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 concers of its trading pamers (see Chapter 7). in its bid to attain full membership sts of the GATT, China has already made significan efforts In trying to conform to the expectations of the hrational community in general and the United States in particular (see below). However, the requirements for GATT membership are not precise and are a matter for some negotiationJIf the trm of recent applications to the GAIT is any guide, China is likely to be called upon to go further In relaxing Its import regime. From the perpective of the emeging ilnteato trade nvioment too, therefore, this appears to be an appopriate tme for China to pursue a program of trade liberalization. B. 1ENT RFoRM INmrTES S.16 Me Chinese authorities have taken some important steps in 1992 in the area of trade policy reifm. In conrast with reform measu of 1988 and 1991 (discussed in Chap 2) that were focused especially 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 epectatons of the General Agreement on Tariffs and Trade (GA77) !I and constitute a response to pressure from the United States. Tqsparec 5.17 China has taken an important step In Improving the tansparency of its trado regime. A significant number of trade documents that were previously unavailable to foreigners hve now been published. These regulations set forth detied administativ guidance for Chinese importers and exporters and should be paricularly helpful to potential foreign suppliers of goods to China who have in the past been diadvantaged by lack of access to govement regultios. Moreover, as per the recenly concluded agreement wih the Unied States (see below), (a) only those rules, reglations, laws, etc., as are readily available to other govnments are to be enforced; and (b) adminitative and judicial tribunals are to be set up for the purpose of reviewing and correcting ministraive action relaing to Customs mattes. 5.18 These steps reent an Importat advance. However, as discussed in Chapter 4, a number of further steps could also be taken to reduce the discretionary element from Cina's system of import licensing and controls. IJbal oa of the Import Regime 5.19 Sever initiatives have been taken in the direction of import lieralization. FJr, the Customs Tariff Commission of the State Council reduced a large number of tariff rates. Rates wer cut on 225 separate items or tariff lines beginning Januay 1, 1992. The items 1/ Refer, for example, to hie cae of Vene=ea which commited ibelf to acrss the board tiff bindigs in its bid to gain GATr membesip. fl Although discsso of the Workig Party appoited to conider China's 1986 applica to remom its status as a contrcing pat of the GATT were spended after June 1989, neg iations ud in lat 1991. ^105 - account for 4.4 percat of Cha's tol import tariff liues. In additon, spe imort regulatory dus, entialy import duty surcharges, that had been Iuted for 14 products in 198S and for 4 addIional products in esuing years, were lifted effective April 1, 1992. For 16 of these 18 producs acal import dutes fell fom between 28.6 and 61.S percent.7/ Tne effect of these measr has been essendally to bring the average tariff level back to their pre-1987 levels. In December 1992, tars were cut fiuher by an average of 7 percet for 3,371 tariff lines. S.20 Second, all import substitution lists are reported to have been abolished and the removal of Im licensiAg requirements on 16 broadly defined product lines out of total of 53 subject to import licensing has been announced.j/ These products include steel and a range of steel products, sugar, coffee, cassette radio recorders, black and white tevisions ad tubes, whes and a rage of production and assembly lines.4 This would constitute a substnt reducton 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 impots would still be subject to canalization. Thus, while these announced measures appea to eliminate the overlap between licensing and canalization, it is not clear that they will result in decontrol of imports. 5.21 Also, the removal of assembly lines from the import licensing list is somewhat surprisg, 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 a ace on raw maeris and com ponents, there is a strong incentive for enterprises to undertake high cost final stage proceing from imported components. While restrictions on the import of production and aembly lines are a highly imperfect means of controlling the expansion of such inefficient pressing actdvies, their removal may spark the rapid expansion of iefficient import-intensive assembly operations. Ihe 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 replacig tariff and nontaiff barriers with a consumption tax. S.22 7hIrd, a much more substantia reduction in the coverage of import licenses ad contols 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 under the US Trade Act.! 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 consttute a significan initiative only if they are to be applied on a multilatera basis. The agreement 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 mehaical appliances, electical machinery and parts, cosmetic and toiletry prepartions. 5.23 More importantly, the agreement provides for the phased removal of the bulk of extng import licenses and controls over a five year period extendig up to 1997. Table 6.3 I1 On th ode hand, tha basic taiff for two other comodites, san cams and video cafiras6 we aised. N , overa, the rtes an these commodities did fll since to basic impot duty _ina feU short of the impo regatoy duties that wen eliminated. in addWion, at dw tithis eport was going to press, it was reportd that SCEMIO has been abolished altwug it appears tat its functions bave been taken over by somm sort of an almative iport veification office. -106- provides a summary of what import licenses and controls will be reaned beyond 1997 and bdicates how this list compar with the present NTB coverage. Ibree broad points emerge: (a) If the agreement wero applied on a multilateral basis, almost all inport conrtols wuld disappear and only about 7.1 percen of Imports would condiue to be subject to import licensing requrements. 'Me later would cover only 10 broad categoy of products, including in partcuar, tobacco manufactres, textie fibers, rubber manufactur, power generating equipment, office machinery, road vehicles, and photo equipment-of these power generating equipment and road vehicles would be the most importan from the point of view of shares of GVIO. (b) There is no indication that the exte or coverage of canalization wfll be reduced. Tbus, 32 perct of imports (of which only 20 percent corresponding to the mandatory Import plan) would continue to be subject canaization. (c) Except for a small selection of products, no tariff or export tax reductions are called for. C. CONCUOMNS AND RCOMMEA11ONS 5.24 Over the last decade and a half, China has achieved a phenomenal upsurge in exports and trade. Most recently, however, its success in raising investnt, growth and trade stupluses, has raised the specter of overheating and Inflation. Further, enterprise inefficiency remas an importat micro and macro problem for the country. Finally, China's dramatic entry to export markets has raised concerns amongst its major tradi partners about its responsibility for opening up to imports. The launching of a substantial program of import could help China address aU three of these issues. Moreover, given its comfortable reerves position, the advanced state of price reform and the growing factor mobility and fexibilit in domestic resource allocation, China is parcularly well positioned to undertake such a program at this time. 5.25 Ihere is no doubt that China's recent reform initatives consttute 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 measres seem incomplete and need to be complemeted with other initiatives, both in the immediate and in the medium term. Rcommendations for the Immediate Tem 5.26 Canaliation. The distinction between Category I and II imports should be abolished, and 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 FIMs or enterprise with direct trading rights. 5.27 icening and Controls. Nonbinding NTBs should be removed. IThe discretonary element of import licenses and controls should be reduced by ensuring that all decisions with regad to import licensing and controls are made only by central goverment auhrites and according to citeria that are uniform and transparent. 5.28 Tariffs. First, the number of rates and the level of tariffs applying to consumer goods should be reduced. Immediate steps could take on a range of mature consumer products -107- for which there is evidence of "watr in the tariff.' On the basis of available data, it appears tha reducdons in the order of 20 to 40 percent should be possible, depending upon the product, wi resuldng In any sgnificant dislocatons in domestic production. Where, tariffs are currently being used as a way to disoourage coOn Dptio, these tariff reductions should be acompanied by the imposition of an appropriate sales tax. 5.29 Tadff Exemptions. It is recommended that all exemptions, including those to foreip investors, on Imports for use in domestic production should be abolished. 5.30 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. Recommtendations for the Medium Term 5.31 Phase Out of icensing, Controls and Canalization. The Memorandum of Understnding that China recently concluded wit the United States Is an Importan initiative intend to reduce NTB coverage significandy by 1997. China must implement this agreement on a mltilateral basis. Only then would this iniative constitute significant progress. In addition, an in paralel wit its declining reliance on import planning, China should also phase out the practice of canalization. 5.32 Tarff Reduction. Given the importan initiative that the government has already taken In the form a preannounced and phased reduction of NTB coverage,2/ the same should be done for tariffs. A reasonable target would seem to be to implement a 50 percent radial cut in tariff as soon as possible. Such a taiff cut would bring China's tariff structure into line with dt for Korea's, for example, with average rates on c-nsumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, on agricultura goods to 17 percent and on mining to 10 percent 5.33 Given that trade diplomacy is likely to remain an important part of China's future 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. 5.34 On the other hand, China should move unilterally and much more quickly in the reduction of import protection to the machiney sector. Of all options for selective liberaization, this one is likely to yield the most promising results. 5.35 LUis with other Policies. The trade, foreign exchange and investment planning apparatus must be further dismantled (see recommendations of Chapter 2). Depreciation in the real effective exchange rate and disciplined macroeconomic policies must accompany the proposed program of import liberalization. Reform of the SOE sector should not be allowed to lag too far behind the proposed program of import liberaization. Parallel efforts must be made to provide support for export development and to articulate a national industrl policy that would lay down a strtegic framework for certaI sectors identfied as key sectors that would complement the preannounced measures to liberalize the import regime (see Chapter 6). 1/ tsat tgds is to be aple mulIterly and not ust to imp from the United States. - 108 - S.36 Reduction to Export Contrs. Finally, export licensing and taxes on products for which domeic prices have been kept deessed should be reduced progressively as part of th government'8s ogOiog effort to pursue price reform. - 109- Ebd_ 1. Li. Singh (19). 2. See Choksi at al., in lbo Design of SuccesaM Trade Liberalization Policiesu in Koves and Mmer (Pds.), 1991. 3. See World Bank (1986), fr details. 4. GATr (1992a). S. Office of the Trade Representative (1992). -110- VI. POLICIS FOR EXPRT DEVELPMET: A CRICAL EVALUAMON A. DIROIDUCION - 6.1 me exprience of East Asian NICs s evidence of the poe utility of public Intervention in the area of export development. Ibis experience suggests: (a) that public suport fOr eport development can yield import exraities; (b) tha inteventions can be usefl for ofiet dincentives to exports during the transition period to a less dsorted economy; and (c) that selective nvention can be an effective catalyst for setting in motion an qort gowih dynamic. 6.2 aiIna has, in many respects, adopted a strategW of export developmet very simir to that of these countries, and It has atempted to replicate many of the Iostuional strucwes of these counts as well. TIs chapter sees to provide a critical evauation of the various expaiments to dte In order to draw lessons for governm policy in the futr. Whwerer pertinent, Itenaol expeience is brught to bear. B. DEVELOPING BUY=-SnMz L1NKS TI ROLE OF TnADzWG COMIANU 6.3 'There is a growing body of literatu on irntional trade that focusses on the natue and imponce of buyer-seller links.' On the one hand, direct links between an expr and an oversea buyer have been shown to be an important conduit for the diffusion of lnowledge and formation. It is through such contacs that an exporter learns the nature of his market, and that the buyer exercises direct quality contol, and often will also transmit valuable design, pacaging and produtidon know-how. This tnds to be important for consumer goods. On the other hand, it is also true that international trade has become a very complex affair. Accordingly. tdes can play the important function of bringing buyers and sellers togete. ln general, though, the appropratens of a distrbution channel for international trade wi}l depend on the naue of the product, volumes involved and the ca of the markel Looking in to the futu, the most important conern for China as it seeks to sustain its export drive Is to draw lesson about how to access developed county markets for mauactes. 6.4 In the contex sketched out above, ornizations specializing in export-impor can play a usefil role in supportng the export drive, particularly of new entrmts, into world markets. In fact, the conid existece of such orgaiaions in market driven economies, not only in Eas Asia, but also in North America and Europe, suggests that they meet real needs of evea well established and experienced trading communities. 6.5 Then b a groat vaiety of trading companes in the market and different forms ba come to predomhate in different economies. The role of the giant trading houses of sogo sostha In Japan is legendary. Korea is one country that set out deliberately to replicate the Japanese sogo sosha model and has done so successflly. Taiwan (China) and Hong Kong on the ote hand have rdied on small trading companies or on trading companies from other ountries. 6.6 Six of the ten largest non-US compaies in the world are sogo sosha. Not only have tiese tradig firms come to dominate Japanese trade, they have proven to be a most onduring titution whose role extends much beyond that of a mere marketing Intermediary. In fact, their prncipal funmtion Is hat of coordinator of whole product systems or production chains. Their involvement ends to multiple stages and multiple functions. Domestic marketig, provision of logistical support, and procurement of Imported materials and equipment is thus an equally important, if not a more hmportant part of their fimctions, as is the markeig of finsed products ovarseas. In addition, finance is a particularly importan service that sogo sha pwrovide to their clients. Leavig system liks to the sogo sosha enables clients to allocate scarce resources to investment in plant and equipment rather than in distrtion networks, and theby 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 rough managing the procurement and markeing activities for their systemwide client base. In any given industy, dtore, sogo sosha and their clients complement one another, and recognition of this omlIy encourges the maintenance of long-term relationships between them. Typically, the clients of sogo sosha consist of sister firms of loosel; structured industrial groups (zaibas and kert). In 1990, sogo sosha handled more than two thirds of Japan's imports and half of its exports. 6.7 As successful as the sogo sosha have been, they have come under increasing pres over reen years as traditional multi-process industies such as textiles and chemicals have faed maur, and as the country's exports have diversified into consumer goods, tomobiles and high technology products. Ih response to declining profitability, sogo soaa ve bee ntaerig ww fields of activity. Plant and prwject exports, real estate, large scale foreg diect Invement and third country trade are activities ht the sogo sosha have pursued aggrssdy tough the 1980s. While these activities provide new opportunities for the sogo souia, they also present new dsks. Looking into the future, it seems clear that the sogo sosha 's trditona activities bave reached their limit, and it is likely that only those sogo sosha with sufiet resources to absorb the costs of breaking into risky new activities will survive and grow. 6.8 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 tran on of sogo jvsha) is the result of a delibera goverment policy, instituted in 1975, to replicate the success of the sogo sosha in expanding Japanese exports. The government established minimum crieia-one of the most important being minimum size in terms of paid-up cpital and eports-for designation as a GTC.2 Generous incentives were offered to firms /I This section is boasd onAn ugj. -112 - meeting tese criteria. The focus of Korean GMTCs was intended to be restricted to export development. Consequently, Korean GTCs ar much less functionally diverse than thoer Japanese ounpats. They do not operate as system coortinators and handle a revely much smaller share of even the import business-less than 15 percent of Korean Impot were handfled by the GTCs in the mid 1980s. The minimum limits for GTC designation were set at high levels in order to encoure only the very largest of fim. It is no surpise, therefore, tht sl but one of the existing GTCs are affiliated to a haebol. the Korean version of the zabaum. Each Korean GTC depends much more closely on Its affiliated uoebol, tan do the postwar sogo swsha oi their respective kefretsu. Indeed, Korean GCs function as exclusiv exot agen for their respective haebols. 6.9 Although the Korean GTCs did make an impressive contibuton to the country's export growth, much of this performance can be attributed to active government support and the OTCs' very close links with their respective daebok. The focus of the GTCs in the early years was on expanding business, without regard to cost. In effect, the GTCs compd fiercely for govement assistance tied to ewport targets. In so doing they becme over-tended and slashed their profit margins. Ihey managed to overcome their worst difficulties only becauss of accs to the vast resources of their affiliated chaebols. Moreover, their share in Korea's exports ha stgnated 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 thdir Japanese counterrs, because of their greater financial vunerability. 6.10 Impressed with the Japanese experience with big ting companies and with Korea's successful effrts t cre thei GTCs economic planers in Tain (China) alo attemted to develop their own da maoylhg or Largo Trading Companles (LTCs). Taiwanese LTCs, however, never really took off is part because governmt incentives to LTCs were very modest compared to what was offered to their Korean counterparts. Moreover, LTCs faced much greater competition than their Korean countep. Roughly half of the trade (exports and imports) of Taiwan (China) is handled by Japanese sogo sosha. Foreign retailers, loca anucturers 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 JapaL Second, LTCs in Taiwan (China) got litde or no support from local business groups which, while not as Impornt as thoso in Korea and Japan, could sdll have given the LTCs a significat boost. 6.11 The multiplicity of small trading companies is a trait tat Taiwan (China) shares with Hong Kong. However, in Hong Kong the small trading company is the most important form of wtade intenediary and accounts for 80 to 90 percent of Hong Kongs total exports. Unlike in Taiwan (China), the role of foreign trading companies is negligible. Hong Kong tang companies tend to be specialzed, both in the type of services they provide and in tho number of products they handle. They are either involved in exporting or Importing or reexportg and handle one, or at most, two products. Despite their small size, Hong Kong tading companies do not operate on a simple agency or commission basis. They funion as fully fledged itermediaries, assuming the risks assciated with taking title to goods. They guantee qulit and on time delivery to the buyer. In many instaces, ty pay for a certain percentage of defective items, or in case delivery deadlines are not met, they assume the cost of packging the merchandize themselves or of maing alternative tranortation arrngements. From the point of view of loca manuac, they also serv an ort tecical assistance function. They carry out rigorous preshpmt nspeon and, in certain - 113 - cases, Ispect the goods at varo sges of producdon, and thereby provide manufcturers valuable normation on the quality, pacaging, and styling requrements of buyers. Fiay, Hong Kong tadit companies providepreshipment finning to local m turerstly o this fincing take th form of credk for Imported inputs or advace payments. Thm xpwlmn of ChIna's FTCs 6.12 As noted in Chapter 2, China has a unique legacy of trading companies, the orins of which lie In the planned econom 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 dectalization, and to encourage greater competition In foreign trade, MOFERT authorized the creation of additonal FTCs. New FTCs were created in two ways. Many spcialized national FTFs saw their provin branches spun off into separate provincial specialized FTCs. More frequently, though, so called general FTCs were established at the provincial or municipal level with authorty to deal with a broader range of commodities. By 1988, thfer were about 5,075 FMCs in operation. le explosion in the number of FTCs substatly increased competition in forign trade, but itled to problems as well. Someofthefltms were not well capitalized and lacked Intenatonal experience and, as a result, defalted on contracts. Others violated central government rulaions in the pursuit of profitable trade transactions. In August 1988, the State Counci launhed a rectification campaign aimed at eliminating or merging FTCs not found to conform to national foreign trade policies. By lato summer as many as 1,400 FMCs had been shut down, and there now remain an esdmated 3,600 in operation. Unlike in any of the other East Asin counties exmind, China's FTC are all publicly owned, each being supevised by MOPERT at the apopriate level, whether municipal, provinci or national. 6.13 FTCs handle over 90 percent of Chinas imports and at least 80 percent of exports. Most FTCs take title of the goods that they export-they do not operate on a commision basis, or on what is in China called an agency basis.2 Ihey are supposed to absorb al the risk of madrkt the product oversea. On the other hand, the bulk of imports boded by FTCs are on an agency basis. Here, most FTCs play terole of a mere Inmediary, rather than that of an aggressive procrer of technology for its clients. Although Chdna's FTCs handle the bulk of the country's exports, they depend beavily on their links with Hong Kong to market their products overseas. Over 50 percent of Cinas exports are to Hong Kong, almost all of which are then reexported to thrd countries (Cbapter 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. 6.14 The perfomance of China's FTCs varies a great deal. Small and dynamic FTCs coexist h giant, inefficient, mowpolists. The more dynmic FTCs do appear to play an effective role as conduits for info on regarding production technology, styling, and pckaging. They finance overseas trips for their clients. They help train the workers of local enterpriss and provide credit to buy imported raw materals. In the case of processing with 21 Ibe- govment's initiatieto sead the usof thd agn system for expots as beerna filur because of the lick of FM cooperaio FTCa hae sho a prehaence for the htadional sstem of purchain goods fam the expor and then seg them in onay an their own acount, in paUt bec of the fineign exchg rntion system-PTCs hae no cam to retaed foreign exchng frm exports handled an an agecy basi. Only 10 percet of export were handled on an agency basis in 1990. -114- supplied or Imported raw materials, an activity which acounts for more than half of China exports of nrufacues, the FTC helps the client procure the necsary raw maerials and the machinery. In some cases, FTCs have also been valuable conduits for tecological upgrading by arranging imports of specialized equipment needed by their client firm. As concens their links with clients, the more dynamic FTCs have taken the lead In organizing network of small and medium sized supplier fims, both state-owned and TVEs. While not rigid, the links betwen such FTCs and their clients tend to be stable and loyalty is important. Regrding their links with buyers, such FlCs have relied a lot on contacts in Hong Kong, but increasigly they appea 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 industrW products, garments and electronics. There is no doubt that Chinese FTCs have contributed to the growth of China's exports from thewe sectors, even if this contibution has, in many cases, consisted only of providig an effective interface between small local firms and Hong Kong buyers who then take responsibility for maketg the products to third markets (Chapter 1). 6.15 As successful as some FTCs have been, there is ample evidee of others that are inefficient or that are engaged in activities that are not necessay beneficial for China. Many FTCs appear to be poorly managed. It has been reported by foreign buyers that middle level staff of FTCs witht whom they have had to deal with lack exper and are poorly motivated.' Many local firms have also reported dissatisfacton with the ability of FMCs to provide feedback from buyers and with their high agency fesw. Several FICs 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 intenional market. Much of the blame for the survival of FTCs of dubious value lies in the policy framework adopted. 6.16 First, the use of FTCs for foreign trade ansactions is mndatoy for A but a handcfu of firms that have been granted the right to trade direcdy.j/ The extent to which local enterprises use FTCs does not, therefore, reflect market detemined deciions, and is hardly an indicator of their success, as it is in the case of the other economies discussed previously. It is true that deccuraization has injected a good dose of competition into China's foreig trade system. Local enterprises do have a greater choice between which FTCs to use-indeed, it is esfimated that up to a third of the foreign trade business of enterprises in Hubei and Shandong, for example, is handled by FICs from other provinces-and this has allowed them to bargain on prices. Even so, the mission encountered several cases in which local entepise were st;il getting prices that were substantially below the intenational level.41 Tbis suggests that the previously noted monopsony power of FTCs (World Bank 1987), while no longer as widespread, is still a problem. It By mid-1992, ody S38 compies had the righ to trade diretly. Thee included some hodig companies with many subsdiarie. 4/ Tho ms also found i mny cases tt local firms were getting lower prce per unit on exprs ta the domesc market Why do theno firms export? Tl ar tw possibilies. Eithe it is the cas that the premuium from thie forignp exchage they earn fiom export is sdficiet to compesat them for the low price, or they ar under pressure to meet fotrg exchange targes in the context of their own contas with th petve productio bueu-in thlt cas tey are probably usdizng ter losm an expos with earings an th dometc - ll15- 6.17 FTC monopsonypower and inefficiency remainessetWlyb cemofInufciet compedtion. Where Information flows are poor, as in the Inteior provinces, and enteprise do not have easy acce to alternative FTCs from other provinces, poorly managed FTCs are able survive. It may slso be tha provincial athorities, desirous of capuring a maxmm of foreign exchange, delibemely restrict the freedom of local firms in dealing with FMCs fom other provinces. Competitve pressure on FTCs is critical to ensuring that local enteprises are not penaized, that profits and foreign exchm are not misallocated to FTCs, and that products that should be exported fom Chin are not undereported. 6.18 Second, there temain a number of designated national and provincWa PTCs 5 that have monopoly power over a certain range of products (Chapter 2). These products are endally of two types. 'here are tho that are subject to planning and whose domestic corsumption b subsidized, such as steel, fertilizer, oil and coa. FTCs serve as a sort of valve to regulate the flow of these products betwee the inteatonal and domestic makets. The exports of such products have to be controlled to ensure that the artficially maintined dIHerenta between the world and domestc price does not result in domestic shortages. T'et there are products in which China is deemed to have market power (mainly some mineral such s tugen). The export of these products are controlled on the gounds tiat Chis market power would be undermined with free competiion in exportsfi/ 6.19 Desiting a few FTCs to handle tho exports of such products has ld to the accrual of rents for a handfil of FITCs. Thus Siwcheri, for example, with exclusive ris to export petroleum products, has profted enormously from the diffrn between the subidized local procurement price and the higher inational price for ol. Sinochems fincia strength does not stem from the fac 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 co _ adjustmen ts for these either through export taxes or profits tax. In practc, thi has not haened to the extet that it should. 6.20 Third, fixing foreign exchage targets for FTCs (Chaptr 5) mks them drivo to meet these targets without sufficient regard to their profitability. The eperience of Korea has shown that such an ientdves fraework leads, over time, to finncily weak trading companies. Unli in Korea, Chinese FTCs do not have the luxury of relying on the finacial resources of giant conglomerate enterpws grups. In the event of financial distress, they only end up burdenig the state budget or, even less desirably, the banks. 6.21 Fourth, all FTCs (even the so called general ones) are subject to some sort of reion as to their product scope-no FTC is fre, to deal with just any product.l( Besides, FTCs are not authorized to handle intemal trade. This practice restricts the chances for FTCs to evolve as systems organies sTmflar to the sogo sosha of Japan-they are prevented from PaFor a putidcular proct, ay crue oil, there is just aoe FTC in ch province with authrt to al td-that FTC coud betho national FTC or a povincial FTC. ITb sa rationale underies dte ubiqutous ue of export licenses (Chapter 3). 2/ Even whom FTCs ;mt raw matrials for hi clieants, thy are not autwhid to aupply these atmdes outsil thir clints group, and cannot export coodit other than those ffr wh dthy ha perms -116- m C.1: FOimGN TRD Com AnoNs 1N CIDNA Two ELAwz ChinaUs FCs are extrmely divere. Thoy ng from the Chma Ntonal hemicals Impot and Export Corpontion Siochm), China's reigning Number 1 hdng conmany uilh 1990 trade nover in excess of $12 billion, to small fims uith volumes as low a a few milfion dollars. Sinochem, which was founded in the 1950O, is an econoopowerhouse. In addition to its trade in a broad range of bulk and speciaky dhmicals, it contols a11 of China' trade in orude oil and In almost all fie petroleum product. I subsidiaries and joint vent include companis in finance, leasing, stop and shing, inteatnal advesng, and biotechnology researh. By 1990, it had become the cor of S _ochm Group of 155 member entprises. The Group includes 56 companies over whih Smochem has diraet dmi av or indi control by virte of paal ownership. There are an additional 98 companies aid to have a loose alon with Sinochem as a consequene of ongoing business trnactons. Sinochem's oadquatters staff in Boiing exceeds a thousand eaployees; an addionlal two to three thousand are emploerd s various povinchl bwanch offices, and hundreds mor staff In moe than sdy freig representai offwies, foepn joint ventures, and wholly owned forign affilat Paruly i recent years, Sinodm inreainy has sought to become a tratoal co ion. A gwing shar of its opeati conist of buying and slling of ohemical and ptoemica producs in third country market, for example, buying products in Singapore and seling them in urp. In 1991 tOs transactions incaeased amnost 50 percent to ecoed $3.5 billion. While to bod scope of Sinoeenii clear, the soures of its appart success are less so. It grew most rapidly in thw first half of the 1980s whe China's oil expos, over which it had a monopoly, grew rapidly. Its toal export volume in recent years remains wel below the record level of 1985 when Cha's IPi rleu exports hit apek Sinoche's petroluam expots we aguated money maker sino it was abb to buy erude oil at roughy one sixth the inteatioa price, sell it on the inteatonal maret, and keep part of the profis. As China's oil exports soared in the firt half of the 1980s, to eceed $6.5 billion dollas by 1985, Sinochom cotrld a flow of 'profit? that was not even remotely matched by any other forei trade company. These were eriveedto create the burgeoning empire evident by the late 1980.. Even es lat as 1991, wh the volum of China's peoleum export had been out back and Sinochem was albowed to rtain only 1.3 percent of the forin cxp ening, its monpoly over petoleum eports ompid an eo_nomi rent woith an estimated $50 mMion. Alhough the Hubei Psovincial Chemica Import-Export Corporation rank among China's top 500 tUadig cmpanis (No. 422 in 1991), its economic profile diffes damay from Sinochem, it former paet company. Until 1989, the Rubei fim was a branch of the parent firm; sine then, it has been independenL Unlike Sinochem, it deals only in chemical-the highly profitable petrolum export businesU i8 atirdy in the hand of Sinochem. Hbel Provincial Chemical hnport-Export Corporation actualy loss mony on more than 90 prent of its exporsS, even a9er feWting in the rebate of indirect taxe it recie on most xpoted poduct. These rbat avera 23 percent for pigments and iyeStuffr, two of the main product lines. In an ampt to reduce its loses, company hs boe reducing its export stedily since 1989. Ofdeting e osso s aro pros it makes on chemica import products, espeially high qualWy heils lBut the firm in not free to expand s busines dne the qan of sveral of the moa proftable importd produb reied by import lioenses. And profis on imports were at a peak in 1987and 1988, prior to the two major devaluatons of 1989 and 1990. Yet the dsteq of diling money-osing export and lobbying for groser quatitics of profitabl licensd impor has me with only lmited succss. Cumulativ financial losse at the end of 1991 exceoded Y 32 mill. Theseo bses are financed by short-term bank loans which are roled over frequety. In recent yea, paymens of intr and pcl have aveaged Y 3 to Y 4 million. n short, theubel Prvincil Chemical mport-Export Corporion is adcappedbya cohing burden of cumulat debt.It pnoipal exports, which it is rqured to sel by virte of an imposed mandatory export tsrgt of $18 miion, mosly lose money. It is kept abat largely through the ren implicit in th import lienses it in allocated by hiMgher authoritie. Any net profits tat these acdvies enee are absorbed in payments of inter and priwip on its umua debt. -117- meedng all the potential upstream and downstream trade-related requirements of their clients. More importanly, the current practice of restricting product scope discriminates against FlCs that happen to handle products in which China is not competitive. lThe problem is that such FMIs 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 FMCs such as the Rubei 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. 6.22 Fifth, relations betweenprovincial/municipal and national FTCs on the one hand, and between FiTs and their respective supervising authorities (whether provinciallmunicipal or central govenment branches of MOFERT) on the other, remain confused and ill defined. Decentralization notwithstanding, provincial FiTs which used to be branches of national Fit stUIl conduct busine4s on behalf of their estwhile 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 vares quite considerably, and depends on their relationship with their particular supervising authority. 6.23 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 FiTs 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 retenton are in part ntended 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 exportproducts. In cases where competition sill remains limited, however, this measure enables FMTs to use the premium from tidr freign exchange retentio quotas to raise their own profits rather than pass it on to exporting enterprises. 6.24 Some FTCs have been granted generous loans to undertake 'enterpdsing' or vertical integration into mInufcting activity, with an idea of assuring them a stable source of supply. In some cases, such links betwee FTCs and ma ers could well be beneficial to both parties-while the FTC acquires a captive supply network, the manufactues could gain access to greater financial resources. On the other hand, as long as such a policy is pursued with the survival of FTCs in mind, there wfll remain the danger of -forced marriages" which, while usefil to the FTC, may place undesirable restrictions on manufacturers who lose the flexibility to chose their trade intermediary. MOFERT is, along similar lines, tryingto facititate mergers between FTCs. Again, much depends on how these mergers take place. Some could result in important economies of scale and scope for FTCs. On the other hand, if mergers are made between FTCs that are not sufficiendy diversified, there is the danger of creatng monopolies. 6.25 Finally, MOFERT has been actively encouraging FTCs to 'internationalize" as a way to diverify their fnctions and spread financial risk. Thus many FICs have received -118- authorizaion to set up overseas subsidiaries, invest in real estate, engage in third country trade, and Wnest abroad. 'ne experence of Japanese sogo sosha shows that breking into these new activities is a risky business requiring considerable resources. It is difficult to see, therefore, how those FrCs already in trouble in competing for tradional business can be helped by enting new and more risky activities. At the same time, it is also not clear what sense it makes even to encourage flnacially stKng and well managed FMCs to Internationalize just yet, when these companies could, if allowed the fteedom, surely find profitable investment opportnities within China. The evidence so far is that many of the FTCs pursuing a strategy of premature *internatioization have bad dubious intentions. MOFERrs policy has in fact been abused, and has resulted in capital flight. Several FTCs are lkown, for example, to have engaged in speculative real estate invesments. Others have set up overseas subsidiaries essentially to escape Chinese law. Some subsidiaries have been used by FTCs to reinvest in joint ventures with theriselves, and thereby, to gain access to substan fiscal inctives reserved for foreign investors. Leso for FTC Polcy In China 6.26 The faiure of Taiwan (China) to develop Japanese style giant trading companies indicates t it is not always possible to transplan models from other countries. On the other hand, the case of Korea demonstrates t effective trade in ries 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 diversitq of its industrial structure, it is apparent that China has useful lessons to lean from each of the economies considered. In the Immediae ternm, the most usefu trading companies for China appear to be the ones that resemble their counterpars from Hong Kong. Smallj/ flexible and specialized tradig companies seem to be the best suited to handle China's most rapidly growing export segments such as light industrial goods, garments and electronics, and to harness the export potential of TVEs. On the other hand, looking into the future, and taking account of the breadth of China's industrial strucure, it is easy to imagine a useful role for large trading companies that could, like 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. 6.27 The real challenge for FTC policy now should not be how to help FTCs survive, but how to create a fiamework that encourages those FTCs to thrive Ihat can serve as effective trade int ries for China. Drawing on our analysis of the deficiencies of China's cument FTC policy, and of the experience of other counies, the following recommentions are offered: (a) Progress in maing the tradig system more competitive notwithsting, steps need to be taken to elim!nate the residual monopsony power of FTCs dealing with noncontroled products. In theory, this can be done merely by ensuring ta informational and regulatory barriers ta come in the way of cross provincial tansactions are removed. In practice, this may be difficult to achieve. A more effective way of applying competitive pressure on FTCs would be, as in the case of Taiwan (China) to allow entry to foreign trading firms, and II/ Compaed to Hong Kong tiading firms, small Chinse FTCs ae stdill large-while the fmer on aver have les thn 50 woidcn, th late tend to have betwen 300 to 400 woers. - 119 - to buying offices of foreign wholesalers and retailers.2/ Another alternative Is to give more enterprises the option of trading dirwecdy. For a start, all cenrl goveent enterprises could be given the option of trading direcly. and alo of handlig trade for other firms too. Uldmately, any local finm should bae the choice of trading itslf, or of subcontracting this fction to an Intermediaty. For t* foreig tade system to funton efficienty, i I not local enterrs tha must arn the right to trade directly, but it is FTCs that must ear the right to act as iediaries. (b) Pending the elimination of controlled commodities, a mechanism must be fomd to systematically transfer the rents that curentdy accrue to FTCs designed to handle exports of such commodities-there is no reaon for them to beneft from widfalls tbat have nothing to do with their capacity to function as trde lntermediaric. The most rational way of doing this would be through the application of compensatory export taxes.I/ (c) As noted in Chapter 2, the practice of foreign exchuange contracts betwn provincial or centra government authorities and their FTCs should be discontnued. Instead, FTCs dsuld operae as independent profit centers and their bonuses could be linked to profits. in paralle, prvia FTCs must become tuly idpnde from their national courps, and all businm between them should be on stricdy commercial terms. (d) The meare prosed above cannot be implemented unless FTCs are granted gater management autonomy (see Chapter 2). At a mimum, the practie of restriig the product scope of FrCs must be eliminated. FTCs dwuld be granted the freedom to handle any commodity (with the exception of thosoe sti subject to import planig and export controls). Ihis wMl enable FTCs, if they so wish, to diversify their product coverage and will encourage them to seek out the products in which Chma is most compemtive, thereby reducing such dirtions as remain in the composition of China's exports, and enabling the growth of the country's foreig exchange reserves with Jeopadi the financial solvability of FTCs. (e) Over time, FMt should be alowed to engage in domestic trade as well. This would provide the opporunity for the larger Chinese FTCs in particuar to play the role of systems organizers like the sogo sosha in Japan. It would create business opponites for them within China, instead of tuning them towards a strategy of premature internationallzation.- (f) Verca in n of FTCs into mancti, mergers between FMTs, etc., should not be facilitated with concessional loans, nor should they be arrangedt with the objecdve of saving ailing FTCs. Already FTCs opeate on a fiancialy Ths ledy a rs to be hpening in Guazgdog. IV Th tax beng equa to die differusce bwe the domesic secody mit price and the t umpnc of theproduct co_nned. Tae ae, in some cas, used at prsent, but dhey m not sufficimey hish to btisfer al of die rent accuing to FTCs. -120- more autonomous basis than most Stateowned enterpri. The logical step to having FTCs take responsibility for their profit and losses, however. is to allow ailing FlCs to exit. (g) aO the other hand, FTCs should be able to exercise the option, if they so wish, of vetically ngaing, or merging with one another, or with firms. If FTCs are able to operate as truly indepeent profit Centers, voluntay mergers between FTCs can be expected to be undertaken for the rigbt modves. In parallel with (b), (c) and (e), it is recommended, therefore, that FMC be permitted to merge with another. Moreover, pending resolution of system wide ownership issues, ionlmerges could also be pemitd betwoee FMCs and the aonomous enterprise groups that the govermuen is promoig. Unbi Korea, which at the incepWon of its GOC policy did not have any large trading companies, China aready has trading companies that are ficialy strong and are large. The elimination of restrictions on product scope and the oprity for mergers should encourage such FTCs to diversify and develop Into genea trading companies, without the government having to subsidize or arrange this process. (h) Finally, the premature intemationalzation of certain FTCs flush with foreig exchange does not bring F ty gains for China-it should not be encouraged. In pticular, the loophole xat allows FTCs to create overseas subsidiaries and revest in the mainland must be closed. C. DEOPiNG Bum-SELa Las: TM ROLE OF PUC SUoRT SERVICES 6.28 Given the dificulties that neophyte exporters can face In establishing link with foreig buyers, many counries have tuned to public intervention of various kinds to try to facilitate te process. Ihus, governments have attempted to provide ssane for export marketig, fr quality control and for other export support senrices, with varying degrees of success. Public Support for Export Marketing 6.29 Amongst developing countries, the so-called Four Dragons have undoubtedly had the most effedve 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 tee four counries demonstrates t appropriately designed and mnaged sions can be effective agens of export promotion, it must be borne in mind that, in all cases, the private sector sill handles the vast bulk of information flows between buyers and sellers. Export Promotion Offices (EPOs) in these countries compete vigorously with private trading companies ad ohr market inermearies. The key to their success has been the strong involvement of the loca business community in their activities and their ability to occupy a maret niche. 6.30 in China, there ts a diffuse and fast anging instutional structe handles vrious aspects of export promotion CFable A6.1, Orgni Structr of - 121 - MOFERT).il At the ntiona level, there is the China Council for the Promotion of Intnational Trade (CCPI), that reports directly to the State Council. CCPIT was originaly charged with the task of handling Chinat's trade with Japan. Over the years, its role has changed and expanded. It now is the foremost national instituion responsible for promoting Chinese exports overseas. Ihe Council's job is to enhance Chinas image as an exporter. To thbis effect it handles the organization of trade fairs and exhibitions overseas. Participation in these fairs is open to all. However, the CouncU makes a selection from amongst applicants from the entire country, and the selected entprses or FTCs are required to pay a fee intended to cover some part of the Council's costs. 6.31 Aside from CCP1T, MOFERT, at both the national and provincial levels, is involved, albeit to a limited extent, in export marketing. MOFERT has a department that handles intational adverdsing. Mostly, this involves designing international advertising campaigns for clients that comprise joint ventres, stat Wned enterprises and FTCs. More significant iS MOFERrs role in orgazing 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. Recendy, provincial and municipal branches of MOFERT have also started to organize their own trade firs. As In Shaghai, locally organized trade fairs have now become Importart annmal featres in many provinces and municipalities. Participation in all fairs, whether organized naionaoly 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 respectve FTCs. As a reslt the fairs have not done much to promote direct buyer-manufcturer contact. Such contact remains limited in large part to entities that have been granted the prvilege of *direct trading rights. 6.32 MOFERTrs involvement In export marketing has declined substantially now that FTCs have become more autonomous. As the decentralization of foreign trade contiues, the role of MOFERT or any succesor organization can be expected to evolve further. Increasingly, MOFERT will be called upon to focus on regulating Chins's foreign trade policy fiamework, leaving the maagement of the country's trade to independent intermediaries or firms with direct tradig rghts. Even within this famework though, there may still be a usefil 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 expandig direct export rights, in direct competition with independent FMCs. 6.33 RecommndatIns. 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 FTCs unti 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 tansmit skllls and infrmaion that may enable clients to bypass them. Under the circmstanc, public support for export markeedng could help ensure not only that those local enterprises that wish to export direety 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 IV Mis stucue is in te procs of cuae, following recm initiatives (dtmming frm the 14th Naton COmuid Pary Consre i October 1992) to eg the goverment As noted eaier, tie Ministy itself has been renamed the Minity of Foreign Trade and Economnc Coopetio (MOPTEC). - 122 - of scale Involved, MOFERT could easily develop an effective intelligence network worldwide, and channel inormation 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 nonstat owned sector for this purpose. As per the model of succul EPOs elsewhere, the delivery of such services could be managed jointy by MOFERT and representatives of local flrms.l2/ Public Support for Quality Control 6.34 The Importance of product quality is often undestimated by new exporters, who are used to a less demanding domestic market Intafim 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 makets 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' instct, based on genea petions about the country and on infomation from other buyers.4 Considering the externalities involved, therefore, public intervention in the area of quality control can play an important role in export development. 6.35 Quality control can be conducted at several stages of the export chain, ranging from the presbipmentstage, back to the ma ng process itself. The experience of several cunies shows tha, while quality control at the preshipment stage can have an impact on the export quality of cerain industries in the short run, 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 maagement practices. Moreover, no quality control measures can be effective in improvig product quality by themselves, in the absence of a sound overall policy environment. 6.36 The experience of Japan is an example of a multistage approach" to quality control. Japan's dramatic success In developing a reputaion for quality has been the result of a concertd and sustned effbrt by the govenmet 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 preshipment inspection. Taiwan (China) has taken the question of its inrnational 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 originatng in the country.fl More importaty, Taiwan (China) has invested heavily in a dense network of publicly funded technology assistance and testing centers. See Amne 6.1 for details. IV At present, MOPERT is tuar head of the China Associatio of Intrational Trade and hie Chamber of Commerce of Import and Export Commodities The oranizons, however, are ompisdmainly of FTCs and a few dtHt-owned enteprs with direct trading rights. For its proposed new fnctions, MOPERT will need to extend its lin with associaions of producers at every level ,1 Th government is repotted to have paid etur shipment for 300,000 bicycles ra than let them be sold in the United States (see Egan and Mody, 1992). - 123 - 6.37 The Chinese authorwies are cognizant of the impotn of export quality control and a number of steps in the right direction have been taken. Cbina now has a legal firmwork for admini export quality control in the form of the Commodity Inspection Law of 1989, which calls for hnspection of exports of aUll products belonging to an oMcially determied list. In 1990, almost 1.5 million export shipments worth an estimated $27.9 billion were reported to bave been inspected. These shipments accounted for almost two thirds of the value of Chisa's mau rng exports in that year. Of these, shipments worth about $600 million wene detemined to be substandard. 6.38 The responsibility for export quality inspection rests with the State Commission for Import and Export Commodity Inspection. The State Commission now has 13,400 staff spread over 200 inspection agencies nationwide. However, tot 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 cetfication by international tesing laboratories invited to evaluate their chnical capacity and testing methods. The Commission also has 10 solely owned or joint-ventre firms abroad accredited to it that It uses for inspection of imports into China. 6.39 The Commission's activities go beyond providing a preshipment inspection sevice. In an effort to tackle upstream quality control issues, the Commission has also been involved in tecnica assistance and tiing for local manufacturers. In addition, the Commission has a ceriiation scheme whereby it provides a quality licene' to deserving entprises. Over 10,000 such licenses were reportedly issued in 1990 in 13 product categories, including machinery, garments and textiles. Loca firms have also been encouraged to seek certification from accredited foreign laboratories. Thus, many local fctories have the right, for example, to fix United Laboratories or International Wool Secreaiat marks on their products. 6.40 Quality control issues are also being pursued by government agencies other than the State Commission. MOFERT, for examu le, does quality appraisas, and awards prizes for products deemed to be of higb quality. In 1990, the MOFERT High Quality Examination and Appraisa Commission presented awards for over 100 different products nationwide. Elsewhere, offorts have been made to improve indusi standards general in China. China has a mandatory national standard, which since the mid-1980s, has been based on the stadards of the International Stadards Organization (ISO). There remains, however, a problem of intenatonal confidence in the Chinese standad. In the machine tools sector, for examle, foreign usomers continue to insist on the use of imported components even when functionally equivalent Chinese parts are avalable in China.6 6.41 Recommendatons. Despite all these initiatives, quality control for China's exor remai a problem, and it appears that rejection rat are still high.7 Addressing this problem will require a sustained effort at various stages of the export chain, right down from preshlpment, all the way up to the m process itself. In the short run, the chalenge wil be to reduce the frequency of buyer rejection and to ensure that Chinese exports meet the miimum quality requirements of their main markets. Over time, efforts will have to be directed at quality upgrading in general, and at inducing quality onciousness in al aspects of mang acWtvit. -124- 6.42 Immediate attenon should be devoted to improvg control at the preshipment stage. Although the Law on Commodity Inspection was promulgated In 1989, Chinese legislation in this domain is still deficient. 'Me main difficulty is that the sceme is much too inspectio Intensive. The law calls for mandatory inspection of all eport shipments of products figurng on the rather exnive official list. Supplementary legislation introduced in 1990 does allow for a few exemptions, but these are quite limited.' As a result, the adminsaive 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 rlies on random checks on the shipments from a selection of exporters would be more efficient and just as effective. Morewver, the Taiwan model, wbich involves the periodic euation of the quWity contol systems of the exporter himself, has the added advantge of forcing the latter to take responibility for the quality of his products. 6.43 A related problem is th 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 Commissions inspection capacity at this time, a lot of exports are in any event inspected independently by private companies or agencies acting on beldf of buyers. It is reported, for example, that 30 private compes from Hong Kong manage preshlpment inspection for most exports from the provices. In such cases, inspection by the State Commission's agencies seems redundan_ Consideration should be given to encourging more foreign inspection bodies to start operations in China, giving them accreditaon, and allowing exporters to use them Iwead of the Commission's own agencies. In parallel, of course, the network of local tesdng facilities needs to be expanded and upgraded, through acquisition of internationaly approved testing methods and training of personnel. 6.44 Given the importance of country reptaion for export development, measures to build the interational image of Chinee 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 products, as in Taiwan (China), for example, can be very effective image builders. 6.45 Over the medium term, attention will need to be devoted to firther developing the quality control systems of Chinese eneprses themselves. Many Chinese enterprises first inoduced such systems only in 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 ris automatic for firms that ean quality cetfication 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. 6.46 Second, learning from the experience of Japan, the govermment could promote the creation of business associations devoted to quality contol. The Mexican, Chilean and Brazilian Quality Control Assoations have, for example, been effective in spreading the Quality Control Circle (QCC) movement in their respective countries.'° In China, such associations, could be a usefl tool for spreading quality control in the countrys growing nonstate-owned sector. -125- 6.47 Third, stops should be taken to imvrove th crodibility and interauional image of the Chnm national industi stndad. In this rea, it Is sugese tt the natoa sandard be changed from a mandtory to a recommended cification, but with very strict criterla. A ommd standard, if properly efored, can serv as a positve inducement to the firm wiing to gain reogon as a quality producr, rather than as a constint that redoe Its iexlbility. Nationdal cerficati should only be undertaken by the most tehically able governm agcies and not, as has been the practice, by resarch insti of limited capacity. Bdes, i aonal insei groups sdould be reulay ited to ispect natioay certified fctos to iree ernational confidence in the standard. 6.48 Finay, It must be rcgized tha pogr in the ar of quality control wi utimately deped on the pace of more systemic reform of state-owned enterpris and of the Incentives regim. At present, the average entprise is not subject to an icentive regim demandig iovation or quality upgradadon, nor is it orgaized to copo wh product improvemet on a contiuing basis. Unless Chine ntpises are subject to greater compeon both from within the country and from impoit (Chapter 5), and are given the Independn to respond to such presur, pres In I lmvig the quality of Chinese export wm very quicky reah its limits. Publc Support for Other Nonfinancial Export Support Services 6.49 Asid from marketig and quality control, a host of other serices including, for example, shipping, freight forwarding, warehousing, and gener consulting and legal services, have an important berg on export competitiveness. Past neglect meams that both the volume and quality of such services in China is relatively low and this is a hirce to the development of direct radi. As one would epect, China has so far relied heavily on outside suppliers of export support services. The role of Hong Kong bas In fact been pariularly important for the rapid growth of Chinas eports. As noted in Caapter 1, about two thirds of Chinas manufactuing exports e caned through Hong Kong, either as reexports or in the form of transsihipmets. Moreover, the rapid growth of small-scale m in Guangdong is in lage part due to the acce that provie enjoys to Hong Kows service idustry. 6.50 datous. It goes without saying that the Chinese government must press on With Its effots to develop the coutry's service sector. Ultimatdy, whether service suppliers aprtely owned or state-run matters less than wheher they are in a competitive siuaio. Moplies in servics for exports must be avoided and restictdons on the import of services ad on the use of service suppliers abroad should be dismantded. In this context, the recent decsion by the Chinem authorities to allow emry by forei firms to the service industry is a welcome one. 6.51 Some developing countri have experimented with a more activist public role in providing wpport services to neophyte exporters. In several countries, government agencies work with indhvidual entep to help find and finace such conulting or other support servic as might be need to overcome entry barriers into export markets.n2 In most ca the fhmcing prvided is subsidized.H/ Such programs of assistance, dtough effective, have Sube for port swpport sevices e em Of Ihe very few intenytionaypenmitted meams left of p di fin ppt for expob and cam genat ifica positive eteati for de whole conomy (eesg and Sinr, Word Bank 190. - 126 - typicWly remaned small in scale because of their micro-focus. Examples are the Product Speciaists Program managed by the Depment of Trade and Industry in the Philippin, and the Indian Export Marketg Fund, administered by the Import-Export Bank of India. The Chines governmet could give consideration to the caeation of a marketing fund set up along simil lines, to be mda by an ap riat agenw for the pugpose of finaning support services to individual finms seeking to export directly. D. EXPORT FiANCING 6.52 Prwious World Bank reports hav stressed the importance of ready acces to credit for exporters." The experience of the successfid exporters from East Asia suggests that preshpment fince is particularly ilAportant for developing country exports. Post-shipme financig becomes relevant only -when capital goods acquire a sigificant ae of exports. Medium to long-term investm finacing specifically earmarked for export production bh hardly been used by any of the East Asian countries. 6.53 In Korea, the bulk of eport credit has been handled by the commercial banks, which have bad auomatic and quick access to refinncing from the central ba= A preshipment export fance guarantee scheme has been instrumental in reducing risk and has ncourad the commrcial banks to extend working capital credit to all actual and poal exporter. Korea has also implmented a system of domesdc letters of credit (DILC) " that has provided aces to preshlpmn credit even to indirect exporters. Although Korea started with a program of preferential interest rates, these have been phased out. Preshipment credits are now denomiated in foreign cuendes and passed on to borowers at world interest rates plus a processing margin Other East Asian cunties, such as Thaland and Malaysia, have had less successfil proms of preshpment export creit Korea. In most cases, the biggest weakness pears to have been lack of access by indirect exporWrs to export credik. Tese countries have recendy begun exper ng with systems of DLJC. 6.54 In China, the Banik of China, the principal bank dealing in foreigp exchange, has long offered trade credit, but in domestic curey. These credits are offered for working capital as well as financing fixed investment for production of exports and import substtte products. The volume of such credits has been rsing very rapidly. The total volume of trade loans outanui gat th end of 1991 reached Y 181 bilion, more thathree times the level at the end of 1985 (see Table 6.1). Of these, loans outtanding to FICs were Y 154 billion, and the total volume of loans extended to PlCs within the twelve month period of 1991 was in fat Y 390 billion, or over two-and-a-half times the value of loans outstanding to them at the end of the ye. It is reportd that the bulk of these domestic curre trade credits are for financing exts. In 1998, for example, according to the Bank of Chbina, 90 percent of the trade loam etended to FMTs during the year were for exports. 6.55 Rapid growth in the overall volume of trade credit notwithstanding, access to credit for etupri other than FTCs has in fact been shrdidng. Whereas in 1987, 77 percent of total domestic currency trade credit was allocated to FlCs, in 1991 the share of FTCs had ncreased to over 85 perceL This does not mean that preshipment financing to indirect exe bas been declining. By all accoun, one of the important functions of the FTCs has been to provide advanes on export shipments to their clients, or indeed to take over title of their exports. What it does mean, howr, is th local fims are still obliged in most cases to rely on FTCs as I A lack of direct access to tade credit appeas to be one reason that - 127 - a ng firms with dect trading rits have often not been able to exercise tib authority, despitesr reform Initiatives In the 1980s that called for dir exporting. Th situation meds to be corrected. Table 6.1: FOREGN TRADE CREDIT @billons of Yuan) Oustanding at yeared Cumulative loan Total Of which amount extended during extended to FTCs the year to FP 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 180.7 154.8 390.0t L& Estimated. Source Bank of China. 6.56 Purther, the aible data Indicate that the ratio of export credi to total exports Is vey high. Assuming, that as In 1988, 90 percent of new foreign trade loans made in 1989 wr ao used to finance exports, export loans ih year would have amounted to an esmated 150 percent of the actual volume of exports.jI In the absence of more detailed imation IV J 1989, Chin exrs valud in domeic cumucy ver just under Y 200 billion. If more On 90 pwrm of all Bak of China foeign trade loans were used to finnce exports (which is be sm of inrmental las ging to fina expos), cumative expot loans arded in tho 12-month peiod of 1989 would av been Y 306 billion (Y 340 billian x 0.9), of which about Y 109 billion (Y 121 billo x 0.9) would hav been outanding at yea-end. If e averege expwt loa is outdidg for on cenda quarter, one would expect that te value of expt loans _u atny point in tim would be rughly one fourth of the annual value of exports. In 1989, that would be Y 50 billi plying that the awrximately additonal Y 60 billio (Y 109 billion mis 50 billion) outstanding at Ith end of 1989 reprsents nonperforr-g export lon tht wen rolle over (paps more a once) during the year. It is worth noti that Y 60 bilio p tpximaly ne timas the value of the officially ackowlded nual budgey widy to epot loss during th period 1988-90. - 128 - about the maturity structure of the Bank of China's trade crits, k is dicult to pinpoin the exact reaso for such a high ratio. One possbilty s th a brge proportion of the Bank of Chinas trde credits have been of medium- to long-erm matrties. This could be the caseo ff for example, FTCs have been borrowing large sums to finance export relate nvestme in production. Such an explanation is, however, Implausible. Given tha the ratio of the annual volume of loan to that of loans outstading at year-d Is over 2.5, the bulk of the Bank of Chins trade credits to PTCs are in fact likely to be short tm Under the a high export credit to exports ratio points to a more disturbing explanaon. What It sugges Is that a signficant portion of the Bank's domestdc crnc foreign trade loan portolo may be bad loans that are simply rolled over periodically and are not used to fiace now expors. ff FTCs have indeed, much like the stateowned enterprises of the manufacrg sector, been urnig to the Bank of China for off-budget assistance In this nmaner, one would epect to see a marked increase in loans to FTCs s8ta with the introduction of the contact esponsibflity system and the freezing of official subsidies to FTCs in 1988. Table 6.1 ppas to confirm ths view, for it shows that there was a sap ncrease in the proportion of trad redits going to FTCs from less than 78 percent In 1987 to almost 85 percent in 1988. The apparety easy access of FTCs to bank loans for deaing with their structura problems is not healthy for Chinas trading system and it nms contay to the spirit of recent iniatives that rquire FTCs to become mre competitive by taking responsibility for their own profits and losss. 6.57 In addition to domestic CUrenc trade credits, the Bank of China also offes foreign exchange loans for both working capital and fixed invesutent. Thes loans are offrd primariy to foreign-invested enterprises. It is reported that loans outsding by the Bank of China to foreign-invest enterpdses at the end of 1990 totalled $990 million. An apparty much smaller amount of dollar loans had been extended to domestic fims. 6.58 The Bank of China also offs two othr type of trade loans. Export llers' crWedits have been offered since 1978 to Chinese enteprises seling dectronic and mahiny equipmnt, mostly to developing economies, when such sales are made on a defered payment basis.J& Ihe State Council In 1992 also approved the creation of a new system of credits to be eded to buyers of Chinese exports. These loans, made in foreign cucy, are to be used to finance the sale of complete sets of machinry and dectronic equipment valued at a minimumi of one million dollars per transacdon. One hundred million dollars annlly has been earmarked for this program during the Eighth Five-Year Plan (1991-9S).fl It Is difficult to assess how much these initatives can contribute to the growth of Chinas exports of madhnery and electroDics products. It is worth noting though, based on the experience of Korea and Japan, that export credit schemes, or any other export deveowmet mees for that matter, designed to help specific subctors are unlikely to scceed unless they are acmpanied by focused attenton to industial reucturi (see section on export targeting below). jI/ By die ead of 1991, the Bank of China had extended Y 6.3 billio under thi progam nd dho alue of loas outsnding vns Y 3.3 billion. Ilst rates on ee m said to be 12/ Ine rae to be caged wil follow OECD standards on lons xded by natina impoct-export banks That cas for a I-peren prmium over t rate an Sye tresury bonds in the United s or Japa depeig on whether the loan is denmit ia dolas or yen. - 129 - 6.59 Ihe Chineso authorities are considerg introducing an export insurne scheme, managed either by a separae Bureau under the State Council or by the People's lsurane Company. Already, since July 1992, the Beijig Branch of the Bank of China has been providing export insuace and claims settement services to eight major Import-export compaas 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. bis Is a welcome initiative whose bfts should not be restricte to just a few sectors. Recmmedatin 6.60 First, steps mus be taken to ensure that firms with direct t righs enjoy the same access to trade cedit as FCs. Second, for the inidtiative of having FTCs take resronsiblity fo their own profits and losses to work, they must not be allowed to beneft from a soft budget constraint by tapping ino the banking sector. Third, export insuce should be made available to alloca enterprises as a way of encouraging and enabling them to acquire and exercise direct tradin rghts. E. PROIDUCr TAKGING FOR EXPORTS 6.61 One of the fundamental debates concerning the role of public intervention in export policy petins to targetg specific products for export promotion. Does such targeting work and is it derble? If so, how should It be Implemented and under what c aces? 6.62 Targetig pecific product categories for export has become an inherent part of Cias foreign trade regime. Targeted sectors have included light industria products, certain typs of texle products, and machinery and electronics goods in geneal. The bulk of specia export support has, however, been directed at the mainery and electronics goods sectors. Several isum have been used for purposes of targetiDg. First, targeted sectors beefie fom the spc prefeental foreign exchage retention rates (Chapter 2) introduced in the early 1980s. The oriinal retention re for light industral products and knitwear was 20 percent, and ta for the mabery and dectronics sector was 30 percent at a time when the average rate for other products was less than ten perct. In 1982, the retention rate for machinery and electoics sector was rased to S0 pernt At preset, however, p retention ratios are retned only for the machinery and elecuonics sectors which are entitled to a 70 percent retentn compared to 50 percent for all other commoditda/ 6.63 Second, the Seventh Five Yea Pla (198690) provided for ihe creation of Production Networks for Exports (PNEs) with the objective of direcng asistance to selected entpises witin taed sects. The mahiny and electonics sectr was the fit 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 netwoiL neents in the order of $100 million per atn were planned over a five-year period and the parficipating fatories were to be accorded guaanteed uppLes of raw materidals, power, and packaging materials, and preferenti access to tportation and tax reductions. In 1990, about Y 1.7 billion was Invested in construction projects in support of PNEs in the IV Thi is tde a percntge qw the ceal govement ha xercsed its ig to buy back addiona ftrein ae etained by local eneies (Chpw 2). - 130 - textiles, light industry and macinery and electonics secoors, and efforts were made for the first time to draw TVs into production netwok. 6.64 Tbird, MOFERT has eumarked specal investment finds for the technological upgrading of selected entmerp ; $50 million wr channelled to various exporting enterprises mostly in the machinery and eectronic sector thro tDs faiity In 10. To date, an esmated 1,300 eteprises in the machinery and delonics sector ha"e benefited from such finds. 6.65 Fourth, as was discussed earlier (see Cbapter 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, anecdot evidence suggess that export targets are not oly fixed for FTs, within the frmework of their foreign exchange contt, but also for manufacturing enterprises, with and without diret trading righbts. In Jiangsu provice, for example, the provincl COFERT concludes contra with FTCs, which in tum conclude conacts with enterprises, oollectives and TVEs. Likewise, swvra local governents establish export quota for state owned enterp under the enterprise contract reponsibility system.m By and large, entrprise specific export targets are now fixed on the basis of past perfmance throgh a "bottom-up* process-as such they no lonWer signficany distort export composion. For particular sectors such as machiey and electronics, however, it is likely that FTCs and manufacturers are still expected to meet relatively more ambitious export targets in ecage for the additional export support to which they are entited. 6.66 Finally, special export credit schemes have been used In support of targeted sectrs. To date, such schemes have only been used in support of the machinery and electronic sector (see section on export finanDng). 6.67 I is difficult to assess the exat contribution of ths combination of measures on the export perfmance of targeted sectors. As shown in Table 6.2, the share of ligt industrial and textile products in total exports has grown rapidy from about 32 pacent in 198S to over 45 percet in 1991. But since thes sectors did not really raceive significant amounts of special ewport assistance, their export performan can hardly be explained by China's export targeting polices. On the other hand, the growth of exports from the machinery and electronic sectorsV2l which have benefited from subanl targeted support, has been much more impressive tan even that of th tetiles and light industrial sector. It is remakable that the share of mahinery and elecltonics In China's total eports tripled from just under 7 percent in 1985 to almost 20 peet in 1991 and this suggests that export targeting in China has indeed had an impat on export composto 6.68 What IB less ce i the et to which these epor hve been based on static or dynamic compartv advantage.2Q/ For any targeted product, success cannot just be measured in terms of export gowth, but in tems of how competitve the product becomes on the world market. One way to test the success or failure of the polky would be to o exaie the evout of production efficien and product quty in the tgeted sectors. In China, special incenives for machnery and electronic exports have now been in place for over twdve years 121 SMTC 71, 72, 73. ZQ/ S aptw 7 fi more onthi. - 131 - Table 6.2: ExFOM OF TARGED SECTQRS, 1978-91 w% share tota exports) Machinery & Light industrial & electronics Ia textile products lb 1978 4.2 36.1 1985 3.3 31.9 1988 10.0 39.9 1989 12.4 43.8 19WO0 13.9 1991 14.3 La SnlC 71, 73 and 73 (Rev. 1) based on partner country dat Based on Chinese reported data, the sares for 1988 and 1991 are 12.4 percent and 19.2 percent, respectively. The difference is due primarily to exports of ansport equipment-and in particular to exports of automotive components (SITC 732.89-which have grown much fser per the Chmes reported data than per the partner country data (compare Tables Al. 1 and A1.2). As noted ifotnote 6 of Chapter 1, pater country daa toads to be the more reliable because greater ca is taken in classifyin goods in the importig country for duty assent purposes. One possible explaon for the dicreancy Is that Chinese enterises enticed by sbttial fisc neentives for exports from these subsectors have been overreporting the value of their exports. This Is not an uncommon phenomenon wvhere substantial export incentives are offered to selected sectors. Lb As per export data and definidons 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 ffgures have become sysematically smaller than those of the Customs Directora"t. ln 1978, 1985 and 1989, the Almanac repord China's exports as $9.8 billion, $25.9 bilLion and $43.5 billion, respecdvely, compared to the Customs Direcre numbers of $9.8, $26.1 and 52.5 billion for the same years. If cost reductions and quality ve s through the accumlation of production experience and learning-by-doing were possible, these ought to bave been realized in the course of more than a decade. Unforuately, there is little systematic evidence about the evolving efficiency of the macinery and electronics sectors in China. Such evidence as exists, however, suggests that China rmains a high cost producer of these goods." lhe machinery sector repeatedly has been identified as one of the largest conceions of lossmaaking state enterpdses.2/ A recent enterpise survey conducted for a World Bank report on the machine tools sector indicates that the gross profit margins of export oriented firms have been systm cally lower than for other firms in the sector. Likewise, the domestic currency costs for exports of electronics W1/ It shud be noted tha finnca lose ae not a good ndicator of halt in td Chins economy becam of the existec of mrous disAttns and imphcit bsidies. - 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 wer between 20 and 30 percent lower than ex-factory domestic prices and the enterprises interviewed reported that they were making losses on their exports."' 6.69 Another Indicator of the competitiveness of China's machinery and electronics exports is an index of their revealed comparative advantage (RCA).22/ An analysis of the RCA of Chinaes machinery and electronics sector (se Figure 7.2) confirms that, on the whole, China has not yet developed a competitive advantage in these sectors. Of the three maior product categories that comprise the machinery and electronics sector, nonelectrical machiney and transport equipment subsectors show no signs of developing a comparative adv%ntage-China's RCA indices have not even reached 0.2 for these products. Ihe only product group within the machiney 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 stlll only marginay 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, telecommuicatons equipment (black and white TVs and telephone equipment), electric space heaters, and domestic electric goods (refrigerators and washing machines). Similar products manftued domestically do not sdll appear to be competitive in the intemational market place. 6.70 What the above suggests is that China has not yet been able to integrate into its domestic m activity the dynamic benefits and learning that could be expected to accue from an expansion of Its export share in the machinery and electronics sector. If after al these years, Chinas ufaring sector indeed remains a relatively high-cost producer of many of these products, the targeted export incenttves hitherto accorded to the machinery and eletronics sectors canot 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 Chine policy makers, who are no doubt influenced by the werience of teir 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 targedng of specific products for exports. 6.71 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 incendves and targets. Of the two, the Korean experience, being more recent, may be more illumiati. Korean policy has been remarkable for its single minded emphasis on export performance. Of aU the East Asian counties that have pursued a str of export-led growth, Korea has had the most centally 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 22 Ie revealed compastive advantag (RCA) index meas te sbare of a part prduc's dae in the county's total exports relative to the share of that product in world 1td TIe ier te id , th greaer is tho counry's revealed- compaiv dvantag in that pacl prduct An RCA of lo a one suggess that the outry has no comparative advantae in that paicular product See Chapter 7 for details. - 133 - i transportaton, Income tax rebates, and wastage allowances.2 4 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 1971.13 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 du- to the discontinuation of those measures, such as income tax deductions, preferential credit terms, and preferenti utlity rates, that could be construed as direct subsidies. 6.72 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 hmself.' It was not unknown for poor performers to be faced with difficulties in accessig goverment controlled credit for capacity expansion and for good performers to get preferential treatment in this regard. Aside from this, the drig motivation for meeting these targets appears to have been pride and the recognition accr,ded to fims through przes and national publicity. These targets were taken very seriously at all levels of the business community and had a dinct Impact on export performance and structure. 6.73 Although the Korean government did clearly exercise some degree of selective intervention In e encouragement of exports, intervention was limited to specific sectors identified as infant industries, and was used only as one instument of an array of industrial assistance measures, including preferential access to government rationed credit, isolation from Import competition and help for the develb)pment of market agentse. Thus, while most export incentives, such as duty-free inputs for exports and export credit, were provided uniformly to all sectors without discrimintion inft industries had access to additional export support in the form, for example, of wastage fees and utilities at prerentia rites. Likewise, while export targets were generally left to firms to dermine for themselves, in the case of infant industries they were negotiated joindy between the goverment and local manufacturers. In fact, in such cases, export targets were used to insist that these industries sell a swilUy growing proportion of their ouput at world prices as a way of enuring that they became inaonally compettive. 6.74 Using such an approach, Korea was able to provide universal and neutr eport support to wel established industies. Within this industry group, the package of export support measures was not only neutral in the sense that it did not favor one activity over another, but was also ne in the sense that it served essentially to offet the anti-export bias caused by other policies.?n In parallel, the governent provided nonneutra assistnce and a proert bias to targeted Infamt industies. Whether or not ift industry promotion in Korea was successful is a much coutested issues and beyond the scope of this report.2AI What is clear, however, is that the selection of targeted industries was not always a rational process, and in many insmces the government was forced to take supportive action having already chanlled resources into a particular sector for reasons not always related to economic rates of retur. It is generly agreed that the government's heavy and chemicals industry drive of the 1970s was too ambitious, and led to serious strctural problems, including the 'crowding out- of Korea's traditional export industries. Koreas experience confirms that product selection is not without risk, and that, for it to be successfl, it requires the full commitmen of the authorities and the 23J Auowing produce to import duty-free inputs in excess of thir normul wimen for expot. 20 Chape S does, bowver, explor the quesio of the link betw import liAizon and Indu poliy. -134- ability to mobilize a whole spectrum of industrial assistance measures aside from export promotion. 6.75 The sipifficant lesson for China from the Korean experience is that targeting of specific produs for pots, If it is to be successf, cnt be underten in isolation, but needs to be accomanied by a host of other focussed measures to support the industra restrucuring of the targeted sectors. So far, Chins efforts at export selection do not appear to be supported by matching initadtves in industrial policy. In sharp conast 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 Plannig Commission (SPC), the System Reform Commission (SRC), the industral line mWistries, MOFERT, the State Science and Technology Commission, the Materia Sup,ly Bureau, the investment corporations, and banks are all involved in priority setting and target formulation. The resUlt i too many contradictory lists circlating amongst different agencies at different levels and a dilution of focus.0 6.76 The ficus of Chinas' industrial assistance stategy is also dispersed by the tendency, inetable given China's size and diversity, for provincial priorities to be n-.onuniform.aI The creation of PNEs could be interpreted as an effort at more nationally coordinated and foassed taeting activlty. But the limited investment that hs been channelled Into these networks, suggests that industrial targeting stil remains a diffuse activity. At present, t is not clear to what extent MOFERrs policies of providing additional support for machinery and electronics exports are in fact supported with complementary programs for industri assistace 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. Concludos 6.77 China's policy of favoring the exports of the machiey and electronic sector cwot by itself make these sectors more competitive. The experience of Korea suggests that product selection is a riscy business and that successful targeting would require an active and focussed policy of industrial assistance. Given China's size and diversity, such a straW is likely to be difficult to elaborate at the national level, except perhaps for a few strategic sectors. In such cases, great national coordination between trade policy measures and assistance for industrW restructurig would seem to be warranted. The establishment of SCETO in early 1992, and ongoing eforts to create entetprise groups, free from multiple channels of supervision and control, could prove to be important initiatives in this regard. F. GEOGRAPHICAL TARGEIIG 6.78 A fundamental featre of China's reforms has been decentraization at has bestowed increasing authority and control in all aspects of economic decision making to the 25I mm industr sectos that the local authorities of Guangzhou, for example, have desated as their priorty for the Eighth Plan ae markeUy difent frm dhse of Shanghai formo are mm focued on low technolog mamcnuacue such as batteries, shoes and electronic appliances, whie the latter plae thi emphasi on such poducts as power geertig equimt compute numerily Wconrolled (CNC) mahi tool and computer - 135 - provincial and local authorities. In addition, the authorities have sought to conduct reform experiment on a regionally segmented basis. The inevitable cosequence of this neform dynamic has been to accentuat cross-regional policy differences and China's reorms have acquired a defnite regional tilt. In the case of trade policy, this has meant that China's ope door has been opened signiffcanly wider in the coasta provinc than elsewhere In the country. 6.79 Ihe SEZs were the original embodiment of this policy of geographical targetig of China's open door policies. Four SEZs were established in 1979180 in Guangdong and Fujian, /Iand similar policies favoring foreign direct investment and trade were adopted in Hainan in 1983. Since then the approach of geographicalty targeted reform has been extended to all coast provinces. In 1984, 14 coasta cities were designated open cities' and 14 economic and technological development zones (EMDZs) were set up along the coastal line. In 1985, three delta are, Pearl River Delta, South Fujian Delta and the Yangtze Delta were opened. In 1988, Hainn Island became an SEZ and also gained the status of a separate province-it is now the largest SEZ in the country. In 1990, ShanghaIs 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, sonomous regions, and municipalities had been opened to the outside world and policy makers intend to brther purse such strategy. Most recently, the State Council decared the opeing of ten major clies along the Yangtze river in June 1992. These are to enjoy the same peferentl policies and autonomy as the open coast cities. Moreover, six compre ive development zones will soon be established along the Yangtze River Valley. 6.80 lhe impact of this policy has been dramatic, especially In terms of attrtng foreign direct investment (FDI) and in generating exports. In 1990, SEZs and open coastal cities accounted for 66 percent of exports from ChiWa22/ 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 couny. Moreover, the GDP and industrial growth rates of SEZs and most open coastal ctes bave been consiey above the national average.W2 6.81 The impact of the SEZs has not been confined to the zones themselves. Te entire country has benefited from the reform experments, such as the swap market for foreign exchange, that were iniated in the SEZs and then crossed the "bridge" into the hinterland. However, k is the coastal provinces that have benefited the most from the demonstrion effect of policies of geographical targeting. In Guangdong, Fujian and Jlangsu, such policies seem to have unleashed a vitous cycle of FDI and export-led growth.2 Initial flows of F1)I have begotten addional flows while reform expenme have become bolder and wider through a WfI Sheb_en, Zhuhi and Shantou in Guangdong, and Xiam in Fujian. 2/ (rabe A6.2.) This pobaUy exagert the conttoof th coastal proines to China's tota eports bec it includes Xt exports that do not orginat in the coastal provinces but ane haui by thm an behalf of other pvices. wl Th to inportant ecepton are Shaga and 7rajiQ. -136 - tipplo effect.22/ 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 percent and its ratio of ealized FDI to fixed asset bas soared to 28.8 percent, almost four times the madonal sverage.3Q/ In 1990, the cosal povinces together aounted for 81 percent of all exports and absorbed 81 percent of all reaized PDI (Fable A6.3). This impressive performance notwithstanding, it is not clear (a) what the cost of Chinaes 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. Poldes for Coastal Development 6.82 Spedal Economic Zones. The SEZs have been the model for Chinas policies of geoaphically targeted liberalization. Although initally it was Intended for SEZs to be fhioned 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 labortories for reform and to attract FDI and technology from abroad by allowing enterprises to opera In a policy enmironet based much more on market mehanismn than elsewhere In the economy. Successful experiments would then be allowed to cross the *bridge into the mainld for wider application in the rest of the country. 6.83 SEZs are different from other areas in China in two important respects. First, SEZs have a greater degree of aministrative autonomy than other areas. Perhaps most significant is the autonomy they enjoy over investment decisions. Likewise, the SEZs bave onsiderable freedom of maneue in the area of pricing, taxation, housing, labor policy and lad management policies (see Amex 6.2 for details). Second, SEZs provided, at least uil the open door was extended to other coastal regions, significantly more attactive incentives structure tham elswhere in China. The corporation tax rate, normally 33 percent for FIEs and S5 percent for SOEs, is 15 percent for all enterprises in the zones whether foreign or local. In addition, PEs in SEZs are provided tax holidays. Exports and high technology projewi are especially favored. Enterprises within the zones are subject to relaxed import licensing regulations and the zones themselves are treated as separate customs areas. IV 6.84 Open Cities, Economic and Tecnology Development Zones (EDZs), Etc. As In the SEZs, the open coastal cities have considerable autonomy in eoonomic decision making 22/ Te opeing of the Pearl River Delta in 1984, for exaWle, greaty enlarged oppoities for PDI in Guangdtog. Tbis was followed in 1988 by the designation of Guanwdon as a omprehesiveexperiment azone jQ/ The exeien of Fujian nd rngu has been dmilay s fact, grwth rmes in tm provinces have been fast than in Guangdong even tu tgh the rle of FDI has been more limited. Like Gugdong, howenr, both provwices hav taken bold reform iuniuves and provided patiu ateion to dte development of the nonste secw and TVEs I1/ All imorted inputs ued in production that is expoded or sold within the zones ate duty fe and eemp from all indiea in taxes. Impors which ar sold I he zones without firte prcaming pay SO perent of the full duty and indi tax rates. The sale of products in the znes to the hintrand cannot be undetk withou aproval and rers thO payment of full duieS on mpored inputs. - 137 - including, in particular, in investment decisions and approvals, and labor, land and price control regulations. However, the most daring reforms in trms of social security and labor practices are stll only restticted to SEZa. From the incentives point of view, the coastal cities are comprised of two parts: EDZs 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 eah coastal city, tax concession aro rdatively limited. Unile SEZs, none of the coastal cities or their rapective EIlZs or science parks are treated as separate customs areas.32/ On the whole, the open cities remain a less open version of SEZs, although, it apeas in the case of the some of the cities, tat there is less and less to disdnguish them from SEZs..l A _esing the Performance of SEZs and Open Cities 6.85 VariabilUty of Perfomance. Although, in aggegt tems, the performance of SEZs and coast cities has indeed been impressive, this masks a great deal of variability. First, the pefmane of coastal cites in general, and of Snai and Tianjin in particular, has been distinctly inferior to that of SEZs.-31 1he explanation for this variabiity 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 atact a critical mass of P)DI. After the initial spurt In 1984 immediately following their opening up, the share of coastal cites in total PDI has in fact been declining, while that of Guangdong has been increasing.&/ 6.86 Second, even within the subgroup of SEZs, the performance of Hainan, has been less impressive. Its GDP growth rate at 9.2 percent in 1989/9 although higher han the national average of 5.2, was 2 percentage points lower than that of Guangdong, and only a fraton of the growth rates experienced in Shenzhen. Mirroring its relatively weak performance, in terms of GDP growth, has been Ha's record in atacting FDI. Since Hainan gained SEZ and provincial status in 1988, total FDI committed has been about $800 million, which is less than a third of what was committed in Shenzhen just in 1990.$W What this points out is that, IV As such exenmp frm impott duties and indiret tae ar as anywher ele in the country, restried only to impotd ipus used in exports. 31 Amx 6.3 povides iom ddal tho diffro betwee ETDZs, scince parm, othe specia - and SU 34J The avera annual growth rat of industrial outp for the four origind SEZs was over 34 percen over 1984-90, more tan eobe the national averg, whilo that of the open cities (excluding Shag and rnWin) was only 16 percent. with Shanghai and Tarjn roding gVowth rates of only 6.7 and 9.4 percent, respectively C(able A6.2). By 1990, the SEZs in Guangdong and FNjian had booome h most pospeous cities in China with per capita GDP reaching 6.3 dmes the naoinal avege, while te coastal cities recorded per capita GI)P that was less than twico tho national arage. 31/ This trend may be oveud 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 coastld provinces and _auonom cides, in particur, Shanghai, Tianjin, Lisoning, rngsu and Fujian, accounting for anodter 50 perentL Since then, Guangdong's shar has ise again and now dsan at about 47 percnt, while that of tho other coat cities has dclined. 3I Recent indications that this is changing and the pao of grwth in Enano too is picking up. - 138 - aside from the !,licy environment, proximity to markets and investors, the quality of the infrastructure and the labor force are all important determiants of initial FDI flows. lhe importance of proximity to Investors Is dramatically illustrated by the fact that, wbile 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 threo SEZs in souther 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 itselr by investing heavily in infrastructureY 6.87 Resource Misallocation. There is no doubt 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. ITe rest represented investments in SOEs from outside the zones that relocated a part of their activities to withi the zones in order to take advantage of various tax privileges. It is very difficut to assess how much of the investment in SEZs is based on comparative advantage and accurately reflects the locadonal advantages of the SEZs, and how much represents an inefficient use of resources, atrcted by the economic rents created by distortions and imperfections. However, the following consideratons are pertinent. 6.88 China's regional tilt policies have generated two sources of misallocation- Inducing distortions. The first is the preferential policies intended to auract 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 estblished 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 aeements 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 acrves. As far as Chinese enterprises are concerned, the incentives are unlikely to encourage any significant Increase in total invesment. They only distort the locational distribution of that investment, artificially increasing the opporunt cost of investing in the hinterland and directing fdctors of production inefficiendy into SEZs. 6.89 The interface between the socialist and market economic management systems 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 systens of management and a market economy. While on the one hand 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 discretionay controls. Under the cimnce, opportunities for rent seeking are many, and - 139 - many enterprises ae able to survive simply by exploiting these rents. Providing enterprises in SEZs, particularly Chinese ones, additional tax incentives oly ggavates the problem. Despite access to the distortion related rents It is still estimated that one third of state entepres in the SEZ 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 mailn Chinese companies operating in Hong Kong, sometmes even set up by themselves In order to gain access to the privileges available to foreign-invested enterprises.31t Lessoks and Recommendations 6.90 The first lesson that emerges frm the above evaluation of Chinaes policies of geographical targeting is the importance of the policy environment In attracting FDI. In this context, Pudong is an important initiative. As long as Pudong can offer a policy envirounent that is as flexible as the SEZs, it can be expected to attract more investment flows and inject an importat measure of vitality in the greater Shanghai area. 6.91 Second, the experience to date clearly also demonstrates that the policy environment, though Important, is not the only attraction for export oriented FDL Favorable location and infastcture also matter. Notwithstanding their new open cities, inland provinces would, therefore, appear to have limited prosects for attracdng sufficient FDI flows. Even if heavy investments are made in improving infrstructure, the relatively longer distance of these provinces from intenational gateways and markets is likely to prove unattractive for export oriented FDI. As such, it would be unrealistic to expect Iland 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. 6.92 Third, given the important role that geographical proximity of markes and investors has played in the success of the strategy in Southern China, steps by provinces further up Chia's coast to develop links with their natural interational pamers could pay important dividends. In particular, Liaoning and ShMndong provinces should be acdvely encouraged to forge direct relatons with South Korea and Japan along lines simflar to what Guangdong has done with Hong Kong and Macao, and Fujian is pursuing with Taiwan (China). 6.93 Fourth, efforts can and should be made to taclde the problem of the resource misallocation a has been generated by China's SEZ and open cities polices. An important iniative that the government could take in this regard would be the removal of tax and other incentives given to firms which invest in the SEZ and other open cities/areas. Firms should be encouraged to locate where it makes most economic sense and their decisions should not be distorted by tax breaks.3N1 As a minitmm, 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 distinclTon made between local and foreign-invested enteprises. Likewise, the duty reductions provided for imports sold within SEZs, and for loclly produced goods, should also be abolished-in effect the SEZ's should IV Of the $9 billion in ized FDI in 1992, it is estimaed that about 25 percent was in fact disguised invedtnt" by firms from te mainland. I Su t locadtons On gi development grounds can be effcxted by int ta , such as those already in place. - 140- ces to be teated as separate customs areas. AlH other Inenves which Induce enteprises and individuals to locate In the SEZs for artificial reasons should be abolished. 6.94 The role that SEZ9 should continue to play Is that of economic laboratories. with market mnisms are still in a very early stage and much remains to be done. All of the markets which have bee 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 seking. An important new role fbr the Special Economic Zones would be to experiment with the introduction of such checks and balances. Ihe System Reform Commission coud be asked to develop a program along these lines in cooperation with the Special Economic Zone authories (see AM 62 for details). 6.95 Plans to increas the nmber of SEZs should be resisted, although the de facto SEZ nae of the Pudong Development Area in Shanai should be formally recognized. Other, interior locations under discussion, however, do not have any locational actins for the role of economic laboratories. Similariy, proposals to develop Haina, Shenzhen and Xmen as fr por e daivgerous and should be resisted. Already, the problem of smuggled goods comig across frm Hong Kong is quito severe, and the status of SEZs as separate customs areas is being exploited to cbannel goods Into the mainland without the payment of customs dudes. The aration of free ports would, under present conditions, only eacerbate the problem and widen the distortions that have led to abusive behavior. For the time being, dterefo, efforts must be directed at strengthening the administrative and enforcement mechanisms of existing SEZs, and on developing the capacity to regulate and manage them, raer than on creadtg new ones. - 141 - Bab= 1. Is sectin draws substantially on Egan and Mody, 1992. 2. Thbe lnduded minimm sin In terms of paid In capital and annmu exports, minimum number of oveaseas branches and number of product haned, minimum of oveasn markets and the condition that the firm offer public stok By the early 1980s, the only crieria that wero mainad were export target and the requirement of a public offeing. See Kad Fields, 1989. 3. McBean (1992). 4. Turbl (1977) and Egan ad Mody (1992). S. Alnac f Cdna's Forei8g Economic Reladons and hade, 1991/92, p. 82. 6. See World Bak (1992b). 7. World Bank (1992d), p. 64. 8. The dcree allows for exempom only in cases wher (L) the enteprie has received an intnionally recogized quality prie wihn the pmvius three years; (Ci) product qualty has been sble as ofirmed by an Ironal onzatin approved by the Ste Commision and proved tough Inspection by an inspection ageny of the State Commssion; and (il) the product has been found by an Insection agency of the State Commission to be of high quality for three consecutive years. 9. Wodrd Bank (1992d). 10. Herando Mrino Navaete, "Quality Control Circles: Colombia's Experience,* ntnatonal Trade Forum, ITC, GATr, January 1991. 11. See World Bank (1992b), p. 59. 12. Keesing and Singer in 'How Support Serices Can Expa Manufacd Exports: New Metiods of Assistance," World Bank, November 1990, quote many examples that show how, when a developing coutry has been cut off from intenational best practice, the returns from outside consultancy can be impressive. 13. See World Bank (1987a) and World Bank (1990b). 14. prlncple oft DL/C is to provide credit to the indirect expoter on the basis of the direct e es ceditwoi. When the dt eo teceives a letter of credit or other firm evidence of an export order, his bank is able to open a simla credit account with the inde exot as bficiary. he DLC entitls the direct epoer to payment from the bank upon submision of evidence of delivey of goods to the fhuIn exporter, and can serve as collateral for him to access preshipment fincing. - 142 - 15. A. Paarya (1988), World Bank (1987a), World Bank (1992b), and Executive Summary (p. 1i). 16. See World Bank (1992b) ad World Bank (199Oa). 17. Interiw with Qingdao electroic firm, May 29, 1992. The firm had direct rights and reportd that, while domestic free market price of black and white TVs was abot $60 (valued at the swap market exchange rate), the FOB export price was $42. and Ihat, whe it was maldkig a profit of Y 20 per TV on domestic sales, it was makin loss on its export sales, ev aer taidng account of the rebat for indirect taxes and duties paid on Impord bputs. 18. Balassa et al. (1986), reported in Lin and Bhauacharya (1988). In Japan, although Support for export devdeopmet was simiarly comprehensive in its scope, it was ner quite as substantial. 19. See Kores Competitive Edge, Manafgng Entry into World Markets, Rhee et al. (1984). 20. See Larry Westphal (1990). 21. See World Bank (1986). 22. There is a vast and uldmately inconusive litare on the subject. See for exaple, 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 Micael Bell (1992). 25. Bateman and Mody, World Bank mimeo (1991). 26. See Ma Jun and Gang Zou (1991). . 143- VII. EXTERNAL MARKETS AND CHINA'S EXPORTS 7.1 For the remainder of the decade, growth of the global economy is expected to slay sluggh at around 2.8 percent per amnum.1 Prospects for the Uruguay round of GA1T egotians, altough improving, stl remain uncertain, and there has been a marked trend towards regonalism in trade rdation the world over. Morewver, with growing tade fricdons, biate barining between trade partners can be expected to become more important. This chapt explores the quesdon of market oppo ities and access for Chinese exports and the mitions thereof for Chinaes own goals for export growth during the Eighth Plan and beyond. A. PROTION AGASr CHINAS ExORtS: TM FACI 7.2 A f_equenty expressed concem is whether developed countries can absorb a m*or a ioan of deveoping country eaxpots. One source of pessimism in this rega stems fotm the pcetion tat key OECD markets are already so "satuatedw by developing country eorats at a fArthe sizeable trade eansion would not be feasible. In fact, as shown In Box 7.1, export of manuactum from developing countries currently account for only about 3 prcet of cnsum of such products in OECD markets, and China's manuftured exports account for about a tenth of the developing country share. Even If all developing country exports of maufactrs were to increase at a sustned rate equal to that of Korea's exports during th 1980s, and China's exports contne to grow at 15 percent per annum, the developing country hah of OECD conumption of m actures would only be 5 percent, and Cinas sae woud stil be under one balf of 1 percent aRer a decade. Import penetration atios at these levels cer y shoud not produce a general protectionitresponse from OECD importers. 7.3 A rdated worry Is dtat trade barriers are now relatively more importat an they were when SinWore, Korea or Hong Kong began their rapid industrialization. If external condions ar now less favorable, China may not be able to follow an export led growth strategy to theb te Ihat the now more advanced Adan developing countries did in the past. Box 7.2 prvdes a comparison of trade baiers 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 pecent lower than those faced by the East Asian NIBs in the 1970s. Ca the odter hand, whie the ontariff bari (NTB) coverage of China's exports is lower than that of Korea or SiWaore in the =id-1970s, compared to Taiwan (China), and Hong Kong a greater proportion of Cahnas prest day exports are faced with NTBs.2 While it is difficult to be precise, on the whole ad aig account of tred in both tariff and nontariff barriers, it is safe to conclude that the currm external enviroment for China's exports is not much different from that ficing hie As NEs in the early 1970s. 7.4 no above evidence is reauring for it indicates that there is still ample 1boprity for export devopmet, for a large county such as China. However, this does not Imply that China wil not be faced widt difficulties in accesig OECD markets in the fute. -144- 7.1: CAN INmNXUONAL MAr ACC A MAjoL Cam=ES TRADE C 'ANEON? Th data cied beow india that ther remains subl_mt scope for OBCD marke to absorbdevelopnountryeaporofmanufctu. Thestac showteeoent (1988) sheofC.J and Noth Ameicn mpWts fom developmp caudies in a consumption of maaures, wi Chne ratios show eparae in paetheses, Stics alo show (lower half of the table) tht indicate how a mi&r increaso in Chine all other developing countie' cpots would nluence these ratos. The fie assunme (a) ihat epowts fm daelopigcoun (eoig China) incase at Koreas 1980-90 growth rt and tat Chinas expors continue to increase at about 15 prcnt; and (b) that appae cnsumption of these product expands at the same, r as it did for thie a decade. Kores eIot inceased at a compound annual rate of about 14 percnt over the decade, which was about wo and oe hafMtUme that te for aU other developing countie. Th Korean t is ud in thee projectio sincw it probably consditas an upper Imhit to possblle deeloping country growth. I988 AND PRoJEcTUD19M8 IMPoT PESEtmAnoN Ulnos STAWTICS FOR AIL DEVELOM G COUNMR AND CINA SEPARATIULY (in parnhOs) European North All SituatIon/product Communuiy Ametica Japn combined 4CM11988 &uuS All Manu1Acr 2.9 (0.2) 4.1 (0.3) 1.8 (0.3) 3.1 (03) Chemial 1.5 (0.2) 1.0 (0.1) 1.1 (0.2) 1.2 (0.2) Tnspr equipm_t 0.9 (-) 1.7 (-) 0.1 1-) 1.1 (-) Al mahiny 4.4 (0.1) 8.0 (0.2) 1.3 (0.1) 5.0 (0.1) Cbthing 19.1 (1.6) 27.9 (3.0) 13.1 (3.4) 22.1(2.7) Hffh-Grotmb Sckuwi Al n nfacturcs 4.3 (0.3) 6.1 (0.4) 2.7 (0.4) 4.7 (0.4) Chemical 2.3 (0.3) 1.5 (0.2) 2.0 (0.4) 2.0(0.3) Trasport equamet 1.4 (0.1) 2.6 (0.1) 0.2 (-) 1.6 (-) Al machinery 6.6 (0.2) 12.0 (0.4) 1.8 (0.1) 7.5 (0.2) Cldhg 23.5 (1.9) 34.3 (3.8) 16.1 (4.2) 27.1 (3.3) Note: Asumes that the rowth rat of all devloping couni w porsb mathehd that of K a over 1980-90 and China continued at the me na as that for the ls decade. Appare consumption is asmd to inc by about 4 percnt per year. For one, while the absorptive capacity of OECD markets for developing country mnufac exports as a whole may be sufficiett, problems could occur for some specfc Idustri where import penetron is already high.1I Under the growth scenario for deveiloping couny exports assumed above, the Increase in Import peneatio ratios for clothing, for exmle, China already accounts for 14.7 perent of US import of cothn, 27.5 pecet of its &uw RIM of footwea, 32 pret of its impos of toys and soting goods nd 7 pemot of it Impo8 of tem mcatins equipment (Source: UN COMTRADE, 1991, data reotd by USA). - 145- lou 7.2: CvuMurO AmD CNA's ThAn fosicC I SeOS COWPAM90NX WIU= AN ANMIn. PEIUOD TeStaislcprsetdbeow omparsimayifrmaionetenltaebarieu aig ur Asia NID Mtpbli of Kona, HoKng Sipor, ad Taian (Chia)) in dh ary 1970l wih ose now notnga h dat nodicae t avegtf th cou ad on .otaxporsto OWCD u assweastdsodeoftids tsdcoverby bardcare 1Th. Givende impotanceatbuted to manu in th counti' exports, eparttbulaton aro fow thei s goods. OECD COUNIN TIwn BIA FACIG Aat NIEs IN 2m 1970 (O) OECD buii TIad Rep. of Hong Taiwan ng bauw Products Koe Kong S9_gao (0ad)- Chins Avraptffs All ltems 11.6 10.1 5.6 11.5 4.8 Manufactures 11.9 10.5 7.6 11.0 6.4 NTil covap rtio All Itms 43.0 25.1 43.9 25.4 31.0 Manufactures 44.0 23.6 16.8 25.7 41.1 Source: OCD barms n the 190 from Obcowld (1979). Other saiss ae World Bank erstdme. As fa as twif ar concened, curnt avers impot duies applid by 0 ountrues on developing couy expo (4.8 peet) are roughy 40 to 50 peorn blow those fcing the Asia NhE In the ly 1970. lbb i due primriy to phasing in of arif ducton neotied in the Kmnnedy Round, hitr ut in th Tokyo Round, ad th extosion of Geeabed System of }refrn (M) teomnt to Chna by om OCD cotrics (China in n inlded in the US OSP pan). The sution rerng Nil is less clr cut, but Chn's cumnt NTH clagatio for all goods (31 pereat) is 12 poins er tan that fr Kore and Siapr in th eady 197, but about 6 point highr dtn th cowvr ratios for Hong Kong anddTaian(China). Ter issomeevience(LaWa Yet, 1990) tatgierireasaiNTB procto w.confiedl to a handful of industs lie sel and appuelwdh littl chneinlmost manfturingseo Overathe , it is prebabe tht trade baris hcod by China toy ar about thc same as s faced by th East Asian NMt in the 1970s. wOwld become slfn reaing 27 percen by the end of a decade, with Ch s share three and Oa haf peent of OECD osumption. Similarly, it is projected ihat developing countries could achiv Im poretaon ratios In eces of 20 percent for sevel othet pcif industrial seOr lIk lher clothing, ftw , floor overi and radio broadcst receivers.' Whethr or not a protectoni backlas would be tWiggere in such cases will depend on te indusi countries' wifliWness ad ability to provide supporting adjustme measures in thdr respective afhcted regions or industries. Second, while the export baries faced by China may not be highe ta those faced by the Eas Asian NIs at the start of their eot drive, dtis does not exclude the possibility tat Chinas epor may be at a disadvange becuse they face eer te bariers a se of their man coptors today. -146- 7.5 Indeed, a moe dIa d aalysis reve China s exsting exr ar particuarly vulnerableto tade bad ers in developed cownies. Tabls 7.1 reports average import TableA AYSEM3 O TABU CMN ExOT 3SOim1U of NN MAR OECD UM[ edh= Avea 0 tTokwoRound =dfd OEx heo im dw OBW Mob fffi Prodgroup Au s AM Cand SC baa Nomw Swede Sw_luan Unid 4a la & & SWat AU 1bodo- aNW ani- lal 4.9 8.0 6.2 3.7 9.7 2.8 1.6 10.0 4.1 Food& 2.8 5.9 6. 3.2 10.0 3.0 1.4 9.0 3.8 Oil aedaiWua 4.1 1.9 6.0 103 5S 4..' 33 7.S 1.4 Amnlad vegeplablaoR 2.0 0.8 0.0 0.1 0.3 0.0 0.0 0.2 0.9 Agrlcu wrnterakd 5.1 2.3 06 3R 0.7 0.6 1.7 1.9 0.3 Ore NW andossa, 10.2 S.6 2.1 2.8 23S IS 2.5 1.4 1.9 kwoanddadelp ouc 17.2 8.4 SR 5.5 5.0 1.8 4.8 2.0 43 Nonrmanstas 3.9 6.1 2.2 3.2 5.5 1.9 1.00 1.2 0.7 FPl - 2.1 1.4 0.1 1.5 0.0 0.0 0.0 O4 auemadrnoW SA 63 6.4 84 5.5 5.9 5.0 0.9 3.7 ica 17.7 14.1 7.0 8.1 5.7 6.1 5.4 33 5.6 Leahesoods 17. 53 3.8 10.2 11.9 4.7 4.1 1.8 4.2 Tewtile yam and Mdoaf& 153 18.2 9A 17.3 8.6 12.8 IO 6.0 10.6 Clod° Isg 49.3 30.2 12.6 19.9 1S.0 203 13.6 8.6 203 Foo_wa 43.9 25.9 11.9 22.S 14.2 11.2 14.3 9.6 11.7 Mmai ulandotdrtms 0.2 3.3 0.1 4.8 2.3 2.0 1.8 0.4 2.1 Du to do Ca aUS a e trade aangern immred betwee dim cous is_ duty Assl ars a *dabuniislS couxtris whjlsb both the US and Cammada offer epaia preeance to Cauibea caounris hmport fivn bsraedW iow e deoth US duty fe.under the Wim of a five trad armgers AU tdea epeda pre*reuoot ar a comj,eddv. disadvantage fwr &Under de kem ofta Vepela puisce gohws ods beftwee SC ad European Iris Trad Are (EPrA), countrie are seedd duty fie wVic displce mmr poasMi Chiusee eposl-asdoe. -e* regloml aurra emmebetwee EfrA. the SC 0dm) underb thaem of te Lamd C=wandon. S Eubdes dhpS33XeNeAUC, Swodlih ad 9wia. vaible iAmor levieon angeScukiul product. Soan cnoinetd ad valoen S _ e b . I *d I vAEldes nomina powacims frm 'vkwntry expor redtrint. and ether Nil ta ds e ealsnsv.l applie to thea produts. 4gtu hpaeft Uthe lbe o t * and _ethe b_a Wo eil aFd) co tar Soue: ie Wod BU ch SAD Soawar Sw Mates Anzdy and Reartm an Tr& PM sae ad iwe and dutis levied in OECM market on a variety of product. Thre prouct categories clothn, footwea and textile yarn and fabrics, tha togethe account for over a quarte of Chinas exports, are subject tD ohg tarff barrier by OECM standard. Compare to an aveag tarff of 4.8 pe n ta aplie on overal OEM Imports, lodti is ubje to impr ues In ecess of 20 pece in the EC, N way, ad Uni Stae. Ee hh tarf of 30 pecent or more are applied to dothing impop s in Aualia and Auria. Lewi footwear also facs - 147- average tariff of over 20 percent in the EC, Austia, and Austia, while duties on textile yarns and fecs eounter relatively high tari In tie 10 to 20 percent ranges. 7.6 Table 7.2 compares tie share of Chias and al developing counies' export to the United states, Japan and Euopen Community encounting NTBs in place in 1990.2i Tabl 7.. AitaLit OF TM RUAiwa lroaANc OF Nc.AMw haRlEM ON Exs IROM CHU4 AM O1Q DEVELOPI COUzN (Sam* of e~esa tha &c. MISa In the US, Japan and siC.erentage) UAWd tes In" JNUMen Couummatv 4adout- Maw AU Agiml- Mmmi- AD Agu4du Mimi- AD DeeoplW q e3tpodsr ur intr PMd NM tcte Prod, Wm bate prod- Products VWod WUc produces gods ucla products goods act AU declnpsc4mtda 9.7 284 IS.7 38. 12.9 15.0 21.5 32.4 13.7 Psplspublck of chai 83 59.6 47.0 34.1 23.3 22.9 173 40.5 29 Ahsw 1kw &kcdDewmkphg All atn Ame l13 17.2 9.9 25.0 9.6 12.3 17.7 26.9 135 A;gnan 8.2 2.3 4.1 23.2 4.2 10.1 21.4 18.6 193 Mealo 1.0 12.5 8.0 18.4 5.6 12.1 22.0 25.4 21.0 Beat Adb 12.8 36.8 30.2 38.8 13.0 17.0 27.4 40.6 23.8 Indoacl 0.1 46.0 9.2 44.3 4.3 8.6 10.8 32.8 16.1 RP. .tKM 1.0 13.1 10. 3.6 23.2 3.6 2.1 13.9 63 mana" 20.2 32.1 28. 19. 6.1 12.6 77.6 41.9 20.9 Tl_d1 32.4 28J 27. 42.9 23.2 3S.2 79.9 55.2 67.8 Iub&bMaAMU 4.4 18.7 3.9 45.6 23.2 31.8 13.0 17.2 3.7 KX3a 0.6 0.1 22.6 3.2 10.1 24.1 8.4 11.7 TawAul 0.0 0.2 0.0 18.2 3.2 12.1 9.0 6.0 7.0 Sal - 0. 0.1 46.1 3.4 42.0 30.4 16.2 24.6 South AsI 0.2 45.7 33.0 64.1 11.7 2S3 18S 50.4 36.2 NoKm: Namff har cluded In el d overa o ge c aluaos a 'bad oe NTB sas fows: tApoe ptalftloa, _BmndtaIlv.atrlc VOW. lMpobt lvIe UFA reOtrlcth flosuatug. ad cOnan ad anti- denWing mamu. Not Inldd antumo Sceasn proceduss, msonl uaft, halt ad anlay requ_rens and -S stndar& or pacagIngglon. S9nwe COMlMDStsofdthe Ud NaionsaudUNCFAD's nvnoyof Tad CoolMeaues. oN covwea bides dje an dhs pag he ben computd ug bale in pac in 1990 nd a 1986 tad, data ban. t showe hat the NWM coverage ratio for China's overall exports is consitderably higher than the avage for the exports other developing eownomies, with the exception of Thailand. In Japan, almost 23 percent of Chinese expots face one or more forms of hard core NTBs as opposed to an averg of 15 peet for all developing counies. Similarly, in the USA, the Chinese NTB Laud and Yoats (1990, Table 4.1, p. 90) indicate dua to rave iuportance of NTBs as banie facing develping countries dhowed only a modest inCre over mh of die bast decade Howeve, bed on e avalbl evidenc it is dficult to arg dha curen tade borne hae siSmifcamilyredued export po beow thwsiedth existed in the 1970s oreirli (a DB 7.2). - 148- trade coverage ratio, at 47 percent, is thrice the corresponding ratios for exports from other developing countries. Table 73: SroL COVERAIg or CUA's EPwT ay NOwrARuI BA8YN 1I1N 1 UN= IFAY JAPAN AM EUROP COMMITY Usitd .t . . community .S. 1986; lpot NTB 1986 inoet NTB 1986 impost Nt8 Podut Grewp m val covea vae covew_ valu ooVn (S mkind (%) (S =lin (S) (0S i odex(%) AIJproduOeD(Dt9) 4,597 47.0 3,89 29.5 5,604 22.9 AR ptodaee Al (r to 9 kw 3) 4,052 53.3 3.720 30.8 3,878 27.7 All6ode(D+1+22+4) 206 0.4 766 29.0 1,387 39S Aatblul mteralsl (2-22-27-28) 70 32.2 527 0.3 485 18.4 Onoe adaals (27+28+67+68) 97 5.0 152 0.2 237 CS FP us (67) 10 51.3 10 0.0 30 0.0 awmncasi( 165 63 348 2.8 305 9S OU_ aufatee (6 trougb S Is 67,68) 3,412 62.2 1,9I5 47.5 1,440 26.7 L.a ranu ituu (61) 23 80.2 19 1.7 5 38.2 Texlhs OS) 435 93. 543 81.0 673 553 Claodh (84) 1,653 943 $42 69.7 443 1.4 FoOPWr(M85) 74 0.0 77 99.7 39 1.3 Souc: UnhdNuomCOP.TRADEdatbaseandtUNCTADDa BasTrd. ConutrolMeasr. beNTBUtdecovagp salosm uf es_tidonfln etibo1 1990 whih tradesdtcs reltetto 1986. Mm batrfixed-year tadewetshav bee usd bt Woadd Ba (1992) e 1in onberto dbbgAsh bde caoges in ctmposiio and chamges in do aplctim of NTM. 7.7 Why is the NTB coverage of Chinaes exports so high? The answer lies partly in the composi on of Chins expor and pary on their distribution across key trading partnas. Table 7.3 provides a breakdown of NTB coverage ratios for major groups of products exportd by China to Unted States, the EC and Japan, China's dtree most important trading pan in that order.2I The table indicates that the US NTB coverage ratio of 47 percent is the highest of the th markts, 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 manftes. Ihe NTB coverage of Chinas manatred eports is 62 percen in the USA, 48 percent in the EC and 27 prcet in Japan (Table 7.3). Chinese mactuing eXports to the former two markets aa higher NTBs because of their concenrt among texties and clothing. Over 80 percent of Chinese exports of textiles and clothing to these markets are subject to quota restrictions associated with the Multifiber AChemen Cinese exports to the US market are subject to a part arly high NTm coverage because of the diproportionately large share of textiles and clothing-United Sta clothing imports from China are roughly three times te of the EC. On the other hand, the low NTB coverage of Chins manufctured 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. 7.8 It is difficult to estimate the implications for the competitiveness of Chias exports of the application of NTBs in major OECD market. Some relevant data is, however, ,1/ Taking into acoont uuexprt th ough Hoag Kong. - 149 - Figume 7.1: NOMINmAL PROTECON AGANT CI'S TEM AND CLoFNG ExpORTS TO TuE UN STATES IN 1988 (tariffs, nontariff barriers and combined protective effec) Woven or cont. cellulosic t - MMF specialtv tabncs WCt sweaters ms sweaters AGI trousers and shorn t me trousers and shorts I wCi IMF coats - .; wri knit shirts I Other As coats other cotton apparel L MS shirts. not kitu me sut-tvpe coats _ es knit shirts Woolens and worsteds Knit shirts and blouses Cotton gloves and mittens Wool hoserv Cotton sweaters Cordurov tabric wG shirs. not knit Woven ot spun celullloscic Me wool suits =-_ _ _t ma suits Cotton hosery *rassier. etc. I tow dresses _ meB shirts. not knit MMF underwear me trouses and shorts I wC wool coats L WGi knit shirts and blouses _ me suit-tpe coats I Dressing gowns. etac. Other %s coats Shirts. not knit AMMF plVSUlts. sunsuits Wool knit fabrics Velveteen tabric MMF nightwe and pa.am MMF skits_ mmF gloves and mnitm Wct wool suits %Ms hosiery wa wool sweater %VGa trousers and shorts me trousem and short Other wool apparel MIu wool sweaters Otwhr Mfappard Tamfi rawe *Kit MF fabrics_ Handkemchigfs Wood skits Tarif eqvaen of NS MM taffrte cinghamn fabric 0 20 40 60 80 t00 tZ0 SmM m_ i. iie r wa mens wnens'. g. and itW MS SM an boys'. Soemu Wtrc 1969. - SO - available for the US market. Figure 7.1 is based on a special study prepared by the United States nternational Trade Commission and shows US totl proticdon for various types of textile and clothin products importd from China as well as nomial 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, cumWulative levels of protection on textile and clothing products imported from China are in fact in the range of 40 to 80 percent, wifth protection levels in some cases like man-made-fiber specialty products, rising to over 100 percent.41 The levels of protection reflected in Figure 7.1 clearly suggesi that a substantial expansion of China's textile and clothing exports could result from a liberalization in this sector. B. EVOLVING EXTERNAL MARKS AND IdMCAToNS FOR CHINA'S ExroRn3 7.9 Conditions of access to international markets are in a state of flux at the moment. Such changes as ocwr 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 successfil 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 generaly filled its annual -tetle and clothing quotas for exports to OECI) markets. On the other hand, the growing trend towards bilateralism and regionalism 5I 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 (PTA) arrangements like NAFTA, the proposed North American Free Trade Area between Mexico, Canada, and the UitW States, and other amngements curently 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 exernal market conditions could influence China's future export prospects. lmpllacbns of the Uruguay Round for COina's Epos 7.10 Most of China's trade partners already accord MFN stus to its exports. Thus, China is likely to benefit from whatever iberalition 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 GAT, it would remain peralized in several respects. First, several major agreements expected to emerge from the Round 6ike streamined dispute settement procedures, would remain inaccessible to China. Second, China would condtue to be denied the potentW benefits from the Generalized System of Prences (GSP).fi/ Third, if the Uruguay Round were to conclude with a liberalization of MFN barriers, and C-ina were to lose its United States MFN stats due to bilateal issues, 4/ Aldho a direly co_ ble study has not beem copleted for EFTA or EC couies, most nayses sggest at protcto aganstxtie and clodtng export from Ci= is rughy comparble to tt in th United Sta. See Lad ad Yet (1990) fir a survey. If In a deailed aaysis, Brag and Yeat (199) estiafte that FTAs which hav thu far been conclue coe approximaey one half of currn world ade in manufactur aV Even if China w. to acquir fill contating party at in th GATT, it is t " s that it would GSP fteatbmt-this would deped on the twma tha the Cine wee. able to - 151 - its compettiv, posidon in the US markt would deteroraw due to the Lncrased spread bewen generli and MFN dudes. 7.11 WhUe the precise nature and magnitu of any liberalizaion sill remains somewhat unertain, most observers feel that the negotiations are likely to reut In an ovea onethrd to onalf reduction In tarifs and nontariff barriers. Iis a Incorpores exist offer for taiff reductions along with proposals by Anthur Dunkel, Director General for GAIT, for iberaizi NTBs 7.12 If protection levels in the EC, the United States and Japan were to be reduced by 50 percent, Cbina's exports Increase by an esdmated 38 percent or $11.4 billion in tem of 1988 prices (see Table 7.4).7/ These figures suggest that China woud fre corsiderably better from a Unrguay Round liberalization than would other developing countries on average, because it is estimateds that a 50 percent librization in EC(USAIlapan trade barers would increase all developing countries' exports by about 15 percen, wbich is less ta half the projected 37.6 percent expansion for China.A/ There are three major reasons for this disparity. Fist, most developing counies have a far higher share of raw materials like metal ores In their total exports and these primy products generally face zero or low Import barriers in developed outry makets. Second, many developing countries enjoy special perenes, like GSP in the United Stat or Lom6 Convention or special regional prefeeces in the EC, that Cha does not receive. Urugul0p2lXRoMioN tariff cuts would erode the margins of prefeence these countries rceive and caue some of their exitig trade to be diverWd to nowrece receiving countries. Because China's exports do not benefit from GSP or other special tariff treatment, it would be one of the counties standing to benefit from trade dtveed away from tie prefrence receiving counies. Finally, the trade gains China might expect from the Uruguay Round should exceed those of the developing countries (on average) due to the relatdvely high share of textiles and clothing products in total expots. These products currently face trade barriers which proide nominal protection of over 100 percent (Figure 7.1) and a liberalization from these levels offers the potential for maximum trade gains.' The Patenl Effects of Rgionalism on China's Exports 7.13 As previously mentioned, the fuither spread of regional p ret arngemen has the po_tntial to impair China's export prspects. For exmple, current discussions aimed at creating a North Amer Ftee Trae Area (NAFTA) would grant Mexico, Canada and the / This estima as based on a ptial equilbium, model tt th Wodt Bak and UNCrAD developed to help developing couties ault thdir Dnoatg positns i UrWu Round. Two qualificatios should be noted. Fir, it pecs aoly atic ffe and does not etaat ay dynamic as that may be equally impotnt Second, it th fe ins from an NTB liberaliton since nominal equivalents for somne existing rstricis wor not avilable for use in the modeL For a description of this ('SMART) model soe m .l of this rport See Wodd Bank (1992) for SMART proectios of Urugy Round results all deeoping coune trade. ji In fact, tal Chines trade gins frm the Uruguay Round shoul be largr an d figure reportd in Tal 7.4 ince other coumnies like EFTA members, Austlia, Now Zealand, and Canada will o lowe taiffs and NTBs. In 1989, these countries imported $3.2 billion ftom Chn Asuming tis tad expands in tLe same prpotin as dat for ECUS/Japan, dtheal Ungay Rond pins for ia would be primaly $12.6 bfllion. Table 7.4 EnaMIM EnWr OF A 50 PCET? LIDRAIAIMON UN TAAM &XUM aY N IWC, UNI1ED STrAS Am JAUAON Im S mm C A Pmloated lba. nInot from Chi=i EC, US and Japan Vaue nc Shar of Podut (ST9 Impots fom CinA (8 MiSon) (%) to inorwe (miion. of US doar) (%) Food and livetock (0) 3,055 795 26.0 7.0 Fish and prparation (03) 947 455 48.0 4.0 Fnr vgtabbts (05) 1,053 216 19.9 1.9 Bevrag and obacc (1) 43 9 20.9 cuemateals ox uel (2) 2,522 81 3.2 0.7 Teatle ibsoe (26) 1,095 12 1.1 0.1 Cr ,e naial, nee C2) 463 60 13.0 0.5 MIeal 1i (3) 2,702 200 7.4 1.8 Pdmlum product (33) 2,384 194 8.1 1.7 Anmll v_gablogoils (4) S0 2 4.0 Fixed v aoils (42) 48 2 4.2 - Chanic (S) 1,445 38 2.6 0.3 chm d_dms (51) 849 17 2.0 0.1 Modi_lalptedus (54) 182 7 3.8 - Manu&oturcs cleslle by mata (6) 4,415 733 16.6 6.4 Tolm& yan nd fbrs (65) 2,272 Sl 22.5 4.5 Mod maufacr (69) 593 132 22.3 1.2 Macey and tansort (7) 2,489 157 6.3 1.4 Elicalm achIny 2,034 106 5.2 0.9 Mwoo. manctur (8) 13,544 9,38S 69.3 82.3 Travd goods (83) 959 463 48.2 4.0 Clothig (84) 4,699 5,154 109.7 45.2 Mfi8. __Rcuu nes (89) 4,263 8S6 20.0 7.5 Al goods (0 to 9) 30,338 11,40062X37.6 100.0 All manufacture (S to 8 las 68) 21,488 10,300 47.9 90.4 United States duty-free (and nontariff barrier fee) access to each othe's mkes whfle similar products from other counties (fle China) would continue to f existing tde bafriers. lbi diffeal treat_m will cause Chinas exports (and other non-NAFIA countries' trade) to be diplaced In the hee FTA marks. In the US, export from China woud be died by -153- canad and Mexico, in Mexico Chinese export would be displaced by the US and Canada, whie Mexico and the United States would divert Chinese trade with Canada. Tabld 7.5: ESIAS OF TRDE DIMRSON IN I UNM STA7ZS DU TO A MECAN-US Ft= TRE ARRANGNMET _ | lTrade Disoiaced by a Meieanl-US FIA (o'000) EpoIe Pood & agouual Enerw Ore & AU All material products ets manufactures item AUl non-FrA expormts -35,030 -22,390 -1,80 -381.370 -440,640 China -3,230 -190 -20 -33,830 -37,270 Us* South Amican Exposmus -11,920 -5,890 .60 -10,150 -28,060 Argentina -740 -190 - -270 -1,200 Bolvia - - - -20 -20 Braz -9,830 -210 - -8,260 -18,310 Chile -510 - - -240 4300 Colombia -420 -460 - -480 -1,370 Ecuador -190 -460 - -20 -670 Paraguay -10 - -60 - -10 Peru -20 -290 - -80 -450 Uruguay - - -160 -160 Venezadb -190 -4,280 - -610 -5,080 Sourco: Projecions made with the World Batik-UNCTAD SMART modeL For a desinption, see ASnnx L. 7.14 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-FTA countries taken together would have trade of about one-half billion dollars displacced by the prposed arrangement, with approximately 86 percent of the trade diverted consistg of ma cts. China's trade losses are estmated to approach $40 million, a figure which, though quite small, exceeds the combined total ($28 million) of displaced exports from Wi the major South American exporters. Chinese losses are projected to be higher than those of South American countries, because China directly competes with Mexico in many high tariff highly labor-intensive sectors like textiles, clothing, footwear,2OXsportiods, etc., that are subject to high tariffs in the United States and Canada. Most South Amencan countries, like Bolivia, Peru, Ecuador, Colombia, and Venezuela, on the other hand, primarily export raw materials or fuels to the Unied States and Canada where low (or zero) tariffs limit the potentidal for trade diversion to occr. 7.15 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 FrA with the United States, Table 7.6 suggests that a significant proportion of China's manufctured exports to Canada could fce heightened competition from comparable products originatg in the United States. The table shows that the United States is in direct competition with China for almost all 2/ I proections am mae with the Wodd Bak-UNCrAD trd projections model. See Wodd Bank (1992a, Appendix C) for a discussion of the main febat and limitatins of this model. -154- Table 7.6: AREAS OF POrENTAiL DDi1LACEMENT OF CHINA'S ExomRS To CANADA DImu TO TE UNImTD STATES-CANADA FTIA Product (SITC) 1990 CnadianImm I Cm AUl Manufactues (5 to 8-68) 1,061,859 62,983,839 Clothing of Textle Fabric (8411) 164,383 74,555 Chldren's Toys (8942) 141,055 179,109 Travel Goods (8310) 81,911 22,371 Footwear (8510) 64,506 43,445 Cloding Knited (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 stic Manuftes (8930) 27,167 763,015 Made-up Textile Goods (6569) 26,198 71,613 Headger (8415) 16,430 18,427 Woven Synthetic Fabric (6535) 16,087 151,784 Teleommunications Equipment (7249) 15,101 924,655 Woven Cotton Fabrics 6522) 14,679 91,911 Other Mafactures, nes (8999) 14,636 95,797 Furue (8210) 14,370 743,3777 Clothing Accessories (8412) 12,303 9,794 PoreeWn Ware (6664) 9,871 4,141 Lighfing Fixtures (8124) 8,063 116,104 Steel Nuts and Bolts 7,883 342,245 Total Of 82S 4.322.804 Tow a a puecentaje of all Mfg.(%) il 6 Source: Candian import statistics drawn direcdy from United Nations COMTRADE sources. - 155 - of the ltes 20 largest four-digit SlTC manufactured expors to Canada Since the PTA asgreem ew into offect, products odginatiag in the Uited States pay no duties, whea thos from China continue to be subject, on avage, to a 10 percet MFN equivalen Import duty and, In some cases, also to NTBs. ImplIcatIofs ata Lesn f China*s PIsovona MN Status In the US 7.16 Article I of the General Agreement on Tariffs and Trade (GA?T) contains a amost-avored-nation (MFN) clause that applies to all member's taiffs as well as all other nles and fornalities relating to Importation and exportation. The basic principle of this clause rests on the premise of nondismination and requi that all membas of the General Agreement be treated on an equal or nondiscimiatory basis. Article II of the GATI contains a related provision that requires that any tariff or trade barrier teduction must be extended equally to all countries that are GA1T members and notjustto the contrtng party wkh which the concesion was negotiated.Q/ Tis latter provision formed the keystone of efforts to liberalize trade baiers within the context of multiatral trade negotations such as the Tokyo or Uruguay Rounds. 7.17 While MFN status is normally guaranteed to all the 105 countries that are now officid GATr members4j/ its extension to a nonmember nation depends entirely upon the doicn of a GA1T member. It was thus that the United States provisionally granted MN sam,s 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 povisionaly grnted Chinese MFN status unless key points of contention were resolved.IV A key quation is what impact the withdrawal might h,Fe on Chinese exports to the United States. J,Q/ ahere sever spec4fic situations where GATT members suspended or modified this prnciple. On of the more iuposut exceptios is a pmvision that allows developed countries to exted twiff prferc to developing countries in order to accelate the latter's iand wt This exception led to th estbihmt of the GSP which OBED counies adopted in he early 1970s. GAIT Atcle XXIV contains special uions coneing the foamaion of *ee trade areas and customs unions under which specific counies remove import dute and nontiff bais from ea othes trade, but contin to apply the restictions to imports fom nonanaibem Also, in the mid-1970s, GATT adopted a speial Protcol for Tade Relaous among Developing Cowtria that allowed developing counties to _ncoue teir own _inatade by applying klwr than MFN tarffi to this exage. J1/ Per Aicle X MFN pnviges have occsonaly been supended on 'nationa socurty grounds' (e.g., USA against Nicaagua and Cuba). Likewise Article XX can also be used to this end an such gounds as morality and health Finally, Aticle VI could be used to suspend MFN privge on anti-dumping gond. .w }6In addition, in tho case of China, it must be noted that GATT does not necessaily ma automatic MFN treame by all conscting paties In prncple, if Chi's ca weo trated as tat of th accession of a now meber, an exis contactwg party could ivoke tho nosapcation claus (Article XXXV) of the Genal Agreemt to deny China access to MFN rivileg it is not improbable tht te US woud see to invo this clae The problm is that the US is requited by domed legislation k' review China's MFN staton an an anu basis, and as such, it must rsve the right to suspn these privileges. Usiug the napplicatin lausd co China would be ane way for the US to sa the requiments of existig domstic legislation wi tiolatng the provisios of the GATr. - 156- 7.18 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-aled '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 S to 10 times or more higher than prevailing United States MFN tariffs .j/ With such a major upward shift In the level of Import duties, Chinese exports to the Uned States (its largest export market in 1990-see Table A1.3) will clearly experience a major decline and, in some product groups, may be completely eliminated. 7.19 Table 7.7 examines the potential trade losses Chinese exporters could experience on 15 major four-digit SITC products if these Items were to be taxed at the higher US genera taiff rate.l4/ The table shows the trade-weighted MFN tariff China now faces on each product as well as the general tariff tru that would be applied if provisional MFN treatment were withdrawn. The table also shows t!ie 1990 actual value of US imports from China for each Item and a projection of the trade that wowd occur under the general rate. 7.20 For 7 of these 15 key export products, it appears likely that Chinese expors to the US would face grave difficulty due to the major cost disadvantage associated with US genera tariffs. The increase of roughly three-and-one-half tires in the clothing duty (from an MFN rate of 15.3 percent to a genera rate of 55 percent) would substaly undermine exports of this key product (its esimated decline is between 50 and close to 100 percent, depending upon the assumtio, 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 restered In the key clothing and toys or games groups. 7.21 Although it would be a major task to derive the required nominal equivalents for all US gene tariffs (some 9,000 tariff-line levels are Identified in the United States customs schedule), the data in Table 7.7 cm provide some indication as to the overall effects of China losing provisional MEN status. Under the assumption tat all goods would experence the same proportional decline as the 15 major products listed in Table 7.7, China's annual export losses ILI The previous rounds were held an 1947 (Geneva), 1949 (Annecy, France), 1951 (Tontay), 1956 (Geeva) and 1960161 (Geneva). TM Kennedy Round was concluded in 1967 after four years of negotatio while the Tokyo staed in 1974 and was finaied in 1979. Since these MFNs did not rest in a uniform reduction in all tariffs there is no genera (const) relation betwee pret MEN and United States geneal taiffs. For examle, Table 7.7 shows that prevailng MM naes for ry woven cotton (SITC 625.1) now stand at aout 45 pcet of the US geneal tariff while the corrpwd atio for watches and clocks (SITC 864.1) is currnly about 7 percent. , These prjecions were madp9Sd using the World Bank-UNCTAD SMART trade projection model-se Annex 7.1 A very high sharo of dte United States general taiffs are exprese in terms of combined nominal and specific duties (say, 10 percent of the f.as. import value plus $2 pr item) and this made th convesion to pure nomi nal tesso in Table 7.7 difficult n X specific (fixed rat per unit) cha had tobe expred as a ratio to the prodct's unit value it should be noted that the nominal equvalents of these comhined general rtes wiil hagp as Chin expott unit values d , i.e., if Chi export unit values fall the nominal oquvants of the gneald taids will ris. Tab *.7: ftOJCTIs air TO TRAME leuw Or AmLVMs U)uin es GEENAL TARIE COr MAIM TuwaN CM= EV8 B aWrS led Sakazhpm fim a -" INO-under us mmif actua .oinmualtffs I t8~~vem 1 e~ hrap 8IC Dee"o NM Gonad Om dad(S) d_eln(S) I013 Fred aiion dwaef 0.0 20 a,148 -33.1 -100.0 6S21 OMe woe ctcasen maIns 03 ISA 142,3 -143 -20.9 as69 Mueup ele sle, 9.4 60.0 266,135 -71.1 9. 6575 Textfleow owvings S.1 4.0 79,260 43A. -100.0 6785 boln aid seaba aid ipas S.9 25.8 55,426 -28.1 -503 7142 Acmx rak Saod statsal hInese 3.7 35. 12939 43.8 -100.0 7242 RadIo' hmdca - qubn" 4.7 35. 516,632 43.1 -96.0 7331 Ecayoes, noonetar 8.7 30.0 38.631 -283 92.7 8210 ]PrnI r 6.9 4S.0 167,966 -51. -10. 8310 Trav goods and buanba ISA 46.0 741,092 41A4 -100.0 6411 Clbtn Goftetie hbdIc 153 550 2,159,043 -51S M99.5 6415 Hbeagear 7.7 5.S5 62,617 42.1 -100.0 3510 Fbotwat 14.6 343 1,539,008 -255 -M922 8641 Wstce and wotmb enn 4.6 65.0 81,446 644.1 -100.0 B942 Top ond Ind2t - 7.4 38.0 2,20,71 -44.2 99.3 Al - li sfted 4abov 13.4 42.0 8,621,008 -42.9 -96.4 ysh ofCexs am oaln'h . fr om Chia it 162601,11 -4"29 -96.4 e Mm WN rains am tarf-usem klv qwd weightd aveages wich bhrs hbee. comped auuft ho Wold Dant's SMAtT MtM and twds dabase. The geneal Wit rages bave been coqtetdu 3gdapabliredn off6cisiUneSaecui edu & Thus data are bosed an Impors In, dboUSA. As agdlnt the 816.26 btilln in Impots erponed by the US fikn Chn, expors o thUSA m paned by tar were S54 bilelo. The diffenem wd apear to be epbind by ep ort thlrgug K wIc wa valued at $10.Sbilion I1990 (as Chpter 1) ad wom ai l~ Trad proectn wee mud at th ee ow tarif tlin prout an the ageedup 10 th ardg SIFC prodct pee 1ee Li Two ecsof aranlon ae been _e to estmt th psibl sige oftho wade desrctioomd and wde diesoect of MFN reovl. Sceario bi baed aD die Ibldn and Mussy (1977) apoch (iplea_td In the SMAR sofwsytem whc aies all the wade destuton effects to the pa_cua coumi (Cli Int case) agiq wa.protctive bauer at d_ff.lsy rised (sO Anmex 7.1 for deti of the _ of the SlAZtT mde). Soeeio UI cda t thde rade reatio effect but hen alocdatesavas ag apli acordingto thir rsapece dim.olfte bm ig8 countr's wade. rae dieso aingo spplir is clcatdc blg a constan elsictf sibstitath S SensitivityanalyOsivsws mndertaenusing a range of alues for the peramater Involved (i.e., elaticity of UJS Import d_emadlsticity of Chines eexport apply, aod elatct of aibstittion between Chines export snd tdees for competing supplies) in thd computation of bodh Scenaios. The reslts presntedhere from Sceauds l and represen the lower and uppe bound, reetndvely, of teo etitempact on Chine's expors of tEN mnov by the US. Ptojectm based endte ampuponthad thne odUeline i a mps fi Chine wold mah tat ofvthe iS four.dlg nrc Core prodcsisted 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.11I 7.22 Chinese exporters ar not the only ones that would lose. According to one estima US consumers could end up paying as much as $14 biUlion per year in higher prices resulting from a combination of costlier substitutes from alternative supply sources, and higher tarUff on the products that would continue to be imported from China. j/ 7.23 It appears, therefore, that the dislocation in trade flows likely to result from withdrawal of Cbina's MFN privileges by the US would range from the dramatic to the disastrous, with the associated costs being high for both parties. C. PERECS ON DRECONS FOR CINA'S ExpRTS DiXverslfcadon of Markets 7.24 The analysis of the preceding sections would suggest that China may wish to reduce its vinerability to trade barriers from major OECI) trading partners. One way to pursue tis 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. Oppormnities 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 eports 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 expos 25.6 percent ,V 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 exports. Product DiverdficatIon and Comparative Advantage 7.25 Another way for China to reduce its vulnerability to protection in OECD markets is to diversify its export structure. The objective of product diversification is hardly new for China. Ihe question is how this diversification should be pursued. In addressing this question ,a/ It should be noted that this analysis is focused only on China's exports to the US. It is possible that Chia will find alternative export makets to make up for thesw losses. However, te switching of $7 to $15 billion worth of goods from one market to another cannot be done without imposing appreciable coss on Chinese exporter j/ 'The costs to the US economy that would result from removal of Chnas MFN trade status, lnatio Busine and Ecoomic Research Copati, September 1992. This report also argues a reaiy acion by China could futherjeopardize $8 bilihon i US expors to China and $5 bilion in US investments. fli After austing for reexpots of Chine products from Hong Kog. ^ 159 - it s useol to draw lsons from the experenc of other counites and evaluate ChiWs evolvig comparative advantage. 7.26 Korea and Taiwan (China) provide useful comparsons. Both these economies have followed a classic export deveopmen pattern. Over time, as their respective Indusal stcesl have become more sophisticated, they have seea the share of manuactring exports grow. Moreover, as real wage and the costs of labor have grown, they have both seen the manucturedexports become progressively more capital intensive. 7.27 Korea begn Its manufcturing export drive concentratng on trdtional labor- intesiveproducts, prominent amongst which were clothing and footwear. In 1970, these secton alone accounted for 36 of Kores manufacturig exports and 28 percent of its total exports. The cpil Intensity of Korea's expors began to rise sharply towards the end of the 1970s, and reflects in part the ifluence of the country's heavy and chemicals Industry drive. Thus, in the by tde early 198bs although traditional footwear and grments sectors retained a respectable dse of 21 percent, exorts from the heavy sectors of the economy had grown very substally. In 1982, shipbuilding accounted for 13 percent, and iron and steel for 9 percent and micals for anoher 6 parce of total export. Since then, the stidking feaure of Korea's export deolpment has been the rapid growth of high value exports, that are more or less wbholy ut within th county, no just sembled. most spectacular growth has been In pae car exports, which scarcely exise before 1984, and now account for about 3.5 pecent of exports. The other main are of growth have been the electronics ad electrical equimen setors. In these sectors too, Korea has progressd steadily up the learning md value ve, from redic on the assembly of Imported omponens, to the complete desig and manufactr of a range of producs. Office machinery (mainly personal computers), kalos equipme (including radios, TVs and VaR), and other eectriae equipment (SMTC 729) now account for just 20 pere Korea's total export. Their share in total exports is now _st y larger tn that of the traditional footwear and clothing sectors, which have sn their importa decline progressively over the last few years. 7.28 Taiwa (China) has followed a patten very similar to that of Korea. During the eary stages, i.e., during the early 197, Taiwan (China) had a much greater dependence on primy sectors than Korea. Over a fiflh of exports were accounted for by the processed food and th wood indies. By the mid-1980s the share of these secto had fallen to under 10 pecn. As In Korea, gment were a critical sector for Taiwan's (China) export drive, accounting for 15 percent of export In the early years. The share of this sector remained fairly stable rtg up to the mid-1980s, but thereafter declined rapidly to its current levels of under 6 pecet Over recent yeas Taiwan (China) has diversified very rapidly into higher value expo. Tie most dynamic sectors have been exacy the same as in Korea, namely, office machinery, tel ications equipment, and other eectrical equipment, which together accwue for 22 peren of expo in 1990. As In Korea, these products are now more or less entirey manufacrd witin th economy, and not aembled. 7.29 Although Chais ewpo structure has been following a path ta looks similar to Ihat of Korea and Taiwan (China), ere ae some interesting diffrn. Similar to the case of Koea and Taiwan (China), the share of manufacr in China's e%ports has clmbed extrmdy fast Cale 7.8). UnlIke Korea and Taiwan, however, China's manufatred expors hve not as yet shown any sgn of becoming more capital intensive. In fact, as was noted in Chapter 1, a key featre of China's exports in general, and also of its manufacturing exports, -160- Table 7.8: CROSOWrRY COAiSON OF TRDS IN AVERAE LABOR II%rNiTY OF EXORm Exporter 1970 1980 1990 Change over last decade (pOint) Average labor Inensty Index of exorts (S average = ZOO&) China 89.6 87.7 77.5 -12.1 Comparators Republi off Krea 73.1 81.5 85.6 12.5 Hong Kong 74.0 75.3 75.9 1.9 Saore 113.2 108.8 102.4 -10.8 Taiwan (China) 79.1 80.0 85.0 5.9 are Of m=*teW In toa e (%) memo eM KOrea 76.5 89.6 93.5 Hong Kong - 94.5 S oe - - 71.7 Taiwan (China) 75.8 87.9 92.S ChinaI - - 79.7 Ia The labor inoensity is an invese indicator in dh see tha the higher the Idex the ss labo- intensive the production process. An index value of 100 meam that the avae labor Intesity was exacdy the same for all United Staes manuf ng activity. Values above 100 indicate the proce was more capital in ive. & SITC S to 8-excluding 68. k Based on parter country data. Source: COMTRADE. over the past ueade has been their growing labor intensi. In 1979/80 Chis aver labor intensity index for all wasw 87.7 (indicatg they we apprImely 12 percen more labor Intenive than the United Sta average for all m), and the auafly fel almost 10 fill points by 1989/90 (Table 7.8). ThIs Is not altogether spridsig given th China strted with a highly distorted economy. The decline In the capital iity of a'as manufactring exports is, no doubt, the result of les dited prices and the progressive reduction of export subsidies to capitl-intensive exports fom state-owned enteris ad te decline in export planning in general. Ibis suggests China has been exportig more and more along the lines of its naural comparative advatage in low-wage labor. Thus, not surpt singly, the share of clothiig, footwear, toys and sporting goods, and travel gods has rise. dramaally from 16 percent In 1985 to over 35 percent of tota expots In 1990. More - 161 - significantly, China's share of world tade in these products has gone from an average of 4.9 percent to 19.4 percen 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. TaW 7.9: CENA AD Omu EAs ASIAN CovmR SHRE iN TE WoRD ExpORT OF SELECT1D PRODUCTS srrc Advanced East Other Eat Code Commodity titl Chi Asian Exofters Asian Eanoiters 1985 1990 1985 1990 198S 1990 724 Telecowmunications equipmn 0.8 5.9 11.9 15.0 1.S 4.9 72S Domesti electrc equiment 0.8 8.8 113 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 clocks 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, spoitng goods, etc. 6.5 22.3 21.8 13.0 0.9 3.0 Note: (1) Advanced Hast Asian Economies: Koa, Taiwan (China), Singapore, and Hong Kong. (2) Other East Asian Counties: Indonesia, Thaiand and Malaysia. 7.30 This picture of China's competitive advantage Is reinforced using a revealed comparative advantage (RCA) I analysis of China's exports over the last decade. Figure 7.2 indicates the changes in China's RCA for 18-product categories over the decade 1979/8S 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 tie other categories have RCA indices either below unity, or at any rate, not significantly higer than one. 7.31 lhe story of China's evolving export structure is more complex, however, ta the above might suggest because of the role of the machinery and electronics sector exports. The share of these sectors in China's exports has grown very rapidly, 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 noteworthy in this context. First, China still shows no sign of developing a comparative advantage in most subsectors of the machinery and electronics sectors. Thus, for example, the RCA indices for China's exports of nonelectrical machinery and transport equipment are still way below unity. Second, the performance 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 expors of electrical equipment. - 162- 1979810to 198lo/90 aedCW"llV tAd Ir#bxWU Change In Revealed Coi"arabiv Index Va rb LI . . 6 t3t@C4 Foodand , , , , ,, , * | I. , , , I * s |PIoducIt. ' ibitil.. and ohLeahr ard , Products PrIoducts. IL Phintng and Ph.msand Petroem Products ~~~~~~~~S 1 11.1 N Nof '1f Products ft3; metal pmt . thin Ia>ZE - 163- 7.32 What thi indicate is that China may not yet be ady to move into the exports of heavy Industial equipment or of high technology products that camot easily be assembled locally. If the experience of Korea is any guide, significant upgraeing of Chinese industry is si required before China can break into the export markets for these kinds of produes. On the other hand, it is not just cheap labor that constes China's comparative advantage In export markets. China's competitive strength derives from low wage labor with reasonable skill levds. Given that China's real wages today are still subsnially lower today than they were in Korea in the early 1980s, when the latter's export struture 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 exrprts (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 uncertaindes, is for China 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 exploridn (i) the potential for China to improve the unit value of its exports through quality upgrading and (ii) the opportunities that stil exist for China in a range of other labor- and skill-intensive eports that do not require very sophisticated technological inputs (see Boxes 7.3 and 7.4). The Potential for Upgrading China's Major Exports 7.33 Table 7.10 below lists the 10 largest two-digit SITC manubfa'ed product groups currendy exported by China to the EC, Japan and United States (these items account for Tnbk7.1O, RAmI f* ls l Wv CUDIAn OlQ Basu T0 - E, JOAN AMD USAM 3 01W 1990@ a1nsAwegEot 19a0 IMbYsDC Pe Reai to O= me A"Oa N Is M 3V= d United SEtae _ Ute SrfC Das fes cum ($ miDn) OIC aWNil OWD FewMi OBM F°wNM 84 Clois 8.49 53.6 .18.2 41.1 -37.0 -5S.2 -17.5 89 Nh. _ cmafutaune 6.236 -37.6 -28.5 41.6 -27.5 -49.2 .17.8 72 _eculduacmy $539 .26. -28.7 -9.9 0.0 41S -220 65 T?Mi Md idon 2385 * 11.1 4.8 -50.2 -9.6 36.S *14.1 85 Feotue 2.000 .55.0 44.5 45.2 -11.5 -76.8 -32.5 8O TnWlaodeh& 1.41t -58.8 4.4 49.9 -235. u.s. u.n S1 to_uedeZ 901 -9.7 *5.S .13.0 -20.6 1.8 .153 0 MetWMnnlnct 855 .40.8 .41.6 -70. -173 47.8 -18.0 71 Nk*hWWG=ceilc 657 38.9 -49.8 -7S.2 -5t.8 47.2 -253 s6 Sdoom _bumab 5S5 41.5 -27.1 -9.7 -22.7 64.0 *22.0 AU 1iuAMA_ 29.801 45.6 .21.6 .589 *26.5 .2 -19.9 Nam WIv ukb a&twadigliV d srapai ofa ara..' U .dltpaductaaoue by balk Chi= m OBOD eatre -A, = die km Go PI I IbyCbhusmed&smfouNID. Farikah gum.lsuovodatdo u. ..wuteb d ihc atioNMEOBCDptIeu ig CW'soa spap4whsr -eve 4.Is=fivefdlubITC puluct bin a tov . m pi=t moveby OBMDwat edo w.nce dAeaes'uQ Kiss. SIuppou. ibiwan (0th.. aed RspubD f Kain. *WgM "s be meds fw tde Unite Sums .h.. di coutey hfoa ed to ,eaetrquIudquui bhnfA=.tleaee to =camnptsunl*whu. about 90 percent of allmnfcue exports) In order of declinin Importanc. Mme table as shows the akveage price for Chinas five-igit componen products in each sectr relative to thoe -164- received by two groups of comparators: (a) all developed countries exporting comparable five- digit products, and (b) four advanced East Asia developing exporters, namely, Hong Kong, Siaoe, Korea, and Taiwan (China). 7.34 If price differents between simlar products are any indicator of quality diffecs, the general message that emerges from the table is that there exists considerable potential for upgrading Chinas export In a wide rang of products, irrspctive of whether the comparisos are with OECD countries or the four East Asian exporters. In the case of footwear, for example, Chita's xcportso the EC, Japan and the United States are on average SO 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 manufictures (SlTC 89), China's export pric. are 35 to 60 percent lower than OECD export, and 1S to 30 percent cheaper than East Asian exports of simflar products. Even in the case of the key dothing sector China's average export prices fall more than SO percent below those of similar five-digit em oiginating in developed countries, while the price differental falls between 20 to 26 percent in the Asian NIE comparisons. For many products, but particularly for clothing and travel goods, price differentis between Chinese exports and those of other countries appear to be the widest in the Japanese market. rnis suggest 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 . Opportnties for Divreltlon 7.35 DepIt rpldly ncrasing developing country exports of labor-intensive products, their share of total US and Japanese Imports of such products is still only 40 pecen, while in the EC their cueN share stands at about 12 percent. Wiftin the EFTA countries, like Norway, Sweden and Switzerland, import shares are even lower rsaging from 5 to 10 percent, while for all developed countries combined, developing countries now account for about one fifth of total imports. de of Chain total OECD imports of such produc s at present 3 pecent, while that of Korea, Taiwan (China) and Singapore, together is 9 percen. Even if it were asumed, as an exteme case, that fiuther import penetraton of such products by developing countres was impossible without reliaory trade bariers In OECD markets, for China to be able to SuStain 4 10-percent export growth re over the next five yeas, 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 ridng real wages are forcing countries like Korea end 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 gwwth targets by continuing to focus on not very high tecology, labor- and skill-intensive products. 7.36 Although fitre trade performance in Individual product is difficult to predict, Figur 7.3 explores potentia diectkm for future diversification of China's exports within the category of labor-intensive products. Ihe items identified in this figure have five common WV Wbile aboveo ofims at the potil for upgan Cinas upo exiss in d.al all seor, it mut be bo inn mind tht th co= of achving this upgmading are lely to vay cond&rbly fm sector to sector. Figure 7.3 Selected Labor Intensive Manufactured Products In which ValuInUSS i On China May Have a Major Future Export Potential 30 - ... 30~~~~~~~ 120- o | I § t 1 0 , W ! 1 E ! 00 0 | ie X W -166- characteristics: they all use at les 10 pent more labor per unit of value added ha the US average; a major market exists for each kem, with developed countries imping at least $5 billion annually; they are currently manufictured in China, but constiute a small share of Chinese exports; developing countries have not as yet made Important inroads In the trade of these goods (they supplied 20 percent or less of total OECD Imports), and finally, none of them are currendy subject to hard core NTBs. 7.37 In total, the items listed in the figure accounted for more than $220 billion 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 manufactum, requiring technology that is not overly sophisticated, and that China could still tap fairly easily and with relatively quick payoffs, before it makes the switcb towurds more capital- and technology-intensive exports, along lines similar to that of the East Asin NEs. C}onhsos 7.38 China's export structure has, over recent years, evolved increasingly in accordance with its comparative advantage. 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 countdes. this does not imply that China's exports prospects are poor, nor does it suggest that China needs to reorieat 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 markels and in terms of other products, that China could pursue (a) without trying to go against the nature of its comparative advatge 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. Finally, the analysis suggests that withdrawal of MFN stats by the United States could have severe consequence for China's export, at least in the short term. Trade diplomacy will neeu to remain a part of China's future trade strategy, although it should be noted in this regard, that the conclusion of a successful Uruguay Round of negotiations would be by far the best outcome for China. - 167- Eub 1. Wodd Bank (1992a). 2. World Bank (I992a, Table 2.6) Indicates that the coverage of OECD countrios, NTBs on developing countries expots ased only slighdy (from 20.3 to 21.8 percent) over th last decade. lbese figures are also consistent with the propoition that no basc cn cc owued in genr levels of protecon against China and other devdoping 3. eig a (1981). 4. The two main elements of the general proposal for reducing NTBs relate to ot and agricultu. Mr. Dunkel's daft teniles and clothing agreement would elimiae the Muldfiber Arrmgement (MFA) in tes stages over ten years. It stipulat minimum quota growth rates during the phaseout such tha half of the quotas need not be liminated untl the end of the tenth year. The text aso allows goverments the opto to intoduce a diry safeguard mehanibm during the transition to fil fledged -AN treatet. The proposed agreement in agriculture commis governmen to specifc reductions In levels of barrieas to market access (a simple average reduction of 36 percent, with a 1S percent minimum reduction on all tariff lines), in domestic support measures (a 20 pecent reduction on support measures affectig prices and producton decsio), and in export subsidies (a reduction of 36 percet on subsidies and 24 percent on subsidized qua es). It also commits them to replace nontuiff bamriers with trffs, but troduces a safeguad mechanism that would adjust for chages in wodd product prices and exchange rates up to a specified level. S. World Bak (1992a), p. 22). 6. There is a furer raon why the export expansion in textile and clothing products is so large. OECD cotries' MFA quotas apply only to devdeoping counties (the US impose some barriers on Japan) while the intra-tade of developed countries in these products does not ace similar restricdons. As such, liberaization of the MFA quot would cause a substantW amount of developed country intra-tade to be divened to dveloping counties. These gains are in addition to the sizeable trade creation dth would result fom the high textile and clothing tariffs. 7. The *revealed" comparative advantage (RCA) index is a measure developed by economits to help identfy products In which a country does or does not have a oomparative advantage. Specifically, if X;. is the value of country i's exports of j and X is the counts total exports of maniues its revealed comparative advantage mies for the product j is, (1) RCAV + xit) + (Cjw + xtw) where the w subsipts refe to world trade totals. Ihat is, the index relates the share of te product in theo onrs eports tothe swe of the prodct in wodd exports. 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The Ohina-Hong Zong Cocnnectin (Cambridge: Cambridge University Prs). Yusuf, S. (1992). 'he Rise of China's Nonstate Sector,' World Bank, mimeo. ANNEXES - 178 -ANNEX 1 DIFFERENTIATING LABOR* AND CAP1TAL-INTNSIVE MANUFACTURERS Ihis report dWIs h bet labor-intensIve and cap-In Ive mmb . JIt usm a approach dewdoped by the US Naoa Burea of Economic Research for i of labor and capial-Intensive products. his analysis uses the cria of rative valu-added pe emplyee, both In the United States d other counties, to identy the degree to which products ar cita or labo intensive In pructo. Products whs vaueO- added per employee falis bdow the nationl avae for al US mnufuI acti aia casified as lbor Intensive. Captl-Intsive goods const of producs who value-added per empoye Is abve the Uni Ste avrg. Table I of this annex shows the distribution of labor-Intsive Indues witi broad areat gps. As indiati, toetle and appare produc are almost ecluiey produced with labor-intensive process, ad chemicals ad peroleum refing are almo excusively capil ntensive. -179 AN= 1.1 Table 1: ANALYSIS OF TIE RELATVE IMwORTAcE OF LABOR- AND CAFTAIMSIVE DUMRES WMIN BROAD STANARD INDUsRIlAL CLASSICATION (SIC) PRoMCr GROUPS Share of component four-digit industries that are labor and capital intanesve (2) Labor intensive la Capital SIC Description Very hih igh Moderate Total intensive 20 Pood products 9.5 1.2 0.0 10.7 69.3 21 Tobacco products 0.0 8.8 14.3 23.1 76.9 22 Textile Ulll products 70.2 17.5 0.0 87.6 12.4 2211 Cotton mill@ 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 Nonwool tr-'.) fnLshing 20.0 79.9 0.0 99.9 0.1 228 Yarm and sad Mill. 100.0 0.0 0.0 100.0 0.0 23 Appare&. 6; textiles 78.7 18.9 0-3 97.9 2.1 2311 Men's mite 100.0 0.0 0.0 100.0 0.0 232 Mense clothing 67.3 32.7 0.0 100.0 0.0 233 Womanes outerwear 80.1 19.9 0.0 100.0 0.0 234 Women's undergarmeuts 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 fistures 4V.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 products 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 Prlmary 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 Nonelectrical machinery 0.0 1.4 19.6 21.0 79.0 36 ElRctricl 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 g Produos witb vey high abor inensi alre tse where thd fator proportion ratio is at L-at 40 points beow dhe averagefr all US manufaturing. Poduct with high hbor intesies arn se iwhose fator proporions ratios fall bween 0.60 and 0.74 while the omodeately lbor-itnsive products have fctor proportions ratios between 0.75 and 1.00 See Yeats (1989) (1991) for detailW infonnation on how h labor-intensive industies wre ideni&d and an analysi of tade trends i these products. Sour: WorldBank staff mte. -180- WLLL CRITERIA FOR ACCESS TO FEACS Alhough the role of the swap market price in allocating foreig exap expanded in 1991, the stae continued to coAtrol access to the market in order to prevet the sprr ad between the offic5a: and swap market es from widening too gretly. The regulationa in effect I 1991 established three categoies of access to the market, depending on the Itded use of the forign exichbage. The highest priority, guaranteed access to the maket, ws for purasr wbo intnded to use the purcased foreign exchaW for one of the foilowinr 3 to import chemical fertilizers, sgricultural pesticdes, plasdc eeting for aricultul use, diesel fuel for agrcutdul use, and other mates used to support agdculture 3 to import grin, sugar, edible vegetable oR and other raw materials necessay tD suppor the living sadards of the people * to mak prncipal and Interest payments on eterna debts denominated in freg currec * central and local key point constuction projects - item needed for exports that will ean foreign exchmnge forWeign-Invested entprises repaying foreign exchmge loas tk out abroad and epatating of ptofits - to introduce advanced equipment and techology f the above priority uses for foreign exchage could be guranteed, would-be prcae who had the following proposed uses of foreign exchange would also be allowed to enter the market * to purchase raw materials and supple maters needed for Industra production * for business needs of foreign invested eteprises * for equipment, sruments, reagents, and books and reference materials needed by scientific resarch, educational, cultural, medical, and health dertme * b toepay pincipal and pay inrest on the foreip cturency loan fiom dmetc financi institutions and to pay leasing fees * to Ipot crtical llus fitings needed In state key-oint actor producing houeold electronic goods i If ij sit eo l m .#fO tXt lf U ig||0|2 C1 8 * * **-. *0t ~ f~~~~~~* -182- ANNEX2.2 OPERATIONAL MEHANM OF EEACS 1. 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, Shanghi, 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 on the principle of price priority and time priority. Prices are allowed to fluctuate within a small band during each trading session.JL/ 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 fbr 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 bilater deals. 2. 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 organzed 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 tractons. 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 centers 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. 3. As noted above, the FEAC processes buying and selling orders and attempts to match them. If there is excess demand, as happened frequendy 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 purdcase directly from an excess center in another j1/ h Qingdao, exchnge rtes are allowed to increase or decrease by 15 fea per US dolar wbhich implies a b,and of about S peecenL -183 - A 2 povite or through a brokr. Altnativdy, if a cener has an Xex supply of foreig exhage, for n c in Wuhan, the enterprise may sdl ther forep exchns dctiy or througb a brokr In another center otde the pvce. hitially, the volume of trnscon beween FEACs was low beau the provical authodties were eluct to let for currency leave their povibcs however, it ppears that such n ve bariers are breaking down and the volume of iter-FEAC anaons has ris to over $6 billion in 1992. 184- ANNEX 2,3 UNDERSTANDING CHINA'S FOREIGN EXCHANGE SYSTEM 1. China's foreig exchage system exrts a pervasive influence on the fre market pries of goods and hence on resource use and the llocatio of goods and savices. In conts with e tariff system, which lmposes a wide ramge of diffeing levies on parcular goo, th foreip exchange system affects pre, at oie margn, of ai Imported goods by the same amou and mpos the same level of effecdve export taxatio an most goods. 2. The Chinese, orign exchange system is a two-der pdcing systm, with a official echange t which has typically beeo held constant for etnded peiods and a secodary market rate which I demed by supply and demand factors in leg ndary markt caled Foreign Excang Adjustment Cetr (FEACs). Memofficia exhoge rt has canssny beea ovevalued, with the margin between the two rates vaying coniderably over tme. When the margin is small, the freg eang system can be opected to hve only mior effts on trade whil i can be an importt distortion when the margin is large. 3. An exrmely Importat advance lthe devopment of Chinats freig exchang and foep trade system wa the development of a larg system of secondary makets for foreip excag in 1988. Since ta dtm considerable effort has been devoted to improving the pv emnam of this maketng sym. At an early stage In the deveopmen of this marketig ssm, there weO many Imerfections. One Impota maniftaton of thes problems was the existen of pdco spreads between markets. While ther stll scope for Improvemet In the system, its operation has impwved considerably and the ead betwee mars in ainy perio ha dropped to relaiely low levei. 4. Oerauation of the offcial eange rate dses the retuns received for exports and hence reduces the amouns which exporte are wilng to supply. lbi reduction In sWpply dmnisds the amout of for exhange avalobe in th secon y maets and hence drives up its pric. hese ef&fe are illustrated in Figure 1. In tis diagam, a geneal eq_irium supply curve for foeign exchange is represnted by the curve SS while the cr-es demand curve i shown by DD. The 'equilibrium' market exchange rate coni wit these supply and demand relonships Is e, with fordexcmgeean and sedg of q, at the fixed, wodd pdres of Import used as numeaire. his equilbrium exchange ts b condio on the commodity spe iatventons such as Iport arifs and export taxes which affect the postion of the supply and demand cres. S. Overvaluatio of the offical exchange rate at eo reduces the supply of expons fom q, to q and, at a fixedword pdre of eports, reduces the supply offoreign exchne proportionay. Beco of the induced scacy of foi exange in the economy, its pdce i bid up to al. Ihe effcts of th ovenvuaion in this stac contex a equvalet to th impwkioa of an export tax of (e1-, or, equivalently, an import duty of the same maniude 0~ 8 - 185 * MAN 2.3 .~~ _ _ _ _ _ _ _ FbUm 1: ForOp Ev*wp Sup*,, . Dd and eb 1~~~~~~~~~~~ 'IO~~~~~~~~~~ I ° qo ql qQumtdf r in eidher case, there is a reduction in trade volumes of (qq) and in government revenue geation of (e Ielq. The Icidence of the ovwrvaluatdon tax depends upon the relative slop 3s of th export supply and Import demand equations. In terms of its incidence, the overvaluation can be decomposed into a ta on exportu equal to the difference bew the official exchange rate, e% and the "equilibrium exchge rate, e and an import tax of (e.-e). 6. Ahe adverse effects of overaluation of the official ehage rate for Chinas trade and welfiae are offset to some degree by a system of foreign exchange retention. histead of having to surnder aU foreign exchange earnings to the State Administion of Exchno Conrl, eqxpot entepre are now reqired to surrender only 20 percent of their forei whange ering at the official exchange rate. In terns of Figure 1, the effect of a foreign excha retendon scheme is tO increase the supply of exports and hence of foreigl excge. Te genel equibrium supply curve for foreign exchange is rqerented by the Inked curve - 186 - ANNEX 2.3 S'S, wilch b shifed to the right of the undistorted supply curve at all foeign exchge prices below .. lhe Increase In the suly of foreigp exchange lowers the seLondary market prce from e, to ea, loweing the effecdve levd of taxaon on exports. The effective price received by exporters (not shown In the diagram) rises from eo to a weighted aveage of the offifci and secondary market rates, with 80 pecent of the weight on the secondary ket rate. At a rett at of 100 percent, this price is identically equal to the secondary market exhag rate; at any lower retention rate, the swpply of foreign exchange wil be constained, implying a weighted avea export rate lower than the 'equilbu rate. 7. A partal foreign exchnge retntion scheme such as Chi's is, at best, a parti offset to the trade reducing effects of an overvalued and contrlled exchng rate system. In the diagm, this is evident from the fact that the introduction of the schem Icrenaes trade, but to a level lower than the q which would result from removal of the forelgn exchage ditrtion. In ths respect, ik equilvalent to a devaluation of the official exchange rate which partially removes the initial exchange rate overvaluation. S. Another feature of retenon schemes eviet from Figur Is tht the supply of expors wil be less responsive to the official exchange rat in the presence of a retenton scheme than otrwise. As the official exchange rate is increased, the seondary market rate can be xpected to decline, reducing the stmulus to exports. h the exreme case of a 100 percen retenon rate, devation of the official rate has no impact on ewports, which already generate q in exporwt. A consequence of the decline in theelastcity of export supply with respect to the official exchoa rate is that the gap between the official exchange rate and the equilibrium exhane rate hicreaes relative to the gap between the scondary market rate and the equilibrium rate. 9. Ihe foeign exchan mechanism with tntion can be viewed as equimvalent to eiher a uniform export tax or inport duty. The magntde of the tax in this case is the difference between the marginal (and average in this case) exchange rat paid to exporters and the secondary market excha rate which represnts the marn cost for imports, that is (E'- E,;) where Bi the weighted average of the official and the secondary market exchange rates using the retenon ratio as the weight on the secondary maket rte. 10. The magntude of the trade tax imposed by the foreign exchange regime has been calcated usig the available data on official and secondary market rates, and foreign exchange retnion rat, and the results are presented in Table 1. For the period prior to 1991, the foreip exchange reteion rate was assumed to be 44 percent, which Lardy (1992, p. 54) estimes to have been the average te of foreign exchange retenon 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 fr mainery and electronics for which an effective rate of 100 percent is aailable. For simplicity, a uniform retention rate of 80 percent has been sumed from the beginning of 1991. 11. Since late 1989, there have been two extremely important developments In China's foreign exchange system. The first was the suntial reduction In the margin between the officia and the seondary market exchange rates brought about by devaluation of the official exag rate and a related apprecatiou of the secondary market exchange rate beginning in the fDurth uaer of 1989. Ihe second was the very at increase in the foreign exchangp retenton rate frm the beging of 1991. -187 - AN Table 1: EXCHANGE RATE AND TRun TAX REL&TIONs UNDER CHINA'S EXCHANGE RATE SYSrE Officia Seoary implied Weighted Implied Ywr- exchag market rate "equiflbrl quarter rate rat tax for expors rate (Yuan$) (YU=n$) (%) (YUan$) (Yuan/$) 1987-I 3.72 S.2S 20 4.39 4.60 1987-H 3.72 5.3 20 4.42 4.62 1987-r 3.72 5.46 22 4.49 4.71 1987-IV 3.72 5.61 23 4.55 4.79 1988-I 3.72 5.7 24 4.59 4.83 1988-1 3.72 6.3 30 4.86 5.13 1988-r 3.72 6.6 32 4.99 5.27 1988-TV 3.72 6.65 33 5.01 5.29 1989-I 3.72 6.65 33 5.01 5.29 1989-U 3.72 6.6 32 4.99 5.27 1989-r 3.72 6.55 32 4.97 5.25 1989-1V 3.89 5.9 24 4.77 5.02 1990-I 4.72 5.91 13 5.24 5.42 1990-1 4.72 5.81 12 5.20 5.37 1990-m 4.72 5.8 12 5.20 5.36 1990-IY 4.97 5.7 8 5.29 5.41 19914- 5.22 5.8 2 5.68 5.72 1991-1 5.31 5.84 2 5.73 5.77 1991-r 5.36 5.87 2 5.77 5.80 1991-N S.3! 5.87 2 5.77 5.80 1992-I 5.46 S.95 2 5.85 5.88 1992- 5.5 6.25 2 6.10 6.14 1992-r 5.5 7.0 4 6.70 6.78 1993-I 5.73 8.41 7 7.87 - 12. As is evident from Table 1, the forsign exchange system imposed a very substuial tax burden on Chinse exports during the period from 1987 to 1989, with the inplied rate of export taaion plateauing at around a third in 1988 and 1989. The recognition of this problem led to an importat policy responses, including a series of devaluations of the official exchange rae from late 1989. Other policy responses at this time appear to have included increases in some tariff rates and in the tightness of nontariff bariers, which merely shifted the burden of protction from the forelgn exchange system to commodity-speciltc trade distortions. The combined effect of these measures was to reduce the effective export tax imposed by the foreign exchange system substally, to only 11 percent by the final quarter of 1990. 13. 1 / The increase in the fbreign exchange retention rate to nearer 80 percent caused a further, drmatic, fail in the implied export tax rate, to only 2 percent fom 1991-1 to 1992-U. Even with the surge in the seconday market exchange rate in mid-1992, unaccompanied by my - 188 - ANNEX 2L3 dewuaio of the official exchang rate, the implied po tax rmins atidvely small. Bocause of the of the high retnon rate now applying, weighted averago excago rate applying fr expor has Increased almost a much as the "equllbrIum* excango ra, with the result that th Implicit expottax has increased ondy to 7 percent, despie the growng gap that has emerged betwee the ofScIal and the swap market rates in e first quaztvr of 1993. 14. Ihe high b forig exchange retenon te Implied by the current forig exha sysm Is an Imotn safety vave for the t system. As Is evidet fom the eperience of 1992, even a quite sizeable margin between the official and the ndary market ecdae ras no longer rests In the imposion of a laW tax on exports. Even if the seconday market Iresed to 10 Yunl$, the resulig ept tax would be oldy ten percent. Some sicant ptical problems would be likely to emerge befo ts point howeer, with such a larg inentiv for sbitage between the two markets, and with some activites such as tousm where maket p p ar currently restricted to the official market. 15. Ihs development and refnement of the forei ex e retion sdheme has been an Im t sta in the reform of ia forei exchage sytem However, thr ar good reo to question whether the time has come for frther reform of the system With a wrigd exang retenton rat as high as 80 percen, the system can raise only a very small amount of rvene, making the use _le of such a complex and restictive system somewhat quesionae. Now that erphses and even individual have become used to the opation of a fe mat In freign exchage, there seems a good ca for moving to a completely market demined system for forpeig eange. Such a system mght InitWly be restricted to current acount transactions to reduce the likuihood of fluctuations reslidng from changing_ of futre prospects. A move to a filly market oriented system would remove the possibility of t forein excage system again becoming a significant source of distortions in foreip trade. -189 - AN= 2 3 TECHNICAL ATTACENMAT ESTllMATING TE EFFECTS OF CHINA'S FOREIGN EXCHANGE SCHM 1. As b ear fom the regoing discussion, the effes of a two tero relgn excag system suc as hat operating in China depend upon whefter enriss are allowed to reta forig exchane, or must surrender all of it to the state at the official exchange rat For simplcity, the ca in the absence of a reention scheme i analyzed flrst. Once the ature of the solution to this problem has been established, the Incorporation of a rtentio scme Is the. consided. 2. In the Absmnce of a Foreign Exchan Retenon Sceme. For dds andysis, k is usf to defe a generad equilibrium supply curve for fin excage as: and a correspog genea equilibrium demand cue as: where: S is the supply of foreign exchange derived frm import (defe as foreign excage receipts from expots and other sources less withdrawals for acmlation of forig assets) 16 is th official exchamge rats; El is the parallel maket exchange rate; D is the demand for fregn exchange; a is a pameter ummang the enomys factor endowments anad te ee of foreign asset a is the general equilbrium supply elticty for exports; 7 i a sh parmeter for feig excnge demand and 8 is the general equilibrium dasdcity of demand for 3. he general equilibrium supply and demad cur for foreign excha depicted above can be dentified with the export supply futon and the Import demand function snce wodd prices of traded goods have been normalized, widhout loss of gerait at unity. 1b general equilibrium specification maint market cleing in tie mats for facors and for ontaded goods, so ht th supply ad demnd for foreigln e go can be e sd soly in tem of the relative pdces of domestic and foreig goods, which cbages as the nomin exchange rate changes. 4. Removal of the foreg xchage distion requim at the offcial ehang rat be depredated from F. to E' whffe the p arallel maret cange re area frm 1 to E* while manni the equadity between the spply ad demand for forei exag. Using lower case vaiables to deo proporton change from the Iitial sution to th undistortd equiibrium, this implies that: Sin both th official ad the secondary maket are equalized in the undistorted equilibrium: -190- P =e' - (3) Be -(+ec - (e)E1(4) Solving (3) and (4) for the poportiondal dange in the official excunge rate required tD reach the undistorted equilibrhm yields: Substit the result obtained in (5) ino (4) yields an expression for the uequilibriumt exchge rate in the absence of the exchne rate overvaluation: a I A (1 Thus, the "equibrium" nomial exchan rate required to remove the exchange rate overvaluation can be eqpessed as a funcion of the observable official and parallel exchange rates and the genal equilibrium elasticies of export supply and import demand. s. In the Prosem of a Foreig Exchange Retention Scheme. he approach outlined above needs to be modified slghtly to take into account the effects of a foreign exchange retedton scheme. With a foreign exchne retention scheme, the supply curve for foreign exchange becomes a function of a weighted average of the official and the secondary market exchange rates with the weit on the secondary market rat equal to the shae of foreign exchage enings which entepris are permitted to retin. In this case, the supply curve for foreig exchange becomes: S=64! (7) where B, is the weighted average of the two rates defined as B, =(&E +(-O).E1). The propordondal c in E. resultig from any given proportal changes in B, and E, can be deflned as: E,,,% (E l (I _£) 0E, - 191 - A~N= 2.3 Clearly, the coefficients on tie proporonal cages In each of the exchange rate varables ar deady not constoit In this case, and allowance needs to be made for changes In these as the two excage ra coerge on the equilibrium rat. One obvious approach, wiclh will give exact results as long as the model h linear In percentage chges, s to utilize the averages of the Initial and final values, that Is: * Ž(E,, +.5! °.+ 2(E E NW)( -e).e For notational convenience, equation (9) may be simplified to: *,,- h8.-to + th(1-)e (10) Since expott response depends upon the weighted average price in the parta retention case, rather a merely upon the official exchange rate, equation (3) must be modified to: 04 - a. e (-1) Substituting fiom equaton (10) and rernging yields: C8-Ph1(1-O)I (12) If (12) Is rewrite fbr notational corenience in the form: #0 1,5A *I ~ ~~~~~~(13) - Is^ Li then eaty the same steps as were followed in the case of no retenon can be used to obtain an explicit solution for F. The result analogous to equan (6) is Equation (14) may be used to calculathe equilibium xcha rate given only hInation on the Initial offici and sonday maret exchge ra, the foreg exchng retention rate and the general equilibrium structural elsticities of the economy. 6. A discussed earlier in this an, it seems rerable to take 0.44 as a representative foreign exchange reteton rate during the priod fom 1987 to 1990 duriag which the secondary market for foreig exchge were operating and a wie range of retention rt applied to different commoditias. For the period since the begnning of 1991, a reteton rate li _i 0~~ 411~11 SI Cs27 a 08ga @{0 8l - 193- ANEX .L EECTKVE RATES OF PROTECTION CALCUATIONS: A MEMIODOLOGICAL NOTE 1. Effective rate of protect provide a indication of the exten to which protecton policies influence h aocatio of resouc towards, or away from, pardcular activi or sectors. Whe nomnal rats of protton are differen across commodites, the effcive rates appoh ta accoun the fact that protecton on Inmediae Inpu may offset, or overwheim, the benefits provided to an import etng industy by protecon on Its ou While this pplication of the technque fequenty pduces use inights int th effects of particular combimtlons of proction rates, It provides little In the way of perWective on the ovrall consequences of the prteton regime. In principle, the approach ca also be applied to more broadly defined sectors such as those Incorporated in put-out tables of the economy. In this way, an dication of fte broad intersectoral resource pulls within the economy migt be obtained. 2. In conto wih model-based approaches, the methodology is extremely siple, easing the c tatonal demads and a ,iding the need to specify a wide range of parameters. An Important limitation ofth approach, however, is th assumption ta domesicaly produced tadable goods and imort or eported goods are homogeneous products. 3. ll firt step in applying the procedure Is to obtain the rates of protecdon alying to particular to. In the case of China this must include imo tariffs; Imort tff equ en of Nontariff BarTiers; export taxes and ihe export tax equivalents of export liceng. h tiff rats were obtned from the ip tarff schedule of China and trade weighted to obtn trade weighe raws rates of taiff protecn to 16 impotn traded goods sectors. Given the rela y mino use made of eprt taxes, only one Importat expr tax was considered: the export tax of 40 perceat applied on coal. Estimates of the effective impact of nontaiff baders applying n addition to taff and expot taxes were made using the I-f-rmaton contaned in te pde comparisons reported in Table A3.7. Since the ElP approach requires a single estima of prtecd for each commodity, a judgemet must then be mad in those cases where there is more than one trde baria applying (e.g., export licfnsingd an import ta) as to which bauier is the effeve one. he esdmated rt of sistace in each cateprty and the single rate chosen as representative for the calclation of effecdve rate of protection are presented in Table 1 of his annex. 4. BasD on the representative nominal assisne rat preented in Table 1, effective rates of asstac to value adding factors in each sector were aculated by convrtg the price of each traded good to iational prices. Under the asuptions of the Effectv Iate of Prtection approach, the domestic price of any traded good is equal to (1 +t) tims its wodd pice. lbus, the wudistorted dotc price can be obtained simply by dividing the (disoted) pric of each good by (l1+t. After pefonning ths adjustment, the resida return available for paymento domestc value adding factors can be reclculated with aU tradable - 1943-1 Tabb 1: TRADE DISIOR110NS ON Tim TRDED GOODS SEcroRs (percent) Weighted Taiff ExporRVepresen- aerage equiv. tax equiv. tative import of Im of export Exprt distor- tarlff NI licesing tax tion Crops 19 0 40 0 -40 Animalhusbanry 36 0 30 0 -30 MOl 24 0 40 0 -40 Eletcity 0 0 0 0 0 Coal 15 0 70 40 -82 Petroleum min 0 0 85 0 -85 Petoleum refing 36 0 18 0 -18 Chemicals 24 0 0 0 0 Mahinery 33 10 0 0 47 Buildiugmateials 41 0 0 0 31 Wood & pulp 31 0 0 0 31 Food Prcing 59 0 0 0 59 Texties 55 0 0 0 55 Apparl 90 0 0 0 90 Paper 38 0 0 - 0 38 Miscellaneousmanuf. 45 0 0 0 45 goods prices at world prices. The effective rate of assiac simply compares the value added at (distted) domestic prices witb the residual return to value adding fiactrs at world pnces. S. A summary of the results used in the calculon of effecdve rates of protecion is presented in Table 2 of tis annex. The fis column of the table gives the repre e rates of assistance used in the caluati. Ihe second shows the value of gross output at distorted prices drawn fom Mari (1992) while the third column contains the calculated residual return to value added when Interadonal prices are received for oututs and paid for inputs. Where value added at inenatona prices is positive, the effective rate of asistan to domeically oriented firms is presemed in column (5). - 195 - AEX 3t Tab:. 2: Emcnvz RATes Ow AssirANcE To iNumy, cUnA 1i1 Gross Value Value Nominal output at added at added at distor- distorted distorted world Effective tion (%) prtices prices prices rae (%) Crops -40.00 312.62 246.60 436.85 43.55 Animal husbadry -30.00 61.95 20.76 21.46 -3.25 Metals -40.00 73.16 30.18 48.82 -38.18 Elc-tricty 0.00 18.82 5.57 -33.99 n.a. Coal -82.00 24.99 13.60 120.01 -88.67 Petoleum mining -8S.00 51.61 44.30 324.37 -86.34 Petroleum refining -18.00 44.86 10.39 -167.27 u.a. Chemical 0.00 127.23 56.37 26.44 113.17 Macdhknry 46.62 158.37 51.59 -17.84 n.a. Building materials 30.8S 34.82 16.29 -5.45 na. Wood and pulp 30.85 16.48 6.90 -0.26 ua. Food proceing 59.19 98.78 14.93 -63.99 n.a. Textiles S4.97 106.95 28.11 -17.60 u.s. Appare 89.59 49.06 6.31 -4.10 uLa. Paper 38.4S 21.92 3.34 -S.34 n.a. M-ic. manufctuing 44.90 24.92 6.71 -6.32 n.a. consuction 0.00 108.90 24.67 25.68 -3.93 Freight traupt 0.00 31.50 15.63 10.60 47.47 Pass. trasport 0.00 8.29 2.30 1.46 57.37 commerce 0.00 57.36 24.si 22.44 8.36 Mmis. serVices 0.00 11.99 9.80 9.68 1.24 Educa#tio/health 0.00 78.92 40.42 42.20 -4.21 Pub. administraion 0.00 12.70 12.70 12.70 0.00 Iousing 0.00 13.97 11.24 ll.S4 -2.58 -196- ANNX4.1 A COMPUTABLE GENERAL EQUiIBRIUM MODEL OF THE CIMESE ECONOMY 1. The computble general equiibrium model of the post-reform Chineseecoaomy utilized in this stdy draws on the recen theoredta alyses of the two-ter price systm in China [Sicular (1988), Byrd (1987, 1989), Wu and Zhao (1987)J and earlier work on foreip exchane mechanisms in cetrally planned economies [Deall and Bhgwa (1979)J. The model ibs pimly on a World Bank (1985a p. 55-6) inpuoutput table extended to producton, consumption and trade for 24 sectors, and updated to 1991 pattens of trade. Given the ;mortane of foeig tade for the development and mode of China, particular emhasis Is placed on the foreign exchange and foeig trade syms. 2. Dervis, de Melo and Robinson (1981) have demonstrated the feasibility of using such a model in the presence of foreign exchnge constraints while Kis, Robinson and Tyson (1986) have previously applied models of this type to post-reform socialist economies. 3. In developing a model of the Chineseoconomy, a number of adaptao of the tchnique used in modeling other developing countdes [Robinson (1989)O were required. The more importan of these adaptations were: adaptig the Input-output and price data to reflect secondary-market rather thn official prices for material inputs; - modeling the effects of the foreign exucange stm 4. Given the evolvig policy chges in the Chinese economy associated wit rapid economic growth, any modeling exercise can lead, at best, to a highly stylized representation Of the economy. Despite this conDst , modeling can provide many usefu nsighdt provides an explicit framework for analysis, frequenty leading to the discovery of mportant, but otherwise overlooked, causd linkges. BIoad Feats of the Modd S. The model used in the analysis covers the data and strtur used of the model and the specification of the equadons. For more details of the theory undedying the peification and of applications, see Martin (1993). Like most omputable gend equilibrium models (e.g., Denr:s, de Melo and Robinson 1981, Dixon, Parmenter, Sutto and Vincent 1982), this model focuses on th real dside of the economy, with particular emphasis on the response of the eConomy to trade policy changes. 6. The behavioral asumpto of the model nvolve cost minimion by prducs and uti m by households, and the assumpdon that there is sufficient compettion for unit profits (at matket prices) to be driven to zero. As discussed below, the ccal - 197 - b that economic agen resnd to margia market price for Inpu ad outputs. ra thanl official prc. Although it Is recognized that the Income re-distribution induced by div ces between officia and market prices may have an Inpact on demand behavior, this seood round effect seems likely to have a relatively minor impact on rource allocaton and henc has not been Incotporated in the model. 7. While enterprses and conswmers are asumed to respond In a manner consistent wth noodas theory to the market prices which they experi, these market pries are offted by distortion suh as oveauaon of he official exchange rate, the forign exchno ntes_m syste m tuti and licensing, all of which can be icrporated in the model. 8. The model as specfied Is fiey nonlinear and it was lInezed in changes and t solved fo each xperme in one, two and four steps, with databa updastg to allow exact solution via Euler's erapolaton [Pearso , 1991]. Following Armington (1969), domestdc and imported products are treated as imperfect substutes. A stadad simplfying feature of COE models adopted in this model is a two-lev opesentadon of tecology In which intermediate inputs and a composite primary factor input are demanded In fixed pwpoin to output. Changes In outp levels t require changes in the composite prmary factor input levels which, in the presence of any fixed faetor, require ustituon bee fctors. Following sndad practice in this type of model, this substitution s epresented using ctant elasdcity of substiton (CES) technology. 9. For many goods, there are marked differences between the product produced for the epo maret and tt produced for the domestic market: both in the product's physical pi 0- acs and in is less tangible maketing requirements. To capure these differences, it is tt d products sold on the domestic market are diffentiated from those sold on the export market Ihese differences are represented using a constant elasticity of transformation (CET) fiunct fom binon (1989)J. 10. The model I short-rn in chacter, withn capital assumed to be fixed in each sector. It would be poile to buid a longer-run version of the model in which the capital stoc In eac Industry were endogenous, altough invement behavior in China seems likely to be difficult to model adequately. In the absence of a well-developed theory of ivement for China, investmet in each sector has been specified as simply chag in line with total real absorption.As i common In sbort-n models, ivstment does not add to the effectve capit oclc The underlying time period is assumed to be sufficiently long for new equipment and ma y to be produced, but not brought into production. 11. Given the complexiies of the government revenue and expenditure system in China (Diejer and Szaay (1989)], an explicit set of fiscal accounts was not incorporated in the model. Imp}lcidy it is aumed t hihe authorities make whatever adjusmes to fiscal policies are needed to keep real absorption at an exogenously detemined level. A skeletal monetaty setor Is incoporated to allow deemination of the aggregae price level as a numerar. This allows th user to specify either complete control of the money supply or any given degree of 'slippage' and conequent monetary expansion. -198 - AN= X4.1 Data and Struct 12. The initial source of data for the model was the World Bank (1985a pp.55.6) table for 1981, the latest available at the dme the model was Initiasly contucted. This table has the advantage of having been prepared using the SNA conventions, rather th the mateia product system (MPS) used in most Cinse inp-output tables. A Chinese input-output table for 1981 [State Planning Commision and State Statistical Bureau (1987)1, was used to split the combined 'Textes' sector in the original datase into separae textiles and clothing sectots. 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 tha 1981, shares in the economy and the 1991 tariff rates, and exchange rate distortions were incorporated as wedges between trade values at domesdc and foreign prices. The remainder of the fin 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. 13. In the development of sandard computable genea equilibrum (CM) models, i is assumed that the economy is in equilibrium In the benchmk year. Clearly, the conventonal 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 an the madrt prices required for the analysis. To make the model operational, It was assumed tha the (agely) 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 (admttedly strong) ssmption is provided by Anderson's (1989, p.70) conclusion that the pattetn of development in the Chinese economy since 1949 has been consistent with the predictions of Western economic theory. 14. A data set c ding 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 prmarily from studies by Lardy (1983), and the Raeearch hnstitUte of the State Price Bureau of China (1988). The industrial sector price relativities were for 1988 when a well developed set of secondary markets was in operation, while the agriculral price relates were based on a relatively complete set of estmates o 1982, updated where later estmates were avaable. The exchange rates used in the model data base were based on those prevaing in eady 1991, 5.32 Yuan/US$ for the official role and 5.845 Yuan/US$ for the secondary market rate. 15. The actua price adjustme factors used to convert the model from official to secondary matret prices are presented in Table 1 of this annex. The price adjusen ctors are large for raw materi inputs such as oil, metals and coal, where official prices a e reported to be subtantialy below secondary market levels. They are also quite high for agricultura products, reflecdng 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 had been alleviated by the adjustments made in conuction of the table [World Bank (1985a, p. 51)1 16. The pnce adjusments changed ihe goss output value of the industries to which they appLied. Since two-tier pricing is not genly use in the lbor market these output value 199 - AN = Table 1: PRICE ADUgrMM USED IN TiH ADi)SD C HwN INUu-Oumtr TAKE Commodity Adjustmen Commodity Adjustment fctor factor Crop 1.78 Textiles 1.00 Animal husbandry 1.51 Apparel 1.00 Metallugy 1.60 Paper 1.10 Electicity 1.00 Miscellaneous manfacture 1.30 Coal 1.50 Constiruction 1.45 Petroleum mining 4.00 Freight transport 1.35 Petroleum refining 3.00 Passenger etansport 1.28 Chemicals 1.98 Commerce 1.10 Machinery 1.40 Miscellaneous ervices 1.00 Building mars 1.50 Education and health 1.45 Wood 1.50 Public dministration and defense 1.32 Food procsing 1.40 Housing 1.00 changes were assumedto cause changes in profits. This assumption seems reasonable in the light of the widely held propositon that the official pricing system leads to major distortions in the relative profiaility of different industries in China [e.g., Chen (1988)1. The resldtng esdmates of factor iesides (Thompson (1991)} appear to be more consistent with pectations, and with the range of estimates observed in makret economies, than e set of esimates obtained in the nonadjusted table. 17. Following stdard practice In CGE models, relatively parsimonious functional foms, such as the Constant Elasticity of Substition (CBS), the Constant Elasticity of Transformaon (CEI) and the Linear Expendtue System ES) were adopted throughout. Ihe necea elasickies of substtution in demand, transformation in output supply and the parametrs of the consumer demand system were obtained from econometric studies of China where these were aailable and for other counti where Chinese stdies were not available. The specfkic values chosen for these parameters, and the justification for these parameter values, are discusse after the equation specification in the next section. Equations and Paranmets of the Model 18. The set of equadons maklug up the model is presened in Table 2 of this annex, together with the definitions of the variables and coefficients. 19. Tne fist six sets of equations specify the fial demands for goods and the demands for intermiate goods by each sector. The fir se of equatons specifies the demands for each good by households as a function of household dbposable income and the (marginal) pries of each good. In the absence of any elasticity estimaes based on the approprate marginal prices, the set of elasticities was calcuated using expenditre elasticites for each good [World Bank (1985b)I, budget shae data at market prices, and an esdmate of the Frisch Parameter -200- 4.1ANNEX.1 (.6.9) obaned by nterpoltng from th ntaal sdmates provided by Uuch, Powell and Wims (197). By virue of the method used in their cosction [Derv, de Meo and RobIson (1981, pp. 482-S)J, the resulting imes satisjy the theoraedi constain on demand Systems: homogeneity of degree zero in prices and income, symme8ty and adding up. 20. Equadon sets (2), (3) d (4) spcIfy pr tional chan in fixed nvestment, invtmen In stocl and govenmet consuuption demands for each commodity as equd to the op tonal changes in goss rea absoptio in the economy. This behaviora hypothesis was chosen as a neutral benhmak given the coniderable uncrta y about how these categories respond to reladve prices. 21. Equation set(5) summrizes Chns trade wnvoent Chias exports of each commody i are end using a CeS fion (Ineized In percentage chages) conisblt with the Amington (1969) model. The demand for exports of good I is deteamined by the prcs of Chinu's exports relativ to exports from the rest of the world, and the tota demand for ets of tbat commodity. In Wn, world Import demand was specified as a linear Cm poprtiol changes) funcion of the weighted average price for good I, where the weights ar theshares of Chinia ar the rest of the wodd in total eprts of good L. The supply of impots specdfled as a tiction of the world price of imports, allowing for the possibility of China bein 'large in particula markets. 22. Equation set (6) specfies the demands for itermia inputs of commodities in the production process. For simplicity, and for consitency with moot models of tis type, itemediate Iputs are assumed to be used in fixed proportion to outputs, that is acoording to a Leoutief technology. Equaion set (7) aggregates Iutaiae usge, household stoc, conupionand govenmentdemand into atotal abso vaablefor each good. Valuedsare weighs are used to cownert this linear identity into percentage chage fom Becase export and domestic poducts are differentated, export demand is not a component of total absorption of L 23. Equation set (8) spcifies impect subsdion between domestic and imported prudtcooniste with the Armingt (1969) modd. Equation se (9) specifies Imperfect h_wbxmadonetween domesdcally produced products supplied to domestic and export marets. This equaion a lineaizaon in percentag changes of the contat elasticity of tasformaion (CE) fnton dicssed in the context of COE modes by RobInon (1989). 24. EuIn set (10) specifies the demad for prima ctor inputs by industry i as a function of the output level in industry I and the reloive prices of each of the primary factor Inpus and, labor and capi). R is assumed that these inputs can be aggregated into a omposite primary factor bundle using a CES fnction, and the demand equations are obined by imp the first otder conions for cost mimiaion and linearizing in percentage changes. 25. The market cleaing conditions for commodities are specified in equation block (11). In 11(a) domestic demand for good i from domestic sources (qj is equated with domestic producto of good i for the home market (x1). Simiay, export demand for good i from China must eq alChinese production of good i for export (x,). - 201 - A = Li 26. u ton (12) deals with market dearing for pmary ator. Equato 12(a) embodis dth assuaption, star in models of this ye, t labo is able to move beween diffent istries In respone to changes In the dmand for labor. While tis I undoubtedly a strong amon given the constait on the physical mobfliq of labor in China, the eplosive growth of the lwy rgaed rurl Industies in Chia has greatly Icreased the oppotunie for abor tD move between sgdrultur and Idusy, and bween Idua sects. 27. Me stock of capital in eah Industry, an3 the sck of la in each agricu Industry, are specified exogenoudy In 12(b) and 12(c). Equaton set (13) Imposes the conditon of zero pure proft on actives conducted at marginal (free maket) prices. In producdon, s condition hnolves the Inheren asuption of conan rn to scale - reonbe given the very large number of enterprises Involved In most indutria (and cetnly agiculual) acdvitie In China. Whle the t-ter pricing system geat large profs and los, dhe are aumed tD be and hence Irelevat for short-run resource allocation. 28. The zero-profit or arbitrage cnditions in exportig and importing are of vitl importance and therefore are examined in some det. The condition for the import market is simply a l1e in percentage change version of: PC = Pl(l + TL )2 wher Po is the luaded, domestic acrec price of imported good i, Pi is the 'world' prico for impors of good i, T, is the rate of tariff applying to Imports of I (plus the taff equivalent of any Im quota) and 4 Is the seconday maet exchange re. At th margin, it i assumd tdate opportu cost of all mports Involes the seoondary market rate. If an enterpise has less foeig exchange hn it demands, k must purh addional feig exchange in the secondary markel If it iniay has more foreig exchange h requires, its opporuity co of using fo exhane Is also the secondary market ra 29. In exptng, the nominal returns per unit exported dqed upon the foeign currency price received, the rate of any export tax or the export tax equivalent of exort liceng, and a weighted average of the officia and secondary market excage raes. The hiher the re of retlon allowed to eaeprs, 1th la ther wel onthe secondary market, and hence the higher the domestic currency price of exports. 30. 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 exchane rate for exports. 31. Equation set (14) includes idees to form aggregate Gos Domestic Product and asortio in cet and const prices. Equation 14(c) is used to make aggregate real absrto an exogenous vaiable in te model. Equation 4(d) requies a total houhold consumption, and the spending associated with invetment and government purchases add to total absoptiol 32. Equation set (15) defines the balance of trade, and equao set (16) Inludes Identies for trade volumes and values. Eqaton (17)(a) b a demand for mony quSaon, with a unitary income elstcity of demand imposed, is used to determine the model's numeraire price -the oomposite price of Gross Domestic Prduc - 20Q2- NP4. 33. Equations 17(b) to 17(e), deflne the price of each of the composite goods (import plus domesdc sources goods) consumed domestdcly, and the price of composite goods (export plus domestc destnaton goods) produced domestcaly and composite prices for totl abWrption and total Gross Domestic Product. 34. Equation 18 provides a money measure of welfare change, the Hicksian Compenatng Varation, which ak into accou the effects of shocks on consumer and producer wefr, and on revues fom tafs epo taes ud the trade taxes imposed by licensing and exchage rae over-valuo t allow evaluaton of the second best consequences of partial liberalization tin 1992; Andrso and Neary 1992). 35. In kddUtio the nhput-out data discsed above, the model requires that a number of lasticity paramets be specied. Ih elasdeities involved were: * consumer demand elasticIties; * elasticitdes of sbshttio beween domestic and imorte good i (base value 2.0); easticides of trausirmatlo between domestic and export good i (base value 5.0); : elasticities of substiuon between Chie exports of I and the exports of other countries (base value 10.0); * the elasticity of demad for total world exports of i (base value -2.0); * ithe elasticity of supply of import i to China se value 100); and 3 the elasticity of substittion beween pdmary factors in industry i (base value 0.5). 36. As previously discssed, tie consumer demand elasticties were derived using ex dture elasticities, budget shares and the Fdsch parameter. It seemed unlikely that reasonable estniates of the elaies of substi and transeormation for each commodity coWld be estimated saacrily using the mvilabl data for China. Ilme series of the relevant market price data are exremely scarce d, in any even, the time period over which enterprise mang have been free to allocate their resources in response to relative pricechges is short. Acordingy, the approach taken was to Impose sdected base values chosen on the basis of the evidence from other countries, leaving open the opdon of exmining the sesitivity of the results obtned to these sumpions. 37. The base value of 2.0 used for the elascity of subsicttion between domestic and Imported commodites is withi the rnge of values used for this parameter In CGE studies. Whilete values used in the Grais, de Meo and Urata (1986) study range only fiom 0.4 to 1.2, the coreponding parmetr are larger in many other CGE studies. If one accepts the weight of empirica evidence mrshled by Goldstin and Khan (1985 p. 1076) that th, aggregate eldasticity of import demad Is in the range -0.5 to -1.0 and believes ha own price elasticides for individual commodities are likely to be higer ha the aggregate aicity, then an elasticity of substiution of 2.0 as the individual commodity level would seem entirely reasonable. 38. Unfortnatey, the empirical evidence on the elatcity of transforation between domestc and export producdon is extremely limited. The estimate of 2.90 cited by Taff (1989, p. 5S6) provies some indicaon of the ore of magitude, at leastfr manufactured products. Whfle well below the value of ifity implick in models constructed without explicit - 203 -ANX4J t axs atio Inproductoit Iis well above the values of O.S and l.S usumed by Grals, de Meo and Urata (1986). Ih edece uhat the aggrega supply eticity of exports may lie in the range fom 1.0 to 4.0 [Goldsten and Mhan (1985 p. 1087)] also seems to point tO highe values for this pameter than those chosen by Gras, de Meo and Urata (1986, p. 74). The value of 5.0 for Individu commodities used in this study was subjectively set somewhat above the empiricaly estmated aggregate values given the well-known downward bias in these esmates r ting from the pervasive problem of measement errors. 39. The elasticities of subsdttuion between exports from China and other export products were set at 10.0 in the belief that Chiese expor of many products are close substtuto lor other products In world markets. his asumption is higher ta the few available diret estmates of the elasticity of export demand for Chia's exports but the likelihood that such esumates are baed downwards wedl known [see, for example, Leamer and Stern (1970, p. 56-74)1. For commodity exports, at least, the value of 10.0 does not seem usonble, and is broadly onsist wh values used in many other COE modeling exercises (e.g., Dixon et ad. 1982). 40. The base value elasdcity of demand for total world eports was set at -2.0 in light of the relatively low elasdcity of subsution between domestic and imported goods aumed in the model. Since the focus of the model is on a relatively short time period, supply adjustment in other counties 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 exorts woud generally be expected to depend more heiy on the elastiity of subsutthan the overall market elasticity of demand. 41. The very high base value for the elasticity of supply of impors to China was chosen to make China essentily a price takar in the market for imports. Given China's small share in most markets this does not appear unreasonable as a wodri assumption. 42. The elasticity of substution between primary factors was set to a base value of 0.S. Tis value was selected by Dix et al. (1982) after an exensive literature search. While it is substan y below some of the estmates prented in the developing country literature e.g. Llmasb (1988)1 it does not seem unreasonable as a short rn estma, particlady when the effects of any constra on adjustment resultiwg from the operation of the planming system are considered. 43. The model is aflexibleand adaptable itrmuetforthe analysis of a wide range of policy issues and exogenous dsocks in the postrefm Chinese economy. In the past, it has been applied to policy issues including: the impacts of echange nte policy on the demand for imports of cmmodiies (Martn 1991); th adjtment of the Chinese econmy to major shocks, such as the oil price decline of the mid 19 O(Peng and Martin 1991) and a number of macroec ic sbocks (Mart 1993). Now tha the criical trade database has been updated, the ability tO handle large changes incorporated, and a theoretically cosstent meas of welfare changes added, it can readily be applied to the anaysis of a wide range of shock to the Chinese ecomy. - 204 - AN 4.E X1 Tabb 2s Moou EQuA1ion AND VAmA 1. & _ = v_ 11~~~~~It Pgoduct aft2Qi * ~~~~~~~~~(a) Dmnd uhmtk..as i.wae U 1E,'. 2. (b) bi" t M2"dIaft 3. S ' 43.Ud8 " ' ,12. D N _ (a) -Op 1; l -Labo t 4. 41-% 1 9 (b)~~~4-1v- (a 4" osD _<-s Owl ( ' -LAii g or Wq - or w 3 n ad (o)Iqois8uDowdahm (aISp~*) hb *4tqj*iI 2 S~~~~~~~ ) - " ," '¢ * *~~~~~(b In h b * 4 (,u1.i.u Zh14 pit-P) , (a) In spog_ 3.~~~~~~~~~~~~~~~P _-p1!, ' P*tw ' V * °. S 7. se _0 * ap , *£ 4 6Wstft4 % dmmO0) so-EEI,,(q*p I 9. I ' ' so o o Pt*) O) so-EtEJrwk: I 1; wo~~~~~~~~ + 4z -e (Po + + F^zs (pi, 15. Bdnce ofT Con $mm5D *Sh I -205 - ANX4.1 16. - * A *A .ib 19. (e) T3iq auIVeba. .. (PO-E TS; r,^ * .+ .) 0b) TO4aI,W &VMS u - we%~ . + Z., +~ q wTMt(Po* gj~ (,) Vsu ENS o Volum (4 Tiaw kpl ahVa Ej; x 81 * vP OR ItA u I (s_ .r 17. ComoP V @b) PAW Dsf&totfb,g4 P" be T Jr.1D_ (a) Ad Deflat hr Toil AbSpa () Pdse Ddflat Ow ml eAbuptaof I 2 (e) PAW Dsd.O fw CiEp Of I dot t8. -eiT d a9tm 2 +4 t I Vs z Via * Vu * I t (t* ~ s - 206- ANNEX 4 Bnda oV-bs lPaa eul_u No. p4* Wod Dend fr oodi I dl' Govermneal do fo I fr D_M& (lb i fiwwo WWO S o ouehl oawaomial abiorpic £m Demod fori flo mar hum v b a 1w in l,ilto 2, do_o 2g do" otbee s GD ktnaaI,yJ (v-geibor; * Exa 1 2. cpte 3. lad 3g *a t~~oitVol RjoIiUtefrIoodI E Pow.rof th.ta Mtoan iznptof i P^aIp IS o(I + oonaltdff ete) s NoAinmigdp I if$ Prof "idetulffqulvsltw ofNs. s * Impo Vl I Vs Pow*oft doot ax an "Poo of I pa jVIporttVo I a' - gum 1 am) Iodnowm u,o xot1 vq, Powero dx. exoit tax squv. on i g i .1a Ii al oautueyj g RM pmy how v N SpofgoodIt e inadayl1 2tb I eWV" 0)atdowfso (2) 2g S dioeguunpiueflpit g Compoite pus. fw r m Ib SeonIdary MY d oublop rate I C~~C d polrmf abmdaofI 8 *a OW" zebo nuhga Pi PA *I In . 43o t oot 3, dowoe a a Tod gtAa.sfZIiOZIYSfddblE 2 + 29. 14 a hisd for 1odutdoaof i (ocapo_ue of daoused and exor) a RIimiYaddgbIaMgM Cefl3t a pJAgpegtepdwoofutu dde) I A Real absoi-sio Totale Agog ofi g cq apliyookhinuduty #60 kANIMIDesusotibyh iYJ 14 Lead an by luftryj e -tkdsy 2 Nwupply qp Hounbold daned for i 50 ForeIPGnurreny Puts. tod I cm2, RO.W. file lBoddwailfi*O CMih X Tadffbyaiv.ofHTheanI Tad?euff nto an is Toed lbor h ui aForig eowheg rention rat zxr P a an I Vs# Expor tax equlv. of? NMsan -207- -A 4.1 *I OffAoW exiangeate, (Yua.JUSS) Value Share C _d N bXM4 hM fMW SM tmow.umonolnldp A Il abapdt AA,, Shar of $108aptloo Oft deuived *om Elm mmls Of e61 d&UWJ fit ooIWot i <)Sbu fIre d laltuo mby luiss '7 * shr f oul Jiad Isfd bog 4e Shae of nhadb IS b &Sa foodIsttaboip AP Shaoe of atookdmand in total abs0rptio Ws Sb of good nud In foreg uteo of commodity I BS,' Shmraofhoau&ddcOi1lau tiotI tbosalnJ w s ogdIinfe m y apof commodity I AP Uweof hg_tompio in od _fivbm aba4 of1 cai nodi&odI AP gN Sate sfovemnhntl n total absoptIn aft i Nblemd of xm u for good I Wi, epoart weihtd fo commody I) 1*1W elstcy ofhoU demand fo good i NW,, Shao of Qina and LO.W. in word eot i w specto puie Sba otmmei S I i s tooal __ Eardoll of subatitutisbeWM Ipovst and 3(bzoa£-gi ido prodtof good I B; mnof lnduryj*wvi o o S 5 ~ ~ ~ ~ ~ ~ ~ l Shr fpeayfcovnoa itaollyof nbetenp*iay froar of8bidret'j lupuauIn "cow i $bSae f good i production to destnates NifY OfBOb11- _ betw domestl 1. evort; 2, doicdpi K GOP at f6a a" eoqNsa oflsity Of beween Chins and Shamr of hactr i in idry j in oal toDP O.W. podut In wodd mak fir i at factopkc 4 Shate of lnsduanrj in tota empbymest as ast eloApor $upply ff goodies Co ina Mt wShowof i intoedl ilpos its Ba non rots fr gvh i Share of;pmay fac in prmy aco Ewaj - 208 ANNEX 61 DEVELOPING BUYER-SELLER LINKS: THE INTERNATIONAL SXERIENCE 1. There is a growing body of literature on International trade that focusses on the natbre and imporace of buyer-ller links.I On the one hand, direct links between an exporter and an overses buyer have been shown to be an impora conduit for the difhusion of knowledge and infimaton. t is tough such contact that an exporter learns the naure of his market, that the buyer exaises direct quality control, and often wil also tramit valuable design, pacagi and production know-how. This tends to be important for conumer goods. On the other hand, it is also u that International trade has become a very complex affir. Accoringly, i ies can play the important function of bringig buyers ad sllers together. In gena, though, th a aenss of a distrbuon channel for intematonal trade wil depend on the natre of the product, volumes involved and te char stics of the markel Looking in to the futu, the most impoan conern for China as it seeks to sustain s export ddve is to daw lessons about how to access developed country markets for mnuf s. k Is uefl to briefly eamine the pceptons of developed counrAy buyers of manuctur and the halenges faing new sellers. Mm Deeloped Country BuWs Ppectve 2. There is a whole range of buyer types tat an exporting country Is facd with Lage retg chains in developed country ofte buy producs directly from m. For this purpo mny retafig chains maintain new of innationl adbuying offices worldwide. It is estmated that about 20 percent of deveoping couty expous of are sold though such a channel. Then there are the wholesale impore who buy for reale to reaiers or other ediaies. Finaly, there are producers themselves in the importi country who buy either for resale to retaflers, or for use in their own production process. bere Is a growing trend for large manufctures to takeover indepndent importing fim to buy for them. Indications are dth developed country imports by m a exceed thosough buying offices of retaing chains. 3. Price Is only one of Itree elements tdat buyers in developed country markets look for-the othe two eqtuy important elements are quality and tmely delivery. Buyers like to devdop their reatp with selles ieenaly on the basis of tust Ince y, they seemb to be wing to muture long term relatos with ideal suppliers." Buyers supply infonmatin on maketing, st , packaging and technology via such relationships to ensure hat prodt adhere to quality and dlivery standards. Buyers often provide in-plant taing and arrang for short-tOrm worker tining. This is paricularly the case for buyers that are Im! S. Buyers preer to work direcdy with suppliers, they do not like to work hough 11 Tis M swmo dws substmafy on EgS and Mody, 1992. - 209 - AD=BX. middle men Even whene buyers use wadig companies to idetify suppliers, they tend to dea diectdy with the supliers when it comes to handling defects and problems with speciflcaon ad qwity conrl. 4. Although there is this willingnss to invest in stable and reliable supply sources, not all buyer-seller relationships ae long trm The key is the development of tust between the two parties. The seiler's reputation plays an Important role in iparking the initial interest of a buyer. Even it the best of relationships, buyers almost always seek to retain a mimum amout of flexibility over their choice of sources. They often seek to restrict the maximum proportio of a seller's output they will buy and/or maint one or several parallel source of supply. Ihe Seller's Perspecive S. While direct links with buyers bring oovious benefits to sellers, there are clear limb to how much buyers are wiling to do for their suppliers. The evidence Indicates tha buyers are not motivated to transfer information that might help suppliers bypass them in the disbution channel or eter the market as competito. The onus is on the supplier to proacvvely break new ground on the basis of contacts and information gleaned from the buyer. This may not be easy. More importaty, accessing marketig channels in order to even develop a reat with a buyer Is getng increasingly diffilt.l Not only do chanel stctr vay greaty by industry, but e within industries they have become fi2agmented./ Negotiating this maize of ans re s soisticaton, and above all, information, which Is the single biggest barrier to entry fo th exporter. 6. For neophyte exporter, the more generic problem is a lack of undnding of how to interest impore or met their requirements. An empirical survey of Chinese expores found that the pereptio of new exporters, being rooted in their own domestic experience, wee quite differet from the ewpectations of developed country buyers, and an importa phase of learning about supplier sdection criteria was in order.a/ Unfortnately, there already exist a cadre of experienced pplers in Asia from whom importers can buy similar products wkhout teahing. New exporters must take more responsibility for their own learning, than did the Four tigers during their export drives. 7. In any given bndustry, access for new exporters has become more challenging, not only because of barrier relating to leaig and information. but also because of the sbrinking windows of opportuity. The very fact tgat buyers, in an ever more quality conscious 2 In te bicye ad so dustries in the US, for exam e, marke san ddeieW by price ange, and ach segmet bas its own maketing channel. The sales and imports of discont bicles, at ft. low end of t8i priceu, are handlt by the large rail chains Such as Sens, while bicyces for the premium mket segment are handled though over 6,000 i dalr Wbi eh segmet te are sune rl defined by size user (adulcid, nd end-uos (se, ninnn, et.). The de industry is AmDary conplex. 3/ Veonw-Wod el at l, 1988. hus, for emplo , Chia expotes were found to systematIclly ach lss importane to podct qual than Amrcan iporters. Even in case, wher both paries a d equal degees of m ce, such as timely delivery, diffeences of interptation We vast-t e thouh that delivering at least some part of the arder an m was accepta as g as is was due to cumsta beyond thdr control, where for te Ameria on tm deivey meat the whle order not some pat of iL -210- AN X h 1 market, are seeking to maintin long-tem relationships with their best sppliers, of itself limits opporunities for new exports. Moreover, as developed couty manufaturers come to rely more on externa vendor for technology and design, and as uatng processes become increasingly based on just-in-ime iv ntoy maament, buyes ae looking to reduce the number of suppliers they de with. bn consequence the banriers entry to new eoprtens are becoming even higher. 8. Finally, In an envionmnt In which buyes are becoming mnore selecve, country reputaion has become an im nt fScto to the success of exportes. It is quite common for developed country buyers to assume reputations in diect prportion to the level of economic development of the country. Such perceptions aggrvate buyer inertia in moving to new suppliers-buyers are more rductant to invest In learning about a new country's sources when the general impression about that country Is that it is techologically less advanced than their curent suppliers. Ihis seems to be the case even for the simplest of consumer goods, with the possible exception of garments and selected textile products. C. DEvELOPImG Buyn-RS-&aLU lzKS: TlI Roz OF o TRADG CoNPANIEs 9. In the context sketched out above, ornzations splizing in export-import can play a usefud tole in suportig the export drive, particularly of new entrants into world markets. In fact, the continued istence of such organiztion in market driven economies not only in East Asia, but aso in North America and Europe, suggestsuthat they meet real needs of even well established and expienced trading communities. :r; 10. There is a great variety of trdig companies in the maret and different forms have come to predominae in different counies. The role of the giant trading houses of sogo sosha in Japan is legdary. Koea is one country that set out deibeately to replicate the Japanese sogo sosha model and has done so succssy. Taiwan (China) and Hong Kong on the other hand have relied on small tg companes or on trading companies from other countries. The Japanese and Korean Experience 11. 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 JapanWs GDP./ The sogo sosha have heir origins in Mleiji Jap. They were created, with active encouragement from govenment, to provide an indigenous altenative to foreign merdhants then handling the bWk of th Japan's trade. Not only did the sogo sosha come to dominate Japanese trade, they have prven to be a most e institution that has adapted to the fast paced deveopmnt of the Japane economy. Over the years, the sogo sosha have evolved into complex instians with dtinctive feaues. 12. First, sogo soas ae not merdy a marin intemediary. In fact, their principal fimction is that of coordinator of whole product systems or production chains. Thei involvement eends to multiple stges and muiple unctS. Domestic marketin, provision of logtical support, and procment of ipoted mseals and equipment is dus as imnportant, 4/ Tennom Omaw (ed), 187and Y. Asaoin sarn - 211 - ANN= 6.1 if not mor important a part of their functions, as is the marketing of finished products overseas. in addition, finamce 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).I/ Sogo sowa also provide a range of other financial services, including gurant loans and eqity investme, but these are always in direct or indirect support of some sort of trading actvity, which after all is thiek primary activity. 13. Second, their function of coordinator is fulfilled within the framework of complex links with a vast client base comprised of members of industrial groups. Sogo sosha have matned strong links witi the giant sister firms of the prewar za1batsu,fil and have also created linkages with keretsu, 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 the- mutualy binding. Ibis gives both parties some bargaiDing leverage which is critical to maintainin a balance betwee the interests, as perceived by the sogo sosha, of the product system as whole and of the welfare of the individual clients.lJ 14. lidrd, the sogo sosha operate on a large scale, and must rely on large volume busnss for their profitability. While fixed costs of maitnng a worldwide marketing/ frmation network and a lage wel tained cadre of personnel are high, sogo sosha have to rely princially on low trade commissions Al for their income. High turnover is, therefore, of crWical importance to them. 15. Finally, not only are they fnctionally diversified, but they are all also general utri companies each dealing in a great variety of products. In fact, diversification has been a key to their success and it ha enabled them to spread riskt2I 2/ Typically, as much as 60 to 70 percent of a sogo sosiha'ss are com itted to financing uppiers and cutomers (Yohiro and Lifson, 1990). J ThIe largest isg sogo sosha developed as dt tuading arms of prewr zabBatsa (Mitsui, Misubishi, Sumitomo). The aibauu, which were groups compised of hierarchically anaged subsidiaes reporting to siwle family held holding comanes, were formay dissolved at the end of World War H. However, lin, albeit less fomal, bet constituent firms rurfaced in the postwar era lhe postwar ena also saw teo emgence of a scoond kind of industrial group, centerd around bakss snwa, Da-Ichi Kayo, Fuyo), linking togeter new actors oan the industrial scn such as achid and Matssita (LUfson, 1990; Ozswa, 1987). 7/ Iher is, however, an asymmetry of power between the sogo soa and teidr smaller clients. Sims, financial power, infrlmation and albmativo sources of supply invaiay favor the soge soaha, wich are in a position to apply trendous parxe these ients In the c of declig mdusies, such as textiles, such power has been mud by the sogo sosha to squeeze higher mgins rouhreduced prics, delayed paymnts, etc. f./ Typicaly, 2 per of sales. P./ Even thoug some sogo soa may hae d o specalzng i cera product goups, sch as textiles and nw silk in the case of Mitsui and Mitsubishi, they all very apidly expnded their podut coverae Sogo sauha us thei muptodu appoach to hedge and to crossubsi when necessary. Profits on imrs have been used to susdize los on exports, and high profits n certain maet _sment have been used to finac entry into new ones. -212 - 6.1 16. The great value of the sogo sosha to thei ciets s that they elp them to limit unceainty, and to reduce costs. Leaving system lhnk to the sogo sosha enables dlie to alloce scar resources to investe in plant and equipment rather than in dibution networks, and therey to reduce production costs. On th other hand, the proft of the sogo sosa deend on their ability to explok the economies of scale t accoru to them thoug managing the procurement and marketing activities for their systemwide clent ban. In ay given Industry, therfore, sogo sosha and their clie, compl one another and recognit of tis compl rity encourages the m ce of longterm relationships be e them Although the reaionshp between the two Is not mutualy bindng, client fims, lnked together in a producdon system by their sogo sosha, do not behave entirely in an atomisdc mer. Tbis fhumework tends to maximize the efficiency of production systems as a whole, and arguably has belped Japanese industries achieve greater cost reductions than either under a more rdy lntejrated, or a more atomistic framework of industrial organlzation.jD 17. Iher Is no doubt that sogo sosha have contributed to the development of num us 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 h lapaes tewtils industry. By the 1920s, sogo soshas were hading over 70 pecet of Jap's eorts and about 90 percent of the countsy' Imports. Ihe 1960s marked ante ig growth pedod for the sogo sosha, which proved to be ideal nstiutions fr supporting Japans diversificationinto heavy and processing industries such as steel, chemicals, petrchemical, and sytetic fbesjj/ 18. As successf as the sogo sosha have been, there are limts to thei perf_mace, and these have become inceaiy appaent over recent years. Over the years, the depende of Japanese manuft indusry on the sogo sos/a has been declinng and by 1990, their ar of Japans exports and imports was down to 50 and 67 percent, respectively, much lower th their shars in the early 1960s. At least two facts accout for this. First, the sogo sosha's comparative avantage lies in nmulprocess; systems and handing large volumes-hey are not suited for marketing consumer goods that are mm d in dIferentiatd and small batches. Moreover, because the sogo soiha deal with a bighly diersfied portfolio of goods, their personnel tend to be generalists. Products whose maket requr specialized techical knowledge or sustained after-sales spport are also not their strong suite. Thus, as Japans more tradional industries such as textiles and chemicals have fad matur and decline, and as the countrys exports have diverified into consumer goods, atomobiles and high technology products, the sogo sosha's dominanc has natwally diminished. Companes like Sony, Matushita and Hitachi, whose products now account for a major share Jf See LIfon, 1990, for morm an dhs. il/ Of dhu, ste has been a particulary stikng succs It is difft to imagine te Japane sed Wndsty withou th involvemt of sago sosha. Hem te sogo s*o' involvemet iclude th procuremen of io ores and cokng coa for h lare stod mils, thoe maetiog of t di r and deedl p cts abad and to smer downstam _ _ ma-keing of finished prduct of downstem indusries. In addiion, the soga sasha manage inventordes, o e speallized lod andu6nloingdoclm provide other maintain stomg fialities and a pronent membes of cortia in xlorati and devlopmentof col and ivon om Such a _ systm hasbelped mkak Jaa td seond largest roducerof crude stel in the wox with steed expors accoutin for over 10 pere of the 0Otr' texport recpts -213- ANNE of Jyps eports, have never reied on sogo sosha for marketing their products. Likewise, the sogo siza have not been able to become part of the automobile production syte Second, oalder cnts have been growing out of th dependence on sogo sosha as they themselves hav grown in sz and gained exosure to interational markets. Thus, for example, although the Mi hi Autmiles first started to market its cars through its affiliated sog. sosha (Mtsubishi Shoji), this relationship was teminaed a soon as it had built up sfficient sales Volume. 19. As a result of these trends, the 1970s saw the profitability of sogo sosha wlummet, with gross margins being cut in half. Sogo sosha have responded In various ways. tbey bave tred to hire speciaized and techical personnel in a bid for the business of high techology industries, but with mixed resultsl2/ More importantly, they have been erng new fields of actvty. Plant and project exports, real estate, large scale foreign direct invesm and thrd county trade are activities that the sogo sosha have pursued aggessively through tho 1980s. While these activities provide new opportuities for the sogo sosha, they also present new rik. Looking into the fimre, it seems clear that the sogo sosha's traditionl activities bve eached their limit, and it is likly that ordy those sogo sosha with sufficient resources to absorb the costs breaking into risky nw activiies will survive and grow. 20. Unlike Japan, the history of trading companies in Korea is rather short. In fact, the development of the Korean genera trading company (GTC) or chongap sangsa (a direct t lation of sogo sosha) is the reut of a deliberate government policy, instituted in 1975, to replicate the success of the sogo sosha in expanding Japanese exports. Although the Japanese govepnme did sponsor selected trading companies deemed ilely to succeedt/ such a qum as not critcd to the success of the sogo sosha. In the case of Korea, goverment support was the key to lanching the GMs. The governmt established minimum criteria-one of the most importat being minimum size in terms of paid-up capital and expot-for desigion as a GTC.i& Goms incenives were offred to frms meeting these cra. Incentives Iluded, priority access to governmet agency trade and foreig exchange, tax reductionsoad exemptions, and concessionary export loans. Besides, the Korean GCs waere tred as national campions with the govemment deliberately cong high visibility and pretg to their managers, while competition from foreign trading intermediaries, particularly the Japanese sogo sosha, was sysematically resticted in the early years. 21. Althou the creation of Korean Gs was inspired by the Japanese experience, the focus of Korean (Ts, unlike their Japanese couterparts, was intended to be restricted to export development. Thus, Korean GICs were not encouraged to enter such activities as trade finaing, which was reserved for the sta-owned banking sector, or transport services. IV Deasi a more apciad workfore, sogo sosha s bave not made sigificant inads ino the mareting of electic maciunery, electrics and autmobies. They have had notable mccen though in tdoe c of aircaft, military hadrware and ships, or products whose sale requireo oexelt contcts (LifonW, 1990 p. 73). Aul Ca s Johnson, 1982. if 1a. includ minimm size in tems of paid in capitl nd annual exports, minimn number of ovrseas bcbes and nuber of prodwt handled, miniaum of oveas mares and to condifion tht the firm offer public Vxc By the ealy 1980s, the only crteia that uw maintained. wen epott targets and thr regqum of a public offrig. See Kard Fi 1989. -214 - ANN 6.1 Consequenly, Korean GTCs are much less functionally diverse than sogo sosha. They do not aperate 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.Os/ A total of 13 companies won designation as GTCs after 1975. Of these nine survive. I These GMCs started out handling less than 14 pecent 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 encouage only the very largest of firms. It is no suprise, therefore, that all but one of the existing (TCs are affiliated to a dbebol, 1V the Korean version of the zabatsu. Each Korean GTC depends much more closely on its affiliated chaebol, than does the postwar sogo sosha on their respective keiretsu. Indeed, Korean GMCs function as exclusive export agents for their respective dlaebols. I 22. As was expected of them, the Korean GTCs did maka an inmrsive contribution to the county's export growth. They helped Korea diversify their exports, in particular by marketng the products of the heavy and chemical industries-almost three quaters of the exports handled by GMCs in the mid-1980s were from these industries. However, much of this performance can be atributed to active goverament support and the GTCs' very close link with their respective chaebols. The focu of the FTCs in the early years was on expanding business, without regard to cost. In effect, the GaYs competed fiercely for goerent assistance tied to export targets. In so doing they became over-extended and slashed eir 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 overcozie their worst difficulties only becase of access to the vast resources of their affiliated chaebols. Relative to their Japanese counterparts, Korean aOCs still remain weak financially epd ndent on the ahaebols. Moreover, their share in Korea's exports has stagnated at a 50 ercent since 1982.12! 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. ne Expience of Taiwan (China) and Hong Kong 23. Impressed with the Japanese experience with bi-Itrading companies and with Korea's successful effots to create their G s, Taiwan's economic planners also attempted to develop their own da maoylshang or Large Trading Companies (LTCs). In 1978, the Taiwanese government announced incetves for firms designated as LTCs, such designation being contingent upon the satisfaction of a set of minimum criteria. Taiwanese LTCs, however, never l Duk-Choong Kim in Ozawa, 1987. W They are Samn, Saogyng, Dawoo, Hyosg, Lucky-Goldstart, Sunkyong, Kumbo, Hyundai, and Koryo. JIV The ninth, which is also by fiw the smallest GTC was created by th govemnt to help organiu the expots of smal and medium scale Korean firm. IV Kar Fieds, 1989. B/ Fields, 1989. Japane sago sosha accout for roughy 8 pern, forign retne for anotier 10 peent, and oter direct and indirect chuannels for the remang 34 pet of Kores exports. -215- AN 6.1 realy took off. Of the seven fim hat were awarded LTC status in 1978, only two remained in 1986, aounti for about 1.5 pect of Taiwans eports ad less than a tenth of one pcent of the counts imports. Pvt of th .xplnaton lies in the nature of the governme's LTC policy. Taiwaes Inentives to LTCs wer very modest compared to what was offered to their Koreaon . Nor did Taiwas LTCs get the type of protection from foreign trading Itmediaies tbat te Konrean OTCs enjoyed. Besides, unlike Korea, where the interests of the GTC were pramoted kspetive of the implications for small fims, Taiwanese policy towards LTs was decd y ambivalent-LTCs were eligible for incentives only if they had small-scale firms as partners.ZQ 24. Lukewm govement policy is not the only reason why LTCs failed in Taiwan (China). LTCs fced much greater ompitn ta their Korean co parts. Roughly half of Taiwanes trade (exports and imports) is handled by Japanese sogo sosha. Foreign retailers, local namdachun tand govament agencies each control an estmated 10 percent, leaving only 20 percent to be handled by local trading companes, of which there are reportedly about 40,000, or 20 times the number in Korea and about 4 times that In Japao4w Second, Taiwans LTCs got litle or no support from local bus_n gotups, which while not as Important as those In Korea and Japan, could sti have given the LTCs a sinificant boost. 25. Themultiplicity of small trag companies is a traitthat Taiwan (China) shares with Hong Kong. However, in Hong Kong, the small trading company is the most important form of ade Intmeiary., lere are about 38,000 registed trading companies in Hong Kong, and 99 percent of them haie less than SO employees. Tese frms account for 80 to 90 percen of Hong Kos total eWpor. Unlike n Taiwan (China), the role of foreign trading ompanies is negigible. Hong Kong tWadig copies teed to be specialized, both in the type of services thy pjovkind in the number of product they handle. They are either involved in exporting or importg or reeotn. Rarely do they mix these activities. Most Hong Kong export tradig companies (ECs) handle one, or at most, two produ. Hong Kong imort tadi companies Ts), iewise tend to specalize in very few products. Hong Kong does have a few large general tading companies such as Jardie or Hutchinson, that are also involved in shipping, financing and iurace. Unlike, their Japanese oun ts, however, their role in Hong Kong's exports is De$igible, and they import goods only on an agency basis, on behalf of some of the larger local mn a s and retailes. Hong Kong, therefore, offers a model ta is markedly different to ta of Japan and Konea 26. Despite their small size, Hong Kong ETCs do not operate on a simple agency or commission basis. They fuction as fully fledged Iermediaries, assuming the risks associated with aking tile to goods. While they tend to specialize in one or two products, they 2QI They were resticed just to offering duty f&ee aces to importd input to the extent that were to be used for exports, expt arees and petaission to estish bonded waehouses. W1, Fieds, 1989. 2V3 Thebe ae two kinds in Taiwan: qJkuo aterpria groups,t and gaawn qbe or relted enepi (Fels 1989). 21.1 Rh... 1989. TMe emier of this section es on this ppe for infor; tion on HFog KXog's trading c011Pnies. -216- ANNE 6.1 ur aways on the look out for new opportuiies and will frequently switch the products hy ded in, dpnding upon the needs of ther buyes. Being small, though,theydo not maintan a large worldwide network of marketlng offices or represe ives. hey rely more on stable reatondhps wih a limited umuber of oversea buyeas. Their relatons with their local clients, on the other hand, tend to be more fleble. Typically, they deal with a vast entprise network developed and masinned ofte through strng personal relations. They tum to groups of frs within this network depending upon the requrements of the buyer. Ti fam=ework, combined with their light admineisive structure, makes ETCs very responsive to buyers and enables them to have fast response times. They are particlarly well suite to handle small and frequent orders, an important requirement for success in light industri goods, the manstay of Hong Kong's exports. 27. An Important role of Hong KonDg ETCs Isto serve as ariskcbufferbetweenbuyer and seller. They gwuatee quality and on time delivery to the buyer. In many insnces, ETCs pay for a certain percentage of defective items, or in case delivery deadlines are not met, they assume the cost of packaging the merchndie themselves or of makig anative transportion arangs. n tihe rare case of buyer nonpayment, they absorb the financi consequenc. From the point of view of loca manar, ETCs also serve an import an nical assi function. They carry out rlgorous preshipment inspection and in certain cases, Inspe the goods at vaious stages of producion, and thereby provide manuctu valuable inmation on the quality, packgin, and styling rqiement of buyers. Where manfaers require advice on oduction kw-how to help them meet buyer specifications, ETCs pay for expert assistance, which often comes from importers of machine tool and eq pment. Pnlly, most BTCs provide some kind of preshipment ficg to local maf e-mostly this financing takes the form of credit for imported input or advance payments. 28. Unlike the ETCs, Hong Kong import tradig ompanies play a more limited role. They function primarily as marketing agents for nme brand overseas mnacturers, with whom they attempt to establish exclusive relationships. In general the relations between Cs and their loca dients are not as close as between ETCs and their local clients. For some products such as machinery and equipment, however, lTCs do provAde aer sales services and advice on prduction tedcniques. 29. Ihe nature of Hong Kong's trade intermediaries reflects in large part the natre of Hong Kong's industry. Of the esimated 50,000 manu s in Hong Kong, 94 percent have fewer than 50 workers, and three quarters of their outp* is light consumer products. It is not suprising, therefore, that Hong Kong's trade is dominated by small trading companies that rely on lrge and flexible networks of small firms, rather than, as in the case of Japan and Korea, beig comprised of giant raders with close links to giant local nuaurers. D. DEvELopNG BuumfSuz LIKS: MT RoLe OF PUBLC SUPPORIT SERVICES 30. Given the diffWities that neophyte exporters can face h establishig links with foreip buyers, many countries have tuned to public intevention of various kinds to try to facilte the process. Thus, governments have attempted to provide assistance for export marketig for quality control and for other export supply services, with varying degree of wocess. -217 - ANINEX.i1 Public Support for Expot Marketing 31. Amongst developing counties, the so-caled Four Dragons have undoubtedly had the most efective public export marketig instidions. The Hong Kong Trad Development Councl (HUTDC) was set up in 1966; in Taiwan (Cia), the China Extern Trade and Developmet Counci (CETDC) was set up in 1970; the Singapore Trade Development Board (STDB) becme opational 1983; and the Korea Tade Promotion Coxporaon (KOTRA) wa esalihed In 1962, in Imitation of its Japn counteSpat, te Jpaneso Export Trding Organizao (ETO) which was set up a few years beore. The experience of these counties in maang export marketing organizations (EPOs) is uite dstinctive.2i 32. In all four cases, EPOs hame had strong private secto partipation. Typically, they amanaged by boards or councils that include represe ves of the priwvt sector. HKIWCI, for example, is an independent statutory body managed by a council comprised in part of representatives from the chamber of commerce, the tertories leading maufacrers' associationAs. CETlC, on the other hand is a foundation, half the capital of which was provided by the chamber of commerce, exporters' associations and other major busies associations. 33. The EPOs in all these countries are fin Aced at least in part by their users. KOTRA get about 70 percent of its fuds from the g )vernment. Ihe rest comes from the Kore Tade Assoition. Likewise, the bulk of CEIT Cis fauds are donated by exporters who pay a voluny minimal levy on their exports. Ass four EPOs have been kept small and inexpsive. On average, these EPOs spend less than one dola per thousand dolars of exports handled. Yet they maintain a faidy large work of overse offices and tend to employ staff tat ar sophcated and weJl educated.2V 34. Tee bsutions handle two basic functions: trade related Inormation and inquiry services, and trade promotion (trade fairs, publicity, etc.). In some cases, assistance is ao providd in the form of market analysis and development, advice on product dedgn, pacag , and training. Of the four, HKDTC has the narrowest role and it regards itsdf essentially as a matchmaker rlying for this on its computer data bank. This data bank reportedly carries essal rmation on more ta 26,000 local manaces and some 96,000 overseas traders. Foreip buyers are peruaded to divulge detaled 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 disrbted free of charge in 173 countries. An important role for HKDTC Is to foster a image of high quality for Hong Kog'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 release, etc. Pwomotion events tend to be specialized and organized in the min importing countries, although some events are also organized in Hong Kong. Ihere i an importan element of subsidy lnvolved for participan. 35. The EPOs in the other counties each have roles ta are wider in varying degrees than of HKDTC. They aU play a fairly proacive role in tms of market 2W1 See Keesing, 1988, for deils a the exprieneo of EPOs in thid. four oouies. 2a KOTRA hs about 80 officoes abroad and STDB about 20. The numbe of daffing italo in all case is low, and staff ypically bae postaduae der -218- ANN 6.1 developinuct. In the case of SMDB, for ample, an Import fmiction of their overseas offices is prospectng for Singapore companies. At any given time, eah office works for a select list of frms, for wbich k prospect up to the stae of the ia¢order. Then it monitors its successfu delivery before moving onto to other fims. Another function undertaken by these instiut is assce for product development to local manufacturers. KOTRA collects samples of products from leading retailrs aound the world and rnishes these to various local industry organizations to help them with product desW CEM1C, on the other hand, provides grants to hire export consultants, and sponsors design and packaging training and seminars. 36. 'he 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 tide to the expors that they handle. Their compaative advantage does not lie in their ability to absorb risk, but rather in their abiity 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 fims just becoming established as exporters, but who want to lean how to trade direcdy, rather than go through a trading company. 37. While the experienc of these fur couies dmotrates that appropriately designed and managed instltuons can be effective agents of expo 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 markeedng Ihmediaies. The key to heWir success has been the strong involvem of the local business community in their activities and their ability to occupy a market niche. Public Support for Quality Control 38. The imortance of product quality is ofen un ted 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 altrnative systems for ensuring product quality. Quality is an importan 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. Conseving couny reputation is aU the more important, considering that buyers tend to follow a "herd" instict, based on genera percepdons about the country and on information from other buyers.-2( Consideing the eenalties involved, therefore, public intervention in the area of quality conol can play an important role in export development. 39. Quality control can be conducted at several stages of the export chain, ranging from the preshipment stage, to the ma tng process itself. The experience pf several coutries shows that while quality control merely at the preshipment stage can have an impact on the export qualty of cetain hldustries in the short run, a wider approach to the problem is inevitable in the longer rnm. Ulldmately iproveme in export quality wot be sustained without upstream effrts to control the quality of components, upgrade the level of technology, and even to improve managemen practices. Moreover, no quality control measures can be 261 Tum (1977) ant Ega and Mody (1992). - 219 - ANNEX 6,t effective in Wpovig product quality by themselves, in the absence of a sound overall policy environment. 40. Ihe exmies of Japan is an example of a mutistage approach" to quality control. Japans dramatic success in developing a reputation for quality has been the result of a concerted and sustained efort by the government and representatives of the prvate sector in developing quality control systems at various levels nadonwide. 1he role of the government in is domain goes back to actm of the Industraw Standin 1949. This law provided the framework for developing the industrial standard system in Japan and is also the basis for stering the certfication system linked to the standard. The cerificadon has reportedly been an important motivaing factor for the introduction of qualty control systems in Japanese industry. Second, the govenment started the scheme of prize grants to the best certified factories in 1953 and has provided technical wsistance to enterprises planning to introduce standards. hid, the government bas provided an effective export inspection scheme dating back to 1955. Finally, the government has provided extensive support for the diffusion of tedcmology in the form of fully funded regional and ntonal testing and research institutions, fiscal and ficial incentives for the adoption of new techologies, and training facilities for technical and manageral staff of small firms. 41. The 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 introdce statistical quality control, by 1969, 91 percent were practicing it. Public intervention alone did not help Japan acieve these results. An Important lesson from the Japanese exerience is the importance of private sector initiative and of the involvement of the work force in implementing success quality conrl systems. In this context, the role of Japanese business associations has been particularly ignfant. The Japan Productivity Center, the Japan Management Asoation, and th Opeations Reseach Society of Japan are private nonprofit o izations tat have been very effective in introducing modern management methods in Japanese industry. Likewie, the Japanese Standards Association and the Union of Japanese Scientists and Engineers have helped spread quality control systems to all levels of the anufactuing process through their influentidal research activities, and their technical consultations. in fact, the concept of Quality Control Circles (QCC) was first itoduced and popularized in Japan by the Union of Japanese Sciendsts and Engineers in 1962. 42. in Taiwan (China), the goverments role in the area of quality control has been particularly noworthy 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 importnly, 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 tk some time to develop an efficient scheme for export quality control. An important fature of the Taiwans scheme is that it is low in inspection intensity. Not all sectors are subject to inspection. Only those sectrs are identified for this purpose in which the number of compla from buyers are disproportionately lge. All exporters dealing in these commodities are exted to have their quaity conrol 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 quaity control systems, and their ptoduct shipments are inspected on a - 220 - ANNEX6h1 random basis. From a peak of about 60 percent of exports In 1976, less tha 25 percent of Taiwans exports were subject to export qulity inspection in the late 1980s. 43. As In the case of Japan. however, the Taiwane_ govment's efforts at quaity cool extd way beyond the proion of preipmet inspection. Taiwan (China) has taken thoe qudon of its intenaton image as quality exporter very setiously. Recognzing the 'puic good nwate of country reputation, the Taiwanese goverment has itself paid no _posa to buyers for dective export products oglatilg I the ntrY.2V M Importanty, Taiwa (China) has Invested havy in a dense network of publicly funded technolog assstae and testing c . These center work closly with exporters and the Commot Inpecto Bureau on quality related iues at various stages of the m process. On the on. band, they are used extenively by the Commodity Inspection Bureau to undrtak certification and Ispecon on its behalf. On the other hand, they provide valuable tehi asisan to in specific seetors. Thus, the Taiwan Electrica Testing ceter and the Taiwan Plstics Deveopment Center, for eample, are designated by the ?nspco Burau to undertake xport qualiy ipecton for most electronics and platics poducts. Aide fiom this, the ceters are a much valued reource for mnu rs in the two stors wbo use them for advice on product design and techology Imports. 2V II Oenmet is reported to hv paid rotm sAhp t for 300,000 bicyles th a lot U. he mod in dh United Sae (so Pa and Mody, 1992). -221- ANN XI CHINA'S SEZ POLICY-AN EVALUATION A. NDmODUCMON 1. The -Spring Wind' speehes of Doug Xiao Pig early In 1992 ed national and ktenationl attention Cha's five Special Economic Zon (SEZs). Afr the events of June 4th 1989 cneatve forces who had always been opposed to the SEZs becam mor voca in their atack on the zones. ITey described them as 'bastions of capitalism" and called for them to be abolished. Deng Xlao Pings Ivention was a direct response to the atac and was aimed at mani and Ineasing the pace of 'opening up and economic refrm In China by drawing aeion to what he sees as the remarkable success story of Chia's Special Economic Zones. 2. As it was obsved that overeas Chinese had taken a maJor role in the economic development of tee of the four Little Dragons, and of other countries such as Maaysa and Thailand it was deided to locate the SEZs in places where advantage could be take of conentrdatos of such people. In fact, the inidative for he stblhmt of the fist zoa cm frm a Choine-owned firm in Hong Kong, China Merchas Steam Naviatio CompaY. China Mercha wanted to epad its operaio by tking advantage of low cost land across the border in Bao'an Couty, developing an area of Iand from which they and ote foreg Invesorm could take advantae of the Cines market and also develop export satities. Accpan by the State Council of the proposal led to the staim of the Sekou IndustrW Zone in 1979. The area around Shebou was quicldy, also in 1979, establisd as a zone In whch adatage could be taken of the proxiiy of Hoag Kong. The new zone wa Shene, lat to be established as a municipality with its own govermu This expanded zone became the frs SEZ In China, the Shenzhen Special Econoic Zone. Te second, in Zhubal , the area contiguous wih Mao, was dso establis erly In 1979, qily folowed by te tir ao in Guangdong, at Shatou which has a large and extesv diaspora. h first ouide Guangdong, at Xiamen In Fujin was esalished In 1980. Ihe fifth SEZ, Hnn isld, was ealished In 1988, but by tdat time there had been many devd_ns in the opening up policy. 3. The apparent early successes of the SEZs led to a conceptu expansion fiom the model of South East Asian export pcessing zon to someth more ambitious in tem of policies, activities and physica dimensions. As awareness of the deveopmeal impact of foreip invtmren and market mechanisms grew, the scope of operation of the zones wa extended and the application of the opening up process was extended to other areas, ially to four denated cities and then to whole coastal delta areas and pela. bis geographical expansion of the areas opened up has continued since 1979 widhout a break; in 1992 it is bng extended to the border aras wih the former USSR, and Viet Nam Howeve, although die applicadon of the opeing up policies is being extended to an ever wideng area, the specW nature of the SEZs continues. - 222 - AbNNE 6.2 4. What has always disnguied the SpecW Economic Zones as "special" is their role as economic laboratories." The SEZs arn seen as mreas wkhin which the local authorites, under the guidance and oveal control of the central govenmen and subject to supervision by provincW govenments, can encourage foreign imestment and also domestc investment from hinterland authorities by allowing them to operate in a policy environment based much more on market medms tha 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 entetprises in the hinterld. By using the SEZs as "windows" in this way the hinterland authorities and enterprises can decide which experimens It could be useful to move over the "bridge* into the greater Chinese economy. In his 1992 *Spring Wind" speeces Deng Xiao Ping reiterated that the function of the SEZs was to continue to carry out such experiments with mar ket 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 nitake in not extending SEZ teatment to Shanghai from the outset. This position Is reflected in the fact that apart from the SEZs the Pudong development area of Shanghai i the only other place in which a market mechanism experint has been introduced ito China The experiment in question being the permission given to foreign companies to engage in tadig activities, including retail trade. S. 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 ino the hinterland. Second it reviews the progress of the SE in terms of their ecoomic achievements. It then identifies problems which the SBZs have fced and assesses their overall effeveness. Finally, recommendatons are made for futre policy developments. B. Time Introducedon 6. Not all of the policy initatives which make up the "opening up and economic refomt progm have begun as experiments in the SEZs. Many reform measures have been intoduced on a nationwide basis, for example the 'household responsibility system' in agricultue, price ieforms, reforms in the management of state eprises, the development of free commody mawkets, the establishment of a private sector, and the decentrlation of the manageme of foreig trade. This secion, however, addresses only those reoms 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 p aerm reresent the removal of obstacles which prohibit, or used to prohibit, certain activities In China, for example the establishment of foreign-fnded enterprises ('FEs). And some represen incentives to encourage certain sorts of acdvity. They can be caegoized as those which relate to the c cs of t'e economic management system itself and those which relate to specific factor marets. They are covered below according to this categorization. - 223 -ANNE .2 System Experiments (a) SE2s as pients with te Economic Mnagement System 7. The establishment of economic zones repmesents acceptance by a government that there are some economic objectives which it caot achieve by relying on the domestic economic policy frame. Tbus the very existence of zones presen a mor experiment in the reform of Chinese economic policy. Initially at least, the model w the export proesing zones of South Korea, Taiwan and other Asian coutries with succefl export records. 'he single objective approach of export processing zones, was however, quickly dropped in vor of a multi-objective strategy. This was partly in recogition of the fact that China could not at that time attract investment from the sort of firms which had been reponsible for the successful development of exp3rt processing zones In other countries. It was comidered that to attract firms other than those solely interested in labor-intsive procesg acdvities, Chia would have to trade access to its domestic market for inflows of capital, manageri skill, techdology and access to int ional markets. bt was dso quicldy discovered that tee was a vast pent up demand among overseas Chinese, especially in Hong Kong and Taiwan, for holidays and red esae in China. The zones, especially Shenzien and Xlamen and late Hainan were quicldy geared up to meet this demand. The inifal industrial estate type of expot processing zone development, represented for example by Shekou in Shenzhen and Huli in Xiamen, was quicky added to and the size and scope of the zones enlarged. 8. As their name implies, export processing zones have a single objective: the developmet of exports. Within them companies benefit from incontives under various policies nOt available to compaies elsewhere in the country. Ihey are usually relatively small in area, do not include residential areas and have management powers delegated to them which give them a high degree of autonomy, especially with respect to the tratment of investm applications. By contrast, Chinas Special Economic Zones cover large areas, including agricultural as wedl as industial districts. They have multiple objectves and are nm by local governments which have to cauy the fill range of local govenmet responsibilites at the municipal level (excet in the case of Haian which is a province), as well as wlng the SEZ (b) Extr-Plan Investment 9. Peraps the most important faor diffg the SEZs from other areas of China is that investment decisions taken there are to some extent outside the State Pla As long as they can raise the extra funds from taxation, profits from enterprises they own (wholly or partilly) or from banks in the zones, the local govemen involved can establish their own infraucre development and commercial investment plans. And enterprises in the zones, including stae enterprises-owned locally or by hinterland authorities, joint-ventures and wholly foreig-owned firms, can make their own investment, production and markedng decisions. This gives the local authorities and ste entepri involved much more autonomy and flexibility than their counterparts elsewhere in the economy and is a major fctor in attracting hinterland investment into the zones. The SEZs authorities have been delegated powers, within limits, to approve investment proposas, although ihis rg has been extended to other authorities covered by the open coastal city and area policy. -224 -&N 6.2 (c) Preetl Tax Tratment 10. FFEs in the other economic zones, such as Economic and Technological Development Zones, now reeve the same tax treatment as FFEs iuvestig in the SEZs. The higher corporation tax rat which obti outside of the zones is 33 pere. The rat in the zons X set at 15 percent. Tis s the ra which obtaind in Hong Kong at the dtme the policy was ibrmulated-the aim being not to Impose a tax disadvantage on investors compared to Hong Kong, while not giving away tax revenue unnecessarily. Ihe tax holiday of 02 plus 3'-i.e., the first two yeas In profit are tax free and for the next three the tax rate is oily 7 'A prcent-b also available to FFEs in all zones anywhere is China. There are various special rates depending on the type of acdvity, for example if after the expiration of the tax holiday a firm is exporting more an 70 percent of its output then the tax rae is only 10 percet. 11. With respect to tax incentives, of far more significance ta the treatment of FFEs is the incentdve given to Chinese state eMntprsles. In the SEZs (and the Economic and Technological Development Zones) they also pay only 15 percent compared to 55 pert lsewhere (this i to be reduced to 33 percent by the end of 1993). They st bave to remt a share of their profits, if any, to their *owners* of course and in the case of Xlamea for example this dividend* is set at a rate which gives the Xiamen Municipal Government a tot reun of approxImtely 55 percet (the acta rate being negotiable, depending on the peromace of the company). The lower tax rate means that for hinterland owners of state enterprlse there is a substantW incentive to invest in the zones. (d) Trade Policy 12. Since the establishment of th SEZs firms investing there FEs automatically d Chinese state enrptises after approvsl) have been exempted from import leon their imports. This wOvem capital goods specified in the investment plan and itemediat goods and raw materias needed in productio Duty free imports of intermediate goods and raw materials re subject to appval by the Custm serice, usualy via the registaton of an impot plan on a six monthly basis. IT SEZs are treated as separate customs areas and in addition to being free of import licensing these approved imports also enter duty free Cn addition, duty free items are also exmpted from all indirect intemal taxes). If the products of enterprises in the SEZs arenexorted tb are free of all duties and indiret taxes, as they also are if sold within the zones. If they import items which are sold in the zones without ruther processinthen they pay 50 percent of the full duty and indirect tax rates. If they sell their products onto the Chinese hiterand market, atr having obtained approva as import substitutors, they pay ful tariff and idirect taxes. These duty concessions were later extended to enteprises in the EMZ of the Open Coastal Cities and to those in Science Parks, however, in these cases they are lmited to capital goods in ger and to aU imports when they are being procesed for export. There is no xemption or reduction in duty or taxes for imports or output sold in the EDZ as they are not separate customs areas. As the population of the SEZs increast dhis concesion to fims operating there becomes increasingly important. 13. The ex pot collection of duties and indiect taxes sales in the SEZs and to the hindand palels the practice in most EPZs arond the world. However, in other countries there Is iher tight control by the astms service on ihmp of raw materials and intmediat goods hed in bond In the factories or stricdy controlled by a customs policed perimeter fence aund the zone. Only Shenzen operats such a fence, the second management line,' with al - 225 - ANN 6.2 other zones operating on a basis of trust plus occasional random checks. Firms are required to report sales Into the zones or hinterland; private Individuals are free to carry their purchases out of the zone wlthout fuither payment of duties or taxes. Hahan being an island it has a natura barrier, although it is not stricty policed. The other thr hinterland zones operate strict surveUlmae over socksi of Imported raw materas and hntormedae goods held in bond. 14. A new development Is the establism of free trade zones. Two have been set up in Shenzhen. One is already operating (the Shataojiao Prcessing Zone) and a new one with a bridg dirdy into Hong Kong (the Futian Free Trade Area) is under construction. Residential developments and ret trading are prohibited in Shataojiao while Futian allows both. There are other privileges for firms operadng In these subzones, including the feedom for enterprises to lease their land direct fiom the municipality itead 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 referee to the Labor Bureau. This free trade area intiative was quickly copied in the hieland, 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 Shahai in 1992. In Waigaoqiao FFEs can also, uniquely in China, engage in trading activities. (e) Forelp Exchange 15. One of the first and most important of the policy experiments introduced in the SEZs was the establishment of foreig exchange swap centers. 16. Originaly, all enterpises in ihe SEZs could retain 100 percent of their export eanings. Laer, by 1985, this rate was also applied to firms in development zones in Hainan (before it became an SEZ), Huangpu, uanghou, and Xijiang. Enterprises in Tibet were also allowed to retain 100 pecent of the foreign exchange earnilgs. FFEs which were allowed to sel in the domestic market, however, orginaly 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 rtentio needed to sell foreign excage rights in order to obtain Chinese currency for their local costs, altho they were reluctant to do so at official rates. The foreign exchange transcton center established in Shenzhen in 1985 was intended to allow these two types of company to balance, or swap, their foreign exchage market requirement at a mutually agreeable rate. Since then the range of entities allowed to operaw in the market has increased and the sums involved have increased as retention rihts have been extended. The number of swap centers was increased to meet the increased demand and now approaches 100. 17. As far as the foreig exchange market is concerned, the only remaining advantages for firms in the SEZs is easier access to foreign banks, including in the case of Xiame to a freign-funded, joint-venre bank which can also deal, within limits, in local currency. In the case of Sheozhen, firms may also benefit from the unique situation that a foreign cumecy, the Hong Kong dollar, is a major component of the money supply and plays an important role in day to day business. Apart from tue establishment of foreign banks, which is beginnig to take place in the hinterland, these experiments-joint-venture banks and the local use of foreign cuoreny-are unlikety to spread inland in the near future. -226- ANNEX 6.2 (f) Nature of Enterprises 18. With respect to enterprises, the main feate of the policy experiment In the SEZs relates to the extent of the aulti-ownership forms allowed there. While the three forms of foreign-funded enterprise (wholly foreign-owned, joint-venture, and cooperation agreement), private enterprises, state enteaprises and collectives, are now found throughout Cbina, the ratio of wholly publicly owned firms is much lower in the SEZs than In the hinterland. Tis is true even in Xiamen where there are a large mnmber of stat enterprises which predate the formation of the SEZ. On the whole, however, Chinese private enterprises are restricted to restaurants and other retail outlets. 19. The growth of the joint stock sectr has also progressed faster in the zones than els.- vhere. Foreign ownership paicipation througb 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 exchae and more were expected to be Introduced. Similarly, although branches of foreign banks are now found esewhere 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 Iternatoa Bank. (g) vis 20. One experiment still restricted to the SEZs is the more relaxed methods for issuing visas for entry into China. For enty to Hainan foreigners and residents of Taiwan and Hong Kong require no visas at all prior to arrival. Vs for up to two weeks can be issued at the port of arrival and these can be extended for a futiher two weeks without difficulty or delay. In all four of the other SEZs visas can be issued at the point of entry, as they canwhen leaving Hainan for the mainland. In al five cases Imestors 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 smal matter in itself, this easier access to visas can be an important psychological factor, as obtaing visas abroad can be a time consuming, frusatig and expensive ptocess. (h) Deleted Govenmnt Authority 21. The four mainland SEZs are governed by their own local governments, each having responsibility for neighboring areas as well. The original, more 4irect, 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 estabishment as an SEZ in 1988. In principle the govemments of the zones have a great deal of delegated power. However the operion of that power is subject in many ways to influeace and control from the provin governments in the case of the four mainland zones and from the central govenment in the case of all five. 22. At an early stage powers to approve investment in the zones were devolved to their goverments, although this was true for nonzone govments too. Currently the zone governments can approve invesmts by Chinese conpanies up to limits of 100 million yuan for nonproductive investment (such as hotels), 50 milion for heavy industry a 30 million for light industry. In principle there are no limits on approval of forei invesments, but in practice as joint ventures involve investment by Chinese parters, and even invesmes by wholly -227- ANNE 6.2 foreign-owned firms involve domestcally financed infastucWre investment, the 100150130 limits apply in these cases as well. Above these limits central govemment approval is required, from the State Plnning Commission. Approval is also required fr,m the central Ministry of Foreign Economic Relations and Trade (MOFERT) if the investment involves imports or exports of any im covered by quotas or licenses. 23. The SEZs have considerable feedom of manoeuvre In the area of taxation. The aes set by the central government appear to be maxim 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 Shenhen, has not remitted any tax revmnues to the central government for three years. Hainan, as a backward area, does not remit any revenue to the cental government but is a net recipient of fiscal transfers. 24. Dependence on the central government for transfers limits the independence of any authority. For insuce, Hainan has been trying to reduce the size of its government, using the slogn 'small government, large society." It had reduced the mimber of government departments to 27, about a third of the number of departments and bureaux in the central government However, central government departme and bureau which did not have direct counteparts in Hainan began to make difficulties, including refusing to pass on grants on the grunds that without specialized offices there was no way of ensuring that the grants would be used for the purposes for which ihey were given. 25. 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 curtaied by the 'grandfMther clause' that any such rules and regulations have to be consit with central govermment legislaon or position, as interpreted by the bureaucracy of the central govment. For example, two 'approved' stock exchanges now exist, although there are no centrally established detaied 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 "regang the two exchanges but have no centrly establihed reglations to enforce; the operatons of the exchanges are being governed by rules and regulations devised by the local governments. And although there Is no central government law preventing the establishment of stock exchanges, the iniative 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 cental govent working with local goveanments 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 experimea. Ihe three largest SEZs, Hainan, Shenzhen and Xiamen, are now pressing for more genuine autonomy by being allowed to convert themseives Into free ports, following the call by Deng Xiao Ping to establish severa 'socialist Hong Kongs' in China. These moves are being resisted by the central bucracy. 26. On a different level, but related to the delegation of powers issue, is the issue of 'zones wihin the zones'. The first economic zone to be created in China was the Shekou IndustrW Zone. Although it was incorporated into Shenzhen Special Economic Zone soon after its establishment it kept its stat equivalent to tat of a county, until the end of its fis tea year lease. Even now, it has kept many of the considerable delegated authorities set out in its original * 228 AMU62 "les of dho Sheoou area. he China Merchns Shekou Industial Zone Investmen and Management Company was give many of the powas of a loca govenme, Includg the rights to tax, approve estments, develop laud and I uc , lice Imports for use In zone, borrow abrad, ue via and ae experimt with ecnomic refors. Th housing relfor and labor market reforms, and fledbiity of control over lad ue rghts wer takn further in Shekou than anywher else In China For examle, with repect to labor laws the Company ha labor bureau status and apart from being able to hir and flre at will, It Is not boun by any of the nadona rules on wage scales. Anyo moving Into the zone loses their standing in the natnal scales and has to work their way up again; elsewe workers moving from plac to plac keep their place in the tonal scales. Pay scales In Shekou are about 30 percent above those In Shehen. Evaluation methods have also been Inoduced which lI mor cleualy eneprise performance and individuals' wages, bonue and managemen'sincomo. Mnages cortracts are voted on anually by the workers, and can in principle be cancelled by democratic vote. 27. Housing conacts ed to fixed term work contracts were also first Inroduced In Shekou, and rent are also market dermied. The Company's power over land us is sufficiently strong tdat it was able to block a proposal of the Shenzhen municipal goverment to locaOt a power station In Shebou. The Company Is the monopoly supplier of utlities in the zone, keeping the land use fees as ime. It has an equity stake in many of the 380 companies In Shekou. I kept aU tax res fDr the firstaten years and now keeps a share of ta reveu in excess of 160 million yuanL Its reported capital rose from 60 mIllion to 1.3 bIlion yuan over its first five yes, al from reinvested profis. When Is lease was renewed in 1990 Sheku wa incorporated as a subsidary uni of Nantou county, although it kept many of ts quas- govermn funios some only on "license from the Shenzhen municipal goverment. Tbere are frequent _ between the autorities of Shenzhen and those of Shekou, most realy oaver land USe fees. 28. The proposals for the Yangpu Free ITrde Zone in Hainan involve dlegased powers sir to those obtaining in Shekou, except that the responsible agency wi be a devolved branch of the provinca goverment. This agency will also have powers to approve investms, up to $50 milon, subject only to the need to report to the State Planing Commission, and powers to license imports and export from the zone. It will supevise the actvies of the joint-venture company, to be established by Hong Kong and Japanese property deveopment companies, which would have the responsibility to develop the land, atact investors to establish there and to manage the zone on a day to day basis. Exermet8With Markets (a) Cmmdity Makets 29. Comm prices in the SEZs are mostly market detrmined. The develpmet of commdity markets is not unque to the SEZs, but it has gone fiuther tee ta in the hinte d. Thee are few, if any, controls on commodity prices (other than the smal quatities of ratoned Items), or on sevnes, in the SEZs. Recent years have seen an extensive dvelopment of free markets and priva, collective and joint-venture shops, and trtlay sctor establishm s such as resturan and haidrs in all of the SEZs. Localy produced goods ar sold free of duty and imported items are ondy subject to half he standard raL Imported Inemediate products ad captal equipmert, as aready noted, are duty free to produces in the -229 - AN= 6-2 zoms. Markt In producer goods bave developed in which commodies ar comptitively 30. Competon is lited, however; foreign etaers have not so far been allowed to establish In a. Mm firs expime with forei rtailing has now been approved for Paudog, with SlnoJapanese joit venture having ben givae permssi to open a depatmt store there. Prices In the SEZs are higher hn In nnation markets but lower ta elsewher In th Chins economy. In adition, In Xlamen there ae many sa enteprxi companie which wero in eistence before the creation of the zone and whRe they benefit from the tax and other incentives they are stll subject toplann controls. 0b) Factor Markets 31. Factor markeht in the SEZs are more developed than eewhee in China They ae si more subject to controls than markets forces and sdll much less wel developed dt commodity mark. SinCe 1978 several experimen have, however, been Intoduced Into tho market for capital, labor and land. All were quickdy transed to the rest of the ownomy.- There are currently no eperiments In force In the fatr markets In the SEZs which we not also opeating in the hintland, aIthough In most caes the ten of application has gone rhr the zones. (I) Capital 32. The eeiment in the capital market with potenaly the most far reaching effect has been the developmnt of the joint stock system. This was first tried in Shewzhen Specl Eoomic Zone. State tpries established there which passed stict cea relai g so capitd structure, profitabiity and accountg practices were alowed to sel shares to the pubic. Outside of the SEZs, firms were allowed to convert dtemsas into joint stock compes but were only alowed to trade stock on a horizontal basis among similar companies. On the bas of tie lessons leamt from the early development of the stock market in Shen7hen the Government of China decided to consolidae the eperiment with the establishment of stock dcanges In Shenzhen and Shanghai in 1991. Inially only thre stocks were approved for litg In Shanghai and seven In Shenzhen. The experim was further extended early In 1992 with the Intoduction of B shares on both exchanges, B shar be ares which only foreign aInstrtuions can deal in and for which settement has to be In freig exchange. By March 1992, Ieve, only one B share was traded on the Shagi exdcange and three on the Shenzhen cange. The adoption of reguladons requidrg firms wishing to be listed to subject themselves to accounting and auditing practices based on Hong Kong rules, and the requirement that firms wishig to Issue B shares should be audked by foreign accouning firms, also represented a sigificant extsio of the joint stock experiment. The number of A and B shares traded on both eanges, and the number of brokers accredited to each exchange is expected to increase dig 1992, includig foreign brokers for the first time. 33. Although forma stock markets on which the general public can dea have not been approv elsewere, ifomal market have developed in many cties. In the case of Halnan the Provincial Govenment, following the advice of Deng Xiao Ping to act boldly, establised a stock exchange in Halkou in March 1992, with t shars being tded. Centra i frced the closue of exchage a few months later, meawhile sral other citie, - 230 - A 2 including Guangzhou, Tianjin, Xiamen and Beijing are seeking apprva to establish stock exchags. 34. Enepri accepted for listng currentldy not allowed to sell a majority of their shares and, except for the foreign participation in joint-venu companies, Boards of Directors and manags conme to be official appointments with iron anmchairs8¶ For the 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. 35. 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 prmdces and disclosure rules are probably the most significant reform elements. These reforms will restrict the mnmber of firms willing to seek listing or which could qualify for listing. To be of sig,nificance 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 ddition, companies and shareholders should be able to appoint directors, directors should be ale to appoint and fire managers, and takeovers through share purchase, subject to takeover codes, should be introduced. Apart from the limited accounac requents for listed companies, the reforms so far have not made any significant cage to the Chinese socialist characteristics of the system under which state enterprises operate. 36. With respect to banking, there have been very few expernts either in the zones or the hinterland in the opening up and economic reform process. The banking system remains basically a centrally planned capital allocation mechanism, even though the details of its ainisaton has changed. 37. The only real experiments have been with foreign banks. Early on, overseas banks were allowed to set up Iranches and representave 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. 38. Two experiments in banking are still restricted to the SEZs. The first is the xistene of a joint-venture bank, the Xiamen International Bank (XIB) in Xiamen. In addition to the range of actiities allowed to foreign banks the XIB also operates in the Xiamen foreig exchange swap center, arranges mortes on property and, uniquely for banks with foreign fuding, carried out business in local currency, albeit as yet only on an agency basis. The XIB is currently testng the limits of economic reforms by seeking a bankuptcy order in the courts against a defaulting stte enterprise. 39. In Shenzhen, where the Hong Kong dollar operaes as a parallel acrency, the Hong Kong and Shanghai Bank is able to operate more or less as a full service bank, including acfng as a note issuer. It provides ts own currency notes on demand, inctuding 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 ermnt which is unlikely to be spread to the hinteland. -231- ANNEX 6.2 40. Banks in Xiamen and Shenzhen ar now providing mortgage finance although this is stll limited and restricted to the residental housing market. This development is possible because a secondary market in residendal property is now developing and foreclosing no longer necessarily means wdting off the loans. 41. Despite the small amounts of capital raised through the stock market and that brought in from the binterland by state enterprises investi in the zones the largest share of domestic capital formation is finaced by the banking system. This financing is not allocated according to market detmined commercia pdnciples, 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 makig cotnuous losses and show no signs of ever recovering. This is because in the absence of an effective bankruptcy law any atempt to refuse additional credit would result in nonperformig loans being tured into bad debts on the books of the banlk. Profitable firms, being mainly those able to exploit import and export quotas and other monopoly positions, fimnace part of their operton with reinvested profits, but they also tend to be fully loaned up and maiain the high bank debt to asset ratio now common throughout China. (,i) lAbor 42. In the case of the labor market the main expernts introduced into the zones bave been: the etensive replacement of life long tenure with short term contcs; the ability of firm to recruit some categories of workers on a national basis and to fire unsatisfactory workers; in Shenzhen, the abolition of guarantied gov ent placement of graduates; and the development of govermt run socia security system. 43. Experiments with labor practices have gone further In the SEZs than elsewhere in China, but the labor market is still more chacterized by controls than by market forces. The iron armchair of the cadres remains more or less unscathd. 'he iron rice bowl has, however, been broken for laborers. With the exception of workers in preexistng state enterprises, mostly in Xiamen and HaE n, the majorty of unskilled and semi-skilled workers in the SEZs are on two to three year contracts. They neaer obtain rights of residency. Tbe 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, inclusive of bonuses and piece rates, are suantially higher than workers receive in the hinterlad. 44. Hiring and firing practices are controlled by the labor bureaux. Firms are free to recrut skilled workers and managers from anywhere they want, although in practice the guaxi system applies. For unskiled and semi-skilled workers a more restrictive system applies, with tight limits being applied to employment of workers from outside the zones. In the case of Hainan the restricted market is itntded to pct the interest of the island's minoruies and encouage their absorption into the modern labor force and in Xiamen it is intended to protect the terest of existing workers and their children. In the green field SEZs, Shenzhen, Zhuhai and Shnou, the restricfson is mostly now intended to prevent the reliance of the zones on unsklded labor-intensive industries. The result is the extensive development of labor-intensive industry, on a more or less unreguated basis, close to the zones but outside their jurisdiction. 45. The experiment of allowing more freedom of mobility of workets between firms has been taken much further in the zones. This is parly because firms are free to fire workers - 232 - ANN 6 2 and workers are free to leave fim, either at the end of their contas or during them with the permision of their employers (wh compnsao often being paid to the fim If training has been provided). Such flexibility is possible because workers' welfiar benefits are wt tied to an individual firm. In the first quate of 199M, 470 of the 1037 labor COac signed in Xlamen were for workers chaning firms, some having been fired and some simply seeking beter jobs. 46. Experiment with government run socil secuity have been taken firther in the SEZs hm elsewhere in China, with the scheme, for urban workers, being more highly developed in Hahan. Most firms also run supplementary welfare, especially health, services which are available to contract staff, who have no access to fiee health services provided by the local government. The ease with which firms can fire surplus or unsatisfactory labor depends on whether they are stte enterprises or FPEs, the latter having little diffieculty 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 hbinterland with respect to labor practices Is that the greater reliance on the use of conact labor reduces the burden of their having to provide the welfare services expected of state enterprises in the hinterland. 47. 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 iFEs in Xamen early in 1992 was roughy 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 governnt provided social security benefits; different rates apply for wholly foreign-owned enterprises, joint-ventures, and FPEs based on cooperaton agreements. In Xiamen, outsiders are not allowed to work In the state enteprises. Skilled workers and graduates on the other hand prefer to work for FFEs as they do not need the same job security and are atracted by the higher skill premia. 48. 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. 49. 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. Tle gender imbalance this represents has generated some soci problems, especially when the women 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 Industria Zone in Shenzhen has an agreement with the Shenzhen municipal authority that the authority takes over the contas of women as they reach margeable age while Shebou recruits replacement teenagers. -233 - ANNEX. 50. 'he experiment of removing the plaemet system for university gradua b sdll only found in Shenzheo, wher grdua hav to find their own jobs. Exc demand for graduates In ShenAhen means that ths s no real problem; most register as cadres in the hope of avoiding the vagaries of the marke later in life. 51. 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Ossta by we1bmmm & 55x of uDborn p s3 7202M F _ a F s6 720230 F so 720262 .by wA h4% of ouabsa P $5 728049 VA__ F 567 720250 M _;.. P 568 7?0mm T l P so0 "ao P - ___ P m7 7m20 rW__*"= hfo o4s mn Far eob F "5 720310 F _ ^_ X ef " P $76 7203s S VWl -e od%worl* nb=_lY ywef9 . 994X F 57 720210 FU.MiM l m P 57 720295 F amsoOsm F Soo 720W m*3 ~ a.Usou,a F m o M 575 7202410 p- Fur*"psiutad Ahdb diaetuiudsom m. adssfw F 576 7205490 Spa ywoadsorbsM ays.at uhmprl ywlb f9.4 377 720610 Whsets el ocpWeowa koddF 578 720621 Powdo aWp dtadl selp 579 720429 Wils o a lly art F 30 720650 Ws a of el sted F Su1 72044 Fwmmwml a aiy o .f.f.m41e wk fimi. F 58 72044 wS.baelaodmy. fronM o te a- 1?f YwOCSM 831 7204150dbp4 mo nomllhwryleg .fofr t ual -S%ctd.a F 584 72051 3m&fis pog Io legektk. *eI F 585 720511 m aded P 396 7208129 Hewi. isosud isah 387 72061 Iot.m er__tua P 3911 720690 y . y_ _ * e .s4xi .-; P 389 720711 SaNI.hprodMaJ.sA mhIne>g by w.2Sk Xc<2Xbak as F 390 70712 2I_ ula ttb 25%cak P 59 720719 SmIbprod et, k.o saiosed.ag y_ wae(25Xc_ Pb. a 592 720720 SmfbpijmMm4 ysaigb t .25% b F 493 72011 Finoep,>I-omwllb355p F 394 720112 Pbsse pl.M4D..kulbr.).wdOha.4.5(ulkC/m1f.355ay P 595 72061 Piitlbpl.MmhoUv,SImO.S>1/0Ebsmwe. 51tbk, F 599 720925 Fofrlelrl.Yaa,>leI.r.w4b 1ie.ua (Il (4.7aa F 400 7202 FPrul vm.oe.e..0 t >.Ua5mka F -283- AIAL- _ _amb D 403 7202 .b _._. n. . o. hr a.E0Q=vddW.i. :Ioinm& myp 355 ut . 401 723 M roile pr d. 4.OSmm>/ 600inm . 4.75uam.mykCtmgs F 40 720835 M rom grdjh,,wImEm = Sm ftk.upSU S F 406 720341 FmreIM, .I I,250m),>10 4umdkm F 411 7t042 rlWp.4, lU, sa eIn L br >/wDOfumwe 2 t httk u F 408 ?A4 PtUp.M*uUwI.4.7SIe*k t0un P 40 704 FMleired.1 >wa4illO ithk (4.tin P 410 720345 M olhld rod.1 i* olLk.>.t>60B. )I 00 >-SWAuMt Pp35 a5 m 41 7M2012 FItl .keolr.w>60 m.1mmCth (Smyp r 414 7AW2 Frdl_i ail.c.w>l->/dm_p27$p F 4U 720914 h.>r.^ 60amvd c smy F 416 72021 FM,Udid dLc.>1D 600,3ern P 4111 7=2090 dil..or.).4 M1um(Il F 418 720923 F r wdg l e4w, I1n0.0.5I 1vmp.uee P 419 72A924 F puIuoer ,f ,>1-600.1a Q P 420 72093=1 fIledplulIuvsIsea.r .w, >IwEOm>l -mmkx355 P 421 720932 FmelM proiodsal .r.w)J>l-G,mImm< fk <3mmAw3ssus P 42 720933 FLrl ed. ir.v>l-0.thk>I0 P 423 7M2934 Pwull,d Ih cd.cs.w >u00 0.Si.kSM_ F 4i4 720941 F dgrllaiao4cr >I-Em e, >l-- P 425 TA0942 Fu .Ir >l-m e,1 tlk S F 42 720943 F.it piLce>.>10611_0.5 Cl a.a. F 42 "D"4 MM ll ridU s cilwr.w/>1-600A< Q.Sme F 42 t20990 FW Wto ledie l macil. cc >1600 . F 429 721011 FlrM ll ptdI,phtreast1* wthdw> 1-600.>l-QJ0fh F 450 721012 FMteWll grdNo4 >1aro with >1-6O0omwld0.5.mmkF 431 721030 FMtUel ped,soawlvl, -6 f ba F 42 Ma72131 P ai ted.Adhoopll/csI wxbin6o 7S.m>VT.>1-3Im 3W F 453 721039 FMt*Wprud.1ems oplm or.cd w rho.:/160lmwide. P 454 721041 FmadhdN=d_ berc4dw zIm=n Mud. >IOmwidsn F 43S mo1049 P lw udiA drQoedw with>rime_O, P MWD. m 456 721030 F bMtel preAmog/cadw Pmwckam&c&amoul> .JmOm F 457 721060 Fuler wa >/ P 438 721070 Fmroledpr d _ mcFet.>1 608 F 459 721090 lfM dpie IA..dphlftedeeMd >/-6M.wlIde, mF 440 721111 FMto rodl.U 4Aint4f <,150(w<(4600aIk>=4wm. S F 441 721112 FMtledgm i.m r.4 (60A.uwMe>14.7Smm.yp 555 p. F 442 721119 Phirll gMJM,w<6OO, S ikl3h)1>u_pS5r F 4# 721121 p .h-ulM4 s v wI_m/ F 44 721122 F toiledgdm r. <600 wio. I >t-4.7Sal.a- F 445 721129 PfQiLdipcywlit. 1"w3wp275d>u3umwSS5 F 447 721141 I.25% -S s F 448 721149 FM old pgride. . oe tolaedit co duced <600ammw F 449 721190 FMrt ede prod I/u <600=w" sos old. pPad or C m 450 72210 FMsId npro i. I h_ < amwfiK pad er oriud wth dk. no F 451 72121 Follpdd. C amwMs.smc3athk p275.)>1-3Smtuk 555 F 452 72129 FlRailcdgod./m. C mewib. cd.pld od. F 453 721n23 Flhdgroid.ih (C0muiek w pWtedor otdwithh F 4S4 7124O Forl plus cowsd F 455 721250 Firolaed pid gUs <6OOmmvi.. plated or coded - F 456 721260 Poiled pr.m (60vm . d cld F 457 721310 km. wod coilaed Idetasaesprd Sp P 458 721320 Om & U_o. hr. In kms woi _eci. of feem ulngsd F 459 721331 UaWmgeru,1.brhk u d vao of cIc c asCIw -0.6%C P 496 7217S2 WJks.IfmspW ulooeO wilh she oaltahgby w8fto.6% o P a U 495 721755 W lfiwAu.p ad w adebuemiesao >tg by wgt >lm0.6%aubhs p 4:6 721739 Wlrs.rosomeioysdeclines costes by w*u P .6% emmeI-GOQMW6k8 > I1 UM ,o 721912 IW told pPdAuausMelr.ao.w>-600nA.7SiM< U S01 7219S FI Md prod.se dim biee n oA.w>)lm6O0 ,3 /bmmA.7Smm.<1-ti k1-600 Sm60bMwld n s lick U 537 72191 Nolled pr*d.stm deAr.EObmwme..75ourer lck U 5SO 72192 Niroi prd, sJm stel ccw_>l600b.S= ash. stl *rw>-600uvu.0.SmWl600owiie U 5 722s30 an low pro doa w. colls.nfw dan hW>/-60mnm.m U 528 722540 PiAt e prod.ssoAtteh_c.o ufw tin br.>I-6EOOuwik, no U 52 72250 Rd ro prodoiMeh1iadonfwi doncol Qa rom600rawdsiam U 510 72590 PA rold prod?2. o oh fehw > 1600omwMe. mU 551 72610 rolepr of sae elsl. <600mmwide U 52 7220 N pd.t peeds <60m wie 555 7221 Rolle ,edprodmrhh l Oam e d.c60mwi. U 524 722 no rowIed pd ohdas ,ss. *on Ol rld. <600mm w1ie U - 285 - STMI= ANNM SM MS C.d. sa w D CUa 535 72699 Fst reepod. OA dbes. 406m F 563 73S51 _ 1M w w hexicfra c set.extd>'406. P 54 730519 Ie.cSrcc crwos sectwdtddk )406.4mmjm P 5" 7"020 CuhgsA,scluo o ewU exd >4f4wmoWsddil F $71 7301 Tlb a pipsjOrSW.b adlweddaLMmldh >406.4mm F 572 730639 1 ws,7cT & piporswd bei4ve doslm cd.d >406.4 _ P 573 730590 1 T&p*ei aos, d hnmd i d auds >406.4mwz 74 "70610 pe ,wedre afro e F S75 7U300 C. h w ee dorsim id fodug P 576 73060 T*S4P& holopuoflke.arm.6wed.ofclre ress P 577 ?00 _Ths.*imwowpsd%Ado okmsb4wkd.fdamesssc.a F m78 710650 1ipeAhoiJowprfles,oAsa wlofn ncos socu... F S" 73060 m oab d lo .d/s.ifao e cres se F smo 730090 lb. ipe & bdllw pfitre. o stel welded, am m A8 73O1t1 F86sgs pipsat be*. of *c= eb t fm F 512 730719 FIRbns ppsowtube, ml#. of e oatedo P 5so 730721 Fip s n pe 54 710722 lmdd ebowbaebo d of tdas l F 585 73072o blugs. pI s sl 586 7309 Ruiporefdemle l w F 537 730791 Flag ein orsteel. s 58s 730M2 l ed lbw, bad ad dhw ae r steelw F so9 730 IlIng. but wdg. fo or oe , wP S* 709 FiN prbe. i orted, P 591 730810 Brid4e ad bdss eoadm rimos P s92 73082 Tows. ad h nse% io osed F 598 730850 Doewudow& thi famn & abduo fordoom of m orel p 59 730840 wpefl pmt f heu l F S9O 730890 Susuiefps softWaucr.is(pefxbblp Pofhem o.4 5" 730900 _lmOap >)30Li o s (ex Bapg.Pp F 597 731010 oowjwmm_ c .r.lrnc >/aSOLbut I-3mwm'l)>-100w2F 617 731438 GeU,uslug.bftmsu.eca "we" uatla lnm madm.r on8 751441 Gill softs. thmbg, kmer ci uWIuL plidr crauwld VA bs 610 75442 Oda, soint. liming kr or ass) asso coe 611 751459 Bqdnsiast Ier omr ass) 611 73U 0 Ciudbscar.wiiletMc . asl Bm C 63 75259 1 bIb _inig a ike brUnn of ker crass). e fo 1pt F 614 75258 AidadosckercaiLaim 615 75214VWv1 " i l F 616 7321420di c _ kescaii.tceraetUgs.btaefn woi3vs>/lO c F 617 75"60 As dwicm Sm Pra 618 720 X144. Gdl _rs) h_as_ F a1 21 s MMkis Sawss OAT'r GMPI). U id w ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ P~~~~~~~~~~*,. $ - 287 -STATSTCAL Tdb A Cu Im eC UOI C&uGS boIU (AG_N_ d_D umuCb"gS S rkl HS Code _u~ inm D e Cyd 1 28111 So_asydoubl(oe " u w 2 S91120 P*ob S 5 59um0 P*8obuym 4 S93230 1 SoopobqM s S"O -pabrsueofpapymumanof dohlu m n .peImutaym 8 6 390610 _I _ e S 7 5960 AwyaP*mumme. inp,bhs to. S 8 M91211 Caldhluea. i oqAb"id S 9 S91212 Cdhi... aomi pbdoisd S 10 S91220bwe - (ei"coom) S 11 591251 8 S 12 591259 Cdon d_m am hpdmuy 9. 8 13 5290 Cd"e awmuwu hpgwyfom 8 14 441211 Pbvod.at 1 oatptjt iavkd wood.(Ws <6 MS is 441212 Plwood. at I _marl b o uafmaf-owod . (Ws (6a S 16 441219 ywood me. at Iud I ofetAt of _ouuro wod( <6( mm S 17 441221 P_ba I *der p aameou & I * af_1pulbuud S 18 441229 P,lh t oiw*som omwoodnu S 19 441291 Pb lok* IM wood.y 1 h if pde bmd S 20 441299 P,b 1 _ly_ae.woodv. S 21 470100 JIm wod p* S 22 470M00 CO e wood juP. d;dv g 8_ S 25 47011t Chm wodu*. soda ot a*,dphsoi. amim u.blw* S 24 470519 CImw wood Puo, sods of Mt*^ , onouorom.uuh.od" S 25 470321 _ paIcwQwd ,*.aodsor - b bhmda S 26 4739 _ _ _dwuodu S 27 470411 Cakwd WOW y, MOb6 misr ubhahd- S 28 470419 CbOaaia_. wood p*. uasgb, omomsfme S 29 47421 Cb .wood_ e S 52 470610 Cam. jlp* S S5 470691 Mullpieo OtArm .1(AiiIza 54 470692 Odeip il f_i (o ie_ S 55 4706 Su 4.i.lpalys.owfihm dui( (.te^_ arUat S ;5 4710 Waitei a dbludildkretorcoflgadpsdpepebohd S 57 470720 Wsiedsmo tp lpq.due.fdblcbinp*Aioad.a S S8 470M0 Wa sad airewdp off I uwb.aahfb'd =Wep S S9 470790 W,eMa)eriu S 40 840s10 Aw tpbdhru_w_ temovapourgmumtboUrse S 41 102 Codusmwfri rwv rpowwrum S 42 8490 Pth r-fo t_m uam S 43 $080 Mar Protwb*amudid S 44 8210 Taauaasivsmhokivb muteu& whprwm. S 45 8su2 IV eevQmw&whIgvbue.ailb&wv"eqs. imoanu- S 46 801t Caoa _ _ J __de viapIibu.hoVMs oa *udw S 47 854012 C _bdeolAWl pio ue hbukA.i.lorfw,D&W/Inimodob S Swmm GAT(1992b). I U~~~~~~~~~~~~~~~~~~~ '"Z~~~ 2 intr ;1jIIIi " 1 11 11l7 3fl jgi 38'fI~ 1 0111i0 \ g§SgSiRRi§R§00EERElF§EEl0-iESa 0289 - Lne di& ummber code Label 53 520511 Cotan yr,>/-8%,bd /,unombd, >1i714.29 dto at pu up 54 520512 Cowto rn,>/-85%l ,,714. >dtx>-=.56, no Put UP 55 520513 Cotton yau,>/=8ngd 6>dtcz>I1= 1, p up 56 520514 Cotn yam,r>1-S%,nluned,192.31 >dex>f1125, tw pu up 57 520515 Cotton y ,>/r85%,dsl unoombd,<125 dtox,put up fretail sUl S8 520521 Coon yao,>/m85%, sinl, combed,>1-714.29, not put up 59 520S22 Coton yrn,>/m85%,A ,ooabd, 714.29 >dtx>1-23256, not put up 60 520S23 Coon ya,>1-85%, ne, combed, 232.56 >dtcz>/-19M31, aot put up 61 520524 Colo yam, >/5. s*dngle, combed, 192.31 >dtox>I-12, not pA up 62 5205 Colton yMn,>/-5%uPg&,Go0lbGd,<125 dteoput up Ibr lo sa 63 52031 Cotn ya,>/8S%, mul, unombed,>1-71429 dtex, not put up, nes 64 520532 Caoton yu,>/=S5%,multl,unoombed,7142 >dtx>/123256,t put up, 65 52053 Coton ysm,>/'85%,m ,u oored,232 >dteX>/n19231,t pu up,n 66 520534 Cowaon >mdm>1d125j put up, no 67 520535 Colon ya ,>/'85%,nwl,unoombed, <125 dIx, not put up, ao 68 520541 Cotton yan >1-85%, mull, combed, >1-714d29tex, n put up.,m ff 520542 coton yam,>l-/S Miobd,714.29 >dtx>=-232X,nt putup,m 70 520S43 Cotto yM,>/-s85%6mwu*lcmbed,232.56 >dtcx>I=19.1 rAt pu upa 71 520544 Cotn ymn,>-865% ,1921 >dte>1-125,notputAAs 72 52054S Cott yau, >1-8S%, multl combed, <125 die, ad pu up, no -73 20Ci Clom yan, <85%, sngl, uaoombed,>>1714.29, not put up 74 52612 Cotton ya, <85%, sIe unoumbed, 714.9 >dtu>1-232.K at put up 75 52061 Coton yan, <85%, snle, o,6 >dlex-19.31, notput up 76 2614 Coon y, <85%, dsno, unoonbed, 1231 >dMz>/I-l, at put up 77 520615 Cotllon arO,<85%, oo,<5dt,not pu fu reasale 78 520621 Cotn yar, <85%, sbi, conmoed, >1-714.29 dtxat put up 79 526Z2 Coon ya, <85%, singl, combed, 714.29 >dtex>/-232.56, not pt up 80 520623 Coton yan, <85%, sngle, comsbod, 232.56 >dMz>/-192.1, not put up 81 520624 Coon ya, <85%, single, combed, 192.31 >dtM>1-12S, not put up 82 5206 Coon yarn, <85 X,se, >4714.29, no pu up, nos 84 520632 Collonyar,055%,mulpu ocMI ,714J29 >dtMz>1-232.56,dt put up,nes 85 520633 Cotton ya, <85%,mu_ bed,2326 >dx>19.31,ntput up,e 86 520634 Cottonyan, <85% ipe,unoombd,192.31 >dtu>1-12$,nt put upturn 87 520635 Coto yarn, <85%, muIple, unoombd, <125 dtx. aot put up, ass 88 520641 Cotn ya, <85%, mult combed,>1714.29, at put up, ne 89 520642 Cotton yan, dt>-232.56,At put upse 90 520643 Coton yan<5%m iplo> >dtMx>/192.31,Atput up,n 91 520644 Coton yarn,<85% 5 pho d192.31 >dtex>1-125,t put up,as 92 520645 coton Y, <85%, ulbtie, combed, '2sdx, ant put up, ass 93 520710 Cotn yam (ol swing thra >/-85%'j wght of cotton, put up 94 52079 Cotton y (oht w thead <85% bywtI ofottonpt up f e sle 95 520811 Pla wwcoton ,>1-8S%, not mod t lOO#hm2, unblaedw 96 52082 pin wo cotton bido,>/-85%, >100 gn2 to 200 g#I2, unblenhe 97 520813 Twill wevo coto >o,>-85%, not mom tan 200 g/m2, unblsahed 98 52081i Woven hb of coca,>1=85%, not mo than 200 g5 unbl_edk, - 99 520821 PIn weam coton thb ,>1-85%, not mom than 100 gh2, blacd 100 5208 PlaI vweae coion hbdo,>1-85%, >100 gDm2 to 200 gh2, bleached 101 520823 TwM woem coan abb, >1-85%, not ot- than 200 /m2, blabotd 102 52062 Woven bris of otton, >1-85%, at mo th 200 gIm2, blUechod, - 103 52031 Plain wvcottonbd,>/-85%, not ime 100 gm2, dyed 104 520832 Pla wem cotons Oe,>1-85%,> 100lgI to 2001m-, dyed 105 520833 Twill wee cotoa Jbe,>S-85%, not more dan 200 gIm2, dyed - ~ ~~~~~~~~~~ 29 - Rs 6 Line di numbr coot LSbd 106 520839 Wovf of coton>1-8 , not moethn 200 gAu2, dyed, a 107 520641 Pla wev oton *b,>1n85%, not so ha 100 V.2a yar dyd 108 52042 lwwaveocoton fb,>/=8S%, >100VA l to200sfn,,yandyed 109 208 TwIw - ton fb,bd,>-8%, na mo t 200 g1n2 y dyd 110 520849 Woven fbrc otton, >/=85%,n m*o fta 2 gn2, yn dyed, an III 520851 Painl wa otmon fibulk,>/85%, no moe ta 100 gSIn, printd 112 S2085 Pinwecottonn ab,>/-8%, >100 IOSm2 to200saPtd 113 520853 Twill wemv otton b,>I85%, not ma ta 200 Wrn2, prted 114 520659 wo fa of comtta, >1-5%, nt moe thn 200 s/r2,= d, as 115 520911 Pa weecoton fb,>1-8S%, moetha 200 I, sunbihd 116 520912 TwM w ea cot fbdo, >1-85%, mm ta 200 g1m2, unbind 117 520919 Wove. bd of coeon, >-85%,mare tsa 200 sfmIa unbicacd, 11t 520921 pirn wea co.to fbi, >1-85%, motoan 200 gIm2, bleced 19 S20922 Tw wev cotmn fabd=,>1-85%, mor twa 200 &W2, blead 120 520929 Wove &brc of coton, >=85%, mor tn 200 gia, bhed, nan 12 503 plin w cottonbu>/-85%, mo than 200 V.,. dyed 12 520 Twil _root_n b >1J-85%, m- gma 200 gsd,dyed i23 520939 Wom faic of oton. >1-85%. ma ta 200 l4 dyed, 124 591 Pi.in wea coto fbrio,>/-M5, mo tan 2 Vga2, ym de 125 520942 Dnmfbofoton, >/in85%,-tn 200 v.2 i* 12a 520943 Twlm wvotonao dwim>1-85% than200gIm dyed 1 520949 Woven fab of ottoc. >I-SS% . - tha 200 $I. -ym dyed - 123 520951 Pli wmv cotn fbi, >1-85%, - ta 200 V.2d pritd 129 5209 Twil wave onan fbra,>185%, - don 200 V.2, 4 print-e 130 5209 Wove. fbc of oto, >l85%, -O dtn 200 staprited, a 131 521011 Plain we coStt fb,<85% mid w rn fb,ot m ore 200 Valu ab1 132 521012 TwM wveve coton b,<885% mdx w r-r Sb,xt rnortn 200 SWA2U 133 521019 Wov of cott,<85% md wih rn- fib,<1-200 1 _baabL,n 134 521021 Pla weve cotn hb,<85% .m w m- fib,not me ta 200 W2,bl 35 21022 Twil wem ooton <85% mixd w r-m fibn moII tha 200 8I=ZW 136 521029 Wov b of coto, <85% mind with rn-r fb,(<-200 VAi bl, ass 137 52101 Plaiweavcn fb,<85% mhd w m-r fbot mathan200 fV2d 138 521032 Twl wem cotton ab,<85% mind wa-m flb,t mo ta 200 VIm2d 139 521039 Wove. hbrc of ot 20012j md 158 521149 Wove aiof oo#to,<85% md wit nfib,>200 gm2y d4e. I IlI4 3ji. .l 411 Jri(jffi§jjffl(ii sttll|}.. * SXiSX}0 ';t}fljl 1111xXXl] C04, a!S0lFXll0000|0g"B6 3* U K 0 1 IR -292 ANX Tab A2* CROz LSTor swaOND C&lmoY Dzvomw us '. LbM di* 1 l1031 Swin, ln purebrd breeg 2 10391 SwIn, liv eept prmbd eding wighin lss Oh 50kg 3 1392 Sw_ne, ive excp purbred beei weging 50 kg or mo 4 20210 3.in srs and hlf cuseu, 5 20220 lovin aft bone in, Iroen 6 20230 lwIn cu bonoe_, fre 7 20321 $whn caraes and haf caca , fen 8 20322 Pans, solde and cu treof of swin, bowein, fozen 9 . 20329 Swinmcuta,frcnmnes to 20721 1, domesto, whmol, foen 11 2072 Tu1 , domesei, whole, ham 2 207 D D , gSee and h-, fows domesi, whol, frozn 13 20810 Rabbit ot ba ma ad edibl mea offal frieh, chid or fozn .14 30613 Swmps ad prawns, froe, in s, c- not, Inluig boiled in shl is 30619 rustaceans m. froaz, in elU or nt inolding boiled in shll 16 40900 1oey, sna 17 010 BDrse, hai and was ofpi, hos or boar 16 S0O0 Gutb, badde and _mnhs of annmals xcept fish whole or in pieeos 19 50510 eWte used for saudwn cleanedAdlsind or tred hr p_v 20 50390 F dsibul,_d_dp*&o 21 71190 Vetablo mmiue puvis pesvd but at f Immediate osumptn 22 71200 VeSab and Vms dred, hut no huthr piwd s 23. 71320 ChIkpass, drid, sheded, whher not skind or stpt 24 71S31 Udullgeen pam beus dMd dweldvAwh n dmskdspit 25 71 a d (m ) dledsl,wh r aot d skind or plit 26 60I231 Walntinol f_s or drled 27 MM2 W_ulu, hus or dred, shed or -d 28 00240 Chbeosuts, bash or dried whmhw or nohell or 29 9040 fP of th gem. Capium or Y'_mb, dred, conshed or gpound 30 100810 1uokuhat 31 12210 Ground_ in l t roasedor oterwiso ook'ed 32 120220 Groundm s ld th or not braekent romastd or otewie cokd 33 120740 Ssamum sds, wher rnot broke 34 130190 Nau gum, rein, gum-s and balam, ept arabi gum 35 140420 Coto incr 36 151540 Tong ol"b fretou,we_tro not refind,but not chemialy modifid 37 170199 Rdefnd ur, in solid om, ur 38 200B10 Mushoms prepad or prserved odhrth by vir or aceoc acid 39 2006 Asa pepad or prwA by vinegar or aced ad,not fo 40 200590 Veg rwsl of veg prnps oA by vinea/cet acddn foz 41 200611 Groundnts mh pewp or preavd_,s se dp or not 42 25i0100 lt (cg bb a m us) pure sodium oudesa wate 43 28250 Iogno banes ad; ades, hydroxides nd pexide 44 28461 Cerm compouds 45 26460 Comd of nreew met eof ytl da Of tee meal 46 331A ov dd i o ofpwem 47 33012S uenUobof oder wh 48 360410 Frks 49 30610 Res 50 366 Rosin uk or t_in acid lb S1 3830 Bgum 52 380690 Rei acdsAdedvosin deb esoin spktron oibru gM - 293L dt ZU8 53 410110 Dovw skins, whol, aw 54 410310 Oat or kid hides said skin, gaw, nm 55 410710 Swi later, nes 56 420329 Glbves _,d t for spot,of letero of composition leatr 57 430110 Rxw mink fturskins, whole 55 430211 Tanned or drese mink ftrakin, wholot assembled 59 440310 Plboi, tetedlpal doe. 60 440320 LAp, poles, conirouw n 61 440331 Lop, Masui, lht & dar ed & a B sw a 44032 Lop, whit Lan, Menuu, Saaya yelow M oanti & Alan 63 440333 Logp, Kaui , Raind, 1aur, Toek, Jank& Maess,, de. 64 440334 LoW, Okus. Obeohe, Sael Sipo, Asijou d'Aibqu,, toe. 65 44033S Lop, Tfs=, Mansomn, Llomba, Dbto, L3mba ad Amobs 46 44091 LAW, Oak 67 440392 Los, Bemb 6 440399 Lop, nonoonifhtous nee a 440610 e, s ay wa, wood not hqp_ 70 44060 rue, , wood a 71 440710 Lumber, conieous (softwood) 6 mm and thce 72 4401 Lumber, Mot ed (lh & dark. Manti Babe, Whit a, eue. 73 440M Lume, Okoum', Obee, Sapdl, 8ipo, Aso=s d'A*ku Makl, de. 74 440723 Lumber, Daboea, Mahoy (wictmnl spp) Imb NW BJs 75 440791 Lumber, Oak 76 44072 Lumber, Beech 77 440799 Lumbw, nononhros n 75 440810 VYne, conir (softwood) less han 6 m thick 79 440820 Venee, topica woods, s than 6 mm tc so 440890 Veneer, nonoofmus nee, les than 6 mm hdick 1 460120 Meu, taing and sovcem of vetb plitin moati 82 48010 Paper, utigS (conrrugat medium), in ros, scmical, muated 83 510210 Plnanimal hi, not carded r combed 84 S1030 Pin animl hi, calded or comed IS 520821 Plai we con fbris >I-SS%, not -gtn 100 M, blache 86 520622 Planweae otone fb,>/-6S%, >100 gmato200 m2, bleah 87 5208 TIM wav fabA*,>l'S%, no Pmo 200 /2.bleachd SS 5208129 Wove fab of coon, >1-85%, nt mom dha 200 mt2, bleached, - 89 P 92 Pliniweave colaon fabric,>I-65%, mrthn200 m2, blebed 90 520922 Twillwaeton fabrics,> 185%, -mt 200 g)u2, Mlh4e 91 52092 Wovn fabrc of cotton, >1-85%, mor ta 200 gan, blaobhd, 92 S21Q21 Plain weaeot b,<8S% w mm b,not m n200 2,b 93 5210=2 Twi wea coton fib, < 85% md w rn-n b,nt -m th 200 g&2.b 94 52109 Wov brs of coton,<85% mlxd wit mm fib, <1m200 g/m2, bl, aszo 9f 521121 Pin wea coon fob, <85% WM w men f,bnodotn 200 g/m2,bd 96 521122 Twi womv cotton fab, <5% Smxd w -S,m orfg tho a 200 gln2gbltoed 97 521129 Woven fibrs of cotto, S% m;nd w mm fib, tha 200 glM,nes 98 S30310 Jut ad othe textil bast fis, nw or reed 99 530390 Jule and othbr that fbb,Aot b spn stw and wase of tha fbs 100 531010 Woven fab of Ju or of thr Mtile badt fibes umlcbed 101 531090 Woven fbis of oe or of othr i badt fiber, oA unibeaied 103 S70110 Cap of wol or fn animal bha, bad 103 570241 Carpes of wol/fi ana hair,of won ple 104 S70291 Carpe of wool or flawAima hair, woven, made up, ae 105 570310 Capet of wol or fA anima hair, tMd - 294 - AM= US' Lin digk numbr c0d. Label 106 5705O0 Carpt nd oth for overi, nes 107 700311 Coatg sh heetb maawld colurd, eto. havs an abseibgeOt layer 108 700319 Castga seets nonwited se 109 700320 Cuat glass sheO wired 110 700330 Can profils 111 700410 Drawn gsm sheb,colourd, do. hvg an absoxbg or renfdg lye 112 700490 Drwn gss in sheetse 113 700510 Float gls, do. in shes,onwd hxvg an absobent or reflig layer 114 7001 Flat glass, do. In sheb, naonwed coloreWdtougbout th mm, do. 115 700529 la gbss, de. in het, nowired ncn 116 700530 Float ss, et. in heets, wired 117 720110 PI" n, oy, by wght <1-0.5% phosphous in pimaq fm 118 720120 Pig imon alloy,cotg by wgst >0.5% of phosphou in p dima fom 119 720221 Frso, containing by wigt more than SS% of slion 120 720229 1 4os , mes 121 720280 Fev1tngsten and korn,ils_untn 122 730110 Sheet pllUig8s whethrnot dukd1punhd1mad fm asam elents 123 730120 Angle, shap and sections, weded, irs or sted 124 730210 Rails, irO or st 125 730220 Sleep (cros-tes), iron or sted 126 730230 Switch blades,crosng ftog,point rods & other crossg piooes, or s 127 730240 Fish s and sole pates, iro or se 28 7320 R or ban_a constution mate of in or stee, e 129 730300 Tubes, pipes and holbw profl of cast irwo 130 730410 P ,line t or oel,smns,of a kind usod fw or ,s pipeines 131 730420 Cas,tubg & di pipe ¢ or lsmbr use, in drIlg for . or S 132 730431 Tubeplpahollow profles,Unas,_ sl,cd r,of te oss eo o,nes 133 730439 Tubcs,pp & hollow profilesi. or nassmlsof ct. oss sactionnes 134 730441 Tub x,pipe&ollowprofo,i stem,smd cdler of ir coss set,nes 135 730449 Tubes,pipeAhollow prof lesines seumlsof it aross oet,ne 36 7351 Tubes,pi holwprofi,s,(oA sain) amls,cdcr of oc* ocos soet 137 730459 Tubc,w profo,as,(ot staine) smb,cro co seatw 138 70490 Tubs, pipe & hollw pofiles, iroa or steel, nub, see 139 70M11 Plpoeinel_so ba m ube wld,Intx c sect,dia >406.4mnm 140 73052 Pip,ni/slonglludinnlly wld w mt/ekt c secAx dla>406.4m 141 730519 1ele or s,inet cit cross seckwld,ext din >406.4mm,nes 142 730520 Cass,It/ct cita sect,wld ext di& >406.4=oiUllgs drm 143 730531 Tubes & pipe,i or s,onsghdinlly welded,atral dis >406.4An,n 144 730S39 Tube & pipe,i s,welded,veted or sim losod, di >406.4mmnes 14S 730590 Tubes & pipe, I or a, rivetd or sim closed, ext di& >406.4mm, noe 146 730610 PIpe,i, or s,wddivetd or aim clsdnesfofl or gs pil 147 730620 C gtubigi or s,wided,ivaed or sim clad,es,fwr oigs drug 148 730630 Tube,pipe & hollow profila,i r n,wed,of cie cross sectnes 149 730640 e,peolowrof,i sL, fci seo n 150 730650 ,p*ipeblwprofmlls,s(olt stin) wld,of cie ro sectnm 151 730660 Tubes,pipe & bollow pro,/s,welded,of aon cite cross sct,n 152 730690 Tube, pipe & hollow prAles, ir or eel, welded, em 153 790111 Zino ao aloyed unwougt contAini by weg 99.99% or mm of zlio 154 790112 Zs not alloyd umnou co g by w tles tha 99.99% of zinc 1 79010 Zinca unwroug_t 156 800110 h aoyed unought 157 80000 lh ba, rods, profil and wim 15 810110 Pob400, tung1te (WOlfa) 295 us & 159 810191 TIaqe (woltism) unwuogtno a&t sim*l Adied;waaddsop 160 810192 Tua pr pao bArd at siml sintud 11 810193 Wr. g (wo 162 81099 hWten (wolfram) and autlo tU eof e soww "aT (ss2b). - 296"v ST CAA Table A2.7: UIVT OF PRODUCTS SVUBDT TO STR PRICE COMROL Ta1rns Descriptions A. LIn aOfgdd9ua bjfc t to Stat Pdc by aiff Lies 1006 Rice 1001 Wheat and meslin 1005 Mae (corn) 1201 Soybeas, whether or not broken 5201 Cotton, not carded or combed 2401 Un tobacco, tobacco refse, tobacco, not semed/stped SOOO10 Stem ffiatnre silk 50020020 Tusah sk 0902 Tea, wher or not flavored e=ct mos to state-oied retail pri: 11010000 Wheat or meslin flou 1006 Rice 100 mlan (corn) 1201 Soybeans, wheh or not broken 4403 Wood In the roug, whether or not strpped of bark or sapwood, or roughy 23040000 Olcake and oher solid reddues, whedher or not grund or In the form of pelets, reut fm the etaction of soybean oil 3. lbe gag ubiect to statefixe reaipri: 4403 Wood in the rough, whether or not stipped of bark or sapwood, or roughly 44039990 Other wood 4407 Wood sawn or clippd lengthwise, sliced or peeled, whether or not planed, sanded or finger-jointed, of a tickmess exceeng 6 mm. 4412 Plywood, veneered panels and siml?r lamnted wood -297 -A.sncMM Tariff lines Description B. List gf Mandaid Producls . bW Product of Light ndusr (11 ms 25010010 Salt 34022010 Synthetc detergents in power form 8528 Telesion receivers (Including video monitors and video projector), whether or not incorporating radiodcast reoceivers or sound or video recording or reproducig apparatus 4801 Pape 4813 Cigare pap, whether or not cut to size or in the form of booklet or tubes 48114010 Iuling paper and ppr board 4701-4705 Wood pulps 4707 Waste and scraps of pap or paproad 283531W0 Sodium triphosphate (sodium tripolyphosphte) 2902 Cyclic Hydrocarbons 2827 Chlorides, chloride oxides and dclode hydroddes Tedilgs ad knitted fbrics (7 lems) 5205-5207 Cotton years 5208-5212 Woven fabrics of cotton 5111-5113 Wovenfabrbics of cardd wool or of cardd fine imalhair; woven bcs of combed wool or of combed fine anal hair 5109 Yar of wool or of fin animal hair, put up for ret salo camtical8 and medica oip (2 items) 3003-3006 Phceutcal 9018-3 Medical eipment &Udl&ti m2terial (A ites 39074000 Polycarbonates 39052000 Polyvinyl alcohols, wheter or not conainig unhydrolysed acetate grops 39021000 Polypropylene 20337100 6-hexetam (esplion-ap m) 39094000 Phenolic resins 29212210 Nylon-66 salt 29161400 Esters of methacrylic acid 3901 Polymers of ethylene, In primay fs Tariff lines Desrtipdom C. Us of PXdS of HOWy bdSy Mig la ROMAWSe Ile Catey Subject to State-Fixed Ex-factory PrIceM (21 k=ems 2701-2705 Coa and fads manufacted from coal 2709-2711 Petoleum oils and gases 2501-2530 MIneral product for chemity 3101-3105 Chemical ferizers 2801-2851 Inorganic dhemicas 2936-2941 Organic chemicals 3901-3914 Plastcs and copolymers 3203-3215 Pigments and other coloring ma 40014017 Rubber and ales thereof 3701-3707 CanematograhIc films and goods 2515-2530 Building matrias 4403-4418 - 6801-6811 - 7001-7008 - 7201-7205 Pig iron and granules and powers thereof 7208-7216 Stee and ardcles thereof 7218-7229 - 2601-2621 Ores and semi-poduct of iron and onfoerus metals 7401-7406 - 7501-7504 - 7601-7603 - 7801-7804 - 7901-7903 - 80014005 - 2704-0010 Coke and sead-coke 7407-7419 Products of nonferous metals 7505-7508 - 76D4-7616 - 7805-7806 - 7904-7907 - 80064007 - 8101-8113 - 8501-8OS Electric motos, generaors and pars thereof 890148905 Ships and boats for civil use 8802 Aircrafls for civil use 3601-3603 Explosives and device thereof Ike« QUMec Sbbxx to Soso-Fixed }B$d Prices ! Rena 2701-2716 MIbneal foes and products of their disrbution 3102-3105 Chemicl ferize 3808 Herbickies and odtes Source: GAIT (1992b). - 299 -a Tab An Tu. DV4 ExcEAG R Rea R..l Nomna" Nomnal WWW.lbe affeatv. fhcll offeeSivo effectiv Year .ohq maM now ta at (eeomuaar reaw (Secodw quutw Kwt. aoutMs (o l) a4 ) (oficia) ma*et (aul (Wa (YWnS) 198010 (IMO10) 18-10 1980-10 19874 .72 525 4.59 4.05 2.87 5.41 3.84 19874fl 3.72 5.53 442 3.6 2.78 5.31 3.73 1987W11 3.72 5.46 4.49 4.07 2.78 5.44 3.71 19874V 3.2 5.61 4.55 3.97 2.78 5.24 3.48 198I 3.2 5.7 4.59 3.97 2.64 5.17 3.38 198- 3.72 6.3 4.86 4.13 2.S9 5s. 3.09 1988l 3.72 6.6 4.99 4.67 2.44 5.60 3.16 198-v 3.72 6.65 5.01 4.72 2.63 5.48 3.07 1989I 3.72 6.65 5.01 4.95 2.64 5.67 3.17 198 3.72 6.6 4.99 5.3 2.77 6.06 3.42 189-l 3.72 6.55 4.97 5.24 2.95 6.36 3.61 1989-V 3.89 5.9 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 19904 4.72 5.81 5.20 3.96 3.14 5.45 4,43 199041 4.72 5. 5.20 3.70 322 5.27 4.39 19904V 4.97 5.7 5.29 3.33 3.08 4.84 4.24 19914 522 5.8 5.68 3.19 2.92 4.75 433 19914-f 5.31 3.84 5.73 5.33 2.91 4.95 4.33 ;9914 5.36 5.87 5.77 3.30 3.03 4.93 4.51 911-V S.39 5.87 5.77 3.15 3.02 4.79 4.36 199241 5.46 5S. 5.85 3.12 2.67 4.80 4.37 1992-f 5$.S 6 6.10 3.13 2.75 4.84 4.26 199i 5.5 7 6.70 3.07 2.46 4.76 3.81 1993-1 5.73 841 7.87 3.16 3.17 4.88 3.3S Soum- hteraaina.lM Fund and Staff Balimet. - 300 - Table AM.1: Avu&Gz TARE Isms On) BSchapter CTrde weigted Unweigted 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 Not IS trade wo wd tariff levels have been estdmad uig first quater import data for 1992 at th sh.diglt HS lve, and Ibomaton on t rates at the ndgl level of both provided by the Customs Directorate. Soure: Chine Cstoms Deorate and staff esimates. - 301 - SIMSTM AS Table AS.2: CnNC AVERAGE TARw RAMES (by S1TC 2.dlglt codes) Line STC Rev 2 Simple avg Weigted avg Diffence numnber 2 digI tariff rte Taiff Rae RImple-eIghted 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 36M53 15.69 20.8 14 22 46.56 50.15 -3.6 1s 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 S1 19.S9 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-ANE Line SrrC Rev 2 Simpl. avg Weghtoed avg Dl_fee number 2 digk tariff rat Tifff Eate ime-weightd 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 SO 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 78.52 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 averag ed Sourc: Cblnum Customs Dlrctoaze and staff uatimatm. SALQ AM=E Tabh A33S CesIs m v Paamrc= uU An "omu (by two4gbEIC (vMamS) uiqosj' noU 8so NW 2 lad avio aVIO Im i uavow 8 mE Jeta ubtB * dodo 4e 1985 1985 195 GVIO AMVIO IWtO (C_ZlO (Cgw _*N (Zlm4 tIIs (Oas= 0 v ) (S (= = (1Ue 65 0 UM UO.aldbtfy fboi f oo I I Mmi" _PaAm Il,57" ,942 65 431.1 1.4 0.2 10.9 2 2 DabylPdauia.bkto'gp 1,179 402 29.1 5.1 0.1 7.2 3.2 S S PA ad Ps auu 1,;,? so 41.5 257.9 0.1 I1.4 73.8 4 4 Cub ad pmpmdaa 24 9,004 9037 10074 3 10.0 11.2 5 5 Vqpitmm*i( 4.011 1 47.5 7816 0.5 3.5 57.2 6 4 8 a"daPPaM. 8.119 2.765 26.1 74.1 1.0 95 2.7 7 I COMM. t ocoa. q. 3.40 ?1160 38.5 414.7 0.4 53 5.7 a 8 P.uigan rfffor aImh 2.487 847 78.7 224.6 03 93 26. 9 9 N1L edhbpadb 2253 767 21. 20 03 2.8 8L 10 11 BUv_ 13.713 4.669 20. 67. 1.7 0.4 1.4 U 12 ToSS w _ mW umtutsa 20.226 68 175. 329 2. 2.5 O 21 Ou"ohudd"ml - . . 22 .iio., faukiw . 12 25 Ibw. ei 371 12 205.5 3.5 0.0 1t. 2.8 13 24 Caki weo d 8069 2.748 812.5 8.9 1.0 29.6 0.3 14 25 P*Wmd wuapar 58 20 208.8 0.2 0.0 1056.8 1.2 is *2 Teinbadwt_ 18,5--9 6,SJ0 1,031.8 1.076 2.3 16 17.0 16 '2- Ceu suiswr almb, 5.17?3 t1762 S.4 250S 0.6 2.9 14.2 1 58- Mr2 lfSuu one ma_ 3.640 1.239 520.7 214.8 O4 42.0 17. J 29 Cmbmbnimvag. A. 4.662 1,S88 91.4 77.0 0.6 5.8 23.7 19 42; COdal o_d briqugu 24" 8S.06 59.7 324 3.0 0.7 4.0 20 35 Pwwn_=d pdw* 45.980 15,6S? 464 6.3005 5.7 0.S 40.2 21 34 . _nuadon-u A 1.556 530 1.9 3.1 0.2 0.4 0.6 22 35 Ulio&ko. 29.195 9.941 5.9 2.6 S.6 0.5 0.0 23 41 A^ la E . . . .s 24 42 FI_d ssaslhd. t 6.8ts 2.320 83.4 125.5 0.8 3.6 5.4 25 ,43 P _asoa.d Vq. an*. 197 67 2.8 c9 0.0 4.1 1.4 26 S Oq.sdhuflb 8S94 .66 648.9 291.7 1.1 21.2 9.5 27 52 Inoqabda ab 9.067 5.088 298.5 270.5 1.1 9.7 L8 28 55; nIua,o.hrprda 6,198 2.110 I112 72.7 0.8 6.2 3.4 209 54 M > pb.. prod 8.0S8 2.751 961 280.8 1.0 35 10.2 30 * ' S m & P e dCite.. 56S12 1.911 24.1 10s.5 0.7 1.3 5.4 51 56 P. l_m. arnaAcIm 5.2 4.503 1*375.6 1.7 1.6 S0.5 0.0 32 57 Robdvpo i t832 283 1.4 106.0 01 0.5 37.4 33 58 1bdh Ia, do. 11.705 5.906 1544 39.1 1.4 S3.8 1.0 $4 5t t Hmbuatbba. 7,446 2.55 2 114.8 0.9 9.5 4.5 35 61 IA,iu *r d ,nl O GI. 4,37 t.75 155 42.1 0.5 9.9 3.1 $6 62 kkSar__u 10.646 3S2 14.1 48 1.3 0.4 L1 57 63 - Wooi_o _ 2.39 898 244S 23.9 0u. 27.2 2.7 58 4 A15,99 SA44 407.2 142.1 2.0 7.5 2.6 S9 65 Toy. e . 97,651 3.52 1, 3 3.051.7 t 2.0 4.5 9.2 40 66 t u__n 41.542 14,146 . 215.1 5.t 2.2 1.5 41 6 b1 tded s5.4 18.747 6650.0 110 6.8 S5.5 0.6 42 68 N _P0faMmAtl 24220 6"a8 1,5 195.6 2.S 22.5 2.8 43 0 Mi _ _.aimsa 21,021 7,158 2.5 400.0 2.6 4.6 5.6 44 71 FNWarpuaugaqupu 514 5.160 SO0 465 1.9 59 0.9 45 72 anu OW go" b&Ule 26. 9.182 4,92.6 142.6 3. 53.4 1.6 46 73 UmivoMngmilay 11534 3.962 287.8 27.1 1.4 7.5 07 47 74 Gmmalhd. mdamn 1to95 6.447 98S" 47.9 2.5 15.2 0.7 48 75 011 ..SI *a. qed*m 1,532 522 9S6. 9.8 0.2 185.4 1.9 49 76 Tadees. qupm I,803 4.70 2,589.5 8S. 1.7 508 1.8 SO 77 Ebounmdmyw.d .6,746 nt,51S 129.4 114 4.5 10O 0.9 5t 78 hAl vaMa 29.775 10.19 5,S6.0 55 3.7 302 0.5 52 79 Odm1 - i - otmum 7.830 2.6t6 167 1953 1.0 513 7.3 a5 U Pldmbhg. bomi n Iagquip 1.6U25 5 5. 55.2 02 6.4 6.4 54 82 P mt.pal, A 4.735 1.612 32.7 8S 0.6 2.0 5i 55 8a TtwWooodklma 8sO 2,5 25 79.0 1 0.9 27.0 56 84 Cda mi- 16501 5,551 It.8 1935.9 2.0 02 34.9 57 85 Pim-o 9801 3T .0 24. 1.2 0.2 7.3 58 87 _ _bmtaa 76 2.407 835.8 31.8 0.9 34.7 1.3 19 So U aou oepGP" ob. ao. 5,95O 1,545 m71.0 63 0.5 27.6 4.5 at l ome u figdmulolam 21,640 7?.9 500.1 8U.9 2.7 6.8 11.0 95 NOSid ahemhm - 97 NoAt d f ...wb . . lo Ye1b4 19014d O St37L2 21111985 11111 _Sl 5aw91>$0Stt9 ImN ClStC *18 -304-. 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117 8 3.6 08 0.1 * 41 hnW.I fo .b 0.0 , 24 42 i 13.657 2.855 947 M5 0.7 332 5.4 25 43 Su_ 1 534 112 2 5 0.0 1.6 4.7 3 51 O __e 24.131 5.045 1t131 38 1.3 22.4 16.6 7 S2 246 5.148 2t5 842 1.3 4.2 164 23 5a 162 3.519 244 36 0.9 69 10.4 39 54 _ 2.604 4.726 417 643 1.2 .8 .6 so 5S .. - 15.212 3.187 37 319 0.8 2.7 10.0 S1 t 6 .912 75 2.60 25 1.9 34.7 0O3 32 5?7 u 19? 41? 0 211 0.1 0.0 50.6 33 a 18bh. ai , 30.d15 63 149 265 1.6 23.9 4.2 "4 59 Chioamldabau 19.524 4.02 474 240 1.0 11.6 59 S5 61 Ia_ s h . 9.63O 2.A35 374 13 0.5 183.5 9.0 s6 ea 1 __mw 2#2A 4.750 SO 19 1.2 1.1 4.1 37 a W0 Uo&oeAam 4,112 1,010 564 273 03 55.8 27.0 so a _ 40.141 332 745 294 22 8.9 3.5 89 Ss 212175 44.35 5A6 7.219 t1A 12.2 163 40 d Na 1mhsWirAm 37.0 13.310 453 1.316 4.7 2.5 7. 41 6? 114 11.75 2755 2.52 1.22 7.1 10.4 4.7 42 Ss Nhinsb 5.990 1. 706 579 59? 3.0 4.9 5.1 * * eMlmm Iua. 43L1 10.206 540 1437 2.6 S.3 14.1 44 71 nuIhg uPs 32.120 6.715 1.730 271 1.7 25.8 4.0 45 72 8w d SuS" 5524 I,55 5.9A6 1.8 3.0 51.4 12. 46 73 25.947 S.007 791 261 1.3 15.8 5.2 4? 74 l d _A 33.934 8.150 1,732 536 2.1 21.2 6.6 43 75 S 3.675 763 m 775 0.2 104 43. * 76 1 bhomuu. miS pul 34.627 7.239 2.540 262 1.9 35.1 36.2 So 77 a e& .4.729 17.714 2.050 1.219 4.6 11.6 6 .9 51 78 PAPA 6819 14.333 4.234 3,814 3.7 29.8 26.5 S2 79 w&1 3.987 1.630 252 1.0 42.7 6.4 53 31 _, 1 b o.57 765 59 12 0.2 7.7 16.7 54 33 IbuIhm.prntasraf 3,137 1.71 72 322 0.4 43 13.9 55 33 Ieldgoads. buduqa 207 426 6 335 0.1 1.5 90.5 5s 84 sa i m92 8,216 4a 9.669 2.1 0.6 117.7 n 3 Ra_ 2.661 4.7"8 9 t,957 1.2 0.2 41. 5 t7 husbum*a 13.44 2.790 733 193 0.7 2.3 6.9 N 3 pq b t ,450 1.76? 330 1t149 0.5 49.8 65.0 * Mb._grndsaw 49.671 10.334 1,456 3.726 2.7 14.0 359 97 Ka duS Lbm . .0.0 Tod MJ2 DE fl Ll IMh I I2 Nbx Nm*wvbmhtWObs - Y4.732 MmllJ: Muhl I d-------- -u-1_ SluCRWMa. s. 1 ad.rnTiS.ohIamIhda WI_d km 1935 IsimIsIC_ SUM Sl_ffal. 0 TOas1I20hr whimit pm wssY2 990.AY 23,M - 305 - s uA Tab MA CW;M LW 0r ftopuc SuwUC, To imuT LaEw (as of Aus 1992) (ArngdW Accordng to HaauoWlrd Commodil Dsucipon and Coding System) Saw 11 Code number ndw Decrpi 1 30559 FIh se, dried whtw ot not saltd but not sukd 2 50690 Boneo & honmore dJ yd,unwk,deaudo ipy pwdr& t 3 50790 Whalebone,ms,o unwowd or simply pd, apdadpowd w 4 51000 Amberris, castorum eto., bile dd d l ghnd&prod Sfr pham prep 5 80290 Nub edible, fsh or died, whethe or vAot shelld or peeld, neo 6 90111 Coffe, not roased, sot deoafMuszed 7 90112 Coffe, ad rotd, 8 90122 Coffee, toaste d, defbnd 9 90700 Cloves (whole huit clove ad Ms) 10 90830 Cardamom. 11 91020 Saffra 12 12120 GinS toots iWsd pr*im n p d sipp 13 121190 Mas & pi of plantsnldr) usd In d o ea 14 130190 Naral gum, rosins, gum-rsins and bals, eet arabio gum 1S 210110 Coffe etats, eas & concenrates and prepation eeof 16 390740 Pblyarbovales 17 720410 Wste sad sap, east i 18 72049 Wase and s , of alley ste, oher sainles 19 720441 Rom wast & s.ra oa sor the mechnical wor*ing of mstalne 20 720449 Ferous waste and scp, o or stede, as 21 720450 Ratesn scrp Inot, of iron or ste 22 720711 Sau-fih proodXiln s,r q woss-ot e by wg1-600mm wide, >10mm tp 355 up 27 720812 Flat rod prod,isA ooib,r,w>/-600mm,4.75J=EOmm,SmmI/-thk <4.75mm,35Smpa 29 720814 Flat roed ptod,Vnss coil,lr,>- m600n wide, <3mm t,yp 275 mps 30 708 Flat roled prod, ihss, in coil, hr, >/-600mm wide, >10mm t, as 31 720622 Flroldpod,lna,i or,w>1-60mm,4.75mm/-600mm wide,3mr I-600mus wide,s tan 3mm h,cs 34 720831 Fat roled podj,no,hr,Omm/-4mm thbSSmpa 35 720832 Flat roled prod, Vm, nAc, hr >1-600mu wide, >10mm t, myp 355 mps 36 720333 lt rolled prod,Ullas,ob,hr,w>/-600mm,4.7amm/=600mm,3mm1-600m s th 3mm thmmdbyp 355 _ps 39 720841 Flt roed pod,Um,1-4mm ohass 40 720842 Flt roled prod, is, at in coil, br >/-600mm wid, >10mm thk a 41 720843 a rId prod,na,nth in oobr>/-6,4.75(I1-Uk/=600,3mm C/-E A, 3ml Iht, d ak 44 720890 Ft od psd, lia., nat theriwod thnhot rolled, as 45 720911 Ft rolled pond,ssin coi,r,w>/as60m,>1-3mm thk,mp 355 _ps 46 720912 Fla red prad,lu,n oor,w>/-6Omm,1m I-60Qmmk>/InO.S msummy 27mps 48 720914 Fl rolled prod, m coao, >1=600mm wid, <0.5m th yp 275 npa 49 720921 PFlt rollod prodis,% coll,,>/-600mm wid,3 or mor tb-,nes 50 720922 PFl rold prod,I i col*, >1-6E0mm WIde1mm1-600mm,0.5/-60mxnla than 0.5m tha 53 720931 lat ol etod pd,nua in coiLc,w >1/600min,>1=3m ft,m 3u5 MP 54 720932 Fa rl p N inocrw>=6Wmm,1mm /I600,tbd>/=3maumm p SSinp 56 720934 Flt roaled prod,11has,aot in oA,cr,w>1=600,tA&<0. ,myp 35Sma 57 720941 Fat roled prd,asaa h in c,cr >/InO m wd,>/-3mm th,e 58 72094 Fatrld prod,na,ot in cor >/-600mm wd,lmm /=600am,0.S I-hkC11mm, 60 7204 Fltolled prod,nn in cofcrvw>/-6 hk< OSmm,t 61 720 Ut rol prd, iaa, not i coil, or >1-600mm wide, no 62 721011 Flt roed prod,lnas,plmtd or oad wlb tin,w>/=600m, >1-0Snmm tk 6 721012 Flat ld pMod,laas,pad or coatd wit tin, >1600m wide, <0.5smm th 64 M7 Va oWU od,pltd o cotd w lead, >1-60omm wido,Inoludg teoepVe 5 721031 FltroW prod,sAtel,o pdc/d w zino,thkd<3ua myp27S,>/=3 myp3SS 66 721039 Fbt rol prod/is,elscto phd or aid w zinc,>1-600mm wide, ae 67 721041 Plat rolled prod,inuaad or otd w zwo,coruted, >/=60fm wide,noa St 721049 Fatrolledprd,U/asplaed or coated wth zino. >1600mm wide, noe S 721 050 Frd pred,/nas,pWd w oro chom ozid>1=600mm 70 721060 Fat roled prdjInas,plated or oated with alumjium, >/=600mm wide 71 721070 Phlt rold pwod,o,prd,vm d o pleat coated, >/-600m wid 72 721090 Fat roled pod, Inas, cld, pblod or ocated, >6600m0 ide, n 73 721111 Flat prod,lla,rold on 4 fiuc,101=4mm,Ayp 355 74 721112 Flat rod prod, iasat hr, <600mm wide >/-4.7Sm dthk, aWp3SS apa 7S 721119 PFlt rUd prodNsaslbw<600,thk<3mm my27SW >I-3mm myp 355,a -76 721121 Flat 0olld prod,m9,hrMroUd on 4 wes 1S0mm/-4M thk,n 77 721122 Flat roledprod, llama, br, <600m wid >1-4.7Smm t aes 76 721129 Flat tolled prod, ama br, <600mm wd no 9 721130 Flat Vroid pd aworw60ti<3 myp 27S,>I=3mm myp 355 80 721141 Flt told pod,hasaor,w<600mm catg by wSft la than 0.25% carbon S1 721149 Flat roged prod, llm, od Wolled or cold redued, <600mm wide 8 721190 Flat reled prod, Vlm, <600m wid, not cldad, plabte r coated, neg 83 72120 Flbt oled pVo lams, <600mm wido, plated or coated wib tin, no 84 721221 Flt rod pod,ateeL<600mm wIde,<3mm tk myp 275, >1/-3m tk myp 35S 85 7229 Ft rolled lodl Va, <600mm wide, clad, plaed or coated, nee 86 M230 at rolled pd, lams, <600 wid, olw pla or coated wt zin 87 721240 Flt olled proiWhu, <600mm vide,paed,adsa or pla coated # 72125 Fa roed yo llama, <600mm wide, plaed oate,a 89 72 Ftoldpd lagm, <600mm wide, cld 90 721310 D r,Vlaa,Ir,ilnl wound coils,cutg lnde,b ptod d p 91 721520 Dus & toda, laa, hr. in ir"g wound coils, of fvee outtinS teel 92 721331 Ds/od,llmahin l u wad woil toiro aoct,dia<14mn,Atg<0.25%C 93 721 Dm & zod Ma,htAr,ooIiuA&by weg lessathan0.25% ombonmes 94 721341 Du all hr,ofcir am soe <14mm da,otg by wt .25% 1=8Omm 11S 721650 AnS,din hot rolWdtmwnlxtrudd,hght>I-SOmrn 116K 1660 AnJs hbyaes and sectoNias,W than old fmed or cld finh 117 721690 Angla, dshpe and seoions, iton or non-ally steel. no 118 721711 Wr as,polisd or not,but not platd or coated,ontg by wght <0.25%C 119 721712 W Nas,pat or ooad with zino,ontaing by wght s than 0.25%C 120 721713 W nps,latd o coatd with 0th baan motis nes,ong by wght <0.2S%C 121 721719 WVe, Ulau, containing by wit le than 0.2S% cabon, nes 22 721721 Vzr,1/nas,polfshd/not,but not pdctd,fctg by wght 0.25% /I0.6%C 127 7217 Wir,Um,platd o coatd with zbi conAta by wSht 0.6% o canbon 12 721733 VWrlNhsp1td o ctd w oth base mt s,catg by wgbt >1-0.6% Can 12 721739 Wir o non-alloy tele conti by weightb 0.6% o - carbon 130 721810 lnots and otr prim forms, staled 131 721890 Semifihed pod , silesststo el 132 721911 PFt Rolld prdsanled rel In ciw>1-600mm,thk> 10mm 13 721912 Flt wodd prdAta stel,hrn ol.w>l-600mm,4.75/i-00mm,3 /-600mm,hk< 3mm 136 721921 Pt oed prodtainss olbr,n, >1-600m wldeover 10mm thik 137 72192 Flat roid prdAWinl st ,Aio,w>1-600MA,4.75mmI-600mm,3m/-thk <4.75mm 139 721924 lat rold prodi seelbrnim, >600mm wido,less than 3mm tick 140 721931 Fat rold pod,sailess sel,or,>600mm wide,4.75mm or mom thic:k 141 721932 Flat roed prod, stainlessteel, or,w>/-I00mm <3nu b/=600mm,O -Smm 600mm wide,lesa than 0.5mm thick 145 7210 Fat oled prod, dsai stee 600mm or mowe wid, ne 146 722011 Ft rolled p ,dA s stel.hr <600mm wide,excoding 4.75mm thick 147 722012 Fat rolled pdstaie el <600mm widOlessthan 4.75mm tdick 148 722020 Flat tolled d, stdaines stel <600mm wido, cd rolled or red 149 722090 Flat rolod prod,ialm sel o <600mm wide, aso 150 722100 B1 & rods, dainless dste hot rolled in rreSuary wound coils 151 722210 B & rosb,sta sdeaf ta hot rollcdhot dawn or extuded 152 Ban rods, sWa dt f than cold rd or cold finidhed 153 722230 Bus & rd, stdan sel sm 154 7M40 Angles, ship and scins, saie sel 155 722300 Wire of tains tel 156 722410 bnot &hr oybtw of allyste, otat stail 157 722490 Sum-.finidOd produt of alloy see olt sainle 158 722S10 Plat rold pdod Of useof >/-60011 U A& 159 722520 Ft Oed podut of 1igh sOpd sde >1-600mm wiO . 308 A Sam RS Cod 160 0 Htolled prodAs,oA td,in colls4iw thdin br;w>/=600un, 161 722540 Fit rolled prodA,oA stlnlossn,alo ma thn hr, >1-600mm wide, nes 162 722550 eat toDd pod,as,ok stans to oold wold,>/=600mm wide,ues 16 722590 FMatolld prod as, oh tdess >1-600mm wide, as 164 722610 He soed prod, of dlio dleIa sted <600mm wide 165 722620 la volled p, of igh speed otel, <600m wid 166 72691 Flt roled prod,s,so atainlsnfw t hot rolled, <600mm wideo_ 167 722692 F tp rolledpod, a, olt stadiles, aw Om o olled, <600mm wide 168 722699 PAt rod prod, as, oh sails, < 600mm wide, rAs 169 72271 ar rodsn of bigb ped sel hr. in irgula wound coil 170 72mo BIA & sods, of O _ t, i,n ireuady wound cols 17 722790 s, ye,A dtis hr, hegulay wound coilsnes 172 722810 Ba and ods of h qeed see,as 173 72 0Bm ml Da of d_Onee 174 722830 D&rodsA,lloy _eeoh stanles mAr th hot roflldrdaw/extrud,nes * 175 722840 s & rods, a, OAt saie, not luiter worked than fogd 176 7220so U. slnless,ndftr wostd than cold fondlfniahd 177 722360 Ba& ds, as, ot stIe, ns 178 7228 Ans, shape and secions, as, olt sales, nos 179 7m A rods, holow drm, aloy or nonsIloy teed 180 722910 We od igh spood eed 181 722920 Wire of sosel 182 722990 Wire of aloy s oh saiss 183 70431 loprofih,l/a,amia,od/cr,of clo cross setion,nos .184 73039 Tbeipep Jt holobw ptoe, or aasAma,ofekro cre sectioonA 10p 730441 1 ated,s,d/r of .iro cross ae,ne 18 730449 Tub o ps stpomlsof rcroar ecatnes 187 730451 T esppzole,s,(o dsain) slscdlr of ciecss sem t 188 7304S9 wpppolow m,(ot l) smlecross sectnes 89 73490 Tuaes pip & hollw proes, iro or eel,ms, m 190 A31 Tdubes& W r a ,hnSit,dinaisaodx dd >406.4nuA 191 709 Tubes & ppe, or d, or aim close,ext dC >406.4mnm 192 705 Tmb5 & pip, i or a, aivd or dm clousd, et dla >406.4mm, nes 193 730630 Tp e A hollow pzofie,in or ns,wslded,oflr Crss sect,nes 194 730640 bprofianins steLwdof c cross sect,S M9 700 Tubes4 peH.lowprofle,alls,(o stdin) wd,dof c rs sect,ne 19 730660 Tubesplp A bholow pr ,II,fweled,of non oh cro act,nes 197 730690 Tuba, pipe A hollo profiles, hm or seel, welded, so 198 731210 Sanded lea of imon or e,nAD electcally inslated 199 810510 Cobalt, i pdodswpd 200 84420 TextIl sp n a n 201 847989 Mah A nochn appliances ns bhing inivid fnto 202 8520I Msg Up ioorpotg sound epodug aup 203 8B 9 gneOl pe recor xnot sound rproduing apparatus, as 204 8M090 Magdio ta p recordes and otbe sound recording appartues, e 205 85271 Rao brd too capa of op W/0 an Cxta source of pow omb 206 m52721 Radio m at p of op Wo et soue of power f motor veh,ombind 207 821 Ral brd re combind wTh sound ooordS or reprduog apparatus two 2 8 T2820 V reciWes an0 ins vde p*oc mno_m 209 5012 COday TV IV - tube iad vido moito 0ub,13MWloth nmnoom 210 880211 11_oper oa uRde wgt t exceedng 2,000 k1 211 88212 ReBoorta o n unden weg weceed 2,000 kg 212 88UM Airms am of an ded weWigt a exedi 2000 kg 213 8UM0 Arc m dof an adem weot > 2,000ks but not eeedg 15,000 kg - 309 - Saw NS Cods mumbhr b D- 214 804 Aloaft n of n unlden weg sweedls 15,000 ks 215 890800 Vessbsand ohe log structures fobr bvang up 216 900610 Caner of a kid used for prpaing pinng ple or cylind 217 901210 Mloroooposad ote ta opticalamIcocopesand diffracion waparau 218 283711 Cyanld and cyan oxide of sm 219 30200 Pfeaed elosives, oht propn powdon 220 360 Saft ltd _adg ISub1 ddonomb 221 390830 Aynkrgsbuad. stn.(A)op 222 400211 Syemban mubber(RYeazboxykd tyemuad xDR) le 223 400219 nbrbr nbd Br(XSD 224 400220 Buam nbberB (R 225 4001 sobuten-iopmee (buy rubb (I 226 400 HalIsbumv4sopmen.ub (CIt or D 227 40241 Chrpme _(ohlub_utdla) rubber (CR),le 228 400249 ChoOp (Oo rbb (CR) am 229 400251 AorylomV964uladm 'vbber (NB), Iaez 230 4029 Ayukdlutdien tuber (N R s 231 400260 sopmr rbber (ER) 232 400270 Ethyleneproylenenon-oojugtoddi e, rubbor (EPDM) 233 4002 Mxtr of any produot of headg No 40.01 w any poduct of th head 234 400291 Syntheido rubberand tctic deived fom oils, ec, lt 235 400299 Syntdo rubber and ahoi deried from ois, etc, nes 236 4408310 Pole, tw /dpteetc 237 4420 Lo, pols, coniros nos 238 440831 Logs, Man, lg & dark rd & Dahu 239 440332 Logp, whi Lan, Moant, Seeaya yew Man& Alman 240 440333 LgsP, Keuing, Ramin, Kapur, Teak, Jo0gkng, Metau, dt 241 440834 Logs, Okom, Obecho, Sapeli, Sipo, Ajou d'Afrqus, ed 242 440835 Lo, flame, Mansonia Lomba, Dbton, Ia and Aosb 243 440891 LAs, Oak Z44 44092 Log, Boh 245 440899 Logp, noncoltrusne- 246 440610 lee, rlway/tway, wood aot _mpd 247 440690 h, raay wood na 248 440710 Lumbr, confrous (softwood) 6mm and thce 249 440721 Lubr, Meranti d o(light & da*), Manti BDaka, White Ln eto 250 442 Lumbr, Oum", Obaech, S_pl, Sip, Aojou d'Aluo, )Makll deo 251 440723 Lumber Baboen, Mahoy (Swianl p). Imbui and al 252 44 '791 Lumber, Oak 2S3 440792 Lumber, Beea 254 440799 L1ube, noncousww am 255 440810 Veer, conifroeu (softwood) les than 6 m thick 256 440820 Veneer, uopic woods, ess than 6 mm thik 257 440690 Venoer, non-conifous as, les than 6 mm thik 258 470100 Mecanical wood pulp 259 4700 Chemica wood pulp, dbolving gades 260 470311 Chbneal wood pulp, sods or sulpbate, coniou, unbehdw 261 4Ml9 Chemcl wood pulp, sods or sulphe u, nbleahod 262 470321 Cheal wood pulp,soda or sup urs i-blrt blehld,ns 263 470829 Chm l wood pulp,soWwIts.b 264 470411 Chemica wood pulp, sulphte coniferus unblesod 265 47019 Chmc wood pulp p"i, w *ib, u,_aod 266 4741 Chemial wood palp,aul ---Ite , sal4beached or blaed,nes 267 470429 Chem wood pulp,lhbw smior blachld,s - 310 - A el RS Code number numnber ecpio 268 400 Seahn- ical wood pulp 269 841810 Comne reftigperator-fiezenr, fted wkih sepate a na doors 270 841821 Reftigrato, hoshod type, cmpessn-ype 271 841822 Refiators, houwhold type, absorptioyp, elrol 272 S41829 Rerieror, houhold typ, nss 273 841830 Fers of h chest typ, not eceding 8001 capacy 274 841840 Frer of the upri tp, not axaeedin 900 1 capciy 275 841850 Reiting or flezing display countes, cabine, show-a, etc 276 841391 Funitu desiged to receive rfigeratig or freezing equipment 277 24021 Cipar dhoots and cgrios, ontanig oco 278 240220 Cipaettes caining tobacco 279 240310 Smokg toboo,wbethero not cdtg tobac substit in any propation 280 2709 PSoulem oils and oils obained from bituinous miel, cude 281 271000 Petroleum oIs& oined from bit ous minrals,oftan ctude otc 282 291737 Di_uyl trehat. 28x 292122d its sb 284 293371 285 39o210 Polprope 286 390230 P_opyle opolymers 287 390760 Polyethyene phthalato 28; 441211 Plywood, at es 1 outer ply of topial woods Wl <6 nm) 289 441212 Plywood, at l 1 ouer ply of non-conifeus wood nm (ply's <6 mm) 290 441219 Plywood nes, at leat 1 outer ply of conieous wood (ply's <6 mm) 291 441221 Pal, 1 outr ply nocniferu & I ply of pail board 292 441229 Panes, 1 out ply non-onifeus wood n 293 441291 Panels, 1 oubt ply conifeou wood, & 1 ply of pacle board 294 441299 Paneb, 1 outw ply conifu wood nes 295 5410 High naty yar (*Itsowg ftha4)nyIonfth polyanides, L put up 296 540231 Texturd yam nes,of nylon/oth polyamkies A. S0 sy- A,not put up 298 S409 Tetud yarn of synttc filamants, nes, not put up 299 540241 Yarn of nylon or ote polyamides fl,sin e,,not put up 300 540242 Yar of polyester filaments,ptialy oiaed,sing,,not put up 301 S40243 Yar of polyester filn, single, untwisted, nes, not put up 302 540249 Yam of synthi flaments, single, untwted, tis, not put up 303 S40251 Yan of nylon or othr polyamides , singl, >50 tunsm, not put up 304 540252 Yarn of polyese filamts, sngle, >50 uns per metr, not put up 305 540259 Yau of snmthetio fetsig, >50 turns per metre,nes,not put up 306 540261 Yam of nylon or othe polyamides fi, multiple, ne, not put up 307 540262 Yarn of polyester filmt, multi, rn, not put up 308 540269 Yam of synthe ae, ultpl, nes, no put up 309 540310 High tnity yan (ot swg thbed),of visow rayon lsnt put up 310 540320 Texted yamn neso atificial filame,t put up for etai ose 311 540331 Yam of viss rayon filaments, sl, uwisted, ne, not put up 312 540332 Yam of visco rayon filmentssgle, >120 tus per m,,nt put up 313 540333 Yan of cluls acett filments, sle, no, not pu up 314 540339 Yam of atfia fament, sng, ue, Aot put up 315 S40341 Yan of visos rayon fila, muiple, ur, not put up 316 540342 Yam of cose0 actae filamenb, multiple, nes, not put up 317 54030 Yam of a l filamesa,w multipl e, not put up 318 540410 Synthei mono,>Im67dMe, no ms seonal dimson ece 1 m 319 540710 Woven fob of high teacity A yarns of nylon oti polyamidespolyesters 320 54070 Wove fib obtaind fim s9*ftip like of synthet textile mteials 321 540741 Woven &b,>1-85% of nylon/oer polyamdes filames,unbl or bLJe - 311 - saw HS CIO& _m*e mm*e Dna*on 3= 5742 Wov fbrics, >185% of nylWafa poalyies milameds, dyed, nu 223 54043 Wow. fAb,>/85% ofylonlotherpolyamides fintymaf y4d,n 32 54074 Wove fabs, >18S% of Sylondo polymides fihmeat, pitd, an 325 5471 Wovws hbrics,>1-85 of txuepolyestfiamns, uniblorb, a 326 S40752 Wove fabdis, >/-8S% of xtured poetr filamet, dyd, ae .327 540753 Woven fibi", >/I-85% of teured polyesrfil t, yar dyed, ne 325 S407S4 Wown fabic, >1-85% of texumed polyesdt flAent, printed, an 329 540760 Wowv S brias,>/I-85% of non-textued pobester fimt, nos 330 540771 Woven fob,>/u85% of synthetio filaments,unbleched or bleacbed,nes 331 540772 Woven fabrics, >/-85% of synthetic filmet, dyed, nes 332 S40M Wovew fabr,>/-S5% of yntheio filme, yasn dyed, aen 333 540774 Woven fibrics>/-85% of synthetic filaments,-printed, an 334 540781 Wove fabrics of syntheti fiaments, <85% mind w cotton,unbl o bl,ne 33M 540782 Wown fabrics of synthetic flamn, <85% mibxd with coatton,dyed,nm 35 S4 Woven fibri of synteio filamS, <85% mixd w cotton,ya dyd,es 337 S40784 Woven fabr of synthec filmet, <85% mlsd with cotton,prnted,nes 338 540791 Woven fabri of synthetic fiaments unbkached or bleached, an 339 S40 Woven fabrics of syntheti filamen dyed, ae 340 540793 Woven fbrc of ynteio filamens, yamn dyed, e 341 54074 Woven fabrcs of syntoi filmens, pnted, sa 342 54010 Woaven fabric of hig tnciy filament yams of visose rayon 343 54082 Wow fob, >1-85% of artica o strip of art tea aat,usblILn 34 54062 Woven fab, >I-SS% of atifici or stip of art ta mat,dyed,nes 345 5408 Woven fob,>/-85% of aificl fi or sftip of art t mat,y dyed,nes 346 54062 Woven fb,>l-85% of atifi fi or srip ofat ta matprntdsde 347 031 Woven fabdrc of acial filames, unbbihed or bleachd, n 348 540832 Woven fbrs of artfial filams, dyed, an 349 540633 Woven fabrs of rial filamn, yam dyed, am 350 540634 Woven fabric of artificial filamns, pnted, am 351 550110 ilment tow of nylon or oth polyamides 352 55012 Flme tow of polyersn 353 5500 Flament tow of acrylic or modacryli 354 550190 Synteic fiment tw, am 35S SS0200 Artfica filame tow 356 5SOB1O Staple fibes of nylon or other polyamides, not carded or combd 3S7 559320 Stale fibers of polyeter, not cardod or oombed 3SB 550330 Stp fibets of acryio or modaylio, not oarded or coobed 359 559340 Sta fibe of polyprole, naot caded or combed 360 559390 Synthedo staple fbers, not carded or combed, nos 361 550410 Stal fibes of vsose, at carded or combed 362 550490 Artficil stapl fibers, ohl vbos, not carded or combd 36 550610 Stapb fir of nylon o othr poyamides, car4dd or combed 364 5500 Stap fibes of po4stm, carded or combed 365 550630 Stl fiben of arylio or modarylic o care or combed 366 SS0690 Synthetic sapl fibers, caded tr combed, a 367 50700 Artficial stapla fib, carded or combd 368 50911 Yam, >-85% nylon or otoher poyade stefbssigleot put up 2655 012 You,,>I-SS% nylon o oth polyamidet fesmult,t put up,es 370550921 Ym, >1-85% of polyester s fiber, sil, rotput up 371 550 22 Yam, >1-85% of polestersple fibe, multiple, not put up, ao 372 55031 Yam, >1-85% of acrylio or modarylic stapl fiben, sio, aot put up 3 5S0932 Ya, >1-85% acylic/modylic sotal fiberws,ultip,ot put upeam 374 550941 Yam, >-85% of othr synthe sal fer, single, ot put up 375 550942 Yarn,>/-=5% of oter syneic sapl fibes, multiple, not put up,nes -312- M-SUMARM sei KS Cod, mb_r umer Descrit" 376 550951 m of polyesterd apl f mxd w at stl fib,"not p up,nma 377 SO92 Ym of polyastetple fib mld w woole anuim hlbr,nt put up,ne 378 550953 Yan of pobstr stpl fibe mimed wit coon, not put up, cm 379 5505 YTm of pobleste aMf, not put up, an 380 S50961 Yum of a oli staple fmbid w wol/her animal h*An ut up,nes 38 550962 YTm of scyli stl fibes mimed with oto, not put up, m 382 5969 mYam of acyli tapl fibers, aot put up, mo 383 550991 Yarn of oth snoto ap fib mxd wwool/ffim animl barn 384 M0992 Yam of othr syntetc stap be med with cotonno put up,Qes 385 5O9 Yam of other rpdo stp fiber, n put up, nos 386 551011 Yam, >/-85% of utical e'ple fibe, oglo, not put up 387 551012 YTn, >1-85% of atifcial _aple fibers, mulipl, not put up, nos 388 551020 Ym of artio staple lb ixd w woolfmim halr,nt put up,nea 389 5103 Yam of uatlol staple fbes mixed wi coto, aot put up, nea 390 551090 Ym of atificil stWb fibe. not put up, aea 391 551219 Woven fbr >/codts>I-8S% of polyoter stab fiber,o/t unbl or bl 392 5S121 Woven fabrceAcnMqln>-mU % of cqylo sta flber,unbleacs or bl 393 551229 Woven fhbicsecit >lq8S% of cryl tpl fiber,Ad unbl or hU 394 551291 Woven fabA=,cont >1-85% of odh syntio sah fber,sunbllbl 395 551299 Woven febriee,o_tg>l -85% of other sythio stl fibpo/t unllbli 396 551311 Plain weawpolyest tapl fib fab, 170Q1m2,unbYbl 413 551412 Tw woav poet stapl fib ab, <85%,mlxd wcoaton,> 170g/m2,unbVbl 414 551413 Wovea fab of posr_ staple fib,c85% mind wl/ot,>l70rJm2,unbVlbl,n=s 415 S51419 Wovem fb of th staple fib,<85%,m;imd wleot,>170 gIm2,unbllbl 416 551421 Pla wme polyetr stapl Aw foab. <85%,mimd wlootton, >170g/W2,dyd 417 551422 Twi wwo polyster p fiber ab, c8S%,Aixd w/coton, > 170g/m2,dyd 418 551423 Woven fbdi of poly r s fllb. <85%,mixed wlcot,>170 gIm2,dyed 419 151429 Woven fa of th synho spb fib. <85%,mixd wv/ot,> 1701m2dyd 420 551431 Plain wm polestber apb lb fab, <85% md w/oct, > 1702yamn dyd 421 551432 Twi wame polys dos flb tb, <85% mid wloet, > 170Sg(na, dyd 422 551433 Wovm b o polyestr safib, <85% mkd wIoot, > 170gW2,m dyd ow 423 551439 Woven fbie of ot snp sta lb, <85% mid wboot,>170 gm2,yarm dyd 44 551441 Pla weav poblet al Abor tb, <85%,mixd woot,>l70ft ,primd 425 551442 TwM wae polyeste sta*le Abe, < 85S,l/d veot, >170glm2pdntd 426 551443 Woven ab of polyee Sfibe <85%Pwloot,> 170g1m2,ptd,es 427 551449 Woven fbrs of oth sy tpl flb, <85%,mixed wcct. >170 gim2pimed 428 551511 Wove tb o pobsr std fib mixd w vioose myon stap lb,ow 429 551512 Wovem fb of pobalete fibers h xd w ma-made filamn,nes -313 - Serl HS Code number number DsolptI 430 551513 Woven fb of poldyedsteapi. fibes mud wlwooYfil amal har,nes 431 551519 Woven brim of polyeser stIape b, nee 432 551521 Woven fibrics of aylio staple fiben,mxd w man-nad, fiamens,n 433 551522 Woven fob of aorylo aple filbesmd w/wool/fin. anial help,e 434 551329 Woven fbrics of arylc or odaryo sl Mfbe, ues 435 551591 Woven fbreis of oth sa" stple fibifxed with mantmade fimuts,nes 436 551592 Woven fbibs of oth syn stiaple fb,mxd whool o fine anima hair, 437 551S99 Woven fbrics of synthdio stapl fbr, ans 438 S51611 Woven fabrls,cmhIAg>I-S5% of artificial staple fbers,unblachd 439 551612 Wowv fabics, coninig1-85% of at l ap fibers, dyed 440 5S1613 Woven fas, oontnlng>/-SS% of atficl staple fib, yan dyed 441 S51614 Woven fabrics, oontninb>/-85% of atifiil stapb fibes, pintd 442 S51621 Woven fabrics of atficial saple fib, <85%,mixd w mao-nadu f,unbl 443 551622 Woven fabs of artificial sWt fib, <85%,mxd with man-made fidyd 444 SS1623 Woven fabis of arfiil staple fib,<8SS,mixd with - fiam dyd 445 5S1624 Woven fabrics of atifical staple fiAb, <8S%md w man-nad fiptd 446 551631 Woven ab of ati staple fib,< S% mixd wlwooYfin animal hair,unblibl 447 551632 Woven fabrics of ai stapl fib,<85% mixd uwofine animall air,dyd 446 SS1633 Woven fab of staple flb,<85% muad w/wooYfio ann biry dyd 449 551634 Woven fab of aid taple fib, <8S% mud wMol/fi anima hakfir,putd 450 SS1641 Wove fAbds of arfiia staple fib,<8S% aixd with otoa,unbl obl 451 551642 Woven fabics of atiilstae fib, <85% mixed with cotton, dyed 452 551643 Woven fabris of adtfica aple fib, <8S% miud withb oton dyd 453 551644 Woven fbri of ardficial stap fib, 250 c to 1000 co 523 804 Engines, spar on recphocating displcig mor than 1000cc 524 84079$O ies, spak-i on type - 5Z5 8080 En s, dbsl for th vwecl of Chp tS7 526 41430 Co_mp of a kind usd in refhrgetg equipment 527 841510 Air _wdoingmadmwdow or wtypes, weff-oued 528 841581 Air oad maoh ass inw a rf unwAk vale f rev of th coollheat cycle 529 841S82 Air oead mach e, io a refigtin unit 530 841583 Air cond macahm, not inorporng figti nag unk S31 84610 A_tmc pXaw& ad wedpge4s mhi 532 847010 lecAronb collator capable of oper wlo an exteal source of power 533 847021 Eletonic calu et macines, inoroain a printing device, nes 534 847029 Eletonic caoulag m , as 535 847110 Analogue or hybrid outmati data poessing macin 536 847120 DWi auto dt po mch cntg in same housg a CPU inputoutput 537 847191 Digial pocsms us whehenat prestd w the rst of a system etc - 315 - AlIM Saw HS Code tmb IIUII Doak"p 538 84192 Input. output uulls,whcther o not td w t rest of a systm eto 539 WiOS storag unhs, vAbhr or not prsetd wih thc tesm of a sytem 540 852110 Video meording or rprduing apparatu magnti tapeype 541 82290 Pats d acsoies of apparat of hading Nos 85.19 to 85.21, na1 542 152530 Teevison s53 852810 Teision recehers inwd video monitos & vidoo ptoremots,colour 544 854011 Cathod-ray tviso pictUetub c video MOt o tubescolour s4 870120 Ra traco for mitaie (trk t s) 546 70210 Did powered busesh a seatig capaty of > nine persons 547 870290 Buse wth a seawn capity of more than niae peron noes 548 83 Snowmobie, golf es and simir vehides 549 70321 Autmobiles w reaiprocg n engino disidlcg not more ha 1000 co 550 870322 Auomoble w reclprocg piston engie diplag > 1000co to 1500cc 551 80323 Atmob w rciproagpiston e e diplwSg > 1500 cc to 3000 co 52 87324 Autmbs wi cocatg pio engi displacing > 30 cc ,53 870331 Autmobiles wh asel engine dispacig not more than 1500 c 554 870332 Autmobfie with diese engine displcing more than 1S00 cc to 2500 co S5 873 Aumobie wt diese eg disp4ing more than 200 co 556 8390 Aomoe nea incudn gs tubin poweed 557 87041 Diese ,w ed usb wit a Gvw not exooeding five onnes 558 870 422 Diws powerd tnuc w a GVW xo five tonnos but not ex Wmonnes 559 8023 Die A powered trc with a GWM excacdins tWeny tonnes 5 87031 asn powetd truc with a GVW not ecedng five tones 561 870432 as powed ucks wit a GVW eedng five tones 6 870490 Truk so 53 870510 Mobile ran 564 870520 Moabil din derrik 56s 87030 fire oftng vicles S66 870540 Mobib eonwoe mix 567 870590 Special pu1pose Motor vdehile nam 5a 870600 Chasi find w ges fjr the vhicles of headg Nos 87.01 to 87.05 So6 870710 Bodies f pa er carng veiles 50 870790 Bodis for actors, buso, ts and spci purpose vehes 571 870850 Drive ax wh d_rIa fw motor vehicles S72 871110 Motryce WMt reicating Pistoneine diSPlacing 50 or less 573 871120 Motoryes wi ropoctg piton engine displsog > 50 co to 250 co 574 871130 Motryce with recpocat piston engine displsog > 250 cco 500 cc m 8171140 Mocbyces wih prcag pison cngin dsplag > SOO IN to 800 cc 576 871150 Mooryce with reiprocatg piston eagine d;pog moren 800 cc 577 871419 Motroyce past am 5m 900640 ndpntm 5W 900651 cana,slngl lens ref or rol fim of a width not exoeedg 35 mm 580 900652 Camrs for ro film of a wid le tlhan 35 mm 581 900653 Cma for roi film of a width of 35 mm, nes 582 9009 Potom8aphil, ote ta cinmatographic Ocmeas ns 5U4 9MI92 E l_ _e bdvPY! 4 Vd-hh O"t 58s 900921 } et , i4till 0ptb4 lySOQ Use 586 ConW t a_ hab-apt es8v J M8 900930 Thnn-optWe S8 901819 an 589 902211 Ap bud On the ue of X-mys f med iad,/v uses 590 910111 Wdr-watch w mnch display,batey Wd - of precio ml 591 910121 Wdl hS,wwth aumti widiAng & With ae of preious M n-e -316- S Sami HS Codo 592 9101 Wdow" , wth a m of preciou nAt, a= 595 910211 Wdst-.athbal sIcu Ipowed w mahn ad plhy oq aft 594 910221 Wd wa swih Wm toaWA windg a 595 91029 Wd_Awbh s S9U 910311 Wah movmmtio,uNd, beaty poid wuih meoh a display 597 9103 Wauh movnua, ompi on asuembed wit a omaw windi&g, ans 598 910391 Watch mowwms,oow t and asuebld,m.asu#33.8 am nor una 599 911011 Compo mnn of wathes" , ua bd or patly aumembld 403 911012 nmplao movemt of watcs umnbled 801 911019 RPog mvo=m o f wae Bowm GATT (WM) d OffiA of tho Ute StIs Tadoe Rralw (1992). - 317 - E XA Table A3A: CmU LI oF PRMM SuB0TOND Comm (as of Augst 192) (Arrangd Accordin to Hammnnled Coumodiy descipdion and Codin Systm) smea RfS Code 1 391810 Flor,wal and ceiling coveting etc, of polymers of vinyl ehlrbd 2 68021Mo stoneocudaaw MdatocamAublcArveallnealbaur 3 68091 Klaste boardseo not ornmetal b ood renford w pap041er/aesos 4 69079 Tiles acubs ad .in mo, unglad ceramics 5 70052 Float jm etc in shouts, non-wird cm 6 70199 Ohm fibers (includig &ss wwOl and sricles dmthef nso 7 731100 ContAInr for cwwompsed or lqeedgSu of Iro or steel 8 761010 Doors, windmows ndw ftherbe and thresholds for doors of lumdamu 9 840120 Maohiney and appraus for Isotopic separatin and paut theeo 10 84019 Steam aVW vapou turbimnusm 11 84131 Marin propuis onegines, diesel 12 84136 Rotar posktive displacement pumps em 13 84137 Centrfoasl punps em 14 841391 Paut of pumps for liquid whether or not fited with a memur devise 15 841410 Vacuums pumps 16 841451 Pan: table,roofdet w a self-ooat els mtr of an outpu t at ecd 15W 17 841480 Air or p. compresors, hoods 18 841710 Funosoasn-cI f the roast,meh-trest of ores,yrltesmeta 19 841960 MachIney for liquefying air or p. 20 84199M acleypmtlbrtr equip f tmea of mat by damag of ta apne 21 842119 Ceftriftses nm 22 84212 FIlltin or purifyInkg machinery and apparaus for liquids em 23 84223 Mach f fiu/lo/sal/eYdobtWecanibox/ bag/sa em,mah f srerat bov 24 842240 Pacok"n or wrapping machinery ems 25 84238 Weighing modaciey, em 26 842511 PWlley ftackleosts clet (oxm skip hoiss/hists f raiS vehicle) 27 842520 Pit-hed winding gea winches specialty deWsignd for use undergroud 28 84253 WInches or captain em 29 842620 To awerca 30 842649 Dwduok,omne or work tbuk ftted with a crsno,self-propelld ass 31 8471 el-poele works truok powered by an delctri. motor 32 820 epedW kbu a 33 847M Truck fittd with 1111mg or handlig equipmen, non-pwowed 34 842810 LIftso ad skp hoist 35 84282 Puemdatl eleator and conveyers 36 842832 Coat-acton cm vtor oveosfr oods/mat bucke type am 37 842833 Cont-cton elvtoscnvyr for goodsmAt, bell type em 38 842911 Bulldozer and angedm.ozs vcAwler typ 39 84292 Graders and leveler, self-propelled 40 84293 Seampr, selfpropelle 41 842940 mping mache and oad roolers, ofrpe ovld 42 842951 Frnt end shovel loaders 43 842952 Shovel and excvator it a 360 rvolving superswucr 4 842959 Seflprpdeled eva ting mac em 45 8431 Coa or ra cur, sdf-propele 46 84309 Co or r mokt, not sefpopelld 47 847301 Bog or inkig noiey em, nl*q op f bod 48 843143 Pat of bong or sinkfi muahiy whedtr or td f _,ropeed 9 8443230 S s pand brasplomnae 50 8435 Combine a- ser-hesher. St 84u390 Machiny fr maing pulp of fibous ceruosb matei*oo - 318 -ffAmscA Sei NS Code mAmbe numbe Deription 52 844110 Cutng machines for pae pulp, pa or papeoW of al kinds 53 844180 Maciey for making up paper pulp, papw to papeoxrd a 54 8410 Phototpstting and composing main 55 844311 Ree fed offse pring maciney 56 844350 Priting machiey as 57 844400 Madhs for exrding, drawng, ext or cutting rn- text materat 58 844621 Machines f weavg fa of a widt axo 30 c,mshudlo tpe,power loom 59 844630 Maces for weavg fabrics of a width eeede 30 ahu elg3sm td 60 844790 Mac f makg gb ydellaceembiey/ d lmm raed lnetg 61 845110 Dry-clanlg machin oft hdg No 84.50 62 845140 Washinlachg or dyeg maces (olt machies of hedg No 84.50) 63 845180 Macb f wzingldresfisbh/adV eg te yars eto(oh hdg No8450) 64 845229 Swg machins, other than book-ng mshines, nsee 65 845290 Part of wing machin, see 66 845521 Hot or combinaton hot & cold metl roling mlls 67 84819 Hor=Wial lthes nos for removing mel 68 845899 Lathes e for removing meal 69 846019 Flurf gindg mach in which pos of 1 axis acc to 0.01 mm nes rem mmt 70 846029 Ginds mach in which pos of I axis to an ace to O.Olmm ean f rem mat 71 846090 Mh-tool for deburing polisg eto for fin maet se oft hdg 84.61 72 846140 r cutting,gear gng or gpr fibShg mwhu by reovg metal 73 846291 Hydrau peues for wodkng meta 74 846410 S mach f w*g stocroc /ctefor cold wodg gla 75 846420 Grg/po mach f mvrkg sooncam/cocr/aab/ceS etctf col wzg g1 76 846593 raidingadg o poihg mc for wkg woodbse/ar eto 77 847410 Sol gs egor wag mach for ston/r or oth min eto 78 847520 Machines for manufactwing or hot dwing gSI or glsswa_ 79 847710 maches for worg rubber or pleatlos a 80 S47720 Exhdmfor ww dg nbbwor pbstios 81 847730 BIw moulding mans for wodig rubbe or plsoes a 82 847751 Mach f mo paew tires/for moulding/ortu inner tubes nee 83 847780 Mach for v-rkg mubbertlast for te mft of prods form the mse a 84 847930 Prs f the sf^ of psfib boardtf t wood eo sa hvg idiv fiuo 85 848010 Boxes, moulding, for metal foundry 86 850220 Geatg ets with sp*r-Igniointemmal combustion piston engie 87 850230 Elctic genratig so, eae 88 85W23 Liq dilectri tranf bavg a power handlg capacity exceedg 10,000 KVA 89 850440 Sat convert, oe 90 850SO Inductors, deotri 91 85121 Elheti maapp for resistaon vding of meala foll or putl auto 92 851531 Eble mach for a (m pbsm a) weldg of met fully/pal auto 93 851580 Blea/Iuas onic mach ecw f weld/cut sea/for hot sry of met 94 851710 Telephon sets 95 851720 Td opne 96 8S1730 Tdeonic or telegrao swichig appar 97 851740 Apatu, fo earierount ln sms, ane 98 851840 Audio-oequecy deole amplifis 99 82510 Tnmis appt for adiolb boda or teision 100 8S2520 Tranmmission *apats rditelph ioorot reception apparats 101 8S291O Aalskeal rfeors of all&sTs suitable f usc thrwith 102 85530 soltg swithes & mse- ea swdbes,voltap ag c 1,000 volts 103 85540 Lightag aeters,votg limien & surg sw volb > 1,000 volts 104 853720 BoarWs,pane,u numdl conto pae,for a volt > 1,000 V 105 854320 Sg generators -~~~~~~~~~~ - l I tolti tt1 - 320 -STAIM SANNl Tabe A3.6: L r OF1 SiM CATEGORIES SUiwr TO EXPORT IUCENSING HS No. 0207 4300 0802 3200 12119015 2008 1120 2617 1090 0208 1000 08024000 12119016 2008 1130 Chb.1 02101110 0805 2000 12119017 2008 1190 Ch.27 0109000 0805 4000 12119018 2701 1100 0103 9110 Ch. 3 0807 1020 1211 9019 Cb. 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 01042090 0306 1329 1211 9023 2703 0000 0105 9190 0306 1400 Ch. 9 1211 9024 Ch. 23 2704 0010 0105 9991 03062391 0902 1010 1211 902S 2304 0000 2707 1000 0105 9992 0306 2491 0902 1090 1211 9026 2707 2000 0106 0021 03062499 0902 2010 1211 9027 hb. 24 2707 3000 09022090 1211 9028 2401 1010 2709 0000 Ch.2 Ch. 4 0902 3010 1211 9029 2401 2010 2710 0011 0201 1000 0407 0020 0902 3090 1211 9031 2710 oos1 0201 2000 0407 0022 0902 4010 1211 9049 Ch. 25 2710 0012 0201 3000 04070023 0902 4090 1211 2020 2501 0010 2710 0013 0202 1000 0407 0091 09042010 2504 1000 2710 0021 0202 2000 0407 0092 0906 1000 Ch. 13 2508 3000 2710 0031 0202 3000 04090000 0906 2000 1301 9040 2511 1000 2710 0032 0203 1100 04010020 1302 1200 2519 1000 2710 0052 203 1200 Ch. 10 1302 1910 2519 9090 2711 1100 G203 1900 Ch. S 1005 9000 2S23 1000 2712 2000 0203 2100 0502 1010 1006 1000 Gh. 14 2523 2900 G03 2200 05040011 10062000 1401 9090 2526 1020 Ch. 28 M23 2900 050 1000 1006 4000 14042000 2526 2200 2804 7000 02041000 05069010 1007 0000 2.529 2100 280S 3010 02042100 0507 9020 1008 1000 Gb. 15 2529 2200 2805 3090 004 2200 1508 1000 2530 9020 2811 1900 0204 2300 Gh. 6 Ch. 11 1508 9000 2812 0204 3000 0601 1090 1103 1300 1515 4000 Gb. 26 10002815 02044100 11042300 2601 1100 1100 02044200 Ch. 7 Ch. 17 2601 1200 2815 1200 02044300 0703 2000 Ch. 12 17019910 2601 2000 2825 8000 02045000 07095100 1201 0000 1701 9920 2602 0000 2825 9011 02063000 0710 8000 1202 1000 2603 0000 2825 9012 o2064100 07119011 12022000 Ch. 19 2604 0000 28362000 206 4900 0711 9090 1207 4000 1902 1920 2607 0000 28366000 0207 1010 0712 3020 1208 1000 2608 0000 2841 8010 0207 1020 0712 9020 1211 1000 Ch. 20 2609 0000 2841 8020 0207 1030 0712 9040 1211 1000 2001 9000 2610 0000 2841 8090 02072100 0713 3100 1211 2090 2003 1010 2611 0000 2845 1000 0207 2310 0713 3200 1211 9011 2005 6010 2612 2000 2846 1010 02072320 12119012 2005 9020 2613 1000 2846 1090 0207 3900 Ch. 8 1211 9013 2005 9030 2613 9000 28469011 02074100 0802 3100 1211 9014 2005 9050 2617 1010 2846901 ' 321. S 28469020 Ch.39 440335M0 Ch.S1 52063500 Ch.56 28469030 3902 1000 4403 9100 5102 1010 5206 4100 501 2900 28469090 3902 3000 4403 9200 5102 1020 5206 4200 2849 1000 4403 9910 5105 3010 5206 4300 Clh. 57 2849 9090 3903 1100 4403 9920 5105 3021 52064400 5701 1000 2851 0090 3903 1900 4403 9930 5105 3029 5206 4500 S701 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 52010000 S208 1300 5703 200O 2906 1100 4001 1000 44071000 S2030000 5208 1900 5703 3000 2907 1500 40012100 44079100 5204 1100 S208 2100 5703 9000 2918 1400 4001 2200 4407 9200 5204 1900 5208 2200 29209000 4001 2900 44079910 202000 5208 2300 Ch. 58 2932 1200 4011 1000 44079920 S205 1100 s208 2900 58012100 2932 1300 40112000 4407 9990 5205 1200 5209 1100 5801 2200 293S 0020 40113000 44121100 52051300 s2091200 58012300 29362700 4011 4000 4412 1200 5205 1500 S209 1900 5801 2400 2934 9090 4011 9100 4412 1900 5205 2100 S209 2100 5801 2500 2939 4000 52052200 52092200 5292 29399090 Ch. 41 Ch. 46 5205 2300 5209 2900 11005804 2941 4000 4101 100 4601 2000 S205 2400 5210 0oo 3000 4101 2100 46012230 52052500 5210 1200 58109100 Ch. 30 4101 2 5205 3100 5210 1900 58109200 30019010 410122 Chi. 48 5205 3200 52102100 5810 3004 9052 4101 2900 48010000 S205 3300 52102200 99005811 30049053 4101 3000 4803 0000 5205 3400 5211 1100 0010 3004 9055 4103 1010 480 1000 5205 3500 5211 1200 3004 9090 4103 9010 s20 4100 5211 1900 Ch. 60 41042210 Ch.So 520 4200 52112100 6001 2100 Ch. 32 4106 1200 501 0000 5205 4300 5211 2200 60019100 3204 l500 s2 0010 5205 4400 5211 2900 6002 1010 Ch. 42 S0 0020 5205 450 5212 1100 60022010 Ch. 33 4203 2910 SO50 0090 5206 1100 5212 12W0 60023010 33012100 5003 1000 5206 1200 5212 2100 6002 4200 3301 2500 Ch. 43 5003 9000 5206 1300 52122200 6002 9200 3301 2930 4301 1000 5004 0000 52061400 5212 2900 3301 2940 4302 1100 SOOS 0010 5206 1500 Ch. 61 5005 0090 52062100 Clh. 53 61043200 Ch. 34 Clh.44 S007 1010 S2062200 5303 1000 61043300 3406 0000 4403 1000 5007 090 5206 2300 S305 9110 6104 3900 44032000 5007 2011 5206 2400 5305 9911 61044200 Ch. 36 4403 3100 S007 201h S206 2500 S305 9912 61044300 3604 1000 4403 3200 S007 2021 5206 3100 53089010 61044400 4403 3310 500 2029 5206 3200 5310 1200 61044900 Ci. 38 4403 3390 5007 2031 5206 3300 53110011 61044900 3806 1000 4403 3400 500 2039 5206 3400 6104 S200 - 322 - S 6104 530 Cb. 70 72142000 73062000 76069100 84712010 6104 90 70049000 72143000 7306 3000 76069200 84712020 7005 2900 72144000 7306 4000 7608 1000 8471 2030 CbL 62 72145000 73065000 7608 2000 84719110 62113200 Ch. 71 72146000 7306 60 84719120 6211 3300 7101 1000 7215 1000 7306 9000 Ch. 78 8471 9130 6211 4200 71012100 7215 2000 7312 1000 7801 1000 8471 9210 6211 4300 7101 2200 7215 3000 7317 0000 78019100 8471 9230 62132000 7102 1000 7215 4000 78019900 84719310 6213 9000 7102 3100 7215 9000 Ch. 74 7802 2000 8471 9390 7102 3900 7216 1000 7407 1000 7803 0000 8482 1000 ch.63 72162100 7407 2100 7804 1100 8482 4000 6302-2110 Ch. 72 72162200 7407 2200 7804 1900 8482 500 6302 3191 7201 1000 72163100 7407 2900 6302 3110 72012000 72163200 7408 1100 Ch.79 Ch..85 6302 3210 7201 3000 72163300 7408 1900 7901 1100 85051110 630 3921 7202 1100 72164010 7408 2100 7901 2100 8528 2081 630 4010 7202 1900 72164020 7408 2200 7901 2000 8528 2082 630 5110 7202 2100 7216 5010 7408 2290 7902 0000 85282083 63025210 7202 2900 7216SO90 7409 1100 7903 1000 8528 2084 63025310 7202 3000 72166000 7409 1900 7903 9000 8528 2090 6303 1100 7202 4100 7216 9000 74092100 79030000 6303 1200 7202 4900 72171100 7409 2900 7905 0000 Ch. 87 6303 1900 7202 8010 7217 1200 7409 3100 7906 0000 87120010 6303 9100 7204 1000 7217 1300 7409 3900 6303 9200 72042100 7217 2100 74094000 Ch, 80 Ch.96 63039900 7204 2900 7217 2200 7409 9000 8001 1000 96019000 63041110 7204 3000 7217 3100 7411 1000 8001 2020 9603 4011 63041921 72044100 7217 3200 74112100 8003 0000 9609 1010 6304 1931 7204 4900 7229 1000 7411 2200 63049110 7204 5000 7229 2000 7411 2900 Ch. 81 63049210 7206 1000 7229 9000 81100010 6304 9310 7207 1100 Ch. 76 8110 0090 63049921 7207 1200 Ch. 73 7601 1000 8101 1000 6305 1000 7207 1900 7304 3190 7601 2000 8104 1100 630 3100 7207 2000 73043990 76020000 8104 1900 6305 3900 7208 1100 73044190 7604 1000 8104 2000 7208 1200 7304 4990 7604 2900 8104 3000 Ch.65 7213 1000 730S1100 76051100 81049010 65059010 7213 2000 7305 1200 7605 1900 8110 0010 7213 3100 7305 1900 7605 2100 81110090 Cl. 69 7213 3900 7305 2000 7605 2900 6911 1010 72134100 7305 3100 7606 1110 Ch. 84 69120010 7213 4900 7305 3900 7606 1190 8408 1000 7213 5000 7305 900 7606 1210 8408 2090 7214 1000 7306 1000 7606 1290 8471 1000 Souc: GAIT (1992a). T1Wih A.: BIWm U or Pmom w 3mW 11 lrtNAlANL PUCE COuv Fm. -' ~ ~~~~~~~. - _ .. _ .. ._ _ _ as t + @) e ~~~~~~(4) (5) a PoIM (1 6 S_) 5,400.1S 4,64131 1,076.00 O.M0 -51 0.00 25 Y N 0203 Tdea 6,542.7 6,990.80 2,0.00 0.50 -70 0.00 54 Y N 0902 Tea lS,S3.41 2S,051.52 1,853.00 0.00 131 0.00 -136 N N IhOl W_ - 789.14 128.00 0.00 5 0.00 -7 N N maimM 329.28 354.11 107.48 0.00 -44 .00 43 Y N 1006 Rioo 550.82 996.88 287.17 0.00 41 0.00 40 Y N 1101 Wboot fiew 524.54 93S.48 162.00 0.06 -6 0.00 -1 N N 120 IMS~~~~~-1,8.42 239.60 0.00 35 0.00 -37 Y N 2611 127,69.18 13 ,945 6,763.30 0.ao -6 0.20 55 Y N 2701 aeDr47.70 6451 39.70 0.00 -72 0.40 53 Y N 2'A ~~~~~~200.79 109.22 130.00 0.00 486 0.00 85 Y Y 2710 W~~~~~~4257 1,050.93 225.5 0.10 -27 0.00 18 Y Y S1,918.5 1,2.8403 322.00 0°03 -5 0.00 0 Y N 31010 Nt_ u) 53229 843.16 172.00 0.05 -20 0.00 1S N N 310420 P_ 11 AN= Table A73: CI AND Oiuu EAI Ag aN COw _M Sff IN m WORMD EDO= 0 SUIC1 POUT (S) Advane Odher Bs Asa Bs Aian Wod S:r Chim law _ lwltS billironl code Commodity aIt 1985 1990 1985 1990 198S 1990 1985 1990 China's Ton 15 0=xw%s 651 Textile yam and thread 6.2 5.0 9.9 12.0 1.1 1.7 12,300 22,321 652 Coflon hics, woven 13.6 10.7 13.7 263 2.9 2.S 7,171 15,735 653 Woven txils noncotton 6.4 8.0 16.S 22.2 2.0 2.4 14,374 31,095 656 Textile, do., produocs nes 15.7 18.9 13.5 9.8 1.9 2.3 3,730 6,894 722 Eloetri power machbe, swtog 0.4 2.1 7.6 9.6 0.8 1.7 25,20S 59,505 724 Telommuniatons equipment 0.8 5.9 18.0 17.3 1.5 4.9 32,825 80,167 725 Domestic Eectri EquIpment 0.8 8.8 15.0 11.6 0.2 1.6 9,156 19,711 831 Travd goods, handbag 12.3 30.6 46.2 26.0 07 2.5 3,720 9,771 841 Clothing not of AV 8.0 14.4 31.9 20.7 2.9 4.7 45,448 110,151 8s1 Footwa 2.4 13.3 32.1 25.7 0.7 4.7 13,633 27,8S7 864 Wates and clock 3.0 9.2 21.4 21.3 0.9 2.5 6,197 13,913 891 Sound recorders, produce. 0.3 4.0 8.0 13.6 0.2 3.6 19,778 37,167 893 Aticles of platic nos 0.9 4.9 14.2 11.6 0.7 1.8 9,355 27,642 89 Toys, sg goods, ec. 6.5 22.3 39.6 25.2 0.9 3.0 9,983 27,232 89 Other mafatue goods 10.2 16.5 21.4 16.5 1.0 2.4 5,228 12,597 PomnW fori = _m rsfedo 821 Funtr 1.3 2.1 11.0 7.7 0.7 2.7 12,119 29,548 7192 Pumps, centes 0.1 0.4 5.4 2.9 0.1 OS 13,457 29,087 7151 Maline tools for mel 0.4 1.2 4.6 5.6 0.0 0.1 6,763 17,267 8616 Photgraphio equipment Qe 0.1 0.2 0.9 2.9 0.0 0.0 5,566 12,669 71992 Clcb, valves, eto., sea 0.1 0.4 3.0 3.9 0.1 0.2 5,738 12,345 695 Tools 1.8 3.4 7.9 8.3 0.1 0.2 5,921 11,711 7195 Powerd-tols nes 0.1 0.3 3.7 5.4 0.1 0.1 4,718 l1,581 8617 Medical IntuenAs ea 0.1 0.6 2.1 2.9 0.7 1.2 3,932 9,368 7171 Tete machnery 0.3 0.8 1.8 4.3 0.0 0.0 5,669 15,805 6989 Other bas met manufact_u 0.8 1S 9.2 8.4 0.3 0.9 4,579 9,254 7294 Atmotive deectri equipme 0.1 0.4 3.1 4.2 0.2 0.4 3,223 7,241 694 Steel, oppernails, nus, eto. 2.9 3.2 10.9 13.7 02 0.8 3,621 7,037 6981 Lckamihs wames 2.2 3.6 11.2 10.6 0.1 0.3 2,806 6,399 Noto: (1) Advanced Et Asan Countie-Koa, Taia, Sipore d DHog Kaog. (2) Ot Vas Ada Counrie-donia, Thaia and MaysiL