Project onCHINAS FOREIGN TRADE

BY-VINOD JOSHI

TANVI CHUGH
RAHUL RATHEE RAHUL RAUNIYAR ROHIT THORAT DAN PRISIKLINA BASUMATARI GOPALKRISHNAN IYER

CHINAS MERCHANTALISM POLICY

High tariffs, especially on manufactured goods; Monopolizing markets with staple ports; Exclusive trade with colonies; Forbidding trade to be carried in foreign ships; Export subsidies; Banning all export of gold and silver; Promoting manufacturing with research or direct subsidies; Limiting wages; Maximizing the use of domestic resources; Restricting domestic consumption with non-tariff barriers to trade.

BASIC FACTS: CHINA

World largest Population:1,339,724,852 China is No.1 in Internet users 253 million. China is Largest in Mobile Phone users with 574 million users. China lead in Relative website usage. Worlds largest standing army Worlds second largest defense budget China is the biggest furniture producing country in the world. The gross industrial output value for enterprises above designated size1in the furniture reached 448.8 billion Yuan in 2010, up 32.4% year-on-year (yoy).

CHINAS ECONOMIC GROWTH: CAUSES AND PROSPECTS HISTORICAL PERSPECTIVE ON CHINAS ECONOMIC MIRACLE

Prior to 1979, China maintained a centrally planned, or command, economy. A large share of the countrys economic output was directed and controlled by the state, which set production goals, controlled prices, and allocated resources throughout most of the economy. During the 1950s, Chinas individual household farms were collectivized into large communes. To support rapid industrialization. The central government undertook large-scale investments in physical and human capital during the 1960s and 1970s.

CONTD.

Foreign trade was generally limited to obtaining only those goods that could not be made in China. Although some growth occurred, these policies kept the Chinese economy relatively stagnant and inefficient, mainly because there were few profit incentive for firms and farmers. Competition was virtually nonexistent, and price and production controls caused widespread distortions in the economy. Chinese living standards were substantially lower than those of many other developing countries. As a result, by 1978 nearly three-fourths of industrial production was produced by centrally controlled state-owned enterprises. Private enterprises and foreign investment were nearly nonexistent. A central goal of the Chinese government was to make Chinas economy relatively self-sufficient.

CHINAS FOREIGN TRADE BETWEEN 1979-2006.

Year Exports ($ billions) 13.1 18.1 27.3 62.9 148.8 249.2 762.0 969.1 Imports ($ billions) 15.7 19.5 42.5 53.9 132.1 225.1 660.1 791.5 Trade Balance -2.0 -1.4 -15.3 9.0 16.7 24.1 101.9 177.6

1979 1980 1985 1990 1995 2000 2005

I

2006

TABLE 1: EXPORTS AND IMPORTS OF GOODS AND SERVICES, 19782010

Pdf file contains data

WHY IS CHINA GROWING SO FAST?

High Savings and Investment Foreign Direct Investment(FDI) Productivity Increment

FACTORS THAT CONTRIBUTED TO THE GROWTH OF CHINA FOREIGN TRADE.

High savings and Investment generated by SOE. ( state owned enterprises). Chinas trade and investment reforms and incentives led to a surge in foreign direct investment (FDI) estimated to be at $633 billion in 2005. Increased productivity at 3.4% per annum, accounting for 36% of Chinas growth. Reallocation of resources to more productive uses, especially in sectors that were formerly controlled by the central government, such as agriculture, trade, and services.

Growing advanced techniques of production (technology). Economies of scale International property rights (IPR). i.e. Promotes piracy thus limited R&D. Chinas exchange rate policy causes the Yuan to be less expensive than it would be if it were floating, it causes Chinese exports to the international market to be relatively inexpensive and exports to China to be relatively expensive.

CHINAS COMMERCIAL POLICIES

Inward-Oriented Strategy China initiated reforms in 1978 to shift to a more open market-oriented economy. The previous inward-oriented centrally-planned strategy had caused multiple economic distortions that hampered exports and private sector activity. The inward-oriented strategy introduced in the 1950s fostered import-substituting industrialization using stringent protections and state control of resource allocation. During the Maoist period, private sector firms, including foreign-owned firms, were gradually taken over and private sector ownership was completely eliminated in 1958 during the Great Leap Forward. Instead, state-owned enterprises emerged at the forefront of the countrys industrialization effort.

OPEN DOOR FOREIGN DIRECT INVESTMENT POLICY AND OTHER REFORMS

The post-1978 reforms marked the start of a gradual and highly coordinated transition process in the China over the next 3 decades. The initial focus of reforms was to promote exports by attracting FDI. In 1979, an export processing law was passed that provided incentives for the processing and assembly of imported inputs. These incentives were expanded in 1987 to provide for the duty-free import of all raw materials, parts, and components used in export production. Monopoly state trading was liberalized starting in the late 1970s and replaced with a complex and highly restrictive set of tariffs, non-tariff barriers, and licenses. Reform of the complex import control regime was more cautious during the early transition years, but was strengthened from 1992 onward by extensive reforms that the china agreed to implement as a part of the WTO accession process. Accordingly, a dualistic trade regime existed from the mid-1980s onward that promoted exports via FDI alongside controlled liberalization of protected domestic sectors

CONTD.

The growth in Export, especially among domestic enterprises there was the liberalization of the system of export licensing and quotas. Only 8% of exports were subject to export licensing and quotas by 1999,compared with a peak of about 66% in 1991. The foreign exchange system were initiated starting with unification of dual exchange rates . As a significant incentive for exporting, exporters were allowed to retain a share of their foreign exchange earnings, which enabled them to finance imports without needing to seek official permission. Over time, the state also devalued the domestic currency and in 1997 moved toward currency convertibility on current account transactions, making it even easier for exporters to obtain foreign currency. In 2005, the China moved more systematically towards a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.

COMPARATIVE ADVANTAGE THEORY:

Cheap educated labour. Large amount of Manufacturing Units providing employment to labours. Developed Nations have set up their manufacturing units since the cost of production and labour rate is less in China.