[MUSIC] In this presentation, I want to provide an overview of China's trade performance. And introduce you to the key policies that have effected the patterns of international trade in China. So, we know that China became the Factory of the World. And we're going to describe how that happened and the nature of Chinese exports and imports. Then, when we turn to the discussion of trade policies, we'll talk about the amount of tariffs that China has charged on imports over time. We will present some information on the extent of processing trade in China. And we will describe the agreement that China made with leading developed countries that led to its entrance into the World Trade Organization. So, if we look at the performance of exports, we see this dramatic figure of China's exports growing from a very low initial level, to becoming the largest exporter of goods in the entire world. Far surpassing even the United States which is the second largest exporter. More perhaps less known is that the import picture actually looks very similar. Although, China did not quite overtake the US, we see a similar, very dramatic increase in the amount of imports coming into China. If we add imports and exports together and look at the total amount of trade as a share of GDP in China, we come to a figure of 42% in 2014. Now, this is much more than the United States. It's lower than Germany which is another of the world’s leading economies but a much smaller economy or much smaller population. Compared to some of the other large emerging markets like India, Brazil, and Indonesia, China has higher or comparable levels of trade as a share of GDP. So overall, we can see that trade, this dimension of globalization, is very important to the Chinese economy when compared to other countries. Now, what have been the composition of exports and imports in China? This figure provides a description over time of the structure of the goods that China exports. And the main thing to note here is that, whereas at the beginning in 20 years ago, China was exporting quite a lot of clothing and textiles. That percentage, this is the gray area, that percentage has fallen very steadily over time as China has shifted to more sophisticated higher value products. And you can see that telecommunications, electronic machinery, other machinery, office and data processing. All of these more sophisticated products have increased gradually over time. Now, with respect to imports, interestingly, if we look at the manufactured grids which this tan shaded area at the top of this figure. China has imported fewer and fewer manufacturing goods over time as it's developed its own manufacturing capacity. The areas that have increased the most are actually related to energy, so crude materials, fuels. As China has grown there's been an enormous increase in the demand for energy and China has limited own energy resources. Now, in addition to goods trade, which was described in these past figures, there's also been a pretty steady increase in the amount of service sector trade in China. And here you can see that China imports quite a lot of service sector trade but it doesn't export very much. And imports of these services include things like IT, communications, financial services. And for China, Chinese tourists going abroad is also an important part of services imports. Now, turning to the policies that have influenced international trade. If we look at the amount of tariff revenues collected as a share either of total government revenues or as a share of the import value of goods, which is kind of the affective import tax rate on goods coming into China. We see that there's been a dramatic reduction since the mid-1980s. So interestingly, even before China entered the WTO in 2000 and committed to very low levels of tariffs, China had already on its own begun to systematically reduce the tariff rates. And to allow increasingly large groups of goods to be kind of free of any tariffs at all. So the effective tariff rates, the tariff revenue as a share of import value, fell rather dramatically. And today it's very low. Something like 2 or 3% of import value. So goods can come into China fairly freely. One other thing that China did to try to encourage exports and to encourage foreign investment. Foreign companies come in and produce goods for export was to establish export processing zones. So export processing zones, initially they were actual physical locations or zones where producers could import anything they wanted without paying any tariffs or any taxes. And they had to use all of those imported goods to produce something that was entirely exported. In other words, these are very pure kind of processing operations where something comes in, it's assembled, and it's sent back out. And by providing a lot of benefits in terms of no taxes or import fees and good infrastructure. China was able to attract foreign firms to set up factories in these zones, hire Chinese workers, assemble products, and export. Now obviously, the advantage of this is that it can attract firms into China. It can employ lots of workers in China. But the disadvantage is that these firms are not purchasing products from other Chinese firms, they're importing them. So they're not generating kind of extra benefits to other firms in China by demanding those goods. And because the operations are very assembly oriented, it's not clear how much new technology is actually being introduced into China through this type of production. Initially, process and trade was focused in physical zones. But later, firms could be processing firms even if they located outside of these zones. There has been concern at various points that some of the kind of import duty exempt goods being imported into the processing zones, actually leak out of those zones and are kind of resold to other domestic firms, obviously to their benefit. But leaving to a kind of evasion of the regulatory regime. And this could lead to kind of reinterpreting the degree of openness of domestic trade. In that, many domestic firms may have greater access than might have been expected to cheap imports to support their production. Now, if we look at the percentage of China's trade that was in this processing zone, we find that in the 1990s and into the mid-2000s, actually the majority of Chinese trade was of this type. But since about the mid-2000s, there's been a pretty dramatic reduction. So that now only about a third of Chinese exports is this type of processing exports. And that has occurred as more firms have been willing and interested in sourcing their inputs domestically. As China's own manufacturing capabilities increase, Chinese firms can produce the inputs that these export firms need at decent quality and at low cost. And so many firms elect to kind of give up the benefits of being a processing firm, in order to access the opportunities of sourcing their inputs domestically. Now, the last thing I want to talk about in this presentation about policy, is the World Trade Organization agreement that China entered in 2000. This was a remarkable deal. China made many concessions including opening many of its service sectors to international competition. Leaders in China said that part of the reason that China made all of these concessions in the WTO negotiations, was they wanted it to use this as an opportunity to spur reform domestically. To put pressure on Chinese firms, to reform and innovate and compete in the open market place. That this would actually help spur more aggressive economic reforms domestically. So this was a quote from Zhu Rongji when he was negotiating the deal at the White House. The Competition arising from WTO membership will also promote a more rapid and more healthy development of China's national economy. So what were the terms of the deal? There was an agreement to increase agricultural imports which had been a quite protected sector. Reduce tariff rates, nontariff barriers, direct subsidies, to basically make trade more free. To reduce tariffs on most industrial products. To open these key service sectors to foreign competition. To commit to not unfairly subsidizing state enterprises. That there should be an even playing field between Chinese state enterprises and Chinese private companies, and most importantly, foreign companies competing in China. And that foreign companies would also have good access to distribution networks in China to sell their products. In addition, China committed to being part of dispute settlement procedures established by the World Trade Organization. So, if it had a dispute with another country, or another country wanted to initiate a dispute with China, they could go to the World Trade Organization and China would abide by the ruling. There were also specific agreements to try to ensure that there would be fair treatment for firms operating in China. And an agreement to relax any stipulations about local content, transfer of technology, R&D activities. In order to allow foreign firms to come into China, invest relatively freely without having to do things that China thought would benefit the Chinese economy. China felt like those things could occur more naturally and the main thing was to make China an attractive foreign investment environment. And finally, there were assurances made to protect American workers from very high levels of increases and imports coming from China. So there were antidumping methodology and other surge protection types of measures. Now, the agreement, of course, has now been in place for 15 years. Throughout this time, there have been complaints from the US and other countries about China's implementation of the agreement. And so some of the concerns that have been raised are that first, China has continued to maintain barriers to some US exports or exports from other countries. These are concerns that have been expressed in reports from the US Trade Representative's office. Second, a failure to protect intellectual property rights of American firms. Third, a failure to enforce other types of standards, such as labor regulations, that are important for US firms to feel they're on a competitive, kind of equal playing field with Chinese firms. And also, strong concern that China still supports its own industries and its own state enterprises, in kind of indirect ways. And this also gives them competitive advantage. And finally, there's been a lot of political discussion about the large trade imbalance between the US and China. And China has been kind of accused of manipulating trade. And we will discuss that issue and discuss how this growing trade that China is engaged in, contributes to China's overall economic growth.
