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Trade: Cause for hope, concern
2004-01-19
Business Weekly
China's foreign trade continues to gain momentum, alongside the world's strengthening economy and rising trade volume.
In terms of foreign trade, China has several advantages.
* Competitive labour force.
China has a huge number of labour force.Moreover, China's labour is inexpensive.
The International Labour Organization once studied the annual cost of labour in 16 countries and regions' manufacturing industries.
The study indicated the cost of labour in China in 2000 accounted for less than 3 per cent of developed countries, and less than 20 per cent of Mexico and Brazil.
* China's labour force is better educated.
Fifty-nine per cent of China's labour force, by the end of 2000, had received at least a junior secondary education.
That was 16.5 per cent and 7 per cent higher than Brazil and Mexico, respectively.
* China complements its primary trade partners' industries.
China's primary trade partners are the United States, European Union, Japan and Hong Kong Special Administrative Region.
China's labour-intensive industries, such as textiles and clothing with capital-intensive industries, such as metals, complement the capital- and technology-intensive industries, such as transportation facilities, in the United States, European Union and Japan.
* Enormous potential market for foreign direct investment (FDI).
Between 1995 and 2002, FDI-related export growth amounted to 66 per cent of China's overall export growth.
A recent survey by A.T. Kearney Inc indicated China has consistently been multinational firms' first choice for FDI-related projects in recent years.
China in 2002 surpassed the United States to become the top FDI destination.
* Exchange rate policy.
China continues to retain its unitary peg to the US dollar, which ensures the dollar's current depreciation will boost China's global competitiveness.
* World Trade Organization (WTO) membership.
Export restraints regarding China in violation of WTO norms have been eliminated since December 2001 when China joined the trade bloc.
China has improved its laws, regulations and investment environment, and the nation's market has gradually integrated with the global economy.
As a result, enterprises, especially those that are either collectively or privately owned, have benefited.
Between January and November of last year, the combined export of firms increased 81.3 per cent over the same period of the previous year.
China should exploit these advantages to expand exports.
While maintaining the renminbi's exchange rate, China could try to switch from a unitary peg to the dollar to a three-currency basket peg, with roughly equal weight on the dollar, the euro and the yen.
In terms of FDI, China should pay more attention to the structure and distribution of foreign investment.
Furthermore, China should improve its investment environment -- including laws and regulations, management systems and infrastructure.
Generally, opportunities and challenges are mutually inclusive.
While grasping opportunities, China must face the problems that arise.
The following are some of the problems China might face:
* Unbalanced product mix.
Regarding China's end products for international trade, there is great potential to export office facilities and communications equipment.
China's iron, steel and chemical products, meanwhile, are at a disadvantage.
WTO statistics indicate the export volume of China's iron and steel in 2001 accounted for 2.4 per cent of the world's imports.
Meanwhile, the import volume of iron and steel accounted for 7.6 per cent of the world's imports.
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China's export volume of chemical products accounted for 2.2 per cent of the world's imports, while China's imports of such products accounted for 5.2 per cent of global imports.
* Irrational market structure.
Most of China's exports are to the United States, the European Union and Japan. The US market is the major destination of made-in-China commodities.
China has become a manufacturing centre of export-oriented finished products, while its neighbouring economies supply the primary products.
China has created one of the world's largest assembling industries, with imported materials from such major economies as Japan, South Korea and Taiwan Province.
* Low tax rebate rate.
China on January 1 reduced the rate of its tax refund five levels -- at 17, 13, 11, 8 and 5 per cent.
The average reduction is 3 percentage points.
This should increase the cost of exports, which, in turn should, discourage domestic enterprises from selling their goods overseas.
The volume of China's exports will probably decrease.
*Transition of WTO's effects.
China's exports have grown since it joined the WTO.
After two years of economic development, however, that momentum is fading.
On the other hand, China must fulfil its WTO commitments.
China's trade deficit will widen as growth in its exports shrinks and the volume of its imports increases.
Confronted with those challenges, China should take appropriate measures to minimize the uncertainties.
As China focuses on exporting labour-intensive products, it should promote the competitiveness of some other products -- including capital products and domestic raw materials that are in short supply.
China should strengthen trade co-operation with countries and regions other than the United States, the European Union and Japan.
As the price of crude oil drops, China will no doubt establish a State-controlled oil reserve.
That would guarantee the nation's oil supply.
The transformation of China's currency reserves into oil reserves would reduce international pressure on China to revalue the renminbi.
But reducing the tax rebate rate will exert pressure on China's exports.
Although a trade deficit looms, China must maintain the equilibrium of revenues and expenditures, due to increasing consumption and investment across the country.
The author is an economist with the National Bureau of Statistics.
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