In a little over a quarter of a century, economic reforms and openness have let to rapid economic growth and poverty reduction in China with her international trade soaring to reach $1.1 trillion in 2004 when China became the world’s third largest trading economy (WTO 2005, 16). Policymakers and development practitioners the world over are wondering how. In a recent NBER paper “China’s Embrace of Globalization”, Lee Branstetter and Nick Lardy (2006) provided an excellent overview of China’s pre-WTO and post-WTO reforms, encompassing reforms in trade, investment and foreign exchange regimes.
Several main themes in this paper are inspirational: first, prior to WTO accession, China had achieved a greater degree of openness to foreign trade in manufactures than is generally acknowledged; and the reforms accelerated in the late 1990s. Second, to date, China has made reasonable progress toward meeting her WTO obligations, which will likely to make China the most open of large developing countries. Third, the patterns of China’s trade have conformed to patterns of her comparative advantage, benefiting China and her trading partners. In particular, multinational corporations (MNCs / FIEs) are using China as an export platform, and the biggest exporters in China are foreign invested firms. As a result of this displacement effect, the combined shares of the US global trade deficit accounted for by China, Japan, Hong Kong, Taiwan and South Korea actually fell. So it is misleading to just focus on the US-China bilateral trade deficit which is rising rapidly causing so much concern.
One particular point got me thinking. The authors eluted to the possibility that “an overdevelopment of the export sector was a function of a long undervalued exchange rate”. “The longer a currency’s undervaluation encourages an overexpansion of the export sector, the greater the power of the lobbying groups that could seek to halt or limit the adjustment ….” To which I might add, the overexpansion of goods exporting sector is in sharp contrast with an inefficient service sector: even though progress has been made, China’s service sector has been largely sheltered from international competition until recently, and many subsectors are under state monopoly. FDI in these areas has been limited and the budgetary allocation to social services (0.6 percent of GDP on health and 2.4 percent on education) has been lower than other developing countries. The imbalances between the manufacturing and the service sector (accounting for only 40 percent of GDP and declining) are more pronounced in China than elsewhere. It is now the time for rebalancing the pattern of growth to shift the focus on the reform and trade in services. (detailed program)