China's Embrace of Globalization

China's foreign trade has soared from $21 billion in 1978 to more than $1.1 trillion in 2004. What reforms must China make to reap the full benefits of increased integration into the global economy?
April 18, 2006 | Case Study | Q&A
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This essay summarizes China's progressive opening to foreign trade and investment in the years since 1978. These reforms led China's foreign trade to soar from $21 billion in 1978, when China at best was a margin player in global trade, to more than $1.1 trillion in 2004, when China became the world's third largest trading economy (National Bureau of Statistics 2005, 161; World Trade Organization 2005, 16). We will briefly review the history of Chinese trade and investment policy from 1978-2001 and note the impact of important policy changes on expansion of trade and investment. Because accession to WTO marked an important watershed in the evolution of Chinese policy in this realm, we will also include a discussion of the key features of the agreement under which China joined the WTO and an assessment of the progress China has made to date in implementing its obligations. The WTO accession agreement opens up important components of the service sector of the Chinese economy, and these will receive special emphasis. We will also address the high-profile debate over China's currency regime and discuss the implications of China's expanding trade and foreign investment for the rest of the world.

In providing this overview, we will be emphasizing several themes. First, China achieved a greater degree of openness to foreign trade in manufactures prior to WTO accession than is generally acknowledged, even in much of the best recent scholarship. In fact, the drive to liberalization of trade and FDI regimes seems to have dramatically accelerated in the late 1990s. Second, the additional openings mandated under China's WTO accession agreement will likely make China's economy the most open of any large developing country, and, to date, China has made reasonable progress toward meeting its obligations. Third, developments in Chinese trade and investment have generally conformed to patterns of Chinese comparative advantage, yielding important benefits to China and its trading partners. Fourth, China needs to act quickly to address fundamental problems in its current exchange rate regime. In addition to laying out the key features of these problems, we will propose a reform package that could resolve them. Finally, China's growth as a trading nation has recently reached the point where developments in China have global impact. China's impact is particularly strong in East and Southeast Asia, but the degree to which this impact is on balance a positive one depends on the relative development of the trading partner in question.

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Lee Branstetter

"China's Embrace of Globalization"


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