Competing Perspectives on the Liberalization of China's Foreign Trade and Investment Regime.

Author:Lichtenstein, Peter M.

China has been experiencing a social and economic transformation that is no less dramatic than those experienced since 1989 by the nations of central and eastern Europe. In a span of twenty years, this once "sleeping giant" has evolved from a centrally planned, autarkic, socialist economy to a rapidly growing, decentralized, open, market-driven economy. What makes this transformation especially remarkable is the fact that it was initiated, guided, and encouraged by the Chinese Communist Party (CCP) itself.

China's transformation, which began in 1978, has enormous consequences for the global economy because of the strategic position that an "awakening" China occupies in Asia and, indeed, in the world. The effect China's economy is bound to have on the allocation of the world's resources will be enormous, and so too will its effect on the well-being of the historically dominant western capitalist nations. It is therefore understandable that the Western nations, especially the United States, have been eager to integrate China into the world trading system by sponsoring China's membership in the World Trade Organization. The hope is that WTO membership will constrain if not neutralize an independent and possibly obstructionist China while at the same time prying open China's doors for global businesses. The Chinese, on the other hand, see membership in the global economic community as essential to their own continued economic growth and development and as an opportunity to influence to their own advantage the futu re of trade liberalization, although they hope the terms of such membership would preclude excessive foreign interference with their domestic economy.

Many, if not most, Western observers, informed by the orthodox economic model, celebrate the changes taking place in China and view the Chinese as having finally come to their senses by realizing that only free market capitalist institutions can maximize welfare. Indeed, they argue that China's glamorous performance over the past two decades is proof of the superiority of these institutions. Some have even gone so far as to suggest that China's reforms, together with the revolutions that took place in Europe and Russia, prove that history has actually come to an end with the triumph of Western liberalism. [1] In their view, China's only error so far has been that it has not yet gone far and fast enough in disassembling the old socialist institutions (e.g., state enterprises) and replacing them with Western political institutions and values.

Others, arguing from various heterodoxical economic positions, observe that while China's economic reforms have indeed resulted in enormous increases in material wealth, this has come at horrendous social costs. These costs include rising unemployment, massive environmental degradation, obscene inequalities in income and wealth, crime and corruption, the proletarianization of the peasantry, and the emergence of an underclass of migrating workers (the so-called "floating population") forced to labor under hazardous conditions. At the same time, a profit-making urban and rural elite class has emerged, allied to the CCP bureaucracy, which is able to benefit from its access to political power and influence. [2] Observers from this vantage point discount official CCP pronouncements asserting that China is building a "socialist democracy"; they claim that neither socialism nor democracy is being constructed. [3]

It is not possible in this paper to deal with the entire array of economic reforms that have been put into place since 1978. [4] Instead, I will focus only on the reform of China's foreign trade and investment regime. My position is that the orthodox laissez-faire doctrine, abundantly criticized in the pages of this journal, logically leads to and promotes the conclusion that China should liberalize its current and capital accounts and allow the free flow of capital into and out of China. I believe that this logic is based on faulty premises and leads to ill-conceived international policy, and that these faults can best be exposed by deploying a heterodoxical "counter-theory." The counter-theory used in this paper is Post Keynesianism. [5] Post Keynesian theory originates in John Maynard Keynes' own position that "the weight of my criticism is directed against the inadequacy of the theoretical foundation of the laissez-faire doctrine upon which I was brought up and which for many years I taught" (1964, 339).

The paper is organized as follows. The following section outlines the dramatic changes that have been made in China's foreign trade and investment regime. After a brief discussion of the nature of interpretation, the next section examines the economic orthodoxy. This section is followed by another that investigates the Post Keynesian heterodoxy. The final section draws certain conclusions about the choices China faces based on the distinctions drawn between orthodox and heterodox theories. In particular, it is concluded that the Chinese government's management of foreign trade and investment (i.e., dirigisme) is economically defensible. Whether it is more broadly defensible on social, political, and ethical grounds is another question that this paper does not address.

The Transformation of China's Foreign Trade and Investment Regime

China's foreign trade regime prior to 1978 was designed to serve the needs of socialist industrialization. Export earnings were used to pay for the import of the modern technologies and raw materials needed for industrialization. The annual investment plan dictated the trade plan, which in turn specified the magnitude of imports and, therefore, the volume of exports needed to finance those imports. In order to guarantee plan fulfillment, the Chinese government put into place institutions that directly controlled all exports, imports, prices, and exchange rates, thereby also controlling China's international payments position. Foreign trade corporations (FTCs) were responsible for carrying out the trade plan and monopolized all exporting and importing. The FTCs purchased export commodities from domestic producers and distributed imported commodities to domestic users. Residual revenues were turned over to the Bank of China, while losses were subsidized by the state. This foreign trade regime, which remained m ore or less unaltered until the start of the reform era in 1978, allowed China to maintain a trade surplus and a favorable international payments position every year up to the start of the reform era in 1978. [6]

The rise to power of Deng Xiaoping and his proteges marked the start of CCP-led capitalist reconstruction in China. This policy has continued under Deng's successor, Party General Secretary Jiang Zemin. In order to preserve its connection to its socialist lineage, however, the official Chinese interpretation since 1978 has been that China is building "socialism with Chinese characteristics," constructing "socialist democracy," and entering the "primary stage of socialism." Presumably, once the material foundations are established, socialism would emerge in a classical Marxist manner, most likely in the next fifty to one hundred years. [7]

Central to China's economic transformation has been the liberalization of the foreign trade and investment regime and China's gradual, yet deliberate, integration into the global economy. [8] Liberalization in China has meant decentralizing foreign trade decision making, permitting the domestic market to play a larger role in determining China's pattern of trade, linking the domestic prices of tradables to international prices, exposing domestic producers to international competition, and encouraging foreign direct investment. Yet, the original 1950s strategy of relying on imports as a conduit for advanced technology and management expertise, and of paying for these imports with export earnings, has continued to this day. This policy goal, together with the nationalistic desire to remain financially self-sufficient and immune to the vagaries of global markets and speculation, has required maintaining control over China's balance of payments, particularly the capital account. The pace of liberalization, then, is influenced by these seemingly contradictory objectives.

The reform of China's trade and investment regime has consisted of the following elements:

  1. Decentralization of decision making. The scope of economic planning and the extent of direct central control over exports and imports were sharply curtailed throughout the 1980s. This has meant increased use of guidance planning, greater latitude for FTC and enterprise level decision making, the introduction of negotiated contracting between the central planning authorities and FTCs, a dramatic expansion in the number of FTCs, and a sharp reduction in state subsidies to FTCs. The trade plan also has become more export driven, and an increasing fraction of trade has been conducted outside the scope of the plan. By the mid 1990s, most FTCs had become independent and responsible for their own profits and losses, and state enterprises, foreign-invested firms, collective enterprises, and private enterprises now have direct trading rights.

  2. Use of tariff and non-tariff trade barriers to regulate trade. Annual plans continue to regulate trade, although the instruments of control are more likely to consist of licenses, quotas, export promotion policies, tariff exemptions and assessments, government-managed exchange rates, control over access to currency markets, canalization of imports, designated trading (assigning import rights to designated enterprises), miscellaneous administrative controls, and international market conditions. [9] Mandatory export plans have been abolished, and import plans have been substantially scaled down. The continued existence of trade barriers conflicts with WTO standards, and the admission of China into this organization is conditional on the...

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