Impact of China's open-door policy on Pacific Rim trade and investment - International Perspective

Business Economics, Oct, 1993 by Jong H. Park

AN OPEN-DOOR policy has been Deng Xiaoping's most dramatic contribution to China's economic reform movement. The policy represented a rejection of the inward-looking, autarkic development strategies of the previous two decades. Adoption of an open-door policy and implementation of a series of reforms in its foreign trade system have transformed China into a new export competitor in Pacific Asia. Between 1970 and 1987, for instance, China's exports to her neighbors in the Asia Pacific region jumped by twenty times and her imports by fifty times! At the same time, foreign direct investment in China from Japan and the East Asian newly industrialized countries (NICs) rose rapidly, as did China's exports to Asia and the United States. This article examines how the entry of China into world markets has affected the pattern of trade and investment in Pacific Asia and speculates on the future role of China in Pacific Asia and the world.

ECONOMIC DYNAMISM IN PACIFIC ASIA AND CHINA

No region in the world has surpassed the remarkable economic performance achieved by the East Asian countries in the past three decades. Japan emerged first as a Pacific economic power, followed by the four East Asian NICs (those four "Little Dragons"), which in turn were closely followed by member countries of the Association of Southeast Asian Nations (ASEAN). Now it is China's turn. While the per capita income for the world grew only at a 1.5 percent annual rate between 1965 and 1988, and the U.S. grew at 1.6 percent, Japan's income growth was 4.3 percent, the Asian NICs ranged from 6.3 percent to 7.2 percent, and the ASEAN countries grew a little more than 4 percent (except for the Philippines with a poor growth rate of 1.6 percent).

Particularly noticeable is a per capita income growth rate of 5.4 percent experienced by China -- truly a remarkable success for a country whose population accounts for 22 percent of the world's population, but whose arable land accounts for only 7 percent of the world's total. Moreover, China has emerged as a major exporter of labor-intensive manufacturers and has successfully penetrated the markets of industrialized countries, especially the United States. In 1991, for instance, China's bilateral trade surplus with the U.S. amounted to almost $13 billion, the second largest after Japan's $43 billion surplus with the U.S.

CHINA'S ECONOMIC REFORM AND OPEN-DOOR POLICY

Perhaps one of the most significant elements of China's reform movement has been the renunciation of the "self-reliance mentality"(1) and the recognition of China's needs for foreign trade, investment and technology in order to modernize. This meant replacing the hard-line doctrine of self-reliance with an outward-looking policy of opening up the country to the outside world. The major goals of this reformist new doctrine are: (1) Fill the domestic savings gap necessary for economic development with foreign capital inflows; (2) bring in advanced foreign technology and managerial skills; (3) increase exports in order to expand foreign exchange earnings; and (4) increase industrial and agricultural productivity.(2)

As a first step toward achieving these goals, China in 1978 adopted an open-door policy toward foreign trade and investment. Before 1978, Chinese firms were practically sealed off from the world economy. The required levels of exports and imports were simply established by the government in its five-year economic plans. Foreign direct investment was severely restricted. Only the state-owned foreign trade corporations were allowed to have contact with foreign businesses and to carry out exporting and importing of goods.

As a first step to encourage foreign trade, the monopoly power of the twelve state-owned foreign trade corporations was reduced by allowing local authorities and enterprises to set up their own trading corporations. Later, these corporations were given expanded power and autonomy in management and independence in financial responsibilities.(3) Large private firms were also allowed to engage in trade directly. Furthermore, these local foreign trade corporations and private firms engaged in exporting were allowed to retain up to 25 percent of their foreign exchange earnings. The foreign exchange retention rights could extend beyond the 25 percent level for "key" export industries and for those provinces in which special economic zones (SEZs) are located.(4)

In 1979, a joint-venture law (the Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment) was enacted to encourage foreign investment and technology transfers and to establish SEZs with a variety of incentives for business firms to locate there and produce for export. Four SEZs were established in Shenzhen, Zhuhai and Shantou in Guangdong province and Xiamen in Fujian province. Later, in 1981, Hainan Island was designated as the fifth SEZ. In 1984, fourteen cities along China's Pacific coastline from Liaoning province in the north to Guangxi province in the south were declared open for foreign direct investment and technology. In 1985, this was followed by the opening up of three huge deltas in the Pacific coastal areas. Thus China appears to be opening up the entire Pacific basin to court the inflow of foreign investment and technology.