China's foreign trade and investment strategies: implications for the business environment - foreign trade and investment guidelines of China from 1979 to 1997 - includes discussion on the trade balance and foreign investments in China

Business Economics, Oct, 1997 by Penelope B. Prime, Jong H. Park

China under the leadership of Mao Zedong was an autarkic economy, in which foreign trade was a residual of the economic plan. Except for Soviet assistance in the 1950s, foreign operations for the most part were nationalized or closed. In the 1960s and 1970s, China imported the production equipment that was deemed vital to its basic industrial development. Exports were planned to finance these imports, keeping an overall trade balance. Altering production to take advantage of China's international comparative advantage was not a consideration.

Under the leadership of Deng Xiaoping, China's policymakers took a radically different approach. They decided that substantially more imports of technology were needed to modernize the economy. The former approach was too slow and restrictive. The resulting opening policy (duiwai kaifang zhengce), beginning slowly in the late 1970s and accelerating in the mid-1980s, encouraged both imports and direct foreign investment as means to improve the technological base. Exports were encouraged to help pay for imports. China is now ranked with the top dozen largest trading countries in the world and will soon overtake Japan as the country with the largest trade surplus with the United States. China has also successfully attracted billions of dollars of foreign investment.

The role of foreign trade and investment in economic growth has been extensively debated in the economic literature.(1) Numerous arguments are advanced for favorable export-output linkages that might be exploited by pursuing an export-oriented development policy, including economies of scale, availability of foreign exchange to import capital goods, pressure to specialize according to comparative advantage, and benefits from increased competition. Empirical evidence in support of the export promotion hypothesis is strong but not universal. The East Asian countries such as Korea, Taiwan, Hong Kong and Singapore are generally believed to have enjoyed particular success with export-promoting development strategies, thus rendering credence to the superiority of export-promotion policies as a development strategy.

The success story of China's opening policies in recent years has added another dimension to the East Asian success component: the favorable impact of "opening up" is not just for small economies, but also for large continental economies such as India and China. In the case of China, we argue that the implementation of the opening policies, which involved much more than export promotion, created an increasingly attractive trade and investment environment for international business firms. This improving environment resulted in significant inflows of foreign capital, entrepreneurship and technology as well as growth in exports. Dynamic forces unleashed by the creation of an environment conducive to international business operations have thus played an important role in the process of rapid economic growth and development in China.

In this article, we analyze the impact of the progression of major policy decisions on the business environment for foreign companies doing business with China. In addition to the opening policies, China has experimented with wide ranging domestic economic reforms. These reforms have resulted in fundamental decreases in the planned economy of the past, but at the same time have introduced new pressures resulting in several cycles of serious overheating with inflation, budget deficits, and rapidly expanding credit and investment. We hypothesize that domestic reform and the ensuing problems of macroeconomic imbalance have influenced foreign trade and investment policies and therefore the environment for international business operations. In addition, we observe much evidence of trial and error and conflicting interests in policymaking, rather than a coherent, centrally orchestrated development strategy.

A PROGRESSION OF FOREIGN MARKET-RELATED POLICIES

In the 1990s, many new and reorganized institutions in China are involved with international markets compared with the late 1970s [ILLUSTRATION FOR FIGURE 1 OMITTED]. The people involved with these institutions have different goals and incentives, with a wide variety of decisionmaking powers. Most of the policies described in this section were the prerogative of some part of the central government, but within the center different agendas were at work. Often these agendas conflict with each other. When problems arise, such as low foreign exchange reserves or currency pressure, certain agendas gain recognition within the policy process in China, which can lead to administrative controls on imports or other backtracking on opening. Nonetheless, a review of China's policies over time shows a definite progression towards encouragement of more trade and investment, along with a tendency for liberalizing and decentralizing economic activity and decisions.

China adopted a variety of measures to promote both imports and exports. Foreign trade organizations were established or reorganized, trading corporations were decentralized, and trade restrictions resulting from planning and import-export controls were liberalized.