China’s Trade Patterns and International Comparative Advantage

In the recent economic reforms, China has successfully transformed itself from a closed and centrally planned economy to a more open and market-oriented economy. Over the past two decades, China has also enjoyed unprecedented growth and is fast becoming a key player in the world economy. Understanding the changing nature of the Chinese economy and the dynamic elements behind China’s recent ascendancy will be vital for the world’s future.

China was one of the world’s most isolated economies prior to 1978, trading only about 0.75 per cent of the world’s total exports and imports. Since then, China’s foreign trade has been growing at an average rate of 15.5 per cent a year in nominal terms, more than twice as fast as world trade. Between 1978 and 1997, the volume of total trade rose from US$21 billion to US$325 billion and the volume of exports had increased by 18.9 times in nominal terms. Significantly, more than 80 per cent of these exports are manufactured goods. By 1997, China had become the 10th largest trading nation in the world, up from the 37th less than two decades ago.

The analysis of trade patterns and comparative advantage should be conducted at a commodity level. In this chapter, the defined commodities or groups of commodities are classified into different categories according to their factor intensities. Alternative methods of estimating factor intensity are discussed in the context of their applicability to the Chinese economy; the purpose of this classification is to indicate the factor contents of Chinese tradable commodities and so facilitate the following discussion of China’s trade patterns and comparative advantage.

Foreign trade has always played an important role in China’s economic development (Eckstein 1966; Chen 1975; Hsiao 1977, Hsu 1989). It has outstripped gross national output since 1950. From 1953 to 1996, gross domestic product (GDP) grew at 10.8 per cent per annum in nominal terms (State Statistical Bureau, Department of National Economic Accounting 1998:3–4). During the same period, the total value of China’s foreign trade increased at an average annual rate of 11.8 per cent in nominal terms, with annual growth rates of exports and imports at 12.3 and 11.4 per cent respectively (State Statistical Bureau 1997:588).

The principle of comparative advantage has significant implications for the efficiency of resource allocation and economic growth. The term ‘comparative advantage’ is often used interchangeably with ‘comparative cost’ which is closely associated with the term ‘opportunity cost’. The opportunity cost of a commodity is the value of other commodities which must be forgone so that one extra unit of a commodity may be obtained. This is equivalent to what is expressed in the literature of comparative advantage as ‘relative price’—that is, the quantity of some commodity that must be given up in exchange for one unit of another commodity. In the classical case, the comparative advantage in a commodity is defined by the divergence between its autarkic and free trade relative prices.

At the onset of economic reforms, China’s domestic price structures had diverged substantially from that of the rest of the world owing to 30 years of central planning and isolation. These distortions had resulted in a huge loss of allocative efficiency for the Chinese economy and hindered the opening up of the domestic economy. It was clear that the domestic price system had to be reformed and realigned with the rest of the world. After nearly two decades of intensive economic reforms, by 1995, 89 per cent of consumer goods and 78 per cent of producer goods were being sold at market prices (Editorial Board of the PYC 1996). However, the impact of economic reform on China’s domestic price structure has not been subject to rigorous empirical scrutiny. Although the magnitude of China’s domestic price distortions can be indirectly measured using data on the sectoral profit rates of Chinese industries,¹ few attempts have been made to directly quantify the changes in the differentials between China’s domestic prices and the world prices at a commodity level.²

In Chapter 6, we estimated the ratios of domestic to border prices for China’s tradable goods. Distortions also exist in the markets for non-traded goods and primary factors. To calculate the domestic resource productivity for China’s tradable goods, the shadow prices for non-tradable goods and the primary factors of production have to be estimated.

The estimates in previous chapters of China’s relative price structure for tradable goods and shadow conversion factors for primary factors make it possible to adopt the domestic resource productivity (DRP) method to measure China’s international comparative advantage at a commodity or sectoral level. This chapter presents the estimated results and discusses the impact of China’s recent economic reforms on the country’s comparative advantage over the period 1978–95.

Was China’s foreign trade consistent with its comparative advantage in the late 1970s before the economic reform process began? Has the reform process led to a convergence between China’s trade patterns and its underlying comparative advantage? The net export performance ratio (NEPR) and the domestic resource productivity (DRP) measures estimated in the previous chapters allow a further investigation into the relationships between China’s trade patterns and comparative advantage. This analysis will reveal the impact of China’s economic reforms on allocativie efficiency in the tradable goods producing sectors.

This study has analyzed the impacts of economic reforms and the open-door policies on China’s foreign trade. The efficiency of China’s trade and production has been examined by a detailed investigation into the changes in the commodity patterns of trade and production structure which have taken place over the reform period and their relationship with comparative advantage. This chapter summarizes the main conclusions of the study, links the findings of various chapters together and draws policy implications from these findings.