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Working Papers
No. 17: Impact of China's Trade and Foreign Investment Reforms on the World Economy
by Winnie Lam, Micro-Economic Policy Analysis, Industry Canada, October 1997
Summary
China's population is huge, encompassing over one-fifth of the world population in 1995. The country is the fastest growing economy in the world with a double-digit average annual real growth rate of 11 percent between 1980–1994. In 1995, China was the world's 11th largest trading nation. China was also the second largest recipient of foreign direct investment among all the APEC economies in 1992, taking up 6.8 percent of the world's total.
The re-entrance of China into the international trading arena invites many trading and investment opportunities for other countries, especially with per capita income in China still at a low level of US$451 in 1994. Canada and other countries are expected to gain directly from increased trade and investment relationships with China, and indirectly through the spillover effects that other economies might benefit. Less-developed countries and other former command economies can also learn from China's experience as they undertake reforms in their own foreign sector.
The significance of China's opening up to the global trading system warrants an in-depth empirical analysis. To achieve this objective, this study closely examines the hypothetical scenario in which China totally removes all its trade and foreign investment restrictions. The implications for China as well as for other trading nations are investigated using the computational general equilibrium technique. A secondary objective is to provide some perspective on the current evolving state of the Chinese external sector and its significance for Canada, Asia, and other economies. Following are some of the major findings of this study:
- For all regions, the results of the model used strongly suggest a positive complementary effect between China's trade reform and foreign investment reform. Though the model shows that every region benefits from China's trade reform and foreign investment reform, it further indicates that gains augment substantially for all regions if China simultaneously implements both reforms.
- Though the potential of expanding trading opportunities between Canada and China can be enormous, at the moment China's import restrictions and price controls are still inhibiting many major and potential exports from Canada to China. To a certain extent, Canada's import restrictions in labour-intensive goods (e.g., clothing, fabrics, and footwear) are restraining China's exports to Canada in these areas.
- China's trade and investment ties with the U.S. and especially with Hong Kong in Asia have significantly strengthened. Canada is expected to benefit from the indirect effects of gains made by U.S. and Asian economies through China's foreign sector reforms.
In policy terms, the findings strongly support the complete removal of China's trade barriers, both for the sake of China and for other economies, including Canada. More significantly, the model results point to the importance of implementing a comprehensive reform package in China. China's trade and foreign investment reforms complement each other positively in the fact that welfare gains increase significantly for all regions when China performs both reforms jointly rather than separately. Lastly, it is hoped that China's successful experience can provide some optimism for less-developed countries and former command economies as they embark on their own foreign sector reforms.
