Impact of Outside Forces: Trade, FDI, and WTO

1
Impact of Outside Forces Trade, FDI, and WTO
2
Question

• How has the Chinese economic structure been
  affected by the opening up of China?
• How do the changes (due to outside forces) to
  economic structure affect the economic efficiency
  of China?

3
Impact of the Great Depression on Southwest China
(Wright, 2000)

• Why could the Great Depression in the US in the
  1930s have any effect on the distant inland
  Southwestern region of China?
• Trade

4
Economic Structure of Sichuan Province (late
1920-1930s)

• Agriculture 66
• Rice 23
• Silk cocoons 1.3
• Tong oil 0.3
• Opium 10.8
• Industry 6
• Reeled silk and silk cloth 0.1

5
Exports of Sichun (Ch million)

• 1926-30 1934-35
• Silk goods 15.8 1.8
• Tong oil 9.9 9.9
• Linen 8.0 0.2
• Herbs 5.6 3.2
• Silk Sichuan was a major player in the national
  silk industry (16 of silk exported through
  Shanghai). Tens of millions of farmers relied on
  silk for income.
• Tong oil Sichuan accounted for 1/3 of total
  output in China. Tong oil production was almost
  all for export, mostly to the US

6
Overall Impression

• The Great Depression caused a sharp decline in
  some of the major export lines. Income declined
  for farm households. A general weakness of demand
  affected a much wider variety of a industries and
  trades.
• The impact of the Great depression did not shake
  the foundations of the economy

7
WTO and Chinas Agriculture(Johnson, 2000)

• Scenario
• Changes of Chinas Import Quota
• Wheat From 7 to 9 million tons
• Corn From 5 to 7 million tons
• Rice From 3 to 5 million tons
• Tariffs for imports in excess of quotas (above)
  decline from 77 to 65.
• Modest short term impact on agriculture
• The tariff rate quotas will preclude large-scale
  imports of grains.

8
Long Term Impact on Agriculture

• Entering WTO is expected greatly expand the
  manufacturing industry, raising economic growth
  rate.
• Due to the low income elasticity of demand for
  agricultural products, the agricultural sector
  will not grow as rapid as the other sectors.
  (Technology may also advance faster in
  industries)
• Agricultural labor income decreases relative to
  industrial labor income, causing farmer labor to
  migrate towards non-farm jobs.

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Long Term Prediction

• By 2030 agricultural employment in China will
  have declined to 10 percent of total employment,
  down from about 40 percent before 2000.
• In the US, Japan and Denmark between 1950 and
  1980 farm employment declined by 65 to 70 percent
  and labor productivity increased by 400 to 500
  percent (annual rates of about 6 percent).

10
Forecasting the Overall Impact of WTO on Chinese
Economy (Ianchovichina, 2004)

• Method
• Computable general equilibrium model
• The analysis focuses only on tariff
  liberalization, but not including changes of
  nontariffs.
• Experimental design
• Baseline The economies of the world grow with
  some projected paths.
• Experiment 1 Tariffs fell from 1995 to 2001
  levels.
• Experiment 2 Tariffs fell from 1995 to 2007
  (entering WTO) tariff levels.
• Assumptions Full employment, perfect labor
  mobility within nonagricultural and agricultural
  sectors.

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Changes in Chinas Trade Policy

• During the 1990s China made substantial progress
  in reducing the coverage of nontariff barriers,
  lowering tariffs, and abolishing the trade
  distortions due to the exchange rate system.
• The important coverage of all nontariff barriers
  in China fell from 33 in 1996 to 22 in 2001.
• Coverage of import licensing and quotas fell from
  19 in 1996 to 13 in 2001.
• A key change is the abolition of agricultural
  export subsidies. (Before that there was a 32
  export subsidy on feedgrains and 10 on cotton.)
• Six million people will leave farm.

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Impacts on China

• Output in textile and apparel sectors rises by
  16 and employment 56. That in turn stimulates
  the production of cotton by 16.
• For most merchandise goods, real wholesale prices
  fall as a result of trade liberalization after
  accession. Retail prices reflect a uniform
  consumption tax increase of about 1.9 levied to
  compensate for the loss of tariff revenue.
• Real farm wages fall by .7. Real rental price of
  land falls 5.5.

13
Welfare Gains

• Chinas total welfare gain from WTO accession is
  estimated at 41 billion per year (in 1997
  dollars), or 2.2 of per capita real income.
• Among Chinas trading partners the largest gains
  accrue to North America and the Western Europe,
  with close to half of the gains coming from more
  imports of textiles and clothing.
• Taiwans welfare gain is estimated at 3 billion
  per year.
• Developing economies that compete with China in
  third markets may lose. The losses will be
  largest for Vietnam (a 1.4 drop in per capita
  income)