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News Release

Trade Protection Stunts the Chinese Economy

November 19, 1998

Contact:    Erika Wada    (202) 328-9000
    Gary Clyde Hufbauer    (202) 328-9000

Washington, DC—A study by top Chinese economists Zhang Shuguang, Zhang Yansheng, and Wan Zhongxin of the Unirule Institute in Beijing shows that potential consumer gains from eliminating China's trade barriers could reach roughly 14 percent of China's GNP (or about $78 billion in 1994). This estimate is based on the experience of 25 specific sectors, representing about 30 percent of China's merchandise imports (see table 1). These sectors are analyzed in Measuring the Costs of Protection in China, the fourth in the Institute for International Economics' series on national barriers that restrict trade. The series includes previous studies on the United States, Japan, and South Korea.

In absolute terms, China's potential consumption gain from trade liberalization is about the same as for Japan (between $75 and $110 billion in 1989) and the United States ($70 billion in 1990). As a percentage of national income, however, China's potential gains (14 percent of GNP) are much larger than for Japan (about 3 percent of GDP) or the United States (about 1 percent of GDP). The new study calculates the cost of protection for 25 highly protected products that are nevertheless imported in large quantities. These 25 products represent 30 percent of China's total merchandise imports and the corresponding domestic products represent 35 percent of Chinese industrial-sector and agricultural-sector output.

The new study suggests that the value of imports would increase from approximately $38 billion to $68 billion if the 25 products were liberalized. As a result, the ratio of imports to domestic consumption would increase, on average, from 36 to 56 percent for the selected 25 products.

Despite these potential benefits, many Chinese observers question whether more liberal imports would help the Chinese economy. In the case of China, where surplus labor was estimated at about 338 million in 1995, potential job losses are the most serious concern. The authors estimate that full trade liberalization would cut employment by about 11 million, or about 27 percent of the workforce, in the affected industries (see table 2).

However, if the dynamic benefits of trade liberalization were taken into account, liberalization would probably increase domestic employment in several sectors. The authors explain that the Chinese economy is still in the first phase of its transformation from a planned economy to a market oriented, competitive economy. Trade liberalization coupled with investment liberalization will lead to higher domestic production, a greater variety of goods and services, and more competition; all of these help to increase market efficiency. Using an illustrative dynamic model, the authors show that three out of four sectors that have traditionally featured monopoly or oligopoly structures would increase their domestic production if trade and investment liberalization led to more competitive markets (see table 3). Accordingly, employment in these three sectors might increase from about 1.0 million to about 1.4 million.

In 1995, China committed to reducing its average tariff rate to 15 percent by the year 2000. Since that goal was set, China has undertaken numerous reforms. However, the reforms have been more incremental than systemic, leaving the principal challenges of trade liberalization essentially the same. To reform the system fundamentally, the authors urge China to follow four guidelines:

  • Continue to reduce statutory tariff rates and strengthen administrative control over import levies, deductions, and exemptions;
  • Further deregulate the trading-rights regime;
  • Reduce the number of goods subject to import quotas and licensing;
  • Unify trade policy and trade administration to achieve a rational system.