China Reaps Benefits of Free Trade

Since the beginning of the Chinese reform process in the late 1970s, China’s foreign trade has developed from an insignificant amount to almost 1.5 trillion USD in 2005. Especially the accession to the WTO in 2001 has propelled foreign trade to contribute more than 60% to China’s GDP.

So what about the concerns that were voiced before China’s move to join the WTO? Did China’s agriculture suffer from a rapid expansion of cheap imports? Did China’s car industry suffer from its lack of competitiveness once the import tariffs were reduced? Did the financial sector collapse under the weight of international competition?

The famous Chinese economist Prof. Mao Yushi gave answers to these questions in a forum organized by the Malaysian Chinese Association (MCA-Beliawanis) and the Friedrich Naumann Foundation on September 15 in Kuala Lumpur.

According to Prof. Mao, the financial sector is still the weak link of the Chinese economy. However, China did not suffer any of the predicted consequences of its unilateral trade concessions to the WTO. On the contrary, competition by the international car industry has led to significant cost reduction and a growth in competitiveness of the national industry. Meanwhile, the national agriculture produced a strong surplus, which led to reduced Chinese prices while the international prices went up. This prevented the feared surge in cheap imports.

Within the trade balance of Malaysia and China, Malaysia has continuously enlarged its surplus to 10.1 billion USD in 2004. This was mainly due to a surge in Malaysian exports to China from 470 million USD in 1990 to 18.1 billion USD in 2004. This amounts to an annual 30% growth of Malaysian exports to China, which mainly consist of capital-intensive goods. Malaysia hence also strongly benefited from the openness of the Chinese economy.

Prof Mao is a co-founder and Chairman of the Unirule Institute of Economics, which is an independent think tank in Beijing/China. In November 2004 he was elected by the International Business Review as one of the ten most influential economists in China. His research area concerns institutional economics, energy and environmental economics, transportation, policies on economic reform and poverty alleviation.

His presentation on “An Analysis of Chances and Challenges for China’s Foreign Trade” (in Chinese language) can be downloaded here.

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