-Besides marking a new phase of policy reform, WTO membership (Dec. 11 2011) symbolizes China’s
coming of age as a participant in the global economic community.
-Before 1979, China’s total trade/GDP ratio never significantly exceeded 10%, and it reached a low point
of only 5% in 1970-1071. Chinese reform has unambiguously helped Foreign trade expand.
Reform and Opening=The international opening and domestic economic reform that were
complementary processes during the post-1978 period.
-A central element of this reform was a dualistic trade regime, which enabled China to adopt
relatively liberal rules on export-processing trade while still protecting domestic markets.
-During the first years of the PRC they traded heavily with the soviet-union (Almost 50%). They traded
textiles and processed foods for industrial materials such as steel and diesel fuel, as well as machinery,
which provided for the GLF.
-After the failure of the GLF the Chinese economy moved towards complete self-sufficiency and halted
all exports and had to use what little forex reserves it had towards the importation of grain.
-As forex earnings increased in the mid-1970s China began to import technology goods from the West.
Most needed were fertilizer plants and steel mills.
16.2 The Process of Trade Reform
-The domestic economy was virtually separated by a “Double Air Lock” system that controlled goods and
The first air lock: The centrally controlled foreign-trade monopoly. Twelve national foreign-
trade companies (FTCs) exercised monopolies over both imports and exports
The second air lock: The value of the Chinese Currency, renminbi, was set arbitrarily, and it was
not convertible. Individuals could not exchange RMB for foreign currency without special permission.
-The FTCs bought and sold domestic commodities at planned prices, and world commodities at world
-When imports passed through the air lock, they were repriced in accordance with domestic planned
prices and the FTCs regularly cross-subsidized money-losing products with revenues from profitable ones.
-Low-relative agricultural prices and high industrial prices were used to concentrate profits in
state-owned factories, where they could be harvested for the government budget.
Import Substitution Industrialization (ISI) =A system in which developing countries erect barriers
against industrial imports, thereby protecting their new industries and (they hope) fostering
industrialization. In China as well, one of the functions of the traditional foreign trade system was to
protect state-owned industries. -Exports were viewed as a kind of necessary evil, required because exporting was the only way to pay for
-As Chinese planners tried to step up the pace of technology imports in the late 1970s they soon realized
their forex reserves were being depleted rather quickly. With this, the Chinese realized they needed to
reform their international trade system.
16.2.1 Initial Reform Steps
- The first step in the reform was the creation of four Special Economic Zones (SEZs) which were a form
of Export-Processing Zones (EPZs). They were in Guangdong and Fujian due to their close proximity to
Special Economic Zones (SEZs) =Like other EPZs, the SEZs allowed imports in duty-free, as
long as they were used in the zone to produce exports
-This system allowed China to promote exports through Hong Kong’s already established export
production networks while still maintaining the ISI regime since it still protected Chinese industrial firms
from import competition
16.2.2 Liberalizing the Foreign-Trade System
-The main elements of the initial trade reforms included:
-Before reform the RMB was highly overvalued making it unprofitable to export. By 1986 the
currency had a real depreciation of 60%.
2. Demonopolization of the Foreign-Trade Regime
-Industrial ministries were allowed to set up FTCs; the provincial branches of the former national
foreign trade monopolies became independent; and many local governments and SEZs set up trading
3. Significant Changes in Pricing Principles
-Profit retention and bonuses provided incentives, decentralization increased competition, and
devaluation made exporting a potentially lucrative business. All of these things put together
integrated China into world markets.
4. Creation of a System of Tariffs and Nontariff Barriers
-As reformers dismantled the planned trade system, they erected high tariff walls and substantial