During the 10 years from 1995 to 2004, China's foreign trade rose from 280.864 billion U.S. dollars to 11,547.92 billion U.S. dollars, a net increase of 873.9 billion U.S. dollars in annual foreign trade in the 10-year period, accounting for 28% of the incremental increase in world trade in the period, and became the world's third largest trading country. At the same time, the share of foreign trade in China's economy rose from 40% in 1995 to 70%, and China's dependence on external markets for economic development reached an unprecedented level, surpassing Japan and South Korea, which were founded on trade, as well as other economies of comparable size to China's economy.
In the process of realizing the above transformation, the impact of foreign investment on the development of China's foreign trade has always been a matter of great concern to people, which is not only related to the speed and structure of the development of China's foreign trade, but also related to the trade benefits associated with this mode of development as well as the sustainability of the development, and thus has a strong policy implication. Based on the 1996 United Nations classification standard for manufactured products, this paper carefully classifies China's trade products in 1995 and 2004, and conducts in-depth comparisons and analyses on this basis to further elucidate the role of foreign investment in China's foreign trade.
First, the development of China's foreign trade in the past 10 years
From 1995 to 2004, China's foreign trade development has made remarkable achievements, and the total amount of foreign trade in 2004 exceeded the 1 trillion mark, and the annual growth rate of import and export trade in the past 10 years has reached 16.6% and 17.4%, which is more than that of any other economy in the world in the same period. In addition, China's export structure has changed in the same direction as the dynamic changes in world market demand, especially China's successful expansion of its participation in the production and export of many of the most dynamic products in world trade, which not only ensured a sustained high rate of export growth, but also further improved and optimized the trade structure.
From the perspective of China's trade structure in 1995, exports favored labor-intensive products and imports favored medium- and high-tech products. After 10 years of development, China's export structure has tilted significantly toward medium- and high-tech products. Although labor-intensive products still account for nearly 1/4 of total exports, their share has been significantly reduced; high-technology products have formed a completely opposite trend, with their share in total exports increasing by 18 percentage points compared with 1995, replacing labor-intensive products as the dominant products in China's exports today. On the import side, the share of primary and high-technology products expanded, while the share of resource-based, labor-intensive, low-technology, and medium-technology products declined, with medium-technology products experiencing the largest decline. This contrasts with the increase in the share of exports of medium-technology products, indicating that China has made substantial progress in the manufacturing capacity of medium-technology products in the past 10 years, and that its ability to meet the demands of the domestic and international markets has continued to improve.
Table 1 Structure of China's Foreign Trade in Goods (%)
Exports 1995 Exports 2004 Exports 1995 Imports 2004 Imports
Primary Products 16 9 20 23
Resource-Intensive Products 5 5 3 2
Labor-Intensive Products 38 23 11 4
Low-Technology Products 10 9 8 6
Medium-technology products 12 16 28 22
High-technology products 19 37 29 43
Source: China Customs
China's rapid growth in trade, especially the remarkable structural changes, is closely linked to the role of foreign investment. Since the 1980s, when China gradually opened up its manufacturing sector to foreign investment, the scale of foreign investment in China's economy has been expanding and its role has become increasingly significant. in 1995, foreign investment accounted for 15 percent of China's fixed capital formation, 17 percent of sales, and 15 percent of its industrial value added, but in 2004, the share of foreign investment in China's fixed capital formation had increased to 21 percent, sales to 31 percent, and industrial value added to 28 percent. By 2004, the share of foreign capital in China's fixed capital formation had increased to 21%, sales to 31%, and industrial added value to 28%. Foreign capital in the total amount of increase at the same time, and constantly to the depth of the industry in the direction of advancing from the labor-intensive industries and low-tech industries to medium and high-tech industries, resulting in China's trade structure at the same time has undergone a major change.
Second, the impact of foreign investment on the development of China's foreign trade
(a) growth rate
1. Foreign-funded enterprises import and export growth rate is significantly faster than that of domestically-funded enterprises
China's import and export trade in the 10-year period between 1995 and 2004 increased by 3.25 times and 2.98 times, with an annual growth rate of 16.6% and 17.4%, respectively. . Among them, foreign-funded enterprises accounted for 61% of the increase in imports and 66% of the increase in exports, with an annual growth rate of 20% and 24.6% respectively, which was 5.3 and 13.9 percentage points higher than the annual growth rate of imports and exports of domestic-funded enterprises during the same period. During this period, although both foreign-funded and domestic-funded enterprises showed growth trends in their exports of major product categories, the annual growth rates differed considerably. In the primary product category, the annual export growth rate of foreign-funded enterprises was higher than that of domestic-funded enterprises by 13 percentage points, and in the category of high-tech products in terms of manufactured goods, the difference between the annual export growth rates of foreign-funded enterprises and domestic-funded enterprises even widened to 21 percentage points.
Table 2 China's Import and Export Growth Rate (%)
Exports
Imports
Domestic Enterprises
Foreign Enterprises
Domestic Enterprises
Foreign Enterprises
Primary Products
6
19
20
20
20
Table 1: Growth Rate of Domestic Enterprises in the Manufactured Goods Sector, 1995-2004
18
Manufactured products
Resource-based products
13
26
7
13
Labor-intensive products
10
13
3.2
5
Low-tech products
13
24
11
15
Medium-technology products
16
27
11
16
High-technology products
13
34
15
29
All products
10.7
24.6
14.7
20
Source: China Customs
The difference in growth rates between domestic and foreign enterprises stems from several aspects. First, the base difference. in 1995, the export scale of most products of foreign-funded enterprises was smaller than that of domestic-funded enterprises. among the 30 products examined, the export scale of foreign-funded enterprises was larger than that of domestic-funded enterprises only in 5 products, such as animal and vegetable fats and oils, shoes, transportation equipments, computers/office supplies, and telecommunication equipments. The opposite is true for imported products, with foreign-funded enterprises importing more than half of the total number of products, 18, than domestic-funded enterprises. Products with small bases are prone to higher growth rates, but the difference in growth rates can be attributed to the fact that only a few products, such as iron and steel, have small bases. Second, differences in the ability to meet foreign market access standards. Some products have higher foreign market access standards, domestic enterprises to expand exports to form a constraint, while foreign-funded enterprises with more advanced production and processing technology and more stringent, standardized management to maintain a high rate of exports. Obvious examples are food products. The difference in export growth between foreign-funded and domestic-funded enterprises in this category is huge, with the former increasing by 20% per year over the past 10 years, while the latter grew by only 2.6% per year. Beverages and tobacco are an even more extreme example. The export growth of foreign-funded firms increased by 23% per annum over the decade, while domestic exports fell by 47% per annum, with domestic exports gradually being replaced by foreign-funded firms. Third, the role of international production networks. A considerable part of the production capacity established by foreign capital in China is part of its international production network, which is very export-oriented or even completely export-oriented. Although there are also some domestic enterprises in China that have expanded their export capacity through the processing trade route, and even some of their production has been incorporated into the international production network led by foreign TNCs, the scale is after all not large enough to be compared with that of the foreign-funded enterprises in China. The most representative products are computers/office equipment, communication equipment/semiconductors, aerospace vehicles and other high-tech products.
2. The export growth rate of foreign-funded enterprises is higher than their import growth rate, while the export growth rate of domestic-funded enterprises (10.7%) is lower than their import growth rate (14.7%)
In terms of categorized products, there is a big difference between foreign-funded enterprises and domestic-funded enterprises. In all product categories, foreign-funded enterprises export growth rate higher than the growth rate of its imports, while domestic enterprises in the primary products and high-tech products on the export growth rate is lower than the rate of growth of imports, especially in the primary product category on the export growth rate than the rate of growth of imports 14 percentage points lower.
The fact that the export growth rate of foreign-funded enterprises is higher than that of imports may have something to do with the time period chosen, and also with the industrial chain established by foreign-funded enterprises and local enterprises in China. Foreign capital in the early stage of China, mainly through the introduction of technology and equipment to establish production capacity, and a large number of imports of key intermediate products for processing and production, so the import demand is relatively large, imports grew faster than exports. With the establishment of production capacity, the growth of demand for machinery and equipment will slow down, and the import demand for some intermediate products may also gradually decrease with the emergence of local substitute products. The latter is actually an effective way of upgrading technology and structure within the Chinese industry.
(II) Structure
1. Foreign-funded enterprises' import and export share in China's import and export trade has been rising
The proportion of foreign-funded enterprises' import and export in China's total import and export in 1995 was 31.5% and 47.7%, respectively, and it increased to 57.8% and 57.1% in 2004, which are both more than half of China's total import and export. In terms of categorized products, the share of foreign capital in exports of primary products and five types of manufactured goods has increased over the past 10 years, but the magnitude of the increase varies greatly, with only a 6-percentage-point increase in exports of labor-intensive products and a 35-percentage-point increase in exports of high-technology products. At present, the proportion of foreign capital in China's exports of primary products, labor-intensive products and low-technology products accounts for more than 1/3 of the total, while the proportion of exports of resource-intensive, medium-technology products and high-technology products is more than 50%, especially in China's exports of high-technology products account for a high share of 80%. Therefore, it can be said with certainty that without the exports of foreign-funded enterprises, the rapid shift of China's export structure to high-tech products in just 10 years is impossible.
Table 3 Share of foreign-funded enterprises' exports in China's exports of various categories of products, 1995-2004 (%)
Exports
Imports
1995
2004
1995
2004
Primary products
14
33
26
24
Manufactured goods
Resource-intensive products
28
51
53
64
Labor-intensive products
33
39
66
69
Low-tech products
22
38
45
52
Medium-tech products
39
58
58
67
High-tech products
45
80
45
71
Source: China Customs
On the import side, except for primary products, the share of foreign investment in imports of five categories of manufactured goods have increased to varying degrees, with the highest increase in high-technology products, and the lowest increase in labor-intensive products. 10 years ago, foreign imports of the largest share of the total imports of the top 10 major products occupy a prominent position, shoes and toys. The prominent position is shoes and toys and other labor-intensive products, now they are out of the ranks, giving way to communications equipment / semiconductors and precision instruments.
The changes in the share of foreign investment in China's imports and exports over the past 10 years show that foreign investment has come to dominate the structure of China's trade to an increasing extent.
2. Changes in the export structure of foreign-funded and domestic-funded enterprises
10 years ago, labor-intensive products were the most exported products of domestic enterprises as well as foreign-funded enterprises, and in terms of the proportion of exports, the proportion of labor-intensive products in foreign-funded exports was even higher than that in the exports of domestic enterprises. However, 10 years later, labor-intensive products are still the highest proportion of domestic enterprises exports, high-tech products, despite an increase of 3 percentage points in the share of foreign-funded enterprises, but the gap is even greater than compared with foreign-funded enterprises. In contrast, high-technology products have become the number one category of products accounting for more than half of foreign-funded exports, while the share of labor-intensive products in foreign-funded exports decreased by 23 percentage points and has lost its former dominant position. Though slow, the trend of China's domestic enterprises' exports shifting to technology-intensive products is still relatively obvious, especially the proportion of exports of medium-technology products has changed considerably.
Table 4 Structure of China's export trade by enterprise (%)
1995
2004
Foreign-funded enterprises
Domestic-funded enterprises
Foreign-funded enterprises
Domestic
Primary products
7
20
5
13
Manufactured goods
Resource-intensive products
4
5
5
6
Labor-intensive products
39
37
16
33
Low-tech products
7
11
6
14
Medium-technology products
14
10
16
16
High-technology products
28
15
52
18
Information Source: China Customs
(3) Benefits
1. Trade Balance
As with the early mercantilism's obsessive pursuit of the inflow of money (gold and silver), the pursuit of a trade surplus is still a policy objective that cannot be ignored by the country's foreign trade policy, and the trade balance is still an important indicator for evaluating a country's trade benefits, especially when it comes to arguing that foreign investment plays a role in a country's economy. In particular, when arguing for the role of foreign investment in a country's economy, the balance of payments of foreign-funded enterprises' import and export activities remains a relatively sensitive issue. When examining whether foreign-owned enterprises improve a country's balance of payments, there are at least three issues to consider. One is the time factor, another is the question of the orientation of foreign-funded enterprises, and the third concerns the degree of linkage between foreign-funded enterprises and local Chinese firms. As far as the time factor is concerned, at the initial stage of the entry of foreign capital, in order to establish the necessary production capacity, the demand for imports of capital goods is relatively large and imports are relatively concentrated; thereafter, imports of capital goods will continue, but the scale and speed will slow down, and will be replaced by imports of raw materials and intermediate products for production and processing. Therefore, the trade balance of foreign-funded enterprises is more likely to show a deficit in the early stage, but in the middle and late stage, whether the trade balance of foreign-funded enterprises can be transformed into a surplus depends on two factors, one is the investment orientation of foreign-funded enterprises, and the other is the degree of association between foreign-funded enterprises and local enterprises. The investment orientation of foreign-funded enterprises can be categorized into export-oriented and host market-oriented from the perspective of its impact on the trade balance. If a country's foreign investment is mainly export-oriented, then the trade balance is much more likely to achieve a surplus, and conversely, if a country's foreign investment is mainly to develop and occupy the host country's market-oriented, then it is more difficult to achieve a surplus in the trade balance. However, the possibility and size of the surplus in these two cases also depend on the degree of linkage established between the foreign-funded enterprises and the local enterprises in the host country. The higher the degree of linkage, the more the foreign-funded enterprise uses inputs from the host country, the greater the possibility of achieving a surplus; conversely, a high degree of dependence on inputs from the home country or other foreign suppliers, even for export-oriented enterprises, it is difficult to balance the balance of trade.
Table 5 China's foreign trade balance (million dollars)
1995
2004
National
Foreign-funded enterprises
Domestic-funded enterprises
National
Foreign-funded enterprises
Domestic-funded enterprises
Primary commodities
-2203
-3379
1176
-79986
-14095
-65890
Resource-intensive products
2630
-371
3002
19236
8253
10983
Labor-intensive products
39228
7803
31425
113925
38172
75752
Low-tech products
3661
< p>-16175279
23256
4305
18950
Medium Technology Products
-19566
-14596
-4970
-27451
-27698
247
High-tech products
-9264
-4197
-5066
-22995
2603
-25599
All products
16700
- 16067
32768
31945
14038
17906
Source: China Customs
From the evolution of China's FIEs' trade balance in the last 10 years, several important changes can be observed. First, in absolute terms, China's trade balance has not changed much in the last 10 years, with the surplus expanding from US$16.7 billion to US$32 billion, a net increase of US$15.3 billion, an average annual growth rate of 7.5%, which is considerably lower than the growth rate of imports and exports in the same period. Secondly, the enterprise composition of the trade balance has changed a lot. 1995 China's domestic enterprises realized a trade surplus of 32.7 billion U.S. dollars, while foreign-funded enterprises showed a trade deficit of 16.1 billion U.S. dollars. 10 years later, domestic enterprises realized a substantial decline in the trade surplus, the scale of only 54.7% of the 1995 to 17.9 billion U.S. dollars, while at the same time the foreign-funded enterprises from the deficit to a surplus, and the foreign-funded enterprises from the deficit to a surplus of 14 billion U.S. dollars in 2004. In 2004, they realized a trade surplus of US$14 billion. Although the surplus is still lower than the domestic enterprises, but the development trend of the two are diametrically opposed, it is expected that in the near future China's trade surplus is likely to originate mainly from foreign-funded enterprises. Thirdly, the pattern of trade balance of major products remains basically unchanged, but the contribution of different enterprises to the trade balance has changed considerably. in 1995, China's primary products, medium-technology products and high-technology products showed trade deficits, while labor-intensive products, low-technology products, and resource-intensive products showed surpluses, and this pattern has not changed 10 years later. in 1995, the trade surplus of domestically-funded enterprises was mainly generated by labor-intensive products (77% of the surplus), followed by low-tech products, resource-intensive products and primary products, and its deficit products are medium and high-tech products, both of which generate a comparable amount of trade deficit; in the same year, foreign-funded enterprises showed deficits in all other categories of products except for labor-intensive products, and their deficits mainly originated from medium-tech products (accounting for 60% of the total deficits.) In 2004, domestic-funded enterprises realized a small surplus in medium-tech products, while medium-tech products and resource-intensive products showed a small surplus, and this pattern did not change after 10 years. Domestic-funded enterprises realized a small trade surplus in medium-technology products, and high-technology products still showed a deficit, but the most important deficit item was primary products, accounting for 72% of the trade deficit generated by domestic-funded, high-technology products accounted for 28% of the deficit; the most important change in foreign-funded enterprises was that resource-intensive products, low-technology products and high-technology products realized a trade surplus, but the deficits of medium-technology products and primary products expanded, especially the growth of primary products deficit was higher than that of medium-technology products, and the deficit of medium-technology products and primary products expanded, especially the growth of primary products. The deficit of primary products grew faster, with an average annual growth of 17%, but the deficit of medium technology products accounted for a larger proportion of the total deficit, accounting for 66%, and primary products accounted for 34%.
The above comparison found that, firstly, 10 years ago, foreign-funded enterprises played a deteriorating role in China's trade balance, and 10 years later, it played an improving role in China's trade balance surplus, and with the production and export capacity formed by foreign direct investment getting stronger and stronger, the role of foreign investment in improving China's trade balance is also more and more significant. At the same time, the ability of domestic enterprises to create trade surpluses declined; second, labor-intensive products are still the main source of China's trade surplus, 10 years ago, and 10 years later is still the same. Domestic enterprises play a dominant role in the export of labor-intensive products, but the rate of export of labor-intensive products by foreign-funded enterprises is 9 percentage points higher than that of domestic enterprises over the same period, indicating that most foreign investment in China's labor-intensive industries is export-oriented. Third, in terms of capital goods, the size and growth of the trade deficit of foreign-funded enterprises greatly exceeded that of domestic-funded enterprises, which indicates that, in terms of such products, foreign-funded enterprises are more dependent on their own countries or other foreign countries, and are less connected with Chinese domestic enterprises; fourth, unlike 10 years ago, China is now short of natural resources for export, and both foreign-funded and domestic-funded enterprises have had to rely more on primary raw materials imported from abroad, which will become the main source of the future trade deficit.
2. Value added of industry
The role of foreign direct investment (FDI) in the expansion of China's foreign trade and structural improvement over the past 10 years cannot be questioned, but the technological spillover effect of FDI from developed countries is still an issue to be examined and demonstrated. Studies by some international organizations and trade experts have shown that the success of many developing countries in expanding their exports of manufactured goods, especially high-tech products, cannot be measured at face value, on the grounds that developing countries are still engaged in labor-intensive, low-value-added labor in the production of high-technology products, which means that the expansion of their exports of manufactured goods has not been accompanied by an increase in their incomes and value-added. growth. As the largest export-oriented developing country, what is the situation in China?
China's exports rose to 35.9% of GDP in 2004, up from 21% a decade earlier, and its industrial value-added rose to 40% of GDP from 26% over the same period, suggesting that the rapid internationalization of China's economy has occurred almost in tandem with the deepening of its industrialization, and that the role of foreign firms in this process is becoming clearer.
First of all, the value added of industry created by foreign-funded enterprises in the past 10 years has grown at an annual rate of 23.5% (slightly lower than the 24.9% growth rate of exports in the same period), and its share of China's value added of industry has risen from 15% in 1995 to 28%, while the value added of industry of the national enterprises in the same period has grown at a rate of only 13% (slightly higher than the 11.8% growth rate of their exports), which is lower than the growth rate of foreign-funded enterprises in their value added of industry. 10 percentage points lower than the growth rate of industrial value added of foreign-funded enterprises.
Second, from 1995 to 2004, foreign-funded enterprises in manufacturing value-added to exports of the average ratio of 66 (while the national enterprises for the 207), foreign-funded enterprises in the export of products imported content is very high. From the trend, from 1995 to 2001, China's foreign-funded enterprises manufacturing value-added and export ratio from 62 has risen to 78, but from 2002 the ratio began to decline year by year, to 2004 has fallen to 10 to the lowest point. This and China's accession to the World Trade Organization at the end of 2001 to further enhance China's ability to attract foreign direct investment and stimulate the potential of its exports have a direct link, rather than due to the industrial value added by foreign-funded enterprises there has been a major decline.
Third, the share of domestic value-added is increasing in industries with a large share of foreign-invested exports, such as the electronics industry.
Third, the conclusion
Looking at the development of China's foreign trade in the past 10 years, we can conclude that foreign direct investment has helped China create new trade advantages, which is manifested in two aspects, one is to break through the constraints of China's factor endowment at this stage, and improve the efficiency of the traditional advantageous sectors. Traditional trade theory holds that foreign trade competitiveness and gains from trade depend on differences in the efficiency of different countries in producing different goods. Even today, the key determinant of such differences remains factor endowment differences. In order to break through simple factor endowments and "given" technological advantages, lagging developing countries can introduce scarce factors and combine them with their own factors of production, which may enable their own production to shift rapidly from the factor-driven stage to the investment-driven stage, creating new trade advantages. Over the past 20 years of opening up to the outside world, China has accelerated its entry into the investment-driven growth stage through the large-scale introduction of foreign direct investment and the accompanying advanced manufacturing technology and management. At this stage, competitiveness is not primarily expressed in the relative price of certain factors, but in the efficiency of producing standardized products. China's current trade competitiveness stems both from international differences in certain factor endowments and from the increase in labor productivity brought about by increased investment, especially by increased foreign direct investment, the combination of which has enabled China to enjoy unique cost and efficiency advantages in the production of certain standardized bulk manufactured goods, and to gradually develop into the world's processing plant. Second, it has helped establish a diversified pattern of China's export-oriented labor-intensive industries. China's traditional export strengths are concentrated in labor-intensive sectors such as garments, shoes, and toys, but the potential for export growth in these sectors is severely constrained. From the perspective of the international market, these products have low income elasticity of demand and slow market growth; as more and more developing countries implement outward-oriented development strategies, the supply capacity of the international market is rapidly increasing, and competition is intensifying; and developed countries are becoming increasingly protectionist, and are even adopting more discriminatory trade policies towards products from China. From the domestic point of view, on the one hand, with the continuous expansion of these traditional export industries, the marginal cost of production is on the rise, i.e., with the increase in output, every additional unit of production means giving up the production of more units of other products, due to the existence of increasing marginal cost, no country can specialize in the production of a product, nor can it excessively pursue the continuous expansion of traditional industries, or else , it has to face the continuous deterioration of trading conditions. Kiyoshi Kojima, a famous Japanese OFDI theorist, summarized the principle of the correspondence between comparative cost and comparative profit, arguing that any industry with comparative cost advantage has higher comparative profit. However, China's export labor-intensive industries, such as textiles and garments, which are generally considered to have comparative advantages, do not have comparatively high profits, and the continued expansion of these industries has faced difficulties.
Therefore, the cultivation of more export industries is the guarantee of China's sustained growth in export trade, and the realization of such a breakthrough depends first of all on foreign direct investment (FDI). FDI has helped create and nurture more sectors that China did not have the capacity to export on a large scale, such as information technology products and consumer electronics, giving these sectors the ability to access international supply chains in a short period of time, and expanding the scale of low-wage employment and exports in these sectors. Although China's role in these sectors is still positioned in low value-added and labor-intensive assembly and testing, etc., these are, after all, the fastest-growing and most dynamic products in international trade, and the ones with the fewest trade protection barriers in international trade. The rapid expansion of these non-traditional export sectors has opened up a new channel for China's low-skilled labor force to enter the international market on a large scale, effectively alleviating the pressure on the traditional labor-intensive sectors (textile and garment, etc.) to expand exports, and safeguarding the sustainable development of China's exports.
Author: Zhao Yumin, Researcher (China Foreign Economic and Trade Research Department, Research Institute of the Ministry of Commerce)
(First sub-site: Research Institute of the Ministry of Commerce sub-site)
2006-01-04