Announcement of the World Bank's Study Titled China: Foreign Trade Reform

FOR IMMEDIATE RELEASE World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. * Telephone: (202) 477-1234 News Release No. 94/S50EAP Contact: Peter Stephens (202) 458-0344 External Affairs - East Asia & Pacific Region CHINA, TRADE AND MFN Washington, D.C., April 1, 1994 -- A new World Bank study concludes that loss of Most Favored Nation (MFN) trading status would have consequences for the United States and China ranging 'from the dramatic to the disastrous." The report, entitled China: Foreign Trade Reform finds that China's exports to the US could be reduced by between 42 and 96 percent, depending on how readily Chinese exports can be substituted by others. On the other hand, American consumers would also be penalized and could pay as much as $14 billion a year more for costlier substitutes or for the continued supply of Chinese goods at higher tariff rates. The 334-page report was compiled by World Bank staff in Beijing and Washington with collaboration from Chinese In 1992, the United researchers to provide a detailed look at China's trade regime and States imported almost reform agenda. The principal author is a senior economist in the $27 billion worth of China Country Department, Mr. Rajiv Lall. According to Mr. goods from China, Lall, "In actuality, the impact of MFN loss is likely to be closer to making the United the lower bound, but even that is a substantial dislocation of States China's single trade." largest trading partner. The report says that the time is right for China to China's top exports significantly liberalize its trade with such steps as reducing tariffs, include: replacing import quotas and licenses with simpler taxes, and yarn, cotton fabrics, removing remaining export controls. It notes that competition telecommunications from imports would help make state-owned enterprises more equipment, travel goods market responsive. "Import liberalization would also contribute to and handbags, the growing momentum of China's drive to become a full member footwear, watches and of the international trading community," the report says. clocks, toys and sporting goods and The United States first granted provisional MFN status to clothing. China in 1973. Countries that are not signatories to the General Agreement on Tariffs and Trade (GATT) are not guaranteed MFN status, but can receive it at the discretion of a GATT member. Domestic legislation in the United States requires the review of China's MFN status on a yearly basis. The next such review is expected to take place in June. The report says that "complete MFN loss would lead to severe dislocation of China's exports to the United States, " at least halving, and possibly wiping out, the export of clothing. In contrast, the report finds that success in the most recent global trade negotiations (under the auspices of the General Agreement on Tariffs and Trade) could boost China's exports by 38 percent. Dramatic Progress in Trade Reform and Growth The report also notes the dramatic progress that China -- now the eleventh largest exporter in the 2D 15.4 world -- has made in reforming its 1 trade regime. "Since 1979, " the 0 7o study states, "the promotion of external trade has been central to 10 I China's efforts to modernize its - economy. The policy has met with . -5.5 States l"e. IOn remarkable success, with exports -10.4 -1.2 having increased ninefold and imports more than sevenfold over *Sooes: China CustansStatistics and HongKagExternal Trade the period (992) The study finds that China's economy has become progressively more open. It states that "the share of merchandise trade in China's gross domestic product (GDP) went from 10 percent in 1978 to 31 percent in 1991, with imports accounting for 15 percent." When judged along similar criteria, the study concludes that China "appears to be more than twice as open as India and Brazil, and significantly more open than the United States or Japan." The study points to the importance of institutional decentralization and foreign direct investment in China's export performance. In 1978, trade was monopolized by 12 Foreign Trade Corporations (FTCs) and there was no foreign direct investment. By 1992 over 3,600 FTCs competed for export business and over 90,000 foreign direct investment projects had been approved with a contracted value of $58.1 billion. Note: Review copies of "China: Foreign Trade Reform" are available free to the media. Send your request by fax on company letterhead to Peter Stephens at (202) 522-3405. Others.may order the study from World Bank Publications at (202) 473-1155 or by fax (202) 676-0581. 2/.