China - Foreign trade reform : meeting the challenge of the 1990s

Repoit No. 11568-CHA China Foreign Trade Reform: Meeting the Challenge of the 1990s June 18,1993 MICRMXGRAPHICS Country Operations Division China and Mongolia Department East Asia and Pacific Regional Office Report No: 11568 CHA FOR OFFICIAL USE ONLY _. * .2 .aA0 i 04 wa- J E9z*^t A 6 Th&~~ets a ., . - . D ,* ^i 'ia .e -sdi -cpe . - .~, -. , f __dwes.ts.ci4tan ofeir, ,fl da,,;es - ,,contertsma bof, erWise, ~' _ "  CURRENCY EQUIVALES Currency Unit: Yuau (Y) $1.00 = Y 5.73 Y 1.00 = $0.175 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System ACRONYM AND ABBREVIATIONS ACP African, Canbbean and Pazific (Countries of the Lomb Convention) BESD (World) Bank Economic and Social Databse BOC Bank of China CES Constant Elasticity of Substitution CET Constant Elasticity of rransfonution CGE Computable General Equilibrium (Model) CCPIT China Council for the Promotion of interatonal Trade CETDC China External Trade and Development Council CNC Computer Numerically Controlled COEs Collectively Owned Enterpises COFERT Commisin of Foreign Economic Relations and Trade COMTPRADE Commodity Trade (System) DIP de facto import promotion DLUC Domestic Leers of Credit EC European Commission EP Export Promotion EPOs Export Promodon Office ERP Effective Rate of Protection ETCs Export Trading Companies ETDZs Economic and Technology Development Zones ETE Export Tax Equivalent FDI Foreign Direct Investment FEACs Foreign Exchange Adjustment (Swap') Centers FFEs Foreign-Funded Entepris FlEs Foreign-lIvested Enterprises FT Free Trade FrA Free Trade Area FTCs Foreign Trade Corporations GATr General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross National Product GSP Generalized System of Preferences  FOR OMFCIA US ONLY ACRONYM AND AREVIATONS (conu GTCS G en Trading Companies GVIO GOs Value of Idustri Ougtp RKDTC Hong Kong Trade Deveopmt Cou RS Harmonbed System HTZ ih Technology Devopment Zon Interlatdonal Moeary Fund iS Imp Subston I lSO Itraional Stdards Orgizaton nr.s Import Trading CompaniS JETIRO Japanese Exp Tradig Ogizato KOTRA Korea Trade Promoton Corpratio LES Lie ExUre Systm LTCs Lage Trading Compaes MFA Multfiber Anrrgemen )tFN Most-Favored-Nation (sus) MOFERT Miltty of Foreign Economic Relations & Trade MOFTEC M sry of Foeig Trade and Ecoom Cooperation WPS Maes Product System NAFTA North Ametican Free Trade Aea NIBs Newly Industrialized Economies NTB NoIatlftarer OECD Oranizain for Economic Coopation and Deveopm PBC Pl n of China PEPed Pmoon sNEs Prdbton lheworks for Expors PTA c ydride QCC Qualit t rol Circle RS Richar4 A Stone (algoritm) RCA Redaled Comparative Advanage REER kee1 fifeve Exchage Rate RMC ftlde* Mission in ChIna SCEIMO Stae Council Maciey and Elecomnics Import Offic SCETO Stte Council Econmc and lTae Offi SCETC &St C cil Economic nd Trade Commiso SAECs Stae Administration of Exdcange Ccntol SEZ Specia Economic Zones SITC Stndad ineratona Trae Classfication SMART Softwae fr Mare Analysis and ResriP o on Trade SOPs Ste-Ofted Etepis SPC Stae Planig Commision SRC System Reform Cmmision STDB Singpore Trade Devdopmen Board TVEs Towhip and Viae E Dntises UN United Nations UNCrAD Uned Nations Conferce on Trade and Deveopment US Utd States USSR Union of Sociist Soviet Rebics XTB XMamen Intenaonl Bank This document ha a rsictod distribution and may be used by recipients onl in the p:-"ce of their ofcal dutioL Its contents may n othewise be disclosed wihout Woi Bar. .ruthor, on.  CONTENTS Contributors ......................................... Xvi Execlutve summary ............................................ Ix 1 ChIuns Mcndie Trade-Trends and Persp"wv . 1 A. htrduction ... . ... ... 1 B. Trends in theTraelae .. ...................... 2 C. P spctv u sonChlnsnCposPpor Pff.nian.n. 4 ThI hChaig Composition of Chns Exports .... 6 TbeRoleofAssemblyOpeatons .......... . ... 11 Marets for Chins Expors .. 12 leRole oftheNonstateSectwo ..... 13 Th RoloeofHongKong . .... 15 D. Trends In China's Mercadise rinports ........ ... 15 The Strur of Mrandiso Imports . 15 E. Tradein Chia Econy: SomeCowludingObsvatons ...... 20 Endnotes ...............................,. .. . . 23 2 The Tra Plnnig and Foripn Eap Systm-Managg Refms Throuh A Period of tlodnon .................... 24 A. Forign Tade Pbnnig, Foreign Trade Corrations, and Subsidies . ............................ 24 The 1988and 1991 Re nm s ........................ 26 B. Ihe Exchge Rate Regime ........................... 28 Foign ExchZe Plan ........................... 29 ReentonSceme ............................. 29 Foreig Exhang Murks ............. ........ 31 C. Brad pact of Recet Deeopmens .. .................. . 34 Impa of DevdopmentsintheBxdmp PeatRegime 34 impat ofRf inTrade Planni.ng 38 D. Rmaining Problem and ot Future R rm 39 Export Phlnning d the Foreign Trade Cona .39 import Plai .g. .. ....... 40 Exdage.RaIes ..ues .......... .. .. 41 Enidwts ...................... 45  -il 3 Ch 's System f Foreign Trade Controb: A Qbnitadve EvLuaton .... ................................ 47 A. Objecdvs and Instrments of Chs Sys"m of Foeign TradeControls ................................... 47 B. Tarlb ......................................... 48 TariSticture ...... .................. 48 Conlusions .... ...................... 56 C. TariffReveesandExemptions ... ............ 57 Admnistraonand Revenue Raising: Implication of Chis prDuty Sysm ..................... 57 Inpact of Exemptions on Exports and Economic Performance ... 60 Condusions ............................. 62 D. Nontaiff Buders to Trade ............................ 63 Types, Aninration and Coverge................... 63 he Stuctr of NTBPnoecn .............P n......... 66 Concusions ............................... 67 E. Export Cotrol and Taxes ............................ 67 F. InpatofTdeControk ............................. 69 Inteaional Price Compaisos ...................... 69 Eflectv Rates of Protection ....... 73 Evidence fom Secoral Analyss ............. ..... 75 Conus ...... ... 78 EAdnotes ........ '. 79 4 Priorities and Pwrspectives on Reforindg China's Trade Regime....... 80 A. TrafdStrategyandTradeRegime Orletaion ... 80 B. RdormPrPioritiesfortheImmediateTerm . .82 Canalized bIorts and Products Subject to Mndaoy Import Planing ......... 82 Import Lcensing d Quotas. 82 Import Controls ... . 83 NTBs and Bane of Paymens Managemet.. . 84 TariffExemptions .... .. .... ...... 85 Export Controb and Taxes.. ... ... ... ... 85 C. Priorities for the Medium Teer .... ...... . 86 ReducingProtectiononConsumerGoods . . 87 Reducing Protction on bItmediae and Capital Goods ..87 Redcclg theBian apingtRaw aMeias ......... 88 D. Altenative Approwaes to Reform . ... .. .... 88 TI Ba Case: Effects of a 50 Percent Rai Cut in EffdveTa....... 91 ImnpactoftheOtherRefom Scenarios.. 94 Summary ........ ..... 97 Emdiotes ................................. ... 98  S Towards a Program for Trade .aio .. .. .... 100 A. Timing, Sequening and Iages with Other Reorms .10......... I Trade Rem and Reform of the Plmning System .......... 100 Trade Reform, Reform of the Exchamge Rate Regime and _ icrwnonilcPolicy . . ... .. ...... 101 TradePolicy andPriceReform ... 102 Trde Liberalization and Enrpre Reform 102 Trade Liberal on, Support for EWxp and nustrial Policy 103 Tade . * m and the Inteational Envionment .104 B. Recen Refbrm inltatiavs.. ... 104 Tanspvey ......... . 104 LlerEafzaoo t o thegime. .. R. g.. 105 C. c.... . . .. ... 106 Recmmendations for the Tmiteerm.m . .. .106 Recomendatbonsfor the Mdum Term .107 Endnotes ..................................... ..... 109 6 PolIie for Export Devielopnnnt: A Critical Evialuton ....... .. 110 A. Istroducion ... ...... ...... .. 110 B. Develping Buyer-el Lnbs: Te Role of Trding Companies .... 110 The netona Eperience . .... ... . 111 Ie Experience of Chinas FMC ..... .............. 113 Lesons fo FTCPolic i China .. .. ... ..... 118 C. Developing Buyer-Seller Links: The Role of Public Support Sevices . 120 PublicSupportfbrExport Marketig . ................... 120 Pubflic Supportol .................rtforQualityContr... 122 Puoic Suppo for Odher Nofinnci Export Support Seavices . . 125 D. EVpo Findwg ................................................. 126 RB ^e m ............................... :::.......... 129 E. Produc Tagetlng frEpo . . .... .......... 129 Conclusions ... ................................ 134 F. (eogaphical Targedg .... .......................... 134 PoHlies foCoastlDevelopment .................... . 136 AmssisgthiePaomanceofSEZsandOpenCities ...... 137 Leons and R nd...................... 139 Endes . .......................................... 141  - iv - 7 Etlernal Markets and China's Exp ...................... 143 A. Patecon AgansChiin'sExports: Theacts .. ............. 143 B. Evolving Extnl Markets and Inplications la Chias Exports .... 150 mplications of the Uuua Round for Chins Expors . ...... 150 he Potential Effec of Regioadism on Chines Expots. ...... 151 Implicatios of a LossofChiasProvwonal nFN Status in the US 155 C. Perspecdves on Future Dhldeos forrChina'sExpots ... ........ 158 Divrsification of Markeft .......... ........................ 158 Product Divasification and Comp"ive Advantage ..1....... 58 MhmPotentldaforUpgradingCh na'sMijo Exports ......... 163 OppountesforDiversificadon .......... ........... 164 Condudons ................................... 166 Endnotas .......................................... 167 Referenc ... . . . . . . .. 169 1.1 D ating Labor- and Capita-hI sivebMnu& ours- ......... 178 2.1 Crteria for Access, to FEACs .................... .. -. . 180 2.2 Operational MIebanism of FEACS .... . ....... . 182 2.3 Ugnd Chin'sForgnExchaSystem . . 184 3.1 Effective Rat of Protection Calculatons: A Metodolo N . 193 4.1 A Computable Genea Equillbrlum Modd of the CineseEconomy . 196 6.1 Developing Buyer-Seller Links: The International Expetience .208 6.2 Cines SEZPolkcy-AnEvauation .221 6.3 EcnomicZonesinCh ad ATaxnomy .246 7.1 Descrwiption of the SMART Trad Pmducdtn Model used to Side the Effects of a 30 and 50 Percent Liberdizaon of Nontariff Barriers and TxariM ........................................ 252 7.2 An Assessment of China's Changing Revealed Comparative Advantage in Labor-lIensive Manuacu ....... ..................... 254 Statdstcal Annex .................. .. . 260  .-V TAmLES IN Tgr 1.1 Structr Changes in Cina Major Exports: Selected Years from 1965 to 1990 .......................... S 1.2 The Value and Share of Major Tr-Digi STC Products In Chin's Exports-Selected Years from 1965 to 1990 .............. 7 1.3 nhe Value and Share of Various Types of Produ I Chin as Exorts: Sdected Years 1965 to 1990 . .................. . 9 1.4 ConnatIo oChia's snd Comparator Country Export ........... 10 1.5 Export from Assembly Opeaton .... ...................... 12 1.6 Marks for China Expors, 1990 .................. ....... 13 1.7 Townshipand VilgeEnterpriseExpoms ...................... 14 1.8 Chin Stmetural Change In Chinas Imports (CIF) Custm Basis ...... 16 1.9 Strcture of Chins Iorts (CI') Customs Basis (A Compwion wth Oder hIpoers fbrl990) ................................... 18 1.10 Origin of Cheinas Ihpos: A Compario with Other Econmies of East Asia (Selected Yea) .. 19 1.11 ShreofMerdhadLseTrade nGDP: SeectedCounries ........... . 20 1.12 China The Structure of Producion, Imports and Exports, 1985 and 1990 ...................................... 21 2.1 Losses of Foreign Tade Corporations Finced by CeM Uovetn,nnBudgeew. ............. 26 2.2 Forep ExchangeRetntlon Rates, 1991 ..................... 32 2.3 Exdage Rate and Trade Tax Rlationships under Chin's Exchage Rate Systen ............................ 35 3.1 AvegeTarffLevelsbyBroadRS Category ................... SO 3.2 Average Tariff Levelby HSSecin ........................Sn. 51 3.3 IT Tariff Sptemsof China and Other Large Developing Countries ..... 56 3.4 The Commodity Pattern of Taiff Sym in China and Other Lage Dvelping Counties (Unweighted Avage TariffRe) ............R . S7 3.5 ImportsbyqprtDotyCConcesionCagwy ................... 59 3.6 ValueoflmportandReveriesf rom mpottDuties ................ 60 3.7 Covege of Notaf Bariers by Sector ad Type( ) ............ 61 3.8a Estimat of Protecton to Importables based on Intenaional Price Comparw (1iM)f ................................... . 71 3.8b Esmates of Exort Taxaon (1992) .... 71 3.9 Efective Rates of Protection to Cnse Industry (1991) . . 74 4.1 Efcs of Rducdons in Ptection Valous Scenaios. 90 4.2 Effecs of Reduction of Foreign Excage Retention Ratios for the Machnery Sector ..... 93 4.3 Nontade Barriers before and afe Import Liberalization Proposed byChina . ..95 6.1 ForudeCredk ................... . 127 6.2 Exrs of Tageted Seor, 1978-91 ......................... 131  -vi - TABLus IN TEhr (contd) 7.1 Avea Level of Tariffs Chines Exports Encounter In Nine Major OECD Mrx .............................................. 146 -7.2 AnalysIs of the Rdative Importance of Nontaiff Barriers on Exports from China and O Developiag Countries .................... 147 7.3 Sectoral Coverage of China's Exports by Nontariff Barriers in the UuItedStatesJapannd EuropeanllCommunW ...... .. ... .. . * . . 148 7.4 EstImated Effet of a 50 Peroe Lberukaon in Trad Bariers by the EC, United Stateand Japnon mportsfromChina ............... .. 152 7.5 Estimats of Trde Diversion in the Uitd Stas due to a Meim- US Fre Trad Arngement ................... . .... * ..., 153 7.6 Ars of Potntial Dp nof Cha's Exports to Canada due to theU dSas n FTA .......................... 154 7.7 Projections of the Trade Effects of Applying United States General Tariffs on MajorChineseExportProducts ........................... 157 7.8 Crss-Country Comparison of Trends In Average Labor ntensity ofExports ......................................... 160 7.9 China and Other East Asian Countries Share in te WodddExportsofSelected Poducs ............... 161 7.10 Redave Prices Recived by China as Other Exporters to the EC, Japan and UntedStatesinl990 ........... ............ ....... 163 Bo=0 IN Tz1 3.1 TheConstructionofThreeSmallPolyesteFactodesin Ckengdu . ...... 76 3.2 Supply bflances wihin the Refrgator Industry: Asymmetric lJvestmnent ReqrenmInt ................ . 76 6.1 Forep Trade Corportio niChina Two Examples .116 7.1 Can Imternational Markets Accommodate a Major Chinese Trade Expansion? 144 7.2 Current Protectionism and China's Trade Prects: Some Compaisons with an Earlier Period ..145 IGURES IN TEX 1.1 China: TrendsinTrade,1978-91 ............................ 3 1.2 Broad Money and Impots ................................ 6 2.1 Trends in the Officia and Swap Market Exchange Rates .... ......... 36 2.2 Trends in Reai Effective Official and Swap Market Rates .... ........ 37 2.3 TheWeighted Average Excmge Rate and Exports ..... ........... 38 3.1 Tarlf Structure-Food, Bverae an Tobacco ....... ............ 53 3.2 Tarff Structure-Raw Mvaterias..54 3.2 TifStume-Ra Ni"hW ........................ : . ... .... 5 3.3 Tadf Structure-Man ....u cture.. .. 55 3.4 Strucre of NTB Coverage, 1992 ............................ 66  -ii- FIGUI IN TEV (coned) 7.1 Nomal PM i Aganst Cias Tile and Clothing Exort to the Uia Statem In 1988: Taft, Nonuiff Bale, ad ComXbind Protec18eEffet ........................... - .. . . . 149 7.2 nalysis of ChWis Revealed Companaive Advatag in Broad Groups of t Products, 1979f80 an d 198999 <.......... 162 7.3 Selected Labor-bn Ma urud Products In which China may have a Meor Fu Expt Potential .... ....... ............ 165  - Viii - CONThIBUTORS This report and its annexes are based on the findings of a mission that visited China duaing may-Jue 1992. In addition to interviews and discussions In Beijing, the ission visited Jinan and Qingdao (andong Province) and W%ha (Hubei Province). The mission consisted of Peter Harrold (mission leader), Rajiv Lall (dep mission leader, export developmnt and trade refom strategy), Alexander Yeats (expon prospets, Will Martin (tariff ad nonutiff barrier (NrB) regime, protective effects of exchange rate regime), Nizholas Lardy (rcent rfoms), David Wall (special economic zones) Hoe Ee Khor (MF) (fweign exchange reie), Sona Zhao (RMC) and Chen Xingdong (tMC). Research eas in Washington wa prvided by Teja Raparla. Rajiv Lall is the principal and coordinatg ato of the Report The mission reived valuable collaboration from a team headed by Mr. Yuan Wenqi, Director of the Research Deament of Chisa's Foreign Trade at the Instue of Finance and Trade Economics of the Cbinese Academy of Social Sciences. This team was comprised of Massrsi. Chen Jaqin, Li aoxi, Yag Shangxiag, Yu Lixin, Feng Yuan, Zhang Li and Lu Shenglibng. Spec ths are owed to Mr. Ji Chongwel, Senior Resech Fellow of the Devedopment Reeatch Center, Mr. Liu Xiangdong, Assistant Minise, Mnstry of Foreig Trade and Economic Cooperaton (MOFTEC), and Mr. Song Halpeng, Deputy Director General Of the State Admion of Exchange Control (SAEC) for their guidance and suggestions. Ackowledgements are also due Mr. Qlu Xichun, Deputy Division Chief, Department of Policy and Delpment, MOFTEC and to Mr. Wang Qin Hua, Division Chief, Depament of Foreign Ttrde, State Council Economic and Trade Commission (SCETC) for their commes. The mission grateful to the Mistry of Foreign Tra6e and Economic Coopaon (MOFTEC) for facilitadg is work in Beijing, and for helping to make the visits to Shandong and Hubei provinces frit. Finally, the mission extends its gratitude to all the officials from the various government agencies, trading companies and enterprises with whom it met.  EXECUTIVE SUMARY A. OvERmvLw i. Since the launhg of the refrm program In 1979, the prmotion of aeral trae9 has bn centra to Chinas ef to modriz its eonmy. The policy has met with rearable success, wh expors having hceased nnd and Impots morve t sevenfold over the period. This has been accompmnied by rtpid chang in the tiinal support system for foreign tade and in the incentive framework. But, China has a long way to go In replacwing direct de Imnerventon with indirect price based isruments for managing its trade policy, and much i still unclear about the functioning of Chia's ade regime. in. Histodrcally, Chinas appoach to trade policy has been aimd at chig export growth for th k^ of genferatng foreip exchange wkhout sufficie regard to Is O, while import policy has frtured contols to regulate pmt growth. Although as a sult of the 'open- door policies- of the 1980s, deci oncenag exports hwbecome casi y ddtmind by the mrket rather ta adminitrave fat, reform of th import egim has, by comparis remained neglected and is now taking on some urgeacy. The report addresses y Ius in import a well export policy for accelratg te county's transrmai Into a market basd econloy. Four imta concusions emerge. I. F, uhile the rle of planming in Chis foreign trade sector has been declg, several problems of transition remai. The repor t reoms that would enable China to tasform what rema of its rade and fign exchange plamg systems Into Instrments for the Idire maagement of trade policy. hv. Second, the tr t finds tht depito a complex aray of taff and nontarff barrien to trade, China has bme relatively open economy, with evidence of cosiderable taf rdudancy. It demonts t the present is, not les for this reon, an opporn dme fr China tD embark on a substanve program of trade liberalizatkioL mott competi would be an imo instument for helpig China make its sta owned sector mor responsi to market forces-an issue of mounting concern for the ooury. Import liberaliztion would also con to the growing momem of China's drve to become a fuil member of the internional trading commuIty. Moreover, In view of its remakable export perfrmane so far and its comftable reserves position, Chin would appear to be well positioned to launch such a progam at tis tim. v. iW, sdi the dinishing rlac on export planng, th Chnose gover has been actively involved In export development Aside from financi l o and incenv, the governm has directly provided a variety of other suppor secs inud maeting and qualit conr. Such spport dsould be maintind. Howev, as China conus Its drive wards a market economy, the way in which export as _t is deliveed  will need to be refimed. 'Me report proposes a programn of action for making the institutional support sucture for exports, a public support for export developmen In gnedr, more effective. vi. FLwily, the success of China's continued reforms in the area of foreign trde depend on its abllty to sustain a healthy rato of export growth. Ile report finds,tbat, ein today's uncertain global trading enviroment, China should be able to mainin its eport perfmance through quality improvement and some product amd market diversification. On the othr had, there is litlo doubt that the successfil conclusion of the Uruguay Round would be very helpful for China, or that the discontination of China's Most-Favored-Nation (MFN) status in the United States would lead to significant trade dislocation. B. MAIN FBAMM OF CINA'S TRADE PWRFORMANCE vii. Over the decade of the 1980s, Chinas exports outrfomed those of most other countries, including such newly industrialized economies (NEs) as Malaysia. Ihe only economies tat resred average anmalized export growth rates higher ta China were Thailand (13.2 percent), Korea (12.8 percent), Taiwan (China) (12.1 percet ) and Portgal (11.7 percent). China is now the eleventh largest exporting nation in the world. It exports about 17 percent of the gross value of indus output (GVIO) of its overall m sector. Institutional decentraization, foreign investment (especily from Hong Kong), depreciation of the real effeve exchnge rate, and duty-free access to imported inputs for export assembly, all seem to have contributed to this strong performance. Whereas in 1978, all trade was monopolized by only 12 Foreign Trade Corporations (FTCs) and their branches, today over 3,600 FrCs compete increasingly fiercely for export business. From no freign direct investment (FDI) in 1978, the total has risen to over 90,000 approved projects with a contracted value of $58.1 billion. Since 1985, the real effective official exchange rate has depreciated more than 100 percent, almost two thirds of China's manufactrg exports are now based on processing actvity tat utilizes duty-free imports. viii. Another development which has had a bearing on China's export performance over the decade of the 1980s has been the delining importance of trade planning. Direct subsidies for exports have been more or less phased out, and export targeting has become progrsively more macro in naure (now operag essentially only through the foreign trade contract sysem-pma. xlii). As a result, the composition of Chinas expo has been allowed to evolve increasinly along the lines of the count's comparative avantage, with te cntributdonof nonste and foreign-invested enterprises also growing very fast. Nonstate and foreign-funded enterpises account now for at least one third of China's exports. Manufactures as a whole constitte 80 percen of exports, with labor-intensive manuf6ctures contributing almost thre fourths of total exports. As in many other East Asian economies, clothig, toys, sportig goods and footwear have emerged as amongst the most dynmic of Chineas export sectors. ix. Unlike exports, imports seem to have remained subject to a much stronger hand of government management. Over the 1980s, import trends closely followed trends in planned domestic economic activity, and appear also to have been sensitive to changes in administave contols such as foreign exchange retention and import licensing. Overall, the patern of Chinas imports renained very stable and reflected the ountry's import strategy of asu g supply of key raw mates and acqrig embodied technology, while minimizin imports of consumer  -xi- goods. The degee of central government control over imports has been dimiishing, but even today, over 50 percent of the country's foreign exchange eaing are subject to central governmen contrl (para. xv), and 50 percent of imports are subject to some form of nontaiff barriers (NtBs) (paras. xxii-xxvi). X. On the whole though, Chia's economy has become increashgly open. Most remarkably, the share of merchanise trade in Chias gos domestic product (GDP) went from 10 percent in 1978 to 31 percent in 1991, with Imports acountg for 15 pecent4/ Based on this measure, China appears to be more a twice as open as 1di and Brazil, and significanly more open than the United States or Japan. Moreover, Import peration in certain sectors is extremely high. For example, in 1990, Imports amounted to an estmated 28 percent of GVIO in China's machinery and transport equipment sector. xi. While the growing openness of the Cbhinese economy has had a perceptible impact on the quality of a range of Chinese products, it is noteworthy that the structure of China's industry hardly changed between 1985 and 1990, despite a nonnegligible degree of import penepration and rising export rstios over the same period. Itus, the respective shares of light Wd heavy industries in total industrial output rmaine viruly unchanged at around 47 and 53.percent between 1985 and 1990. Likwie, the sbare of consumer manufactur (with such heavily export-orented sectors as clothing, footwear and travel goods) has also stayed remarkably stable at around 8 percent of GVIO. Tbis suggests tha investment in China remaned heavily directed, at least until the late 1980s, such that the allocadon of investment across sectors went largely unaffected by the county's changing patems of exten trade. As open as the Chinese economy is today, trade still does not appear to play a sufficient role in domestiq resource allocation. C. TRADE AND FOEGN EXCHAG PLANNiNG: Tm REMAI G ISWS Trade Pbnnig: What Next? xii. . China's trade system has moved from one in which, at the start of the reform period, almost all trade was planned and carred out through a handful of FTCs, to one in which the role of planning is much diminished. Similarly, pricing has moved from a position of wide- ra&mg ibsidy and cross-subsidy, to one in which, in 1992, only import subsWes remain, and these are really enterprise subsidies. Such export planning as exists now takes place through the foreign trade contract system in the form of value targets for export enings. xiii. The present foreign tade contract system, although intended to be fixed on a bttom.pu basis, still takes on a compulsory quality for several reasons. irst, the value txgets negotiated in the contract for exports and the amount of foreign exchge to be remanded to the cee are still mandatory. Second, fulfillment of the tagets in the contract is a precondition for awarding bonuses to officials responsible for carying out the export plan. Each X1 liis fig needs to be treate with cauo First, Chinas GNP is likey to be Second, customs statistes an exports include the fill value of exports based on processing of imp huts, wbich tends to exage the role of trade in to Chinese economy. Excluding the latter woldd reduce the value of Chinas expts in 1990 by about $11.9 billion, and th trade to GDP share to about 28 paceaL Depeniag up what estima of hd's GDP is take, the trade to GDP share could be anywhere betwoee 18 and 26 percenL  -xi prvc contully detemined targets are n tti disaggregated and asigned as targets to various prvia trading companies. Thi, rebates for domestic taxes levied on export goods have now boee linked to fDfill trges for expors. The problem is a te targts hv to be met by FTCs that are not enirey free to choose what goods they can tade, and are no longer digiblo fr subidies to covct their loss making exports. As a rsut, FTCs an pay fll ateni to profability whle at the sae time meedtig thei obliations ur the forgn excan contract. Avablo eviden suggests the incidenc of bad bank loans to FTCs bas gone up shaply sinc the contract responsibility system was introduced and subsidy paymen begato be phased outin V188. xiv. In order to address tils problem, the authorites neod to take the reforms of the exPot planning system to their logical conusion as soon as pssible. The trade cona responsibility system should be abolished and Fs should be allowed to work towards maimizig profits rather thad foreign exchange earnings. inkg bonuses to profits, insbad of to forei exhanp tirgets, would motiv FSCs to market only profble exports, thereby genating export eaigs for tie country without concomitant domestic currency loss. Such measures will, however, not b effective witout further Istuional rform of the FTCs themseves. FTCs need to be d greater autnomy (along the lines of the rec eulatons p tining to the opert mechns of stat-owned entes) so at they c ction as truy independent profit centers. At a minimum, FTCs must be grand the right to iwooa their own product scope. Xv. On the Import side too, as noted above, the hIportance of plannig has declined, with the coverag of the trade plan having fallen to under 20 pecet of al Imports (from 40 percent In 1988), and this trend can be expected to coniue. However, a large pwopotton of nonan plan imports continues to be subject to ad e regulaton through tg tol of foreig exchang allocations. Ihe cetal gov erm stll onols 50 pet of all kfeig excge eanings. Fudn for key projects and for their associaed imp Is aready allocated as part of the gverme investmont program and the state indu policy. It is, tihefor, redundant to also administatvely assig foreign excage for th purpose of procn these imports (which acoun for more ta 30 perce of all imors). All concened SOEs or pvernm t agencies ought simply to purchase the forei exchange they need In the fored exchango adjustmet Cswap") cenes (EACs) ntead of having loc e surrender 30 percent of their foreig exchag eanins to the cetal government at the swap rate, and dte having these funds allocaed to them administr ly (para. xix). MheEhang late Reghw Towards Convertibmty xvi. Since the establiment of PEACs in 1986, whh created an offici two-er exchage rate system, thirk volume of transactions has gw rapidly, and reached $25 billion In 1992, ar about one half of all cash Imp . The FEAC system has serted two key functions: it has proved critica relief to exporters in maintaining export incetives, and it has frced the governmen to move the officia rate to more maket mined levels. Nevertheless, important deect remin xvii For one, the exst system of quota retention is flawed. Quota are monopolized by FTCs, with most local mn etprises being left wi ltle or ne of the fig exchge they help genert. Since FTCs thmsves do not have any diect Import le nts, they have tendd to hoard retention quotas for spelative purpos. More  -xi - imortnly, the system of tadig predom lyin quotas stead of cash has deied the Peoples Bank of China (PBC) an Instrument for intrveing in the foreigp exchange market for pupos of stabilizing the exchdage rate. xviii. Second, although 80 percen of foreign exchange earni are now priced at the swap rtme, the market for foeip excage remains thin and fragmted, in large part becse the govnment stll does not purchas its foreign excbange requimens through the PEACs. Bedides, the differtil between the swap market and the officiat exchange rate, down to uder 10 pct in 1991, has once again become significan The differential exceeded 45 percent at the end of the first quater of 1993 (despie atempts, later abandoned, to enforce price ceiings in the FEACs). xix. Structal reform of the exchange regime has theefore become urgent. is the sated objective of the autrites to unfy the exchange rates and make the renminbi a convertible currncy. Ihis process needs to be accelerated trugh the speedy impl ation of the following rommended measures: (a) Replacement of the system of retenton quotas with a system of cash retention tha would allow entr to retain their foeig exchange in resident bank account, reduce the incidence of hoarding and allow the PBC to intvene, if neceary, to stabilize the swap market rate; (b) Elimination of remaining restrictons on access to FEACs (reflecting either the status of the purcha or the purpose of the trasation), and paralle creation of an integrated national swap market; (c) Wiening of the scope of FEACs to cover all curret account transactions (includin nontrade tansactions), and parallel abolition of all remaining surrender requements, with the govenment having to purchase al its uaret accn fo exchange needs ncluding for mandatory Imports) through the swap market; and (d) Abolition of adminitred foreign exchamge allocation for pririty investment projecs, and phasing o 7t of that for mandatory imports. xx. The dbove measures would make the renminbi convertible on the currt account, strengthen the links between the monetary and the etnal sector of the economy, and thereby placo a greater burden on monetary policy as an Instrumat fur Influencing the balnc of paymenu outcome. It is important, pardculrly in light of the recent trends in monetay aggregate, ta the authorities adopt a disciplined monetary policy stance while these mear are being implemented. xx Finally, as concerns the question of moving towards full convertabiity on the capital acount, although ther a some exceptions, the experience of other counties in gener sugges that a measred pace b advisable. Generalized opening of the capia ac:ount often leads to exchange rate inality. As such, the prudent cowse of acdon woul *'e to leave libalization of the capital account until after ipoat remaining structural 4Joi as, such as tho rdadtg to the Import regime have been implmented (par. xli4).  xiv . D. REFORMING CINA'S TIADE REGME Prorities and Perspectves an Reform xxii. Despite the declinn importac of trade plannig, China still operates a relatively complex trade regime. Apart from conthmed reliance oni the mandatory iport plan, and the use of controls over the allocadon of, and access to, foreign exchange, impors are reuaed through tariftf, canaizaon (monopoly or limited Import rights), licensing and direct controls. Overall, more than 50 percent of China's imports were subject to some form of nontariff administrative control in 1992, with imports under the mandary plan coverig 18.5 percent of import. The Import regim, therefore, bears the marks of considerable government management. In addition, licenses, quotas and taxes are also maintained to regulate the exports of a variety of products. xxiil. Aftr seeing a substa increase over the last few years, China's weighted average tariff ui I992 was back to its pre-19S7 level, with a trade-weighted average of 32 percent. On average, however, Chinas tarffs remain higher, more numerous and more dispere than most other lae developin countres, with 69 ras and a standard deviation of 30 pere, compared with, for example 34 rates and 17 percent for Brazil at an identical average tariff rate. The multiplicity of objectives seems to account for the high dispersion of nas tariff structure, with both a desire to protect sectors in which domestic production is significant, and also to penalize nonasental consumption. This has kept import penetration in certain sectors very low and has provided high margins of protection to local production. xxiv. Ihe most important method of nontaiff control of Imports is to assign import rghts to one or a few FTCs, such as for timber, cement and fertilizers. This process we label canaliation An esImated 32 percent of total Imports are subject to control through cnalization. Of these, two thirds are Imports under the mandatory trade plan. For the remaining 13.5 percent of imports, therefore, canalization is used as an instument for controlling import demand for reasons tgat have nothing to do with the trade plan. xxv. In addition to canalization, import licemes are used to serve multiple objectives. On the one hand, licensing is used as an administrative device to allocate a fixed quanty of planned imports and centrllylprovinciAly contolled foreign exchange. Here it functions as a quota allocation mechanim. On the other hand, licensing is also used for protecting domestic economic activity as well as for regulating, for balance of paymens purposes, the demand for imports fiaced through retined foreign exchange. In all, there are presny 53 broad categories of products subject to import licensing. These accounted for 12 pet of all RS tauiff lines in 1992 and covered 25.1 percent of Chinas total imports. Of these imports, however, more than half were aso subject to canalizadon and there appears to be some redundanq. In 1992, ftose ipot for which licek ig requiements applied in a nonoverlapping manner accounted for an estimated 11.7 percen of China's total imports. xxvi. Import controls (distinct from import licenses) are primarily used to protect the maciery and electronics sector, through the State Council Machinery and Electronics Import Control Offive (SCEMIO), and such controls cmrenty apply to about 7.7 percent of total imports. The combined effect of licensing and controls serves primarily to control three groups of products: agricultural raw materis subject to domesdc price control; critical domestic production such as steel and texiles; and nonessent consumer goods.  -~~~~~~~~~~~~~~~X - "x%v - xxvii. Export qotslicenes covered 15 percent of China's exports In 1992. A large set of commodities subject to epott licensing was agricultural goods, such as beef, pork and vegetables, expord to Hong Kong. Her the objdctive of the liening arrangements is to increase the pries received for these commodities by conolling supply. Tho same is true for exort licensing in the case of such commodities a tugsten, in wbich China has a very large share of the innation market (40 percent). On the other hand, expor conts on such producs as rie and maize have been used to ensure the adequate avaiability of these goods domestically. The scope of export controlswas reduced somewhat this year. Even so, 38 broad categoties of products still remain subject to export qus/licenses. xxvii. The use of export licemses to increase the domestic avaiabiity and/or depress the price of a variety of key planned commodities has, however, been more signficat. The government's objective seems to be not only to fix official prices below international levels, but also to maintain the secondary market price of selected exportables such as coal, petroleum, maize and rice, below world parity, by restricting exports though the widespread use of export licensing. The rationale for these controls will disappear as China phases out the implicit subsidies to consumers and industry that its policies of price control eail. XXix. In summary, China's import and export regimes appear to operate essentially to aise the price of final consumer goods reladve to producer intermediates, mirroring basic biases in Chia's general industrial policy. Prices of many agricultura goods appear to be depressed through the use of implicit export taxes and their equivalents. Prices of basic producer inputs to m, such as coal, oil and thnber, are likewise depressed. On the other hand, the price of most inemediate and capital goods are maintained above import par. The prices of some intmedite inputs, especilly petrochemicals and texte yarns, that account for a sigifcant proportion of China's toWal industrial output, are eeptonally high. Ibis no doubt penalizes the competveness of some downstream sectors, such as apparel and footwear, in which China has obvious comparative advantage and seems to contribute to the low domestic content of export processing activity. Import licensing is also used to reinforce the price Incrming effect of even higher tariffs on a selection of hbigher-tech nm cired goods. xxx. Notwithaing the foral regatory system that survives de jure, China's import regime is de faCto more open than the above descdption might suggest. First, despite the 32 percnt average nominal tariff rate (which is not dissimilar to average tariff levels in other developing countries), China's actual duty collection ratio is only 5.6 percent (more akdn to the situation in developed countries). The gap oetween nominal and effective rates indicates very high levels of duty exemption in China. China operates a relatively well-developed system of duty exemptions for exporters, and duty concessions of 50 percent are provided for foreign- funded enterprises. About half of all imports are trated as 'concessional' in this sense. In addtion, it seems that a range of imports for "priority projects" are also exempted. The rate of duty collection as a share of total imports has declined from 9.7 percent in 1986 to today's very low level, which is only about one third of the average rate of collection of other developing countries. Ihe rapidly decining duty collection rtios are in fact cause for some concern to the extent that they are caused by (a) increasing evasion on ptoducts for domestic consumptio r (b) increasing exemptions on import for use on domeic (as opposed to export) production. On the other hand, the small revenue contbution of Chinas tariff endows it with much gaer flexibility than most other developing countries. In parti, it enhances Chioa's optons with regard to the sort of fiunameal restructuring of its tariffs suggested by the report's analysis.  - xvi - Dxxi. Second, price compaison data suggest that such proctive dices as hig nomnal tariff and nontariff barriers (NTBs) e, for many products (patcularly for a rango of mature consumer mufactres), not binting, i.e., their domestic prices, aldtough stl high than world prices, are nevertheless below the duty-inclusive prices of competing imports. For thes products, import licenses are redundant as a protective isrument and there would also appear to be considerable 'water in the tarifr caused In part by smuggling. Examples of such products include automobile tires, small petrol engies, cassette recorders, televisions and domestic refrgerators. In the case of cassette recorders, domsic prices are stll close to two- thrds above import parity, although they are 35 percent below the duty-inclusive price of competng import. Likewise, domestic prices of color and black and white televisions are between 80 and 40 percent above import parity, but between one-fifh and two-thirds below the duty-Inclusive price of imports. mxiid The foregoing analysis of the trade regime underlines the need for subs_taive refom. Aside from simplification, and reduction in the mber of instruments of control and tie dispersion of tariff rmtes, significant overall lowerig of tariffs (but with fewer exemptios, except for export production) would seem to be In order. There could be number of strategies for such a reform effort, and the report examines six alternatives through a simulation exercise. xxxiii. The resudts of the simulations provide severa useful points. Frst, they suggest that China should be able to undertake deep cuts in tariffs and NTBs without t resulting in any major contraction of even the most protected sectors such as textles and machinery. In a country of China's size, domestc consumption relative to imports can be expected to remain large and domestic dislocations are likely to be limited because of the considerable di tation between imports and domestic production. Import liberaizati should improve Chinas export perfmance, particularly of its macinery sectors. The condition for succe liberalizadon, however, is that acdvities within each sector should be allowed and able to switch to the more export-oriented segments and that macromanagement rmain discplined. Second, it seems that radial import liberalization (e.g., a 50 percent across-the- board reduction in nomina tariffs) is a superior option to selective liberalization limited to the currently most protected sectors. Nonetheless, amongst the possibilities for selective liberadization, the option of reducing import protecton on only the machinery sector is likely to produce the best rests for the least effort and dWocation. Third, not possible dlocation to downstream Industries, significant gains could be derived from the reduction of export controls and taxes in addition to the reduction of import protection * iming, Sequci and Linkges xxdv. It is evident thattrade reform on its own is unl.kely to yield the desired results. For It to succeed, progress in, and coordination with, other ars of policy and reform wiUl be essential. This does not mean, however, that reform of Chinas trade regime should wat Whie it is true that trade reform needs other reforms to make it fully effective, it is also trme tha progress in trade itself is likely to generate importat momentum for reforms other areas. Moreover, a number of factors relating to both the domestic situation and the intenadonl trdit evironme, suggest that the dme is indeed ripe for China to enbark upon a bold program of trade liberalization. xxxv. Trade reform in China cannot proceed without the further dismaning of th outry's trade and investment planning apparatus. In addition to the elimintion of the current  - xvii - system of frei excnge plaing and allocation (para. xll-xv), the system of fJreign changecontrating needs to be replaced with onv In which FTCs are frea to purue profis rather than foreigp exchange targets. Further, k s imratve ta netment (especilly 1pian vestmen) be allocated in accordance with market signals. One step ta should be tk immediately In this context is to subanty raise the miimm le of Ivtment requiig cetral gove approval. xxxVI. Trade policy Is an intgr part of overall onomic policy. The evidence from other counties is clear about the importance of a real depreciation of the currecy for the succe of progms of trade liberaization. It is critical that steps mmeded above for unifying the exchange rate and making the currency convertible for all curent account transaction(s para. xix) be implemented as quicldy as possible, and certainly befor trade liberalization proceeds too far, not least so that the impact of reduced protection on the domestic Industri sector can be moderated through an apropriate depreciation of the exchange rate. Action on reforming the exchange rate regime is all the more importat now given the most recent tendency of the gap between the official and the swap market exchange rate to widen again Te experience of odter countries also indicates that trade reform will go much better if caried out during a period of relative macrostability. At the same time, by acting as a safty valve,' a more liberal trade regime can itself contribute to the management of aggregate demand. his a pertit consideration for China. With its comfortable level of international reserves and a cumet account surplus, China is weli placed at prent to use trade liberalization as a Meas to addre the threat of ovetheatig and the emerging shortage of essentalIndustri raw materials. mnvii. An Important objective of reforming the trade regime is to rationalize the sructe of inctives for domestic economic activity and thereby imprve resource allocaton If domestc price contros reman in place, however, the traderegime would be of lltthelp in accomplshing this objective. This is not to say, in the case of China, that trade libeaization should await finther price liberaization. China has aleady made very considerable progress wh regard to price reform. Ihe incidence of subsidies for imported commodities has declined y. Moreover, the widespread application of the two-tier pricing mechanism has meant that a large measure of price flexibility exists for much of nonplan domestic economic activity. Under the circmstances, import liberalization can be expected to be effective for an important segment of the economy even without removing such price controls as still remain. xxxviii. Enterprise efficiency is not only a micro but also a significant macro problem In China. Losses equivalent to almost 5 percen of GDP, and financed in good part through loans fom the banking sector, statowned e prises (SOEs) are the largest contbutors to the government's fiscal and quasi-fiscal deficit. Trade liberalizaton can be a valuable tool reform for altering the behavior of enterpries and improving the efficiency of resource allocation. To be sumcessfbl, it requires enterprises to be able to shift patterns of production and investment in response to chaging incentives. In this context, the growing volume and importance of nonstate epre and the Increasig flexibility being accorded to SOEs are encouraging trends which sugesat the time is righ for Iniilating trade liberalization. Indeed, import li zatn should not wait because once initated, it can play a key role in exerting competitive pressure an SO0s nd In maintaining the momentum for enterprise reform. mix. It should be emphaized that izaonof Chinas Industry wl require much more ta just import liberization. Parallel efforts wil noee to be made in such areas as  - vill - support for export development (see pam. Iiii), quality control, worker training, technology polcy and competition policy. If China wishes to have a targeted program of support to its export sector and, indeed, if it wishes to have a meaniAgM indusial policy, then these two policies will have to become the mirror image of each other and be very closely coordinated, preferbly withn a single agency (see also para. liv). Id. Finally, as China's presence in global markets coninues to grow, it must become increasingly responsive to the demands of trade diplomacy. In its bid to attain fuil meership status of the General Agreement on Tariffs and Trade (GATT), China has already made significant efforts in trying to conform to the expectations of the International community in general and the United States in particular (para. xlii). However, the requirements for GATT membership are not precise and are a matter for some negotiation. If the treatment of recent applications to the GATT is any guide, China is likely to be called upon to go futher in relaxing its import regime. From the perspective of the emerging international trade envirnent too therefore, this appears to be an opportune time for China to pursue a substantive program of trade liberalization. Deflning a Bld Program of Trade Liberon xli. Over the last decade and a half, China has achieved a phenomenal upsurge in exports and trade. Most recently, however, its success is raising investment, growth and trade supluses, has raised the specter of overheafting and inflation. Besides, enterprise inefficiency remains an important micro and macro problem for China, and its dramatic entry into export makets has raised concerns amongst Its major trading partner about its responsibility for opening up to Imports. The launching of a program of trade liberalization could help China address all three of these issues. What is more is that, given (a) its comfortable reserves posion, (b) the advanced state of price reform, (c) the expanding role of the nonstate sector and growing flexibility in domestic resource allocation in general, and (d) evidence of tariff redundanc and the de facto opemness of the economy, China is paricularly well positioned to implement bold measures in the area of import liberalization at this time. xlii. China has begun to move in the right direction. Recent import liberalization initiatfves undertaken as part of China's bid to attain ful membership status of the GATT, and as part of its bilateral trade negotiations with the United States, include publication of regulations, some reduction of tariffs (tariffs on 3,371 tariff lines were reduced an average of 7 percent in December 1992), abolition of *import substitution" lists, and limited removal of import licenses and controls, with a commitment to eliminate two thirds of these over time. However, no have yet been made on import planning, canalization or phased taiff reduction Considering the opportunit that China has to liberalize trade at this time, these measures seem quite incomplete, and need to be complemented by other measures over the immediate and medium term. The report makes the following recommendaons: xliii. Phase Out of Canalization. The distinction between Category I and H imports should be abolished immediately, such that a single list of only those products that are subject to mandatory import planning remain subject to canalization for an interim period. All other imports should be made open to any FMs or enterprises with direct trading rights. Beyond this, as reliance on import planning declines, China should phase out the practice of canalization altogether.  -xix- xliv. Phm Out of Ucesing and Control. Nonbinding NTBs (as in the case of a range of consumer n ) should be removed immedtely. ithe discretionary element of remaing import liceses and controls should be reduced by easuring that all decisions with regard to import licensing and controls are made only by central govement authorities accordig to criteria that are uniform and transparent. idv The Memorandum of Understanding (MOU) that China recently concluded with the Utd States is an ort initiave intended to reduce NTB coverage significaty by 1997. Chin must implement this agreement on a multlatera basis. Only then would this iniative conStitute significant progress. xIvi. Tariff Simplification and Reduction. Ihe number of rates and the level of tauiffs applying to consumer goods should be reduced right away. Immediate steps could taken on a ange of mau consumer products for which there is evidence of 'water in the tarifP (i.e., a partially redundant level of protection). On the basis of avaiable data, it appears that reducdons in the order of 20 to 40 percent should be possible, depending upon the product, without resulting in any significant dislocations in domestic production. Where tariffs are currentily beig used as a way to discourage consumption, these tariff reductions should be accompanied by tho Imposition of an appropriate sales tax. x1vii. In parallel with the Impleion, on a multilateral (not merely bilaterl) basis, of the program of NTB reduction agreed to in the MOU with the United States, China should pursue an equaly bold program of tariff reducton. A reomnable target would be to implement a 50 percent radial cut in tariffs as soon as possible. Such a tariff cut would bring China's tariff sucture Into line with that for Korea, for example, wih average rates on consumer goods declining to about 32 percent, those on intermediate and capital goods to around 14 percent, ricltural goods to 17 percent and ming to 10 percent. Idviii. Given that trade diplomacy is likely to remain an important part of China's future trade strategy, the actual phasing of these tariff reductions could be linked to progress in negoiations with trading partners, most notably within the context of GAT. xix. Tariff Exemptions. It is recommended that all tariff exemptions (mcluding those to foreign-invested enterprises) on Imports for use in domestic production not as yet on- stream should be abolished, while exemptions on imports for use in domestic production already on-stram should be phased out over the shortest period possible. 1. Reduction in Export Controls. Wherever China's existingprice control policies neessitat the use of export regulation, export taxes should be used in place of licenses because th latter allow the few PTCs designated to handle such products to capture sizable rent which would more appropriately accrue to the Goverment budget. Such export reguatory devices as remain, should in any case be eliminate progressively and in tandem with ongoing price reform efforts. E. POLIces FOR ExpORr DEVELopmeNr. PRItoRUEs FOR TB 19908 li. China's past export support strucute, cetered on national foreign trade corporations, a very active and inteveationist Ministry of Foreign Economic Relations and  - xx - Trade (MOFERT),2/ and some foreign paers, such as entrepreneurs from Hong Kong, dt were alowed to play an actve role In the export sector, has seved it very well during the firs decade and a half of reform Its eprience has provided nowther emple of the lesson observed lsewhere In East Asia ta appropi public intervention In export developmen and provsio of explict public support to the export sector can yield substanti dividends. While succl refom and continud success In export markets may require a cage in the way in which China provides this support, it does not Imply the removal of this support. Rather, it requim rorm in idie way support is provided in such areas as marketing, quality control, xport pr n, export credit and the fostern of pp iate trade inmediaries. 11 Inenational experience offers a rich set of options frm which China can lern In drawing up futur reform plans in tis rgard. Ihe most Important issue will be how to deepen the reform of FTCs, which are likely to remain at the cmor of Chinas export support structur, wit losing the considerable body of epertise that has been accmulated over the past In order to meet Its diverse needs, China should encourag the development of a variety of trad fims, rnging from the small, fleible Hong Kong tpe trading companies (best suited to hane its rapidly growing export segments such as garments and light industrial goods), to lr trading companies similar to the Japase sogo sosba or Korean chabl (suitable for developing efficient production systems or promoting the trade of affliated conglomerato grups). To help achieve this objecdve, the report offers the following suestions: subject FTCs to greater competition by removing remining barriers to cross-provincial transactions, grang more producing enterprises the right to trade directly, and allowing entry to foreign tain firms; make FTCs operate as independentproJft centers, with bonuses linked to profits ratier than to foreign exchang targets; eliminate all restrictions to the product scope of FTCs and pmit them to particpate in domestic commerce; allow ailing PTCs to exit and permit megr bvete FTCs and, for eample, emearing enterprise groups. 3iii, At the same time as FTCs are being converted Into compettive enterprises, the governnt should also assist manufctrng enterprises to export diredy if they so choose, giv the well-accepted benefts of direct contact between producers and overseas buyers. There are four esst elements in such support: (a) Export Markedig. At present, direct trading rights are not ofte ganted to domestic manufacting enterpis themselves on the grounds that they are inexperienced in matters peraining to lnt