By Long, Guoqiang

Abstract: 

China's trade dependence ratio has been on the rise in the past 20 years. As a result, a sense of anxiety appeared domestically: an exceedingly high trade dependence ratio might have an adverse effect on the healthy development of China's economy. With China's forthcoming entry to the World Trade Organization, whether we maintain a correct understanding of trade dependence ratio will directly affect our assessment of various situations and the adjustment of our opening-up strategy. Making an international comparison of China's trade dependence ratio by scientific methods and arriving at a correct understanding is of both theoretical and important practical significance.

I. Evolution of China's trade dependence ratio

Trade dependence ratio of a country is the ratio of the total amount of foreign trade of that country to its gross domestic product (GDP). The ratio is used to measure the degree of dependence of a country's economy on the international market. Foreign trade is divided into export and import. Correspondingly, trade dependence ratio can be divided into two categories: degree of dependence upon export, i.e. the ratio of export amount to GDP; and degree of dependence upon import, i.e. the ratio of import amount to GDP. In practical work people tend to pay greater attention to export dependence ratio. Compared to trade dependence ratio, it lays greater emphasis on the locomotive effect it has on economic development. It can also avoid double counting of import and export trade values. From a long term point of view, the export and import of a country tend to balance themselves.

Henceforth, taking one into consideration would suffice.

As a result of the tremendous efforts exerted in opening up China to the outside world in the past 20 years, China’s foreign trade grew by leaps and bounds. According to customs statistics, from 1981 through 1999, the average annual growth rate of China’s total import and export volume reached 12.40 percent, while export grew at an average annual rate of 12.90 percent and import at 11.90 percent. The position China occupied in world export and import rose from number 32 when reform and opening up was initiated to number 9 and 10 respectively. Among developing countries China became one of the few winners in the process of economic globalization. At the same time, in the years before 1994 the Renminbi (RMB) devalued steadily. It started in 1981 at 1 US dollar to 1.70 RMB yuan and ended in 1994 at 1 US dollar to 8.70 RMB yuan. The exchange rate in 1999 was 1 US dollar to 8.28 RMB yuan. Correspondingly, China’s trade dependence ratio rose dramatically. It was 9.80 in 1978 and by 1999 it was 36.40. It once reached 40.60 in 1994. The export dependence ratio was 4.60 in 1978 and 19.70 in 1999. The import dependence ratio was 5.20 in 1978 and by 1999 it reached 16.70. (see Chart 1)

The rapid development of the processing trade played an important part in raising the trade dependence ratio. Processing trade takes place when enterprises import raw material and component parts and process them into finished goods for export. It includes "trade of processing imported materials provided" and "trade of processing materials provided by foreign clients". In the 18 years from 1981 through 1999, the average annual growth rates of China’s export and import was 12.90 percent and 11.90 percent respectively. However, general export and import trade grew at average annual rates of 7.70 percent and 6.80 percent respectively, both lower than the average annual GDP growth rate. On the other hand, the average annual growth rates of export and import of processing trade were as high as 29.50 percent and 26.90 percent respectively, making the ratio of processing trade in the total volume of export and import trade rise from 4.80 percent to 56.90 percent and 37.80 percent respectively. Processing trade has become China’s biggest mode of trading. Though in recent years, both domestic content ratio and rate of added value of processing trade have gone up, a unique feature of the trade remains to a certain extent "import and high export". It is not deeply integrated with domestic economic operation. As a result, making use of trade dependence ratio which includes the processing trade may to a large extent exaggerate the degree of dependence of China’s economy on the international market.

Chart I Evolution of China's trade dependence ratio (1978-1999)

Source: China Statistical Yearbook over the years

II. International comparison of China’s trade dependence ratio community

Theoretically, there is no generally accepted criteria for measuring the appropriateness of trade dependence ratio. Henceforth, to acquire a correct understanding of China’s trade dependence ratio, we must carry out analysis with China placed in the context of the international community and by comparing China with the international community so as to arrive at a convincing conclusion.

First, the continued rise of China's trade dependence ratio is in conformity with international trends. With the development of economic globalization the growth rate of international trade has been consistently higher than that of the world economy. From 1980 through 1995, the growth rate of international merchandise trade was 5.60 percent. However, the average rate of world economic growth from 1980 through 1990 and from 1991 through 1998 were 3.10 percent and 2.50 percent respectively. As a result, the trade dependence ratio of the economies of the world's most nations and regions in the past several decades had been on the rise. The world’s average degree of dependence upon export rose from 14 percent in 1970 to 25 percent in 1997 (see Chart 2). From a horizontal point of view, the higher the per capita income of a country, the higher the trade dependence ratio of that country (see Table 1). This is another piece of evidence demonstrating that the rise of China’s trade dependence ratio as per capita income rises is in conformity with international trends.

Second, at present China's trade dependence ratio remains lower than the world average. In 1994, China's foreign exchange rate devalued by a big margin which in turn caused China’s trade dependence ratio to be higher temporarily than that of the world. Apart from this, China’s trade dependence ratio has been consistently lower than the world average (see Chart 2). Third, when carrying out comparisons between China’s trade dependence ratio and that of the international community, we should take into consideration the composite difference of the GDP of various countries. Generally speaking, if other factors are the same, the tradable attribute of service industry is much lower than goods. Henceforth, the greater the tertiary industry component in a GDP, the lower the trade dependence ratio. The GDP composition of different countries differs greatly.

Table 1 International comparison of trade dependence ratio

	Proportion of merchandise trade volume in PPP GDP (%)	Proportion merchandise trade volume in merchandise GDP (%)
	1987	199719871997
China	6.8	8.543.653.1
United States	14.0	20.450.375.3
Japan	20.8	25.040.846.5
Germany	-	54.3-60.4
Australia	24.4	35.080.1116.8
Russia	-	21.3-64.4
Low-income countries (average)	7.0	8.431.352.0
Middle-income countries (average)	10.3	18.653.880.0
High-income countries (average)	27.4	38.772.578.7

Source: The World Bank, 1999 World Development Indicators

For instance, the tertiary industry occupies 75 percent of GDP in the United States, whereas in China it occupies only 33 percent of GDP. If the GDP composition difference is not taken into consideration and the degrees of dependence upon foreign trade of various countries are compared without differentiation, the comparison would then contain irrational factors. Rational international comparison should take into full consideration the composite difference of various GDPs. One way to do this is to carry out weighted average of the ratio of merchandise trade volume in merchandise GDP (i.e. the added value of primary and secondary industries) and the of ratio of service trade in the added value of tertiary industry. Another way is to use the ratio between merchandise trade volume and merchandise GDP to measure the degree of opening-up of the economies of various countries. The World Bank employs the second method to carry out comparisons. Since the import and export volume of China’s service trade is relatively small, we can therefore employ the World Banks'method to analyze China’s trade dependence ratio. For the year of 1997, this ratio for China was 53.10 percent. It was lower than that of the world’s major countries. For instance, the ratio for America was 75.30 percent, Australia 116.80 percent, Germany 60.40 percent and Russia 64.40 percent (see Table 1). It is even lower than that of the so-called "small open economies".

Fourth, the study of trade dependence ratio should take into consideration the impact of foreign exchange rates. The foreign exchange rate of the RMB devalued by a big margin in the 1980s and early 1990s. Various studies both in China and abroad show that the nominal exchange rate of the RMB is about 3 times lower than its purchasing power parity (PPP) exchange rate. The World Bank calculated the proportion of merchandise trade in the purchasing power parity GDP of each country. The results showed that the level of China’s opening up was far lower than the average level of the world. China's level of opening up in 1997 was 8.50 percent which matched that of low income countries, but lower than the middle income countries (16.70 percent) and high income countries (38.70 percent) (see Table 1). In short, China's present trade dependence ratio is not high no matter viewed from whichever angle. It is baseless to assess China’s trade dependence ratio as too high and oppose further rapid growth of China’s foreign trade.

III. Future prospects of changes in China’s trade dependence ratio.

Future changes in China's trade dependence ratio will be determined by three factors: growth rate of foreign trade; nominal growth rate of GDP; and exchange rate. Nominal growth rate of GDP on the other hand is determined by its actual growth rate and inflation rate.

The growth rate of China’s foreign trade is an important factor affecting changes in China’s trade dependence ratio. From 1980 through 1995, the average annual growth rate of world trade was 5.60 percent, or 2.60 percentage points higher than the world’s economic growth rate. In the past 20 years, China's average export growth rate was 12.90 percent, or 3 percentage points higher than China’s actual GDP growth rate. The relative relation between China’s export and actual GDP growth rates conforms with the world trend. In the coming 20 years, China’s foreign trade should continue to grow at a rate of 2 to 3 percentage points above its GDP growth rate. Should China's GDP in the coming 20 years grow at an annual rate of 7 to 8 percent, then China’s export growth rate should be somewhere around 10 to 11 percent. Proceeding at such a rate, China's proportion in world trade by then will correspondingly rise from the present 3 percent to 9 percent. This conforms with the forecast of the World Bank.

The fact that the growth rate of China's foreign trade is higher than that of the economy is determined by the fundamental realities of the country and the impact foreign trade has on economic development. From a long-term point of view, export and import will be basically in a state of equilibrium. In other words net overseas demand will approach zero.

Henceforth, viewed from aggregate demand, foreign trade has limited impact on economic growth. In a realistic sense, however, because of its resource allocating effect foreign trade is of irreplaceable importance to the economic development of a developing country like China. First, China is a country with an unbalanced endowment of resources. On the one hand, it is strapped in natural resources on a per capita basis. On the other hand, it has an oversupply of human resources. China has established a grand target of raising its per capita national income to the level of moderately developed countries by the middle of this century.

To achieve such a target China will encounter severe bottlenecks in terms of natural resources which in no way can be resolved entirely at home. At the same time, quite a number of labor intensive products produced in China would have to rely on the demand of the international market. In other words, only by expanding the export of labor intensive products and intensifying exchange on the international market can China breakthrough the resources bottleneck encountered in the course of economic development. Second, there exists a relatively large gap in terms of technology between China, a developing country, and the developed countries. This places China in an inferior position, but it is also a source of development potential. International experience shows that the cost of importing technology is about one fifth of the cost of independent research and development. Therefore, importing technology and equipment from the international market will be an important source for China’s technological improvement for quite a long period in the future. It will also be a shortcut to accelerate China's technological progress. Third, the international market is of important significance to raising the competitiveness of some of China’s new industries.

China is a large country with a population of 1.3 billion. Its per capita income remains rather low. For those industries that produce consumer goods of a comparatively strong scale economy with rather costly price tags, the size of the domestic market cannot fully support their development. To grow up into internationally competitive industries they must rely in part on the international market. Fourth, international trade is also a place of learning. By engaging in import and export trade, domestic businesses acquire international market information as well as knowledge of how foreign enterprises are managed, the technology they employ, and how business is conducted. By learning as they conduct everyday business and as they watch how foreign enterprises operate, domestic enterprises can imitate and innovate. This is conducive to improving the quality of China’s enterprises as a whole.

Fifth, pressure created by the competition of imported goods on the domestic market is an important impetus driving Chinese enterprises to improve their technology and management.

Future trends of trade dependence ratio will be collectively decided by the prevailing tendency of the relative speed of foreign trade to economic development, foreign exchange rate, and rate of inflation. Henceforth, when international trade proceeds at a greater speed than economic growth, it does not necessarily have to raise the trade dependence ratio. In the past 18 years, China’s average export annual growth rate was 12.90 percent, or 3 percentage points higher than the actual GDP growth rate. However, because of inflation, China’s nominal GDP growth rate was as high as 17 percent. Had it not been for the devaluation of the RMB, China’s trade dependence ratio would have decreased instead of increased. In the coming 20 years, should the consumer price index of the United States remain at the average level of 3.40 percent of the past 20 years, China’s export growth rate be 10.50 percent, and China’s GDP growth rate be 7.50 percent, then whether China’s trade dependence ratio 20 years later will rise or fall would depend on the changes of the effective exchange rate of the RMB. If the average annual devaluation rate of the effective exchange rate of the RMB is higher that 0.60 percent, China’s trade dependence ratio would rise. On the contrary, if the average annual devaluation rate of the effective exchange rate of the RMB is lower than 0.60 percent, China’s trade dependence ratio would fall. If, however, the average annual devaluation rate of the actual exchange rate of the RMB is exactly 0.60 percent, China’s trade dependence ratio would remain at the present level.

Viewed from another angle, if the world average export dependence ratio continues to grow at the average rate of the past 30 years, by 2020 the world average export dependence ratio will reach 41 percent. Henceforth, hypothetically, should the consumer price index of the United States be 3.40 percent and China’s export and GDP growth rates be 10.50 percent and 7.50 percent respectively, and the average annual devaluation rate of the effective exchange rate of the RMB reach 4.20 percent in the next 21 years, China’s degree of dependence upon export will reach the average world level only by the year 2020. The devaluation rate in this case is lower than the average annual devaluation rate