By Zhang Xiaoji, Long Guoqiang

Opening to the outside world is a fundamental state policy of China and is also an important component of the Tenth Five-Year Plan. Formulation of a feasible new strategy of opening to the outside world on the basis of summarizing the successful experience of the past and adapting ourselves to economic globalization at the time when China is approaching accession to the World Trade Organization (WTO) is of important significance to carrying out China’s three-step development strategy.

I. Basic experience of opening to the outside world

In the past 20 years, China implemented the policy of opening to the outside world and did quite well in taking advantage of the favorable circumstances created by the international restructuring of industries. It expanded its foreign trade and attracted direct foreign investment. As a result, significant results were achieved and the economy grew at a fast rate. China became one of pioneering the developing countries in the economic globalization.

China’s basic experience in opening to the outside world consists of the following:

First, China never wavered in opening to the outside world.Opening to the outside world is an important integral part of Deng Xiaoping Theory. It is the consensus of the entire Party and all the Chinese people and has become a fundamental state policy. Even when serious incidents such as the Tiananmen Accident and the Asian financial crisis took place or when the international situation was in turmoil, China persisted in its fundamental policy of opening to the outside world and maintained stability and continuity of its policies. It thus has established its status as a country consistently engaged in reform and opening to the outside world.

Secondly, China made full use of "international and domestic resources and markets", actively participated in the international division of labor, and increased its national economic strength.By opening to the outside world, China was able to import capital and technology. It gave play to its comparative advantage and overcame the resources and environmental bottlenecks that were limiting economic development. It greatly promoted its economic development and boosted its national strength.

Thirdly, China properly coordinated institutional reform and opening to the outside world and turned the two into a virtuous circle.Through opening to the outside world China has imported foreign capital and technology as well as international practices in market economy. As a result, the country’s economic restructuring has been promoted. On the other hand, the marketization domestic economy and the major restructuring of foreign economic relations and trade in turn provide favorable conditions for further opening to the outside world.

Fourthly, China adopted timely strategic measures for further opening to the outside world according to changes taking place at home and abroad.China opened its coastal areas to the outside world in the 1980s. In the 1990s, it put forth the "strategy of expanding international market share by improving quality", "market diversification" and "strategy of broadly-based foreign trade and economic cooperation". Furthermore, it practiced "all-dimensional, multi-tiered and wide-ranging opening to the outside world". The degree of opening-up rose continuously.

Fifthly, China consistently maintained the principle of independence and kept the initiative in its own hands.China is a large socialist country. It must base itself on its own strength. While absorbing the common achievements of human civilization, it opposed the encroachment of decadent capitalist culture. It cracked down on smuggling, struck against evasion of foreign exchange and took strict precautions against financial disturbances. All these measures ensured economic security. The successful experience of the past 20 years should constitute the basic principles guiding China’s further opening to the outside world in the early stage of 21st century.

II. New situations and new problems faced in opening to the outside world

With economic globalization as the backdrop, China will be gaining accession to WTO and will fulfill most of its commitments in 5 years. It is a significant event affecting China’s economic life as well as a basic point of departure when we analyze the new situation facing China as it continues to open to the outside world. Opening China’s market implies that China will be more deeply involved in the globalization. This will not only bring new problems, but will also make the existing problems more conspicuous. It is therefore necessary for China to correctly gauge and actively deal with new situations and new problems. It must seize opportunities while striving for the best and avoiding harm.

Firstly, structural adjustment is not only a problem which China faces. It is also a prominent problem in the entire world.The new technological revolution with information technological at the core and the international industrial and technological transfer bring China with an historic opportunity to undertake structural adjustment by carrying out opening to the outside world. However, technological innovation brings along with it a drastic shortening of the life cycle of products. Some industries are already faced with overproduction on a world scale. Such a situation raises new requirements to the efficiency of China’s structural adjustment. Should the nation fail to keep up with the technological progress and changes in the international structure of demands that are taking place around the world and thus fail to carry out structural adjustment domestically and accept international industrial transfer, China will find that it will not only be unable to upgrade its industrial structure, but structural problems might even more deteriorate.

Secondly, the change in the aggregate supply and demand pattern of the domestic market created favorable conditions for China to gradually open its domestic market to the outside world and actively develop the international market.In the present stage of development when industrialization and urbanization have yet to be completed, insufficient demand has created tremendous employment pressure for China during its Tenth Five-Year Plan period. The development of some new industries is meeting with constrictions resulting from the size of the domestic market. China would have to actively expand domestic demand. At the same time China should make use of the improved external conditions after its accession to WTO and increase the share China’s products and services occupy in the international market. It should also take this opportunity to expand the utilization of foreign capital and import those resources and advanced technology and equipment that are in short supply domestically. Such undertakings are of important significance to expanding aggregate demand and increasing effective supply more than ever before. It is directly related to whether opening to the outside world can continue to be a driving force in promoting the rapid growth of the Chinese economy.

Thirdly, whether China can truly reap the benefits of opening its market to the outside world depends on a large part on the improvement of the domestic market mechanism.Lowering trade barriers, relaxing the restrictions on the entry of foreign capital, and further linking up the international and domestic markets will enable China to give play on a wider scale the fundamental role of the market in the allocation of resources. However, the present domestic market is still plagued by barriers existing between different departments and between different regions, and market orientation calls for prompt improvement. Whether China can carry out a unified application of economic and trade policies and establish a unified large market in the country during the transition period after accession to WTO will directly affect China’s optimization of resources allocation and economic development.

Fourthly, opening its market of trade in services to the outside world is a new focus in China’s participation in international competition.The development of China’s service sector is rather backward. The percentage it occupies in GDP is lower than that of most developing countries. Trade in service is conducted mainly in the form of commercial presence. Related professional knowledge and technology is hard to monopolize and blockade. Henceforth, equity joint ventures in the service sector can enable China to import foreign capital, sophisticated managerial experience, professional technology and standardized market operation skills. They can train and develop China’s rising service sector, create jobs and raise the general operating efficiency of the national economy and the quality of people’s life. Developed countries enjoy absolute superiority in services such as banking, insurance, telecommunication, distribution, etc.. Opening the market will inevitably bring tremendous competitive pressure to the domestic service industries. Under the WTO framework, there are no safeguard articles in trade of services. Once a sector has opened and the overall situation is threatened, there will be no remedial measures. It is therefore a test for China’s legal system building and government regulation efficiency when it comes down to properly controlling the examination and approval procedures, strengthening trade regulation, guaranteeing the security of state information system, fending against financial risks, and preventing monopoly of the distribution system.

Fifthly, government will have to adapt to the new situation of accession to WTO in terms of concepts, functions and modes of regulation.At present, governments at all levels are accustomed to using administrative methods instead of market mechanism. They interfere directly with enterprise decision making. The regulatory scope of the government’s industrial policies is much too extended and many policy measures are incompatible with the WTO rules. Henceforth, the first to be challenged when China joins WTO will be the government. The government’s management of foreign trade will be restricted by WTO rules, government measures of quantitive limit, requirement of domestic content and foreign exchange balancing will have to be phased out. The government must administer according to law with increased transparency. On the other hand, to guard against risks an open market might bring, China needs to substantiate and improve relevant laws, regulations and policies, and strengthen its regulatory ability. The change of government functions and the heightening of its regulatory efficiency will directly affect its degree of opening to the outside world.

III. New strategy of opening to the outside world

Firstly, China’s general target of opening to the outside world will be to develop an open economy.

In terms of economic development and economic restructuring China has formulated long-term targets and strategic measures for various stages. China has made opening to the outside world a fundamental state policy. However, it has yet to propose long-term objectives of opening to the outside world. China has made concrete commitments regarding the gradual opening of China’s market to the outside world after accession to WTO. Most of the measures concerned will be put into practice during the Tenth Five-Year Plan period. President Jiang Zemin made the commitment on an APEC summit that by the year 2020 China will have realized the liberalization of trade and investment. Actually, there already exists a stage by stage timetable regarding opening to the outside world. Therefore, we suggest stating clearly in the Tenth Five-Year Plan that the general target of China’s opening to the outside world will be to develop an open economy.

The concept of "open economy" is in direct contrast to the concept of "closed economy". In actual life, Hong Kong’s free port economy is the extreme of open economy. The small countries in the South Asian hinterland and North Korea (DPRK) are the extreme of closed economy. Countries in the world can be lined up like a spectrum between these two extremes according to the degree of their economic and market development. Generally speaking, the higher the development level of a country’s economy and market, the nearer it is to open economy. As economic globalization progresses, developing open economies has become the only way for countries to participate in international cooperation and division of labor. "Develop an open economy" has been written into all important documents since the Third Plenary Session of the Fourteenth Central Committee of the Communist Party of China. Compared with previous formulations such as "Raise the degree and level of opening to the outside world", "All-dimensional, multi-tiered and wide-ranging opening to the outside world" and others, "Develop an open economy" is more concise, brief and to the point and prominent. It is well suited to the new situation created by China’s accession to WTO and its active participation in economic globalization. It is also of greater appeal to the people of the entire country and is more easily understood and accepted by the international community. It takes time and a process to develop an open economy. The development can proceed by stages according to the timetable of China’s opening to the outside world. It will then be in concert and harmony with the long-term objectives and stage by stage implementation strategy of China’s development and reform. In brief, the development of an open economy is the intrinsic need and inevitable result of the gradual modernization of China and the establishment of a socialist market economy system.Putting forward the strategic objective of developing an open economy in the Tenth Five-Year Plan will help strengthen the resolve to continue with reform and opening to the outside world; prevent vacillation when formulating policy; and establish an image of China as a large and responsible country.

Secondly, bring into play China’s comparative and "posterior" advantages with structural optimization and raising efficiency.

Structural adjustment is an important task of China’s economic development at present and for quite a long time to come. Structural adjustment in the past put greater stress on increment adjustment and not on stock adjustment; relied more on the power of the government and not on market mechanism; and limited itself to the domestic market and failed to develop itself against the backdrop of world economy. As a result, it was unable to achieve breakthroughs.Carrying out structural adjustment against the backdrop of economic globalization, we must further emancipate our minds and "do some things and leave some others undone". China lacks the ability and neither is it necessary to insist upon producing everything domestically. It should participate in an overall fashion in international division of labor and exchange. It should focus its resources on developing strong industries that can compete internationally. It should reap the greatest amount of benefits from the international division of labor.

For quite some time to come, rich human resources of a relatively high quality will be China’s greatest comparative advantage.By developing labor intensive export oriented industries it can help relieve employment pressure. It does not run counter to structural optimization and raising efficiency. The key to this is to give full play to the "spillover effect" of processing trade and help domestic industry participate in international division of labor. As a result, the present processing potential can be fully utilized and the general added value will be increased.When developing labor intensive industry China is not adopting expedient measures. The United States have always been a large exporter of technologically labor intensive products. Henceforth, from a long-term point of view, China’s economic development should head in the direction of increasing the technological and knowledge content of products, upgrading labor intensive industry and increasing added value.In developing labor intensive industries, we should mainly employ market forces. The government should decrease its direct intervention of microeconomic subject.Enterprises should be allowed to rationally choose investment and distribution strategies on the basis of comparing the benefits offered by the domestic and international markets. Only by thus doing can enterprises realize the largest amount of profit and in turn macroeconomic results can be improved.

China as a large country can and must occupy a fitting position in the field of high and new-tech industries. Otherwise we could only follow the footsteps of developed countries and be controlled by others. In view of this, China must give full play to its "posterior" advantage and catch up with the mainstream of the world’s technological advances by opening its market and importing foreign capital.The country must choose a rational road of technological development and a proper point of entry. It must then focus a certain amount of its financial and human resources on the undertaking, adopt effective policies and measures, organize enterprises and scientific research institutions to jointly engage in key projects and do its best to achieve breakthroughs in the development and industrialization of high and new technology.

Neither the development of technologically labor intensive industry nor the realization of the industrialization of high and new technology can afford to ignore the development of the manufacturing industry. China should seize the opportunity offered by the international industrial relocation and give play to the advantages China enjoys: human resources and its solid industrial base. It should intensify the import of technology, reform the traditional manufacturing industries, and lay special emphasis on developing technologically intensive manufacturing industries. Those regions and departments which possess relatively good manufacturing bases and relatively high quality human resources should move from simple assembly and processing to original equipment manufacture (OEM) and original design manufacture (ODM) and ultimately reach the stage of producing products with autonomous intellectual property rights. They should endeavor to turn themselves into world significant supply bases of certain component parts and finished products.

Thirdly, expand import and export trade and intensify foreign trade restructuring. With the expansion of China’s economic strength, China’s share in the international market will inevitably increase correspondingly. The World Bank forecasts that China’s share in the international market will by the year 2020 reach 9 percent up from the present 3.50 percent. This implies that China’s foreign trade growth rate in the next 10 years will not only be higher than the average growth rate of world trade, but will also be higher than the 8 percent growth rate of East Asia.At present, China’s trade dependence ratio is lower than the average world level and its manufacturing industry’s trade dependence ratio is lower than that of major large countries. Henceforth, making full use of the relatively stable external circumstances and the opportunity to enter the international market after China’s accession to WTO, China should by optimizing its trade structure increase the added value of its export products and realize the rapid development of its foreign trade. It will not lead to the so-called "drain of resources". On the contrary it will boost the growth of the national economy.

Whether China can accelerate its trade development and increase its share in the international market depends to a large degree on the upgrading of its domestic industrial structure and on improving its international competitiveness. The optimization of trade structure will in turn be an important impetus to the adjustment of the domestic industrial structure. Henceforth,the central task of foreign trade during the Tenth Five-Year Plan period is to increase the share of mechanical and electrical products, especially high and new-tech products, in export trade; raise the added value of labor intensive products; raise economic returns; and boost the upgrading of the domestic industrial structure.

As China gradually makes good its commitment to lower tariffs and abolish import quotas, more and more foreign products will enter China’s market. In general, lowering import cost will be conducive to expanding the import of technology, accelerate technological transformation, enlarge effective supply, raise export competitiveness, and add to the welfare of consumers. However, increase of imported goods will also increase the competition pressure on certain domestic enterprises. China should make full use of the hard-won transition period of the opening of the domestic market to make structural adjustments, so as to be ready to take on the international competition challenge. With the "infant industry protection" clause of WTO in mind, China should give necessary support to those new industries that will be of important significance to the development of the national economy.

In accordance with the general plan of making strategic adjustment of the state economy, the state-owned foreign trade enterprises will be reorganized according to different categories.Apart from a few products that are assigned by the state and must be traded specially, sole state ownership should gradually withdraw from foreign trade.Making use of opportunity offered by accession to WTO, the trade right should gradually transit from state examination and approval to a registration system. Enterprises of different ownership and different sectors should directly participate in international competition.

Separation of the domestic and international markets and barriers existing between different departments and between different regions must be completely changed. The building of a unified large market must be accelerated.A new type of distribution system in which goods flow without hindrance and in which there is free circulation between industry and distribution and between trade, wholesale, retail, transportation, warehousing, after-sale service must be common practice as soon as possible.Export enterprises should seize the excellent opportunity offered by the development of electronic commerce and break the information and distribution bottleneck to build up international operation and distribution networks of their own gradually. China should actively pioneer new markets and gradually realize the diversification of its product structure and market structure. It should make use of the excessive processing ability of certain industries and through investments in foreign countries boost export of capital goods and component parts.

Fourthly, further expand the utilization of foreign capital and raise the quality of such utilization. After accession to WTO, enlarging the scope of entry of foreign capital is not the same as "market access in exchange for capital and technology" under trade protection circumstances, this is in fact giving full play to advantages China enjoys in terms of the size of its market, its industrial base and its human resources with economic globalization as the backdrop.It is bringing together even more closely the utilization of foreign capital with the adjustment of the domestic industrial structure, regional development strategy and the reform of state-owned enterprises.

We must seize the opportunity offered by the international industrial relocation to participate in full scale international division of labor and competition and upgrade China’s technological and industrial structures by strengthening cooperation with multinational corporations. We have to adjust the "Guiding List of Industries Making Use of Foreign Capital" and reduce the number of sectors where the entry of foreign capital is restricted because domestic production capability can satisfy domestic demand. Otherwise, without competition pressure technological progress in these sectors will slow down. At the same time,the state should focus its control on the investment orientation of state-owned capital. The state should be very cautious with regard to investing state-owned capital in those industries where there is already overcapacity on a world scale.

We should break up trade monopolies, actively and in an orderly fashion open the service sectors to foreign and domestic capital investors. Legislation in the services should speed up. A "Telecommunication Law" and other important laws and regulations governing the service trade sector should be promulgated as soon as possible to establish examination and approval procedure of the entry of foreign businesses, regulate operations of foreign businesses’ and guaranteed fair competition. It is also to prevent shock on China’s service sector by foreign capital after opening the market to the outside world.

The strategic plan to "Develop the Western Regions" calls for improvement of the investment environment of the western regions and active guidance to foreign capital towards those regions. A number of well equipped places should be chosen to implement special policies and act as "growth polar". We should continue to persist in the policy of making use of direct foreign investment as the mainstay while actively exploring new ways of using foreign capital. We should adapt ourselves to the transnational M&A trend and formulate relevant laws and regulations as soon as possible, so as to make it feasible for foreign capital to participate in the reorganization of state-owned enterprises through M&A.

Taking into consideration the progress achieved by market economy restructuring, especially the ability and level of financial supervision, China should open its domestic capital market step by step. The aim is to create conditions for the ultimate realization of the convertibility of the Renminbi under capital account.

On the basis of further lowering tariffs and reform of the value-added tax system, equal competition between domestic enterprises and enterprises with foreign capital should be gradually realized.China should act according to rules of WTO and abolish various requirements and restrictions, such as ration of export, balance of foreign exchange, domestic content, and so on.In doing so China will be giving foreign funded enterprises national treatment. China should create conditions to gradually abolish tax exemption and reduction reserved for enterprises with foreign capital and create a situation in which domestic enterprises and enterprises with foreign capital bear identical taxation. Even in those trades and regions where the state deems it necessary to encourage investment with preferential tax treatment, such as developing China’s western regions, domestic enterprises and foreign funded enterprises should be treated equally without discrimination. Those policies that conform to the orientation of reform but were solely enjoyed by foreign funded enterprises, such as the right to engage in foreign trade and opening foreign exchange accounts, should be extended to domestic enterprises as soon as possible.

Fifthly, establish economic and trade systems that conform to international standards and norms and a flexible and highly efficient macroeconomic regulatory mechanism.

Establishing economic and trade systems that conform to international standards and norms is the prerequisite for China to participate in all aspects of international division of labor and exchange. Though the economic and trade systems of various countries differ in thousands of ways, well established ownership, market-determined pricing, corporate governance, unified implementation of trade policies and increased transparency tend to be the same. Therefore,when formulating economic and trade systems for China’s open economy, we must proceed from China’s national conditions, but must also emphasize standards and norms that conform to international practice.

According to the rules of WTO, one government must accelerate the transformation of its functions and reduce its direct intervention in trade and investment activities. The implementation of industrial policies should rely mainly on market mechanism. Furthermore, administration should act according to law; transparency of trade and investment policies should be increased; departmental and local protectionism should be erased; monopolies should be broken; and fair competition should be promoted. A flexible and highly efficient macroeconomic regulatory mechanism that conforms to open economy should be established.