A Study on Import-boosting Strategies and Policies

Dec 1, 2008

 

Over 30 years of reform and opening-up, the size of import has been expanded, the policies have been improved, and an import system in line with the international practices and accommodating the needs of economic development has come into being. However, with the growth of export, the development of the opening-up, the rapid expanding of trade surplus and foreign exchange reserve, the import-boosting policy has become the key in the development of foreign trade in the new era. Therefore, we should nail down the concept and the key factor in the boosting of import, formulate and improve related import-boosting policies and promote the sustainable development of foreign trade in China.

(I). The change of the size of import

It can be roughly divided into three stages:

1.       The import-control stage under the two-tier exchange rate system (1978—1993)

The total import grew from 10 billion to 100 billion U.S. dollars in China. The total import grew from 10.89 billion U.S. dollars in 1978 to 103.96 billion U.S. dollars in 1993, with an annual growth rate of 16.2%. during this stage, we mainly imported advanced technologies and equipment and primary products such as foodstuff and crude oil from abroad. Since the import valued more than the export, trade deficit prevailed.

In this stage, the two-tier exchange rate system, the coexistence of floating official exchange rate and adjusted market exchange rate, was exercised. Correspondingly, there were two channels for the distribution of foreign exchanges: planned distribution and market allocation. The foreign exchanges of the central and local governments were obtained through the planned distribution, and the foreign exchanges of enterprises were obtained through market allocation.

Since foreign exchanges were short, the import of all goods and equipment were strictly reviewed and approved by related government bodies. In terms of the import of goods, the Planning Commission was responsible for the ratification of the limit of foreign exchanges and quota of goods; the Ministry of Foreign Trade and Economic Cooperation was in charge of the management of licenses, and the Administration of Exchange Control was in charge of the ratification of foreign exchanges. In terms of the import of equipment, the Planning Commission was in charge of the ratification of projects, the Office of Import Examination of Mechanical and Electrical Equipment of the State Council was in charge of the examination of imported equipment and the Administration of Exchange Control was responsible for the ratification of foreign exchanges.

2.       The import-control stage under the single exchange rate system (1994-2000)

The total import grew from 100 billion U.S. dollars to 200 billion U.S. dollars. The total import grew from 115.61 billion U.S. dollars in 1994 to 225.09 billion U.S. dollars in 2000, with an annual growth rate of 10%. Under this stage, the processing trade grew rapidly. However, affected by the financial crisis in Asia, the development speed of import and foreign trade was slow. The export of some industrial products began to grow in scale.

Since Jan 1, 1994, the two-tier exchange rates were consolidated and the official RMB exchange rate was cancelled. A single floating exchange rate system based on the market supply and demand was implemented. Since Apr 1, 1994, bank exchange settlement and sales system began to be implemented in China. As to the foreign exchanges used in ordinary trade, foreign exchanges could be purchased in appointed banks with the import contract and payment notice of overseas financial institutions. As to the import wherein quota, license or registration was required, foreign exchanges could be purchased only with corresponding contract and credentials.
 

As to the import policy, since foreign exchanges were still short, the ratification by related government bodies was still needed in the import of some key goods and equipment which played a vital role in the national economy and the people's livelihood. In terms of the import of goods, the Planning Commission, State Economic and Trade Commission and Ministry of Foreign Trade and Economic Cooperation are in charge of the quotas and licenses of key goods in accordance with their respective functions. In terms of the import of equipment, the Office of Import Examination of Mechanical and Electrical Equipment of the State Council saw to the examination of the import of equipment.

3.       The management of import in accordance with WTO rules (2001—2007) 
 

The total import grew from 200 billion U.S. dollars to nearly 1 trillion U.S. dollars. The total import grew from 243.55 billion U.S. dollars to 955.85 billion U.S. dollars, with an annual growth rate of 25.6%.
 

In terms of exchange rate, due to the enhanced competitiveness in export, the RMB appreciated gradually, which was adjusted from 1 U.S. dollars for 8.2770 RMB in 2001 to 7.6040 RMB in 2007.
 

During this stage, the Chinese government fully adjusted the import policies in accordance with the promises made in the accession to the WTO. The tariff quota import system was established. The registration system replaced the ratification system as to the foreign trade right of enterprises. Market administration was implemented in accordance with international practices on the enterprises and businesses related to import and export.
 

As to the import of Mechanical and Electrical products, three types of management were implemented, i.e., import prohibition, import restriction and automatic import license. The state government publicizes the catalogue of the three types of products regularly.
 

1.       In terms of the mode of trade, the processing trade import developed rapidly when the general trade developed steadily.

From 1981 to 2007, the general trade import grew from 20.37 U.S. dollars to 428.65 billion U.S. dollars, with an annual growth rate of 12.4%; the processing trade import grew from 1.5 billion U.S. dollars to 368.39 billion U.S. dollars, with an annual growth rate of 23.6%.

2.       In terms of the composition of imported goods, the import of primary products such as energy and raw materials and the industrial products such as mechanical equipment grew rapidly, accounting for high proportions in the total import.

From 1980 to 2007, the import of raw materials such as fossil fuels and lubricants grew from 200 million U.S. dollars to 104.83 billion U.S. dollars, with an annual growth rate of 26.1%; the import of non-edible raw materials grew from 3.55 billion U.S. dollars to 117.91 billion U.S. dollars, with an annual growth rate of 13.9%; the import of mechanical and delivery equipment grew from 5.12 billion U.S. dollars to 412.51 billion U.S. dollars, with an annual growth rate of 17.7%. In 1980, fossil fuel, lubricant and some raw materials, including non-edible raw materials, mechanical and delivery equipment, accounted for 1%, 17.7% and 25.6% in the total import, whereas their import accounted for 11%, 12.3% and 43.2% in 2007.

3.       In terms of the marketization of import management, there are fewer goods requiring the ratification of the government and the marketization is enhanced.

Before the reform and opening-up, the import situation in China was: the import was monopolized by several state-level foreign trade companies and enterprises could not have direct access to the international market. Since the reform and opening-up, this has been changed completely. The registration system was implemented for the qualifications of the import and export right of all the enterprises. The government control has been greatly weakened. When the reform and opening-up was just started, quotas and licenses were needed for the import of most of the goods and equipment. Even if quotas were not needed, ratification of foreign exchanges was needed in acquiring the licenses of the import of goods. Nearly all the import was monopolized by foreign trade companies. Currently, tariff quotas are exercised on only 7 types of agricultural products and 3 types of fertilizers, including grain, sugar, and fertilizers, and only some mechanical and electrical products are restricted from import, the import of most of the goods is registered and conducted freely. The state government is exercising some indirect means to regulate the import, such as economic and legal means. The administration of foreign trade is turning to be more accommodating for the needs of the socialist market economy and the international practices.

4.       The import tax rate has been cut constantly

The Chinese government has cut the import tax significantly in accordance with the promises to the WTO, from 43% at the end of 1991 to 15.3% in 2001. The import tariff was reduced to 10% in 2005, as promised. The non-tariff barriers were cut significantly as well. China has adjusted the export tariff since Jan 1, 2008, mainly involving the tax rate of most-favored-nation, the annual interim tax rate, the agreed tax rate and the concessionary rate of tax. After the adjustment, the general level of import tariff in China was 9.8%. Among which, the average tax rate of agricultural products was 15.2%, and that of industrial products was 8.9%. After the adjustment, China has basically fulfilled the tax-cut obligations as promised to the WTO except for several years of tax-cut implementation period for a couple of items.

Firstly, it has boosted the sustainable and rapid growth of the national economy. The accumulative total import from 1978 to 2007 in China was 5.63104 trillion U.S. dollars, with an annual growth rate of 16.7%, among which, over 50% was the energy, raw materials and advanced technical equipment urgently needed in the development of the national economy. The expansion of the import has played an important role in boosting the sustainable and rapid development of the national economy.

Secondly, it has boosted the adjustment and optimization of the composition of the national economy. As a bridge of connecting the domestic and international economy, the import not only introduced energy, raw materials, advanced equipment and management expertise urgently needed into China and created more job opportunities, but also increased the tax income and boosted the upgrading of domestic industries. Meanwhile, it has played a positive role in steering the structural readjustment of the national economy and boosted the optimization of the readjustment via enabling the acquisition of the latest news of the development trend of the international market.

Thirdly, it has enhanced the international competitiveness of China. The import and introduction of advanced technology and equipment abroad has provided insurance for the upgrading of products and industrial structures in China and enhanced the international competitiveness of Chinese products and industries. Especially in processing trade import, foreign businesses did not only bring raw materials, technology and capital, but also the advanced management mode, which facilitated the reform of state-owned enterprises.

Fourthly, it has facilitated the formation of the introduction of foreign funds and an open economic system. Currently the foreign invested enterprises engaged in processing trade have become the major forces in the foreign trade in China. Before the reform and opening-up, the Chinese economy had been closed or half-closed. With the rapid development of import, especially the processing trade, the foreign trade in China has been growing largely. The import dependence ratio has increased from 4.7% in 1978 to 29.1% in 2007, which promoted the formation of an open economic system in China.

Fifthly, it has offered benefits to the national economy and enhanced the connection with other countries. China has regarded the economic benefits as the basis of the development of the foreign trade. Therefore, in the international economic exchanges, we can achieve more than the average value in the domestic market, or even the international market. Meanwhile, the development of foreign trade has enhanced the economic connection with other countries in the world and has created a sound international environment for the modernization of China.

III. The new situation of huge foreign exchange reserve and the strategic choice of import-boosting policy  

(I)      The rapid growth of foreign exchange reserve in China has brought forward challenges on the macro-control

Since the reform and opening-up, especially in recent years, with the rapid development of foreign trade, the foreign exchange reserve has grown hugely. The foreign exchange reserve in 1978 was 167 million U.S. dollars. It grew to 1.0663 trillion U.S. dollars in 2006, ranking the first in the world; by the end of June, 2008, the foreign exchange reserve of China has reached 1.8088 trillion U.S. dollars.
 

The increase of foreign exchange reserve can facilitate foreign investment or bond-issuance abroad to accelerate the domestic economic development. The financial crisis in Asia in 1998 resulted in great depreciation of currencies in neighboring countries, whereas the RMB did not depreciate and the position of China in the world was elevated. The foreign exchange reserve played a vital role in stabilizing the value of RMB.
 

Meanwhile, the excessively rapid growth of foreign exchange reserve and the overgrown size of the foreign exchange reserve also bring along new problems to the national economy:

Firstly, large amount of base currencies are occupied. To maintain the stability of the exchange rate, the Central Bank of China is forced to purchase big amount of foreign currencies to increase the foreign exchange reserve, resulting in big increase of funds outstanding for foreign exchanges, faster investment speed of base currencies, diminished capacity of the Central Bank of China to control the money market, and less room for the monetary policies of the Central Bank of china.
 

Secondly, there is bigger pressure on the appreciation of the RMB. Since the export grows rapidly and the foreign exchange reserve is growly rapidly, some countries exert more pressure on the appreciation of the RMB.
 

Thirdly, idle resources are caused in some degree. A general standard for the reasonable foreign exchange reserve is that the foreign exchange reserve of a country had better equal to the principal and interests of foreign loans of that year, or the import volume of three months or half a year. No matter what the standard is, the foreign exchange reserve of China has enormously exceeds the normal size. The excessive foreign exchange reserve is in fact an idle resource.
 

(II)    Import-boosting policies are imperative  

In general, there are mainly two ways to control the foreign exchange reserve of China under a reasonable level: firstly, to appreciate the RMB and to reduce the trade surplus via the cut of export and the expansion of the import; secondly, to enhance the import control and take the initiative to boost the import. ]
 

Judging from the international experience, the overly fast appreciation of a currency can greatly boost the export in a short term; it will exert adverse effects on the balance of the domestic market and the development of domestic industries in a medium term; and it will exert a hugely negative effect on the development of the national economy in a long term.
 

Based on the current situation in China, there is no advantage in the cost of labor-intensive products, such as textiles and light industrial products, among the export goods of China, compared with those of India, Pakistan, and Southeast Asian countries. The appreciation of the RMB will gravely affect the export of textile and light industrial products, which will not only aggravate the employment, but also goes against the enlargement of the domestic demand.

The current import structure and policies were formed when foreign exchanges were short, which cannot accommodate the needs of the national economy and people’s living standard any more, shown as follows:
Firstly, the composition of imported goods is unreasonable, which is mainly manifested in the emphasis on the production and neglect on the consumption. Most of the imported goods are energy, raw materials and mechanical equipment, whereas there are little food and consumables. High consumption tax is levied on some luxury goods to restrict the import.
 

Secondly, the concentration rate of the import market is too high. In recent years, we have had some achievement in diversifying the import market. However, the concentration rate is still too high. Currently, the first 10 source countries still account for 72.5%.

Thirdly, the import administration system is not perfect. Currently, the National Development and Reform Commission, Ministry of Commerce, Ministry of Finance, General Administration of Customs, and State Administration of Foreign Exchange are involved with import administration and the formulation of policies. The cooperation among these administrative bodies is not efficient.
 

Fourthly, a coordination system for the import of commodities is not established yet. In recent years, the import of commodities is growing rapidly. The import volumes of crude oil, product oil, iron ore, timber, soybean, cotton and edible oil are 79.8, 16.4, 33.8, 7.1, 11.5, 3.5 62 billion U.S. dollars respectively. China has become a big buyer in the international market. However, since a coordination system for the government, agencies and enterprises is not established yet, the enterprises are fighting their own battles in the international market and forcing up the prices, which have benefited the foreign businesses but harmed the interests of the country and enterprises.
 

Fifthly, the import of key goods is not in line with the domestic reserve and cannot accommodate the big fluctuations of the international market prices (China Economic Trade Herald, 2008, No. 17). Due to the insufficient reserve capacity of key goods, we import a lot when the international prices are high and the import is reduced when the prices are low.
 

Sixthly, the policy system of import encourage is not sound. In the foreign trade policy system in China, there are sound policies to encourage the export, such as the tax refund, market expansion, and the building of export bases. However, there are little policies to encourage the import.