Trade and Foreign Direct Investment in China's Development Strategies

Trade and foreign direct investment have been at the core of China’s development strategy since the Communist Party Central Committee’s decision in December 1978 to adopt Deng Xiaoping’s program of economic reform. The goal of that reform, and hence of trade and investment policy, has been to make China rich and powerful. Maoist dreams of a fundamentally different kind of socialist society are dead, but the goal of reducing inequalities remains, if for no other reason than that it is widely believed that political stability depends on ameliorating gaps in income between rich and poor, and between the coast and the interior. Power, in Chinese eyes, is not synonymous with wealth or the maximization of the rate of growth of gross national product, although they are closely related. In China, as elsewhere, power also involves such issues as food and raw material security. Security in this context is sometimes confused with self-sufficiency.

China’s economic reform effort began with limited changes in the industrial sphere. The initial objective was to make the command economy work better, not to replace it with a market-oriented system. Agricultural reforms were more radical, evolving within a few years into the outright abandonment of collective agriculture. In 1984, reform in the industrial sector began in earnest. Although reform was still oriented toward making state-owned enterprises more efficient, the role of market forces in the distribution of industrial inputs and output expanded steadily. Only in the 1990s, however, did the government clearly state that the goal was to move to a market-based system, albeit a “socialist market economy.”

Like China’s general economic reform efforts, its trade and foreign direct investment strategies have evolved step by step as policymakers gradually have acquired greater understanding of what achievement of their goals requires. The opening up to foreign trade actually began before December 1978 with decisions to encourage the import of foreign equipment and technology. The flood of import orders that followed made it clear that China had to find additional sources of foreign exchange if it were to be able to pay for rapidly rising imports. The export promotion effort followed. The decision to abrogate the prohibition on foreign direct investment came shortly thereafter. Initially foreign direct investment was seen as exclusively a source of new technology and a support to the export drive. A rather general joint venture law was passed and special economic zones were created. But pressure from prospective investors, among other reasons, led Chinese policymakers to draft steadily more laws related to foreign investment activities and commercial practices in general. The exclusive emphasis on exports and technology was modified to allow substantial production for the domestic market, even for such nonstrategic goods as Coca-Cola. Foreign exchange controls were reduced and markets for foreign exchange created, making it easier, although not necessarily easy, for foreign investors to repatriate their profits.

Given this history, it should surprise no one that a consensus has not yet developed among Chinese policymakers regarding the details of industrial policy in general or trade and investment policy in particular. Substantial differences of view exist both within the highest levels of the leadership and within the working levels of the bureaucracy. Still, a broad outline of what China’s policymakers hope to achieve is possible. What they hope to accomplish, however, is not the sole determinant of how the Chinese system will evolve. Because a key Chinese objective is to expand its role in the international economy, the terms on which that expansion will occur will be determined by the leading industrial economies as much or more than by China’s own actions and desires. An analysis of China’s trade and investment policy, therefore, requires some discussion of the external constraints on that policy.