The Impact of Foreign Direct Investment (FDI) on China’s international Trade

By John Dudovskiy

FDI China’s economic transformation towards more market oriented economy has been one of the most dramatic economic developments of recent decades. Between the period of 1979-2009, China’s growth rate averaged 9% per annum   and its integration into the world trading system has been crucial (IMF, 2010).  Between the period of 1979 to 2005 its share in world trade has increased from less than 1% to 6, 4%.  After three decades of spectacular growth,China even beat Japan to become world’s second largest economy behind the US (Barboza, 2010). Thanks to its open economy, the ration of foreign trade to GDP increased from 12 per cent to 34 per cent (OECD, 2005).

According to study of Zhang (2006) and many others, the significant growth in China’s foreign trade in the past two decades has strong relationship with the inflow of FDI as it has been core at the core of China’s foreign trade expansion. Furthermore, this was backed by the OECD report (2000) that FDI has been decisive factor in China’s involvement in the international segmentation of the production process known as globalization.

Following the large amount of FDI in manufacturing field, exports and imports as a share of GDP rose from negligible amounts to nearly 25 percent in 2000. The average tariff rate fell from 50 percent in the early 1980s to about 15 percent in 2000, less than half of that India as China exempts so many goods entirely from custom duties. Moreover, a significant share of imported goods are illegally imported, the tariff collection rate as a percent of total value of imports has been much lower. As a result, the tariff revenue as a percent of total imports is only 3 percent in China, compared with 23 percent inIndia. As matter of fact, the net FDI inflows into China in 200 were more than 15 times that ofIndia(IMF, 2000).

After China’s accession to WTO, its enormous trading potential attracted both developed and newly industrializing countries. This is backed up by recent figures announced by General Administration of Customs (GAC). According to figures, China’s foreign trade posted a 45, 2% year-on-year growth in February 2010. Exports stood at $94.52 billion, up 45, 7%, showing the rebound in global demand, while imports also rose 44.7% percent to $86, 91 billion. The European Union and United States remaining China’s two largest trade partners as trade with EU rose to $65,53 billion, 34,5% up, while with the US, trade grew 25.1% to $49,32 billion (chinadaily.com).

Although China’s economy is only one-third the size of American economy, it has already become the world’s biggest exporter in 2009. It also passed United Statesto become the world’s largest market for passenger vehicles (Barboza, 2010). This has enormous significance for China’s foreign trade as for everyone in China’s region it’s now the biggest trading partner rather than US orJapan.

Though China is now a major player of global market, there are huge challenges ahead. Many economists argue thatChina’s economy is too heavily dependent on exports and investment and it is struggling to encourage greater domestic consumption. Furthermore,China has to control its level of positive trade surplus that has been growing consistently and increased almost double to $29.7 billion last year (IMF, 2010).

References

  • China Ministry of Commerce, 2003, Foreign Investment Report 2003. www.mfocom.gov.cn
  • International Monetary Fund, 1997, “People’s Republic of China – Selected issues”, IMF Staff Country Reports, no. 97/72
  • Zhang, KH, 2006, “Foreign Direct Investment and Economic Growth in China: A Panel Data Study for 1992-2004”, UIBE
Category: Finance
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