China Trade Policy Review: A Political Economy Approach

Abstract

Chinese trade policy has experienced ‘great reversal’ in the year of 2008. A series of constraining measures taken previously have been loosened eventually. We investigate this situation using a political economy approach. Unlike in democratic countries, where interest groups play a crucial role in trade policy change, in China, given the political reality, leaders’ will and trade partners’ pressure are the determinant factors. We call this top-down and outside-in trade policy. Actually the idea of ‘harmonious society’ and ‘scientific development’ emphasised by top leaders in October 2006 paved the road for the following trade policy adjustment: i.e. reducing tax rebate, limiting processing trade, compressing the catalogue for foreign investment, etc. However, with the shock of a global financial tsunami, these measures get coastal areas relying on foreign trade heavily into trouble. The economic downturn in Pearl River Delta even astonished the decision-making body, calling on a quick reversal in foreign trade policy. If interest groups had been allowed to express their demand formally and adequately from the very start, the cycle of ‘taking up first but giving up last’ in policy design would have not taken place. In other words, the bottom-up and inside-out trade policy should be more stable. Although flexibility is necessary in the face of uncertainty, frequent and discretionary trade policy change usually produces effects of ‘pro-government’ not ‘pro-market’. This is unfavourable for the transformation in China. The constraining trade policy in mid-2007 to mid-2008 has been a part of the government’s desire to seek healthier development. However, with the inside and outside surroundings getting worse, the structural adjustment (long-run objective) has had to concede to the economic growth (short-run objective).