appearing in the top 50 list. Other important miscellaneous manufactures exports are toys and antiques. Primary importers of miscellaneous manufactures items have been Hong Kong, Japan, and the United States. For some individual items, however, this pattern varied; for example, Western countries were important markets for both antiques and basketwork. Over one-half of Chinese antique exports in 1976 were imported by the United States, which probably represents a growing market for these items. France and the Federal Republic of Germany imported large amounts of basketwork and wickerwork. Hard currency earnings growth from light industry manufactures depends to an extent on world market conditions. In 1975, for example, finished manufactures exports declined in response to weak markets; as Western economies began to recover in 1976, manufactures exports increased. Although 1977 data are not yet available, light industry exports probably continued to rise with improved Western market conditions. Future prospects for increased earnings from finished manufactures depend, again, on continuing recovery on Western markets, growth in the light industry sector, and domestic demand. Looking at the Chinese supply side, we see growth in light industry through 1980 as moderate. However, to improve living standards, the industry will be coming under increased pressure to generate profits for investment. Large domestic demand, aided by recent wage increases, may indeed get a greater share of future output of manufactured goods, and thus constrain the amount available for export. Turning to the demand side, we see limited growth potential for clothing, the largest light industry export. Western countries have already placed restrictions on future clothing imports, and Hong Kong, as a major clothing exporter, has been particularly affected. With 27 percent of China's clothing exports going to Hong Kong, it can be expected that these will also be affected. Exports of other light industry manufactures will probably rise, but expansion of hard currency earnings from finished manufactures as a group will most likely be moderate. V. SUMMARY AND CONCLUSIONS Unlike exports of other Communist countries, China's export trade has been dominated by exports to non-Communist countries; in 1976, non-Communist countries imported over 80 percent of China's total exports. Furthermore, the major portion of this non-Communist trade was denominated in hard currencies, so that bilateral clearing arrangements accounted for a relatively small amount of trade. Looking at China's recent exports to the 20 hard currency countries, we see a rapid growth. In value terms, exports increased nearly 21⁄2 times between 1972 and 1976. The annual rate of growth, however, has exhibited a remarkable slowdown during that same period, declining from a 66-percent increase between 1972 and 1973 to a mere 4-percent increase between 1975 and 1976. An examination of the composition of China's exports to the 20, which are assumed to be representative of China's hard currency capability, reveals that they have been dominated by food products, textiles, crude materials (such as fibers), fuels, and finished manufactures. Hard currency exports are fairly diversified, and except for oil, no single commodity accounts for a major share of hard-currency earnings, and even oil exports contribute a relatively modest share (13 percent) to total hard currency earnings. The composition of China's exports has remained relatively stable. Perhaps the only exception is the recent growth in oil exports. China's exports have also benefited from increasing world market prices, as overall Chinese export growth in real terms has advanced more slowly than dollar earnings would suggest. The geographic distribution of China's trade is heavily oriented toward countries of the Asia basin. Among exports going to the 20 countries examined in this paper, only one-fourth was absorbed by Western Europe and North America. Looking to the future, Chinese hard currency export growth in the near to medium term will probably be moderate. Exports during the current 5-year plan period will continue to recover from the setbacks of the mid-seventies, which were brought about by internal economic disruptions and sluggish world demand. By the end of the 1970's, the stage should be set for expansion, as opposed to recoupment currently being witnessed. The commodity composition of exports could change somewhat if, as some expect, oil exports expand significantly and if some of China's traditional exports are hampered by Western import restrictions. Petroleum appears to be a candidate for the most rapid export growth. To a large degree, the growth of petroleum deliveries for the remainder of the 1970's and into the 1980's has been charted by the Japan-China Long-Term Agreement of February 1978. It is possible, however, that in 1982, the year in which petroleum exports outlined by the Long-Term Agreement will be at their peak, hard currency earnings from oil will not provide a much greater share to total hard currency earnings than in 1975. Underpinning the hopeful, though uncertain increases in earnings from oil, will be a continued reliance on exports of traditional commodities, namely foods, textile fabrics, textile fibers, clothing, and miscellaneous manufactures. Food and raw materials products will remain important to Chinese hard-currency earnings, and the composition of this category is not likely to change very much. Fruits, vegetables, fish, rice, swine, raw silk, cashmere, raw cotton, and down will continue to dominate the food and raw materials export group. Light industry manufactures, which include such important Chinese export items as textile fabrics, clothing, basketwork, antiques, porcelain pieces-and account for about one-fourth of China's exports to The Twenty hard currency countries-will probably be hard pressed to significantly expand hard currency earnings in the near to medium term. The larger part of light industry manufactures fall into the category of import sensitive items. EC restrictions against clothing and textile imports will probably affect Hong Kong more than any other country. This will undoubtedly have repercussions on China's exports of these commodities, as Hong Kong has been the largest market for Chinese clothing and fabrics. Continued Japanese restrictions against these same commodities will further dampen hard currency earnings growth. Other light industry manufactures exports-basketwork, porcelain, antiques-will expand. It is unlikely, however, that earnings will be large enough to offset the potential slowdown in earnings from clothing and textiles. The pace of overall growth in hard currency earnings from The Twenty countries depends therefore, upon several factors: (1) oil exports to Japan, (2) growth in importing countries' demand for nonsensitive items, and (3) the trend in Western import protectionism. One also cannot ignore domestic demand requirements, particularly in the face of the Hua leadership's commitment to improve the Chinese standard of living. China's export orientation is likely to remain in the Asia basin. The Japan-China Long-Term Agreement has mapped an orderly course of Japanese-Chinese trade expansion through at least 1985. Hong Kong, by reasons of geography and traditional ties, will also remain an important Asian trading partner. In the longer term, the United States and Western Europe may be large markets for Chinese goods. In the near to medium future however, these will remain secondary. Although the EC-China trade agreement offered an indication that China was looking to Western Europe, the current composition of Chinese exports makes it unlikely that a large surge in hard currency earnings can come from that area. As for the United States, though a potential market for Chinese goods may exist,16 in the absence of normal diplomatic ties commercial relations will be limited. It appears, therefore, that in the near to medium term, the market shares of Chinese goods taken by importing countries will remain relatively unchanged. The current leadership's more positive orientation toward foreign trade and its stress on the importance of trade in advancing China's economic development speaks favorably for Chinese imports from industrialized countries. Given the leadership's conservative financial policies, however, the ability to increase imports will rest largely on hard currency export performance, which in the near to medium term appears to have only moderate growth potential. 16 For a quantitative analysis of one aspect of normalized trading relations, namely, MFN tariff treatment, see, in the volume, the study entitled, "The Impact on PRC Exports of U.S. Most-Favored-Nation Tarif Treatment", by Helen Raffel and Cheryl McQueen. THE IMPACT OF MOST-FAVORED-NATION TARIFF TREATMENT ON U.S. IMPORTS FROM THE PEOPLE'S REPUBLIC OF CHINA BY PHILIP T. LINCOLN, JR., AND JAMES A. KILPATRICK* 1. MFN extension for leading U.S. imports from PRC, 1975.. 828 2. Trade normalization and MFN extension for selected three-digit SITC commodities exported by the PRC_____ 829 3. Price elasticities of import demand for selected commodities. 830 831 5. Potential impact of MFN on U.S. domestic employment... 832 APPENDIXES A. Some notes on previous studies measuring MFN extension for countries other than China.......... 833 836 B. Survey of previous studies of MFN extension to China.. I. INTRODUCTION The United States presently maintains a two-tiered tariff system with rates that are usually higher ("column 2" or "non-most-favorednation" rates) applying to U.S. imports from the People's Republic of China (PRC) and most other Communist countries. The lower rates ("column 1" or "most-favored-nation" rates) apply in general to U.S. imports from all other countries. The question of extension of most-favored-nation (MFN) tariff treatment to the PRC is of interest because, since the resumption of bilateral trading relations in 1971 after a 20-year hiatus, lack of MFN treatment is one of the few discriminatory legal constraints on U.S. imports from the PRC, and it is the most significant of such barriers. U.S. imports from the PRC have grown slowly, from about $5 million in 1971 to about $202 million in 1976. The 1976 figure was approximately 3 percent of the PRC's total exports in that year, and less than 1 percent of U.S. world imports. This relatively low level of imports raises the question of whether the lack of MFN tariff treatment is seriously hindering U.S. imports The authors are indebted to the late Prof. Alexander Eckstein of the University of Michigan and to Dr. John Harrington of the Foreign Service Institute, Department of State, for encouragement and assistance. from the PRC and, more specifically, what can be expected in terms of increased trade if this barrier is removed. The PRC, in general, has attempted to follow a policy of balanced trade with most of its bilateral trading partners, and extension of MFN treatment to the PRC, to the extent that U.S. imports increased as a result, would enhance the prospects for additional PRC purchases from the U.S. Extension of MFN treatment would also be expected to improve the general climate in which U.S.-PRC bilateral trade is conducted. The main purpose of this study is to estimate the effect that reduced tariffs under MFN would have on the level of U.S. imports from the PRC. Since a tariff reduction is in principle equivalent to a reduction in the price of imported goods, this study approaches the question of the effect of a potential tariff reduction on the basis of recent experience with changes in prices and the levels of U.S. imports of various goods which are important in U.S.-PRC trade. First we provide further background on MFN and some of the previous efforts to deal with the question of discriminatory tariff treatment-including the methodological and empirical problems which must be accounted for. Then, the restrictive effect that the two-tiered tariffs have had on U.S. imports from the PRC is measured, using a methodology which, we believe, represents an advance over that used in previous MFN studies. Finally, an attempt is made to measure the impact that increased imports from China under MFN would have on the number of people employed in competing U.S. domestic industries. II. BACKGROUND The concept of Most Favored Nation treatment has been defined as A provision, generally inserted in a commercial agreement between two states, which obligates the contracting parties to extend all concessions or favors made by each in the past, or which might be made in the future, to the articles, agents, or instruments of commerce of any other state in such a way that their mutual trade will never be on a less favorable basis than is enjoyed by that state whose commercial relations with each is on the most favorable basis. This broad definition applies to all aspects of a nation's trading relations with other countries. As applied to tariffs, MFN treatment means in essence that any reductions in tariff rates made in an agreement with one country apply automatically to all other countries which enjoy MFN treatment, even if the provisions were not specifically included in formal agreements with those other countries. The United States has for more than 50 years generally followed an unconditional MFN policy in its trading relations. However, an important exception to this general policy was instituted in the early 1950's. Under the provisions of the Trade Agreement Extension Act of 1951, MFN status was withdrawn from all nations "under the control of international communism." The Trade Expansion Act of 1962 expanded this definition to include "all Communist countries." Determinations were subsequently made that Yugoslavia, and later Poland, were not Communist countries under the definitions of these laws, and both countries were permitted to retain their MFN status. All other U.S. trading partners currently receive MFN tariff treatment. 1 Richard Carlton Snyder, "The Most-Favored-Nation Clause," King's Crown Press, 1948, p. 10. Quoted in Elias and Searing (1974). |