June, 2006
The Chinese government initiated trade liberalization and domestic economic reform in the late 1970s, when China’s economy performed far behind its potential and more than thirty percent (two hundred and fifty million) of its rural population lived in absolute poverty. Economic reform in China has been systematic over all areas and economic sectors, while its trade liberalization has been relatively limited to the manufacturing sector and urban areas.
Isolation from the international market prevented the agricultural sector from enjoying the advanced technology, specialization in production, and economies of scale. Fortunately, the domestic economic reform in the agricultural sector inspired farmers. The total output of agricultural products grew by more than six times from 1978 to 2005 without corresponding improvement in the technology. Though the per capita income increased dramatically for rural residents, the income gap between rural and urban residents has almost tripled during the past twenty-five years, which has led to an upsurge of labour migration from the rural to the urban areas. This migration reduced the unemployment rate in the rural areas and brought an opportunity for the rural residents to enjoy the gains from trade liberalization in the manufacturing sector and urban areas. However, because most of the migrants were young males and the advanced technology and high quality education were difficult to obtain, the agricultural sector and the rural areas may lose the ability of sustainable growth in the long run.
Fortunately, the trade liberalization in China focused on export-oriented labor-intensive products in the manufacturing sector, which provided the opportunity to absorb the rural surplus workers, reduce the urban unemployment pressure, and accelerate the income and living standards of the Chinese residents. In addition, the trade liberalization also introduced intense competition into the domestic market, as well as more advanced technology, more international experience, mature management skills, and a broader market. Moreover, during this period a large number of the urban population exited the manufacturing sector and entered the service sector. Although the service sector has also been relatively isolated, the gigantic improvement of the living standards helped the sector enjoy great progress and promised its employees a significant enhancement of their income. However, the segmentation of the financial sector in China from the international financial market impeded its corresponding development within the national economy. The inefficiency of the financial system has progressively been becoming one of the biggest obstacles to further development.
In summary, trade liberalization not only opened the market to China but it has also brought large improvement in technology and management skills. Workers in the manufacturing sector directly benefited from trade liberalization with a huge increase in their income. In comparison, the agricultural and service sectors stayed relatively closed and less productive. Luckily, the flourishing manufacturing industry not only directly contributed to the GDP but also helped in the construction and development of other sectors. Higher income and better living standards also spilled over from employees in the manufacturing sector and urban areas to those in other sectors and rural areas. As a result, China ascended from the 32nd to be the 3rd largest country in international trade. Its GDP increased by more than five times, per capita income increased by about four times, and more than 200 million people have been relieved from absolute poverty in the past twenty-five years. China’s fast economic growth, largely driven by its trade liberalization, became, and will be, sustainable due to better infrastructure, more transparent institutions, and improvement of all types of human capital accumulation. However, trade liberalization in China might need to be expanded in a broader scope in order to benefit all economic sectors and geographic regions more evenly and efficiently.