Foreign enterprise share of China’s export and trade balance

Unique to China among large trading nations is the enormous share of exports and the trade balance accounted for by foreign invested enterprises (FIEs), as shown in Figure 2. At 58 percent and 55 percent respectively in 2005, these figures are without doubt far and away the highest for any major economy, although definitional differences make direct comparisons hard. Moreover, the foreign share of both has risen steadily.

The major risk of the openness strategy, from the Chinese point of view, is that China’s economy could wind up being “Latin Americanized,” with many market sectors controlled by foreign firms. In his study of the Chinese auto sector, Eric Thun notes that efforts to create an internationally competitive Chinese automaker have

thus far fared poorly, and suggests that the Chinese auto industry does indeed face some risk of repeating the fate of Mexico’s, which – in part because of the market-

opening North American Free Trade Agreement – is entirely controlled at both the assembly and the component level by multinational firms.9

Although fear of domination by foreign multinationals remains a potent political force – even if one which, in the end, is usually trumped by the forces of openness – it is unlikely that large swathes of Chinese industry will end up being dominated by foreigners. The main reason is the sheer size of the country. The lure of this potential market enables China to impose significant entry fees on multinationals, such as technology transfer, mandatory joint ventures, or limitations of business scope. In one way or another these barriers provide breathing space for Chinese competitors.

Perhaps the best way concisely to sum up the Chinese development model is as a symbiosis of the three types indicated above. The goals of Chinese development are patterned on the classic East Asian developmental states, Japan and South Korea: China’s leaders would like to see rapid economic growth, heavily reliant on exports and rapid technological advance, with a stable administration of elite technocrats playing a substantial coordinating role.10 However the methods for achieving these goals are dictated by China’s peculiar status as a post-communist economy with a continuing Communist government. Unlike South Korea and Japan, China must gradually dismantle the constricting apparatus of the planned economy. This process of dismantling, however, must not threaten the rule of the Communist Party itself, and carries the additional condition that the party-state must remain in direct control of large chunks of the economy through ownership of dominant enterprises in strategic sectors. Left to the mercy of purely domestic forces, such a complicated and contradictory reform process would most likely run aground. Thus a high degree of market openness is essential as a catalyst, to ensure that structural reforms continue without which economic development and technological advance are impossible.

 It is important to recognize that technocratic governance exists in China mainly as an ideal. The practical reality of Chinese policymaking is fragmented and politically constrained, with most policies emerging as compromises between semi-autonomous central government ministries, or as the result of tortuous negotiations between the center and local governments, over which Beijing has at best imperfect control.

Measuring success

Having defined as best we can the nature of the Chinese economic development model, we can now make a brief survey of how successful the model has been. In terms of economic growth the question is easy to answer. Between 1980 and 2005 China’s GDP grew by an annual average rate of 9.6 percent. No other country (including Japan, South Korea and Taiwan) has ever sustained that rate of GDP growth for such a long period of time. It is not within the scope of this paper to disentangle the various contributions of policy, demographics, and other factors to growth; it is sufficient to suggest that in the context of such spectacular growth, it is inconceivable that policy played a negative role, and it is probable that it played a strongly positive one.