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  • China's plans and direction for further opening-up
    2018-08-29    author:

    Shanghai, China [Photo/Xinhua]

    This year marks the 40th anniversary of China's reform and opening-up, and will be the first year for China to hold the international import expo. This signals that China is further opening up its domestic market and striving to be more integrated with the world. Meanwhile, China is enduring the external uncertainties mainly from its biggest trade partner -- the U.S. One question should be asked: What is China's plan and direction for further opening-up?

    Since China is shifting from a mid-high-income country to a high-income country, the trajectory of other major developed countries may be a reference for China's further opening-up process. With this in mind, it's necessary to compare the opening-up pattern of these countries with China.

    One variable might fit this kind of observation -- the foreign value added in one country's final demand. This represent the amount of foreign input used in a country's consumption and investment. Examples include final goods consumed by households, capital goods invested by firms, or intermediate goods used to make products.

    From an aggregated level, China has a very similar pattern compared with the United States, Japan, and the core 12 countries of the Eurozone. To be more specific, the proportion of foreign added value of China's final demand is slightly higher than the United States and Japan, and slightly lower than the core countries of the Eurozone. When adding up the manufacturing sector and service sector, there is not much difference in the domestic market openness between China and major developed countries.

    However, when it comes to the disaggregated level, we can observe significant differences. The manufacturing sector is usually considered to be a measurement of traditional trade, and is also the main target of the import expo. The external proportion of final demand in the manufacturing sector in China is significantly lower than other major developed countries. China's manufacturing industry ultimately requires a lower value-added value outside China, which is 17.8 percentage points lower than the U.S., 4.7 percentage points lower than Japan, and 13.9 percentage points lower than the core countries in the Eurozone.

    Where does this difference come from? If we further decompose the manufacturing sector, we can observe the major difference generally comes from the following industries: textiles, textile products, leather, and footwear; basic metals and fabricated metal products; and transport equipment.

    This difference reveals the factors, trends, and potential policies that will shift China's future opening-up pattern: First, the external reliance of labor intensive industries might increase due to the increasing unit labor cost and GDP per capita. Second, the demand of commercial goods might increase with the ease of import restrictions. Third, industries that require more intermediate inputs might also increase the domestic use of foreign input.

    The service sector, however, tells a different story. In stark contrast to the manufacturing industry, China's service industry requires higher foreign value added, which is 6.1 percentage points higher than the U.S., 12.5 percentage points higher than Japan, and 4.1 percentage points higher than the core countries of the Eurozone, reflecting China's high degree of external dependence in the service sector.