China's trade patterns and international comparative advantage

Abstract

The economic reforms and the open door policy introduced in the late 1970s were designed to transform the economy from a centrally planned to, at least partially, a market-oriented system in which factors of production and natural resources could be allocated and utilized efficiently. As a crucial component of this reform package, the domestic economy has been opened up to the outside world to gain more benefits from international trade and foreign capital inflows. As the Chinese economy is still characterized by distortions, the detennination of trade specialization that would maximize the potential gains from trade is an important issue. Trade theory suggests that a country's commodity pattern of trade should be determined on the basis of its comparative advantage if gains from trade are to be maximized. This study estimates China's changing structure of comparative advantage using the domestic resource cost (DRC) measure as a proxy to assess trade performance during the reform period. In the first part of the study, economic reforms in the foreign trade system and the evolution of a new trade system since the late 1970s are examined. The rapid growth of exports and imports is examined together with shifts in the commodity composition of trade. The second part of the study consists of DRC estimates. The nominal protection structure is assessed with a particular emphasis on domestic price reforms. Shadow prices for primary factors are estimated.