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  • Published on: 14th September 2019
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China's international trade has experienced rapid expansion together with its dramatic

economic growth which has made the country target the world as its market. The stable

political system, vast natural resources and abundant skilled labor in China have made

it a modern global factory. Discussions of the role that international trade plays in

promoting economic growth and productivity in particular, have been ongoing since

several decades ago. A core finding from the comprehensive literature shows that

internationally active countries tend to be more productive than countries which only

produce for the domestic market. Due to liberalization and globalization, a country's

economy has become much more closely associated with external factors such as

openness. Thus, conducting a study on the effects of international trade on economic

growth is of great significance in this globalized era. It helps policymakers map out

appropriate policies by determining the source of productivity growth with respect to

international trade.

Since the initiation of economic reforms and the adoption of the open door policy,

international trade and China's economy have experienced dramatic growth. China's

integration into the global economy has largely contributed to its sustained economic

growth. Some of the industries with comparative advantages began to acquire a high

level of specialization, and China has achieved a high growth rate of GDP, as well as an

enormous inflow of hard currency and increase in employment. Additionally, China's

participation in international trade has also contributed to improvement in productivity

of domestic industries and advancement of technology. On one hand, large imports of

machinery goods in the early 1990s had an immediate impact on productivity through

the application of technology embodied in them. On the other hand, the level of science

and technology in China increased dramatically due to the effect of “learning by

doing.” Therefore, research on how international trade contributed to China's economic

growth can serve as a distinguishing case study demonstrating how a latecomer catches

up with forerunners by increasing its participation on the global stage.

This research starts with literature review from the perspective of international trade

effect on economic growth in part 2. In part 3, the theoretical model and estimation

procedures of this research are discussed respectively. Both econometric and

non-parametric approaches are applied in this research. The data and variables used in

this research are explained in part 4. The characteristics of a 6-year balanced panel data

of 31 provinces/regions of China from 2002 to 2007 are discussed, followed by the

analysis of each variable in the model. Part 5 presents empirical results according to the

model constructed in this research by offering an in-depth explanation of each

coefficient and comparison with the previous pieces of research. In part 6 and 7, policy

implications and the main conclusion are drawn respectively.


2. Literature Review

Empirically, there appears to be good evidence that international trade affects economic

growth positively by facilitating capital accumulation, industrial structure upgrading,

technological progress and institutional advancement. Specifically, increased imports of

capital and intermediate products, which are not available in the domestic market, may

result in the rise in productivity of manufacturing (Lee, 1995). More active

participation in the international market by promoting exports leads to more intense

competition and improvement in terms of productivity (Wagner, 2007).

Learning-by-doing may be more rapid in export industry thanks to the knowledge and

technology spillover effects. In addition, the benefits of international trade are mainly

generated from the external environment, appropriate trade strategy and structure of

trade patterns. There are comprehensive empirical studies on the impact of trade on

economic growth. Before the 1960s, research on trade effects was limited to a few

specific countries. With the development of econometrics, however, many complicated

methods based on a mathematical model were introduced to analyze the interactive

impact between trade and economic growth. So far, the discussions in this area have

been generally divided into two categories. One focuses on the causality relationship

between international trade and economic growth to examine whether economic growth

is propelled by international trade or vice versa. The other mainly discusses the

contribution of foreign trade to economic growth.

The OECD (2003) conducted a study on the impact that trade had on the average

income per population. According to the result, the elasticity of international trade was

0.2, which was statistically significant. Maizels (1963) discussed the positive

relationship between international trade and economic development by a rank

correlation analysis among 7 developed countries. Kavoussi (1984), after studying 73

middle and low-income developing countries, found out that higher rates of economic

growth was strongly correlated with higher rates of export growth. He showed that the

positive correlation between exports and growth holds for both middle- and

low-income countries, but the effects tend to diminish according to the level of

development. Balassa (1986) and Dollar (1992) argued that outward-oriented

developing economies achieve indeed much more rapid growth than inward-oriented

developing ones. Sachs and Warner (1995) constructed a policy index to analyze

economic growth rate, and found that the average growth rate in the period after trade

liberalization is significantly higher than that in the period before liberalization. Kraay

(1999) investigated whether firms “learn” from exporting using a panel data of 2105

Chinese industrial enterprises between 1988 and 1992, and found the “learning” effects

are most pronounced among established exporters. Keller (2001) discussed that

international trade which involves importing intermediate goods of a high quality

contributed to the diffusion of technology. Frankel and Romer (1999) constructed

measures of the geographic component of countries' trade, and used those measures to

obtain instrumental variables estimates of the effect of trade on income. The result


showed that trade has a quantitatively large and robust positive effect on income even

though it is only moderately significant statistically. Coe and Helpman (1995) studied

the international R&D diffusion among 21 OECD countries and Israel over the period

of 1971-1990, and found that international trade is an important channel of transferring


In sum, most empirical studies support the positive effects of openness on economic

growth. From the comprehensive literature, both static and dynamic gains from trade

could be found. The static gains from international trade refer to the improvement in

output or social welfare with fixed amount of input or resource supply. They are mainly

the results from the increase in foreign reserves and national welfare. Firstly, opening

up to the global market offers an opportunity to trade at international prices rather than

domestic prices. This opportunity provides a gain from exchange, as domestic

consumers can buy cheaper imported goods and producers can export goods at higher

foreign prices. Furthermore, there is a gain from specialization. The new prices

established in free trade encourage industries to reallocate production from goods that

the closed economy was producing at a relatively high cost (comparative disadvantage)

to goods that it was producing at a relatively low cost (comparative advantage). By

utilizing its comparative advantage in international trade, a country could increase the

total output and social welfare.

Another long-term benefit of trade is the dynamic gain. This refers to the change in

production structure thanks to the adoption of new technologies from abroad and an

increase in the production scale. Firstly, international trade sectors based on

comparative advantage always enjoy the economies of scale through the expansion in

production stimulated by the massive demand from the global market. This results in

the decrease of production costs, a large amount of accumulation of capital and increase

in employment. Secondly, international trade is one of the channels supporting

technological spillovers among countries which results in a favorable impact on the

productivity level (Saggi, 2000). Endogenous growth of an open economy is achieved

through “learning by doing” which exhibits diffusion of technology across goods and

countries. International trade, which transmits knowledge internationally, could

increase the absorptive capacity of trading countries by promoting technological

advancement. Increased productivity is also achieved through practice and innovation.

Finally, international trade leads to robust institutional changes. International trade not

only facilitates trading of goods and services, but also ideas on market mechanisms.

Developing countries are learning to apply market power more efficiently with less

intervention from government to increase openness. Especially in bilateral and

multilateral trade, participants should fulfill their commitments to international rules

and regulations to bridge the gap between developed countries.


3. China's Trade

3.1 Evolution of China's International Trade Policy

Some of the unprecedented development in the Chinese trade sectors and trade policy

also had various effects on the nation's economic growth. Targeting the global market,

China has successfully converted itself from an inward-oriented country which was

protected by various trade policies to an outward-oriented one with an open market.

The transition from a closed economy to an open one accompanied with it various

experiences. From the perspective of trade policy, China underwent a number of

evolution periods, such as dependence on the Soviet Union, absolute isolation, and

opening doors to the world. WTO accession, which represents a new milestone in

China's trade evolution, enabled China to participate in the world trade under the global

framework by improving the multilateral trade system.

Before 1978,China's planned economic strategy and inward-oriented policy resulted in

the subordinate status of international trade in the national economy. China had only

minimal trade with the outside world, exporting just surplus raw materials and simple

manufactured goods to cover payments for imported goods, including strategic

minerals and other necessities not available in the domestic market.

The planned economy and import substitution policy optimized China's export

structure by encouraging the growth of domestic industry during the initial period. A

number of national industries were established to foster economic growth. However,

due to lack of competition, the optimization of resource allocation could not be

achieved, and the Chinese trade sectors could not enjoy the dynamic benefits from

international trade such as competition effects, efficiency effects and technology

improvement effects.

It is well known that China has pursued unparalleled trade liberalization since 1978.

Since then, China has gained tremendous benefits from its integration into the global

trade system. The political line and open-door economic strategy determined by the

Third Plenary Session of the Party's 11th Central Committee initiated a new phase in

China's economic relations with foreign countries. With the establishment of the

socialist marketing economy and the transition of the Chinese economy and society,

great changes have taken place in the country. China's opening has moved step by step

from coastal cities to inland ones. Sustained development of the national economy and

the increase of the average income present a great need for international trade which

makes an increasingly significant contribution to economic growth.

From the perspective of the import regime, China was devoted to reducing trade

barriers and enhancing its openness to the world. At the beginning of the 1980s, tariffs

on many products were set to block the flood of foreign products into the Chinese

market. The Chinese government canceled its import substitution list in the 1980s to

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