1.       Historical background and the basic setting 

China, before 1949, was very poor and backward: per capita income was very low and population pressure on arable land and other resources was very high. For examples of the underdevelopment, consider that there were only 107 students with graduate degrees. For every 10,000 people, there were 2.2 undergraduate students, 23 secondary & high school students, and 450 elementary students. China's industrial capacity was reflected by the commodity composition of her imports and exports. In the 1930s about 50 percent of China's imports were primary goods. Imports of manufactured products consisted mainly of cotton, yarn, cigarettes, woolen goods, matches and dyes. Although 30 percent of exports were manufactured goods, they were low value‑added products such as bristles and textiles. Vast areas of China were quite untouched by industry before 1950. Additionally, China did not have institutions appropriate for economic development. Foreign powers owned and controlled about 40 percent of China's industrial assets, the nation's transportation network, and many of China's natural resources. They also dominated financial institutions and dictated China's terms regarding foreign trade with the Western powers. 

Currently, China's economic resources per capita are still very low. In 1989 per capita commercial energy consumption was less than 8 percent of that of the United States. While China has a slightly larger land area than the U.S. (3.7 versus 3.6 million square miles respectively), there is only about half as much arable land to support approximately four times the population. In 1992 China's population stood at 1.17 billion and was growing at a rate of 1.16 percent annually. It is expected to reach 1.29 billion by the year 2000. It has been estimated that, in terms of population, the equivalent of a new Canada arises in China every 15 months. Unfortunately, China's arable land is being reduced daily due to industrial development, housing construction, pollution, and desertification (4‑6 million acres per year were lost between 1950 to 1980).
 

There is also a high degree of geographical separation of human resources from natural resources. About 95 percent of the population resides in the eastern half of China and only about 5 percent in the western half (Figure 1). The population density in Shanghai is 22,000 persons per square kilometer vs. less than 1 person per square kilometer in some areas in the West. Although the West is rich in natural resources, economic development is concentrated in the East. Labor productivity in Shanghai is 13 times higher than the national average. Further 90 percent of foreign investment and two‑thirds of trade activities are centered in coastal cities (see Figure 1). 

However, most people would agree that China's economic performance over the last four decades has been remarkable. China produces more grain and cotton than the United States and the life expectancy in 1990 was 70.1 years for Chinese and 75.9 years for Americans. In the 1980s, the Chinese economy expanded at an average annual rate of about 10 percent, living standards and consumption more than doubled, and, for most of this period, inflation was kept under control. 13y the end of the decade, China's foreign trade had more than tripled and China had become an important player on the global economic stage. In 1992 with about one‑fourth of its GDP exported to world markets, China became the eleventh largest exporter in the world. In March 1993, China was ranked the number one investment market among 20 emerging markets in the world by the World Economic Forum and the International Institute for Management Development. The United Nations Development Program's Human Development Index, which combines indicators of national income, life expectancy, and educational attainment to give a composite measure of human progress, ranked China number 79 out of 160 developing countries. To put this in perspective, Peru is number 81 and India 121. 

2.       Choosing between planning and market 

Since 1949, the government has been vacillating between a centrally planned and a market economy. In the early 1950s the government, following principles of the market system, succeeded both economically and politically. This success, combined with other factors, fueled the ambition of the leadership to move toward a communist society by dramatically transforming an economy dominated by the private sector into an economy controlled by the public sector. Now after more than forty years of experimenting with the two systems, there seems to be a trend in China toward a market system. 

Prior to 1952, when the Central Planning Commission was established, the economy was dominated by the private sector. In 1949, publicly owned industries accounted for 26.2 percent of total industrial production and the private sector for 48.7 percent. In 1952, public ownership accounted for 19.1 percent of the national income, and the private sector for 71.8 percent. Government control of the economy was by necessity indirect and the market mechanism was in operation. The average annual growth of the economy was above 20 percent during this period. 

Historical, political, and economic factors contributed to the adoption of central economic planning in China in the middle of the 1950s. For thousands of years, China had a highly centralized government. During the late Qing Dynasty civil wars among warlords and foreign invasions forced the Chinese people to look for a strong central government that could unite the people and build a strong and prosperous China. Historic regional imbalances in terms of economic development between eastern and western China combined with the determination of the Communist Party to redress these inequities also intensified the demand for a centralized government. International hostilities, such as political and economic embargoes by western countries in the early 1950s, also contributed to the adoption of the central planning system. In addition prior to 1949, the Communist government had applied military organizational rules to run the economy in the controlled areas. The relatively successful experiences with a controlled economy, plus the lack of experience in a market economy, made central planning a natural choice. 

By 1955, the central government, provincial governments, and more than two‑thuds of local governments had established planning commissions. From 1953 to 1957, the share of private ownership in the national income declined from 71.8 percent to 2.8 percent, end public and collective ownership increased from 20.6 percent to 79.6 percent. The Central Planning Commission controlled most of the industrial production (73 percent), and established a monopolized planning system for production, material supply, employment, trade, commodity procurement end marketing, and the fiscal budget.
 

In agricultural production planning, the emphasis was put on establishing proportional relationships in the following areas: (1) the ratio of crop production to animal husbandry, (2) the ratio of various types of crops within crop production itself, and (3) reproduction ratios for various types of animals. Based on careful research of needs and resources, output quotas were specified for major products.
 

Industrial production planning was and remains the most important component of national economic planning. It specifies the rate of growth of industrial production, the ratio of producer goods to consumer goods, and the level of output of major industrial products. Government control peaked first in 1958. The Central government controlled about 9,300 enterprises, more than 300 major products, 39.7 percent of industrial production, and 75 percent of the total government budget.
 

China's economic reform since 1978 has created opportunities for private enterprises to develop. Between 1979‑1981 the value of the output of rural private nonagricultural firms increased at an average annual rate of more than 14 percent. During 1981‑1983 it jumped by 105 percent. Meanwhile, a large number of private enterprises began to emerge including handicrafts and simple manufacturing enterprises. Some regions saw the emergence of cooperatives and industrial partnerships jointly run by groups of farm households. These private firms accounted for 82.7 percent of the total number of rural nonagricultural firms, employed 32.8 percent of the total employees of rural nonagricultural firms, and were responsible for 36.8 percent of the total value of the output of rural nonagricultural firms. In the early stages of the economic reform private family‑owned firms were not allowed to hire outside workers. Now there are private firms employing over 1,000 employees, operating in several regions with various types of ownership (including foreign ownership), producing multiple products, and marketing their products in both domestic and foreign markets. The government has abolished many policy restrictions against private firms end even supports mergers of private firms with other firms including small firms owned by the state. Amendments to the constitution also reflect China's movement toward a market economy. Before 1928 the Chinese economy was defined as a socialist planned economy. A 1982 constitutional amendment redefined the economy as a socialist commodity economy. In 1993 the constitution was once again amended, this time describing the economy as a socialist market economy.

3.       Chine's trade with the United States 

One of the major results of the economic reform has been the growing openness of the Chinese economy. Sino‑American trade reflects the growing importance of foreign trade to the Chinese economy. In 1972 the value of Sino‑American trade was less than $13 million, it jumped to $245 million in 1979, $8 billion in 1985, and $25 billion in 1992 (Figure 2).

 U.S. exports to China include aircraft and aircraft parts, automobiles, machinery and equipment, power‑generating equipment, timber, and chemical and high tech products. Agricultural products which accounted for 58 percent of U.S. total exports to China in 1979, declined to 2 percent in 1986 and rebounded to 24 percent in 1987. 

In the early 1980s clothing, petroleum products, and textiles accounted for 50‑60 percent of China's total exports to the United States. However, in recent years, China's exports have steadily diversified with rapid growth in the export of light manufactured goods, telecommunications equipment, and electrical appliances. Toys, games, sporting goods, consumer electronics, footwear, and travel goods are now among China's top export earners in its trade with the United States. 

For the most of the past twenty years, the United States has enjoyed trade surpluses with China. But recently, the demand for protection against China's exports to the United States has increased due to the fact that China has enjoyed several years of trade surpluses with the United States. The 1992 surplus of $18 billion was second only to U.S.‑Japan trade deficits which totaled approximately $43 billion. 

Although Wisconsin's exports accounted for only 1.56 percent of U.S. total exports in 1990, international trade is becoming increasingly important to the state economy of Wisconsin. Total exports have increased from $4.7 billion in 1988 to $7.1 billion in 1992. These numbers do not include the value of goods and services indirectly exported to foreign countries by Wisconsin through other states. The major exporting industries include forestry, livestock and animals, leather, industrial machinery, printing and publishing, instruments, and fabricated metals. They accounted for more than 2 percent of U.S. exports in their respective industries. Figures 3 and 4 show the most rapidly growing exporting industries and foreign markets in 1990. 

Wisconsin's exports to China totaled about $34 million in 1988, $54 million in 1989 and $26 million in 1990. The major products are industrial machinery, instruments, transportation equipment, and chemical products. Wisconsin's exports to China represent less than 0.5 percent of Wisconsin's total exports. China was Wisconsin's 29th largest export market in 1990. However, there is great potential for increased bilateral trade. If China imported one pound of cheese per person annually at a price of $1 per pound, it would mean a 16 percent increase in Wisconsin's total annual export earnings ($7.1 billion in 1992). 

4.       Prospects for growing interdependence between China and           the United States 

During the 1980s, China became more dependent on the U.S. market. 1:n 1980 only 6 percent of China's exports were sold to the U.S. market, the share increased to 14 percent in 1985, and to 25 percent in 1990 (Figure 5).
 

And China is likely to continue to be a growing market for the United States for several reasons. First, a large and growing population combined with projections for continued vigorous economic growth during the 1990s will create increasing demand for goods and services. Further as China develops the western half of the country and as the standard of living improves, the demand for modern technology and equipment, as well as agricultural products will continue to grow. China is already Boeing's second largest customer in the world and the largest market for Motorola's cellular phones outside the U.S. The total volume of potential Japanese orders for Boeing's major commercial jet airplane from 1993 to 2010 is projected to be $60.5 billion. Chinese orders may total $41 billion during the same period of time. In February 1993, AT&T concluded a landmark deal providing China with advanced integrated circuits and wireless phones, which 'will dwarf everything else AT&T does in the world." And after two years of 30 percent growth, Coke now sells 73 million cases of Coca Cola annually in China, and its rate of growth in unit sales is 10 times higher than in the rest of Asia combined. 

Second, China's total exports will continue to grow and generate income, thus enabling China to import needed technology and equipment. The U.S. has been China's major supplier of modern technology since the 1970s. In the 1980s, China's export growth rate exceeded that of the world as a whole, growing on average by 13 percent annually (Figure 6). 

China's labor force of some 160 million in the relatively well‑developed urban coastal areas, produces more than two‑thirds of China's exports, and is larger than the labor forces of Japan and the Asian Newly Industrializing Economies combined. Wages remain less than $2 per day. This will keep Chinese products very competitive in the world market. Moreover, while China's foreign debt is between $43 billion (according to official Chinese data) and $51 billion (according to IMF), the debt service ratio, that is the ration of debt payments to exports, is only 10 percent. (In 1988 the ratio was 65 percent for Argentina, 47 percent for Brazil, and 46 percent for Mexico). China also retains healthy foreign exchange reserves. 

Third, China is working hard to regain membership in the General Agreement on Tariffs and Trade. The U.S. has agreed to support China's application. If China regains membership, total exports are expected to increase 15‑20 percent annually in the 1990s. To be readmitted to GATT, China has made many important trade concessions which benefit U.S. exporters. In January 1993, China lowered tariffs by 7.3 percent on about 3,000 or 53.6 percent of imported commodities, and pledged to eliminate 80 percent of her import quotas, licenses, and other market barriers over the next five years. In 1992, the government also quietly handed U.S. auto makers a valuable gift, exempting them from rigid government limits on the number and type of automobiles that foreign companies can produce in China. This is a significant advantage for U.S. auto makers over their European and Japanese competitors. Foreign‑made autos sell for more than $30,000 each and supply is still way below demand. China has about 125 state‑run auto plants and only 14 can produce more than 10,000 units annually. Beijing Jeep, a Chrysler Corp. joint venture, produced 22,000 Cherokee wagons and 40,000 Soviet‑style utility vehicles in 1992.  General Motors invested $100 million in a joint venture pickup truck factory and will produce 60,000 GM pickups and trucks annually for the next six years. The Chinese government has also recently promised that more purchasing delegations will come to the United States in 1993 in order to attempt to further reduce the trade surplus.

Finally, according to Coca Cola chairman Roverto C. Goizueta, China is a market with virtually limitless long‑term potential for U.S. investors. And the Wall Street Journal reports that in the first nine months of 1992 China signed 27,112 contracts valued at $30.6 billion which is equivalent to the total value of contracts signed during the decade from 1980 to 1990. In addition there are now 70,000 joint ventures in China. The openness of the economy has forced the government to relax restrictions on foreign investors. Foreign‑invested consumer products factories that had been required to export the bulk of their output are now allowed to target China's 1.16 billion consumers. Foreign investment in banks, law firms, apartments, hotels, and shopping centers is also now permitted. The United States is the second largest foreign investor.

And China has now begun to invest in the United States to secure technology and raw materials for Chinese industries. As of the end of 1989, the number of Chinese joint ventures in the United States stood at 168, with the amount of capitalization valued at $440 million. Of this total, $370 million was contributed by the Chinese side. These ventures generally are small in scale and are primarily involved in foreign trade or in production sectors such as electronics manufacturing, machine tools, steel, timber, fishing, and food processing.

In conclusion, the decade beginning in 1980 witnessed a growing interdependence between China and the United States as a market economy was fast emerging in China. If the market‑oriented economic reform continues, economic interdependence and trade between China and the United States will continue to grow. 

Notes 

1.         U S Joint Economic Committee, 1991, China's Economic Dilemmas in the 1990s‑ The Problems of Reforms, Modernization, and Interdependence. 102nd Congress, 1st Session. Washington: Government Printing Office.  

2.         Business Week, March 29,1993. 

3.         The Wall Street Journal, various issues.