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China: Free Trade Would Pay Big Dividends To Consumers

Washington, 24 November 1998 (RFE/RL) -- Free trade advocates have long opposed protectionist and other barriers to trade, but for the first time a study has attempted to compute their costs and benefits to one country -- China.

The study, carried out by three top Chinese economists at the Unirule Institute in Beijing and published by the Washington-based Institute for International Economics (IIE), shows that eliminating China's trade barriers could give Chinese consumers an annual gain of around 14 percent of GNP (gross national product), or about $78 billion in 1994.

The study was conducted by calculating the cost of trade barriers for 25 highly protected products that are nevertheless imported into China in large quantities. The 25 products, including food, raw materials, fossil fuel products, manufactured goods, and transportation equipment, represent 30 percent of China's total imports and 35 percent of corresponding domestic production.

If China's highly protectionist trade barriers were removed, the study found, the value of imports in those 25 areas would increase from $38 billion per year to $68 billion.

One of the study's authors, Zhang Shugaung, told a gathering at the IIE last week that the average tariff on the 25 goods is 44 percent. He said that if just those 25 products were liberalized, it would give Chinese consumers a gain of around 6.2 percent of GNP or around $35 billion.

But the study acknowledges that there would be a serious downside to completely liberalizing trade -- a loss of about 11 million jobs or about 27 percent of the workforce in the affected industries.

That is a particularly worrisome figure, acknowledges the study, especially in a country with an extremely large workforce, much of which is underemployed in unprofitable enterprises.

Job losses would be especially heavy in agriculture, accounting for 85 percent of total losses.

However, says the study, China's agriculture is the worst at harboring the effectively unemployed. In 1994, it estimates China's rural labor force was 446 million people, but only about 308 million were gainfully employed. This leaves a rural labor surplus of about 31 percent of the total.

At the same time, the study says, the projected losses in industrial production from free trade are exaggerated in the study because it does not reflect the positive dynamic benefits of cutting trade barriers.

For example, it notes, without liberalization, each job retained in the protected industries costs consumers an average of over $3,100 per year.

Even more importantly, the study says trade liberalization would increase domestic employment in several sectors of the economy and would lead to higher domestic production, a greater variety of goods and services and more competition. All of this would help increase market efficiency.

The study says that using a dynamic model, the authors show that three our of four sectors of the Chinese economy with traditional monopoly or oligopoly structures would increase domestic production if trade and investment liberalization led to more competitive markets.

In 1995, China committed to reducing its average tariff rate to 15 percent by the year 2000, but the study says that the reforms to that end have been more incremental than systemic, leaving trade liberalization in the dust.