The Ideal Economic China Policy in the Today's Globalization

ABSTRACT

Japanese companies have been shifting production to China because of its market potential and production cost advantages. This has sparked fears that the domestic industry will become hollowed-out. There are also rising concerns, that decreases in exports and increases in re-imports resulting from this shift might push up deficits with China and bring on foreign-trade deficits. Another anxiety is that the rapid proliferation of cheap China-made products has dealt a hard blow to domestic industries lacking competitiveness. Under these circumstances, it is argued more and more that Japan should strengthen restrictions on Chinese imports and curb the shift of production to China.

With the heavy influx of foreign capital into Chinese manufacturing in the 1990s, about 50% of china's external trade is now conducted by foreign-affiliated companies. Their share in China's trade with Japan is even larger, 60% of being carried on by foreign companies, most of which are Japanese. In addition, there are exports to Japan by Japanese companies under develop-and-import schemes and contract labor arrangement. The result is that Japanese companies are involved in about 80% of China's trade with Japan. Considering the global strategies of Japanese companies and the export-inducing effects on production goods, intermediate materials and parts, it would not be wise to excessively strengthen restrictions on Chinese imports.

The increase in deficits with China is mainly due to sluggish exports, which in turn may be attributable to the reduced competitiveness of Japanese products in the Chinese market (as well as to the import restrictions by the Chinese government and infringements of intellectual property rights). In particular, there is a link between the slow exports to China and the decrease in the late 1990s in direct investment, which has great export-inducing effects. The export-inducing effects of direct investment can be verified by the relationship between the values of direct investment and of export trade by Korea and Taiwan, which are concentrated in manufacturing. The overseas production ratio of Japanese manufacturers is half of German or US companies. As a result, a considerable part of Japan's domestic production has remained inefficient. It is evident from the example of Germany that growth of direct investment dose not necessarily lead to trade deficits.

Japan should not adopt policies intended to restrict imports and to curb shifts of production. On the contrary, it is necessary for Japan to participate in the vitality of China's dynamic economic development and to share in its benefits. For this purpose, Japan should implement four policies: (of) (1) promotion of exports to China, (2) enhancement of direct investment, (3) upgrading of domestic industries, and (4) establishment of a mechanism for restructuring domestic industries. To be more specific, necessary policy measures include establishing an organization to monitor implementation by China of its WTO entry commitments, support for China-based Japanese companies (in intellectual property rights protection, granting of credit and manpower development), granting of a generalized system of preferences based upon industry and product competitiveness, fostering of a favorable operating environment for seeking foreign investment in China, strengthening of research and development to make Japan the R & D center of the world, and establishment of an "industrial restructuring fund".

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