Encouraging imports and further opening the Chinese market are becoming new ways for China to target its burdensome trade surplus.

On December 13, 2006, just one day before the First China-U.S Strategic Economic Dialogue was held, U.S. Commerce Secretary Carlos Gutierrez and Chinese Vice Minister of Commerce Yi Xiaozhun witnessed in Beijing the signature of four important contracts between companies of the two countries. According to these contracts, China will buy aircraft engines worth of $550 million and airport fire trucks of undisclosed value, and at the same time, U.S. companies will purchase Chinese home improvement chains and establish new Internet cooperation with China Netcom.

These four deals not only show that China is expanding imports from the United States and opening its market, but also mark that in 2007, Chinese foreign trade policies will undergo significant strategic adjustment. The Central Economic Work Conference held on December 5-7 made clear that in 2007, the country would actively expand imports. This is the first time that China has clearly indicated it would "actively expand imports."

"Cutting the huge trade surplus is the priority task for 2007," said Bo Xilai, Minister of Commerce. "The yawning surplus with the United States and the European Union has strained China's foreign trade environment, triggering more frequent trade frictions," he continued.

Eliminating unhelpful exports

China aims to narrow the surplus, which jumped 74 percent to a record high of $177.5 billion in 2006. If it grows at the same rate this year, the trade surplus will mount to $300 billion. Early in September last year, China reduced tax rebates on exports of high energy-consuming, resource-intensive and environmentally harmful products.

The move reflects the Chinese Government's efforts to shift emphasis away from low-value-added exports. "The Chinese Government wants to see a trade balance. We don't deliberately seek a rising surplus," said Chong Quan, spokesman of China's Ministry of Commerce (MOFCOM). Last year China cut tax rebates by an average of 2 percent for sectors such as textiles, metallurgy, iron and steel. Only hi-tech industries are exempted. In fact, their rebate is being increased.

"Export rebates for high energy-consuming, high-polluting and resource-intensive products should be stopped," said Fu Ziying, Assistant Minister of Commerce.

Introduced in 1985, the tax rebates for exporters have made Chinese products more competitive in the international market. During the Asian financial crisis in the late 1990s, due to depreciation of currencies in many Asian countries, China had to increase its rebate rates by a large margin. However, the increasing trade surplus, which triggered more and more trade frictions, forced China to cut the tax rebates several times, even abolishing rebates for some products.

In November 2006, MOFCOM, the General Administration of Customs, and the State Administration of Environmental Protection announced the Catalogue of Prohibited Commodities in Processing Trade, with the aim of reducing export incentives to low value-added industries.

Meanwhile, China increased export tariffs of low value-added products such as textiles in order to curb exports. Since June 1, 2005, China has raised export tariffs on 74 Chinese-made textiles by 400 percent.

By lowering export rebates and increasing export tariffs, the Chinese Government enjoyed some success in curbing exports of high energy-consuming, high-polluting and resource-intensive products. Exports of coal dropped 12.7 percent, coke 10.7 percent, billet 35.6 percent and non-forged aluminum 20 percent year on year in the first six months of 2006, according to the National Bureau of Statistics.

However, to get around such restrictions, many Chinese businesses found a new strategy. They began processing materials slightly, but not completely, for export. Thus the bulk of Chinese exports moved from resource-intensive products to preliminary processed products and semi-finished products. For instance, China's exports of semi-finished aluminum products surged 57 percent year on year to more than 400,000 tons in the first five months of 2006, according to Chinese Customs statistics.

The importance of imports

Increasing imports is, to some experts, the best way to cut China's widening trade surplus because in their view, import growth drives economic growth.

China has mapped out a plan to boost its imports to reduce its huge trade surplus. The new measures include increasing imports of large machinery components, advanced technology and resource-intensive goods. This signals a strategic transformation for China to embrace a larger influx of foreign goods and capital. "China will further reduce import tariffs on energy, raw materials and advanced technology in a bid to ease the country's growing trade surplus," said Fu.

"China is expected to import more technology and key equipment from developed trading partners, such as the United States," said Zhao Yumin, an expert at the Research Institute of the Ministry of Commerce. According to her, China enjoys not only comparative advantages in labor-intensive manufacturing but also a high standard in machinery manufacturing.

Meanwhile, Zhao predicted that China would import more agricultural products in the long run because Chinese farmers are bearing increasing costs.

"Besides the zero-tariff treatment under the framework of the China-ASEAN Free Trade Agreement, China has also given zero-tariff treatment to 190 export items from the 28 least developed countries in Africa," Mei Xinyu, a trade researcher with the Chinese Academy of International Trade and Economic Cooperation affiliated to MOFCOM, told Beijing Review when talking about China's measures to enlarge imports.

Besides, China is planning to strengthen financial support for imports through the granting of import loans, a spokesman of MOFCOM said. The Export-Import Bank of China (EXIM) will encourage Chinese companies to expand imports, said Liang Xiang, Assistant President of EXIM. "We have provided loans to importers since 2006 so as to narrow the trade surplus. The government may offer loans with lower interest rates in the future to expand imports," Liang added.

Only a slowing surplus

According to a MOFCOM spokesman, because of different economic development stages and the international division of labor, all countries will certainly see trade surpluses or deficits.

In his opinion, the growth of China's trade surplus is inevitable. A great deal of the global manufacturing capacity has been transferred to China, expanding its exports and at the same time, weakening its need to import. Export control adopted by some Western countries also has restrained the growth of China's imports. With abundant foreign exchange reserves, China does not intend to seek trade surplus, but strives for balanced international payment. The Chinese Government is adopting effective measures to enlarge imports and improve the imbalance between exports and imports, all the while hoping for the elimination of irrational barriers in some countries against exports of hi-tech products to China.

China's high trade surplus is because of its position as a vital cog in the international manufacturing and processing chain, said Yu Yongding, an economist.

Li Lingmin, Vice President of China National Textiles Import and Export Corp., believes that demand for Chinese commodities by the international market is quite strong and many Chinese-made products cannot be substituted for those of other countries. Even if China adjusted its foreign exchange rate scheme and reduced tax rebates, export volume decline still would be limited. To maintain balanced trade, China must enlarge its imports.

An expert from the General Administration of Customs holds that since there is a buffer period for readjustment in export policies, it will be normal for exports to grow faster during this period. It is predicted that in 2007, the growth of China's exports will slow down. With new policies to reduce exports and encourage imports, the trade imbalance should be improved in 2007 and the trade surplus should be narrowed markedly compared with 2006.