New Post
GEOG7114 Geography
Lecture Notes
of
Trade
and
Finance:
Lecture Outlines
Lecture I: Understanding “economic
development” and role of MNC in global economic
development
Background:
China has achieved an almost double-digit economic growth rate since Deng
Xiaoping launched his market-oriented economic reforms and open policies in 1978.
Nevertheless, as in most developing countries, Chinese officials have apparently put
rapid economic growth above all else. To them, people’s “rights to survive
constitute human rights”.1 This attitude sums up their emphasis on “making ends
meet” as the primary objective of economic development. However, development is
not purely an economic phenomenon or of a single focus.2 It is a multidimensional
process involving the reorganization and reorientation of the entire economic and
social systems in a country.3 Economic growth alone is essential, but not sufficient.4
Meaningful development must encompass improvements in almost all social aspects:
more equitable income distribution, poverty elimination, job creation, and a wide
range of physical and human infrastructure development and public goods
provisions, particularly in education, health care, and housing. 5 Beyond the
material domains, the spiritual and moral aspects, such as enabling people to be
persons with self-esteem, sexual equality, personal freedom, human rights, political
see The PRC State Council’s White Paper on China’s Human Rights 1991, (Beijing: the Central
Literature Press,1991).
2
Goulet, D., The Cruel Choice: A New Concept in the Theory of Development, (New York: Atheneum, 1971),
and Streeten, P.P., “Indicators of development: The seach for basic needs yardsstick”, World Development
Vol.7, (1979).
3
Goulet, D., The Cruel Choice: A New Concept in the Theory of Development, (New York: Atheneum, 1971);
Sen, A., “Development: Which way now?”, Economic Journal Vol. 93: 745-762 (1983).
4
Lewis, W.A., “Is economic growth desirable?” In The Theory of Economic Growth, (London: Allen &
Unwin, 1963) and Goulet, D., The Cruel Choice: A New Concept in the Theory of Development, (New York:
Atheneum, 1971).
5
ILO (International Labour Organization), Employment, Growth, and Basic Needs. (Geneva: ILO, 1976);
World Bank, World Development Report 1991, (New York: Oxford University Press, 1991); Haddad W.D.et
al., Education and Development: Evidence for new Priorities, World Bank Discussion Paper No. 95.
(Washington D.C.: World Bank, 1990).
1
1
development, as well as environment protection, are also integral parts of
development. 6 The United Nations and the World Bank have regarded these as
significant and profound meanings of development and begun to use these moral
and political indicators (such as human rights) to assess individual LCD’s
development level.7
Nature of Development
1. Everyone wants development, every nation strives after development. But what does
it means by “Development”?
2. Economic development implies a fuller and more productive use of human and
national resources to achieve improved conditions of economic and social well being.
3. However, what this "use" means and what this economic & social well being
includes?

Multidimensional process: GDP/Basic Needs vs Social Indicators; Material vs
Spiritual,

International framework: The East-West and South-North relationships
(Foreign Debts)

New standard: democracy, personal freedom, women status and human rights,
and environmental protection and perception
6
Owens, E., The Fuiture of Freedom in the Developing World: Economic Development as Political Reform,
(New York: Pergamon Press, 1987); Soedjatmoko, The Primacy of Freedom in Development. (Lamham,
Md.:University Press of America, 1985); Pearce, D.W. et al., Sustainable Development: Economics and
Environment in the Third World, Chaltenham, (U.K.: Edward Elgar Publishing, 1990).
7
United Nations Development Program (UNDP), Human Development Report, (New York: Oxford
University Press, 1992); World Bank, World Development Report, 1992: Development and the Environment,
(New York: Oxford University Press, 1992).
2
Four/Five leading alternative theories of economic development, which
can enrich the meanings of development
1. The linear stages of growth model
2. Structural change model
3. The international dependence revolution
4. The neoclassical, free market counter-revolution
5. New MNC/firm and trade development theory
1) The Linear-stages Theory
a. Rostow's stages of growth : 5 stages :
Traditional society, precondition for take off into self-sustaining growth, the
drive to maturity, and the age of high mass consumption.
b. Harrod-Domgr growth model --- see transparency
S=sY --- (1) 總 saving or 積累 = saving rate x national
I=∆K—(2) 總投資=資本增量
Capital investment
K/Y=k
產出投入率= National income
∆K/∆Y=k
∆K=k∆Y ---- (2a)
S = I (3)
總 saveing=總投資
S=sy=k∆Y= ∆K= I
(3a)
sy=k∆Y
saving
/
3
綜資本/saving
national income
∆y/y=s/k=
=
Capitla investment /
單位產出的需資本
National income
增長率与 saving ratio 正比与產出投入 ratio 反比
Criticism： development is not that simple
2) Structural Change Model - using modern economic theory and statistical
analysis is and attempt to portray the internal process of structural change that a "
typical " developing country must undergo.
a.
The Lewis two sector structural transformation --- see transparency
b.
Chenery's structural change and pattern of development --- see transparency
c.
Criticism :
3)
International Dependence Model
a.
The neocolonial dependence model --- Santos, Pope John Paul II - The false
paradigm
b.
The dualistic-development thesis
c.
Criticism
4)
The neoclassical counter-revolution - The World Bank and IMF against
ILO,UNDPG, UNCTAD
Conclusion and implications
4
What do we mean by “development”?
1) Traditional view: NGP growth
2) GNP, necessary condition but not sufficient condition that need to plus
"redistribution of growth " redefined as reduction or elimination of poverty,
inequality, and unemployment within context of economic grow.
3) Development of people rather than the development of things
4) Multidimensional change in social structure, popular attitudes, and national
institutions, as well as the acceleration of economic growth, the reduction of
inequality and the eradication of absolute poverty.
5) Change in entire social system and materially and spiritually " better".
5
Three core value of development
1. Life-sustenance: the ability to provide basic needs
2. Self-esteem: to be a person
3. Freedom: to be able to choose
The three objectives of development and the three
meanings of development
See transparency
The Nature and Role of MNC
1. The MNC is a company that is headquartered in one country but controls
productive facilities and sales outlets in other countries. Its operations involve flows
of capital, goods, services, and managerial and technical personnel among its
subsidiaries. Ultimately, it leads the corporations to assume a global outlook and
strategy.
2. The world’s 14 richest nations were headquarters to 7,000 MNCs in 1969 and
24,000 in 1994. There total 37,000 MNCs in the world in 1995, accounting for
more than 25% world goods production, 3% employment in world total and 10%
employment in developed countries, and 50% global FDI and Int’l trade volume.
3. The largest MNC have sales exceeding US$1000 billion annually, more than many
countries’ GNP. Global sales of General Motors or Exxon are more than GNP of
25 sovereign nations.
4. Major roles in transfers of knowledge, technology, investments, profits, and
services among themselves – intra-firm trade – shipments of parts, components,
subassemblies, rather than finished goods and services. MNCs play dominant role
in economic development, particular in int’l trade and FDI, in both developing and
developed countries, including Canada, Belgium, France and Italy.
5. New perspective to trade theory – firms rather countries are a prime agent for int’l
trade, see Chapters 11 and 12
6. Two advantages:

Information-gathering ability or scanning capability – an immediate awareness
of opportunities, problems, and new development;
6

Enormous store of capital, technology, and managerial skills that an MNC can
draw upon
Development and Structure
1. Originated from colonial operation
2. Three stages of development:

A Linear Linkup to Japan (1970s);

A transitional period of int’l specialisation and mesh (1980s);

A final stage of global localization – the tetrapolar strategic division of the world
(1990s), see Box1.2
3. Emergence of major trade blocs
Role in Global Redistribution of Factors of Production
1. The most significant feature: an efficient agent for transferring capital, managerial
skills, technology, product design, and commodities among countries; Equalizer of
factors distribution; Generator for innovation and technological change
2. Transfer of managerial skills
3. Transfer of capital – both real (machinery) and financial
4. Transfer of technology
5. Principal generator of int’l trade
7
Theories of MNC
What causes a firm to go abroad and succeed in a foreign environment?
What happens to the firm during the course of internationalization?
- Expectation for greater profits/returns from foreign venture by possessing four
advantages that local firms don’t possess:
1. Superior knowledge – monopoly in knowledge: Leadership in innovation is the key
to compete and succeed in this information age.
2. Superior size and scope of operation – oligopolistic in market competition: Worldwide resources to manoeuvre for competition
3. Superior in technology protection and transfers – transfers within own firms, go
with rivalry and “reverse” investment: competitors and rivalry route/locations,
similar culture, legal and political system, and English-speaking environment are
attractive and favourable elements for MNCs to open their business.
4. Global Strategy:

Move to exports

Internationalization of production

Globalization of outlook and organization: Worldwide recruitment of
Cosmopolitan Executives who are rich in three assets: concepts – best
knowledge and ideas; competence – the ability to operate at the highest
standards of any place in the world anywhere; and connection – best
relationships inward and outward
Global Competitive Advantage
1. Four Processes of globalisation:

Mobility: Mobility of capital (both physical and financial), labour, idea, and
product and service is high.

Simultaneity: Introduction of a product or service in one place and its adoption
at other place is required to be “instant” or “simultaneous”.

By pass: New product or technological alternative can go around existing
structure and barriers.
8

Pluralism: Multiple choices
These four processes have together created a globalization cascade – an efficient and
mutually reinforcing feedback loops that strengthen and accelerated the globalizing
forces.
2. Factors: Michael Porter’s (1990) Four Factors of Competitive Advantages (in
contrast to the conventional comparative advantages):

Factor conditions: conventionally called “factors of production”-
a) Physical resources:
b) Human resources:
c) Infrastructure:
d) Knowledge resources:
e) Capital resources:
The five factors can be grouped into basic factors, such as physical resources,
number of peoples, and advanced factors such as educated personnel and R&D.
Basic factors are endowed, limited and of diminishing necessity and impacts, while
advanced factors are created (through education and research), unlimited and of
increasing significance and impacts.

Demand conditions: the composition of buyers needs and the size and pattern of
domestic demands –
a) Power comes from influence over consumption, not as traditional argument, from
control over the means of production
b) Japanese “light, thin, short, and small” product has international impacts

The nature of supporting industries: the surrounding environment that fosters
success by providing “dynamic externalities” –
a) Sweden’s special steels - cutting tool industry; Swiss dye industry –
pharmaceuticals; Italy’s leather – shoes and fashion; North European Envy for
capital gains leads to least capital accumulation while USA is just opposite

Firm strategy, structure and rivalry: Good have enemy
9
3. Four Stages of Economic Development:

Factor-driven: Developing Countries and China (Labour), OPEC &Gulf States
(Oil), Australia (Gold)/Canada (minerals)

Investment-driven: Japan and South Korean, and Taiwan

Innovation-driven: USA

Wealth-driven: UK and Western Europe
Reference:
Ch.1 & 3: Todaro M.P. (1994), Economic Development (the fifth edition), Longman,
New York
Chapter 1: Berry B.J.L., Conkling E.C. and Ray D.M. (1997), The Global Economy
in Transition (second edition), Prentice Hall Inc., New Jersey, United States.
10
Lecture IIa: International trade, FDI and MNC as
dynamics of global economic transaction
Background - The Necessity for World Trade
Nowadays nations and regions are becoming increasingly interdependent,
not only because of the differences of their natural and human endowment,
but also because of the difference of their living tastes and choices –
No country can by itself supply all ingredients for its people due to their
contemporary living standard enforces them to desire for a diversified
choice and therefore requires variety of goods and services
A retreat to self-sufficiency would so impoverish a people that no country
would find such a course politically feasible.
The world need trade and the trade change the world fundamentally:

A internationalized production process and development strategy of firms as
well as a locational decision-making process

A wholesale restructuring of industry

A revolution in global communication and technology

A growing dominance of MNCs in variety of aspects, including cultural and
political changes

A shifting fortune of countries and regions and new international map of
commerce and polity (political powers)…..etc

A reconsideration of old theories and creation of new understanding, approaches
and new outlook
11
World Trade and the Energy Crises
The Oil crises 1970s and the global recession triggered by them in the early
1980s are the most pivotal event of the last century - Henry Kissinger,
former US Secretary of State
OPEC (Organization of Petroleum Exporting Countries) – established in
1960, but really come to power in early 1970s, then created the 2 world oil
crises in 1973 and 1979 and triggered global economic recession in 198183; consisting of 13 countries in two groups:

Iran, Algeria, Indonesia, Venezuela, Nigeria, Ecuador, and Gabon – large
population and hungry for money

Saudi Arabia, the United Arab Emerates, Kuwait, Qatar, Libya, and Iraq –
Small population and keen to preserve the oil resource
OPEC Oil Control - Oil Crises and Global Recession in 1970s and in
the early 1980s
Pre-1973
Characters
World Oil
Control %
of the
Total
Oil Price
$/barrel
1973
The first
Oil Crisis
1979
The
Second
Oil Crisis
1981
1983
Global Recession
30 - 43
85
Less than
3
3
12
41
72
300
Dramatic down
31
50 - 60
Oil
Revenue
7
billion $/y
Oil Export
million
barrel
Balance of
Payment
billion $
Compete Control and Monoply
+109
12
After 1983
29 - 10
Less
Compete
Control
20 (16
1994; 3038 now)
18
27
-18
Further
deficit
Impacts and Consequences of the Oil Crises:

Pre-crisis, $3/barrel oil encourage lavish use of oil, particularly in western
countries

Global inflationary spiral and economic down-turn which led to global recession

Non-OPEC countries thrown into a balance-of-payments deficit – global
economic downturn

Enormous global transfer of fortune and wealth from non-oil counties to OPEC
countries – at least $100 billion per annum, creating the world new rich and new
poor and creating great problems for OPEC on deciding areas of usage of their
revenue

Developed world benefited from recycling of OPEC wealth and developing
world hit hardest with the exception of S.E. Asia Countries

Global recession in the early 1980s

But demand for oil drop, oil price drop and OPEC deficit rise, new alternatives
and new sources (oil fields) results in and new industrial restructuring

The largest losers is OPEC itself!
Trade Growth and Structural Change
International Labor Division
Internationalization of production – highly independent and interdependent
production process - 25% of finished manufactured goods made up from
imports
Industrial structure upgrading with manufactured goods increasingly
dominant
The increased interdependence did not result in greater industry
specialization, as conventional theory suggested, but in greater
13
convergence – the trade among LCs and NICs has actually become more
similar, differing only in brand name, quality and reputations.
Regional Patterns of Global Trade
See transparencies
Lecture IIb: Looking for Explanation – Old and New
Theories of International Trade
Old Trade Theory: from Classical to Neoclassical
Theory – the Principle of Comparative Advantage
Basic Questions asked:
Why do countries trade with each other?
Is trade beneficial to all trading parties?
What determines the international pattern of specialization in production
and trade?
From Adam Smith to David Ricardo, John Stuart Mill, Francis Edgeworth,
and Alfred Marshall
Mercantilism: exports exceed import – favorable balance of trade; foreign
rather than domestic trade; manufacture rather than agriculture
Classical Theory:
Fundamental: Free trade – trade that is unencumbered by any form of
governmental intervention – is beneficial to all trading partners. Why is that?
To measure the effect of trade: Labor Theory of Value – all cost can be
reduced ultimately to units of labor, which are in turn directly related to the
price of the trading products
Classical + geometric technique = Neoclassical
14
15
Neoclassical Theory – The Principle of
Comparative Advantage
Basic Rationale: To a householder: never “attempt to make at home what it will
cost him more to make than to buy (Never make thing unless it is cheaper to
make than to buy); The same applies to a country
Absolute Advantage (Adam Smith, interpreted from his works in 1937): – As
long as there is a natural advantage for individual countries, it is advantageous
for them to trade among them, and the trade promotes international division of
labor and specialization of production, and hence maximizes the world total
output and consumption
But, what happen to those countries that have no single absolute advantage
but all absolute disadvantage – no a single industry in which they can excel?
Comparative Advantage (David Ricardo, 40 years later): Trade can indeed
take place advantageously, even if one is better than others in every production,
as long as they differ relatively in their capabilities. A country would not have an
absolute advantage to produce everything, so as a country would not have an
absolute disadvantage of producing everything.
That is to say, the “rich” country’s absolute advantage over the “poor” country in
one product is relatively greater than its absolute advantage in another product.
Similarly, the “poor” has an absolute disadvantage that is relatively less than its
other absolute advantage.
The principle of comparative advantage declares that countries should
specialize in production and export of those things they can make more
efficiently relative to other nations and should import those goods at which
they are relatively less efficient
Simplified assumptions:

No transport cost involved;

No artificial barriers to trade;

Labor is homogeneous and skill labor is a multiple of non-skill labor;

Production technology is identical;

No labor movement
16
Example 1: Absolute Advantage in both Countries – see transparency
Example 2: Absolute Advantage in One Country Only and Comparative Advantage
in the Other – see transparency
Mill’s Law of Reciprocal Demand – An Auction Process settling the real international
exchange rate/price
The Gains from Trade - the First Gains from Trade
If trade is “truly” free, all trading partners will benefit from:

Exchange goods

International specialization of production and division of labor

Maximization of production (total output) and promotion of consumption

Specialization further enhances a country’s initial comparative advantage
Inadequacies of classical and neoclassical theory

Unrealistic assumptions

All factors of production being collapsed into a single factor, labor
Factor Proportions Theory and Inadequacies
Effects of Supply Conditions; Land as a Factor; Labor as a Factor; Enterprise as a
Factor; Capital as a Factor; Effects of Demand Conditions; Cultural Differences;
Domestic Consumption and Exports
Empirical Tests: The Leontief Paradox
17
A New Theory of International Trade and Transactions
(Helpman and Paul Krugman 1985)
Basic Fact: The Market and competition is imperfect, but the emerging and
flourishing MNEs and FDI have completely transformed the world
MNEs responsible major share (up to 60-70% of the total) of world trade;

The relationship between trade and industrial organization has been completely
changed

Increasing mobility of factors of production and firms assets
The Missing Elements of Conventional Theory

Reliance on Country Difference – Both absolute and comparative advantages
emphasis on country difference and on country trade – an “arm’s-length” trade

Intraindustry Trade

Intrafirm Trade

Gains from Trade – Though trade tends to increase the GDP of each
participating country, it can be expected to reduce the income to those of factors
of production that contribute little to its export, while increasing the income of
those that contribute more. But, nowadays it founds that trade has increased the
productivity of all factors of production in trading countries and it has left
everyone better off.
New Assumptions:

Individual firms possess unique competitive advantage

Firm assets are mobile among branches of the enterprise

Enterprises engaged in a lot of sectors/branhes (“multiactivity”) and the
economic functions by branches of a firm are decided in accordance with the
spatial distribution of the firm assets

Most transactions take placed within the same industries and same firms

Trade is not entirely free and market competition is not perfect

….
18
Fundamentals of New Explanation that old Theory
Left out: New Answer to Old question:
Increasing Returns and Overcoming Imperfect competition (Krugman 1990)-
Countries/firms may enter into trade in order to enjoy the opportunities for
increasing returns that specialization makes possible by increasing its
scale economies – agglomeration leads to increasing returns
The pressure to secure market share so as to benefit from increasing
returns explain the proliferation of intra-industries and intra-firms trade – a
two-way trade, due to the market is structurally imperfect.
MNEs thrive on market imperfection – Structural Imperfection which cause
a long-term and institutionalized risk for firms

Government restriction, tax, subsidies, tariff, quota etc

Market and capital market insecurity: uncertain of delivery, volatility of
exchange rate, difficulty for customer checking and evaluation, cost of
negotiation, infringement of intellectual property rights
Specialization on path dependence – history matters
The Gains from Trade again – The Second Gains
from Trade:
Imperfect competition allows the possibility for increasing returns that
offers extra gains over and above those obtainable from conventional trade
based on comparative advantage.
Increasing returns also offer extra gains from trade for those countries
having relative same factor endowments
19

Own Production Effects – increasing returns reduce own cost

Concentration of Production – increasing returns reduce prices worldwide

Rationalization – increasing returns increase productivity and efficiency
worldwide

Diversity – increasing returns increase diversity worldwide
This new theory implies that the world as a whole benefits from trade twice:

Gains from comparative advantage that increases total world production and
consumption – the “arm’s-length” trade

Gains from increasing return resulted in scale economies and increasing
production efficiency – the “two-way” trade
Grand Implications – Toward A Theory of International Transaction

Multi-agents for trade – Market is only one agent, others are firms and its
structure, consumer groups, national government, and supranational
government.

Organizing Role of Firms, its hierarchies and networking

Complex of Trade – Trade includes every aspects of our lives: goods, people,
capital, technology (skills), information (experience/management), knowledge
(property rights), policy/regulations….

Organizing Role of National Government

Organizing Role of Supranational Government – GATT and WTO
Reference:
Chapter 11: Berry B.J.L., Conkling E.C. and Ray D.M. (1997), The Global Economy
in Transition (second edition), Prentice Hall Inc., New Jersey, United States.
20
Lecture IIIa: Trade regimes (WTO), Regionalization
and Global Development: Intervention, Control
and Policy
Trade plays a central role in economic growth, serving as a
means for acquiring necessary factors of production and
technology;
Though trade is essential for development, it poses special
problems for many LDCs. High on the list of problems affecting
national growth and development are physical and political
barriers to trade in addition to unfair international trade terms;
However, all are emulating one another to trade and aim at an
ultimate goal – free trade
Thus, trade policy and intervention promoting or restricting to
trade – trade conflict occurs – trade regimes occurs:
regionalization,
Again, MNEs make all difference – breaking through both
physical and political barriers and demanding WTO
Thus, needs for international cooperation – GATT and WTO overcoming physical cost and political barriers (artificial
obstacles)
21
Trade and Growth
Growth and the Propensity to Trade
Growth through Technology
 The trade effects of technology
 Technology – Invention and Innovation; Invention – new idea and
discovery; Innovation – use of new idea
 Two kinds of innovation – new way (efficiency) and new thing
(complete different new products)
 Technology change every aspects of our life and is the most dynamic
element in today’s world trade picture.
 Creation of technology: Education and R&D, Buy and Theft – Trade

Trade growth and the diffusion of innovation
Trade and Development
Trade problems of LDCs – locked into long-term poverty
Unequal trade terms with industrialized countries
Trade strategies for development

Trade whatever you can and the launch of the industrialization of a country

and then to participate in high level trade and share the benefit of trade
22
Barriers to Trade
Distance

Transfer costs make goods more expensive to importers and less valuable to
exporters – see Figure 12.2

The end result is that transport cost decrease international specialization – USA
produces more and sell less abroad while Canada reduce output though sell
more at home

Bill Gates foresee ahead a world of “friction-free capitalism” in which markets
come close to Adam Smith’s concept of perfect competition and in which the
distance barrier will by and large be removed.

However, there is still other kind of intervention – political interference
23
Political Interference
Incentives for intervention

Incentives for intervention – Why do governments intervene?

Nationalism

Balance of payment – Equal between the total export and import of goods and
services including visible trade and invisible trade

Visible trade – merchandise goods that is physical

Invisible trade –all kinds of services – transportation, tourism, financial service
(banking and insurance), investment service (international transfer of interest,
dividends, profits), and professional service (consultancy), and technological
service. It also includes foreign exchange from gifts, private charities, money
sent by individual expatriates, governmental one-way transactions (government
loans, foreign aid, pension payment), and long-term capital flows (FDI and
mutual fund portfolio investment – making loans to or purchasing stock in
foreign countries).

Nowadays, balance of payment is very hard to measure and tends to not much
important in making national trade policy

Political interference includes trade exhibition fairs, government subsidies, loan
guarantees, tax rebates, and other incentives to exporters
Tariffs (both import and export)

Two main reasons: to earn revenue and to protect domestic producers, especially
industries where the countries is on the early developmental stage – the “socalled” infant industry

see Figure 12.3

Imposition of tariffs has a protection effect, a consumption effect, and an
income-redistribution effect. Tariff is basically a way of taxing foreigner.

Tariff leads to retaliation, hence reduce trade, trade specialization, production
and consumption
24
Quotas – a specific limitation on the quantity of exports or
imports, particularly the latter

Quota system makes domestic plants gain at expense of both domestic
consumers and foreign suppliers. The effects are inflationary for the importing
countries and at the same time they could possess monopoly control of
production, hence the price of that good, in which it holds monopoly

Quota is extremely arbitrary

Quota yields no revenue to government

Quota leads to uneasy feelings and retaliation, because of its inherent unfairness
Other Non-tariff Measures

State exchange control and distribution

State monopolies in specific commodities such as alcoholic beverages, sugar,
tobacco, cocoa, grains and other agricultural products

Special labeling and packaging

Sanitary and safety regulations (Japan and Europe in agricultural prodacts
protection are using this excuse)

Special measures and specifications
25
Effects of Trade on the Factors of Production
Factor Prices and Quantities
Factor Mobility

With today’s globalisation trade, factors of production have increasingly become
mobile but the degree of mobility of different factors are different – capital,
asset, entrepreneurship, technology, labour (unskilled labour), local
culture/tradition/habit having different mobility.

In conventional theory, trade will equalize prices, but the MNEs and FDI may
do the opposite – because of circular and cumulative causes giving rise to
increasing returns
26
Lecture IIIb: Trade regimes (WTO), Regionalization
and Global Development: Intervention, Control
and Policy
International Organization for Trade
Two most extraordinary but seemingly contradicted phenomena: global
agreement and regional economic integration
Bretton Woods Agreement 1944 (still in WWII) made by US, Britain and their
western allies (in New Hampshire) decided to form three institutions:

International Monetary Fund (IMF) is to ensure the convertibility of
currencies…now helping the rich

International Bank for Reconstruction and Development (the World Bank) is to
facilitate the international flows of capital… now mainly helping the poor;

International Trade Organization (ITO) to reduce the barriers to world trade.
ITO died in 1947-48 due to being too ambitious: Although it was ratified by
participating countries (54), but they perceived it as a threat to their sovereignty.
But GATT (General Agreement On Tariffs and Trade) immediately emerged in
1948, which was in about 45 years later, replaced by WTO in 1995.
GATT – General Agreement on Tariffs and Trade
Initial 23 countries reconvened in Geneva to find an alternative way to
bring order to world trade and produce GATT which went effect in 1948. It
committed the participating countries to reduce tariff on 45,000 items and
laid down a set of rules and principles governing trade among the
signatories:
27

Reciprocity: One reduce tariff to others and the respecting side must do the
same.

Non-discrimination: No preferential treatment to each others and all are treated
as the most favoured – known as the Most Favoured Nation rule – China got this
status from USA permanently just in 2000

Transparency: replace non-tariffs with tariffs, which subject to scrutiny and
reduction by further negotiation

Developing countries – special provision for developing countries
Great Success: Membership grew steadily and now covered majority of
trading nations (134 in 1999). After series of “Round” of negotiations, tariff
cut from 40% to 10% in mid 1970s and further cut to an average 5%. Now
tariff rate in DCs is about 5-7% (or less than 10%) and in LDCs about 1520%. However, in this period regional integration aim at protectionism also
grew rapidly and caused growth rate of trade not to be increased
considerably.
Weaknesses: Original design is to reduce tariff and enforce rules for trade
in manufactured goods. It has increasingly become inadequate and
unsuitable for today’s world trade scene, such as the important agricultural
product and internationally tradable services not covered at all by GATT.
28
Thus, the far-reaching Uruguay Round of trade negations resulted in 19861990-1994:

Agricultural Trade: most difficult talks but far-reaching breakthrough – USA
free trade victory

Textiles and clothing: the most nasty conflicts of trade between DLs and LDCs.

Intellectual property: patent and copyright protection, such as computer
software, semiconductor designs, biotechnology, musical recordings, books –
against fierce pirating and counterfeiting activities which cause the loss of
billions of dollars of revenue for holders of intellectual property rights.

Services: the fastest-growing sector in advanced economies, constituting 90% of
jobs and substantial trade volume. Internationally traded services include
banking, insurance and other financial services, tourism, advertising,
architecture and construction engineering, planning, consultancy, transportation.
And telecommunications (now the internet) – will besthe most lucrative business
for trade in the coming decades

Investment: National policy distorted international capital flow and foreign
investor, such as joint-venture rule and limitation of the area to foreign
investment.

Dispute settlement
29
The Uruguay Round failed to reach anything by the deadline in 1990, but
the whole world felt the cost and resumed the talks and finally reached
agreement that was also ratified by all participation countries.
The 2200-pages GATT treaty of Uruguay Round is the broadest, most farreaching trade pact in world history – agricultural breakthrough, two new
agreements on telecom sector and on service sector. But the contents of
the GATT are now far beyond the regulation “Tariff” – thus, a world
supranational organization born - WTO.
WTO - a world supranational organisation, literally for trade, in
fact for almost every thing!

Tariffs: One-third cut on the whole, developed cut by 36% and developing by
24%

Quotas: Illegal and should be eliminated

Health and Safety: Cannot be used to against trading partners, thus it ends the
most pervasive technology used by bureaucrats to exclude a wide range of goods,
from foodstuff to motor cars.

Intellectual property: All signatories must protect patent, copyright, trade
secrets and trademarks and to commit to end the wholesale pirating and
counterfeiting of software and series of products relating to intellectual property
rights.

Local content: prohibits members from requiring a high local content in
products manufactured within their borders.

Landslide effect on world trade:

Europe and Japan – agricultural good, while US manufactured and auto goods;
The rich countries phase out Quotas, while the poor commit to more
transparency;

The pact also calls for free trade in financial services – the Financial Services
agreement (FSA).

The pact also call for opening in telecom, internet markets and audiovisual
product - - the Information Technology Agreement (ITA) and the
Agreement on Basic Telecommunications (ABT)
30
Again, great success: the pact will add US$510 billion into global economy,
of which US gain US$122, Europe US$164, Japan $27, LDCs $116. The
world as a whole shall benefited more.
Controversy: Sovereignty, Environment, Labour, Equality, Sanitary and
safety…
Regional Economic Integration
Why integration?

To achieve growth through the enlargement of the market

To raise standard of living and to reduce regional disparity

To strengthen bargaining power in global polity and economic affairs

To develop cooperative solution for a variety of social and political problems
31
Integration Theory

Integration is a form of selective discrimination because it combines elements of
free trade with greater protection – free trade with members and restrictions on
trade with non-members

Five levels of integration: Figure 12.5

Elements conducive to successful integration: Parallel economies, Proximity,
Contiguous countries within a compact area, Large combines territory with
many small countries, Best customers and suppliers, Major world trader and
high trade barriers;

The “second-best solution” to world trade problems

Trade creation (good) and trade diversion (bad)

Most importantly, benefit from scale economy and “increasing returns” - the
bigger the better; creating new trade and making trade diversion is not
necessarily “bad”

Integration for Development

But one dilemma: less than one-fifth of all LDC trade is with other LDCs, most
trade is DCs with DCs and LDCs with DCs.
Great Success in Europe: The European Union
The Global competitiveness of US High-Tech Industries
Reference:
Chapter 12: Berry B.J.L., Conkling E.C. and Ray D.M. (1997), The Global Economy
in Transition (second edition), Prentice Hall Inc., New Jersey, United States.
32
Lecture IV: China's WTO Accession, State Enterprise
reform, and Spatial Economic Restructuring
Background:
After a 13-year conscientious bid and serious negotiations,
China has at last been able to enter WTO this year,
congratulations! This is a great, in fact the greatest, historical
event for China. Its significance is comparable to, or even
larger than, China's first-attempt of reform and the
implementation of open-door policy launched in 1978. The
fundamental meaning of China's WTO accession is far
beyond "trade" or "market opening/access." It has been
Chinese Premier Zhu Rongji's last-ditch effort to break
through the many formidable impasses and deadlocks he
encountered in pushing his grand reform packages that have
by and large remained unsuccessful so far. That is, China's
WTO accession can be seen as the panacea that Zhu Rongji
or China desperately needs to transform China's whole
economic system in general, and to reform the deadwood
state enterprise sector in particular. In essence, it is about
fundamentally transforming China's existing "socialist"
system and about building-up a newly internationalized
system, harmonizing its rule with "outside" rules or “the
global way”, with the help of foreign or international forces foreign capital, competition, and experiences and networks.
Hence, its implication is far-reaching and goes beyond the
economic, social, political, geographical, and even in the
“rule of law”, personal freedom and human right realms. With
a brief introduction to this general background, this talk will
focus on the interrelationship between China's WTO
Accession and state enterprise reform and their profound
impact on China's spatial economic restructuring, including
the possible rise and fall of China's regional economic
centers, such as Shanghai, Beijing, and even Hong Kong, and
sectoral regionalization.
33
Euphoria of China's WTO Accession:








A long-waited for the door opened, a real
breakthrough
A Win-Win deal for both China and USA; HK
people says a Win-Win-Win deal plus Hong
Kong; Politician says a Win-Win-Win deal for
Zhu Rongji, Jiang Zemin and Bill Clinton
To Chinese: "If we say that Deng Xiaoping
opened China to the world in 1979, we can say
that this time China has entered the world."
To Foreigner: "With Deng's open policy, you can
“see” China, now you can do business in
China"
Entry to the WTO should integrate the mainland
economy into a global capitalist system that
offers both tremendous growth opportunities
and, potentially, ruinous competition.
What we concern and interested:
What this means for us, from American farmers
to the AT&T boss to Chinese farmers to China
Telecom directors?
And particularly to our geographers, what this
means to us spatially - to our places, HK,
Shanghai, Beijing, Guangdong, Northeast, and
Sichuan?
34
1. Theoretical Framework and China’s
Economic Backgrounds:
A. Old&New Trade Theories - The world double/triple
gains/benefits from trade:
Trade is always beneficial to the both sides of the trading parties or
multi-trading participants. The world as whole will benefits from trade
twice/triples:
 Comparative Advantages that maximizes the outputs and
consumption for both or multiple sides of trading countries (Smith 1937;
Ricado 19??) - As long as there is trade, no one lose or every trading
country will be better off; This is called "arm-length trade".
 Increasing Returns embedded in FDI and MNE enhance on
specialization and concentration and increase the trade volume
second time from intra-firms/sectors/industries trade, hence
maximize output/benefits for firms/sectors/industries (Krugman
1990) - trade for the trade sake and every trading party/firm will be
increasingly better off; This is MNE or own trade
 Trade embedded in both MNE and joint-venture corporations
gives rise to opportunities for a relative disadvantage
catching up with an absolute advantage or breakthrough the
dominance and superiority of the absolute advantages (Simon Zhao
20??; Porter 1990) - Japanese car industry and China's WTO
accession and market opening.
B. Trade is not mere "trade" or more precisely "trading of
goods" - Nowadays Trade becomes very comprehensive and
complicate – A world of “no boundaries” for the
manufacturing, service and finance sectors.
In fact, today’s world includes everything, particular services. Global
Trade organization is a supranational and suprastructural organization.
In the face of globalization era, IT and internet and time-space
transcending to conversion era, every thing can be traded and trade
instantly - trade finance, trade service, trade information, trade
technology, trade intellectual property, etc. Trading in this area
35
becomes more important, crucial and more profound in this postmodernism era, in which huge amount of financial capital flows
instantly transfer around the world and easily leave a national economy
in ruins. Facing this new or super trade form, the “border” and
sovereignty of every nation is increasing under threat and hence every
sovereignty nation seeks a global supranational organizational structure
that can govern this modern, new and super trade form. Thus, global
trade organization, namely WTO, is increasingly become such a
supranational organization. There are three major and strategic
multilateral agreements negotiated since the Uruguay Round –

the Information Technology Agreement (ITA),

the Agreement on Basic Telecommunications (ABT), and

the Financial Services agreement (FSA).
But, the power of these three agreements is just calling for free trade
and open market in these three areas, without a concrete measure and
provision for enforcing these agreements.

In these three strategic areas - IT, BT, and FS, and particular the service
sector, Mainland China is one of the largest but the most “closed”
markets to which foreign companies have been for years trying to gain
the access but failed so far.
China also renowned with bad practice in intellectual property
protection, counterfeiting and piracy of foreign goods and technology.
That is why Seattle Round of WTO Negotiation is very important and
that is why US and the whole world are so eager to bring China to this
“world trade club”.
C. China's bid for WTO accession is not merely for trade. In
essence, it is about fundamentally transforming China's
existing "socialist" market system and about integrating
China into the global system, harmonizing its rule with
"outside" rule, with the helps of foreign or international forces
- foreign capital, competition, and experiences and networks,
as well as market accountability.
36
It has been Chinese Premier Zhu Rongji's last-ditch effort to break
through the many formidable impasses and deadlocks he encountered
in pushing his grand reform packages that have by and large remained
unsuccessful so far. That is, China's WTO accession can be seen as the
panacea that Zhu Rongji or China desperately needs to transform
China's whole economic system in general, and to reform the deadwood
and “incurable” state enterprise sector in particular.
Let’s take a look at the basic facts and background:
 Consecutively two years of unprecedented deflationary spiral,
with severe lack of demand in consumption and huge amount
of inventory;
 A substantial drop in both foreign trade and foreign
investment, particular FDI: 20% drop in August 2000, but now
there is a sign of recovering - year-on-year 6.2% decline by
September 2000. By 1998 China accumulate foreign
investment worth US$300billion, with amount of US$40 billion
each year with this year 30 billion.
 Huge non-performing loan and bad loan in state-own
enterprise (SOE) sector: Current total SOE fix assets
amounted 9600 billion yuan, but dead/bad loan in the Central
Bank amounted to 5800 billion yuan, accounts for about 60%
debt/equity ratio. Totaling 29,000 SOEs has current capital
less than 3000 billion yuan; Many many SOEs and banks
virtually bankrupted.
 Chronically and extremely poor efficiency in SOEs - more
than 50%, some says 70% firms lost-making, compounded
with massive redundancy - 10% unemployment rate and
massive off-duty workers - about 50% urban workers and
cadres under off-duty threat;
 Extremely poor social security and welfare systems
 GDP stagnant around 7% (7.4% in the first 3 quarters) China's 7% growth means no or low growth and normally 8%
to 9% regarded as OK - catching up employment needs and
social security needs.
 Currency under devaluation pressure
 All Zhu Rongji's grand reform packages - reforms in civil
servant or government sector, financial sector (banking,
37
insurance, security), food marketing sector, urban housing
sector, and SOE sector - by and large remained unsuccessful
(Only one thing Zhu has done so far can be regarded as
successful is his anti-smuggling South China tour in early
2000)
 But Chinese citizens holds 6000 billion yuan deposit saving,
this accounts for more than 60% of GDP in China, and 1000
billion cash in hands;
 But how China could solve these “crisis” with the emergence of
the WTO accession?
D. Integration Theory - Increasing returns by specialization,
agglomeration and spatial economic grouping/restructuring
2. Terms of China's WTO Accession:
China's offers - Nov terms:
 Overall tariffs: Significant cuts in tariffs that will be completed
by January 2004. Overall average for agricultural products will
be 17 per cent and for US priority products 14.5 per cent.
China will make significant liberalization on importing
agricultural products, especially wheat, corn, cotton and
other bulk commodities. According to the bilateral
agriculture-trade agreement, China would eliminate all
quantitative restrictions on agricultural bulk commodities.
 For industrial products, tariffs cut to an average of 9.4 per
cent overall and 7.1 per cent on US priority products. It will
cut tariffs on imported cars from the current 80-100 per cent
to 25 per cent by 2006 and allows foreign financial institutions
to finance the purchase of cars by Chinese citizens.
38
 China will eliminate non-tariff quotas within five years, some
in two to three years.
 It will allow 49 per cent foreign investment in
telecommunications firms from the date of entry, rising to 50
per cent in two years, and will allow foreign banks to conduct
local currency business with domestic companies two years
after accession and with domestic individuals five years after.
Beijing also agreed to lift the ban on foreign investment in
Internet related businesses.
 These are substantial concessions and, if fully implemented,
will give foreign firms far greater access to the China market
than they currently enjoy.
USA offers:
In return, Beijing received a concession on textiles, with
Washington backing down from its demand that quotas on
China's exports remain until 2010. Instead they will end in 2005,
but with an "anti-import surge" mechanism remaining for a
further four years, to prevent a flood of exports. USA have
already granted the “Permanent Normal Trade Relations” (PNTR)
status to China in late 2000, which is formally known as “Most
Favorable Nation” (MFN) status.
Summary (based on both Nov. and the April
Version) (also See Appendix I)
 Market Access and Tariff Reductions: Overall 17% from
current 22%; farm goods 17% and 14.5% to US product;
Industrial goods tariffs cut to an average of 9.4 per cent
overall and 7.1 per cent on US priority products; and phaseout most Tariff Rate Quota (TRQ) system for bulk
commodities by 2005/6;
 Bindings for all tariffs and no export subsidies;
39
 Decentralization of Trade Right and Distribution (wholesaling,
retailing, to both private sector and foreign firms;
 Opening up the strategic and lucrative sectors and market for
foreign investor and investment with 50-50 joint venture and
foreign majority control (some up to 100% ownership - hotel
or reinsurance): telecommunications & internet, banking,
insurance, securities, travel & tourism, and professional
service (legal, accountancy, taxation, management
consultancy, architecture, engineering, urban planning,
medical &dental, I.T.-related services)
 Opening up audiovisual and intellectual property market to
foreign investment and investor who can build and run video
and sound recordings shop and cinemas with joint or own
ventures.
 Binding China to comply with all WTO rules and particular the
three agreements (ITA, ABT and FSA); Guarantee private
participation; impose SOE reform and act on a commercial
basis without any privilege power

In short: China's WTO accession not only allows
American/foreign goods and capital enter China, but
American/foreigner, American/foreigner interest/firms into
China, and into the most strategic and lucrative sectors,
where they can open or build up their own business in an
environment similar to their home.
4. China's WTO Accession's Impact on Economic
Sectors - Industries Hit Hardest and China's Selfdefense
Mainland industries that have been cushioned from international
competition are expected to be hit hardest. Agriculture,
automobiles, banking, telecommunications, insurance and
distribution would experience the greatest competitive pressure,
40
1) Agriculture:
Analyst at China International Capital Corp (CICC) Shawn Xu
Xiaonian estimated the value of the country's agricultural imports
would be double that of last year under the Sino-US Agricultural
Agreements signed in April. He said that, even if the value of grain
imports increased threefold after the mainland's entry into the WTO,
the country's grain self-sufficiency ratio would drop only from 97 per
cent to 92 per cent.
The Chinese government controls the rights of trade and distribution in
key products such as wheat, corn, rice, cotton, surgar, and chemical
fertilizers. All these goods are under TRQ control and China Food Corp.
is the sole agent to trade and distribution
2) Car industry:
High tariffs and government protection have made car-production one
of the Mainland's least efficient industries. China has more than 120 car
factories could be facing closure because of the Mainland's entry into
the World Trade Organization.
China has 120 car factories and produced 1.6 million cars annually , less
than any of the world's top 10 car-makers. Toyota, Japan's largest carmaker and the world's third-biggest, made 5.3 million vehicles last year.
In China only three automakers (Shanghai auto, No.1 auto and No.2
auto) produce more that 0.1 million, most of them around 1000; last
year three factories produce nothing and 30 factories produce 100 cars
The mainland's 10 biggest plants make more than 90 per cent of
national output. Beijing wants to centralize production in these 10 but
cannot because of the protection of local governments and special
interests which see cars as a pillar industry.
48 per cent lost money last year, up from 42.3 per cent in 1997. Total
losses rose 175 per cent to 2.2 billion yuan (about HK$2.05 billion) and
profits fell 55.4 per cent to 3.44 billion yuan. Inventory rose 15.7 per
cent to a record of 114,000 vehicles.
41
WTO terms: It will cut tariffs on imported cars from the current 80-100
per cent to 25 per cent by 2006 and allow foreign financial institutions
to finance the purchase of cars.
The difference of price between the Mainland and foreign cars in same
rank is about 50%, which means to buy a similar model of car in the
Mainland, a consumer need to pay double the price as purchasing the
same car in the overseas market
But:
(1) China import 40,000 vehicles last year, occupying 2.4% market, but
smuggled 100,000-150,000 cars annually (10% output/market). With 10
to 15% growth quota and 5 to 10% reduction in tariffs annually in
opening its market for about 7 years, The number of foreign import
cars are less than or may just amounted to the smuggling cars.
(2) China hold firmly the rights of car trading (right of import and
export - not open at all), foreign car cannot “flooded” into China
markets
(3) It is still the best way for foreign car makers to enter mainland
market through joint-venture in car industry with FID or under the
Debt-to-Share scheme. This will be a win-win deal for the Chinese and
the foreign side.
(4) The Chinese civilian purchasing power is still too weak for to the
purchase and usage of the private CAR, which is currently most luxury
consumer goods in China – The market is not as large as others thought.
3) Similar to cars, China hold the rights of trade and distribution
in petroleum and petrochemical goods; foreign petroleum is much
cheaper than in China e.g. cost for one barrel oil in China is amounted
to US$13.5 and in USA, US$8.8. China should import more foreign
petroleum, which is much cheaper.
4) Telecommunications and internet (lucrative
market):
After China’s ascension to the WTO, foreign investors could take
controlling stakes in the Mainland's telecommunications sector and also
open the door for investments in the Internet sector. The mainland is to
allow up to 50 per cent foreign ownership and control in its telecom and
Internet markets sooner than previously agreed.
42
The timetable had called for 25 per cent maximum foreign ownership in
value-added services such as Internet-related services by next year in
Shanghai, Beijing and Guangzhou, expanded to 51 per cent of
nationwide services by 2004.
As for Mobile services, 25 per cent of foreign ownership would be
allowed in the three areas by 2001, extending to 49 per cent of
nationwide services by 2005.
As for Fixed-line businesses in the three key areas, 25 per cent foreign
ownership by 2002 would be allowed, growing to 49 per cent of
nationwide networks by 2006.
During talks in 2000, US negotiators reportedly insisted on 51 per cent
of foreign ownership rights in the mainland's telecom sector but Beijing
refused to go beyond the allowance of minority holdings for foreign
investors.
But:
All telecom/internet business cannot be sole foreign own. Foreign
control power up to 49% in 2 years and to 50% later. It will be a 50-50
joint-venture business in the telecommunication sector.
5) Banking:
Although foreign banks are allowed to conduct local currency business
with domestic companies two years after accession and with domestic
individuals five years after, Beijing may impose restrictions on the
number of branches a foreign bank can operate in an individual
province or city. "If a foreign bank is allowed to have just one branch in
a city like Beijing, how can it compete with China Construction Bank,
for example?"
All financial and service firms cannot be sole foreign owned. Foreign
control stakes in banks shall be up to 33% in 3 years and to 49% 3 year
later.
43
6) Insurance, Financial and Professional Services:
The provision of insurance, financial and professional sector is very
weak in China. The foreign entries in such industries provide massive
room for development in these areas. In the WTO agreement, foreign
entry to this sector shall be a 50-50 joint-venture business and it would
be again operate under a “one-city-one-office basis.
In summary:




China has largely opened its goods market but
less openness or even no openness in the
service and distribution market for goods- the
right of trade and distribution;
China hold the controlling stake in most
business and investment; Compared to April
version, China offers more tariffs cut in return
of more control or US gets more market
opening but less control power in businesses
and joint ventures
50-50 Joint-venture is the most likely form and
the best form for foreign business and
investors to march in the vast Mainland markets.
And this is a win-win deal for all parties
according to economic and trade theories - FDI
and MNE, rather than goods itself, are the best
way to export one’s goods to other markets.
No foreign goods shall flood in, but there a
chance of foreign capital buyout
44
5. Package of Further SOE Reforms
Background: Existing China's Stock Market establishment and Sharefloating Firms Development - An act of Nationalization, rather than
privatization
Reform Package:
 Privatization scheme - withdraw the state majority control from
51% share-holding to 30% (legal shares) and the “grand” sell-out the
remaining shares to the private markets, including institutional and
private investors; Listing of the large and strategic companies, such
as China Unicom, China petroleum, China Natural Gas etc in foreign
markets with the encouragement of substantial foreign ownership
 "Hold the large and release the small" scheme - State owns,
controls and operates 1000 the country's largest and strategic
SOEs/companies and let others SOEs go, and therefore the shares of
these SOEs are available to the markets for both foreign and
domestic investors.
 Debt-share Swapping scheme (or called Debt-to-equity
conversions scheme) - China's largest SOEs with huge debt and
negative assets can convert their debts to shares which can be bought
or owned by both domestic and foreign investors (selling them into
markets). Along with this scheme, the Ministry of Finance is
considering a massive sell-out of SOE assets which is largely in debt
(5800 billion yuan out of 9600 billion yuan or 60% of SOE assets are
debts) for recovery of the fiscal capability of the central government.
 Cases: H share Anshan Iron and Steel Complex, one of the
Mainland's largest state-owned steel firms, has signed a 6.85 billion
yuan (about HK$6.39 billion) debt-for-equity swap agreement with
creditors. Xinhua news agency said Anshan's swap agreement was
the largest so far signed between a state-owned enterprise (SOE) and
the asset-management corporations Beijing set up this year to
liquidate non-performing loans at state-run commercial banks.
Creditors included the China Huarong Asset Management
45
Corporation, China Development Bank, China Cinda Asset
Management Corporation and the China Oriental Asset
Management Corporation. China's many large SOEs, for example,
publicly listed in HK H-share companies Jilin Chemical (China’s
largest Chemical company), Jinwei Textile and Qinling Motor are
under this scheme,
 Share-option scheme - the payment shares, as a bonus, to
successful SOE senior managers. This is performance-linked bonus
scheme
 Private Company Listed Scheme - Allowing private companies
publicly listed in stock market and encouraging private enterprise
development and protecting their interest. Such private assets worth
about 7000 billion (70% GDP) yuan
Implications:
 Grand and massive sell-out of assets of SOE, but who
bought it and where was the money came from?
 For big caps: conditional sell-out – that is, no foreign
majority control in the large or the largest strategic
industries or in the manufacturing sector. Foreign
investor, particular big players, must become jointventure in order to tap mainland market in a massive
way.
 For small caps: unconditional sell out - SOEs can be
sell-out to both private and foreign investors. This
means foreign investors can solely own their
business in a wide range of manufacturing sectors,
and in some in agricultural sectors (?)
 Joint-venture with FDI and MNEs is still best way to
go to China. As long as in this way, China's industry
has the chance to grow - that is the relative
disadvantage can catch up the absolute advantage
where Joint-venture of FDI and MNEs hold.
46
6. WTO Pact and SOE Reform package Combined
- Spatial Impacts (WTO goods+ services and SOE
manufacturing):
Grand Opening China's manufacturing and
service sector, also including agricultural sector,
not only the market but in investment:
Massive Chinese and foreign encounter in almost all fronts; agriculture,
manufactury, service, hi-tech etc. That is, the fundamental meaning of
China's WTO accession is the last-ditch effort of the Chinese Premier,
Zhu Rongji, to break through the many formidable impasses and
deadlocks he encountered in pushing his grand reform packages that
have by and large remained unsuccessful so far, with the helps of
foreign or international forces - foreign capital, competition, and
experiences and networks.
What will happen from now on, in both short and long turns? Along
with the big surge of trade volume, at least three waves which are
mutually inter-related or cause-and-effected, can be foreseeable in neat
future:
A wave of deals/business/investment in manufacturing,
telecommunication & internet, IT sectors will first emerge, in
which corporate activities (enterprise buy and sell, mergers and
acquisitions) will be very active. Along with this wave, enterprise
listing/floating will boom. Many big players as well as small players,
both private and foreigner, queue to shoot as playing field levels out.
This is particularly attractive for big foreign caps aiming at tapping the
mainland market in the largest and most strategic industries, such as in
iron and steel, petroleum, chemical, cars, telecommunication and
internet industries through joint-venture and debt-to-share schemes.
This wave is particular good for China's Northeast region, where is
dominated by heavy industries, and many urban manufacturing centers.
In this wave, American, Japanese and European firms are relatively the
major actors. The availability of jobs shall come down and moving up,
but shall be dominated by “moving up” .
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A wave of deals/business/investment in financial and service
sector will unprecedentedly emerge, following the first wave. Many
financial institutions, both foreign and domestic (as required in 50-50
joint venture rule), such as banks, investment and development banks,
stock and equity brokers, insurance companies, securities firms, will be
spring out. Immediately following this outburst is another
unprecedented boom of professional services: legal, accountancy,
taxation, management consultancy, architecture, engineering, urban
planning, medical & dental, computer-related services, environmental
services, and travel & tourism. In this boom Hong Kong and America
are relatively the active players. Huge amount of job opportunities will
be created.
A wave of new regulatory rules/laws/policy and vast information
and innovations will subsequently emerge, in which Beijing is
the absolutely major or even sole player. A new round of licensing
and franchising, redistributing/reallocating TRQs (ensuring private
and foreign firms participation), decentralizing trading rights and right
of distribution, is intensively encountered by government, both central
and local, particularly ministerial (China's industries are still under
ministerial management). Establishment of new governing bodies, both
official and sectoral, and of new rules/laws and new policies governing
all these new activities in trade, manufacturing, and service sectors is
urgently needed. Sectoral and civil management organizations handling
industrial disputes and civilian complaints, both international and local,
are also needed accordingly. Along with this wave of regulatory
measures establishments, vast information and innovation, both
regulatory and business, are induced and float around China major
cities, particular Beijing and Hong Kong. Many jobs will be created.
48
So, what is the spatial impact of all these three
wave? Which place is winner or loser, comparable
to their gain and loss, and in what areas?
Overall Outcomes:

The largest is the best and The worst is the best - Large
SOEs bailed out by foreign capital, and agriculture/husbandry
also have chance to upgrade their efficiency and productivity
by foreign participation and competition.

Hong Kong, Beijing, Northeastern and Western regions are
the relative winners while Shanghai and East region (Jiangsu,
Zhejiang) are the relative loser;

Hong Kong will maintain and even advance its dominance in
financial services, trade, transportation (port and airport), IT,
hi-tech development, tourism and a service center as a whole;
Hong Kong will grow into the world’s third largest
international financial center, just right next to New York and
London (Tokyo is now the third largest financial center but
not an “international” one)

Beijing will overtake Shanghai and emerge as China's
Financial Center, economic center, IT and Hi-tech industrial
base – Beijing would still maintains to be China's No. 1
political and economic center, and will emergence as the
No.1 financial and hi-tech center as well;

Shanghai benefits greatly from textile production and export,
high value-added and large-scale manufacturing, such as car
and aerospace industries. Thus, Shanghai will China's
manufacturing center. But, apart from those advantages it
holds, Shanghai is an overall loser. It is not only because the
manufacturing sector is a loser generally in this WTO deal,
but also because Shanghai loses its position as a financial
and service center to Beijing, and it suffers from lack of
49
transportation, IT and telecommunication and hi-tech
development - the most strategic and lucrative sectors for the
new millennium.

The outlook of WTO deal for Guangdong (GD) is mixed, but
GD is a relative winner, comparable to other provinces.
Why?
Spatial Economic Structure restructuring: Heavy
Industry and possible agriculture are winner and manufacture is definitely
the loser in this deal - The largest and worst SOEs will have a chance to be
bailed out by foreign capital; while agriculture/husbandry also have chance to
upgrade their efficiency and productivity to face foreign participation and
competition.




Northeast – with a heavy industry like the South Korean
development model and agriculture base: H share Anshan Iron and
Steel Complex and Jilin Chemical, China’s largest Iron and Steel
and Chemical producers respectively, have completed the Debt-toequity scheme, and therefore, could maintain as a competable force
facing foreign competition.
South (HK + Guangdong): Financial/Service, trade, IT and Hi-tech
development, and low & high value added manufacturing;
West (Sichun + Xinjiang) Agriculture, husbandry and materials and
tourism
East (Jiangsu, Shanghai Zhejiang) low and high value-added
manufactory, machinery, textiles
Shanghai has completely sidelined in this surge of financial and service
development. No doubt, most foreign and domestic big players will set
their headquarters first in Hong Kong and second in Beijing. Now a
sudden outburst/emerge and flourishing of Beijing Financial Street and
the 10-year bleak of Pu Dong, so called China's No 1 financial center are
the best evidence. In Beijing's Financial Street, located both the
headquarters of Chinese and foreign banks, the State Stock and
Security Commission - China's governing body for company's
50
floating/listing, for stock exchange and for financial regulation, China's
first investment bank - China International Capital Corp (responsible
for corporate listing, mergers and acquisitions), and China's most
largest firm in the management of shares - Everbright Security and
many financial institutions are also flourishing in. Beijing is also the
home for the most headquarters of Red-chips and H-share companies
(China's largest companies listed in HK; they are all subsidies of or
affiliations to the State Council and various ministries). Beijing is also
the center for the grandfathering for all WTO term implementation and,
in fact, all business activities. This is the result of the peculiarity of
Chinese economic system - sectoral/ministerial management. Hong
Kong dominates in its enriched international, trading and financing
information and Beijing national and regulatory. Both are financial
center but at different levels - international and national. It seems
Shanghai is being “casted out” in this context.
Precondition of IT and Hi-tech industrial Development:
Excellent telecommunication infrastructure, competitive economic
system (free trade and stable currency), rule of law and intellectual
property right protection, highly educated people who renowned for
scientific innovation and business entrepreneurship.
Many Hi-tech directors, including Microsoft, Intel, Yahoo, AT&T etc
said Hong Kong has every ingredient for IT and hi-tech development.
Hong Kong plus Shenzhen will be China's major IT and hi-tech center.
Beijing shall be in the second place. Shanghai again is left behind
because of its disadvantageous position it is in and the lack of
ingredients for IT and Hi-tech development.
Shanghai will also suffer because it shall became less influential in
China's foreign trade position as a result of its reduced volume of
foreign trade and its lack of natural conditions for container port
development. Guangdong now accounts 40% of China foreign trade
and Hong Kong's container port and Shenzhen's Yantian port are and
will be the largest port in the world and in China. In addition, Shanghai
suffers from the unprecedented vicious circle of real estate – the
financial development in the past decade, which has severely
undermined both the municipal government and the commercial fiscal
ability, and the city’s financial vitality (its annual construction volume
of office buildings for once was equal to the same volume for ten year in
51
Hong Kong), and its total number of office space constructed is more
than HK, in just in a 8 year construction spree. But the vacancy rate in
Shanghai is about 70% in office building and 50% in residential
buildings – the world largest real estate bubble). Shanghai also suffers
from the long-term strict central control, which so far has not relaxed
much. To the worst, Shanghai has profoundly suffered from its unique
or peculiar “Shanghainese Culture”
Guangdong (GD) is one step ahead for capitalism and the WTO
entry, with least SOEs and most developed market system – widely
practices privatization well ahead the central reform plan. GD occupies
40% total China foreign trade with 4 major categories: machinery,
electronics, textile/garments/toys and watch/clocks/small metal tools ,
with the first two accounts 50% and the last two 50% of the total trade
volume. The category of Machinery manufacturing shall suffers after
China’s entry to the WTO; the category of electronics neutral or slightly
positive (GD electronics is very competitive and export around the
world, particular developing countries); the category of textile &
garments & toys shall be in a very positive position (as now it suffer
from both mainland central quota auctioning system, which means 10%
increase in cost, and quota restriction from other countries; the category
of watch/clock and Small metal/tools shall perform neutral or slightly
positive. Overall, the entry to the WTO helps trade, which in turn helps
GD. GD has also benefit substantially from its superiority in overall
infrastructure in general and telecommunication structure in particular.
Just recently, the central government designated GD as China’s IT and
telecom industrial center and Shenzhen as a hi-tech center and high
valued added manufacturing center, in which a “China hi-tech fair”
held in Shenzhen annually. Hence, in a longer run, GD will be again one
step ahead to meet the challenge of WTO and grow into China’s major
trade and IT center.
Appendix I Ten Market Breakthrough for China with China's WTO Accession
Nov 17,1999 - 13:50:44 HKT
Accession to the WTO means China will open its various sectors for foreign
participation. It is expected that China will soon:
1. Reduce its average tariff on foreign goods to 17% from 22.1%.
52
2. Open the market for agricultural products including wheat, rice and
cotton;
3. Ban its dumping of goods to other foreign countries.
4. Open its retail market and allow US companies to have more distribution
rights and after-sales services.
5. Open the professional services market covering the legal, accounting and
medical sectors.
6. Open its market for foreign films. The number of imported foreign films
will be doubled to at least 20 every year.
7. Open its automobile market. Tariffs for automobiles will be reduced
yearly.
8. Open its telecommunications industry. Two years after China has entered
the WTO, foreign investors can invest in the Internet market.
9. Open its banking industry. Two years after the WTO entry, foreign banks
can operate RMB business for mainland enterprises; and
10.Open its securities industry. Foreign financial companies can hold up to a
33% stake in fund management corporations.
Spot the Difference - the Deals between April and Nov. versions (see transparency)
Appendix II Sino-USA Economic Relation and
WTO Trade Impact:
1) China's trade 60% processing trade and 40% ordinary trade;
China-US trade US$60 billion with 600million surplus; China is US the 4th trade
partner and US is China the 2nd trade partner. China is No2 FDI recipient country
next to US and US is the 2nd largest FDI investor next to HK. Mainland China
occupies 7% US commodity market, plus Taiwan and HK 12% of the market.
Currently about 200 thousand jobs and 18 billion export in US depends on
Mainland China trade, according to the US Chamber of Commerce.
2) According to a recent report of ITC (International Trade Commission), the
Impact of China's Accession to WTO to both parties:
GDP Growth
To China
4.1%
To USA
0.05%
To Hong Kong
about 10%
Export Growth
12.2%
10%
about 10%
53
To Hong Kong
Very positive for
HK's service export
to mainland
overall 10% growth
at least
Import from
USA/China
14.3%
7%
3) Large trade deficit of USA to China is not a problem for America, in stead is a advantage for
The peculiarity of Sino-US trade:
Re-export trade increases value 30% to 40%
US$3 out to China > 2 > 3 > 10 back to USA
USA MNE trade and large sell to China by this firms
FID and MNEs prevailed
Reference:
Zhao, X.B., S.P. Tong, and J.M. Qiao (1999) “China's WTO Accession, State Enterprise
reform, and Spatial Economic Restructuring" paper presented in the Colloquium Series of
Geography Department, Univ. of Washington, USA, under review by World
Development.
Zhao, X.B. (2000) “Spatial restructuring of financial centers in the region of mainland
and Hong Kong in the face of China’s WTO accession: a theoretical framework of
geography of finance perspective” paper presented in the 29th International Geographical
Congress, Seoul, Korea, under review by Economic Geography.
54
Lecture V: Geography of Money and Finance – An
Overview and Introduction
The Emergence of An Entire New Sub-discipline
of Economics and Geography:
August Losch (1939 and 1954) The Economics of Location
Richardson (1972, 1973) attributed the neglect of money in regional economics
to the fact that regional economists borrowed too readily from neoclassical
growth theory
Gunnar Myrdal (1957) directed attention to the question of regional financial
flows in his theory of cumulative, uneven regional development
Kerr’s (1965) empirical paper on the geography of finance and the rise and
decline of financial centers in Canada was alone
Even in most 1980s, the “geography of money” remained an underdeveloped
subject. However, since beginning of 1990s, both geographers and regional
economists have begun to remedy that neglect.
In economics, regional economists focused on topics of regional interest rate,
inter-regional fund flow and regional credit availability, while economist made
significant advances in theorising the geographical structure and spatial evolution
of financial systems. One strand of this is the geography of banking and credit
allocation and another is the growth of, and competition between, financial
centers.
In geography, the recent years in 1990s have seen increasing recognition of the
theoretical and empirical importance of finance and money for understanding the
forces shaping the economic landscape. The general inquiries of geography of
money and finance are:

Key role of finance in David Harvey’s Marxist theorisation of the uneven
development and crisis-prone tendencies of capitalist space economy;

Spatial organisation and operation of particular financial institutions, service
and markets, such as banking, venture capitalism, stock markets and pension
funds;
55

Economic, political and social dynamics of the world’s major international
financial centers, such as London, New York and Tokyo and off-shore centers;

Links between regional flows and regional industrial organization and
economic development
Now, in late 1990s, it seems valid to argue that the “geography of money/finance”
is firmly established as a new subdiscipline, or called the “end of the beginning”
of the development of the subdiscipline
Why Geography ? - Landscapes of Money and
Finance
Locational Structure of the Financial System
Institutional Geography of the Financial System – interlocking locational structure,
from the local, regional, national, international to the global
Financial System are also Regulatory Space (US dollar-based Bretton Woods
System in 1945-73 – currency boards; off-shore centers such as Bahamas, Hong
Kong and Singapore)
Public Financial Space of the State
The four interrelated geographies of the financial system shape the flows of
money across space
The Background and Dynamics of the Change
Three intersecting and mutaully reforcing processes of change, namely
deregulation, technological innovation and globalization
56
Deregulation

In the year of 1973 saw the collapse and abandonment of the post-war
Bretton Woods System of pegged exchange rates, dollar convertibility
and capital controls.

During the course of the 1980s and 1990s, a tidal wave of deregulation
(re-regulation) swept across the globe, beginning in the Unite State and
the UK but quickly spreading to other developed and developing
countries.

A process of “competitive deregulation” in a “race to the bottom” to
free money and finance from regulatory structure.

Restrictions on capital movements were relaxed or abolished; stock
market were deregulated; financial market and product boundaries were
dismantled; control on the operation of banks and other financial
institutions were removed; and large sections of state-owned activities
were sold off /privatized.
Technological Innovation

A historic process of TI has been transforming money and capital
markets – cashless society, electronic or “virtual” money combined
with sophisticated telecommunication networks – make every
transaction and transfer electronically, instantly, globally, and in
massive scale

Money has always been mobile and now it is truly hypermobile!
Globalization

Globalization refers to the increasing integration, hybridization,
convergence and stretching of economic relation across space.
Rendered by the force of globalization, the world has now increasingly
become “homeless”, “seamless”, and “stateless”. It is particularly in
financial sector – deregulation, technological innovation and
globalization makes the financial world truly “stateless” and “boundaryless”.

Thus, it is argued by O’Brien (1992), the resultant effect is the “end of
geography” as far as monetary relationship and transactions are
concerned.

As O’Brien put it: “The end of geography….” See transparency
57

However, opposite direction is also evident in this IT and globalization
age – centralization and concentration forces, paralleling the forces of
decentralization and dispersal, are equally powerful and sometime
override the decentralization force.

Nowadays, under deregulation, IT innovation, and globalization,
financial market have become increasingly volatile and crisis-prone, and
individual financial markets have increasingly become geographically
unstable.

The Dynamics and Global Changes of Financial Landscape – See Table
1
What we want to learn from the Geography of Money and Finance Focuses of the book
Ch2: Stages of Banking development
Ch5: The Development of Financial Center – Geography of Finance
Ch8: Venture Capital – Financing entrepreneurship
Ch9: Corporate Finance
Ch12: Pension Fund Capitalism – retreat of the state
Ch6&Ch11: Hypermobility of capital and Crisis of Territorial Control
Reference:
Ch1: Martin R. (eds) (1999), Money and the Space Economy, Wiley, England.
Above Ch.s: Martin R. (eds) (1999), Money and the Space Economy, Wiley,
England.
58