Study Guide 7 International Trade and Exchange Rate Policy There are 3 main sources for this material: Naughton, Chapter 16, Lecture notes on trade and exchange rate policy, and Anderson’s paper on “Export Processing”. 1. Naughton notes that trade reform was a great example of China’s step by step, gradual, “incremental”, sequential reform strategy. In the planning period, trade was considered a necessary evil. Oil was exported to earn foreign exchange used to purchase inputs not available in China. 2. As China opened trade, it insulated its domestic economy from sudden shocks using a “double air lock” system. Describe the two components of this air lock. 3. Discuss the use of SEZ to develop an export processing sector. Note the lack of a direct linkage of these SEZs to the rest of the domestic economy. (“One country – Two Systems”). 4. At the beginning of the reforms (1978) was the RMB overvalued or undervalued? What does this mean in terms of the prices of Chinese exports? 5. Describe the use of Foreign Trade Companies (FTCs) during the opening of trade. 6. Describe the import tariffs (see lecture notes) during the reform period. Why were they raised at the beginning of the reforms? Use the term “tariffication” in your description of tariff policy. 7. Describe the role played by foreign invested enterprises (FIEs) in the growth of export processing. Describe the trends behind the data in Figure 16.2. 8. Describe the types of products exported by China during the early phases of trade reform. Describe how this changed over time. Are these changes consistent with specialization according to comparative advantage? In what way(s) has China’s revealed (as revealed by exports) comparative advantage shifted over the course of reforms? 9. According to Anderson, China’s statistical export growth overstates the importance of the export sector to China’s economy. Briefly summarize Anderson’s issue with the data, how he goes about correcting it, and what he concludes. 10. Over the last 10 the following trends are related. Describe how these trends are connected. How would these trends be affected if China allowed its currency to appreciate? a. Undervalued RMB b. Growing trade surplus c. Accumulation of Foreign Reserves d. Rapid growth of the Chinese money supply 11. Read the NYT article describing the discussion between the Chinese Central Bank and the Chinese ministry of commerce concerning exchange rate policy. Note the relationship between this discussion and your answer to #10 above.