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Japanese and US Trade with China:

A Comparative Analysis
K. C. Fung and Hitomi Iizaka*
Abstract
The paper provides a simple comparative analysis of Japanese and US trade with China. In recent years,
Japanese exports to China had been growing faster than US exports, but Japanese imports from China had
been growing more slowly. A large amount of US and Japanese exports were rst shipped to Hong Kong,
and then re-exported to China. In 1994, Japans largest export item to China was general machinery, while
US largest export item to China was transportation equipment. According to the rivalry index constructed
in the paper, competition in 1994 between US and Japanese rms was most intense in the chemical goods
sector.
1. Introduction
In this paper, we examine the economic relationship between the USA and Japan in
the vast and growing market of China. China is important to both the USA and Japan
because China has the most dynamic economy in the world today. Despite periods of
inations and contractions, real GDP in China has grown at almost 10% annually for
the period 197992. For the provinces by Chinas coast, from Guangdong through
Fujian, Jiangsu, Zheejiang to Shandong up north, the annual growth rate has on
average been over 12% for the same period. Based on calculations using purchasing
power parity exchange rates, the IMF (1993) estimated that Chinas GDP is already
the third largest in the world, behind only the USA and Japan. This dramatic economic
performance makes China an exciting market for American and Japanese businesses.
1
To the USA, the Chinese market is one that is seen as critical. The Clinton Admin-
istration views its trade policy as part of an overall economic strategy to create and
maintain high-tech jobs and to improve the standard of living of American workers
(Council of Economic Advisers, 1994). Aircraft manufacturing, a high-tech, high-
skill, and high-wage industry, is a leading American export item to China. At the
same time, Japan has also increasingly eyed the rising importance of China. Owing to
the bursting of the bubble economy, gyrations of the yen, and the continued and esca-
lating trade conicts with the USA, Japan would no doubt like to increase its exports
to the Chinese market.
In the next section, we examine the evolution of the Chinese trade regime. This
serves as the historical and institutional background for our comparative analysis. In
section 3, we present information about Chinas rapidly growing trade with the rest of
the world, focusing on Chinas import and export activities with the USA and Japan.
We show that in the 1980s, Japans trade (imports and exports) with China was twice
of that of the USA But in the 1990s, the USA has become a more important trading
partner of China because of the sharp increase of US imports from China.
Review of Development Economics, 2(2), 181190, 1998
Blackwell Publishers Ltd 1998, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.
*Fung: University of California, Santa Cruz, CA 95064, USA. Tel: 408-459-3273, E-mail:
kcfung@cats.ucsc.edu. Iizaka: Department of Economics, University of California, Santa Cruz, CA 95064.
Tel: 408-476-6645, E-mail: hitomi@ix.netcom.com. This is part of a project on Chinas trade supported by the
University of California Pacic Rim Research Grant.
Section 4 highlights an important feature of Chinas trade which often renders data
about trade with China (including US and Japanese trade data) incorrect: the large
volume of goods that rst go to Hong Kong and then get re-exported to China. These
Hong Kong re-exports are not reported in the US or Japans customs data as exports
to China; rather they are mostly counted as exports to Hong Kong. We provide cor-
rections to the US and Japanese trade data in the section.
Section 5 shows the composition of ChinaUS and ChinaJapan trade by product cat-
egories. In section 6, we utilize a simple model of US and Japanese competition in China
to calculate an index of rivalry between Japan and the USA in the Chinese market.
2. Chinas Evolving Foreign Trade System
To provide some background for comparing US and Japanese exports, we describe
here the changing foreign trade regime in China.
2
Before the opening up of China in
1978, the Ministry of Foreign Trade (MOFT) controlled Chinas foreign trade system,
which was run as a complete state monopoly. Trade was conducted by 15 national
foreign trade corporations (FTCs). Each FTC monopolized the trade of some specic
commodities. International trade was an extension of domestic planning. The basic
Soviet-style economic plans coordinated the ow of raw materials and intermediate
products among major state enterprises. The production of each good was equated to
the intermediate and nal demands by all industries in the economy. The plan used
imports to ll the gap between planned demand and domestic production. Exports
were used to earn foreign exchange to pay for necessary imports. Under this system,
the domestic prices of tradable goods were shielded from the world market prices.
In 1979, China started to reform its foreign trade system. To decentralize, all pro-
vincial governments, three municipal governments (Beijing, Tianjin, and Shanghai) and
some large state enterprises were authorized to establish their own trading com-
panies. In March 1982, Chinas trade regime was further streamlined. MOFT, the
ImportExport Administration Commission, the Foreign Investment Administration
Commission, and the Ministry of Foreign Economic Relations were consolidated into
the Ministry of Foreign Economic Relations and Trade (MOFERT), which then super-
vised the 15 national FTCs and the local foreign trade bureaus. More recently in 1993,
MOFERT had been reorganized into the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC), which now formulates Chinas foreign trade policies.
In 1984, the State Council decided to end the monopoly power of the national FTCs
and to decrease substantially the extent of foreign trade planning. Since then, the
number of FTCs has proliferated. In addition to the new national FTCs under the
control of central government ministries and other state organizations, almost every
provincial and municipal government has its own network of FTCs conducting foreign
trade.
With decentralization, the number of FTCs increased from 15 in 1978 to more than
1,000 in the mid-1980s, and to about 6,000 in the later 1980s. The new FTCs kept their
own accounts, acted independently, and no longer reported to MOFERT. There were
some unscrupulous activities and some new FTCs were unable to fulll their contracts.
The increasing failure became a major concern. These events led to a retrenchment in
mid-1988. As many as 2,000 FTCs were dissolved or merged. At the same time, the
State Council reasserted control over the process of creating new FTCs.
With reforms, the scope of mandatory planning for foreign trade was also reduced.
From the mid-1980s onwards the foreign trade system consisted of a combination of
mandatory planning, guidance planning, and a market mechanism. The 1984 trade
182 K. C. Fung and Hitomi Iizaka
Blackwell Publishers Ltd 1998
reform assigned exports and imports under the mandatory plan (specied in quanti-
ties) to designated national FTCs, and allowed other FTCs to pursue their activities
both within or outside the guidance plans. Unlike the mandatory plans, the guidance
plans were generally specied in value terms and were thus more exible. Under the
guidance plans, FTCs could take some degree of market demand and supply into
account.
Before 1979, the mandatory export plan covered some 3,000 items, but in 1988 it fell
to 112. By the end of the 1980s, the portion of exports under mandatory or guidance
plans accounted for about 34% of the exports. Compared with the export system, the
import system remained relatively rigid in the 1980s. In addition to import licensing
and high tariffs on protected products, almost all import users were subject to a series
of administrative measures and complicated approval procedures. But in the process
of reforming the foreign trade system, the general scope of the mandatory planning
for imports was also narrowed. By 1991, no more than 40% of Chinas imports were
subject to mandatory or guidance plans. In addition, pressured by a US market Section
301 access case in 1992, and the desire to join the World Trade Organization (WTO),
Chinas trade regime gradually became more transparent.
3
Since 1992, a large number of trade documents that were previously unavailable to
foreigners have been published. A large number of tariff rates were reduced. In addi-
tion, special import regulatory duties that had been instituted for 14 products in 1985
were lifted. While there had been some detours, the trend in Chinas trade regime is
clear: China will increasingly open itself up to foreign trade.
3. Aggregate USChina and JapanChina Trade
In the pre-reform era, China had traded relatively little with the outside world, given
its size. According to Chinas customs statistics, Chinas exports in 1994 were US$121.0
billion, 12 times the volume in 1978. Chinas imports in 1994 were 10 times of those in
1978. In 1990, China was the sixteenth largest exporter in the world, but by 1994 Chinas
rank jumped to eleventh (WTO, 1995).
As a result of its open-door policy, Chinas volume of trade has risen substantially
in the past 10 years. In 1994, Japan was the leading exporter to China, while the USA
was the third largest exporter.
4
As is shown in Table 1, for the period 198594, trade
(the sum of imports and export values) between Japan and China had almost doubled
and that between the USA and China had more than quintupled.
On average, Japans trade with China was twice the volume of USChina trade in
the 1980s. During the 1990s, however, the USA became a more important trading partner
to China than Japan. This is due to the sharp increase in US imports from China. Over
the entire period considered, Japans exports to China grew more than US exports, and
Japans imports from China grew less than US imports. As a result, Japans trade decit
with China has been much lower than that of the USA with China.
5
After the Tianan-
men incident in 1989, both the US and Japans exports to China dropped. However,
Japanese exports recovered quickly and increased 40% in 1991, whereas US exports to
China recovered more slowly and increased by only 31% in 1991.
4. The Role of Re-Exports via Hong Kong
The above description of aggregate trade of the USA and Japan with China is, however,
misleading. As China decentralized its economy, Hong Kongs role as a middleman
between China and the world gained in importance. Although US and Japanese sta-
JAPANESE AND US TRADE WITH CHINA 183
Blackwell Publishers Ltd 1998
tistics record by and large correctly the extent of imports from China, their exports to
China are often miscounted. This is because a large amount of Japanese and US exports
are rst exported to some entities in Hong Kong. These entities can be traders or sub-
sidiaries of multinationals. They purchase these Japanese or US goods, modify them
marginally and then re-export them to China. Since the Japanese and the US customs
do not have knowledge of their nal destination (in this case, China), they are recorded
as exports to Hong Kong. But when the Chinese Customs receive these goods, they
are still labeled as made in Japan or made in the USA, so they are counted by the
Chinese authorities as imports from Japan or imports from the USA. Re-exports cause
large discrepancies in Chinas trade data with other countries.
184 K. C. Fung and Hitomi Iizaka
Blackwell Publishers Ltd 1998
Table 1. Chinas Trade Figures (in US$ million)
Year JapanChina USAChina
Exports
1985 6,110 2,340
1986 4,780 2,630
1987 6,400 3,040
1988 7,920 3,380
1989 8,516 5,755
1990 6,130 4,806
1991 8,593 6,286
1992 11,949 7,418
1993 17,273 8,763
1994 18,682 9,282
Imports
1985 15,040 5,090
1986 12,440 4,720
1987 10,070 4,830
1988 11,060 6,630
1989 11,146 11,990
1990 12,054 15,237
1991 14,216 18,969
1992 16,953 25,728
1993 20,565 31,540
1994 27,566 38,787
Trade balance
1985 -8,930 -2,750
1986 -7,660 -2,090
1987 -3,670 -1,790
1988 -3,140 -3,250
1989 -2,630 -6,235
1990 -5,924 -10,431
1991 -5,623 -12,683
1992 -5,004 -18,310
1993 -3,292 -22,777
1994 -8,884 -29,505
Sources: Japan External Trade Organization, White Paper on Interna-
tional Trade with Japan, various years; US Department of Commerce,
US Trade Highlights, various years.
In comparing US and Japanese trade with China, we need to incorporate Hong
Kongs re-exports for more accurate measures of US and Japanese exports and trade
balances. From Table 2, in 1994, 62.8% of Japanese ofcial exports were re-exports via
Hong Kong, while 40% of US ofcial exports were re-exports. Over the period
198994, 60.5% of Japanese ofcial exports were re-exported via Hong Kong. For the
same period, 32.0% of US exports were re-exported. These gures reveal that re-
exports are important parts of these countries exports to China. In percentage terms,
Hong Kong re-exports represent much larger fractions of Japanese exports to China
than do those of US exports.
We assume that ofcial exports record only those that are directly consigned to
China. The indirect exports (re-exports) have to be added to the ofcial gures to
get the true extent of exports from these countries. Since, in general, customs in both
countries do trace the country of origins of their imports, we assume that the mea-
surements of imports from China are basically correct.
6
By subtracting imports from
the adjusted exports, we get corrected versions of the trade balances.
It is easy to see that because of the existence of re-exports, both the adjusted Japan-
ese and the adjusted US exports to China were, in reality, much higher than the US
and Japanese ofcial gures. As noted earlier, the adjusted Japanese exports would on
average be 60.5% higher than the ofcial gures, while the adjusted US exports would
on average be 32.0% higher than the ofcial gures. This means that for both coun-
tries, their trade decits with China were in fact much smaller than reported. For the
USA, the decits would be reduced from US$29.5 billion to US$25.8 billion in 1994.
7
For the same year, Japanese trade balance with China would be changed from a decit
of US$8.9 billion to a surplus of US$2.8 billion. Indeed, for Japan, adjusting its exports
by re-exports via Hong Kong will turn Japans trade decits with China into trade sur-
pluses for all the years considered except two.
5. US and Japanese Exports to China by Product Category
Table 3 shows US and Japanese exports to China broken down into major commod-
ity categories. General machinery was Japans largest export category to China in 1994.
As a share of Japanese exports, general machinery grew from 19% in 1989 to 25% in
1994. Demand for machinery related to industrial plant projects grew rapidly, reecting
an increased amount of Japans investment in the manufacturing sector in China. Elec-
JAPANESE AND US TRADE WITH CHINA 185
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Table 2. Trade Balances Adjusted for Re-exports from Hong Kong (in US$ million)
Re-exports of Adjusted Re-exports of Adjusted
Japanese products trade balance US products trade balance between
Year to China between Japan and China to China the USA and China
1994 11,723 2,839 3,709 -25,796
1993 10,097 6,805 3,180 -19,588
1992 7,178 2,174 2,350 -15,856
1991 4,633 -990 1,710 -10,979
1990 3,195 -2,729 1,320 -9,097
1989 3,008 378 1,320 -4,861
Sources: Japan External Trade Organization, White Paper on International Trade with Japan, various
years; Census and Statistics Department, Hong Kong, Hong Kong External Trade, various years; US
Department of Commerce, US Foreign Trade Highlights, 1994.
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Table 3. US and Japanese exports to China by Industry (in US$ million)
Japanese exports US exports
1989 1990 1991 1992 1993 1994 1989 1990 1991 1992 1993 1994
Total 8,516 6,130 8,593 11,949 17,273 18,682 5,755 4,806 6,287 7,418 8,763 9,287
Foodstuffs 8, 25 8,25 8,28 8,33 8,30 8,54 1,144 8,527 8,402 8,323 8,354 8,277
Textile 8,555 8,609 8,927 1,223 1,384 1,805 8,418 8,446 8,516 8,326 8,128 8,800
Chemical goods 8,788 8,751 1,072 1,074 1,055 1,360 1,138 1,055 1,675 1,211 8,841 1,508
Metal goods 2,541 1,193 1,554 1,735 3,367 2,713 8,366 8,111 8,202 8,375 8,360 8,335
General machinery 1,596 1,034 1,497 2,865 4,590 4,678 1,032 8,849 1,058 1,176 1,819 1,920
Electrical machinery 1,876 1,391 1,905 2,414 3,138 4,080 8,239 8,258 8,277 8,464 8,895 8,919
Transportation eqt. 8,369 8,314 8,550 1,163 1,959 1,977 8,601 8,806 1,151 2,334 3,058 2,254
Source: National Trade Data Bank, 1995.
Table 4. The USJapan Rivalry Index
a
1989 1990 1991 1992 1993 1994
Total 0.81* 0.88* 0.85* 0.77* 0.67* 0.66*
Foodstuffs 0.04* 0.09* 0.13* 0.18* 0.15* 0.33*
Textile 0.86* 0.85* 0.72* 0.42* 0.17* 0.61*
Chemical goods 0.82* 0.83* 0.78* 0.94* 0.89* 0.95*
Metal goods 0.25* 0.17* 0.23* 0.36* 0.19* 0.22*
General machinery 0.79* 0.90* 0.83* 0.58* 0.57* 0.58*
Electrical machinery 0.23* 0.31* 0.25* 0.32* 0.44* 0.37*
Transportation eqt. 0.76* 0.56* 0.65* 0.67* 0.78* 0.93*
a
An asterisk indicates that US exports were larger than those of Japan.
trical machinery was the second largest export category in 1994. It has been one of the
biggest items in Japans exports to China, averaging 21% of its total exports from 1989
to 1994. On the other hand, the exports of metal goods, which was Japans third largest
export category to China in 1994, decelerated in part because of the appreciation of
the yen, but also because of Chinas increased domestic production.
Japans exports of transportation equipment rose considerably between 1989 and
1994. Its share of the total exports to China increased from 4% in 1989 to 11% in 1994.
Within transportation equipment, automobiles were particularly important because
they accounted for a large portion of the category. There was also a surge in demand
for automobiles in China in 1991 when economic activities began to pick up after the
retrenchment.
Turning to the US exports to China, the largest export category in 1994 was trans-
portation equipment. But its share dropped by 11% compared with 1993. This was
mostly due to decreased exports of aircraft. The second largest export category was
general machinery, with its share rising slowly. Chemical goods was the third largest
export category. Following a slump in 1992 and 1993, the value of exported chemical
goods in 1994 recovered to almost the 1991 level. Electrical machinery, with a share of
10%, was the fourth largest export item. Although the share of electrical machinery
more than doubled from 4% in 1989 to close to 10%, US exports of electrical machin-
ery were still less than one-third of the amount of electrical machinery exported by
Japan to China. Purchases of US wheat by China often make headlines, but the fact is
that the export of foodstuffs to China was actually small compared with other export
items. The share of exported food fell from 20% in 1989 to 4% in 1994. To a signicant
degree, this reects the rapid expansion of Chinas domestic agricultural production
owing to the higher prices generated by Chinas economic reforms.
6. A Simple Model of USJapan Competition in China
We offer here a very simple model of USJapan competition in China. It is a standard
BranderSpencer (1994) model with two international rms. One rm is a US rm and
the other is Japanese. Both are exporting to a third market, China. The intention here
is not to create any new models, rather to derive from the model a quantitative index
of competition between the US and Japanese exporters. Let us denote the exports of
Japanese rm, X, selling for p, and that of American rm, Y, selling for p*. Then the
prot functions can be written:
where C() and C* () are the cost functions for the Japanese and American rms,
respectively, and each function depends on its own output (X and Y), its own wage (w
and w*) , and its own cost of capital (i and i*). The rst-order conditions associated
with the prot-maximizing problem faced by the rms are
p
X
= p + X p
X
- C
X
= 0,
p*
Y
= p* + Y p*
Y
- C*
Y
= 0.
The above equations are the reaction functions of the two rms in implicit form. Solved
simultaneously, they yield the Nash equilibrium outputs, prices and prots.
To get an idea of the degree of competition or rivalry between Japanese and the US
p
p
=
( )
-
( )
=
( )
-
( )
X p X Y C X w i
Y p X Y C Y w i
, , , ,
* * , * , *, * ,
JAPANESE AND US TRADE WITH CHINA 187
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rms, we construct from the above model a rivalry index that captures a notion of com-
petition. The formula for the rivalry index is
R thus measures one minus the absolute difference between the two countries exports
as a proportion of the total exports of the two countries. The basic idea is that in
CournotNash models, prots are positively related to market shares. By capturing the
difference between exports of the rms, we are indirectly measuring a degree of com-
petition between the rms based on differences in prots.
8
Alternatively, we can view the index as measuring the similarity of the magnitude
of the two exports. This index is then a modied version of the GrubelLloyd index of
intraindustry trade.
9
Instead of focusing on the similarity of imports and exports in the
same industry (as in the GrubelLloyd index), we focus on the similarity of the extent
of US and Japanese exports to China. The change in the rivalry index over time shows
the degree to which exports from one country dominate over the other. It equals one
when there is most intense rivalry and it equals zero when there is no rivalry.
According to our index, overall, USJapan rivalry has been decreasing over time in
China (from 0.81 to 0.66; see Table 4). On an industry basis, the most intense compe-
tition occurred in chemical goods and transportation equipment, with indices of 0.95
and 0.93 respectively in 1994. In these industries, both Japan and the USA exported
almost the same amounts. Textiles and general machinery were the next set of indus-
tries with a great deal of competition (with indices of 0.61 and 0.58, respectively, in
1994). Despite the intensity of competition in these two industries, the degree of rivalry
had actually declined since 1989, when the indices were 0.86 and 0.79, respectively.
Finally, Table 3 shows that in 1994 the USA were ahead of Japan in China in three
industries: foodstuffs, chemical goods, and transportation equipment. The USA was
behind in textiles, chemical goods, general machinery, and electrical machinery.
10
7. Conclusions
This paper provides a simple comparative analysis of Japanese and US trade with
China. In the 1980s, Japans trade with China was twice the volume of USChina trade.
During the 1990s, however, the USA became a more important trading partner to
China, mostly because of the sharp increase of US imports from China. From 1985 to
1994, Japanese exports to China had been growing faster than US exports to China,
while Japanese imports from China had been growing slower than imports from China.
As a result, ofcial US trade decits with China had been much larger than ofcial
Japanese trade decits.
A signicant amount of Japanese and US exports to China are rst shipped to Hong
Kong and then re-exported to China. Since the Japanese and US customs have no way
of knowing where these goods end up, they record them as exports to Hong Kong, and
not exports to China. The volume of re-exports is large. In 1994, 62.8% of Japanese
exports were re-exports via Hong Kong, while 40% of US exports were re-exports via
Hong Kong. Thus, Japanese and US exports gures underestimate the true extent of
their exports to China, and the underestimation is much larger for Japan than for the
USA.
In 1994, Japans largest export item to China was general machinery, followed by
electrical machinery and metal goods. For the USA, its largest export item was trans-

R
X Y
X Y
= -
-
+
( )
1 .
188 K. C. Fung and Hitomi Iizaka
Blackwell Publishers Ltd 1998
portation equipment, followed by general machinery and chemical goods. Based on a
simple model of oligopolistic rivalry, we have calculated that competition between US
and Japanese rms was most intense in chemical goods and transportation equipment,
followed by textiles and general machinery. The USA was ahead of Japan in China in
only three industries: foodstuffs, chemical goods, and transportation equipment.
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JAPANESE AND US TRADE WITH CHINA 189
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Notes
1. For a detailed discussion of Chinas trade and Chinas economic development and related
issues, see Fung (1996, 1997), Lau (1994, 1997), Lardy (1994), Sung (1991), Wong (1995) and Fung
and Lau (1997). For a comparative analysis of trade and the internal organization of rms
between the USA and Japan, see Friedman and Fung (1996).
2. See Ho (1993), Sung (1991), Lardy (1992), and Fung (1996) for earlier descriptions of Chinas
trade regime.
3. For an analysis of the effects of the US Section 301 trade law, see Finger and Fung (1994).
4. Taiwan was the second largest exporter to China in 1994. In examining this ranking, we do
not treat the European Union as one single entity. This ranking is derived from Chinas Customs
Statistics, December 1994.
5. In considering trade decits with China, we actually need to take the extent of Hong Kong
re-exports into account. This will be done in a later section. See also Fung and Lau (1996) for a
detailed discussion.
6. Import gures can still be inated because of the existence of markups on Hong Kong re-
exports; see Fung and Lau (1996).
7. If we include adjustments for re-export markups and net export of services, the decits would
become even smaller; see Fung and Lau (1996).
8. For linear versions of this model, in fact, the difference between product price and marginal
cost is positively related to the square of outputs. See Fung (1991) and Friedman and Fung
(1996).
9. See Brander and Krugman (1983) and Fung (1991).
10. Richardson (1993) discussed in detail how export disincentives in the USA may have hurt
US exports to China in some sectors.
190 K. C. Fung and Hitomi Iizaka
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