An Analysis On China's Foreign Trade Policy Through A Political Economy Approach

Under the background of global financial crisis triggered by the U.S. subprime mortgage crisis, many governments took a series of measures and made economic stimulus package to stimulate the market. In order to expand domestic demand and promote economic stable and sustained development, China government introduced a four trillion economic stimulus package in 2009, which mainly benefited various state-owned enterprises. Meanwhile, western developed countries, like the U.S., promoted nationalization campaign. These governments took over financial institutions on the brink of bankruptcy and tried to prevent losses to financial system and real economy. These actions and measures raised widespread concern and discussion of state-owned enterprises. As we all know, state-owned enterprises, as a special form of enterprise, play a significant role in economic development, with a unique advantage against risk. However, state-owned enterprises form monopoly in several sectors and have an important influence on the process of government policy making. Therefore, in the paper, we consider state-owned enterprises as a special interest group and try to analyze its influence on government foreign trade policy making.This paper is divided into six parts. The first part is introduction, which introduces the background and research framework. The second part is review on literatures abroad and home. Based on the literature review, third part explores the development of China's foreign trade and FDI. In more than sixty years since the founding of new China, China's foreign trade policy adjusts constantly with China's economic development and foreign trade strategy adjustment. Tariff dropped greatly. Then the paper analyzes the development of FDI. The forth part makes a theoretical analysis of China's foreign trade policy, clarifies the cost and benefit of tariff and non-tariff barriers, the theory of protection for sale. In the fifth part, based on the framework of Grossman and Helpman (1994,1996) model, this paper analyzes China's political process of trade policy through a political economy approach. Combining China status and theoretical analysis, the paper considers the state-owned enterprises as the special interest group, undertakes an empirical analysis based on China's panel data of FDI, foreign trade, etc, in 2002-2007. In the process of trade policy making, China government faces a tradeoff among wage premium from multinational companies, profit tax, tariffs and losses of state-owned enterprises. The objective functions of local government contain consumers'welfare, profit of state-owned enterprises, profit tax from multinational companies and tariff, while the ultimate objective function is the weight of each local objective function. The structural parameters of China's government objective function are estimated. The regression methods include ordinary least square, two-way fixed effect, panel corrected standard errors and feasible generalized least squares. At last, we find that the weight to state-owned enterprises is almost the same with the weight to consumer welfare, and the government does not give special weight to state-owned enterprises in China, which is unexpected.The last part is the conclusion and relevant policy suggestions based on former analysis. On one hand, the government needs to promote the reform of state-owned enterprises further, breaking the monopoly, strengthening government bargaining power in the policy-making process and weakening the influence of interest group. On the other hand, China has to change the development pattern of foreign trade, improves import and export structure, adjusts foreign trade policy, making foreign trade policy coordinated with domestic industry policies.