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China's economic growth and integration with global markets is restructuring the world economy and raising issues important to the future of US companies and workers. In the US market, we hear concerns over a range of Chinese trade practices, including subsidies, dumping; and the exchange rate. In the China market, lack of enforcement of IP protections and non-market behaviors, such as subsidies and industrial policies, give rise to concerns that the deck is being stacked against US companies. At the same time, US exports to China continue to grow rapidly and US invested companies report strong profits. Many also note that low cost imports from China keep the cost of living in the US low and enhance the competiveness of some US companies in global markets. President Bush has described our relations with China as "complex." Our economic relationship is the embodiment of that description.

Henry A. (Hank) Levine serves as the Deputy Assistant Secretary of Commerce for Asia in the International Trade Administration's office of Market Access and Compliance. His responsibilities include the market access concerns and compliance with international trade agreements that affect U.S. companies operating in China, Japan, Korea, Taiwan, Mongolia, and the member countries of ASEAN. In his career State Department Foreign Service Officer, Mr. Levine has served as the Deputy Assistant Secretary of Commerce for Europe, the U.S. Consul General in Shanghai, China and Deputy Director for Economic Affairs in the State Department's Office of Chinese Affairs. Mr. Levine has a B.A. in Political Science from Bucknell University. He did graduate work in international affairs at the Fletcher School of Law and Diplomacy at Tufts University. He is a 1993 graduate, with distinction, from the U.S. National War College. He is fluent in Chinese (Mandarin).

Series Co-sponsored with the Center for East Asian Studies.

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Hank Levine Deputy Assistant Secretary for Asia, International Trade Administration Speaker U.S. Department of Commerce
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In this paper we set out to accomplish three objectives. First, we wanted to track and describe the way the fiscal reforms have been implemented in China's townships. Second, we have tried to identify the effect that the fiscal reforms have had on the fiscal health of the township. This objective was pursued in three contexts: the effect on the average township; the effect on townships in different provinces; and the effect on townships in poor and rich townships. Finally, we sought to assess the impact that the fiscal reforms had on village fiscal health and farmer satisfaction.

Although farmers certainly have expressed their support for tax and fee reduction through a variety of media, our results show that the fiscal reforms are far more complicated and complex than tax reduction policies. They include a large set of policies that have sought to reassign expenditures, realign responsibilities (for control over resources that flow from county to town and town to county), reduce the importance of extrabudgetary and self raised funds, and increase investment into the public goods infrastructure in rural areas. When assessing the broad impact of these policies on township fiscal health, we find the average township has not fared well. Although county to town transfers have risen, the targeted transfers to offset the decline due to the tax and fee reduction policies do not nearly cover the losses of fiscal resources in the system as a whole. In addition, many policies are putting increasing control in the hands of the county financial office. through changes such as increasing requirement to hand up town to county transfers and expenditure reassignments (even though the fiscal resources come out of the township's budget). Hence, overall the fiscal condition of township's operating budget has clearly deteriorated between 2000 and 2004.

The bright side of the fiscal reforms has come in the area of capital budget management and flows of fiscal resources into new infrastructure investment. Between 2000 and 2004 there has been a veritable explosion of investment into the rural economy, mostly in roads, but also into irrigation, drinking water and to a lesser degree into clinics. The investments have risen largely due to the rising allocation by upper level governments. While we show that the rising investment from any source increases farmer satisfaction, there are some concerns with the new effort to improve rural infrastructure. First, in many places (and especially in Jiangsu and other richer townships) as investments from above have risen requirements for matching funds apparently have led to an increase in township debt. Second, the increasing reliance investment from above also has a drawback. While any investment from any source is shown to increase the satisfaction of farmers, ceteris paribus, when the investments come from above, they appear to reduce farmer satisfaction. Apparently, when villages are less involved with the project selection, design and implementation, the projects leave farmers less satisfied.

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Report to the World Bank, Fiscal Reform and the Role of the Township
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Scott Rozelle
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As President Bush continues his tour of Asia, Pantech Fellow and San Jose Mercury News columnist Daniel Sneider observes in YaleGlobal that growing regional cooperation threatens U.S. preeminence in East Asia.

On the surface, President Bush's week-long swing through Northeast Asia has been a strong contrast with his recent stormy (and, some say, stumbling) excursion into Latin America.

There was little sign of overt anti-Americanism. And no Asian leader will openly oppose American leadership in the flamboyant manner of Venezuela's Hugo Chavez. Even prickly China swallowed President Bush's barbs about lack of democratic freedom in China, quietly acknowledging the two powers' differences. In contrast to the meeting of leaders from the Americas, the annual summit of the Asia Pacific Economic Cooperation (APEC) forum in Korea will embrace the principles of free trade.

Beneath the polite appearance, however, there is no less a challenge to American leadership in Asia. While Washington fiddled, a powerful momentum has been building up in Asia toward the formation of an East Asian Free Trade Area or, more ambitiously, an East Asian Community, modeled on the European community. Led by China, the East Asian grouping pointedly excludes the United States.

The APEC agenda focuses on an initiative to counter the spread of avian flu and to offer a common push at the WTO meeting in Hong Kong next month to revive the Doha Round of global trade talks. The Bush administration has its own agenda for the APEC meeting: to reposition itself as a leader of economic growth and integration in the region. For this, APEC has the virtue of being a more open organization than those behind the disappointment at the American summit. Its 21 members span the Pacific Rim, bringing together nations from Chile and Mexico to Russia, China and Southeast Asia. But this attention to APEC may be a case of too little, too late. The momentum to give the amorphous APEC an ongoing institutional role, beyond its annual summit meetings, has slowed in recent years. Its pledges for mutual tariff reduction exist almost entirely on paper.

Until this year, the Bush administration barely addressed regional economic issues at APEC. It preferred to use the meetings to promote a post-9/11 security agenda of anti-terrorism. U.S. trade policy has focused more on reaching free trade agreements with a few selected "friends" in that war, such as Singapore and Australia.

Meanwhile a Chinese-sponsored move to hold an East Asian summit offers the most visible expression of a trend of declining American influence in Asia. That meeting will take place in Malaysia in mid-December. The gathering groups the 10-member Association of Southeast Asian Nations, Japan, China, South Korea, India, Australia and New Zealand. Pointedly not invited is the United States.

This meeting is an outgrowth of the ASEAN Plus Three (APT) process - an annual dialogue of ASEAN with China, South Korea and Japan that began in December 1997 in the midst of the Asian financial crisis. The APT has grown into an elaborate mechanism for cooperation in a range of areas from finance and agriculture to information technology. This reflects an underlying economic reality - the growth of regional and bilateral trade agreements and the rapid rise of intra-Asian trade.

Until fairly recently, foreign trade in East Asia was dominated by trans-Pacific trade with the United States. But the share of Asian exports headed to the U.S. has dropped dramatically, while those destined for other Asian nations has risen. In the two decades from 1981 to 2001, according to economist Edward Lincoln, the share of intra-regional exports has risen from 32 percent to 40 percent, and intra-regional imports from 32 percent to 50 percent.

Much of the growth of regional integration is being driven by China, which is generating enormous demand for imports of raw materials as well as for semi-finished goods that are assembled for export. China has not been hesitant to use this role to expand its influence in the region. It has embraced the APT as a road towards creation of an East Asian community. At the ASEAN summit last year, Chinese Premier Wen Jiabao declared that such a community was a "long-term strategic choice in the interests of China's development." China has also outmatched the U.S. in negotiating free trade agreements, both bilateral and regional. The most impressive is an FTA deal between China and ASEAN set to take effect in 2010. Beijing even dreams of an Asian currency, based on the Chinese yuan, to rival the dollar and the euro.

China is not the first nation to try for such East Asian economic unity. Back in the days when Japan was riding high as an economic superpower, it too talked of leading an East Asian bloc, based on a yen currency zone. As late as 1997, in response to the Asian financial crisis, Japan proposed the creation of an Asian Monetary Fund, a kind of alternate regional financial system. More recently, both South Korea and Japan offered their own visions of an East Asian community in 2001. And both countries tried to match China in the APT by offering to form free trade agreements with ASEAN.

Japan, however, was never as successful as China is likely to be. "It would seem that Japan is a natural counterweight to China, but Tokyo is generally perceived as reactive and incapable of outflanking Beijing," Brad Glosserman, director of research at the Pacific Forum of CSIS, wrote recently. "Its economic dynamism is no match for that of China."

The United States has never been friendly toward efforts to create an East Asian economic bloc, viewing them as chipping away at the global trading system and rivaling American leadership. But Asia is arguably only following in American footsteps -- witness the NAFTA deal with Canada and Mexico and the more recent trade pact with Central America.

Many American policymakers believe these developments are partly a product of the failure of the Bush administration to articulate - much less pursue - a strategy to engage East Asia.

"The United States has greater strategic interests in Asia now than it did in Europe before World War I or World War II,'' argued a recent report of the Grand Strategic Choices Working Group, co-chaired by John Hopkin's University's Francis Fukuyama and Princeton's G. John Ikenberry. "Thus," the report continued, "it is unfortunate that part of the problem, in East Asia in particular, is that America's relative lack of interest in tending to the region has caused some allies of the U.S. to doubt our resolve and question the value of resisting unfavorable developments alone."

The report echoes other policymakers in suggesting the U.S. form its own East Asian economic zone with Japan, South Korea and Australia."That's a non-starter,'' says Professor Vinod Aggarwal, director of Berkeley's APEC study center. "Nobody wants to be cut out of the China market."

Privately, Bush administration officials downplay the importance of the East Asian summit in December, pointing to the lack of any concrete agenda. The addition of India, Australia and New Zealand to the invitation list, along with Japan, should effectively counter any Chinese initiative, they believe.

But those countries also fear being left out of whatever may emerge from this process. They cannot afford to be left on the outside, looking in.

Ultimately, neither can the United States. The President's trip is a belated recognition of that fact. But to be more than a momentary gesture, the United States must give East Asia the consistent attention it deserves.

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China's integrated circuit market is the fastest growing in the world, increasing from 7 percent of the world in 2000 to 20 percent in 2004. China's State Council has set the ambitious goal of having domestic production satisfy most of this demand, while closing the technology gap with developed countries.

Mr. Yu, President of the China Semiconductor Industry Association and former chief engineer of the Ministry of Electronics, is uniquely positioned to review the past decade's transition of the Chinese semiconductor industry from state controlled enterprises to growing companies responding to market forces. Mr. Yu will also provide his insights on the future of China's high tech development and its ramifications for trade relations with the U.S.

Mr. Yu Zhongyu has been engaged in semiconductor research and management for many years and is one of the leaders of China's integrated circuit (IC) industry. He has engaged in research and design of IC products and was honored with the National Science and Technology Award. Having joined the government in 1988, he was responsible for organizing and leading the IC project during "7th five-year plan" and "8th five-year plan"; he acted as a member of the leading group for the National "908" project and headed the construction leading group of the Huahong factory in the "909" project. These projects made important contributions to China's IC industry development. Mr. Yu has been the President of the China Semiconductor Industry Association since 2001.

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Yu Zhongyu Speaker President of the China Semiconductor Industry Association (CSIA)
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After more than 30 years under the strong leadership of Suharto, Indonesians saw three weak and not always legitimate presidents come and go: B. J. Habibie (1998-99), Abdurrahman Wahid (1999-2001), and Megawati Sukarnoputri (2001-2004). Democratization went forward. Yet Indonesians increasingly longed for a stronger

government that could deliver on its promises, including economic development. In 2004 Susilo Bambang Yudhoyono (SBY) won the country's first-ever direct presidential election by a landslide. During the campaign he promised, above all, an effective

government. Looking back on his first year, how has he performed? Has he broken the string of weak leaders? Will he grow in his job to become more effective? More

broadly, are weak leaders good for democracy but bad for development? Or does Indonesia illustrate some other relationship between national leadership, political

openness, and economic progress?

Hadi Soesastro is currently a visiting professor in the Weatherhead Institute of East Asian Studies at Columbia University. He has been with CSIS since 1971. His research interests include the political economy of development, regionalism, and trade, and energy issues, topics on which he has published and lectured widely. Recent writing on Indonesia includes an essay in Economic Recovery and Reform (2004). Dr. Soesastro chairs the International Steering Committee of PAFTAD (Pacific Trade and Development) and serves as an adjunct professor at the Australian National University in Canberra. In Indonesia he has served as a member of the National Research Council and the National Economic Council. He earned his PhD from the RAND Graduate School in Santa Monica, California.

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Hadi Soesastro Executive Director, Centre for Strategic and International Studies, Jakarta Speaker
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This report provides a preliminary examination of changes in village fiscal affairs between 2000 and 2004. The basis for this assessment is a survey of 101 villages in 50 townships in 25 counties in 5 provinces in China that was carried out between March and April of 2005. The provinces include Jilin, Hebei, Shanxi, Sichuan and Jiangsu. In each province, the counties, townships and villages were selected to provide a representative cross-section. Our village survey was complemented by an investigation into fiscal changes in each of the 50 townships. In this report, we focus on the revenue and expenditure implications of these changes at the village level. We provide an overall assessment for all 100 villages, but also examine village-level differences across provinces, as well as differences between villages in the richest and poorest quintiles of our sample.

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Report to the World Bank, Village Finance: Tax-for-Fee-Reform, Village Operating Budgets and Public Goods Investment
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Scott Rozelle
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Corporate Affiliate Visiting Fellow
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Takashi Kadomatsu is a corporate affiliate visiting fellow at Shorenstein APARC for 2005-06. Prior to joining Shorenstein APARC, he held positions at the Ministry of Economy, Trade and Industry (METI), government of Japan, for about eleven years, where he took charge of policymaking. His latest position at METI was as deputy director in the public relations office, Minister's Secretariat. He did his undergraduate study at Keio University, in the faculty of environmental information.

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Corporate Affiliate Visiting Fellow
Awano.jpg MS

Masaaki Awano is a corporate affiliate visiting fellow at Shorenstein APARC for 2005-06. He currently works for the Japan Patent Office (JPO), one of the agencies of the Ministry of Economy, Trade and Industry (METI), in the Japanese government. Awano has worked for the JPO as a patent examiner for more than twelve years, handling patent applications in the field of semiconductor devices. In 2000, he also took in charge of international affairs at the office, especially with respect to trilateral cooperation among the European Patent Office (EPO), the United States Patent and Trademark Office (USPTO), and JPO.

Awano completed his undergraduate study in physics at the University of Tokyo. He received an MS in the graduate school of science of the University of Tokyo, where he concentrated on plasma physics.

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Shorenstein APARC
Stanford University
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Jeongsik Ko is a visiting scholar at Shorenstein APARC. Since 1998, he has been a professor in the Department of China Studies at Korea's Paichai University. He has also held senior positions at the Korea Institute for Industrial Economics and Trade (Beijing branch), the Modern Chinese Association of Korea, and the Northeast Asian Economic Association of Korea. Professor Ko has published a number of books and articles on economics, politics, and trade competitiveness between China and Korea. He received his PhD in economics from Yonsei University.

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