Economic reform in China, which began in the late 1970s, was accompanied by rapid economic growth and an expansion of foreign trade. This paper uses Chinese customs data to study China’s trade performance in the 1980s and its relation to the economic reforms.
The data are used to construct, for the first time, quarterly unit value and volume series to estimate foreign trade price and income elasticities. The estimated elasticities indicate that, despite the far-reaching reforms, administrative controls still play a major role in China’s foreign trade in both the external and internal sectors of its economy.
The unit value series show that China’s terms of trade deteriorated in the 1980s as a result of increases in import prices and the decline in world oil prices. Export prices of primary products decreased, while prices of manufactured exports increased. Both developments were consistent with world prices.
The sequence of reforms and trade developments are closely related. During episodes of trade liberalization, China’s imports increased substantially followed by periods in which almost no increase occurred. Reforms in the agricultural sector were reflected in export growth and a decline in imports of agricultural products. In the urban sector, reforms led to an increase in industrial exports.
Import price and income elasticities were estimated: the price elasticity was very close to minus one, which suggests that importers were operating with fixed budgets. The income elasticities suggest that the demand for technologically advanced products increases more than proportionately to income, while the demand for imported consumer goods and basic inputs increases less than proportionately. Import substitution is one possible explanation for this difference.
The estimated export supply price elasticities were negative. This result is robust in several empirical tests and may be explained by the institutional structure of the Chinese economy, in particular, by the assignment of value targets to enterprises, foreign trade corporations, and local governments. Future study of this result is suggested.