Trade dispute gives impetus to long-stalled economic reforms in China

Chinese officials this summer implemented reforms aimed at easing access of foreign firms to China’s markets. Measures include relaxing investment rules and lowering import tariffs.

An updated version of the “negative list” limiting or banning foreign ownership in certain branches entered into force at the end of July. It trims the original 63 restricted branches to 48. Officials announced in August that ownership restrictions would be lifted on foreign banks and financing companies, and that such firms would now be treated the same as their domestic counterparts. Media reports that ownership limits have been lifted from car-manufacturing, ship-building and aerospace industries as well. At the beginning of June, officials announced the elimination of state subsidies for new solar power projects to reduce market distortions and ease trade policy.

While tariffs with the United States have risen, China has cut other tariffs. At the beginning of July, the average tariff on consumer goods fell from 15.7 % to 6.9 %. Officials have ordered further import tariff cuts from November on e.g. machinery & equipment. The announced cuts and July cuts combined will lower the average import tariff level from 9.8 % last year to 7.5 %. For comparison, the average tariff level last year in the EU was 5.1 %, 3.4 % in the US and 6.7 % in Russia.

The reform policies are supported by local efforts, as provinces and cities facing lower export growth have decided to approach foreign investors on their own. For example, the South China Morning Post reported last month that the Guangdong province, a hub for many export industries, had eliminated restrictions on foreign ownership in several high-tech industries and was promising its own incentives.

The escalating trade war between the US and China has put pressure on China to move ahead with long-postponed reforms. While the Chinese tout the decision to open up their markets, Western firms operating in China note that Chinese officials recently have moved on other fronts to complicate their ability to do business. Moreover, there is still little consensus in China on elimination of special advantages enjoyed by China’s state-owned enterprises. This is a key question of reform policy and relates directly to current trade disputes.