Summary:
Manufacturing is the foundation of developing countries and provides support to major economies. It plays a key role in a country becoming rich and powerful. High-standard and more competitive manufacturing is a basic requirement for high-quality development. China's economic development is undergoing a rapid transition that requires manufacturing to build a modern socialist China and to develop the real economy. The government sees high-quality manufacturing as one of the most important drivers of high-quality development. China's manufacturing industry is growing rapidly and opening up constantly during the reform era. To what extent does China's high-standard opening-up affect its manufacturing development and global welfare？ How should China continue to promote structural transformation during its reform and opening-up？ Studies fail to answer these questions either theoretically or quantitatively from a macroeconomic perspective. This paper studies the macroeconomic effects of the cost of trade on China's manufacturing development and global welfare through theoretical analysis and quantitative experiments, which may offer novel answers to these questions. We build a two-country multi-sector structural change model with complete input-output links, endogenous consumption and investment structure, and endogenous international trade shares. The model incorporates long-term income effects, structural changes in investment, and sectoral trade imbalance, which are the key features of China's economy. Theoretically, the fall in export trade costs decreases the price of China's manufacturing goods in the global market, which in turn increases their relative demand across the world, as well as the share of manufacturing in China's economy. It may also lower the average price of consumption goods sold to foreign people, which increases their purchasing power and welfare. We apply the model to China's economy to account for the process of opening-up and manufacturing development. We find that the fall in the trade cost of Chinese exports from 1995 to 2010 enhances the comparative advantage of China's manufacturing, which in turn increases China's manufacturing output by 29% and thereby increases the employment and output share of manufacturing by 4.7 and 5.1 percentage points, respectively. It also accounts for nearly 15% of the growth of foreign welfare. Almost 80% of these effects emerged after 2001, when China joined the World Trade Organization. Moreover, imposing tariffs on Chinese goods to raise the trade cost of Chinese exports will not only hinder the development of China's manufacturing but also result in significant foreign welfare loss. If the trade cost of Chinese exports rises by 1 unit, manufacturing output will decline by 5.37 percent, with its employment share falling by 3.32 percentage points, and foreign welfare will also decrease by 0.89 percent. Mounting protectionism, the dim prospects of the world economy, the shrinking global market, and the backlash against economic globalization have added to the risks and uncertainties in China's development. China should become a quality manufacturer to foster the new development dynamic. We derive two policy implications from the findings of this paper. First, China should vigorously pursue admission to new regional trade agreements, advocate for new multilateral trading systems, and promote its manufacturing and market. Developing high-quality manufacturing in China may also help to build a higher-standard open economy and offer many opportunities for the world. China should also reinforce high-standard domestic and international circulations to enhance the competitiveness of its manufacturing across the globe. Policies such as encouraging international trade in producer services or building a pilot digital trade zone may promote technological innovation and structural updating of China's manufacturing industry. Second, China should further reform its factor market to improve factor allocation efficiency. This may lower the domestic cost of trade to form a unified national market and domestic circulation, which will in turn enhance the resilience of China's supply chain. China should also promote timely investment in new types of manufacturing, secure the production and supply of energy, and effectively tackle the problem of rising costs of manufacturing production and trade.
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