Trade Openness In China

According to the literature, there are several different hypothe- ses concerning the influences of the degree of trade open- ness of a country on its Total Factor Productivity growth rate. While some authors argue that the influence of the first vari- able over the second is insignificant or even negative, others such as Romer (1986) and Lucas (1988), suggest that the trade openness degree can impact positively on the growth rates of Total Factors Productivity and, consequently, on economic growth.

The explanation for this possible positive relationship would be justified by the fact that a greater trade openness de-

An evaluation of trade openness effects on Total Factor Productivity (TFP) in China — 2/4 this fact to its economic importance

Throughout the period of the aforementioned reforms, the government reduced tariffs and other trade barriers, such as the total taxes on international transactions that were reduced from 56% to 15%. In 2001, less than 40% of imports were subject to tariffs or taxes and only 9% of imports were subject to import quotas or licensing. The share of the foreign trade in China’s GDP increased from less than 10% to 64% over the same period. Currently, China is considered the most open economy in the world. (BRANSTETTER e LARDY, 2006)

In addition, Branstetter and Lardy (2006) point out three other major policies that were created in China which had a very significant impact on the degree of trade openness and on the levels of development of the exporter sector: (i) the exemption from value-added taxes to exporters, (ii) the artifi- cial exchange rate depreciation practiced by the government since 2002, and (iii) the creation, in the 1980s, of the Special Economic Zones to attract foreign capital through tax and regulations

Methods

4.1 TotalFactorProductivitygrowthrateestimation

As shown by Pavcnik (2002), Hay (2001), Krishna and Mitre (1998) and Rath and Farida, (2014), the Gross Domestic Prod- uct (GDP) growth rate is given as a sum of the growth rate of the available production factors (capital and labor) and the growth rate of the total factor productivity (TFP). The TFP growth rate can be obtained through the residuals of a regression model relating annual GDP growth with available production factors growth rate.

Thus, acording to Solow (1967), Romer (1986) and Lucas (1988), starting with a Cobb-Douglas neoclassical pro- duction function, it can be assumed that the product (Y) in an economy is achieved through capital (K) and labor (L) invested in it.

However, the simple construction of a model with these two independent variables (K and L) is not sufficient to fully explain the dependent variable (product Y). This can be ex- plained by the fact that in this model two other component that impacts the product were not taken into consideration, which is (i) the Total Factor Productivity (TFP) represented in this case by the variable (A) and (ii) the output elasticities of capital and labor represented in this case by alpha and beta. Lastly, it can be assumed that the gross domestic product of a country can be given according to equation