Empirical Study On China’s Import Demand Based On Bounds Testing Approach

After Economic Reform strategic decision made during The Third Plenary Session of the11th Central Committee of the CPC held in1978, China’s bilateral trade with other countries continues to expand. With accession to WTO, China’s foreign trade has been experiencing a rapid development, especially exports. According to WTO report, in2012, China’s total trade volume ranked only second to USA by15billon dollars and export volume attained the first place. China has been a Trade Nation. However, Trade Nation is not tantamount to the Trading Power. Over the past three decades, we have been conducting the export-oriented foreign trade policy, and our export products are mainly processed products and we cannot achieve our economic goal only by exporting low value-added processed products. And there are more and more trade frictions caused by haying too much trade surplus. In addition, to change our unfavorable situation which is the bottom position of international value chain in vertical specialization, there is need to transform the pattern of growth of foreign trade and shift our spotlight from exports to imports, reinforcing analysis and research of our imports demand.Analyzing import demand has much positive significance. Firstly, it could accelerate our transform the mode of economic growth. Import of advanced technology, as well as mere technological spillovers, could reduce consumption or input, hence increase output and efficiency, result in rising total factor productivity. Secondly, it could ease our growing trade frictions with other countries through increasing import volume from those countries. Thirdly, it could help balancing region distinction. With proper import policy, we could lead part of imports to the central and western regions which could also adopt positive measures to encourage imports and achieve its full potential that import promotes economic growth, and then gradually narrow the East-West economic gap. Fourth, it could promote the updating of industrial structure. Being one of the driving forces of updating structure, imports can fulfill its goal by formulating strategic import policies and introducing top technologies aimingly and systematically. However, after analyzing our import demand structure which has its space to be improved, we could find out that our import efficiency needs to be enhanced. Meanwhile, for a long time, there are some loopholes in our import practice and import policies which lead to less efficient in its function in our economic growth. Hence it is of great theoretical and realistic significance to study our import demand and discuss its flaws, and then propose some specific policy adjustments.This thesis focuses on empirical study of China’s disaggregated import demand functions through examining the effects of China’s economic growth on current account by analyzing China’s disaggregate import demand function, examining the existence of cointegration among imports, relative prices and domestic macroeconomic variables by adopting the bounds test. Based on the estimation results, we derive some implications. Firstly, in the short run, export expansion improves China’s trade balance but in the long run economic growth may push the trade balance in the opposite direction through income and GDP expansion. Secondly, the overall effects of currency depreciation could be rather small in improving the trade account. Since our estimated relative prices for capital goods, using investment as the macroeconomic variable, and intermediate goods are less than0.5, the exchange rate policy would have almost no effect on the trade account of these goods. In contrast, the exchange rate depreciation has a desirable effect on the imports of consumption goods. Since the share of imports of consumption goods in China’s total imports is very small, the overall effects of currency depreciation could be rather small. Thirdly, we derive significant but inelastic long-run price elasticities for intermediate goods and capital goods. According to an interesting study conducted by Goldsbrough in1981, the price elasticities for intra-firm trade are found to be smaller than those for general international trade because intra-firm trade is undertaken among foreign affiliates and parents. Thus, the low price elasticities may indicate a large share of intra-firm trade.This thesis has innovated in analyzing China’s disaggregate import demand function from a macroeconomic perspective with comparison to other domestic literatures which only focus on a specific type or commodity and they don’t make distinctions on commodity categories when building up econometric models, that is, not the estimation of disaggregate import demand functions. We partitioned imports into capital goods, intermediate goods and consumption goods. What is also worth noticing is that this thesis take bounds testing approach into practice which is proposed by Pesaran, Shin and Smith in2001. This mechanism can avoid the uncertainty problem of pre-testing which arises from classifying variables either into1(0) or1(1) and the bounds test can be applied to small sample sizes whereas the conventional cointegration methods developed by Engle and Granger in1987, Johansen in1988, and Johansen and Juselius in1990suffer from small sample bias.