734 D. Lo and TM h chan Adopting an analytical approach that is typical of most available studies on the topic, Lardy(1992, p. 691), for one, frames his question this way Has the expansion of foreign trade been achieved largely through a state-driven export strategy in which sales on the international market are viewed simply as a means of financing much needed imports? This would imply, as in the pre- reform era, that exports were selected without much consideration of China's comparative advantage and that, as a result, expanding exports might contribute This approach is strictly in line with the standard neoliberal theory about export-led growth -that is, the thesis of trade regime neutrality, where the clear logical link between allocative efficiency and free trade rests with the principle of(endowment determined) comparative advantage(see, e.g., World Bank, 1987). Hence, the isolation of allocative efficiency as the only channel through which foreign trade could contribute to growth centralizes the question as to whether Chinas trade-growth nexus has been largely accounted for by a trade regime that is heading toward neutrality, for which Lardy gives an affirmative answer We find this approach problematic, even misleading in terms of policy implications We do not dispute the observation that, to date, the expansion of China's exports has been largely accounted for by labour-intensive products that accord with its ' given comparative advantage. Nor do we dispute the judgement that the exports expansion has contributed to economic growth. What we want to argue is: ()that the expansion of labour-intensive exports has had its intrinsic problems which could retard economic growth; (ii) that the main channel through which exports contribute to reform era, is largely unrelated to allocative efficiency; and (iii) that in recent years the export momentum, and hence the contribution to growth, has been increasingly sustained by exports that do not accord with China's'given'comparative advantage Taken together, our arguments imply that the Chinese nexus of foreign trade and economic growth contradicts, rather than validates, the neoliberal thesis of trade gime neutrality which explicitly rules out any form of strategic integration of late developing countries with the world market. I Our focus on the machinery sector serves to substantiate the above arguments. Thi ector encompasses most of China's fast-growing industries over the reform era, with the electronics industry being a representative one. During 1980-95, the machinery sector as a whole grew at an average annual rate of 17 per cent and increased its output share in Chinese industry from 17. 4 to 23.8 per cent, while the electronics industry alone grew at a rate of 23 per cent and increased its output share from 1.5to 3.7 per cent. Perhaps more important, the development of the electronics industry and the machinery sector in general has been especially illustrative of the contradictions is-a-vis relative scarcities--among industries'. As for strategic integration with the world market, it recisely to a situation where the trade regime involves selective discrimination: providing variable effective ates of protection, and export incentives, for different categories of goods. Thus, the division between the wo is essentially about the international specialization of an economy: should it strictly follow its comparative advantage, or should it attempt to create competitive advantage over specific industries 01998 John Wiley Sons, Ltd J.mnt.Dev.10,733-74901998)Adopting an analytical approach that is typical of most available studies on the topic, Lardy (1992, p. 691), for one, frames his question this way: Has the expansion of foreign trade been achieved largely through a state-driven export strategy in which sales on the international market are viewed simply as a means of ®nancing much needed imports? This would imply, as in the pre￾reform era, that exports were selected without much consideration of China's comparative advantage and that, as a result, expanding exports might contribute little or nothing to economic growth. This approach is strictly in line with the standard neoliberal theory about export-led growth Ð that is, the thesis of trade regime neutrality, where the clear logical link between allocative eciency and free trade rests with the principle of (endowment￾determined) comparative advantage (see, e.g., World Bank, 1987). Hence, the isolation of allocative eciency as the only channel through which foreign trade could contribute to growth centralizes the question as to whether China's trade-growth nexus has been largely accounted for by a trade regime that is heading towards neutrality, for which Lardy gives an armative answer. We ®nd this approach problematic, even misleading in terms of policy implications. We do not dispute the observation that, to date, the expansion of China's exports has been largely accounted for by labour-intensive products that accord with its `given' comparative advantage. Nor do we dispute the judgement that the exports expansion has contributed to economic growth. What we want to argue is: (i) that the expansion of labour-intensive exports has had its intrinsic problems which could retard economic growth; (ii) that the main channel through which exports contribute to growth has been the ®nancing of technology imports and hence, just like the pre￾reform era, is largely unrelated to allocative eciency; and (iii) that in recent years the export momentum, and hence the contribution to growth, has been increasingly sustained by exports that do not accord with China's `given' comparative advantage. Taken together, our arguments imply that the Chinese nexus of foreign trade and economic growth contradicts, rather than validates, the neoliberal thesis of trade regime neutrality which explicitly rules out any form of strategic integration of late developing countries with the world market.1 Our focus on the machinery sector serves to substantiate the above arguments. This sector encompasses most of China's fast-growing industries over the reform era, with the electronics industry being a representative one. During 1980±95, the machinery sector as a whole grew at an average annual rate of 17 per cent and increased its output share in Chinese industry from 17.4 to 23.8 per cent, while the electronics industry alone grew at a rate of 23 per cent and increased its output share from 1.5 to 3.7 per cent. Perhaps more important, the development of the electronics industry and the machinery sector in general has been especially illustrative of the contradictions 1 Pack and Westphal (1986, p. 88) gives a standard de®nition of trade regime neutrality: `that policies should not selectively discriminate Ð that is, for tradeables, vis-aÁ-vis world prices, and for non-tradeables, vis-aÁ-vis relative scarcitiesÐ among industries'. As for strategic integration with the world market, it refers precisely to a situation where the trade regime involves selective discrimination: providing variable e€ective rates of protection, and export incentives, for di€erent categories of goods. Thus, the division between the two is essentially about the international specialization of an economy: should it strictly follow its comparative advantage, or should it attempt to create competitive advantage over speci®c industries. #1998 John Wiley & Sons, Ltd. J. Int. Dev. 10, 733±749 (1998) 734 D. Lo and T. M. H. Chan