Journal of International devele J.mnt.Dev.10,733-749(199 MACHINERY AND CHINAS NEXUS OF FOREIGN TRADE AND ECONOMIC GROWTH DIC LO AND THOMAS M. H CHAN2 Department of Economics, SOAS, University of London, UK China Business Centre, Hong Kong Polytechnic University, Hung Hom, Hong Kong Abstract: This paper offers an interpretation of Chinas nexus of foreign trade and economic growth that centres around technological development. Evidence, mainly related to the performance of the machinery sector, is presented indicating that the phenomenal export expansion is not reducible to a market-centred trade regime, and esis of export-led grow trade to growth realises rather through imports. With an emphasis on the central importance of the production side, we present further evidence to substantiate the argument that the relatively successful aspects of the trade-growth nexus have been largely underpinned by a mix of the market mechanism and various non-market institutions.C 1998 John Wiley Sons, Ltd. 1 INTRODUCTION Chinas real gdP grew at an average annual rate of 10 per cent between 1980 and 1996, while the GDP share of its industry remained at basically the same level of somewhat higher than 40 per cent. In the mean time, the countrys total merchandise ports and manufacturing exports grew (in nominal uS dollar)at a rate of 14 and 18 per cent, respectively. This correspondence between the two trends of output and foreign trade gives rise to the question concerning the causal relationship, if any, Correspondence to: D. Lo, Department of Economics, School of Oriental and African Studies niversity of London. Thornhaugh Street, Russell Square, London WCIH OXG Paper initially presented at the Development Studies Association Annual Conference. 18-20 Septembe CCC0954-174898/060733-17s17.50 o 1998 John Wiley Sons, Ltd.MACHINERY AND CHINA'S NEXUS OF FOREIGN TRADE AND ECONOMIC GROWTH DIC LO1* AND THOMAS M. H. CHAN2 1 Department of Economics, SOAS, University of London, UK 2 China Business Centre, Hong Kong Polytechnic University, Hung Hom, Hong Kong Abstract: This paper o€ers an interpretation of China's nexus of foreign trade and economic growth that centres around technological development. Evidence, mainly related to the performance of the machinery sector, is presented indicating that the phenomenal export expansion is not reducible to a market-centred trade regime, and that the standard thesis of export-led growth would not applyÐ the contribution of trade to growth realises rather through imports. With an emphasis on the central importance of the production side, we present further evidence to substantiate the argument that the relatively successful aspects of the trade±growth nexus have been largely underpinned by a mix of the market mechanism and various non-market institutions. # 1998 John Wiley & Sons, Ltd. 1 INTRODUCTION China's real GDP grew at an average annual rate of 10 per cent between 1980 and 1996, while the GDP share of its industry remained at basically the same level of somewhat higher than 40 per cent. In the mean time, the country's total merchandise exports and manufacturing exports grew (in nominal US dollar) at a rate of 14 and 18 per cent, respectively. This correspondence between the two trends of output and foreign trade gives rise to the question concerning the causal relationship, if any, between them. * Correspondence to: D. Lo, Department of Economics, School of Oriental and African Studies, University of London, Thornhaugh Street, Russell Square, London WC1H 0XG, UK. Paper initially presented at the Development Studies Association Annual Conference, 18±20 September 1996, Reading, UK. CCC 0954±1748/98/060733±17$17.50 #1998 John Wiley & Sons, Ltd. Journal of International Development J. Int. Dev. 10, 733±749 (1998)