When transnational corporations move to China, they need to understand the policy environment for international business in the country. Gradualism is the key to understanding China's policy environment. As indicated in the above statement by Deng Xiaoping, China has pursued its economic reform and opening up in a gradual way as compared to Russia and other eastern European transition economies, where a big bang approach prevailed. In this chapter we first discuss how China has gradually liberalized its foreign trade, foreign direct investment and foreign exchange regimes, and the current restrictions on international business in China. Then we evaluate China's steady approach to opening up in the light of the benefits and costs of liberalization, and look at the implications of the gradual approach for TNCs doing business in China.

China's foreign trade regime

Before 1978 China's foreign trade was under strict state control. Many restrictions were imposed on foreign trade, including a state monopoly of the right to trade, a high tariff rate and numerous non-tariff barriers. In that year China began to liberalize its foreign trade regime, by reducing the tariff and non-tariff trade barriers and by offering the right to trade to more enterprises, state-owned and non-state-owned alike. Particularly after the WTO accession in 2001 (box 2.1), China promised to remove more restrictions on foreign trade in a gradual manner.