Decontamination Plan

China and WTO — the Impact of Becoming a Member of WTO

In 2001, China became one of the last countries to join the World Trade Organization (WTO). In accordance with WTO rules, which will ensure the integration of China into the world economy in addition to offering a more predictable environment for trade and foreign investment, China equally agreed to undertake a series of significant commitments that will not only open its economy but will also liberalize its regime. In this paper, I will examine the impact of China’s membership of WTO. A fundamental premise to begin this analysis is to examine why China needs WTO.

China vs. WTO — Potential Benefits

China can be considered to be a significant success story due to its explosive economic expansion over the past two decades. The country is equally a prosperous one given that its growth rate which averages nearly 10% per year and which has created a vast array of new investment and job opportunities — a growth rate that was fuelled by the county’s various reform efforts. It is important to note here that Chinese government’s strategy was to transform the country from a planned economy to a more market-oriented economy. This strategy have made China to influence almost everything in the global economy because its reforms upgraded the country’s status to that of a trading powerhouse whose activities has reverberated throughout the world market (Adhikari & Yongzheng, 2002; Hertel & Walmsley, 2000; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004).

From an economic standpoint, China’s rapid growth is not cost-free. Centrally speaking, some of the structural weaknesses of the Chinese economic system, especially those that are related to state-owned enterprises, finance and agriculture, have been exposed by the country’s rapid-fire growth rate. As such, the country faces an inevitable dilemma — how to sustain the dual momentum of structural reform and economic growth simultaneously. This dilemma is predicated on the notion that a whole new set of economic challenges and difficulties will be unleashed in the country if either of this two is allowed to stumble. The implication of this is that, in many respect, to sustain the pace of economic growth and reform, the best option for China will be to become a member of WTO. In other words, WTO membership has become critical for China and other countries of the world given the level of complexity and interconnectedness of the world economy. As a member of WTO, China will enjoy the privilege of being one of the major players in the formulation and implementation of the rules governing global trade and finance (Adhikari & Yongzheng, 2002; Hertel & Walmsley, 2000; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004).

In addition to the above, the country can use WTO dispute settlement system to defend all of its trade interests. This will be very beneficial for the Chinese exporters given the high degree of assurance and certainty that their trading partners will become obliged to obey WTO rules. This further means that Chinese products will not be discriminated in the home markets of every WTO members. Hence China will become more attractive to foreign investors as a result of its WTO membership. It is also worth pointing out that more high paying jobs, more technology transfers and more government tax receipts will be the resultant outcome of more investment in China’s economy.

It is equally hoped that increased competition in every sector of China’s economy will be facilitated by its WTO’s membership. Increased competition will bring a lot of benefits for the Chinese consumer. First, they will have access to a larger range of high quality goods at lower prices. Second, greater awareness of an appreciation of intellectual property rights and consumer right are virtues that generally emanates from competition. The Chinese economy will equally gain from increased competition which brings about more gains in efficiency and productivity — an outcome that will not only strengthen the economy but will equally make Chinese firms to become more competitive in the world market. Furthermore, foreign companies will naturally want to bring an expanded range of services into China’s economy given that it is now a full member of WTO. The Chinese homegrown service sector of the economy will be stimulated by competition in this area, a situation that will provide a broader range of choices both for the companies and the Chinese consumers (Adhikari & Yongzheng, 2002; Hertel & Walmsley, 2000; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004).

In this section, I have succeeded in explaining the benefits to China of becoming a member of WTO. In the following section, I will examine China’s commitments as well as the opportunities and risks associated with its WTO accession.

China’s WTO Accession — From Margins to Mainstream

My organizing framework in this section will be to discuss China’s commitments as a member of WTO. This will then be followed by an analysis of the country’s opportunities, and market prospects of WTO accession. This, in turn, will be followed by an examination of the potential implications of the country’s increased participation in world trade.

China’s Commitments

Even though China plans to reduce its tariff level as a condition for joining WTO, this act is simply a continuation of a longstanding trend in the country. Broadly speaking, China started reducing its tariff as well as nontariff barriers since the 1990s. In addition, majority of Chinese imports were not subjected to any tariff in 2000 because past reforms in the country introduced widespread import tariff exemptions, particularly for the processing trades and foreign investment. It is important to note here that by the mid — 1990s, China’s domestic prices for most traded goods had largely converged with international prices due to the aforementioned reforms, as well as the Chinese government’s continued domestic price liberalization (Adhikari & Yongzheng, 2002; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004).

When China became a member of WTO, it was then required that the country further reduce its average tariff to as little as 10 per cent by 2005. The country responded in January 2004 by lowering its average tariff rate by 0.6 percentage points to 10.4%. Since the country agreed to eliminate import quota, licenses and other trading barriers, the overall trade regime in the country was planned to be increasingly tariff-based. It is sufficient to note that the transparency of China’s trade regime will be strengthened by its gesture that involves the substitution of import quotas with tariff rate quotas (TRQs) particularly for agricultural products (Adhikari & Yongzheng, 2002; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004).

It is worth pointing out that in order to review China’s compliance with the WTO agreement, a special WTO procedure known as the Transnational Review Mechanism (TRM) was established to undertake this special assignment. According to the provisions of China’s Protocol of Accession, a review of China’s compliance in the first eight years of its WTO membership will be conducted by the TRM on an annual basis. The most striking thing about such reviews is that they provide opportunities for stock-taking on past progress as well as the areas that needs further efforts and improvements. In other words, they are not merely a “pass or fail” tests. The results of such reviews conducted separately by sixteen WTO sectoral councils do not, in any way, indicate or reveal any major source of contention with respect to China’s early implementation of its WTO commitments. However, some of the China’s trading partners did express some concerns in specific areas (for instance, intellectual property, finance and agricultural sectors). Such concerns are generally related to either transparency of the legal framework and enforcement issues or delays in implementation of the WTO requirements for the affected areas. Nevertheless, no formal complaint within the WTO was filed against China as of 2003. Hence, a widely shared assessment is that the problem or issues related to these areas do not reflect a broad pattern of non-compliance — instead they merely reflect primarily technical difficulties (Rambaugh & Blanche, 2004).

Broadly speaking, China’s compliance will be continually tested in the period ahead even though it had already implemented the key changes since its WTO accession. While the elimination of nontariff barriers (particularly in the country’s agricultural sector) is proceeding, tariff reductions have taken effect in the country as scheduled. In addition, to comply with WTO principles, the Chinese government has made a number of fundamental changes to the country’s legal and regulatory framework particularly at the central government level. For instance, the country has not only eliminated a significant portion of the requirements related to foreign currency financing, local content or export performance but have equally undertaken and implemented an extended foreign direct investment (FDI) regime (Adhikari & Yongzheng, 2002; Hertel & Walmsley, 2000; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004). Nevertheless, China’s commitment in this regard, has one important implications. China has to effectively tackle a dire need with respect to ensuring adequate enforcement of new rules at all levels. This is particularly important at the provincial and municipal levels, where progress may be hampered by administrative and judicial capacity constraints, in addition to the potential role of vested interests (particularly on issues related to the elimination of restrictive practices, which nontariff obstacles such as inter-provincial taxes, and fees).

Market Access Prospects and Opportunities

The most immediate benefit to China of WTO accession is increased access to oversea markets. Generally speaking, as a step towards normalizing its trade relations, other WTO members have permanently granted China the most-favored nation (MFN) treatment. In addition, several trading partners have eliminated many of the restrictions they formerly imposed on imports from China after the country became a member of WTO. The bottom line here is that China’s labor-intensive exports in a number of sectors (particularly electronics) has been boosted by the country’s easier access to foreign markets. In particular, the quotas placed against its clothing and textiles will be removed as a result of its WTO accession. While the timing still remains uncertain due to the specific safeguards provisions incorporated in China’s accession protocol, it is generally expected that this removal will go a long way in generating a significant boost to China’s exports (Adhikari & Yongzheng, 2002; Hertel & Walmsley, 2000; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004).

Other sources of benefit to China after WTO accession abound. For instance, within the multilateral dispute settlement procedure under WTO, China stands to benefit from the treatment of future trade conflicts. This will equally go a long way to help the country to benefit from a greater reciprocity in the resolution of trade conflict as well as help the country better promote its trade interests. In addition, the scope for WTO members to unilaterally impose anti-dumping protection against Chinese products will be limited.

Nevertheless, provisions that could constrain China’s export market gains in the coming years, especially with respect to its gains from trade on clothing and textiles, are incorporated in its accession protocol. Note that such provisions are, to a very large extent, widely seen in China’s case as going beyond the usual practice in recent WTO accession cases, even though they do reflect the organization’s principles (Lardy, 2002). Broadly speaking, under the product-specific safeguard mechanism which provides relatively low requirements for safeguard actions against Chinese exports, the provisions unfortunately include a concept of “market disruption” as well as non-market treatment of China, particularly on issues related to the determination of anti-dumping in addition to countervailing cases for as much as fifteen years.

Having examined the above issues in this section, I will now turn my attention to the potential implications of the country’s increased participation in world trade. This will be the topic of the following section.

China’s Increased Role in World Trade — Potential Implications

Numerous studies have shown that, overall, China’s WTO accession will produce a positive international welfare effects. In the 1990s, such welfare effects have been the subject of increasing research by many scholars and government agencies both in China and in Europe. However the major outcome of such studies and models indicates that, given that China’s tariffs have already been lowered substantially prior to its accession, the overall welfare effects of the WTO-induced tariff changes in China are not significant or sizeable when compared with a baseline scenario. As such the studies and models generally concur with the following key points (Adhikari & Yongzheng, 2002; Rambaugh & Blanche, 2004):

1. China will benefit from its WTO accession in the long run. Note that benefitting from increased competitive pressure, which is an external impetus for domestic reforms, is the key objective of China joining the WTO. It is thus not surprising that most analysis point to the fact that in the long run a positive net benefit will accrue to China — benefits that will occur in the form of efficiency gains and other forms of direct benefits for the Chinese consumers;

2. China’s WTO accession will contribute to the country’s sustained growth and this will, in turn, provide benefits to most of its trading partners, including the United States and other European and Asian countries. It is sufficient to note that China has agreed, as one of the conditions to its WTO accession, to open sectors which are considered crucial by its trading partners. Some of these sectors include the agricultural, tourism, and service sectors of China’s economy. In addition, the key obstacles that have long weakened foreign investor confidence in the country will be removed as a result of its continued improvements of its business environment, particularly as it relates to such areas as its predictability and transparency.

3. Both the advanced economies as well as the most advanced developing countries would equally benefit in the short to medium term. Increased exports to China of capital and technology-intensive manufactures are the main underlying causes of these benefits. This is in addition to increased investment and trade opportunities in the services sector of China’s economy, as well as access to the vast agricultural markets in China.

4. 4. Some of the less advanced developing countries may, at the same time, sustain some adjustment costs as a result of China’s WTO accession. Those of them who are the direct competitors to China in, for example, the clothing or textile sector, will be the most affected in this regard.

In contrast, significant benefits may accrue to the low-income Asian nations who not only have close ties with China but have exports that are complementary to China.

It is, however, worth pointing out that narrow trade analysis may be incapable of estimating all the facets that are related to the overall impact of China’s accession to WTO. In particular, with regard to the role of China in the global economy (especially the country’s growing role as a global export base and its attractiveness to international investors), several key aspects of China’s WTO membership could potentially have an even greater impact on some of the trends described above. For these reasons, it can be possible to underestimate the benefits to the rest of the world through quantifications of the global impact of China’s WTO accession.

The above explanations do provide some justification to the fact that China’s emergence in the world trade would be facilitated by its WTO accession. There are, however, some inherent risks. First, through extensive safeguards procedures that may be initiated by the trading partners, China’s exports may be restricted. In this case, there is a possibility that the country may retaliate through its own anti-dumping claims. Second, since growth sustainability could be threatened by the impact of WTO accession on China’s state-owned enterprises (SOE), fiscal sustainability and on the agricultural sector and rural income, the country’s home front may be equally threatened. Nevertheless, the beneficial impact of the WTO accession can be reinforced by the fact that much of China’s trade liberalization has already taken place. Furthermore, two major factors make China’s trade emergence a noteworthy phenomena (Adhikari & Yongzheng, 2002; Ianchovichina & William, 2002; Rambaugh & Blanche, 2004):

1. China did not associate its export-oriented development phase with the maintenance of pervasive import barriers. For instance, the decisive concessions which China made to open its agricultural sector can be considered to be a WTO commitment that is, to a very significant extent, broader that those made by other past WTO member nations;

2. Compliance with a framework of global rules defined in a multilateral context is a key feature of China’s trade liberalization. This is different from what have been observed in other former episodes of trade emergence by other countries which are usually characterized by reliance on regional and bilateral trade agreements.

Having summarized the potential implications of China’s increased role in the world trade in this section, I will now turn my attention to the elaboration of the international impact of China’s WTO accession.

China’s WTO Accession — Its International Impact

On the issue of international impact of China’s WTO accession, most researchers and policy makers concur with the following postulates (Rambaugh & Blanche, 2004):

1. Most of China’s trading partners will benefit immensely if the country’s growth momentum is sufficiently sustained. Already, imports for domestic used have increased significantly in China. This is in addition to the prominent role been played by the country’s processing trade. In addition, in order to meet both local final demand, multinational companies are increasingly investing in China. It is sufficient to note here that despite low growth being experienced in the rest of the world, these developments have contributed to maintaining strong growth in the Asian region;

2. Because most of the newly industrializing economies (NIE) of Asia have a complementary trade pattern with China, they stand to gain immensely from China’s expanding trade. Already their export of intermediate products and components to China has increased significantly some few years after its accession. Nevertheless, China’s domestic production is equally rising and its exports are also moving up the value-added chain. The bottom line here is that the benefits which these economies will enjoy from the growing intra-industry trade will trump the potential competitive threats which China can pose to them in the future;

3. As the exports of all countries to China rapidly expand, the countries that belong to the Association of Southeast Asian Nations (ASEAN) will benefit tremendously. However, some of these countries may need to undergo significant changes and adjustments depending on the extent or level of the competition in the export of labor-intensive products. For instance, the quota dependent, low-and-middle income economies in this association may experience adverse impact from the growth in China’s exports. However, increased opportunities for textile export to China (which serves as inputs for China’s clothing exports) by these countries may serve as an antidote to this adverse effect. It is important to note that the ASEAN countries may not only have to adjust to the possibility of a greater share of FDI (Foreign Direct Investment) in the region going to China but may equally need to reform their economies so as to ensure that innovations and productivity improvements continues to flourish in their economies.

Note that the analyses made so far in this paper may not be enough to provide the overall actual impact which China’s accession can have on the rest of the world. In other words, the actual impact may be greater than the analysis I have already presented in this paper. This is due to many reasons. First, uncertainties in estimated trade elasticities stemming from the rapid changes in the structure of China and the region’s international trade are the main technical limitation of my analysis. Another important limitation is that some of the key aspects China’s WTO membership, especially those relating to the opening of trade in services or reforms that dismantle obstacles to foreign investment are not properly taken into account by some of the analysis and models which I presented here.

Before concluding this paper, it will be necessary to summarize some of the selected aspects of China’s WTO accession. This will be covered in the following section.

Summary of the Selected Aspects of China’s WTO Accession

Some of these selected aspects of China’s WTO accession are reported in Rumbaugh & Blanche (2004) and include the following:

Trade In Goods

Under this aspect, it was proposed that China eliminate or reduce all tariffs on imported goods by 2004. In addition, it was suggested that, by 2005, China should reduce the tariff on industrial goods to an average of 9 per cent. Furthermore, they are expected to lower the tariffs on agricultural goods by 15 per cent.

Trade in Services

Services in this regard include banking and insurance, telecommunication, tourism, legal and professional services. China was directed to, through automatic and transparent licensing procedures in various sectors, ensure foreign access to those sectors.

Right to Trade and Distribution

Under this provision, China was directed to permit foreign service suppliers to engage in the retailing of all products by the end of 2003. They were also directed to ensure that foreign firms actively participate or are allowed to distribute virtually all the goods domestically (except for such goods as oil and fertilizer, which are subject to state trading monopolies.

Banking

Upon WTO accession, China was directed to reform and liberalize the banking sector so as to permit foreign financial institutions to provide services without client restrictions for foreign currency business.

National Treatment (Non-Discrimination)

China was directed to remove all measures and practices that generally discriminate against imported products or foreign companies.

Export Subsidies

China was required after its WTO accession to dismantle or jettison all form of export subsidies that are not consistent with WTO rules. These include tax breaks and grants that are linked to export performance, and so on.

Trade-Related Investment Measures

China should no longer impose mandatory requirements (such as local content requirements or technology transfer) as a condition for foreign investment approvals.

Trade-Related Aspects of Intellectual Property Rights

Rights protecting intellectual property within China should be religiously enforced by the Chinese government.

Agricultural Subsidies

China is required not only to eliminate all agricultural export subsidies upon WTO entry but also to limit domestic agricultural subsidies to 8.5% of the value of production.

Having presented the above facts, I will now proceed to the concluding section of the paper.

Conclusion

The implication of the finding discussed in this paper is that China has, through its membership of WTO, has become a fully vested player in the world economy. Trade expansion, economic reform, entrenchment of the rule of law and increase in foreign investment are among the expected benefits which China will enjoy as a result of its membership of WTO. At the home front, the Chinese leadership and its citizens will fulfill significant responsibilities as a result of their membership of WTO. And in the international arena, China’s relation with other nations will be equally redefined as a result of its membership of this organization. Some of these nations include its neighbors in the Asian region as well as the United States, which is China’s largest export market. The bottom line here is that China’s membership of WTO has, to a very significant extent, produced changes beyond that country’s trade with other nations. Some of those changes were succinctly examined in this paper.

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