China and the World Trade Organization on Capstone Project

  • Length: 30 pages
  • Subject: Economics
  • Type: Capstone Project
  • Paper: #75116965

Excerpt from Capstone Project :

China and the World Trade Organization

On December 11, 2001, China officially became a member of the World Trade Organization (WTO), opening the country's doors to change and a new economy.

One year after china's entry into the WTO, the country reported great success, showing better-than-expected economic growth and fulfillment of its WTO commitments, despite the shaky world economy.

The excellent performance of the Chinese economy was clearly demonstrated by its 8% growth rate for gross domestic product and the significant growth in trade and inflow of foreign direct investment.

As a result of its inception into the WTO, financial experts forecast that China will become the fifth trading country with an import-export volume worth U.S.$600 billion and one of the most attractive areas for foreign direct investment, which exceeded U.S.$50 billion in 2002 alone.

This paper discusses China's inception into the WTO and address the question of whether or not China's markets have expanded since its entry in the WTO.

History of China's Economic Structure

Following the death of Mao Zedong in 1976, it became apparent to China's political powers that economic reform was desperately needed. During Mao Zedong's tenure as China's premier, he had pushed for many social movements, including the Great Leap Forward and the Cultural Revolution, which aimed to serve the people and maintain the class struggle.

By 1978 "Chinese leaders were searching for a solution to serious economic problems produced by Hua Guofeng, the man who had succeeded Mao Zedong as CCP leader after Mao's death" (Shirk, p. 35). Hua Guofeng had attempted to carry on the idealistic movements of Mao Zedong.

However, his plans did not turn out right. Instead, these movement pushed China in a state where "agriculture was stagnant, industrial production was low, and the people's living standards had not increased in twenty years" (Nathan, p. 200).

The fact that the people's standard of living was stagnant troubled China's leaders. While "the gross output value of industry and agriculture increased by 810% and national income grew by 420% (from the 1950's to the 1980's)," the "average individual income increased by only 100%" (Shirk, p. 28).

While the Chinese Communist Party (CCP) aimed to improve its economic conditions to help the people, it also knew that changes would help the political party, which was rapidly losing support. According to Shirk (p. 23), restoring the CCP's political position required improving economic performance and raising living standards.

Due to the fact that the errors made during the Cultural Revolution had decreased popular trust in the moral and political virtue of the CCP, the party knew that it had to shift the basis of party legitimacy from "virtue to competence" (Shirk, p. 23). In order to do this, they would need to pull off a major economic reform.

This change from "virtue to competence" (Shirk, p. 23) would completely shift the country from an era of orthodox Chinese political theory. Confucius, in the fifth century BCE, had stated that those who best demonstrated great moral force should lead the country.

As a result, for centuries, China had chosen it leaders based on tests of their moral force. After China was taken over by the Communist party, Mao Zedong carried on this position, forcing Chinese citizens to demonstrate what he referred to as "correct consciousness."

According to Shirk, the Chinese Communist Party viewed economic reform as a means of regaining its moral virtue even after Mao Zedong's death. By showing a more practical type of competence, China's leaders felt that the people of the nation would feel like they were being served.

Initially, the new economy did not change radically. In fact, China was "still a state in which the central government retained the dominant power in economic resource allocation and responsible local officials worked for the interest of the units under their control" (Solinger, p.103). However, changes were undoubtedly being made.

According to Shirk, in rural areas, decollectivization was taking place. "decision making power was transferred from collective production units (communes, brigades, and teams) to the family" (Shirk, p. 38) and "purchase prices for major farm products were increased" (p. 39).

By 1985, further reforms were called for. For example, long-term sales contracts between farmers and the government were created and maintained. In addition, in an effort to enable the market to determine prices, "city prices of fruit and vegetables, fish, meat, and eggs, were freed from government controls so they could respond to market demand" (Shirk, p. 39). In addition, "a surge of private and collective industry and commerce in the countryside" (p. 39) occurred.

These changes enable much of the population to get involved in private enterprise and investment in family or group ventures. In addition, rural villagers were able to leave China's villages and move to urban areas, where they became involved in industrial sectors (Shirk, p. 40).

China's economy increased rapidly, causing major inflation and forcing the government to place price controls on products and services. At this point of China's, China's leaders decided that it would be beneficial to join the world economy.

China's leaders hoped to affect the 1979 resolution to join the world economy in two ways: by expanding foreign trade, and by encouraging foreign companies to invest in Chinese enterprises. This policy, which was called the "Open Policy" (Shirk, p. 47), represented a drastic shift from the policies of Mao Zedong and from centuries of Chinese rule.

This new policy designated certain areas in China "as places with preferential conditions for foreign investment and bases for the development of exports" (Nathan, p. 99). It proved very successful in the areas where it was implemented (Shirk, p. 47).

However, many Chinese people viewed this policy as nothing less than an avenue to "economic dependency" (Nathan, p. 50). In fact, when the policy was first implemented, many Chinese people feared that the new policy would pull China back toward its former semi-colonial status as a "market where the imperialist countries dump their goods, a raw material base, a repair and assembly workshop, and an investment center" (Nathan, p. 51).

However, it soon became apparent that the Open Policy would be successful and the people resisted it less. As it turns out, the Open Policy had an enormous impact on the success of the growing Chinese economy.

The Open Policy enjoyed such great success that, by 1988, Chinese leaders decided to implement a new program, which was called the "coastal development strategy." This strategy opened more of China to foreign investment, which gave other countries access to China's market, which included about 200 million people at the time.

By involving more foreign investors, "importing both capital and raw materials," and "exporting China's cheap excess labor power," the new policy was one of "export-led growth' or 'export-oriented industrialization' (Nathan, p. 99)."

However, these policies presented China with many new difficulties. Inflation went out of control, prices doubled in the industrial zones and commercial and residential rates escalated (Tyler, p. A8).

As trade expanded globally and countries within geographical proximity and of similar cultural descent and philosophies allied themselves to compete on a global level, China showed that it might be successful in competing in the global markets, which would stimulate the economies of almost all member states (Dorn, 1990, p. 42).

Effects of China's change in economic strategy by a world power could be felt by nearly every nation of the world involved in international trade. The change in the amount of imports and exports to and from China increased the demand on many markets.

In addition, with all the foreign investment China was getting, the socialistic republic continued to become more interdependent upon the world economy. However, the impressive growth rate of China's economy was not an entirely flawless process.

When China opened its economic borders 19 years ago, environmentalists spoke of the efficiency of their farming systems and how they used hardly any organic fuels in their foods. However, many of its systems were inefficient.

Basically, however, in the 1980s and 1990s, China emerged as a major player in the global economy and economists say that no other country has ever expanded its role so quickly (Lardy, 2001). Its foreign trade experienced rapid growth, from about $20 billion in the late 1970s to $475 billion in 2000.

For much of the 1990s, China was the world's second largest recipient of foreign direct investment, regardless of the fact that it was not a member of the WTO (Lardy, 2001).

By the end of the 1990s, foreign direct investment in China accounted for almost a third of cumulative foreign direct investment in all developing countries, exceeding countries like Mexico and Brazil, which opened their doors to foreign direct investment decades before China.

In addition, Chinese enterprises became major investors overseas. In the mid-1990s, reports showed that China was "the largest outward investor among developing countries and the eighth largest supplier of outward investment among all countries" (Lardy, 2001).

China also raised a good deal of capital on international bond and equity markets.…

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