China's WTO accession and expected economic benefits for trading partners

¶ … China's accession to the World Trade Organization for China and its trading partners with a focus on the United States. Findings indicate that China will benefit from new export markets and increased foreign investment. The main efficiency gains from WTO membership for China will be in the protected and non-traded sectors, which will feel the impact of import competition or the arrival of new foreign-backed competitors.

China's market access commitments will provide U.S. businesses the opportunity for significantly greater market access to a broad range of goods and services in sectors that are of key importance to U.S. businesses. East Asian economies could also benefit significantly from China's membership. Japan, the Republic of Korea, and Taiwan (China) all provide intermediate goods and quality consumer durables that could gain market share in China.

Introduction

Premised on the principles of free trade, the World Trade Organization (WTO) requires new member nations to abide by rules and norms that promote the free flow of goods and services across borders (Groombridge, 2001). China will have to undertake sweeping economic reforms to move the country in a more market-oriented direction. To meet WTO requirements, China must make laws public, require judicial review of all trade actions, apply all trade laws uniformly, and submit to WTO dispute settlement to ensure compliance with WTO rules. Despite legitimate concerns about China's ability to live up to all the obligations to which it has committed, it is in the interest of both China, the world trading community and the U.S. To see China enter the WTO.

2.0 Expected Benefits

Stability in External Economic Relationships

According to Cheng (1999) WTO membership will give China a more stable access to foreign markets because it will reduce disruptions in foreign trade that are caused by unpredictable policy shifts. Therefore, China will be in a better position to attract foreign investors who use China as their export platform. In addition, it will also attract foreign investors who feel more secure about developing China's domestic market. Foreign direct investment (FDI) would not only bring in additional capital, but more importantly management, technology, market information, and global production and distribution networks that will link China more tightly to the other economies.

This is not to imply that WTO membership will eliminate trade and investment frictions between China and other economies since such frictions are not uncommon between existing members. However, these frictions will be better managed under the WTO's trade rules and the organization's dispute settlement mechanism. This will represent a substantial improvement over the existing relationships, under which trade and investment disputes tend to be settled by mutual threats and brinkmanship.

China Revitalized

Economists predict that WTO membership will increase China's annual GDP by two to three percent, and each additional percentage point of growth will provide approximately five million new jobs, predict Chinese economists (China at the gates of the World Trade Organization). Forecasts state that China's foreign trade will increase from $320 billion in 1998 to $600 billion in 2005, with foreign investment rising from $45 billion to $100 billion.

Prior to 1978, China conducted trade under a strict system of state trading where approximately a dozen foreign trade corporations monopolized all foreign trade (Martin, 1997). Under the central planning regime, imports were minimized and exports authorized only to the extent needed to pay for imports. Over the last twenty years, the system has changed dramatically and China's trade has expanded enormously. Its share of world trade has risen from one percent to three percent over the last quarter century and the World Bank projects that it will triple again by 2020, making it the world's second largest trader. However, China's trade regime still retains many of its pre-reform trade structures, despite the changes that have happened.

China excels in low-margin, quick-to-market manufactures. But this benefit is constrained by the country's managed trade policies (China and the WTO, 1999). The greatest constraint comes in textile exports to rich countries. China's share of the world market in garments is kept at seventeen percent because of quotas imposed under the Multi-Fibre Agreement (MFA). In addition, World Bank research showed that approximately sixty-two percent of Chinese exports to America and forty-eight percent of exports to the European Union faced non-tariff barriers in 1993. Since then, America has imposed new quotas on Chinese-made silk, and Europe has slapped quotas on a range of Chinese goods, including footwear, toys and kitchenware. China's membership in the WTO does away with all of these restrictions, thereby greatly enhancing its trade potential. China has negotiated with America a phase-out of MFA quotas by 2005.

WTO membership will also improve the structure of China's domestic economy (China and the WTO, 1999). The outcome will be a vastly more efficient economy free of socialism. The state sector has had a negative impact on the efficient allocation of resources. Unprofitable state firms employ about two-thirds of all urban workers in China and command about nine-tenths of the financial resources of the big four state banks. The banks, as a result, are technically insolvent. Private enterprise's capacity to create new jobs has been stifled by a shortage of capital for new ventures, and by the state's tendency to frustrate new business or at least demand a share of it. And banks have faced little competitive pressure to clean up their balance sheets.

Unable to forge a domestic consensus for deeper reforms, China's leaders have turned to the WTO (China and the WTO, 1999) which will have profound effects across all sectors of China's economy. For example, under the deal with the U.S., deep cuts in tariffs will by made by 2004, to just over fourteen percent for several bulk commodities such as wheat and maize. Quotas for low-tariff agricultural imports will also be expanded. The effect will be to prevent China from continuing to keep domestic wheat prices far above world market levels. As wheat imports increase, farmland devoted to growing wheat will over time shift to higher-value crops. That represents a better use of China's scarce resources. China's automobile manufacturers are fragmented and inefficient. Most are sheltered by high tariffs and local-government protection.. Under the WTO, tariffs on imported cars are to fall by fifty-five to seventy-five percent. And foreign car makers are to be allowed to supply financing for buyers. Domestic car makers will be forced to bring their costs down by at least two-fifths if they are to survive. In the past, telecoms have been guarded by the Ministry of Information Industry. With WTO accession, foreigners may now take stakes of up to forty-nine percent in telecoms and Internet companies. Lower prices and better service should follow -- a reallocation of resources from the state to telecoms customers.

Over time, some of the most profound changes will come in the financial system (China and the WTO, 1999).. Foreign banks will be allowed to do local-currency business with Chinese companies within two years of WTO accession, and with Chinese individuals within five years. The geographical rules on where foreign banks may set up will be eliminated. Local banks will need to acquire better business skills and they will need to repair their balance sheets. Otherwise, deposits will flow to foreign banks. But, competition raises the odds of a systemic banking crisis in China. Foreign banks may be allowed to take stakes in the state banks to help recapitalize them.

Finally, membership in the WTO paves the way for Congress to grant permanent Normal Trade Relations (NTR) (also known as Most Favored Nation), thereby giving China the same trading privileges now enjoyed without annual review by almost every other U.S. trading partner (Nolt, 1999). China anticipates that securing permanent NTR will remove the political embarrassment of Congress' annual scrutiny of its human rights, labor, and environmental record.

Conclusion

China's WTO accession agreement is a win/win proposition for China, the world trading community and the U.S.

Market access presents significant export opportunities for China's trading partners. China will recoup these losses by being able to attract foreign capital and by new export freedom. And, most importantly, China's domestic economy will be forced to operate more efficiently than in the past.