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Implications of Membership in the WTO for China

Due to the huge population of the country, China holds a certain fascination for most of us in business, academia, or government. It is destined to become a major player in the world, both for manufacturing and potential sales. A recent impetus to this is the award of the hosting of the 2008 Olympic Game to Beijing. For the longer term, the more significant event that will shape the economic landscape of China and the rest of the world is China's accession to the World Trade Organization. What are the implications for China and the rest of the world? Here we will try to examine the pros and cons of WTO membership for China and how that impacts the rest of the world.

Positives

WTO membership will eliminate the acrimonious annual trade review that U.S. Congress holds. In addition, it will deny other countries the ability to discriminate against China on trade matters.

WTO membership will allow China to be heard in the international economic arena and to enjoy the privileges, like having access to the WTO mechanism for trade disputes.

There will be a shot in the arm for Chinese goods with free access to world markets. The main beneficiary will be those industries in which China has competitive advantages, like textile, home appliances, bicycles and motorcycles, food, and toys.

There will be restructuring in the economy and many jobs will be created in those industries that have the ability to capitalize on the opportunities to export to the world markets.

China will be forced to upgrade its economy to international standards and eliminate unacceptable practices. These include respect for intellectual property, free access to markets, non-discriminatory and unfair practices, and respect for the rule of law.

One main beneficiary is Hong Kong, which traditionally serves as a conduit between China and the rest of the world. The China boom will enable Hong Kong to sustain and increase its economic role.

Chinese consumers will enjoy the fruits of a capitalist economy, with more choice of goods and services. In addition, prices will be lower and customer service will improve with more competition.

Negatives

Many state-owned enterprises that were used to the centrally planned economic system will be eliminated. They are struggling with archaic machinery and old production methods, shoddy products, disregard for customers, heavy debt, and a stubborn, undisciplined, old workforce. They will be unable to survive with open competition.

Chinese farmers, who lack modern farming techniques, machinery, and economy of scale, will be overwhelmed by foreign agricultural produce. They are currently protected by a high tariff wall.

Enormous labor restructuring will happen that is unprecedented in the modern world. Labor will migrate from rural to urban centers to seek job opportunities. Many millions of employees in the lower skill categories, including a high proportion of older people, will be jobless without skill retraining. At the same time, there will be shortage of people needed to fill New Economy positions, like IT, telecommunication, law, finance, foreign trade, biotechnology, etc.

Many industries will be affected. One of the biggest industries to suffer in China will be the car industry. It is protected by high tariffs and lacks the economy of scale to be competitive. It will be attacked by imports at cheaper prices and better quality.

Under WTO rules, tariffs will eventually be eliminated, and there will be no requirement for export quota and transfer of technology for local production. China will be under pressure to develop its own technology.

Rights and Obligations

There will be immediate tariff cuts in industrial and agricultural products upon accession. Further tariff reductions will be phased in over the next 9 years, with most being completed by 2005. By 2005, industrial tariffs will have fallen from an average of 16.3% in 1999 to 9.2%, and agricultural and agrifood tariffs will have fallen from 21.4% to 15.1%. Key services sectors will be opened to foreign investment, with, in many cases, majority foreign ownership permitted within 2-3 years and wholly foreign-owned subsidiaries within 2-5 years. Geographic restrictions that currently exist in a number of key services sectors (telecom, banking, insurance, and distribution) will be phased out over 5-6 years.

China has accepted the rights and obligations that are embodied in the WTO Agreements, including the fundamental principles of national and most-favored-nation treatment. Trade disputes involving China can now be settled under the WTO's integrated dispute settlement mechanism, a central element in providing security and predictability to the multilateral trading system. In addition, China has made a large number of specific commitments to bring its trade regime into conformity with WTO obligations.

Transparency will be substantially improved and all trade-related laws and regulations will be published and available upon request for comment before they are implemented.

China will establish procedures for companies, both domestic and foreign, that are affected by trade-related judicial or administrative decisions to request formal reviews by independent and impartial tribunals.

Product standards and standards-related procedures will be improved and brought into line with international practice.

China will eliminate requirements to export, produce foreign exchange, use local content, and transfer technology previously imposed on foreign investors.

China will not introduce new or maintain existing export subsidies; and the protection of intellectual property rights will be strengthened.

WTO membership will require changes in the structure of China's economy, in the relationship between government and industry, and in government structures, procedures, legal and regulatory frameworks. These changes will take some time. However, the benefits for China will be substantial. China's export industries will obtain secure and predictable access to foreign markets, generating further jobs and economic growth. Liberalized investment rules, a more transparent regulatory framework, and better export market access will attract foreign investors, and the technology and jobs they bring. Greater competition within China will improve economic efficiency and productivity in the long run.

 

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