The Employment Impact of China's WTO Accession

A. S. Bhalla, Shufang Qiu, S. Qiu

• Publisher: Routledge
• Year: 2003
• eBook ISBN:
  9781134394623
• Topic: Politica e relazioni internazionali
• Subtopic: Politica

The book explores the macroeconomic and sectoral employment implications (in agriculture, industry and services) of China's World Trade Organisation accession. It argues that while short-run employment losses may occur, in the longer term China will be able to generate additional employment particularly in the tertiary sectors; and that it can maintain its comparative advantage in labour-intensive exports by relocating production from high-cost coastal areas to the hinterland with abundant supply of cheap labour. It also argues that, although China is likely to benefit in the long run, in the short and medium term China is likely to face enormous problems, including increased unemployment as weaker links cease to be protected by tariffs, and the problem of restructuring state-owned enterprises.

1 The road to WTO membership

China’s bid to become signatory to the General Agreement on Tariffs and Trade (GATT, predecessor of WTO) started in July 1986 when China sought to replace the Republic of China (Taiwan) in 1950. China argued that there was only one China and that the Taiwanese seat rightly belonged to it. China sent several delegations to the GATT – China Working Party between October 1987 and February 1992 (see Lai, 2001). Taiwan applied for membership of the GATT (WTO) in 1992, which may have, inter alia, prompted China to accelerate the process of its own membership. China insisted all along that its own membership must precede that of Taiwan (Lardy, 2002: 16).

In this chapter, we examine the background to China’s protracted negotiations for accession to the WTO. This historical perspective is essential to appreciate the circumstances in which China had to negotiate and agree to stringent concessions and obligations, which, in some cases, are quite unique (see Negotiations and China’s motivation below). We show that China had been making preparations for entry to the WTO for over a decade by progressively liberalizing its trade, investment and foreign exchange regimes. These reforms prior to its WTO entry certainly soften the impact on China of the resulting global competition and opening up of its domestic market to foreign goods. The last section of the chapter discusses the implications of the WTO Agreement and Protocol of Accession especially in respect of output, exports and employment. Thus this chapter provides a background to the subsequent chapters (Chapters 3 to 6), which discuss the employment impact in more detail in both macroeconomic and sectoral terms. Chapters 7 and 8 discuss policies and measures that China may adopt to minimize the negative impact of Accession on employment.

Negotiations and China’s motivation

China’s attempts to join the GATT began with its (a) resuming in April 1980 its seat on the United Nations Interim Commission for the International Trade Organization (ICITO) and (b) by becoming a party to GATT’s Multi-Fibre Arrangement (MFA) in 1984. Also in 1984 China signed the Arrangement Regarding International Trade in Textiles, which allowed industrialized countries to impose limits on textile imports from developing countries during periods of market disruption and urging them to gradually lower these limits (see Jacobson and Oksenberg, 1990). Through these efforts China sought to familiarize itself with GATT procedures and to facilitate exports of its textiles to industrial countries. Two years later, in 1986, China formally applied for membership of GATT (see Table 1.1 for a chronology of events leading up to its accession to the WTO in November 2001).

Many observers, both Chinese and foreign, have questioned why China felt the need to apply for GATT (WTO) membership when this entailed many costs, at least in the short run, in terms of social hardships and major restructuring. The Chinese leadership has certainly been aware of the possible negative social impact of accession, but it has made a calculated guess of the potential net positive benefits resulting from improved resource reallocations and subsequent increase in economic efficiency. Accession to the WTO might have been considered as a means to counter critics of rapid structural adjustment and economic reforms within the country. There are indications that SOE reforms encountered difficulties despite Premier Zhu Rongji’s announcement in 1998 of the goal of achieving SOE restructuring within three years. Bureaucrats and party officials who benefited from the status quo also resisted further reforms (see Lai, 2001). In April 1999, at a joint Press Conference with the then President Clinton at the White House, Premier Zhu Rongji stated: ‘The competition arising from the WTO membership will also promote a more rapid and more healthy development of China’s national economy’ (cited in Lardy, 2002: 20). Chinese critics felt that Premier Zhu had given too many concessions to the US without obtaining any concessions in return. They were further infuriated by the NATO bombing in May 1999 of the Chinese Embassy in Belgrade, which led to some cooling off of negotiations between China and the US.

Table 1.1 Chronology of events leading up to China’s accession to the WTO

The top Chinese leaders (particularly, Premier Zhu) were convinced that increased competition in China’s domestic market following WTO entry would be beneficial in so far as it would put pressure on SOEs to undertake/accelerate the necessary structural reforms. (This view was echoed during our discussions with senior staff at the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) in Beijing in April 2001.) WTO membership was expected to help China increase its exports and employment and force domestic firms to improve efficiency through competition. However, in principle if tariff reductions are substantial and sudden, they can force weak domestic firms to close, thereby increasing unemployment at least in the short run. As we show in Chapter 3, some sectors will benefit from competition while others will suffer a great deal especially in the short and medium term. The net overall benefits are likely to be positive but will accrue only in the long run. As we note below, China has been preparing for WTO Accession over an extended period by progressively liberalizing foreign trade through reduction of tariff and non-tariff barriers (NTBs), and reform of its investment and foreign exchange regimes. Therefore, the negative impact in the short run may not be as great as many observers predict.¹

There were many other reasons for China’s bid for GATT entry in 1986 and subsequent efforts in this direction. First, having adopted an open-door policy in the 1980s, China wanted it legitimized by the international community so as to enjoy easy access to modern technology, foreign investment and global markets. Second, China wanted most-favoured-nation (MFN) status from the United States on a permanent basis. The prevailing Jackson-Vanek amendment to the 1974 US Trade Act, called for an annual review and approval of China’s MFN status in the light of its record on human rights. Third, discriminatory treatment and the blocking of its textile exports as a result of the Jenkins Bill of 1985 which aimed at limiting textile imports from China (Jacobson and Oksenberg, 1990).² Chinese textile exports also faced considerable quota restrictions from a large number of countries (see Chapter 5 for their implications on employment). As a party to GATT, China would have access to its Dispute Settlement Mechanism, enabling it to more easily ward off any protectionist actions by the industrialized countries than if it remained outside the Agreement. Bilateral negotiations are less effective than multilateral ones.

China may have assumed that it would receive developing-country status under which it would be able to retain a number of subsidy and protection measures for its industry. Article XVIII of the GATT has provisions under which a developing country can protect infant industries and provide subsidies for the development of its incipient economic activities. Similarly, a developing country can impose import restrictions to overcome its balance-of-payments problems. Also, it was believed that China could benefit from longer transition periods to meet its WTO obligations.

The US and a few other countries opposed granting of developing-country status to China. They argued that China should be treated as a middle-income developed country owing to its large size and the fact that it was already a major world trading partner and growing at a very rapid rate. However, this hurdle was finally overcome when the US withdrew its insistence and a compromise was reached which allows China to enjoy phase-in periods for reduction of tariffs and NTBs and subsidies, and it could continue state trading in sensitive products in agriculture and industry.

Lardy (2002) refers to the Taiwan factor in the protracted negotiations of China’s WTO membership. It is not clear how important this factor was in China’s willingness to bear the ‘potentially high short-term costs’ of WTO membership. It is true that China was opposed to Taiwan joining the Organization first, whereas the US argued that Taiwan’s WTO membership should not be linked to that of China and that it should be judged on its own merits. It may also be true that. China did not want to be seen as a laggard in negotiations compared to Taiwan.

Pre-WTO liberalization

Trade liberalization

The impact of China’s WTO accession on output, exports and employment is likely to be felt mainly through tariff reductions and elimination of non-tariff barriers. The impact – large or small and sudden or phased – depends on whether the level of trade barriers, such as tariffs, on the eve of China’s accession was high or low.

China’s tariff policy to date has been guided by several considerations. First, it has aimed to provide revenue for the central government. Second, it has been designed to control imports in order to provide protection to China’s infant industries. Therefore, lower import duties are levied on raw material inputs than on semi-manufactured or manufactured goods. Very high rates of import duties are imposed on goods produced in China, or on those considered non-essential.Finally, zero or low tariffs are levied on those imports which are not domestically produced, and are thus non-competing, but essential for people’s livelihood.

Many observers believe that China’s tariff and non-tariff barriers are still very high. While this may be true relative to developed countries, its tariffs are not particularly high compared to those of other developing countries such as the Republic of Korea (Lardy, 2002). They are half the level of tariffs in India and comparable to those in Brazil and Mexico (see Table 1.2 for tariff reductions in China up to the time of accession). Tariff revenue also (as a proportion of value of imports) is quite small: it declined to 3 per cent in 1994. Lardy (2002: 37) describes it as ‘the lowest rate of tariff collection of any developing economy’. One of the reasons for this low collection was illegal smuggling of dutiable goods. The ratio increased in subsequent years with the introduction of a rigorous anti-smuggling campaign.

It is true that China’s trade barriers are high for particular goods (e.g. automobiles). But even in this case tariff rates on the date of accession (November 2001) were 51.9 per cent compared to 80–100 per cent earlier (see Table 1.3). As Table 1.2 shows, on the eve of China’s WTO entry the average tariff level had already declined to 15 per cent, that is, two-thirds less than the highest level in the 1980s. Furthermore, goods processed for export are exempted from import tariffs. Since 1987, all raw materials and parts and components required for the processing of final goods for export have been imported duty free. Imported capital goods by joint ventures and wholly foreign-funded enterprises have also been free of import duty. These provisions were intended as incentives for export expansion. With the rapid increase in FDI and growth of trade in processed goods, duty-free import of these goods increased significantly.

Non-tariff barriers to China’s imports are more important than tariff barriers. They take several forms, namely, import licensing, quotas, and restricting trading rights to a limited number of companies, especially state trading corporations. Before the economic reforms started in 1979, China’s trade was regulated and controlled by a rigid planning system, which gradually gave way to licensing and quotas as trade expanded and China adopted an open-door policy.

Thus unlike other developing countries such as India where prior to 1991 reforms the licensing system was very restrictive, in China this system represented some trade liberalization with the loosening of strong government control (Lardy, 1992 and 2002). Across-the-board controls were replaced by selective controls.

Import and export licensing served several purposes. First, as noted above import licensing enabled China to protect its incipient domestic industry. Second, it enabled China to rationalize the use of scarce foreign exchange by controlling imports. In the 1980s the Chinese policy-makers feared that the then overvalued currency would make imports cheap and could thus lead to excessive import demand. On the export side, China introduced licensing to gain monopoly rents on commodities in which it is a major world supplier and thus is not a price taker. Third, export licences enabled China to monitor the fulfilment of quotas in such exports as garments to the US and the European Union (EU) which imposed quota restrictions. Fourth, China introduced quantitative controls to prevent possible domestic shortages of those commodities whose domestic price was lower than the world price and for which there was, therefore, an incentive to export. Such controls, through quotas, are intended to compensate for the differential between domestic and world prices.

Table 1.2 Lowering of tariff and non-tariff barriers in China (1986–2005)

Table 1.3 China’s import tariff rate reductions by commodity (1998–2006)

Import licensing is the most important of NTBs – accounting for 18 per cent of imports –followed by quota restrictions and state trading (see Table 1.4). As shown in Table 1.2, NTBs have been gradually reduced in preparations for WTO membership. For example, in 1996, import licensing covered about a third of China’s imports compared to more than half in 1992 (World Bank, 1997: 14). Furthermore, state trading and designated trading accounted for a little over 18 per cent of China’s imports, whereas this proportion declined to only 11 per cent in 1998 (see US International Trade Commission, 1999). By 2000, NTBs represented no more than 4 per cent of the tariff lines subject to import licensing. Mostessential commodities such as rice and wheat are subject to state trading (under which trading rights are monopolized by the central government), whereas designated trading (under which a number of trading companies are designated to trade in selected goods) is more common in livestock and non-grain crops.

Table 1.4 Non-tariff measures affecting China’s imports in 1996 (percentages)

As a non-tariff barrier, trading rights have become less important over the years. At the time of the reforms, only twelve trading corporations were responsible for China’s trade. Since then the number of trading corporations, including private trading companies (authorized in October 1998) has increased considerably, to more than 23,000 by 1998 (see Lardy, 2002: 42) and to about 35,000 by 2001 (WTO, 2001a). Although foreign-funded enterprises enjoyed the right to trade, this was restricted to the importation of raw materials and goods for production purposes. China has agreed to grant trading rights to a much larger number of domestic and foreign companies thus opening its domestic market to foreign goods. State trading in only a selected number of essential commodities (mainly in agriculture) will continue under special provisions of the WTO Agreement.

Investment liberalization

In the 1980s China adopted an open-door policy, involving inter alia, investment liberalization to attract not only investment but also modern technology and management skills. In 1986 China issued draft regulations on direct investment which provided for reduction in taxes and costs of certain inputs. Under these regulations enterprises enjoyed greater access to energy and transportation which are under state control. Approval and licensing procedures for foreign firms were streamlined. Investment liberalization measures included special tax concessions, liberalized leasing of land to foreign companies in coastal cities, and foreign participation in property development, port development, power generation and retailing. China also established selective joint ventures with foreign firms which were allowed to sell in the domestic market (e.g. Schindler Elevators of Switzerland and Volkswagen Santana of Germany). Foreign-funded enterprises enjoyed a tax holiday of two profit-making years and a 50 per cent reduction for a further two years. Besides these central government tax breaks, local authorities also offered incentives to foreign enterprises in the form of lower taxes on land, utilities and property. However, many of these incentives were withdrawn in 1996 in order to offer equal treatment to domestic and foreign enterprises.

Special economic zones (SEZs) were established in coastal areas to attract foreign direct investment (FDI) and technology. Municipalities and counties in the eleven open coastal provinces accounted for about 40 per cent of the gross value of industrial output and 33.4 per cent of gross domestic product (Kueh, 1996: 165). Corporate tax in SEZs was much lower (15 per cent) than for other foreign-funded enterprises (33 per cent) and Chinese enterprises (55 per cent). China has successfully used fiscal policy instruments to channel FDI into particular regions, sectors, industries and types (e.g. contractual joint ventures, equity joint ventures, and wholly foreign-owned enterprises). Initially China preferred joint ventures to maintain control and to attract advanced technologies. Wholly foreign-owned enterprises were allowed only in SEZs until 1986 when a law was passed enabling them to set up business also in other parts of China (OECD, 2002).

As a result of new guidelines issued in 1995, such sectors as transportation and communications, insurance and other service industries were opened up for FDI. Foreign-funded legal and consultancy agencies are now being allowed to operate (Broadman and Sun, 1997) and China was revising its investment guidelines prior to its accession to the WTO (WTO, 2001a). These guidelines are intended to ensure greater transparency and better property rights for foreign and domestic investors, the lack of which had previously discouraged FDI from developed countries.

Some observers and organizations (e.g. Kueh, 1996; OECD, 2002) argue that despite some liberalization the Chinese FDI regime continues to be very restrictive in terms of entry forms, foreign ownership shares and industry scope. Wholly foreign-owned enterprises are still not allowed in 31 industries. In 32 industries (e.g. coal mining, key water projects, automobiles, production of grain, cotton and oilseeds) China still insists on joint ventures with majority shareholding by Chinese partners (OECD, 2002: 330–31). On the eve of the WTO Agreement, foreign investors were still not a...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Preface
• Acknowledgements
• Abbreviations
• 1: The Road To WTO Membership
• 2: Trade liberalization, competition and employment
• 3: The impact of accession on employment
• 4: Agriculture
• 5: Industry
• 6: Services
• 7: China and the ‘ flying-geese ’ (FG) theory
• 8: China’s possible response to global competition
• Notes
• Bibliography