China's Entry into the World Trade Organisation

Peter Drysdale, Ligang Song, Peter Drysdale, Ligang Song

• Publisher: Routledge
• Year: 2003
• ISBN:
  9781134549818
• Edition: 1
• Topic: Sozialwissenschaften
• Subtopic: Ethnische Studien

This volume provides a detailed up-to-date analysis of the strategic issues and policy options of China's accession to the WTO. Quantitative analysis demonstrates how tariff reduction resulting from China's accession to the WTO will benefit the Chinese economy as well as the rest of the world. The book argues that there is no single trade policy initiative likely to result in larger gains in international trade in the foreseeable future than China's accession to the WTO.

1
China's entry to the WTO

An overview

Peter Drysdale and Ligang Song

BACKGROUND

When Prime Minister Zhu Rongji visited the United States in April 1999, the long-running negotiations on China's accession to the WTO gained new momentum. With political commitment on both sides and the hope that the issue could be resolved towards the end of the year before the start of the new round of multilateral trade negotiations, negotiation teams from both sides intensified their effort to strike a deal within the year. Significant progress was made by both sides on a broad range of market access and protocol issues, paving the way for China's accession to the WTO. On 15 November 1999, Chinese negotiators signed an historic agreement with the United States on China's accession. The agreement included significant concessions on market access issues, including tariff levels, telecommunications, internet, autos, banking/insurance, agriculture, distribution, audio-visual, and travel and tourism. The agreement paved the way for China's accession to the WTO some time in 2000 and will rekindle a new wave of economic and trade liberalisation in China. There is now broad consensus from a wide range of political and business circles in both China and other member countries that China needs the WTO as much as the WTO needs China.

China certainly has much to gain from further opening of its economy to foreign competition. Even the mounting pressure to deal with the domestic adjustment costs of current restructuring, from the slowdown of the Chinese economy and the negative impact of the East Asian financial crisis, do not qualify the imperative of entry. Quite the reverse. China's entry to the WTO represents a grand strategy to ease the burden of reform, because commitment to deeper reform and liberalisation associated with entry will not only boost efficiency, but also foreign investor confidence in Chinese economy at a time when it is desperately needed.

Clearly the benefits to the rest of the world—including the United States—will also be very large. Manufacturing exporters, particularly from industrialised countries, will benefit from China's substantial tariff reductions. Firms specialising in financial and legal services such as banks, insurance companies and law firms will gain more access to the Chinese market. Foreign investors will be more confident in making investment decisions under a more transparent and rules-based trading system in China. In addition, the WTO will be made more representative by institutionalising China into the world trading system. Indeed, there is no single trade policy initiative likely to result in larger gains in international trade in the foreseeable future than China's accession to the WTO. This volume provides evidence in support of this view.

STRATEGIC ISSUES AND POLICY CHOICES

China's rapid, internationally-oriented economic growth is a major challenge to the international trade and economic system because of China's size, rapid growth, skewed resource endowments and tendency to economic instability. In Chapter 2, Garnaut and Huang make the point that China can best answer that challenge through unequivocal commitment to reform, commitment to the eventual goal of free trade and commitment to application of the rules of the international trading system.

The concentration of Chinese exports and imports in a relatively narrow range of commodities has the potential to aggravate adjustment in the rest of the world to changes in Chinese trade—both in advanced industrial economies with labour-intensive import-competing industries, and in competing labour-abundant developing economies seeking to rely on international markets for exports of similar goods. Yet, Garnaut and Huang argue the world economy is now large enough and open enough to absorb the growth of China's trade and share the gains from trade growth.

Success in meeting the challenge will increase the gains from trade—obviously for China, but also for the rest of the world. Failure will lead to corrosion of the open international system and, in the end, lead to a retreat from the rules-based system, with major consequences for internationally-oriented growth in China, East Asia and beyond.

Putting the reform in China in an historical context, in Chapter 3 Lin, discusses the relationship between economic reform and development strategy in China. Lin provides a theoretical explanation of how the current problems encountered in the process of reform can be traced back to the old inward-oriented, heavy-industry-oriented development strategy.

Lin argues that the economic problems before the reform were rooted in the heavy industry-oriented development strategy, which neglected the comparative advantage of the Chinese economy. The achievements of reform are attributable to better utilisation of comparative advantage, while the problems emerging after the reform arose from an incomplete shift in development strategies. The way to achieve rapid, sustained growth in the Chinese economy hinges on a complete shift from the anti-comparative-advantage heavy industry-oriented development strategy to a development strategy that relies on the comparative advantage of the Chinese economy.

Yang discusses China's trade policy issues in the 1990s in the context of its accession to the WTO in Chapter 4. A review of trade reform in the early 1990s indicates that China has made a number of important breakthroughs in meeting the requirements for entering the WTO. They include the establishment of the legal basis for foreign trade, deeper reform of both export and import systems, including trading company and trade administration reform, drastic tariff reductions and exchange rate system reform. Progress has also been made in broadening market access for both foreign investments and imports during this period. Based on these achievements, Yang points out that conditions are now ripe for China to be admitted into the WTO as a developing country.

Yang argues that if China's accession to the WTO occurs sooner, the international trade rules will play a role as a reference point in China's reform and a benchmark in formulating China's trade law and regulations. This will benefit China and the world as a whole. The trade agenda for the late 1990s spelled out by Yang is challenging. It includes reduction of tariffs to the level of developing countries, market access for agricultural products and services and controlled convertibility of the capital account.

Song explores the relationship between trade liberalisation and rapid trade growth during the reform period in Chapter 5 and lists the benefits to the Chinese economy from open trade. He calculates that exports contributed two percentage points to the average real GDP growth of 10 per cent during the period 1990–98. His estimates imply that the future growth of China's exports will continue to rely on strong world demand as well as further improvement in productivity and competitiveness of the economy on the other.

In the face of the East Asian financial crisis, there will be increasing pressure for China to upgrade its industrial structure, produce high valued-added and high quality products and further diversify its trade structure. Song concludes that further reforms are needed to enhance competition, reduce protection in the form of non-tariff barriers and increase the transparency of China's trading system, particularly its import controls. A key to resolving the financial crisis in East Asia and to a more sustainable pattern for the development of foreign trade in the regional economies lies in a deepening reform and trade liberalisation program in these economies.

Hai touches on the important issue of agricultural policy reform in the process of trade liberalisation in Chapter 6. Observing that both relative and absolute agricultural prices in China have reached or surpassed international levels, Hai concludes that rapid economic growth has reduced comparative advantage in agriculture. He argues that the trend towards a loss of comparative advantage in agriculture will not be reversed as long as China remains a fast-growing economy with a labour-intensive agricultural sector. The Chinese government faces a difficult choice, between following a policy of agricultural protection for the sake of income distribution for farmers and continuous trade liberalisation in the agricultural sector in conformity with WTO rules and regulations.

To balance the act, the most important policy adjustment at this point is to meet the requirement of market access. This would require China gradu ally to remove the quantitative restrictions on agricultural trade and abolish the state monopoly in grain trade. The key to improving domestic income distribution is to increase agricultural productivity and competitiveness by increasing agricultural investment and changing the factor structure of agricultural production. Diversification of farmers' income by developing off-farm production such as rural industries is another policy choice.

Drysdale addresses two key questions with regard to China's accession to the WTO in Chapter 7. Why is entry to the WTO so important to China's continuing commitment to reform and liberalisation and to sustaining the success of the last two decades? And why is accommodating China's entry on terms which define an end point to China's achievement of equal status within the WTO so important to China's major economic partners and the international trading system more generally? Drysdale proceeds to explore the corollary question of the impact of WTO entry on the choice of trade policy strategy in China, and the relationship between trade policy strategy and the reform process. He goes on to examine Chinese competitiveness in international markets and the implications of changing competitiveness for trade and industrial transformation, providing a basis for comment on the appropriate direction of industrial policy.

Drysdale makes the point that the liberalisation of trade policy associated with accession to the WTO in effect forces the pace of reform in many areas, such as in the management of the state enterprise sector, and financial and foreign exchange markets. Accession to the WTO, with its commitment to ongoing liberalisation, entrenches these reforms and helps to maintain their momentum. The alternative would be a loss of momentum and misdirection of the process of reform and industrial transformation.

Drysdale concludes that WTO accession offers an important opportunity to reinforce the pace of trade and economic reform. The protocols of accession must allow time for China to adjust its policies to the full application of WTO rules and to define the principal elements in the schedule of adjustment, if accession is to secure China's reform objectives at the same time as satisfy China's major economic partners that the momentum to full marketisation will be maintained.

IMPACTS OF TRADE LIBERALISATION: QUANTITATIVE ASSESSMENTS

In meeting the requirements of WTO, a series of tariff reductions has been carried out by the Chinese government in the past decade. Zhang's quantitative analysis in Chapter 8 addresses the following question: What impact would further large-scale tariff cuts and domestic market liberalisation have on the Chinese economy? Using a computable general equilibrium (CGE) model technique, Zhang presents the results of a short-run simulation of China's recent tariff reductions. The tariff cut is projected to depreciate the real exchange rate, increase the domestic price of imports and reduce the cost of domestically produced goods. Exports will increase while imports contract initially. The reduction in domestic costs relative to world prices caused by the tariff cuts significantly increases export profitability. The model also projects that the expansionary effects in the export sector (mainly concentrated in manufactured products) more than outweigh the contraction in the import competing sector. Thus, both employment and the trade surplus are expected to rise.

The simulation results also show that there is a marginal decline in government net real revenue as a result of tariff cuts. The decline in revenue from the external sector is largely compensated by possible increases in revenues from the growth of real domestic output, which is projected to have a positive growth. The predictions of the model provide quantitative evidence of the beneficial effects of tariff reductions overall.

A traditional computable general equilibrium assessment of the gains from liberalisation in China typically leaves out two important features: the effect of variation in the disaggregated tariff information and the effect of tariff exemptions. By applying procedures to capture both these effects and building upon the recent literature on trade restriction measures, Bach, Martin and Stevens Spatz use a standard CGE approach to evaluate the effects of China entering the WTO in Chapter 9. Their results confirm the very large welfare gains to China from the unilateral liberalisation extended by China in the context of its negotiations for accession to the WTO and from the reductions in protection negotiated in the Uruguay Round.

China's major trading partners are also estimated to benefit substantially from China's liberalisation. Large gains accrue to major trading partners such as Hong Kong, the United States and Canada, Japan, the European Union, the Republic of Korea and Taiwan. Relatively small losses are estimated for economies such as Indonesia and South Asia, which compete relatively directly with China in the production of some export goods.

To analyse the implications of China's trade reform for structural change and welfare in China and the rest of the world, Feng and Huang presented their quantitative results using the GTAP model in Chapter 10. They find that China gains the most from its own liberalisation. They also point out that economic benefits are also accompanied by significant adjustment costs. In particular some sectors, including agriculture, will contract. This leads to two policy choices if China is to maintain its self-sufficient food strategy: one is to raise the productivity of food production and the other is to distort incentive structures in favour of food protection. The former requires substantial investment in agricultural technology and infrastructure and the latter implies a significant misallocation of resources and welfare losses.

According to these simulation results, structural adjustment for other countries, especially NIEs, is likely to be concentrated in the textile/clothing sector. However, they argue that those economies in which the most significant adjustments occurred in relation to liberalisation in China are precisely the ones that will derive large gains from the adjustments. The key for those countries in reaping the gains is to participate actively in the liberalisation process, which is likely to magnify the gains and ease the adjustment task. Broader trade liberalisation with APEC will thus benefit China as well as other regional economies.

Zhong and Yang, in Chapter 11, focus on analysing China's textile and clothing exports in the post Uruguay Round. The opportunities for textile and clothing exports lie in the prospect that China can secure the abolition of Multi-fibre Arrangement (MFA) quotas on its products and secure substantial benefits to its textile and clothing sector. The challenge is that if quotas continue to apply to China after the phasing-out of the MFA, the competitiveness of Chinese textile and clothing exports will suffer vis-à-vis its competitors and its market share in North America and the European Union will be reduced. Zhong and Yang argue that early entry to the WTO will give China greater opportunity to secure the benefits of the Agreement on Textiles and Clothing (ATC) but much will depend on what is to be included in China's accession protocol.

Demand-side uncertainties aside, they argue that the key to the sustained growth of textile and clothing exports has been economic reform. Trade liberalisation will not only strengthen China's bargaining power in countering anti-dumping measures and subsidy charges, but more importantly it will improve the efficiency of China's textile and clothing sector. Phasing out domestic WTO-inconsistent policies and increases in the cost of raw materials, especially cotton, will level the playing field for exports. Zhong and Yang also note that the phasing out of the MFA will provide a one-off boost to exports in the next decade or so, but this is unlikely to reverse long-term trends in structural change.

Economic reforms starting from 1979 have brought huge changes to the Chinese economy, particularly through rapid economic growth during the reform period. What are the implications for the world economy of China's rapid economic growth? This is the question addressed in Chapter 12 by McKibbin and Huang through the application of the dynamic general equilibrium model (G-CUBED). The model captures not only the composition of the direct trade impact of development in the Chinese economy but also the implications of endogenous financial cap...