No.

E2000007

2000-9

CHINAS WTO MEMBERSHIP: SIGNIFICANCE AND IMPLICATIONS1

Wen Hai China Center for Economic Research (CCER) Peking University, Beijing 100871, China NO. E2000007 September 9, 2000

After more than 20 years of reform and 13 years of negotiations, China finally signed the agreement on WTO accession with the United States (on November 15, 1999) and with the European Union (on May 19, 2000). Although China still needs to conclude the negotiations with a few more countries, it is clear that China has successfully completed the most important and difficult steps to enter the world trade organization. China s WTO membership is just a matter of time. Needless to say, Chinas accession to the WTO will have significant

Paper presented at the International Conference on China: Growth Sustainability in the 21st Century, September 9-10, 2000, the Australian National University, Canberra

impacts for both China and the world economy. There are at least three important reasons for economists, as well as policy-makers, to study and understand the significance of and implications of Chinas WTO accession. First, China is a big economy. Any changes in such a huge economy will most likely affect the equilibrium of the world market, even the world economic system. It is obviously that Chinas WTO membership will bring big changes in Chinas economic performance and structure. These changes, in turn, will affect the world economic performance and business structure. This is one of the reasons why the WTO negotiations with the United States and the EU took so long. Secondly, China is a developing country. Chinas decisions and actions regarding WTO will affect the decisions and actions of other developing countries. If China opens up its markets more than most developing countries, it will bring pressure on other developing countries to do likewise. On the other hand, if China maintains more protection for its domestic markets, it may increase the bargaining power of developing countries in the world trading system. Thirdly, China is a transitional economy. How the WTO access affect Chinas economy will also provide experiences and lessons to other transitional economies. As the seventh largest economy 2 and an economy in process of industrialization and transition, Chinas WTO membership will have significant impacts on its own economic development and reforms as well as on other economies in the world. What will be the impacts of Chinas WTO accession on international trade? How will it affect the scope and
2

According to the World Bank (The World Development Indicator Database, World Bank 2000), the total GDP of China in 1999 was 991 trillion US dollars. It ranks the number 7 in the world. China s population is about 1.3 billion; it is the most popular country in the world.

pace of Chinas economic reform and development? What are the significance and implications of Chinas membership? Although there are many other issues need to be addressed, this paper will focus on the possible impacts on Chinas economy. Chinas WTO membership will significantly affect Chinas economic reform and development in at least three respects. First, it will increase Chinas foreign trade. In particular, imports from developed countries will increase rapidly. Second, it will make a significant change in economic structure of China. As a result of freer trade, production of highly protected sector will decrease. On the other hand, opening up a freer FDI will stimulate the development of a modern service sector, information and technology (IT) industry, and even automobile manufactures. Third, it will accelerate the reforms in state owned enterprises and help to develop private enterprises in the Chinese economy. China may be able to complete its economic transition from a planned economy to a market economy through its WTO accession.

I.

Stimulating a Freer Trade

The first and most direct impact of Chinas WTO membership will be a stimulation of the world trade volume. Economists from the World Bank, China and other countries have estimated the possible quantitative impacts of Chinas WTO accession. All of the studies show that Chinas accession to WTO will make the world trade bigger and freer. The reasons why people believe that Chinas accession of WTO will stimulate the world trade is very simple and clear. Because China is already 3

the seventh largest economy and the ninth largest trading country, further trade liberalization in China will certainly make a significant contribution to the world trade volume. Being a member of the WTO, China will not only open up more of its markets to import foreign goods, but also be able to export more through an improvement in the external business environment and the development of its economic and export capacity.

Reducing Trade Protection and Increasing Imports

Like most of the newly industrialized economies in Asia, the process of Chinas economic development was started with expansions in exports. Although Chinas imports have been grown at a very fast pace, the imports have been restricted by the state. Therefore, while exports are being liberalized and encouraged, imports are still limited and controlled. Table 1 shows Chinas total trade in the last ten years. It is not surprising that China has experienced a trade surplus for all but one year. According to the General
Administration of Customs of China, the cumulated trade surplus from these

ten years was as high as 156.4 billion US dollars. As trade protection is reduced, China will increase imports significantly.

Table 1
1990 Exports Imports Balance Total 62.1 53.3 8.8 115.4

Chinas Trade with the World ($ billion), 1990-1999

1991 71.9 63.8 8.1 135.7 1992 84.9 80.6 4.3 165.5 1993 91.7 104.0 -12.3 195.7 1994 121.0 115.6 5.4 236.6 1995 148.8 132.1 16.7 280.9 1996 151.1 138.8 12.3 289.9 1997 182.7 142.4 40.3 325.1 1998 183.8 140.2 43.6 324.0 1999 194.9 165.7 29.2 360.6 Accum ulated 1292.9 1136.5 156.4 2429.4

Source: PRC General Administration of Customs, Chinas Customs Statistics, July 2000

Tariff Reduction

Currently, Chinas average tariff rate is about 16.4%. This rate has been reduced significantly from more than 40% in early 1990s, but it is still relative high compared to the average 6% tariff rate of WTO members and the average rate of developing countries at 14%. To be a member of the WTO, China agreed to make a substantial reduction in tariffs. The average tariff rate will be decreased to about 15% on accession to the WTO and will be further reduced to about 10% by 2005. Table 2 shows the projected tariff reductions in major sectors and for selected industrial products. The average tariff rate of industrial products will be reduced more than 60% in five years from the current level of 24.6% to 9.4%. The tariff on IT products will be completely eliminated, and the agriculture tariff will be cut more than half from 31.5% to 14.5% by the year 2004. Table 2 illustrated the significance of these tariff reductions on the trade in China and in the world. The current situations of some products are show in Table 2. The fifth column of the table indicates the selected product imported in China as the percentage of Chinas total imports. The sixth column shows the relative importance of these products in total exports from the United States. The last column calculated the products imported by China as the percentage of the world total exports of these products. Partly due to high protections, most of these items accounted for only small percentages in both Chinas imports and the total world exports of these products. On the other hand, many of them are major exports from developed countries, say, the United States. Take the Chinese auto market as an example. With an 80% to 100% 5

tariff rate, imports of automobiles are highly restricted. In 1997, Chinas total auto imports accounted for less than 1%( 0.63%) of world trade in auto products that year. This is rather small for the worlds 9th largest trading country. Imports of cosmetics, furniture, pharmaceutics, agriculture equipment, and medical equipment are also very low as a share of total world trade. The limited imports are mainly due to the trade restrictions. Once China enters the WTO and reduces such protection, imports of these products are expected to increase rapidly. In the China-EU negotiation, China has offered an additional reduction of 40% on 150 specific EU products varying from gin to building materials. Tariffs on 13 leather products, which account for 60% of total EU exports in this sector, will be reduced from 20-25% to 10%. Tariffs on 5 particular footwear products that account for more than 70% of EU footwear exports will be reduced from 25% to 10%. On 52 particular products in the important machinery and appliances sector, which accounts for 26% of total EU exports, tariffs will be cut to 5-10% from current level of 35%. The rapid tariff reduction on these EU specific products indicates that Chinas imports from the European countries will also increase.

Table 2:
Selected Items

The Tariff Reduction after Chinas Accession to the WTO

Current Level (%) Tariff Level Rate of (%) Reducti After WTO on (%) Accession Shares in China s Total Import s (%) Shares of US Exports in US Total Exports % Shares of Chinas Imports in World Exports %

Industrial 24.6 Tariff IT Product 13.3 Tariff Agriculture 31.5 Tariff

Agriculture Equipment Auto Package Construction Equipment Civil Aircraft Cosmetics Furniture Medical Equipment Paper Pharmaceutical s Scientific Equipment Steel Textiles Apparel 11.54 80-100 13.6 14.7 45.0 22.0 9.9 14.2 9.6 12.3 10.3

9.4 (2005) 0 (2005) 14.5 (2004)

5.7 (1. 1. 2002) 25 (7.1. 2006) 6.4 (2004) 8 (1. 1. 2002) 10~ 15 (2004~05) 0 (1. 1. 2005) 4.7 (1. 1. 2003) 5.5 (1. 1. 2005) 4.2 (1. 1. 2003) 6.5 (1. 1. 2003) 6.1 (1. 1. 2003) 11.7 (1. 1. 2005)

61.8 100.0 54.0 50.6 72.2 52.9 45.6 72.2 100.0 52.5 61.3 56.3 47.2 40.8 53.9 1.15 11.51 0.58 2.59 3.68 5.97 2.03 0.06 0.11 0.24 2.20 0.55 5.93 0.39 0.69 1.18 1.55 1.20 4.05 0.52 0.38 1.59 4.30 1.21 0.06 1.57 0.42 8.10 0.98 0.63

and 25.4

Data Source: MOFTEC, The White House, and Statistics Canada. Note: For the last two columns, Agriculture Equipment includes SITC 721; Auto Package includes SITC 781-784; Civil Aircraft includes SITC 792; Cosmetic includes SITC 553; Furniture includes SITC 821; Medical Equipment includes SITC 872; Paper includes SITC64; Pharmaceuticals includes SITC 541; Steel includes SITC 673, 674, 678 and 679; Textiles and Apparel includes SITC 65 and 84.

Removal of Non-tariff Barriers

Besides the reduction of tariffs, China will also remove significant non-tariff barriers (NTBs) once it enters the WTO or few years after the WTO accession. Table 3 summarizes the main changes in non-tariff barriers. Again, we can see in selected industry sectors what type of NTBs will be eliminated. These NTBs include quotas, tendering requirement, trading rights, local content, technology transfer requirement, government procurement, and etc.. All quotas on civil aircraft, medical equipment, and IT products will be eliminated upon accession. Quotas on auto will grow 15% annually until completely eliminated. Removal of these quotas and other NTB certainly will make importing much easier. Sometimes, removal of NTB has more significant effects on trade than removing tariffs since NTB are a direct trade restriction while tariffs restrict imports indirectly.

Table 3: Removal of Non-Tariff Barriers Industry Agriculture Equipment Auto Package Tendering Requirement: for non-government purchases will be eliminated within 4 years of accession. Trading Rights and Distribution: will be changed over 3 years. Quotas: will grow 15% annually until eliminated. Trading Rights and Distribution: will be changed over 3 years. Auto Financing: Non-bank financial institutions will be permitted to provide auto financing. Safeguard: 12 years after accession. Local Content: eliminate immediately. Technology Transfer: no condition on import or investment. Tendering Requirement: will be eliminated within 2 years of accession. Trading Rights and Distribution: will be changed over 3 years. Export performance: not apply after accession. Local Content: not apply after accession. Quotas: eliminated upon accession. Trading Rights and Distribution: will be changed over 3 years. Subsidy: The US could use its unfair trade laws. Trading Rights and Distribution: will be changed over 3 years. Export performance: not apply after accession. Local Content: not apply after accession. Quotas: eliminated upon accession. Tendering Requirement: for non-government purchases will be eliminated within 4 years of accession. Trading Rights and Distribution: will be changed over 3 years. Export performance: not apply after accession. Local Content: not apply after accession. Trading Rights and Distribution: will be changed over 3 years. Trading Rights and Distribution: will be changed over 3 years. Intellectual Property Rights: Implement the Trade-related Intellectual Property Agreement of the Uruguay Round upon accession. Tendering Requirement: for non-government purchases will be eliminated within 4 years of accession. Trading Rights and Distribution: will be changed over 3 years. Export performance: not apply after accession. Local Content: not apply after accession. Intellectual Property Rights: Implement the Trade-related Intellectual Property Agreement of the Uruguay Round upon accession. Trading Rights and Distribution: will be changed over 3 years. Export performance: not apply after accession. Local Content: not apply after accession. Trading Rights and Distribution: will be changed over 3 years. Trading Rights and Distribution: will be changed over 3 years. Quotas: eliminated upon accession. Trading Rights and Distribution: will be changed over 3 years. Export performance: not apply after accession. Local Content: not apply after accession.

Construction Equipment

Civil Aircraft

Cosmetics Furniture Medical Equipment

Paper Pharmaceuticals

Scientific Equipment

Steel

Textiles and Apparel Toys IT Products

Data Source: MOFTEC, The White House.

 Improving Business Environment and Expanding Exports

Although China is already one of the largest exporting countries, Chinas WTO membership will help China expand its exports. First of all, through improvement of export conditions, China may expand its traditional exports such as textiles, toys, footwear, machinery, and electronic products. Being a member of the WTO, China will face a non-discriminative and stable environment in the world trade system through a permanent Most Favorite Nation (MFN) status and participation in a multilateral framework for dispute settlement. Secondly, Chinas economic structure will be significantly changed through freer trade and foreign investment. As resources move to those sectors in which China has comparative advantages, the exports from those sectors will be increased. Without the membership in the WTO, China does not automatically have the MFN status with other trading partners. It must negotiate trade agreements with each individual country. Although China has signed bilateral MFN agreements with most countries, some of these bilateral agreements are not stable. Since 1989, the annual review and debate of Chinas MFN status in the United States has always brought uncertainty to the Sino-US business and economic relationships. Establishment of permanent normal trading status will bring more certainty and stability for doing business between China and other countries including the US. Currently, Chinas economic relationships with all other countries are based on bilateral agreements. As a non-member of the WTO, the

settlement of trade disputes between China and its trading partners largely depends upon bilateral negotiation. Many of these disputes are adjudicated 10

by each of the countrys domestic laws. In recent years, there have been more than 240 dumping charges against Chinese exports. In case

negotiation fails, unilateral trade sanctions and retaliation are often used as solutions. As China becomes a member of the WTO, an effective multilateral dispute settlement framework will be used to increase business security, fairness, and confidence.

Increases in Trade with Developed Countries

Trade liberalization through the accession to the WTO will certainly increase both Chinas imports and exports. However, Chinas trade with developed countries will grow even more rapidly than the average growth rate in Chinas foreign trade. If we look at the trade development of the past twenty years (Table 4), it is clear that the share of Chinas imports from most developed countries (except Japan) have not changed much in spite of dramatic increases in Chinas foreign trade. Chinas imports from the United States, West European Countries, Canada, Australia, and New Zealand have remained at a small percentage of the total exports from these countries. Meanwhile, Chinas total import as percentage of the world total trade has increased from 0.88% to 3.32% in the same period. Furthermore, the share of imports from these developed countries as a percentage of Chinas total imports has not increased either. From 1980 to 1996, Chinas import share of the North America exports changed from 19.4% to 20.9%, Western Europe dropped from 24.4% to 14.4%, and Australia changed from 2% to 1.1%3. Overall,
3

See Table 2.1 Chinas geographic trade structure, 1970-96 (per cent), in Peter Drysdale, Open

11

the growth of Chinas imports from developed countries was below the average rate, and the trade between China and developed countries was restricted. Part of the reasons why China did not import much from developed countries is due to trade protection because most of the goods being protected in China were more efficiently produced in developed countries. As China becomes a member of the WTO and reduces its import restrictions, United State, EU, and other developed countries will be able to export more to China. Meanwhile, China will continue to expand its exports to developed markets. As one of the important results of Chinas WTO membership, trade between China and developed countries will increase more rapidly than the overall trade.

Table 4: Share of Chinas Imports in other Economies Total Export

1980 5.93 0.00 0.00 4.04 4.06 1.29 1.01 3.12 1.64 0.31 1.31 0.88 1983 10.71 0.00 0.00 4.19 2.18 0.74 0.82 2.19 0.87 0.41 2.18 0.95 1987 25.20 0.00 0.00 6.50 4.47 2.29 3.13 2.87 1.10 0.70 1.37 1.69 1990 26.44 4.56 0.91 2.95 2.98 1.67 2.11 1.15 1.17 0.54 1.20 1.64 1993 38.33 14.29 7.91 9.11 4.33 3.18 2.65 2.44 1.58 1.08 0.97 3.28 1997 36.76 17.36 14.02 7.45 4.91 3.91 3.16 2.79 1.57 0.95 0.85 3.32

Hong Kong Taiwan Korea Rp Japan Australia Singapore SEA4 New Zealand USA West Europe Canada Total Market

Note: SEA4 includes Malaysia, Indonesia, Thailand, and Philippines. Data Source: Statistic Canada (1999).

Regionalism, APEC and Chinas International Trade Strategies, P. Drysdale, Zhang, and L.Song (ed), APEC and Liberalisation of the Chinese Economy, Asia Pacific Press, 2000

12

II. Changes in Economic Structure

If a country is engaged in international trade and foreign investment, the country is also engaged in the international division of labor and, therefore, integrates its economy into the world. This results in a series of adjustments in the countrys economy. The driving forces for economic restructuring would come from both freer trade and FDI. Freer trade will reduce the production of the goods which a country does not have comparative advantages and increase the production of the goods that can exploit a countrys comparative advantages. The impact of FDI on the structure of the countrys economy depends on the types of technologies associated with the investment and the types of industries in which the foreign capitals invested. Most of the FDI now comes from multinationals and is associated with particular products and certain types of technology. The technology or product specific FDI is not just a transfer of resources. It may affect either export or import-competing sectors and change the economic structure of the receiving country. Although China has been opening up its markets since the beginning of economic reform in late 1970, accession to the WTO is still a big move for China and further adjustments in economic structure will be inevitable.

Chinas Comparative Advantages

To comprehend the possible impacts of Chinas WTO accession of Chinese economic structure, we must first understand what types of products benefit from Chinas comparative advantages. The revealed 13

comparative advantage (RCA) index, developed by Balassa (1965), is often used to make international comparison. To study the comparative advantage in China relative to other countries or regions, we constructed and calculated a series of regional (or bilateral) revealed comparative advantage indices. The regional revealed comparative advantage index of product i of country jin region R is calculated as follows:

RRCAij = (Xij/Xtj) (XiR/XTR)

Where Xij and Xtj are the value of product i and the value of total products exported from country j, respectively. XiR and XTR are the value of product i and the value of total products exported from the region, respectively. If RRCAij > 1, it indicates that Country j has a comparative advantage of producing Good i in the region. The higher the value of RRCA, the greater the comparative advantage. On the other hand, if RRCAij < 1, it means that the country does not have a comparative advantage (or, has a disadvantage) in this product. To calculate the RRCA for China, we used the trade data compiled by the Standard International Trade Code (SITC) in 1997. Table 5 shows the values of Chinas regional revealed comparative advantage index in each sector.

14

Table 5:

Regional Revealed Comparative Advantage (RCA)

Between China and Selected Economies (1997)

SITC Tiger 3 SEA 4 Japan USA West Europe 0 3.90 1.22 9.62 0.30 0.49 1 1.60 5.59 0.98 0.05 0.14 2 3 2.83 2.25 0.59 0.55 3.93 7.04 0.24 0.77 1.35 0.36 4 1.69 0.13 3.31 0.08 0.26 5 0.91 2.98 0.62 0.34 0.64 6 1.85 2.25 1.33 1.23 0.92 7 0.45 0.69 0.27 0.51 0.67 8 1.28 0.56 3.17 3.78 2.95

Note: Tiger3 includes Korea, Singapore, and Taiwan. SEA4 includes Malaysia, Indonesia, Thailand, and Philippines. SITC: 0 Food and Live Animals; 1- Beverage and Tobacco; 2 Crude Malts Exc Fuels; 3 Mineral Fuels etc.; 4 Animal, Vegetable Oil, Fat; 5 Chemicals; 6 Basic Manufactures; 7 Machines, Transport Equip; 8 Misc Manufactured Goods. Data Source: Statistic Canada (1999)

Compared with all the developed countries in Table 5 (including Japan, US, and West Europe), China has explicit comparative advantages in sector 8 and disadvantage in sectors 1, 5, and 7. Comparing to the US and Western Europe, China does not have comparative advantage in sectors 0, 3, 4 either. The goods in the group of SITC 8 include travel goods, clothing, footwear, instruments, watches, clocks, sound recorders, etc. These products are mainly labor-intensive. The products that China does not have comparative advantages are either resources-intensive products (SITC 0, 1, 3, and 4) or capital/technology-intensive (SITC 5 and 7).

Production Adjustment and Resource Reallocation

As China enters the WTO, both tariff and non-tariff barriers in resource-intensive products (agriculture, wood, paper, etc.) and 15

capital/technology-intensive products (chemicals, autos, and IT products) will be significantly reduced. Imports of these products from developed countries are expected to increase. Consequently, domestic production of these sectors has to be adjusted. Resources will be reallocated to those sectors where China has comparative advantages or potential comparative advantages and the newly developed service sectors. However, the auto industry may have a different situation. Although China currently does not have comparative advantage in auto sector, the auto industry in China may not shrink even after China removes the protection. Imports of luxury cars or those autos that are not produced in China will increase, but most of the economy cars will be produced in China rather than imported. Currently, the major auto companies in China have already set up joint ventures with American, European, and Japanese auto producers. The dominating models are manufactured by these joint ventures. On the other hand, protected by high trade barriers, there are also more than 100 companies in China producing autos on a very small scale. Once the protection is removed, these small scales auto production companies will disappear, but production of joint venture autos will expand. In other words, auto producers in developed countries prefer to produce economy cars in China rather than to produce the cars in their home countries and export them to China. Because of the growing market for small and medium size economy cars, China is attracting FDI from the worlds major auto producers. Therefore, a freer trade will reduce or shut down the small auto companies production while a freer FDI will expand the production of Chinese made foreign cars. 16

 Opening up the Service Sectors to Foreign Companies

Chinas economic structure will also be affected by less restricted FDI after Chinas accession to WTO. China has successfully attracted many foreign investments in past decade, but these FDI were mainly from Hong Kong, Taiwan, and other Asian countries. Most of these FDI are in labor-intensive manufacturing sectors and helped China to produce and export more labor-intensive products. Little FDI has been in the service sector because it is highly restricted. One of the major agreements in both Sino-US and Sino-EU WTO membership negotiations is to open up the service sector in China. Table 6 summarizes the main points in both agreements. All service sectors, including telecommunication, banking, insurances, retails, transportations, professional service, will be opened up to foreign investment and participation. Through foreign investment and competition, the service sector in China will develop rapidly.

17

Table 6

Chinas Commitment in Market Access

Sub-sector Basic Service Chinas Commitment 49% foreign ownership (1st year of accession) 50% (in the 2nd year)

Sector Telecommunications

Finance

Mobile/cellular phone Leasing Market Wireless Service Insurance

25% foreign ownership on accession, 35% after 1 year, 49% after 3 years Open up in 3 years 6 years Eliminate geographic limitation in 3 years; Open 85% of the service in 3 year; 50% ownership for life insurance, 51% for non-life (100% in 2 years)

Banking

Commerce

Others

Non-banking Finance Trading and Phased in over 3 years Distribution Lift restrictions in joint venture and size limit Rights for foreign owned stores Professional Legal: open to foreign law firms Service Accountancy: open to foreign accountants Travel and 100% foreign ownership in 3 years Tourism

Local currency business in 2 years; Full market access in 5 years Auto financing upon accession

Sources: MOFTEC and White House

Overall Changes in Economic Structure

The WTO membership will further integrate China into the world economy. Freer trade and market access will make significant changes in Chinas economic structure in next five to ten years once China joins the WTO. The adjustment of economic structure and reallocation of resources will follow the principles of comparative advantage and economic dynamics.

18

In general, production of goods that intensively use Chinas scarce resources will decrease, and production of goods that intensively use Chinas abundant resources will increase. In particular, China will import more land-intensive agricultural products such as grain and shift the production towards more labor-intensive goods. Domestic production of resource-intensive products (wood, paper, etc.) will also decrease. Production in some highly protected sectors (chemicals, cosmetics, pharmaceuticals, etc.) will decrease as imports go up. But some other highly protected sectors (auto, service, and IT) may develop rapidly as China opens up for FDI. Although China at its present development stage does not have comparative advantage in these sectors, it may have a potential comparative advantage in the near future.

III. Deepen the Market Oriented Economic Reforms

It is obviously that Chinas WTO membership will bring more business to China as well as to other countries. However, the most significant impact of Chinas WTO accession is to deepen Chinas economic reform.

Setting up an Explicit Goal and Road Map for Further Reforms

Unlike reforms in Russia and other Eastern European countries where the ultimate goal is to be a private market economy, there is no clear and consistent road map for China. The reform strategy basically is, as Deng Xiaoping said, a process of crossing the river by touching stone. Chinas economic reform is under the leadership of the Chinese Communist Party 19

(CCP). The initial objective of the reform is to improve the efficiency of state-owned-enterprises without changing the basic economic system. In the latest CCP national congress, Chinese leaders announced that the goal of reforms is to establish a socialist market economy with Chinese characteristics. However, this ultimate goal of reforms is still not well defined. Each political and economic group can interpret it in a totally different way based on its own interest. A vague goal of reforms was not a big problem in early stages because the initial reforms were simple and mainly a Pareto improvement process. This is a situation that no one is worse off and most people are better off during the reforms. The reforms started in agriculture by reinstalling the family farming system. It was relative easy to implement because family farming had been practiced in China for thousands of years. Collective farming in China had less than 25 years history and was easily reversed. Although the land is still collectively owned, farmers now are able to rent land for a very long period (thirty years). Thus, the initial reforms in agricultural sector were very successful. The urban or the industrial reforms started in 1984 and are still far from completion. There is no commonly accepted theory to guide the reform process since the ultimate goal of reform is not clear. On one hand, China wants to establish an efficient modern economic system. On the other hand, political leaders want to maintain the public or state ownership in enterprises. China has been moving towards a market economy, but political leaders still reject Western economics. A strongly influential group of people, including economists, hope to develop a non-planning and non-capitalist economic system, but most businessman and 20

reformists want to complete the transition and establish a private ownership-based market economy. Since the goal and road map is not clearly stated, many interest groups are also using political forces to protect their narrow economic interest. A vague goal now becomes an obstacle for further economic reforms in China. By joining the WTO, China is able to put all the differences among politicians, interest groups, and economists aside and set up a clear goal of further reform and establish a road map to reach the goal. The WTO membership forces China to deepen the reforms based on the WTOs rules. It enables Chinese leaders to turn a controversial domestic issue into an international commitment. People do not have to spend endless time debating what system China should adopt and what sectors China should protect. The most urgent issue is how to adjust the current system to be consistent with the WTO and determine how to reform the Chinese enterprises in order to be ready for international competition.

Development of Private Enterprises

Private enterprises have experienced remarkable development in China in past two decades. However, private ownership is still being discriminated against in many aspects. In many important sectors, including financial, distribution, international trade, power supply, and transportation, private ownership is still prohibited. Under the title of socialist system, interest groups in these sectors are able to use political, ideological, even legal power to maintain state monopoly. It is very difficult for private enterprises to enter these sectors without domestic 21

political support. Chinas accession to the WTO provides opportunities for Chinese private enterprises to enter those previous prohibited sectors. In the process of preparing for joining the WTO, the Chinese government is asked to first open up the financial, telecommunications, and other important sectors to Chinese private enterprises. Since China will allow foreign investment in these sectors and all foreign investors are private, it is natural that China should allow domestic private enterprises to invest or operate in the same sectors. Once the government lifts all bans on private ownership, private enterprises will develop even more rapidly.

Ownership Reforms in SOEs

Chinas WTO membership will also bring a serious challenge to the state ownership of the production of tradable goods. One of the major principles of the WTO is to protect fairness in trade and international competition. Any non-market activities like subsidies or state trading are considered as unfair trade and subject to retaliation. As a transitional economy, the SOEs in China are still playing a very important role in many sectors. Recent data (see Table 7) shows that almost 50% of exports are still come from SOEs. The SOEs share is even higher (almost two-third) of the ordinary export goods. Therefore, even after becoming a WTO member, China would still be treated as a non-market economy. Some retaliation measures against Chinese SOEs could be used in another 15 years or until China becomes a market economy.

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Table 7: Chinas Exports Composition by the Ownership of Enterprises (January July 2000)

Total Export (in Bil. US$) Share (%) Ordinary trade (in Bil. US$) Share (%)

Total 135.95

SOE 65.73 48.35 43.33 74.45

FIE 63.31 46.57 10.16 17.46

COE 5.63 4.14 3.77 6.48

Other 1.29 0.95 0.94 1.62

58.20

Note: SOE - State Owned Enterprises; FIE - Foreign Invested Enterprises or Enterprises with Foreign Investment (including foreign firms, joint venture, and foreign cooperation); COE - Collectively Owned Enterprises. Data Source: China Monthly Exports and Imports, July 2000.

WTOs membership will bring greater pressures for ownership reforms in SOEs. In addition to the need to improve efficiency, Chinese SOEs now have more incentives to reform the ownership to avoid unfair treatment of non-market-economy and painful default dumping charges. Globalization and international competition require common rules of the game. As long as a firm wants to participate in the game (international competition), it must follow the same rules. The WTO membership will bring a convergence of enterprise ownership in different countries. Unless China is able to change the rules of the game (by entering the WTO, China has already committed to follow the exiting WTOs rules), the ownership reform in SOEs is inevitable.

IV. Summary and Conclusion

Since the Chinese trade Minister Shi Guangsheng and US trade

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representative Charline Barshefski signed the China-US WTO accord on November 15 of 1999, Chinas accession to the WTO seems a realistic likelihood. Many studies on the impacts or implications of Chinas WTO membership have been conducted. This fact alone is a clear indication of the importance of the issue. As most of the studies point out, trade liberalization in China will increase both the imports and exports of China. Since the sectors being liberalized the most are the ones in which developed countries have comparative advantages, imports from developed country will grow most rapidly. Chinas WTO membership will significantly increase trade between China and developed countries. The expansion of trade and FDI from developed countries will in return change the industrial structure of Chinese economy. Resources will move away from land-intensive agriculture, resource-intensive

manufactures, and some capital/technological industries to labor-intensive products or the sectors that have potential comparative advantage and market sizes. More significantly, Chinas WTO membership may help the Chinese government to break through the political, economic, and ideological deadlocks and set up the ultimate goal and road map of the economic transition. Pressures from internal and external economies may push China to complete the last and most difficult stage of reform: ownership reform. Through adjustment and reforms, the Chinese economic system may well converge with the system that all the WTO members adopted. Chinas WTO membership implies that China is not only integrating with the world market but also converting to the world economic system. 24

China is entering a new stage of reform and development. Like the agricultural reform in 1978, Chinas accession to the WTO will mark another milestone in Chinas modern history. China has successful achieved high growth under a more open environment. Reforms under the WTO framework will take China into another higher level of economic performance.

References:

Bach, Christian F., Martin Will, and Stevens Jennifer A., "China and the WTO: Tariff Offers, Exemptions, and Welfare Implications",

Weltwirtschaftliches Archiv 1996, Vol. 132 (3) Balassa, Bela, Trade Liberalization and Revealed Comparative Advantage, the Manchester School of Economics and Social Studies, Vol.33, No.2, May 1965 Das, Dilip K., Changing Comparative Advantage and the Changing Composition of Asian Exports, The World Economy, Volume 21, January 1998 Feenastra, Robert C, Wen Hai, Wing T. Woo, and Shunli Yao, The US-China Bilateral Trade Balance: Its Size and Determinants, NBER Working Paper W6598, 1998 Lardy, Nicholas R., China in the World Economy, Institute for International Economics, Washington D.C., April 1994 Richardson, J. Davis and Chi Zhang. Revealing Comparative Advantage: Chaotic or Coherent Patterns Across Time and Sector and U.S. Trading 25

Partner? NBER Working Paper W7212 World Bank, China Engaged: Integration with the Global Economy (China 2020), World Bank, Washington D.C., 1997. The World Trade Organization, Annual Report 2000, 2000.

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