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CHINA RELATION WITH WTO
INTRODUCTION
2011 marks the 10th year of China’s WTO membership and that of the Doha Round
Negotiations. International Centre for Trade and Sustainable Development (ICTSD)
organized a roundtable Discussion in Geneva on “A Decade in the WTO ,Implication
for China and Global Trade Governance” on June 29th, 2010, convening
government officials, academic faculties, business Leaders to review China’s role in
WTO in the past decade, examine its impacts on Global trade and WTO as a
backbone institute of global trade governance, discuss its trade Relations with other
countries, and look ahead China’s future position in world trade and Economy
landscape especially in face of more severe emerging issues as climate change,
International development and global economic governance. The Dialogue is
organized by the International Centre for Trade and Sustainable Development
(ICTSD) in Partnership with China Society for WTO Studies (CWTO), and the
Friedrich-Ebert-Sifting (FES) Geneva office
TEN YEARS OF ADAPTING
The past decade (2001-2011) has witnessed China's efforts in adapting to the WTO
rules and integrating with the world. Over the past decade, China abolished, revised
and adopted over 3,000 laws, regulations and department rules, fulfilled its
commitments to the WTO in tariff and non-tariff areas, and further opened its service
markets to the outside world.
The past ten years did not only witness China's efforts to embrace international rules
and norms, but also its growing experience to defend its own rights and interests
using these rules. This transformation that brought in foreign investment and
promoted market economy was then viewed as "wolf at the door" -- with tariffs to be
slashed and restrictions on foreign rivals to be eased, a shaky future might loom for
some of China's least competitive industries.
However, the industries did not get wiped out but managed to hold up well if not
thriving. "As a matter of fact, ambitious Chinese companies are now more like
wolves," said Lu Haiqng, corporate affairs senior vice president of Tesco China.
Tapping into the Chinese market in 2004, the UK-based grocery and general
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merchandising retailer now owns more than 100 outlets in China.
In the retail sector, international competitors, instead of taking over the whole
market, sparked the rise of domestic retailers such as Suning and Gome
"What we see on China's market now is greater competition and consumers gain
from the contest," Lu said. Joining the WTO and the introduction of international
rules helped China improve the socialist market economy, which will benefit the
country's economic and social development in the coming few decades, said
LongGuoqiang, director of the Research Department of Foreign Economic Relations
of the Development Research Canter of the State Council.
WHY CHINA NEEDS WTO China's explosive economic expansion over the past 20 years is a well-known
success story. Fueled by vigorous reform efforts, growth rates averaging nearly 10
percent annually have created a vast array of new job and investment opportunities,
making China more prosperous. The effect of China's transformation from an inward-
looking, planned economy to a more market-oriented, trading powerhouse has
reverberated throughout the global economy, influencing everything from consumer
choice to investment flows.
Rapid-fire growth has not been cost free, however. In particular, it has cast a harsh
light on some of the structural weaknesses of China's economic system, particularly
in agriculture, finance, and state-owned enterprises. The dilemma for China has
been, and will continue to be, how best to keep the dual momentum of economic
growth and structural reform going. For if one were to stall, the other might very well
stumble, potentially unleashing a whole new set of economic challenges and
difficulties. In many respects, WTO membership is China's best option for sustaining
the pace of economic growth and reform. As the world economy has become vastly
more complex and interconnected, China's participation in it -- according to the rules
of international trade -- has become that much more critical for China, as well as for
the United States, Asia, and the world. As a WTO member, China will be able to
participate in the formulation of rules that govern international trade and investment.
Similarly, it will be able to defend its trade interests using the WTO dispute-
settlement system. Chinese exporters will benefit from the certainty that their trading
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It would be unrealistic to expect the WTO membership to eliminate trade and
investment frictions between China and other economies since such frictions are not
uncommon between existing members. But these frictions will be better managed
under the WTO's trade rules and the organization's dispute settlement mechanism.
This will be a big improvement over the existing relationships, under which trade and
investment disputes tend to be settled by mutual threats and brinkmanship.
2) Economic Reform
From the experience of many countries undergoing economic reform, external
pressure and obligation have proven useful in countering the opposition of powerful
domestic interest groups. In the case of China, the state-owned enterprises are apowerful force against China's march toward a market economy. It would not be an
exaggeration to say that the bilateral and multilateral agreements behind China's
accession to the WTO are a summary statement of the China's economic reform in
the next decade or so. They not only constitute a road map for economic reform in
the coming decade, but as international treaties they also serve as the country's
commitment to the country's systemic reform and restructuring of the national
economy. Given the conditions of the WTO membership, there will be greater
competition between Chinese firms and foreign firms, both in China's domestic
market and in the foreign markets. As a result, there will be a large scale re-
structuring of industries. Except for a small number of industries selected as infant
industries and given some temporary protection, the restructuring to a large extent
will be based on China's comparative advantages and disadvantages vis-?vis other
economies. For example, labour-intensive industries would be in China's
comparative advantage, but natural resource-intensive industries, capital-intensive
industries, and technology-intensive industries are in China's comparative
disadvantages. It may have comparative advantage in some of the skill-intensive
industries but comparative disadvantage in others. Likewise, if firms are rewarded
and disciplined mainly by market forces, then the ownership structure of firms in
China will tend to reflect their relative efficiency in organizing production and delivery
of goods and services. The more efficient ownership structure will increasingly be
adopted while that less efficient ownership structure will diminish in importance.
Since capital flows into and out of China will continue to be restricted before
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convertibility on the capital account is attained (which may take no less than a
decade), the banks will be key in deciding which ownership type gains or loses. If the
four state owned commercial banks continue to play a dominant role in the supply of
investment funds, their attitude toward firms with different ownership structures is
crucial. If their lending decisions are not based primarily on commercial principles,
then the march toward more efficient ownership structure may be slow. Apparently,
the ownership structure also depends on the government's policy on national and
regional government owned monopolies. Although China is still far behind the
developed market economies, the latter are definitely the guideposts for China's own
regulatory reform and institutional building. WTO membership will contribute to
regulatory reform and institutional building in China because WTO rules will be
translated into national laws and regulation. In addition, best practices in regulation
must be adopted to avoid systemic failures. Finally, WTO membership will help to
speed up the enforcement of existing laws on the books. A better legal system, in
particular the effective enforcement of the law, will not just benefit foreign investors,
but also protect honest Chinese companies and business people from poor ethical
standard and outright cheaters.
3) Long-term Growth
The economic benefits derived from China's WTO membership are not confined to
static gains in efficiency from the re-allocation of resources among industries and
among firms. In the long-run, dynamic gains from increased competition brought
about by China's entry into the WTO will be even more important. Increased
competition on level playing fields will reward efficient and innovative firms,
regardless of whether they are local or foreign, private or public. At the same time it
will weed out inefficient firms and technological laggards. The protection of
intellectual property rights will help to build an engine of economic growth based on
technological progress, because it protects the intellectual property rights of both
multinational corporations and indigenous Chinese firms. The serious duplication of
investment and excess capacity in many industries are due largely to a perverse
incentive of investing public funds, but the fact that there is too much money chasing
after a limited number of viable investment ideas may also be a factor. To the extent
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that is true, the problem of duplicated investment should be lessened when there are
many more new ideas and innovations.
4) Short-term Costs versus Short-term Benefits
Against the economic benefits identified above, there are significant short-term
adjustment costs in the form of bankruptcy of domestic companies and increased
unemployment. However, it should be pointed out that the companies with a
reasonable prospect for survival will likely be re-organized, whereas the bankruptcy
of hopeless firms will release resources to new firms for growth and existing firms for
expansion. A social security system and a health care system will be necessary to
provide a safety net for the unemployed. It would be less costly to society to payworkers the same wages without their producing goods that do not meet consumer
demand. As an example, the quality of some completed apartments in China is so
low that consumers will not buy even at very low prices. According to some
commentators in newspapers, the solution would be to tear down the low quality
apartments so that new apartments desired by consumers can be built on the same
sites. It should also be pointed out that China's WTO membership will reverse the
recent trend of declining FDI, which has caused a lot of concerns among the policy
makers. The Government has increasingly encountered the difficulty of reversing the
deflationary pressure by its prime pumping alone. A more stable external economic
relationship would mean that foreign markets can be relied upon to utilize the excess
capacities faced by many industries, provided that the quality of products is good
enough to meet the demand of foreign consumers. In addition, the development of
products to meet the consumers' new or latent needs will generate many gainful
jobs, in contrast to jobs that result in unwanted products. In particular, the opening of
the service industries to foreign investors, by speeding up the development of these
industries, will create many new jobs that can partially offset the loss of jobs by
bankrupt firms.
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FUTURE CHALLENGES
Reform and opening-up, which propelled China's rapid growth over more than three
decades, will continue to underpin China's future development, President Hu said.
China will implement a more proactive opening up strategy and open more areas to
the world, he said.
The target of the opening up strategy, however, should shift to supporting the
transformation of economic development pattern from previous "earning foreign
exchange reserve through export expansion," said Long Guoqiang.
China's export-oriented developing pattern, which relies on high inputs, high energy
consumption and capital accumulation, resulted in grave negative effects on the
sustainability of the economy. Its expanding foreign exchange reserves and growing
trade surplus complicated domestic policy decisions and sparked complaints from its
trade partners.
China's over-reliance on exports has made its economy more fragile, especially
during a time when downturn hit major developed economies, said Secretary
General of the UN Conference on Trade and Development Supachai Panitchpakdi.
China's GDP growth has been slowing this year, to 9.1 percent in the third quarter
from 9.5 percent in the second quarter and 9.7 percent in the first quarter.
To steer the national economy through the international financial crisis and its
aftermath, China strove to boost domestic consumption after external demand
weakened as the Eurozone, the country's largest trade partner, continued to wrestle
with a deepening debt morass.
CONCLUSIONS
It cannot be denied that there will be significant short-term costs associated with
China's accession to the WTO, but much of the costs will have to be incurred any
way. China's WTO membership will impose a time table within which it must deal
with its underlying economic problems. WTO membership will not only provide long-
term benefits to the Chinese economy, but also help to solve some short-term
difficulties. The challenge of the Chinese government is to manage the short-term
problems sufficiently skilfully that as time proceeds the longer-term benefits will
dwarf the short-term costs. In such a scenario, the WTO deal will only cause isolated
nuisances, but not social crises.
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REFERENCE
1) http://ictsd.org/downloads/2011/07/meeting-report.pdf
2) http://ictsd.org/i/events/ialogues/103519
3) http://english.cri.cn/6826/2011/12/11/1461s671120.htm
4) http://english.cri.cn/6909/2011/12/11/1461s671048.htm
5) http://paftad.org/files/34/05_SALLY_WTO.pdf
6) http://www.chinese-culture.net/html/china_wto.html
7) http://www.bm.ust.hk/~ced/nw_benefit.htm#top