After 15 years of negotiations, trade ministers from across the world have officially approved China’s entry into the World Trade Organization (WTO) in December 11 2001. 1 China’s formal membership comes exactly one month after the 142 members of the WTO ratified its application at the world trade talks in Doha in the Gulf state of Qatar, and the Chinese government formally approved the deal. 2 However, adapting to the negotiated WTO package will be only part of the major changes.
China was too advanced in some sectors for WTO member countries to be comfortable giving developing country status that brings with it loose timetables and ” differential and more favorable treatment” for meeting WTO obligations. 3 But China was also not a developed economy by most measures, as its delegation endlessly pointed out. Hence every aspect of China’s entry has been carefully negotiated, adding to the time it has taken for China’s application to be completed. In the end, the full protocol was thousands of lines of tariffs and specific agreements covering approximately 1500 pages. 4
China’s leaders’ push towards joining WTO over a decade and a half is remarkable in the light of difficult transition challenges and serious opposition at home. We still do not have a full understanding of the internal bargaining that allowed for such a serious renewed push to join WTO. It may be due to factors of both economic and political, which probably played a role in tipping the scales back toward membership. 5
Under China’s WTO accession agreement, China made substantial market access commitments covering the agricultural, industrial and services sectors:
(1)Phase-out of non-tariff barriers on imports – Import license requirements will be eliminated within five years of accession, and all quotas will be phased out within five years of accession. 6
(2)Tariff cuts – average import tariffs for industrial products will be lowered from currently 14. 8% to 8. 9% by 2005, and average tariff for agricultural products will be cut to 15% by 2004. 7
(3)Conditions on foreign investment – The WTO Agreement on Trade-related Investment Measures (TRIMs) will be implemented, requirements on trade and foreign-exchange balance, local content, and export performance will be ceased or eliminated. 8
(4)Trading rights – China agrees to provide trading rights to foreign companies, to be progressively phased in over three years. 9 Majority ownership in wholesale joint ventures will be allowed within 2 years of accession with no geographic or quantitative restriction by then. 10 There will be no geographic, quantitative, equity/form of establishment restriction in retailing within 3 years of accession. 11
(5)Open-up of other services – China has also agreed to relax foreign investment restrictions on many important services industries, including distribution services, telecommunications, financial services, professional services. Foreign firms can also provide accounting, management consulting, architecture and engineering services. In return, quota on China’s textile and clothing exports will be removed by 2005. 12 For value-added services in telecommunications, foreign partners will be able to own up to 50% with no geographic restriction within 2 years after accession.
For mobile voice and data services, foreign operators can own 25% upon accession, and rise to 35% one year after accession and further to 49% after 3 years. 14 Foreign banks will be able to conduct local currency business with Chinese enterprises 2 years after joining the WTO, and all geographic and client restrictions will be removed within 5 years after accession. 15 For non-life insurance, branch or JVs with 51% foreign ownership will be allowed upon accession. Wholly-owned subsidiaries will be allowed in 2 years. 16 For life insurance, JVs with 50% foreign ownership will be allowed upon accession. 17
In my essay, I will intend to describe the following perspectives in term of China’s role in the globalisation process :-
(1) Why China’s party desire to push towards joining WTO?
(2) How doe it affect China’s economy itself?
(3) How does it affect the political system in China?
(4) Highlights the most significant relationship with regions
(1) Why China’s leaders desire to push towards joining WTO?
Since mid-1980s, there was only minor progress has been made and only few plans have been initiated to restructure and revitalize state-owned enterprises . It may be the main reasons for China’s leader and government to push to join as they saw it as a way to keep the process of reform going. There are other reasons which lead for the China’s government to push forward to reforming society:-(a) Political aspects (b) More sectors to foreign competition (c) More exports to other parts of the world (d) Technological development- high-tech revolution
(a) Political aspects
Once China joined WTO , it would no longer be hostage to annual Congressional reviews in the U. S. , where all kinds of grievances were raised as possible reasons to deny China Most Favored Nation status. 18 Further, once a member, Chinese negotiators would have some influence in making he rules of international trade and therefore be able to weigh in on the issues that concern them. They also would have more credibility and clout to deal with their own grievances on dumping and other trading issues. 19 Finally, China wanted to make sure that Taiwan did not join first so that China would have a say in that economy’s status in the organization.
(b) More sectors to foreign competition
Once China joined the WTO with more sectors to foreign competition, China expected that numerous state companies will either have to rise to the occasion and compete successfully or close. The state sector is supported by the banking system, which carries a high burden of non-performing loans. Serious banking reform is therefore necessary to avoid a major crisis. The experience of the Asian crisis brought this point home for many in China, and created a sense of urgency. With WTO membership, foreign companies and banks would increase their presence in the Chinese market, setting examples and creating competition for the domestic system.
(2) How doe it affect China’s economy itself?
In 1978, there were no foreign investment and very little trade in China. Contrast that with the present, where China has been the largest recipient of direct foreign investment in the developing world since 1992, and is among the top ten trading countries in the world. 23 Although the reforms that opened China to international markets were gradual, by the mid-1990s foreign invested enterprises began to gain serious market share. 24 Coca Cola and Pepsi had basically dominant the whole soft drink market in China, and advertisements and products like Procter & Gamble and Volkswagen were everywhere in China.
Some popular examples were that Microsoft’s capitalization was one and a half times the size of both the Shanghai and Shenzhen stock exchange put together, and Wal-Mart’s annual sales represented 40 % of China’s total sales revenue 25 The multinationals looked invincible and overpowering. There are two debates going on at the same time. Some people argued that China was relying too much on foreign investment and that development of the domestic, national economy should be the priority. Another side of people argued that in fact China still had too little foreign investment, and that more liberalization was required to insure progress of reforming.
Lastly, China’s leadership has been preparing for these challenges for years. Yes, the changes will be difficult. But the government has pushed this process forward because it believes that joining the global economy is in China’s long-term national interest. For China’s leaders, WTO is a crowbar that will leverage further domestic reforms. Though likely out of office in a few years, Jiang Zemin and Zhu Rongji will remain influential and committed to economic reform. From their perspective, China cannot retreat from its obligations and the fourth generation of leaders will have to see them through.
East Asia regions
After China’ s joining WTO together with Asian financial crisis and Japan’s decade-long economic slump, East Asia’s economics have begun to change dramatically. China plays a key role in determining the outcome of those changes if for no other reasons than its sheer size and speed of economic expansion. China’s economy is about 10 % of the United States’ economy, 20 % of Japan’s. 36 However, after adjusting for differences in cost of living (purchasing power parity adjustments), China’s economy is more than half as large as the United States’, surpassing Japan to become the world’s second largest economy. 37 It grew 7. 3% in 2001 and an average 9. 1 % annually between 1980 and 2000. 38 China expects its economy to grow at an annual rate of 6 to 7 percent over the next 10 years. 39
Due to this reform, China’s has altered regional investment patterns. Particularly those of the ASEAN.( members of ASEAN are Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei, Vietnam, Laos, Myanmar and Cambodia joined later). 40 In 2000, China (including Hong Kong) received 80 % of total foreign direct investment into the major East Asian countries (excluding Japan), up from 62 % in 1995. 41 In contrast, major ASEAN countries received only 9% of the total in 2000, down from 33 % in 1995. 42
According to table 1, the enhancement of the ASEAN-China trade relationship contrasts sharply to the weakening trade ties between ASEAN and Japan. Most ASEAN countries now have a trade surplus with China. This trade is generally intra-industry. The devaluation of some ASEAN currencies in conjunction with China’s fixed exchange rate helped expand ASEAN exports. As China becomes more willing to open its agricultural market, closer trade relations are more likely. In November 2001, ASEAN and China called for developing a free trade area over the next 10 years. 43
Although China’s economic integration with its neighbors has grown substantially, Japan, possessing the largest economy in the region, has yet to invest aggressively in China. 44 According to chart 1, Japan’s direct investment in China has lagged behind its investment in other parts of Asia. Japanese companies have been very cautious about transferring technology to China. Meanwhile, Japan has a significant trade deficit with China. The trade relationship has experienced conflict. In 2001, Japan threatened to use antidumping measures against Chinese agricultural products. 45 China retaliated with a temporary 100 % tariff increase on some Japanese products, including automobiles.
The two sides finally compromised to avoid a trade war. 46 The recent depreciation of the Japanese yen has inflamed the debate as each country complains that the other is deliberately undervaluing its currency. 47 Despite its problems, Japan seem to be persisting in its efforts to maintain regional economic dominance. Nevertheless, from chart 1 and table 1, we can see that ASEAN’s trade and investment ties with Japan are loosening. Japan’s trade with ASEAN has traditionally been tied closely to investments.
ASEAN countries in practice have served as low-tech manufacturing units for Japan. Importing Japanese capital and intermediate goods and exporting final goods primarily to the United States and Europe have resulted routinely in trade deficits with Japan. Recently this imbalance has eased because Japan’s domestic financial difficulties have caused it to invest less in the region and because the ASEAN currencies have been devalued, discouraging imports and encouraging exports.
To reinforce its ties with the region, Japan signed a free trade agreement with Singapore in January 2002. 48 However, it seems unlikely that Japan’s relationship with Singapore can be easily extended to other ASEAN countries. Because Japan is highly protective of its agricultural sector, the agreement excluded any reference to agricultural products. 49 Singapore’s agricultural sector is negligible, so Japan was able to bypass the agricultural issue. 50 This will not be so easy when negotiating future free trade agreements with other ASEAN countries.
These countries have much larger agricultural sectors than Singapore, making it more difficult to keep Japan’s domestic agricultural market closed. The Singapore government is now proposing a free trade agreement between Asean and China. 51 This is an idea which so far has not been greeted warmly by other countries in South East Asia. They fear that it will simply mean that the biggest economy and market, China, will just swallow the smaller ones.
As one of the more technically advanced economies in East Asia, South Korea’s response to China’s accession to the WTO has been mixed, especially among government and business leaders. Korea established formal trade relations with China only 10 years ago. According to the table 1, China (including Hong Kong) is already Korea’s second largest export market following the United States. Major Korean conglomerates, such as Samsung and SK have aggressive plans to increase their investment in China. However, many Koreans fear that, in the near future, China will catch up to Korea’s technology in semiconductors, shipbuilding, steel and electronics, thus encroaching on Korea’s world market shares.
South East Regions
A Chinese unilateral action would mainly benefit other countries in South-East Asia. The most significant influence of China’s entry to the WTO will be the increasing foreign investment to the world largest market, which certainly will affect foreign direct investment in Southeast Asia. Since the early 1980s, China has gradually become attractive to foreign investors, thanks for the open-door policy announced at the end of 1978. During the 1980s, labor-intensive industries were the major international investments in China mainly because of its low cost on land and labors.
The Philippines and other Asean countries will face even greater competition from the exports of China. The Asian giant has been the source of very cheap products, and more will wash on to the Philippine economy . On the other hand, south-east Asia will face some serious challenges from a more open China. Countries such as Indonesia, Thailand and the Philippines compete most directly with China, and so will experience stiff competition and lower prices in a range of labor-intensive products. These countries are also likely to find it harder to attract foreign investment.
China’s entry is expected to boost economic reforms started in the world’s most populous nation more than 20 years ago and open the huge market to the rest of the world. 72 It brings a market of 1. 3 billion people into the global trading system. 73 It is a symbolic recognition that capitalism holds sway in the country and the beginning of a new stage in the consolidation of business power. China has had to satisfy its trading partners, notably the United States and the European Union, that it is doing enough to open its economy to international competition. 74 However, the WTO fallout is more likely to unfold in coming years and does not necessarily mean big foreign-exchange moves in the near term. 76 Indeed, China is changing fast – much faster than the fading of our old prejudices. We see China as a market not a competitor.
To adapt and become part of the world, China has opted to lift restrictions on the movement of people dating from the days of communist central planning. Eventually, the restrictions on its capital markets will have to be lifted and market access for foreign goods and firms will be improved. It could lead to huge rise in unemployment when starting reforming of China’s vast
These results have an important implication for China’s WTO accession. First, accession to the WTO is one challenge to China, but it also means a great opportunity. Shortage of arable land and capital and existence of large amount of unskilled labor force are the basic national condition of China. This situation can not be changed fundamentally within the near future. This basic national condition will be the major decisive factor in the identification and choice of China’s development strategy. Joining WTO will integrate China into the world economy more deeply. China will be benefited from its participation of the international division. Therefore, China’s WTO membership is consistent with its medium and long term development strategy.
Personally I believe that the Chinese authorities wanted to join WTO more out of political, rather than economic, considerations. The consensus view is that entrance into WTO will open up China’s market of 1. 3 billion people. If you take into consideration the actual purchasing power of the Chinese people, you will realize that China’s market cannot be defined by the number of people it has. For instance, I think the over-reaction in the U. S. textile industry is a result of fear of an imagined threat, because China’s textile products on the world market merely provide alternative choices for middle to lower, especially lower, classes of consumers.
In terms of technology, they offer hardly any competition against similar products made by countries such as the United States and Japan. As for the three main groups of more labor-intensive products produced by China’s private, joint-venture and foreign-owed companies: clothes, toys and electronics, China already has a good share of the world market. Chinese high-tech industry is not only weak but that foreign investment has long made strong inroads into the market. Take the telecommunications market for instance.