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World Affairs
Implications of China's Entry Into WTO
T K Bhaumik
Economic reform has led to very high rates of growth in the gross domestic product in China. As a full-fledged member of WTO, China is set to enter a new paradigm of development.
Since the late 1970s, China has come a long way from being a socialist economy (1947—1977) to a socialist market-oriented economy, as it may still be called. The socialist economy of China was never a typical low-growth, least-developed economy.
During the period 1965—79, its gross domestic product (GDP) (or NMP i.e. net material production in the socialist system of accounting) grew by over 6 per cent average annual, while industry and agriculture grew by around 8 per cent and 2.5 per cent average annual, respectively. The people were, no doubt, deprived of the varieties and luxuries of consumption, but had access to most of the basic needs. Life was hard, but people had the wherewithal to bear it. In a way, there was this basic prerequisite for higher growth – a large stock of good quality human capital.
With the introduction of economic reform in the late 1970s (1978—79), economic growth began to take place at a galloping speed. While long-term (1965—1999) trend rate of growth in China’s GDP had been 8.1 per cent, it grew by 10.2 per cent during the 1980s and then shot up to 11.1 per cent during the 1990s. This gives some idea of the miracle that economic reform has performed for the Chinese economy. In the last two years, growth has slowed to less than 9 per cent, due mainly to a crisis in the world economy. But it remains the fastest-growing economy in the world, with GDP that has already crossed one trillion US dollars.
And now, as a full-fledged member of the World Trade Organisation (WTO), China is set to enter an entirely new phase, a new paradigm of development. After a 15-year long negotiation with key trading nations, especially with the United States and the European Union, China’s accession to WTO was announced on November 10, 2001 at Doha (capital of Qatar), the host of the fourth Ministerial Conference, amidst excitement and applause, on the one hand, and fears and apprehensions on the other. Everyone admits that China is the most competitive of all nations. Its export turnover grew by an annual average of 15 per cent during the past two decades. It is already the seventh largest exporter (fourth if Hong Kong is included). Its imports are also increasing, and was of the order of over $200 billion in 2000.
There are several other points that need to be mentioned about the Chinese economy. First, during the 1990s, China’s huge economic machine was run largely by the manufacturing sector, that contributed 49 per cent to GDP (up from 42 per cent in 1990). This sector registered an average annual growth of 14.4 per cent during the 1990s, and is showing no sign of slowing down. Two, the services sector, with a contribution of 33 per cent in GDP, is still relatively undeveloped – average annual growth declined from 13.5 per cent during 1980s to 9.2 per cent during the 1990s – and will be subjected to rapid reform from now onwards, mostly under commitments to WTO. Third, the agricultural sector too has shown a decline in average annual growth from 5.9 per cent in 1980s to 4.3 per cent in the 1990s, and will undergo another phase of reform in the years ahead.
Fourth, even as services and agricultural sectors have witnessed growth contraction during the 1990s, in all the sectors China has been enjoying "fastest growing" status in the world economy. Growth machines have been at work in all the sectors. Fifth, China happens to be well endowed with physical as well as financial resources. China’s stock of key natural (especially energy) resources is well known, and this is backed by a huge stock of financial resources. This makes its economy insular to external uncertainties to a great extent. Much of the foreign exchange reserve (over $170 billion) is stable and will not be affected by volatilities of the global capital market.
Sixth, China has been the largest recipient of foreign direct investment (FDI) in the developing world, currently second largest in the world, and yet FDI in total domestic investment is only a little more than 8 per cent. It shows the extent of capital formation taking place in the economy. The average annual rate of capital formation in the economy is found to have been 10 per cent average annual during 1965—99 and 13.4 per cent during the 1990s.
The key point to note is this: Before joining the WTO, the Chinese economy grew enormously and much faster. It is the world economy’s most healthy "baby" and WTO’s most healthy latest member. What does this mean for China, for WTO and for other countries? Before we go into this question, it may be useful to get some idea about commitments undertaken by China on its way to accession to WTO.
China’s Commitments To WTO
As has been mentioned earlier, China had to encounter hard bilateral negotiations with its major trading partners, often giving in to their demands. The Protocol of Accession allowing China’s entry into WTO is a lengthy one (around 1000 pages) and requires China to undertake over 2000 legislative changes by 2005, in order to honour all its commitments. This should be sufficient to explain the extent of commitments made by China.
These may as well be called "down payments" made by China, as price for entry into WTO. So far, no other member of WTO has made so many commitments. The commitments undertaken by China constitute a very comprehensive package of liberalisation measures, for opening up its domestic market to foreign products and investment. And most importantly, China has been allowed five years from the date of accession to fulfill all its commitments. Some important aspects of its commitments are as follows:
An Outline of Key Implications
First, undoubtedly China has been persuaded to make huge commitments of the kind not undertaken by any other member country, including US and the EU. This creates a situation of serious imbalance in obligations within WTO. Logically, now on entering WTO China may expect other members to make similar commitments.
What it means is that other members should now be prepared for substantial market access commitments and tough negotiations in the new round of trade negotiations. It is quite possible that the entry of China in WTO will accelerate the multilateral process of trade liberalisation. This is good for WTO, and good for multilateralism.
Third, given the commitments China has undertaken, it cannot be expected to join the bandwagon of developing countries. It is not in China’s interest to side with the developing countries and create blockades in the way of trade liberalisation. On the contrary, China may have to aggressively push for faster liberalisation. In this respect, China’s entry into WTO is a bad news for developing countries. However, it can be bad news for the developed countries as well. The good news is that entry into WTO will make China a more transparent and less-subsidised economy, which means more market access opportunity in the domestic markets of China.
Fourth, if there is any other country that should be bothered about implications, it is China itself. For China, it will mean total economic transition, rapid economic reforms in all sectors – all in a short span of five years. No doubt, this will make China a more open market economy and perhaps a more efficient and competitive one. For the leadership in China, it is however a serious challenge. Managing rapid economic transition, without an opportunity to re-examine the implications, is a serious challenge. The impact of entry into WTO for China may extend well beyond economics and spill over to socio-political concerns.
Logically, a transition to a competitive market economy does not come without its accompanying social and political problems. This is all the more so for a country like China, that still continues to have a socio-political configuration that is not tuned to a market economy environment. Entry into WTO for China will mean just not economic transition but at least significant social transition as well.
For the developed countries, for example, US and EU, China will provide huge market access. During the negotiations, both US and the EU have ensured easier access of products and services of their concerns and extracted substantial concessions. China’s trade with the developed West is likely to go up substantially, tilting heavily on the side of the latter.
In return, by virtue of greater transparency, openness and liberalisation following entry into WTO, China is likely to attract considerable amount of FDI in various sectors of its economy from the US and the EU, who currently account for around 12 per cent of total FDI flow into China.
What will it mean for the FDI prospect of other developing countries? If the size of global FDI flow, which is currently around half a trillion US dollars does not increase substantially, it may mean diversion of FDI in favour of China.
It is estimated that if China meets all its obligations within the stipulated time frame of 2005, China’s imports may go up to $600 billion by 2005 from its current level of around $250 billion, and after that of course it will continue to grow at a higher pace. This is an indication of the extent of market access opportunity that is likely to emerge in China. Obviously, the bulk of it will be appropriated by the developed countries – USA, EU and Japan. For the developing countries, given their competitive disadvantage, things may not be very easy.
Finally, given that China will be required to match up with the rising import bill, it may be more aggressive on the export front. If we look at the current scenario in global trade, it is likely that the developing countries will attract much of the attention as potential export markets for Chinese goods.