China into the WTO

Print edition : November 27, 1999

A Sino-U.S. agreement clears the way for China to be admitted into the World Trade Organisation, but it is hard to believe that China would go the whole hog in the matter.

WHAT seemed inevitable for almost two decades, finally seems imminent. The mid-November Sino-U.S. agreement over the terms on which the U.S. would support China's entry into the 135-member World Trade Organisation (WTO), paves the way for the quick acces sion of that country into the world trading arrangement. The Chinese Government would of course have to win the support of many other members as well. Under the rules governing the WTO, where voting rights are distributed on the one-nation, one-vote prin ciple and which follows the convention of taking decisions by consensus, the general council or a ministerial conference has to approve a membership treaty drafted after agreement with all members on the terms of accession. This requires, in principle, b ilateral deals with all member-countries. While quite a few countries had virtually unconditionally backed China's request for membership, 12 formal bilateral deals have been inked so far and negotiations are open with another 28 countries and groups, in cluding the European Union. However, for political reasons, agreement with the U.S. was considered a major stumbling block. With that block having been cleared, full agreement is widely expected to follow soon, even if not in time for the Seattle ministe rial meet starting on November 30.

To most China-watchers, this outcome had seemed inevitable once it was clear that the Chinese economic reform which began in 1978 would remain in place. This view was buttressed by the fact that, despite China's exclusion from the formal world trading ar rangement during the 1980s and 1990s, exports constituted a major plank of its growth strategy under reform. The share of merchandise trade in China's aggregate product rose from 9.2 per cent in 1978 to 16.8 per cent in 1984 and more than 20 per cent in the mid-1990s.

This dependence on trade implied a growing engagement of world markets. China's share of world merchandise exports, which stood at between 0.7 and 0.8 per cent during the 1970s, rose to 1.4 per cent in 1983 and stood at 2.9 per cent in 1996. In that year , China's share was higher than that of other leading developing country exporters such as South Korea (2.5 per cent), Singapore (2.4 per cent), Taiwan (2.2 per cent) and Mexico (1.8 per cent). With exports constituting the goal of an important segment o f domestic economic activity and China's presence in the international markets increasing, it no more appeared sensible for China to remain vulnerable to unilateral trade policy responses and tenuous bilateral arrangements. The dangers were epitomised by the debates which surrounded the annual exercise since 1974 in which the U.S. Congress had to ratify continuing a normal trading relationship with China.

Not surprisingly, China declared in 1986 that it would like to be part of the multilateral framework governing world trade. The fact that China's accession is finally in sight only 13 years later is not primarily due to its own recalcitrance. There have been occasions when China has on many trade-related issues been willing to go further in the direction of liberalisation than developing countries participating in the multilateral trading arrangement. In fact, in the dispute over patent regimes during t he later stages of the negotiations that led up to the Uruguay Round agreement, China's willingness to compromise at a bilateral level was quoted to smother developing-country opposition and buttress developed-country positions. What held back the final agreement were complex political and economic compulsions in the developed countries, especially in the U.S.

That such compulsions played a role is clear from the fact that as recently as April, President Clinton turned down terms offered by China in return for U.S. support for its entry, which were no different from those underlying the latest agreement. Those terms were by no means limited.

To start with, it involves a substantial degree of liberalisation of trade. China's average import tariffs are to be reduced by almost 5 percentage points, from 22.1 per cent to 17 per cent. Tariffs on some farm products exported by the U.S. are to be re duced sharply to 15 per cent. And tariffs on automobiles, currently ranging up to 100 per cent, are to be subject to a "front-loaded" reduction to 25 per cent over a six-year period.

Secondly, the package offers a number of concessions for foreign firms and investors. For example, international automobile manufacturers and banks would be allowed to offer consumer loans for car purchases, which is a crucial concession given the high p rice of automobiles in China relative to incomes. Foreign manufacturers will also be allowed to distribute their own products imported from abroad and not be forced to rely on domestic distributors. Above all, foreign firms are to be provided an importan t role in the emerging and rapidly growing telecommunications sector (including the Internet). The agreement provides for foreign firms to hold 49 per cent of the equity in local ventures for a period of two years and 50 per cent subsequently.

The third area in which major concessions have been offered is the financial sector. Thus far, foreign banks were allowed to offer their services to foreign companies operating in China. But under the terms of the agreement they would be allowed to offer their services to Chinese firms two years after their entry, providing loans, undertaking currency transactions and servicing their other banking requirements. Limits on the insurance business undertaken by foreign insurance companies are also to be gra dually dismantled and they are to be allowed to increase the number and expand the size of their branches as well as enter new areas such as property. Market access is to be eased and enlarged for foreign legal and accounting firms. Finally, foreign brok erage houses and mutual funds are to be allowed to form joint ventures with Chinese companies, holding 33 per cent equity initially and a possible 49 per cent subsequently.

In return for these substantial concessions, the U.S. has agreed to support China's claim to WTO membership. But it has not offered very much else. In the contentious area of textiles, which is a major item in the Chinese export basket, quotas are to be phased out only by 2005. The U.S. has also reserved for itself the right to respond in protectionist fashion to what it sees as import surges in the U.S. market, for a period of ten years, and to respond similarly to "dumping" for a period of 15 years. T he experience under the Uruguay Round so far points to the ease with which such clauses can be converted into protectionist devices by developed countries.

THE willingness of China, an important developing country exporter which has been struggling to join the formal multilateral trade framework, to make these compromises is to an extent understandable. What is less clear is why the U.S. which for political reasons was earlier unwilling to accept even these terms, has suddenly come round to accepting an agreement which according to some reports is not as good as the terms which were on offer and were rejected in April. Moreover, given the impending preside ntial elections and the strong opposition among the trade unions to Chinese entry, the timing of the agreement is indeed surprising. AFL-CIO, the American Federation of Labour and Congress of Industrial Organisations, has vowed to fight the deal, because it threatens American jobs and goes against America's "democratic principles and most cherished values".

And some local business interests, including the textile lobby, have sharply attacked the agreement.

If yet the Clinton administration has chosen to go through with it, it is possibly because of a strategic concern. It is indeed pointless not integrating an emerging economic power like China into current and future negotiations on the world trading syst em. But, more important, the willingness of China to make crucial concessions in areas like foreign investment and the financial sector could be an important source of pressure on recalcitrant developing countries unwilling to agree to start negotiations on investment and services, as part of a new round. That could possibly explain the willingness to conclude an agreement on terms rejected only recently, in time for the ministerial meet in Seattle. As in the case of patents at the time of the Uruguay R ound, China is implicitly being held up as a model of a developing country with a reasonable negotiating position.

In fact, this time around, the consequences of implementing the provisions of the agreement relating to trade liberalisation can be extremely damaging, especially for the state-owned enterprises (SOEs) primarily created during the pre-reform years. There were 118,000 such firms in China in 1998. Although their contribution to China's industrial output had fallen from over 75 per cent in 1978 (when economic reform process began) to less than 35 per cent in 1995, this was not so much owing to the shrinkag e of this sector as to the expansion in the rest of the industrial sector consisting of collective enterprises, individually owned enterprises, wholly foreign owned firms, and foreign joint ventures.

What is significant is that even now the SOEs dominate or even monopolise their chosen areas of operation, which are the capital-intensive, heavy and basic goods industries characterised by lumpy investments and long gestation lags.

The significance of the SOEs comes through in other ways as well. For example, they still constitute the principal source of employment in urban China. In 1995, seven out of ten urban workers were employed in state firms. Such employment does not ensure just a wage, but a range of welfare benefits such as housing, medical care and retirement benefits. Further, SOEs constitute the primary source of tax revenue for government. In 1995, SOEs produced only 35 per cent of China's industrial output but contri buted 71 per cent of government revenues. Thus, it is not only directly that the SOEs contribute to the government's governance and welfare responsibilities, but indirectly, by providing the latter with the wherewithal to finance its own expenditures.

Trade liberalisation, which would subject these units to competition, and financial sector reform, which would make it extremely difficult for them to access the credit so crucial to their survival, mainly threatens these firms. Thus, the terms of WTO en try, if implemented, could spell unemployment and erode standards of living. According to China's official Xinhua News Agency, China's Labour Minister Zhang Zuoji stated in a report to the financial and economic committee of the National People's Congres s earlier this year that more than three million workers in the SOEs are expected to lose their jobs this year. They would join the six to seven million people who, having been retrenched from state firms, are yet to find new jobs. Zhang noted that while China would need 24.5 billion yuan ($2.95 billion) this year to provide basic living expenses to laid-off workers, the amount currently available was only 19.5 billion yuan. This problem of inadequate support is bound to intensify if China resorts to ma ssive trade and financial sector liberalisation involving partial retrenchment or closure of public sector units, since there were an estimated 113 million urban workers employed by state-owned firms in 1995.

It is for this reason that it is hard to believe that China would go ahead with the kind of liberalisation it has promised on a range of fronts. In fact, there are many China watchers who are sceptical. For example, the Financial Times quoted Gord on Chang, a lawyer in a Beijing firm, as saying: "If it (China) really follows through on the agreement, the changes are going to be little short of revolutionary. This leads me to believe that the agreement is not going to be implemented as announced."

In the circumstances, the view that all developing countries should give in to a more liberal (though unequal) global order just as China has done may be misplaced. China's giving in may be more rhetorical than real. And the competitive threat to develop ing countries from China, which has been intense in the past, is unlikely to increase after China's entry into the WTO.

Unfortunately, misplaced views about the implications of China's entry are being aired in India as well, in defence of the position that India should 'learn from China' and not insist on a review of the Uruguay Round and raise too many objections to a Mi llennium Round with a far-reaching agenda. But as in the case of developed-country spokespersons, this is just one more ruse to push through their own agenda.

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