China and the WTO

I. Introduction

After the formal acceptance of China to the World Trade Organization (WTO) on 11 December in 2001, the majority of Chinese and Western press praised the mammoth progress in the ambition to worldwide international free trade (Solinger, 2003). Mike Moore, the former Director-General of the WTO, proclaimed the advantages of China’s access to the WTO in an acutely optimistic way: “The benefits for China are clear. Opening its markets to foreign trade and investment will make it richer.” (Moore, 2000). The Chinese government also perceived the potential advantages for domestic economy. On the one hand foreign trading partners would enlarge their business activi- ties in China, if China’s authorities and businesses would operate within agreed rules and standards. Thus the increasing trade revenues could stimulate economic growth and development. On the other hand China could increase its political power by verifying to be a member of the community of the great trading nations which further would encour- age the Chinese as well as the Asian influence on world’s policy on trade (Holton; Lin, 1998).

The entry to the WTO exerts great impact on China’s businesses; small and medium sized firms as well as on state-owned enterprises. The Chinese companies more and more become element of international added value chains. International competition influences the efficiency of companies and privatization not stops in front of the doors of state companies. The paper will present what it took China to join the WTO and point out the main effects for the Chinese manufacture, financial and agriculture sector.

II. What China took to join the WTO

In 1948 China was one of the founding members of the General Agreement on Tariffs and Trade, but left the agreement after becoming the People’s Republic. China tried to re-join the GATT in 1986 and accordingly to become a foundation member of the WTO in 1995, but the political unrest in 1989 and certain other political aspects caused the western countries to decide against the Chinese accession. Before China’s economic reform in the year 1978, investments were centrally planned by the government and funded by state banks. A financial revolution then occurred in the country and internal liberalization, decentralization and privatization of former SOE’s was adopted. The re- sult was a decline of the state sector and an increase in private ownership, joint owner- ship and foreign-funded property in China and Chinese funded property overseas. In the early 90s the stock exchange was established. China’s external liberalization allowed the flow of foreign direct investments and loans to China (Li; Liu, 2001).

According to Anderson (1997), the objectives of the WTO were to set and enforce international trade standards, dispute and control trade liberalisation and increase policy transparency. The disciplines protected weak countries against trade discriminations of large and influential nations. Foreign companies would be treated in the same way as domestic companies. Furthermore the rules increased welfare of nations by limiting tariffs, trade taxes and regulations in order to offer greater market access for foreign goods and services. The European Union (EU) und the United States of America (USA) were concerned about China’s promises of trade and financial markets liberalisation. In particular the then existing WTO countries worried about China’s trade transparency, its state owned enterprise (SOE) regime, the discrimination of foreign companies and the treatment of quotas and licences (Handelsblatt, 13.05.1994). However, since 2001, China is a full member of the WTO and consequently joined the GATT.

The very competitive production costs as a result of low costs for labour and land, as well as the great market potential, pulled foreign companies to China and pushed Chi- nese exports. For instance, in the period from 1984 to 1995 China’s gross domestic product (GDP) climbed by 10.2 percent per year. If the economic progress of marketiza- tion would continue, it would help China to generate sustainable GDP growth rates that reach the whole country and hence contribute to a higher regional integration of prov- inces rather than regional separatism (Holton; Lin, 1998/ Feenstra, 1998).

Yet the economic success of China’s (export) businesses is still part of both the exist- ing export production networks and the rapid structural change of domestic institutions. An important implication of that argument and a reason for what China took to join the WTO is that, when domestic structural change will slow down, broader economic net- works are desirable to maintain and continue the economic success of China’s economy (Naugton; Lardy, 1996). But China’s trading partners will only offer more economic cooperation and business opportunities if China continues to open its markets for for- eign goods and services. Therefore China’s dependence from intra-regional trade, in particular intra-asian trade, would decline.

With the entry in the WTO the Chinese government hoped to become more independ- ent from bilateral and multilateral agreements like the East-Asia-Network or the Asso- ciation of Southeast Asian Nations (ASEAN). One view of such agreements is that they are uncertain and therefore contain economic risk that affects economic decisions, whereas the WTO disciplines are binding for every participating nation.

Another reason for the Chinese to allow more import liberalization was accumulation of capital. After 1992 the Chinese government offered a greater market access to foreign investors who “imported” new advanced technologies (Naughton; Lary, 1996). Thus, with the help of new technologies, large Chinese enterprises gained the ability to aspire to global players with raising influence on international competition (Nolan, 2002). In recent years there has been and still is an ongoing change in the Chinese trade policy from export promotion to import liberalization because Chinese companies only can ensure and continue the export benefits of trade if China joins trade agreements, or in the best case, the WTO.

China’s objectives by joining the WTO were obviously to continue the progressive development of the Chinese industry as well as the service sector and stimulate the transfer of new technologies to China. But the increasing economic power derives another crucial target of the Chinese government, notably creating the international awareness and acceptance that China’s economic system is similar to a market economy that should allow China to set global multilateral trade standards and allows greater influence on the standard setting process (Whalley, 2006).

III. The Main Effects of the WTO Membership for Chinese Businesses

After almost 15 years of negotiations China achieved the benevolence to become a member of the WTO. Yet that benevolence was not for free. To take advantage of the broad economic opportunities, China had to comply with certain requirements. On the one hand, China had to commit to open market access for foreign investments, goods and services as well as reductions of tariffs and achieve various liberalization targets according to China’s integration in the world’s trading framework. On the other hand, China had to establish higher transparency on national legal and administrative issues (Farah, 2006). However, the successive decline of the Chinese protectionism caused a plurality of positive effects to many of the Chinese businesses.

After China’s WTO entry the controversial advantages of China’s domestic enter- prises eroded. China offered and still offers broad incentives for FDIs. For instance China has a separate tax code for foreign companies, allowing foreign investors to pay reduced taxes on their profits. Until the end of 2006, foreign funded enterprises (FFE) had to pay 15 percent whereas domestic firms paid 33 percent. Yet at the end of De- cember 2006 the Chinese government submitted a draft about the unification of the tax rates to 25 percent for both domestic and foreign companies (WTO, 2007b). However, since the WTO entry, China has also removed the barriers in sectors that were limited or inaccessible to foreign enterprises, e.g. in the financial sector, including banking and insurance, the telecommunication sector as well as manufacturing and transport (WTO, 2007a). As a result, as table 1 shows, FDI increased significantly after 2001 and reached even 25 percent of the all FDI in developing countries over the last decade (World Bank, 2007). To get access to the tremendous Chinese market, foreign companies seek cooperation with Chinese enterprises. Joint ventures, mergers and acquisitions are the most auspicious prospects to step into the Chinese market to reach strategic and opera- tive objectives. As table 2 shows, mergers and acquisitions rose after 1995 and signifi- cantly increased after China’s progressed negotiations according the accession to the WTO in 1999. FDI, including international joint ventures, accumulate technology and knowledge to Chinese parent companies and have helped them reduce levels of debt and become more competitive in the global marketplace. But placing non-capital resources, such as technical know-how, systems or professionals, often requires control over do- mestic firms by the foreign partners. Therefore the foreign investors will successive exert and increase influence on various Chinese companies (Child; Yan, 1999). This means institutional changes in administration as well as changes in business develop- ment and corporate culture.

The Chinese policy, in particular, offers incentives for FDI in the manufacturing sec- tor. One result today is that nearly 50 percent of China’s FDI contribute to the manufac- turing sector (Banister, 2005). As table 3 shows the Chinese manufacturing sector also generates the largest amount to the whole Chinese GDP, followed by the agricultural and the financial sectors. Because of the comparative cost advantage of the Chinese manufacturing sectors, by using economies of scale especially labour-intensive indus- tries such as textile, steel, chemicals, auto parts and electronic (office) machines consti- tute most of the Chinese exports. For instance, in 2005 the manufacturing sector con- tributed 93 percent to China’s total exports and almost 25 percent of the industrial out- put. China’s large textile industry at present is growing enormously.

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