China's Economic Benefits from Its WTO Membership
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China's Economic Benefits from Its WTO Membership |
China officially applied to the General Agreement on Tariff and Trade (GATT), the predecessor of the World Trade Organization (WTO), in July 1986 to resume its status as an original contracting party. After the WTO replaced the GATT in 1995, China's application was to become a member of ( to "access to") the global trade organization. Thus, even if China becomes a member of the WTO in 2000, as many now believe, its effort to join the trade body will have taken fourteen years, much longer than the application process of any current WTO member. China's great effort for WTO membership is a testimony of its importance to the Chinese economy. It would not be an exaggeration to say that if Deng Xiaoping's economic reform and open door policy marked China's opening to the world, then China's accession to the WTO will mark its entry to the world.
Given such a long period of negotiation, virtually every aspect of China's entry into GATT/WTO has been discussed. In the following I shall summarize the major economic benefits China is expected to derive from its WTO membership. They include (a) stability in external economic relationships; (b) firmer and speedier economic reform; (c) long-term growth based on efficiency and innovation.
1. Stability in External Economic Relationships
WTO membership will give China a more stable access to foreign markets because it will reduce disruptions in foreign trade that are caused by unpredictable policy shifts. Given this, China will be in a better position to attract foreign investors who use China as their export platform. In addition, it will also attract foreign investors who feel more secure about developing China's domestic market. Regardless of whether it is export-oriented or attracted by the huge domestic market, foreign direct investment (FDI) not only brings in additional capital, but more importantly management, technology, market information, and global production and distribution networks that link China more tightly to the other economies.
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. Firmer and Speedier 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 a powerful 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-à-vis other economies. For example, labor-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 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.
In any event, sectoral restructuring based on comparative advantages will lead to improved efficiency due to resource re-allocation across industries and ownership changes based on market competition will result in improved efficiency in resource re-allocation across firms.
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 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 pay workers 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.
5. 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 skillfully 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.
Leonard K. Cheng
Department of Economics
Hong Kong University of Science and Technology