CHINA RELATION WITH WTO

INTRODUCTION 2011 marks the 10th year of Chinas WTO membership and that of the Doha Round Negotiations. International Centre for Trade and Sustainable Development (ICTSD) organized a roundtable Discussion in Geneva on A Decade in the WTO ,Implication for China and Global Trade Governance on June 29th, 2010, convening government officials, academic faculties, business Leaders to review Chinas role in WTO in the past decade, examine its impacts on Global trade and WTO as a backbone institute of global trade governance, discuss its trade Relations with other countries, and look ahead Chinas future position in world trade and Economy landscape especially in face of more severe emerging issues as climate change, International development and global economic governance. The Dialogue is organized by the International Centre for Trade and Sustainable Development (ICTSD) in Partnership with China Society for WTO Studies (CWTO), and the Friedrich-Ebert-Sifting (FES) Geneva office TEN YEARS OF ADAPTING The past decade (2001-2011) has witnessed China's efforts in adapting to the WTO rules and integrating with the world. Over the past decade, China abolished, revised and adopted over 3,000 laws, regulations and department rules, fulfilled its commitments to the WTO in tariff and non-tariff areas, and further opened its service markets to the outside world. The past ten years did not only witness China's efforts to embrace international rules and norms, but also its growing experience to defend its own rights and interests using these rules. This transformation that brought in foreign investment and promoted market economy was then viewed as "wolf at the door" -- with tariffs to be slashed and restrictions on foreign rivals to be eased, a shaky future might loom for some of China's least competitive industries. However, the industries did not get wiped out but managed to hold up well if not thriving. "As a matter of fact, ambitious Chinese companies are now more like wolves," said Lu Haiqng, corporate affairs senior vice president of Tesco China. Tapping into the Chinese market in 2004, the UK-based grocery and general
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merchandising retailer now owns more than 100 outlets in China. In the retail sector, international competitors, instead of taking over the whole market, sparked the rise of domestic retailers such as Suning and Gome "What we see on China's market now is greater competition and consumers gain from the contest," Lu said. Joining the WTO and the introduction of international rules helped China improve the socialist market economy, which will benefit the country's economic and social development in the coming few decades, said LongGuoqiang, director of the Research Department of Foreign Economic Relations of the Development Research Canter of the State Council. WHY CHINA NEEDS WTO China's explosive economic expansion over the past 20 years is a well-known success story. Fueled by vigorous reform efforts, growth rates averaging nearly 10 percent annually have created a vast array of new job and investment opportunities, making China more prosperous. The effect of China's transformation from an inwardlooking, planned economy to a more market-oriented, trading powerhouse has reverberated throughout the global economy, influencing everything from consumer choice to investment flows. Rapid-fire growth has not been cost free, however. In particular, it has cast a harsh light on some of the structural weaknesses of China's economic system, particularly in agriculture, finance, and state-owned enterprises. The dilemma for China has been, and will continue to be, how best to keep the dual momentum of economic growth and structural reform going. For if one were to stall, the other might very well stumble, potentially unleashing a whole new set of economic challenges and difficulties. In many respects, WTO membership is China's best option for sustaining the pace of economic growth and reform. As the world economy has become vastly more complex and interconnected, China's participation in it -- according to the rules of international trade -- has become that much more critical for China, as well as for the United States, Asia, and the world. As a WTO member, China will be able to participate in the formulation of rules that govern international trade and investment. Similarly, it will be able to defend its trade interests using the WTO disputesettlement system. Chinese exporters will benefit from the certainty that their trading
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partners must obey WTO rules. This means, for example, that WTO members will not be able to discriminate against Chinese products in their home markets. WTO membership will make China even more attractive to foreign investors. And more money invested in China means more high-paying jobs, more government tax receipts, and more technology transfers. China's WTO commitments will facilitate increased competition in every sector of the economy. Chinese consumers will be the direct beneficiaries as competition encourages a larger range of choices, lower prices, and higher quality, not to mention a greater awareness of and appreciation for intellectual property rights and consumer rights. Competition will foster gains in efficiency and productivity, which will strengthen China's economy over time and enhance the ability of Chinese firms to compete with the best multinationals in any market. Chinas economy will benefit from the expanded range of services -insurance, finance, distribution -- that foreign companies want to bring into China after its WTO accession. Competition in this area will, in turn, stimulate China's home-grown services sector, giving companies and consumers an even broader range of choices. Perhaps most importantly, consumers and companies alike will benefit from an expanded rule of law as China implements its WTO commitments, particularly those designed to foster the highest degree of transparency and traderelated non-discrimination. CHINASECOIOMIC BENEFITS FROM ITS WTO 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) 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 restructuring 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-?vis other economies. For example, labour-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
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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. 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.

FUTURE CHALLENGES Reform and opening-up, which propelled China's rapid growth over more than three decades, will continue to underpin China's future development, President Hu said. China will implement a more proactive opening up strategy and open more areas to the world, he said. The target of the opening up strategy, however, should shift to supporting the transformation of economic development pattern from previous "earning foreign exchange reserve through export expansion," said Long Guoqiang. China's export-oriented developing pattern, which relies on high inputs, high energy consumption and capital accumulation, resulted in grave negative effects on the sustainability of the economy. Its expanding foreign exchange reserves and growing trade surplus complicated domestic policy decisions and sparked complaints from its trade partners. China's over-reliance on exports has made its economy more fragile, especially during a time when downturn hit major developed economies, said Secretary General of the UN Conference on Trade and Development Supachai Panitchpakdi. China's GDP growth has been slowing this year, to 9.1 percent in the third quarter from 9.5 percent in the second quarter and 9.7 percent in the first quarter. To steer the national economy through the international financial crisis and its aftermath, China strove to boost domestic consumption after external demand weakened as the Eurozone, the country's largest trade partner, continued to wrestle with a deepening debt morass. 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 longterm 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 skilfully 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.
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REFERENCE 1) http://ictsd.org/downloads/2011/07/meeting-report.pdf 2) http://ictsd.org/i/events/ialogues/103519 3) http://english.cri.cn/6826/2011/12/11/1461s671120.htm 4) http://english.cri.cn/6909/2011/12/11/1461s671048.htm 5) http://paftad.org/files/34/05_SALLY_WTO.pdf 6) http://www.chinese-culture.net/html/china_wto.html 7) http://www.bm.ust.hk/~ced/nw_benefit.htm#top