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China's admission to the World Trade Organization (WTO): What does
it mean? Who will/won't benefit?
Stephen Sherlock
Foreign Affairs, Defence and Trade Group
12 February 2002
After 14 years of negotiation, China was admitted
to the World Trade Organization (WTO) on 11 December 2001 as the
144th member. The admission will have a major impact on the
domestic Chinese economy and politics, will alter patterns of world commerce
and affect international political relationships.
What is the WTO?
The WTO is the successor organisation to the General Agreement of Tariffs
and Trade (GATT) which had overseen international trade from its establishment
in 1947 until the inauguration of the WTO in 1995. The WTO regulates a
new series of agreements under which member countries acquire rights to
trade with other members on the basis that access to markets is guaranteed.
Members accept an obligation to extend the same right to every other member
of the WTO. The rights, unlike virtually any other international agreement,
are policed by a system of compulsory arbitration which is accepted by
all members, including the US and European Union (EU). Membership will
lock China into a rules based international trading system.
The agreement on WTO entry covers the industrial, agricultural and service
sectors, unfair trade and investment practices and other rules and includes
specific, enforceable commitments in each area. Fulfilling these promises
will require fundamental change in business practices and government policies
in China.
Implications for China
The WTO agreement commits China to substantial reductions in tariffs,
removal of many non-tariff barriers and opening up of sectors such as
finance and services to foreign competition. These reforms should enhance
specialisation and open up new investment opportunities.
The further opening of the Chinese economy to foreign investment and
subjecting Chinese trade to international rules will certainly benefit
those sectors of the economy which are internationally competitive. It
will increase China's integration into the world economy. Membership will
facilitate Chinese exports to major markets in the US, EU and Japan.
The WTO will also provide a means for China to argue its case in bilateral
trading issues. China has already opened a case against Japan over Japan's
restrictions on the import of mushrooms and over alleged dumping of paper
products by importers into China.
Pressures for Reform
Most commentators consider that China and its trading partners will benefit
from China's accession. But the Chinese Government will face enormous
challenges in meeting the requirements of the WTO while trying to maintain
domestic economic reform and growth.
The Chinese economy has experienced two decades of sustained growth which
has transformed the standard of living of a great many Chinese. But this
growth has revealed many of the structural problems within the Chinese
economy and created social dislocation and inequality.
Many state-owned enterprises (especially heavy industries created in
the 1950s and 1960s) and small-scale industries are highly inefficient.
The concentration of growth in coastal regions has left many interior
regions undeveloped and mired in poverty. Major social and urban problems
have been created by the movement of huge numbers of people in search
of jobs.
The requirements of WTO membership will increase the urgency for the
Government to tackle these issues. Having to compete against cheaper foreign
imports will place extra strain on the inefficient sectors of the economy,
but large-scale closures would add to China's already huge problem of
unemployment. Although internationally competitive industries will benefit
from increased openness, most economists consider that the increase in
unemployment will probably occur at a faster rate than the creation of
new jobs. Moreover, these trends will only exacerbate regional disparities
because investment will cluster even more in developed areas.
Politically, the accession to the WTO represents a victory for those
elements in the Chinese leadership, including President Jiang Zemin and
Prime Minister Zhu Rongji, who have been pushing to normalise China's
economic and political relationship with the rest of the world and to
integrate China into the global economy. It is to the advantage of those
who control the internationally competitive sectors of the economy, to
the coastal regions of the country and to those with an open view of China's
international relations.
It is a blow to old line nationalists who regard organisations such as
the WTO as instruments of US economic and cultural imperialism. It may
complicate the position of the People's Liberation Army (PLA) because
the military is a bastion of anti-Western and anti-US sentiment but it
also owns significant economic interests (eg hotels) that could benefit
from WTO membership.
Implications for the Asia-Pacific region
Economic Effects
Many economies in the region will benefit from the opening up of new
markets and investment opportunities in China, from cheap Chinese imports
and from possible complementaries with Chinese producers. Increased competition
from China may, however, create problems for some domestic industries
in these countries.
The Asia-Pacific countries whose economic profiles are similar to China's
may be particularly affected by Chinese competition. Because these countries
specialise in similar products to those produced in China they will face
increased competition in their key markets in the US and the EU. Exporters
of clothing and textiles and electronic goods such as Indonesia, Thailand
and India will be especially affected. India's burgeoning trade in computer
services may also face increased competition.
There will also be increased competition for scarce foreign investment
funds. The southeast Asian economies still recovering from the 1997 financial
crisis, especially Indonesia, are in urgent need of foreign capital but
may be bypassed in favour of more attractive opportunities in the growing
Chinese market. Most ASEAN countries have already been affected by a shift
of investor interest to China.
In general terms the more developed Asia-Pacific economies that are more
complementary with China and that already have well-established trade
and investment linkages with China are likely to benefit the most from
China's membership of the WTO. These include the US and Canada, Japan,
South Korea and Taiwan and Australia. The US in particular will benefit
from the opening up of the trade in services, including the financial
sector, insurance and accounting firms, as well as high technology industries.
The increased Chinese competition in labour intensive industries will
continue to cause concern in some US industries. The continued stagnation
in the Japanese economy have also meant that protectionist sentiment has
been strong in that country as a result of the possibility of increased
competition from China.
Political Effects
The WTO explicitly excludes bilateral political questions from its activities,
but international trade issues cannot be delinked from global political
issues or from bilateral relationships.
China's membership took so long because it was controversial in the US
and other Western countries. China's initial attempts to join failed because
of the international reaction to the violent suppression of the pro-democracy
movement in 1986. China's accession to the WTO could be seen as the final
acceptance of the country on the global stage as a 'normal' country that
is prepared to accept certain international norms and is willing to take
on the political tasks of reforming its economy.
In bilateral terms, China's accession settles a long-running source of
tension with the US. The issue had become directly linked with a range
of irritants in the China-US relationship, including human rights, labour
and environmental standards. On the other hand, one part of the price
of WTO membership for China was accepting that Taiwan would be allowed
to join.
There is some possibility that bilateral trade disputes may receive more
prominence as a consequence of China's membership. The WTO has clear procedures
to deal with commercial disputes and China can be expected to make full
use of them to strengthen its diplomatic position with countries in the
region as well as to advance its economic interests. This is, however,
no different from could be expected from any other state in the WTO and
is an inevitable outcome of integrating a country of China's size into
the wider global system.
Implications for Australia
The Australian economy will gain from opportunities created by the new
trade and investment regime in China, while no Australian industries are
likely suffer from increased Chinese competition.
Australian access to the Chinese market will be improved, in manufacturing,
services and especially agriculture. Reduction of barriers for wool, sugar,
grains and other Australian agricultural products should boost exports
to China. Services such as telecommunications, insurance, banking and
education will also benefit. WTO rules will also help resolve any bilateral
trade disputes that may develop between the two countries.
The only possible concerns relate to adverse affects from increased Chinese
competition that may be felt by Australia's regional neighbours, such
as Indonesia. This may prolong continued economic sluggishness in these
countries, thus reducing their trade with Australia. Any resulting regional
tensions will need to be closely monitored by Australia.
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