China and the WTO - five years on
Klaus Koehler, Managing Director, Klako Group

Many years of negotiations and attempts from multinational representatives to include China into the WTO, led to China joining the organization in December of 2001. China became the largest developing country member ever joining and it marked a new era in international trade.

The five year anniversary in December 2006 is not only a good time to reflect on China's accession and it's benefits, problems and challenges ahead, but also to look into the end of the transition period and to give an outlook into the future.

With China entering the WTO on the 11 December 2001, international trade changed drastically for all members. All parties benefited from the expansion of markets, goods and services. Foreign Direct Investment (FDI) surged into China, bringing with it capital and new opportunities, but also giving some of the stagnant Western economies a needed boost. For China, it not only promoted the country's economic reforms, but also made its integration into the world irreversible. The choice for consumers in Europe and the US suddenly increased dramatically with bigger selections in low cost goods from China, and their quality levels are continually rising. Companies in western economies struggling with their sales gained access to one of the largest and fastest growing markets. All in all, with obstacles still to overcome, both China and the WTO members have benefited from the accession.

What has the WTO brought to China?

In China, the changes of becoming a member of the WTO, are visible everywhere. Many Chinese worried that the influence of foreign investment, commodities and business practices could ruin the domestic industry. However, quite the opposite can be seen in many different areas. For example, the price of imported vehicles are getting lower but at the same time cars made in China are increasing their market share more, banking reforms are coming into place, the insurance sector is finally improving, the entertainment industries are opening up to the West, but also Chinese movies and music are targeting Western audiences.

People in China have become accustomed to the fact that competition from the foreign countries can serve to make their own companies and people even more ambitious and successful. Chinese managers have learned and then selectively adopted some "western" trade standards, management principles and customer service, which leads to a beneficial integration in companies, and in the long term into the consciousness of Chinese people. This will increasingly change the mentality to safeguard their own rights, have transparency, justice and fairness. For the government the accession has meant to face and then implement drastic changes in some of the key sectors of China's economy. This has positioned China as the third largest trader in the world, and at the same time bringing it away from a widely low technology and low quality, but highly labor intense based production of exported goods. With for example machinery increasing to 50% of the country's exports and high tech products now reaching nearly 25%, the economy has been able to start successfully attracting know-how and high technology processes.

What has China Brought to the WTO Members

In the past five years, China has developed into the largest receiver of Foreign Direct Investment, and companies from all over the world have benefited from it. A total of USD 57.94 billion was remitted out of China as profits. According to figures released by the World Bank, the Chinese economy contributes to 13 percent of the world's economic growth.

In order to achieve this, China has reviewed more than 2,000 trade related laws and regulations, according to the Chinese Ambassador to the WTO, Sun Zhenyu and has abolished over 700 of them, amending others to bring the country into compliance. Sun also mentioned that the average tariff for industrial goods was lowered from 14.8 percent before the entry to 9.1 percent in 2005, and the tariffs for agricultural products was down from 23.2 percent to 15.35 percent. He remarked that nine service sectors have been opened up to other members, including 102 sub sectors, which is a higher level than the average throughout developed member countries.
This gives a much easier access into China for the WTO members. The contributions made by China since becoming a member, will help to promote economic growth and exchanges.

Upcoming Challenges

The past five years have not only been a transitional, but also an integrating period of China into the WTO. Of course China will adjust itself as a WTO member and improve in some outstanding areas, but it will also have a bigger influence on the world economy and use its status in the WTO to play a more important role. This will be seen as a challenge from other more developed countries and adjustments will have to be made on both sides. China will face more pressure to open in the fields of agriculture, finance and energy, as well as the protection of Intellectual Property Rights and the evaluation of its currency.

The key issues addressed by both the US and Europe for China for the future remain undoubtedly the issues relating to China's enforcement, the transparency and consistency of Intellectual Rights Protection, the currency evaluation of the Renminbi, existing trade barriers in China for agricultural products through Sanitary and Phytosanitary measures, continuous interferences of the state in certain industries, such as telecommunications and for example the steel industry, as well as recent import tariffs on foreign auto parts.

On the other hand, China still faces protection from the US and European governments in industries they feel threatened by, leading to high anti dumping cases.

Opportunities for the Future

Many sectors in China that will open further will bring opportunities with them, including banking, electronic payments, telecommunication and distribution and retail sectors.

The key areas for opportunities in the future are seen in services, as well as mergers and acquisitions. The easing of restrictions potentially brings not only changes but also immense possibilities and growth especially in the areas of financial services, distribution and logistics.

Financial services are a key point of interest as for example, China's National security Fund (NSSF) is being allowed to make overseas investments for the first time. It is estimated around 1 billion USD will be invested overseas. Meanwhile, listings of Chinese companies will continue to make headlines, like the simultaneous listing of ICBC at the Hong Kong and Shanghai stock exchange, netting initially 14 billion USD in Hong Kong and further 5.1 billion in Shanghai, with follow up placements raising it to an estimated 21.9 billion USD.

The distribution industry will be seeing many changes in the near future, with foreign enterprises now being able to register as foreign invested enterprises (FIE) on a local level. It will ease the process for foreign companies to get the initial set up in place and the operations running. FIE's will also be able to distribute their own goods without having to work through a Chinese partner and get their products on the markets directly, which will reduce their administration and control as well as improve delivery times and service. Many foreign companies have eyed the expansion into the Chinese market as a key focus point in their strategy, but shy away with previous regulations restricting them.

In order to access the vast Chinese markets, acquiring existing distribution channels is often seen as an easier and definitely faster solution. This will increase the mergers and acquisitions in China even further, as setting up multiple branches is still difficult, costly and time consuming.

Outlook

Although China has taken not only significant and often very impressive reforms in order to comply with the WTO regulations, many changes are still necessary. Often many administrative hurdles and excess capital requirements make it still very difficult for foreign investors to be on the same level as their Chinese counterparts. These protecting measures will be one of the key issues in the future and foreign companies will experience them especially in the areas where the reforms where the most drastic.

The government's next five year plan shows that China wants to create stability and slow growth, in order to balance the economy. In addition, the large differences between rural and urban areas, as well as the East and West of China need to be addressed. Even though this will create more and more possibilities and opportunities for foreign companies, the screening of foreign investment will also increase. FDI will be promoted in research and development components, they will be assessed further for their environmental impact and higher value added areas preferred.

If you require assistance with the above subject, please contact us at info@klako.com with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.