WTO and China
By Klaus Koehler, Managing Director, Klako Group

China was one of the original signatories to the GATT (General Agreements on Tariffs and Trade; a precursor to the WTO) in 1948. The Chinese Membership remained with Taiwan (Republic Of China) until it was cancelled in 1971. In the same year, the United Nations recognized the People's Republic of China as the official Chinese government and granted Observer status to GATT. A Working Party on China was formed in 1987 to handle trade issues. In 1995, the WTO was established and China officially joined the WTO on December 11, 2001.

China's main commitments so far

To comply with WTO standards, China has revised its existing domestic laws and enacted new legislation that is fully WTO compliant provided non-discriminatory treatment to all WTO members removed export subsidies on agricultural products eliminated dual pricing practices ensured that price controls are not used to protect domestic industries or services providers established the right to engage in distribution of all products in China within 3 years except some goods, which will have such rights within 5 years allowed all enterprises to import and export all goods and trade them throughout the customs territory within three years (with limited exceptions)

Benefits of China's recent accession to the WTO

Over the past 20 years, China has seen enormous economic growth. Vigorous reforms in government policy have fueled this expansion resulting in annual growth rates averaging nearly 10%. Many new jobs and investment opportunities have been created. The country's transformation from an inward looking, planned economy to a more market oriented, trading country has had great impact on the global economy, influencing consumer choice and investment location.

Being a member of the WTO helps China sustain its economic growth and reform. Reforms are expected to boost the domestic economy and encourage foreign direct investment. The membership will, in the long term, influence judicial reform, regulatory reform, privatization and the labor markets. The export market is expected to increase and access to advanced technology will be granted. China's trade potential will continue to improve.

As a member, China participates in the formulation of international trade and investment rules. The country is also able to defend its trade interests using WTO's dispute-settlement system.

Adverse effects

There are still many structural weaknesses in China's economic system. The dilemma for China has been and will continue to be coordinating economic growth and structural reform.

The short-term costs to China include a rise in unemployment as State Owned Enterprises (SOE) rapidly restructure in the face of international competition. The majority of SOE will eventually go bankrupt or become inefficient. Maintaining social stability is expected to be another major concern, especially in regard to the laying-off of SOE employees. With many SOE going out of business, banks need to write off non-performing loans and recapitalize in order to maintain depositor confidence.

The agricultural sector is also adversely affected. An increase in imports leads to lower prices for agricultural goods and thus lower incomes for rural China. As a result, there is mass migration to urban centers. Previously protected agricultural products cannot compete with cheaper liberalized imports. Many of the local protections have rapidly been removed and, despite the promises of long-term prosperity, rural areas are experiencing hardship due to the free market.

Tariffs and quotas for imported goods

All tariffs for imported goods are guaranteed, and eventually, China's average bound tariff level for imported agricultural products will decrease to 15%. The WTO has set 2010 as the final date for the reduction of tariffs, but even before this deadline, many tariffs may be reduced, or even eliminated. In addition, all import quotas, tendering and import licensing will be eliminated by 2005.

Trade restrictions and protectionist policies

Certain trade restrictions and protectionist policies-both inside China and in other countries still continue. One example is the protection of a twelve-year Transitional Safeguard Mechanism, which other WTO member states enjoy. Under this protection, imports of Chinese products can be restricted where it can be shown that unfettered access would cause market disruption for the domestic producers. Any restrictions against imports from China by other member nations, in a manner inconsistent with the WTO agreements, are generally being phased out. On the other hand, China retains exclusive domestic trading rights for cereals, tobaccos, fuels and minerals. Furthermore, some restrictions on transportation and distribution of goods within China are permitted to continue.

Local Chinese regulations revised

Uniformity of laws and law enforcement throughout the country is required by WTO rules, which prompted a change in local rules and regulations. According to the Legislation Law of China, laws enacted by the National People's Congress (NPC) and administrative and ministerial rules promulgated by industry authorities take precedence over local laws and regulations administered by the local People's Congress and its government authorities. Provinces, autonomous regions and municipalities' governments have organized and revised local laws and regulations under the uniform guidance of the Standing Committee of the NPC and State Council. Particularly in special economic zones where foreign investors enjoy preferential treatment, foreign related laws and regulations are being re-organized and revised.

China and its neighbors

China's accession to the WTO has significantly affected China's relations with other Asian countries. Many economies in Asia are presently suffering from recessions and they are trying to revive their economies by a growth in exports. China represents both a competitive challenge and an opportunity to gain from its extraordinary economic performance. China's share of global exports has increased over the past years whereas the export rates of neighboring countries are stagnating. However, China's WTO accession will improve growth in the gross domestic product for countries with high value exports. Some bank reports indicate that China's accession to the WTO will give Taiwan's economy a boost equivalent to 1.7% of Taiwan's 2000 gross national product by 2005. Other countries in Asia are projected to benefit by 1.1% of their 2000 gross national product as China's demand for their exports increases.

For other Southeast Asian countries, however, the prospects are bleak as some banks predict that Southeast Asian economies will lose between the equivalent of 0.1% and 0.2% of their 2000 gross national product by 2005.

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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.