China and the World Trade Organization

Having joined the World Trade Organization (WTO) in late 2001, China has begun to open its doors to foreign investment. There are still restrictions that impede competition, but most of these restrictions will be phased out by 2006.

The WTO is “the only global organization dealing with the rules of trade between nations. The goal is to help producers of goods and services, exporters, and importers conduct their business(1).” The WTO’s role is to ensure that countries are complying with the agreed upon mandates.

Because China is the largest market in the world, many businesses are anxiously awaiting the opportunity to set up shop. Still, many large organizations with significant global reach have already established their presence in China.

The impact of China’s entry into the WTO will have a lasting impact on how business is conducted there now and in the future. Businesses will have to rethink their global strategies and how they will conduct business worldwide. Joining the WTO means that some of the risks associated with doing business in China that used to curtail companies from entering the market will be eliminated.

For example, before China entered the WTO, Dell withdrew its plans to open a manufacturing facility in China when government leaders demanded that they maintain control of Dell’s operations. Dell felt that it was being forced to give up too much and opted against building a manufacturing facility. Once Dell recognized that China was going to join, it proceeded to set up operations in the late 1990s.

There are other questions that loom over China’s entry into the WTO:

• What are the timelines for different industries?
• Who will be the winners and losers?

• What will be the impact in the United States?

Industry Timelines

China’s entry into the WTO will open the door for many foreign firms to enter a market that has been coveted by many businesses for some time. The opportunities seem limitless for foreign firms. According to the Global Policy Forum, a group that monitors policy making at the United Nations, the breakdown by industry of China’s WTO accession is:

2005 – Telecom

Foreign firms allowed 25% share in mobile telecom companies immediately, 49% after three years. Tariffs on telecom equipment phased out by 2005.

2006 – Automobiles

Tariffs reduced to only 25% from rates that were as high as 80-100%

2006 – Banking

Foreign banks permitted to conduct currency business with Chinese firms two years after entry. Allowed to conduct business with individuals by 2006

2004 – Agriculture

Tariffs on U.S. products will fall from an average of 31% to 14%.

2005 – Textiles

Quotas on imports end, although a special import “safeguard” remains in effect until the end of 2008

2005 – Energy/Oil

Agreement will allow 16.58 million tons of oil to be imported initially, increasing 15% a year until import quotas are phased out in 2005. State-owned oil monopoly ceding some of its business to the private sector immediately.

2004 – Distribution/Retail

Distribution restrictions phased out for most products. Foreign firms will be allowed a controlling interest of up to 65% in retail stores. Foreign firms allowed to set up own distribution networks(2).

The net effect of these tariffs being eased or eliminated will allow for more competition within China. Foreign firms will be allowed to enter the market and will begin to place pressure on state-owned businesses and other previously sheltered businesses. There will be short-term economic woes such as loss of employment and business restructuring, but advocates say it will be beneficial for China in the long term(3).

Winners and Losers

Entry into the WTO is an obvious step for China due to its size and stature in Asia. The winners in this new environment will be all businesses that have been at a disadvantage because of barriers that include permission to enter the market, transparency, and red-tape and bureaucracy(4). The WTO will help ensure these barriers are mitigated. In particular, the following types of businesses will benefit:

• Foreign firms that want to independently set up business within China
• Chinese firms looking to tap into foreign investment
• Foreign firms looking to expand into China

• Foreign firms wishing to set up joint ventures within China(3)

These groups share the same desire to explore untapped markets, but to varying extents. The level of expansion a firm wishes to pursue will be dictated by the restrictions that still remain in certain industries and the knowledge they need to effectively set up within China if the firm does not already have a presence there(5).

Although China is still a communist nation, the leaders within China have recognized the benefits of free trade for their country. State-run businesses, to which many party leaders are strongly tied, will be the primary losers with China’s accession into the WTO. Despite their own potential losses, top government leaders continue to support free trade in China. These businesses will have to adapt quickly in order to survive. They will have to reduce overhead and update equipment to compete with the new businesses that will inevitably enter the market.

U.S. Impact

Many politicians and business leaders in states producing cheap goods, especially textiles, believe that China’s entry into the WTO would negatively impact U.S. businesses. Yet, studies indicate the impact will be minimal. Because the United States is already a WTO member, it does not have to lower any trade restrictions as a result of China’s entry. In fact, China’s entry will help reduce the trade deficit between the United States and China. Based on a Goldman-Sachs study, the Congressional Research Service estimates that the WTO agreement will increase U.S. exports to China by $12.7-13.9 billion a year by 2005(3).

Again, politicians and business leaders in states producing cheap goods, believe that China’s entry into the WTO would actually increase the U.S. trade deficit based on a study conducted by the U.S. International Trade Commission. These business leaders and politicians are concerned about losing jobs in the United States to low-cost production countries, and use this argument to bolster support against China joining the WTO. But according to the U.S.-China Business Council, the U.S. International Trade Commission study does not take into account the fact that China will be eliminating its non-tariff barriers. The study focuses solely on Chinese tariffs and overlooks the fact that trade will increase due to tariffs being eliminated(3).

Second, according to the U.S.-China Business Council, the study puts too much emphasis on the import of Chinese apparel into the United States, which had already agreed to phase out its quotas on imported textiles by 2005 in the Uruguay Round agreement. Even if China had not joined the WTO, these trade restrictions were going to be lifted and the rise in imported textiles would still materialize(3).

References:

(1) World Trade Organization website

(2) Impact on China Sectors after WTO Entry. September 19, 2000.

(3) Questions and Answers: U.S.-China WTO Agreement. December 1, 1999.

(4) White Paper of 2000 issued by China American Merchants Association

(5) China WTO Fitness Survey- How Prepared are Foreign Investors?