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China in the WTO: an assessment

China joined the WTO in December 2001. China and its partners had been negotiating the conditions of its accession since 1987 with two fundamental goals: integrate China into the global economy and anchor the process of domestic economic reforms and opening up.
By Françoise Lemoine
 Post, December 22, 2011

Market access

For its partners, the priority was to accelerate the opening up of China’s market to foreign trade and investment.  Following its entry, China has lowered its customs tariffs (from an average of 24% to 9.6%, the current level which is lower than that of India or Brazil) and has eliminated most quantitative restrictions to trade. It has eased the limits on foreign direct investment in manufacturing and opened some commercial services to foreign investors (retail, banking and insurance, telecommunications).

What have been the results? From 2000 to 2010, China’s imports increased rapidly and they represented 24% of its GDP in 2010 against 19% ten years ago. The increase is even clearer if we consider only the imports for the domestic market (excluding processing trade), as their weight in GDP increased from 11% to 17%. Admittedly, much of this increase was due to the boom of imports of primary products at high prices, but on balance, imports of manufactured industrial products for the domestic market also increased rapidly, rising from 9% to about 12% of GDP. This is higher than the corresponding ratio in the U.S. (7.4%).

At the same time, China has become the second largest recipient of Foreign Direct Investment (with 9% of global flows), and even excluding those coming from Hong Kong (most of which are “roundtripping”), FDI flows to China doubled, from 25 to 44 billion US dollars. Since 2004, China has received more foreign direct investment from the U.S. and from Japan than any other BRIC (Brazil, Russia and India).  China is on the way to overtake Russia as a destination of European companies’ investment abroad.  However, there are still many bones of contention between China and its partners on market access. In some sectors there are still ceilings on foreign participation in capital or high levels of capital requirement for foreign investors. China’s financial sector is dominated by state-owned banks and has remained quite closed. In addition, China has still not signed the international agreement on public procurement, and this allows Beijing to maintain a legal framework which explicitly gives priority to local products and firms.

The explosion of China’s exports and trade surplus has not been directly linked to its WTO accession. 

Looking at the outstanding expansion of China’s exports for the past ten years, it seems that China has gained more than its partners from its entry into the WTO.  It was the sixth world exporter in 2000 and became the first in 2010, its share in world exports of industrial goods rose from 6% to 15%.  In 2001 it was expected that China would enlarge its market shares in labour intensive industries, especially in the textile industry where the quota in force in importing countries were to be phased out in 2005. In fact, the growth of Chinese exports in the 2000s, was mainly driven by their diversification and owes more to the ICT revolution and a buoyant international environment until 2007, than to its entry into the WTO .

China’s trade surplus was also caused by the import-substitution policies implemented by Chinese firms in capital-intensive industries.  Most analyses, made before China’s accession, concluded that in capital intensive sectors, particularly in the car industry, China's production would suffer from foreign competition. But this did not happen, because all the multinational companies in this industry have come to China and built up production capacities in order to be closer to the rapidly expanding local demand for cars, in a market that was sheltered by relatively high tariffs. In other heavy industries (machinery, steel), the Chinese companies have expanded their production capacity during the year 2000 and have thus reduced the need for imports.

While respecting the letter of its WTO commitments, China has kept hold on its industrial policy, using its credit policy, fiscal measures (changing rates of VAT refunds on exports), its exchange rate policy.

In 2001, it was expected that China's transition toward a competitive market economy following Western model would take time, and it is the reason why its partners can deny him the status of market economy until 2015.  It was not expected that this transition would be strewn with so much success.
Emerging Countries  | Trade & Globalization 
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