Although China has been opening up its economy for more than twenty years, it is generally considered that its future accession to WTO will imply far-reaching consequences for its economy. In order to better understand what is at stake as China enters the WTO, this study is intended to investigate the degree of openness of China's economy at the end of the nineties. The rapid expansion of its international trade and large capital inflows provide evidence of the increasing integration of China in the world economy. Since 1980, China's share in international trade has trebled, rising from less than 1% to more than 3% in 1999. China has become the second largest recipient of foreign direct investment (FDI), after the US, with cumulated inflows amounting to more than US$ 300 billion at the end of 1999. These two trends appear to be closely interrelated.
China's opening up policy has aimed at promoting exports, while protecting the domestic market. This was achieved through a dualistic trade regime which has granted tariff exemptions on imports of intermediate by export-oriented industries, and through a selective policy which has channelled FDI into manufacturing production targeted for exports or for import substitution. As a result, FDI has played a major part in the opening up of China's industry and in its integration into the international division of labour.
The study offers evidence of the positive impact of foreign direct investment (FDI) on China's manufacturing industry. The analysis also provides support for the argument that the opening up policy followed up to now has had adverse effects. Turning to foreign trade, the analysis amply shows that China's specialisation pattern during the nineties was largely determined by the strategy of foreign affiliates.
There are three mutually reinforcing reasons why China decided to enter WTO: strengthening economic reforms, supporting economic growth through a better allocation of resources, and maintaining large inflows of FDI by providing them new opportunities in service sectors. FDI in manufacturing industry is expected to slow-down as several sectors are now saturated and suffer from over-capacity. In these industries, investment in capacity (greenfield FDI) is expected to level off, but foreign investment may help the rationalisation programme currently implemented as the opening of the capital of State-owned entreprises is now considered as a way to attract the most dynamic forms of global foreign direct investment (Mergers & Acquisitions). Such an evolution can take place only if the obstacles associated with the lack of an adequate legal and regulatory framework as well as with political oppositions are progressively lifted.