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2/3/04
China
and the
World Trade Organization
Compiled
by:
Scott Frahm, SCRC |
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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:
| Industry
|
Time
|
Impact
of WTO Guidelines |
| Telecom |
2005 |
Foreign
firms allowed 25% share in mobile telecom
companies immediately, 49% after three years.
Tariffs on telecom equipment phased out by
2005 |
| Automobiles |
2006 |
Tariffs
reduced to only 25% from rates that were as
high as 80-100% |
| Banking |
2006 |
Foreign
banks permitted to conduct currency business
with Chinese firms two years after entry.
Allowed to conduct business with individuals
by 2006 |
| Agriculture |
2004 |
Tariffs
on U.S. products will fall from an average
of 31% to 14%. |
| Textiles |
2005 |
Quotas
on imports end, although a special import
“safeguard” remains in effect until
the end of 2008 |
| Energy/Oil |
2005 |
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. |
Distribution/
Retail |
2004 |
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).
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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?
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