What Will WTO Membership Mean for China and Its Trading Partners?

• Author: Ramesh Adhikari and Yongzheng Yang
• Position: Senior Capacity Building Specialist and Principal Economist at the Asian Development Bank Institute, Japan/Senior Economist in the IMF's Policy Development and Review Department

On December 11, 2001, after 15 years of arduous negotiations, China became the 143rd member of the World Trade Organization (WTO). The opening of an economy as large as China's can be disruptive to some developing countries in the short run, but, in the long run, it should benefit not only China but also its trading partners.

China began to open up its economy in the late 1970s. In the early 1980s, it took steps to end its isolation, assuming the membership of Taiwan Province of China in the IMF and the World Bank, of which it had been one of the founding members. By 1986, it had launched a campaign to resume its contracting party status in the General Agreement on Tariffs and Trade (GATT), from which it withdrew in 1950.

As China moved from a centrally planned economy to a market-oriented one, it abolished trade plans, decentralized trade, slashed tariffs, unified the dual exchange rates in 1994, and removed exchange controls on current account transactions in 1996. These actions, together with other reforms, triggered the rapid expansion of China's foreign trade and investment inflows. Its exports grew from $10 billion in 1978 to $278 billion in 2000, making it the sixth largest trading nation in the world (from about the thirtieth in the late 1970s). The trade-to-GDP ratio increased from 10 percent at the beginning of reforms to about 40 percent in the late 1990s. China's total inflows of foreign direct investment (FDI) reached $47 billion in 2000, second in size only to those received by the United States.

China's motivation for joining the WTO is rooted in the realization that it needs an external impetus to overcome domestic obstacles to further reforms and protection of its trade interests if it is to sustain the rapid economic growth of the 1980s and 1990s. But many of its trading partners are worried. Some developing countries fear that global demand for their exports will shrink and that their FDI inflows will fall, given China's potential to pump out a seemingly unlimited supply of labor-intensive exports, and that FDI may bypass them for China's vast market. Some industrial countries worry that China's exports might flood their domestic markets.

Are these fears rational? They have certainly been exploited by some interest groups and, more important, they have resulted in the inclusion of a number of provisions in China's Protocol of Accession that derogate from the general WTO principle of nondiscrimination. It is inevitable that China's emergence as one of the largest players in the global economy will lead to shifts in world production, trade, investment, and employment. But the way in which its WTO accession and increasing openness, in general, affect other countries is a complex issue that needs to be examined in both the short and the long terms, and from the perspective not only of market access but also of the multilateral trading system.

What China is offering

China's own commitments are substantial, exceeding most expectations. In agriculture, it has pledged to bind all tariffs and reduce them from an average level of 31.5 percent to 17.4 percent. It will eliminate export subsidies and rapidly increase the volumes of tariff-rate quotas on most imports. In-quota tariff rates will be minimal (1-3 percent); above-quota tariffs for sensitive products (mostly grain) will be reduced from 80 percent to 65 percent-a level that might seem high but is moderate compared with those in the European Union and some Northeast Asian economies.

For industrial products, China has pledged to phase out quantitative restrictions, cut the average tariff from 24.6 percent to 9.4 percent by 2005, and sign the Information Technology Agreement, which will result in the elimination of all tariffs on telecommunications equipment, semiconductors, computers and computer equipment, and other information technology products.

The...