THE INTEGRATION OF CHINA INTO THE WORLD TRADING SYSTEM: IMPLICATIONS OF WTO ACCESSION. Constantine Michalopoulos*

Transcription

1 Working Draft Not for Quotation or Attribution March 17, 2000 THE INTEGRATION OF CHINA INTO THE WORLD TRADING SYSTEM: IMPLICATIONS OF WTO ACCESSION Constantine Michalopoulos* Paper prepared for the International Forum on China s Reform and Development Strategies at the Commencement of the 21 st Century. CIRD, Haiku, Hanan, March *The author is Senior Economic Advisor at the World Bank. Views expressed in this paper are solely those of the author and should not in any way be attributed to the World Bank

2 THE INTEGRATION OF CHINA INTO THE WORLD TRADING SYSTEM: IMPLICATIONS OF WTO MEMBERSHIP I. Introduction The integration of an economy in the world trading system has many dimensions. The first is an empirical one: how much of an economy s income and output is dependent on international transactions both imports and exports of goods and services; and how has this evolved over time and by comparison to its trading partners. The second dimension is analytical and relates to the issue of whether policies and institutions are established in a country and its trading partners which are conducive to the mutually beneficial exchange of goods and services based on specialization and comparative advantage. This is important because flows of goods and services can increase both absolutely and relatively, but if they are based on policies that are discriminatory or distort comparative advantage, they are not necessarily beneficial. The third dimension of integration is institutional and relates to the issue of whether a country and its trading partners abide by the rules of conduct that govern the multilateral trading system which affect market access and the terms of trade. These rules have been established and are being implemented in the context of the agreements administered by the World Trading Organization (WTO).The agreements include trade in goods ( General Agreement on Tariffs and Trade, GATT), trade in services (General Agreement for Trade in Services, GATS), as well as other aspects of international exchange of goods and services, such as trade related investment measures (TRIMS), trade related intellectual property rights (TRIPS), sanitary and phytosanitary standards (SPS), government procurement etc. The rules and regulations are, in general, based on the principle of non-dicrimination and market based transactions. In particular cases, however, the rules contain exceptions which reflect compromises necessary to take account of circumstances prevailing in countries at different levels of development as well as the need to cushion the domestic costs of adhjustment, in general or for specific sectors or countries. The main areas where such exceptions can be found are in the agriculture and textile sectors, both of importance to China. Nevertheless, 2

3 while the rules administered by the WTO are not without flaws, membership in the organization is an essential element, perhaps even a necessary condition for full integration in the world trading system. In recent periods China has made giant strides in integrating itself in the world economy. Expansion of its trade has exceeded that of its GNP as well as that of its neighbors and other developing countries. This has resulted in part from the introduction of market oriented reforms, in part from the opening up of China to the inflow of foreign direct investment and technology which stimulated productivity and growth of the export sector. At the same time, a lot of challenges remain ahead, one of which involves the accession of China to membership in the WTO. This paper focuses on this challenge and the implications of WTO membership for China s policies and institutions as well as market access for its products. The first part of the analysis reviews briefly the very strong expansion of China s exports over the last twenty years. This is followed by a discussion of the potential benefits from accession to the WTO and the issue of why accession to the WTO takes so long. The next section discusses the implications of accession for domestic adjustment as well as for market access. The final section draws some conclusions and identifies a number of issues that need to addressed before accession can be completed. II. The Growth of China s Exports The last two decades witnessed a remarkable overall performance of the Chinese economy. Its rate of GNP growth averaged more than ten percent per annum over the period, among the highest, if not the highest in the world. Remarkable as this economic growth was, it was actually slower than the spectacular growth of Chinese exports and trade in general. In the period , China s growth of merchandise exports exceeded that of the developed countries, the developing countries as well as its neighbors in Asia by a large margin. Although growth has slowed in the last two years, it has still been higher than the average performance of these groups for the period as a whole and for each subperiod (Table 1). This growth performance has resulted in an increased integration of China in the world economy, using any reasonable measure of integration. China s ratio of exports to GNP has increased from 6 % in 1980 to 22% in In the earlier year it was the same as that of another large Asian 3

4 economy, India. In 1998 it was almost double India s ratio. China s share of world merchandise exports has tripled over the same period, and its share of exports of developing countries has increased more than four times. The fundamental reasons for this spectacular growth can be traced to China s own policies and institutions. While the international environment for Chinese products also improved during this period, especially following the Uruguay Round in the late nineties, a number of problems of market access persisted, some of them due to the lack of membership in the WTO (see below). A detailed review of the Chinese trade and investment policies that contributed to the growth of exports and trade is beyond the scope of this paper. Suffice it to be said that China s growth in trade and increased integration in the world economy is due to three sets of factors: (a) the overall increased market orientation of the economy, which led to significant improvements in productivity; (b) the export orientation of the growth, especially outside of the state-owned enterprise sector, partly stimulated by export subsidies and other incentives; (c) the inflow of foreign private investment and technology which contributed to the growth exports both through broad increases in productivity and through specific incentives linking investment to export performance requirements. China s accession to the WTO has both depended on this increased market orientation of Chinese policy and is going to reinforce it, as it will increase competition in the domestic market as well as establish legally binding commitments for the Chinese government which could not be reversed without damage to Chinese economy. But it will also involve adherence to certain rules of conduct which would tend to limit the use of certain policies that China s government has used to stimulate exports. Table 1 4

5 World Merchandise Exports by Country Group (Million dollars and %) World * Developed Countries Developing Countries * Asia China Memo: China as?? % of World 1.2% 1.8% 2.6% 4.5% 4.6%?? % of Developing Economies?? % of Asia Average Annual Rate of Growth World -0.7% 10.2% 7.6% 5.7% -1.0% Developed Countries Developing Countries Asia China Memo: GNP Growth rate ?? World 3.2% 2.4% 0.1%?? Low Income Countries (excluding China and India)?? Middle Income Countries ?? High Income Countries ?? China *Preliminary Source: WTO, World Bank, World Development Indicators. III. The Benefits from WTO Membership The benefits from WTO membership fall in three main categories: (a) strengthening of 5

6 domestic policies and institutions for the conduct of international trade in both goods and services which is needed before accession into the WTO can be accomplished; (b) improvements in the ease and security of market access to major export markets; (c) access to a dispute settlement mechanism for trade issues (Langhammer and Lucke 1999; Michalopoulos, 1999). Of course, once a country joins the WTO, it is in a position to pursue more effectively its overall trading interests alone or in coalition with others. A. Domestic Policies and Institutions As there are considerable differences in the institutional and policy environment of countries applying for accession, it is natural to expect differences in the opportunities and challenges that WTO membership offers for individual countries or groups. For example, many of the transition economies of Central and Eastern Europe either were already members of the GATT (e.g. Hungary, Poland) or moved quickly to establish market oriented policies and institutions. But for others including China, there are many challenges in modifying existing policies and institutions to meet WTO requirements. The challenges may be even greater for low income developing countries, and especially the least developed (LDCs) whose institutional capacity to cope with WTO obligations is especially inadequate. For China and other transition economies which operated for extended periods of time under central planning, the institutions governing various aspects of international exchange of goods and services, such as intellectual property rights, standards, phyto-sanitary provisions, procurement etc. were very different. WTO membership requires that these policies and institutions be brought in line with the provisions of the main international agreements administered by the Organization regarding trade in goods (General Agreement on Tariffs and Trade, GATT), trade in services (General Agreement for Trade in Services, GATS) and trade related aspects of intellectual property rights (TRIPS). This involves dramatic and profound changes in the way trade is conducted by China. Perhaps most important of these changes is the need to introduce the laws and institutions for the operation of private enterprises and markets free from government controls and state trading practices throughout the economy. In so doing, WTO accession tends to enhance and support government efforts to raise efficiency and productivity through the strengthening of market forces which are important in their own right as well as a prerequisite for WTO accession. At the same time, WTO 6

7 membership would tend to limit the use of export subsidies, performance contracts and the like, which tend to provide artificial incentives to export growth. Equally important to a country's economy is the introduction of greater stability in commercial policy which is a consequence of adherence to WTO rules and legally binding agreements. For example, once China becomes a member of the WTO, it is legally bound not to increase its tariffs (unless it provides compensation by reducing others). Stability is important both to domestic producers and foreign investors as well as to exporters from other countries wishing to access China's markets. There is little doubt that adherence to the WTO provisions in these areas would improve efficiency and productivity of China at the same time as it enhances its integration into the international trading system. B. Market Access There are two main dimensions of market access of importance to China: first, is the extension of permanent and unconditional MFN status, that comes with WTO membership. At present, many economies, including China, which are not members of the WTO have been granted MFN treatment voluntarily by major trading partners. But there is nothing that guarantees that they will be continued to be awarded such treatment. As is well known, in the US extension of Normal Trade Relations (which is the same as MFN) to China, Russia and several other countries members of the Commonwealth of Independent States (CIS) is contingent on these countries' adherence to the provisions of the Jackson-Vanik amendment to the 1974 Trade Act regarding freedom of emigration. 1 Belarus and China are subject to annual waivers. The rest have been found to be in full compliance and have received "permanent", conditional MFN status. As long as the provisions of the act are in place however, the US can not legally provide unconditional MFN status to them. This is an important issue which raises a number of problems in connection with WTO accession for these countries, discussed below. 1 Belarus and China are subject to annual waivers; the rest have been found to be in full compliance and receive "permanent" conditional MFN. When however, Georgia, Mongolia and the Kyrgyz Republic became WTO members the US exercised its right of non-application under WTO's Article XIII-- which means that it did not provide these countries with unconditional MFN-- or for that matter with any other WTO rights and thus de facto has not accepted their accession (see below). 7

8 But perhaps an equally serious market access problem for China and several other transition economies results when the EU the US and other countries invoke trade "remedies" against their exports. This involves primarily anti-dumping actions, currently the most common means of protection, and, to a secondary extent, safeguard actions --both of which are legal under the WTO. There are two sets of problems in this area: some arise because China is not a member of the WTO. Some stem from the fact that it can be designated as a "non market economy" in the determination of antidumping and, in the case of the EU, also for safeguard actions. 2 Both the EU and the US currently have rules which, in China s case, permit them to decide on a product by product basis whether to make a determination of dumping using the procedures for non-market economies -- which are less transparent and potentially discriminatory ( see below). There is evidence that both anti-dumping investigations and the imposition of "definitive" antidumping duties is much more common against non-wto members, especially if they are designated non-market economies. Table 2 presents recent evidence from the WTO data base on the frequency of the initiation of anti-dumping investigations and the imposition of definitive measures relative to countries' shares in world exports. The ratio of investigations or definitive measures to the share of total trade (Rad) is a measure that shows the tendency of a country s exports being subjected to antidumping actions relative to its share of world exports. Table 2 shows that Rad is much higher for non-wto members than for members for both antidumping investigations and the imposition of definitive measures usually antidumping duties. It also shows that the so called non- market economies which are also not WTO members, including China, Russia and the rest of the FSU, except the Baltics, have been more frequently the targets of antidumping investigations which themselves have been shown to have an adverse impact on exports relative to their share in total world trade, by comparison to any other group of countries, developed, developing or transition. China has been hit by far the hardest than most countries in the group. And these countries, including China, are also even more likely to be the targets of definitive anti-dumping duties. 2 The EU publishes annually a list of "non-market" economies. The latest list (1999) includes Albania, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, North Korea, Kyrgyz Republic, Moldova, Mongolia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Vietnam. In the US, there is no formal list and the decisions are made on a case by case basis, usually involving the same countries listed by the EU. 8

9 Moreover, once the target of an investigation, the procedures used to determine whether dumping has occurred in "non-market" economies or for specific products are different than those applied market economies or products. Because it is assumed that prices and exchange rates in centrally planned economies did not reflect true opportunity costs, "surrogate" or "analogue" countries' costs and exchange rates are used for the determination of "normal" value, against which the actual price is measured. This introduces the possibility for arbitrariness and non-transparency. Moreover, these procedures make it easier to induce exporters to agree to minimum price undertakings such as those concluded with Russia on uranium and aluminum (Michalopoulos and Winters, 1997). In the context of safeguards, the EU standards for taking action against non market economies are lower than for other countries, which are WTO members. In the case of non market economies merely the coexistence of higher imports and injury to domestic producers as opposed to a causal link needs to be demonstrated; and there is no limit on the duration of the action, as required by GATT article XIX, (Michalopoulos and Winters, 1997). With regard to antidumping, the WTO provides legal justification for such practices through the reference of Article 2.7 of the Antidumping Agreement to the second Supplementary Provision to paragraph 1 of Article VI in Annex I to GATT 1994 which permits such different treatment "in the case of imports from a country which has complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State" (Palmeter, 1998, p.116). 9

10 Table 2 Antidumping : Share of Affected Economies in Total Cases Relative to Share in World Exports (in % and ratios) Affected Economies Share in World Exports % Share in Total Anti-Dumping Investigations % Share in Total Definitive Measures % R ad R ad Definitive Investigations Measures WTO Members Developed Developing Transition and Other Non WTO Members China Other "Non Market" Other R ad : Share in Investigations (Measures) / Share in World Exports Source : WTO, Trade and Antidumping Data Base, Miranda,et.al

11 These practices perhaps were fully justified when practically all trade was controlled by state trading enterprises or Ministries under central planning and prices were fixed by the State and hence could not be taken to reflect "normal value". But many countries, including China have made great progress in introducing market forces and eliminating state trading in recent years. It would very difficult to argue that China at present has "a substantially complete monopoly on trade" or that all domestic prices are fixed by the State as required under the WTO. WTO membership would address the problem China has regarding the different standards imposed by EU on safeguards. WTO membership, however, would not automatically terminate the designation of China as a non-market economy, nor completely terminate the problems it has with anti-dumping. But it might help, as membership would inhibit the most egregious excesses in antidumping practices against which a non-member has no recourse, as the WTO dispute settlement mechanism albeit with some limitations, can be utilized for this purpose. C. Dispute Settlement Access to an impartial and binding dispute settlement mechanism whose decisions have a significant chance of being enforced is a very important potential benefit for all small countries participating in international trade. The dispute settlement mechanism under the WTO, in the short time since its establishment, has proven to be a success in providing opportunities for any member, large or small to get satisfaction on grievances stemming from practices of other members that cause injury to its trade. WTO membership provides governments with access to this dispute settlement mechanism which can be very valuable to their future trading relationships, especially with large trading partners. IV. WTO Membership and Accession A. Accession Status The process of accession to the WTO has been complex, prolonged and difficult for most countries. The average time for accession was more than five years for the last six countries which became WTO members. The process has two major components: (a) A fact finding phase, which aims 11

12 at determining whether the acceding country has in place laws and regulations consistent with obligations that it will be assuming under the WTO agreements. This stage starts with the establishment of a Working Party which is followed by the preparation of a Memorandum of on the Foreign Trade Regime by the acceding country and a sometimes protracted period of questions by WTO members and answers by the acceding government aimed at clarifying policy and institutional issues. (b) A negotiation phase, in which countries are asked to make legally binding commitments regarding their tariff schedule on all goods, a separate set of commitments on agriculture (which includes a more complex set of commitments involving e.g. aggregate domestic support), and services Formally, the discussions are conducted under the "Working Party", but at the negotiations phase, they involve a large number of bilateral negotiations with important trading partners. At the end of the process the Working Party issues a draft report for consideration and approval by the WTO Council. 3 Table 3 shows the current status of WTO accessions for various economies applying for WTO accession as of the end of 1999.?? Two countries, Georgia and Jordan have essentially completed the process and now all that remains to be done is ratification of their agreement by their parliament.?? China is at the last stages of the accession process having completed many important bilateral negotiations and a draft report having been prepared by the Working party some time ago. A number of other governments including Albania, Armenia, Chinese Taipei, Croatia, Lithuania, Moldova, Oman and Vanuatu are at late stages in their negotiations ( as evidenced by draft working party reports already prepared).?? Still others such as Belarus, Kazakhstan, Russia and Ukraine are at much earlier stages of negotiation.?? And some e.g. Bosnia Herzegovina, Bhutan, Cambodia have only just started 3 For a detailed discussion see Michalopoulos, 1998; for a recent update, WTO,

13 Table 3 Timetable of Accessions to the WTO as of January 1, 2000 Government WP Establishment Memorandum Tariff Offers Service Offers Draft Working Party Report Albania 12/92 01/95 05/97, 01/99 05/97, 09/99 09/99 Algeria 06/87 07/ Andorra 10/97 02/99 09/ Armenia 12/93 04/95 01/99 10/98, 07/99 08/99 Azerbaijan 07/97 04/ Belarus 10/93 01/96 03/ Cambodia 12/94 06/ CHINA 03/87 02/87, 09/93 04/94 09/94, 11/97 12/94, 05/97 Chinese Taipei 09/92 10/92 02/96, 08/99 09/94, 08/99 08/98 Croatia 10/93 06/94 04/97, 11/98 05/97, 11/98 02/99 FYR Macedonia 12/94 04/ Georgia 07/96 04/97 02/98, 12/98 02/08, 09/98 10/99** Jordan 01/94 10/94 07/98, 10/99 01/99 10/99** Kazakhstan 02/96 09/96 06/97 09/97 - Laos 02/ Lebanon 04/ Lithuania 02/94 12/94 10/95, 02/99 04/95 06/99 Moldova 12/93 09/96 03/98, 01/99 02/98, 10/98 10/99 Nepal 06/89 02/90, 09/ Oman 06/96 10/96 10/97, 09/99 10/97, 11/99 09/99 Russian Federation 06/93 03/94 02/98 10/99 - Samoa 07/ Saudi Arabia 07/93 07/94 09/97, 06/99 09/97, 06/99 - Seychelles 07/95 08/96 06/97 05/97 - Sudan 10/94 01/ Tonga 11/95 05/ Ukraine 12/93 07/94 05/96 02/98, 06/98 - Uzbekistan 12/94 09/ Vanuatu 07/95 11/95 11/97, 05/98 11/97, 11/99 11/99 Vietnam 01/95 09/ * WP expected to be established ** Accession completed; awaiting ratification Source: WTO 13

14 B. Why Does it Take So Long There are three fundamental reasons for the delays in accession: First, there are political issues between the accession countries and WTO members. One of the clearest examples of this was China, whose accession process started in 1987 with the establishment of a Working Party and the preparation of Memorandum that same year, and was then interrupted for four years, from 1989 until Another example was FYR Macedonia whose process was interrupted between 1994 and 1999, essentially for a political issue. Second, the accession process is inherently demanding and time consuming especially for developing countries and countries in transition. There are inherent complexities of enacting legislation and regulations that bring into conformity the regimes of transition economies with WTO rules. These extend far beyond the obvious, such as the Law on Customs, the Tariff schedule and related regulations on imports and exports. They include such items as the laws on joint stock companies, the Central Bank and credit institutions, licensing of economic activity, domestic taxation, regulations on food and alcoholic beverages, veterinary medicine and pests subject to quarantine, patent and copyright protection, consumer protection etc. Design and enactment of all this legislation and regulations are quite demanding on the institutions of the acceding countries. But the WTO accession process provides a useful stimulus for the review and consistency of a lot of these matters which may not have otherwise happened. There are some issues which are especially difficult in transition economy accessions which have also caused delays. These include the degree of privatization in the economy and the extent to which government agencies involved in the regulation of economic activity do so on the basis of transparent rules and criteria as opposed to administrative discretion. Both of these concerns emanate from the dominant role that the state previously played. While the WTO agreements have no explicit requirement that a member must have fundamentally a market economy, 4 such a requirement is being imposed de facto by existing members as part of the leverage they have in the accession process for new members. 4 GATT Article XVII calls for notification of enterprises engaging in state trading practices. However, Article XVII had never been intended to address problems that come up when the bulk of external trade was controlled by the state. Indeed the old GATT accommodated under special protocols several countries, e.g. Romania and Czechoslovakia which at the time had centrally planned economies. 14

15 Third, the negotiations phase can, and frequently has been, the most time-consuming phase of accession. Delays can occur because of attitudes and policies of acceding countries as well as because of demands of WTO members. It is important in this context to understand that there is a basic asymmetry in all negotiations for accession. In practically all cases and with very few possible exceptions which include China because of its size as a trading nation and importance in international trade, the negotiations are in one direction only: they relate to the policies and institutions of the acceding country and the ways they have to change to bring them in conformity with the WTO; they do not involve negotiations on practices of WTO members, or changes in the rules of the WTO to make them more to the liking of the acceding country. Thus, it is very difficult for China to seek changes in WTO member practices which affect its trade, except in so far as they are in violation of the WTO; and even then certain exceptions may be made (see below). (1) Acceding Government Strategy and Tactics. Within the rules and disciplines of the WTO, each country has considerable scope as to how restrictive or liberal its trade regime will be. The key decisions countries have to make relate to the level at which they bind their tariffs, the support they provide to agriculture and the range of commitments in the liberalization of the service trade. Many of the smaller transition economies which have recently gained accession, e.g. Estonia. Georgia, the Kyrgyz Republic, Latvia, have very liberal trade regimes. These countries used the accession process to consolidate and make permanent the liberal trade policies which are critical to their integration in international trade. Other countries, including China have pursued a somewhat different strategy, in part because they feel that significant levels of protection are necessary during a transition period during which restructuring of inefficient state enterprises and service sectors can be undertaken. Since at accession, large trading countries like China can not typically negotiate improvements in their own market access, some have also attempted to maintain some levels of protection, which can be used as bargaining chips to obtain improved access in future trade negotiating rounds. Broadly speaking the more rapidly countries have moved to introduce market oriented reforms and liberal trade policies, the closer they are to becoming members of the WTO. For example, countries in Central Asia which are laggards in market oriented reforms are also lagging in terms of WTO accession. Also, smaller countries typically have found accession negotiations easier. In part this is because the smaller the country, the more likely it is that it can ill afford a protective regime; and because small countries typically poses fewer market access issues for major WTO members. 15

16 (2) WTO Member Attitudes and Policies have also played their part in delaying accession. In many respects, the demands made for newly acceding countries are greater than the disciplines on existing members at similar levels of development. Acceding countries are requested to bind all tariffs while many developing countries, whose level of economic and institutional development is similar, continue to have a large portion of their tariff schedule unbound outside agriculture. More generally, the standards of accession have evolved in such a way as to provide members with assurances that a newly acceding country fundamentally is run on market principles. It can be reasonably assumed that transition economies would not secure WTO membership unless they could demonstrate that their trade was fundamentally based on market transactions and the state did not have a substantially complete monopoly on trade, as required in the WTO provisions regarding the use of alternate procedures in anti-dumping cases. Acceding countries are also typically requested to meet all commitments at entry, for example with regard to TRIPs, customs valuation, standards or sanitary and phytosanitary regulations; without time limits such as those available to existing members at similar levels of development; and regardless of whether institutional weaknesses make it difficult for them to fulfill such commitments. These weaknesses relate broadly to aspects of the operations of a market economy, where it takes time to establish the proper institutional infrastructure that would enable them to discharge their responsibilities properly under the WTO agreements. There are many examples of such areas: the development of appropriate legislation and institutions for intellectual and other property rights protection, the establishment of a suitable regulatory environment for standards or phytosanitary controls, regulatory aspects of provision of financial services etc. While the insistence of WTO members on a liberal commercial policy at entry is likely to serve both acceding countries long term development interests as well as WTO members' commercial objectives, insistence on adherence to all the WTO commitments at entry and without transition periods in areas such as customs valuation, TRIPS, standards and SPS where there are obvious institutional weaknesses in transition economies raises the following issue. Acceding countries, because of their strong desire for membership, may end up agreeing to obligations which, later on, their weak institutional capacity would make it difficult to implement leaving them open to subsequent complaints. 16

17 More generally, perhaps the most important factor for the delays associated with WTO negotiations is that the political economy of international trade policy is dominated by particular commercial interests in all countries. Thus, while at a general policy level WTO members might agree that accession of a country to the WTO is of paramount importance to their national interest -- and for some large countries such as China and Russia to the very operation of the international trade system -- accession cannot occur until the particular commercial interests in all countries are satisfied; and that takes time. 5 It is also important to keep in mind that the final agreement that China reaches will involve various compromises reflecting the desire of the Chinese government to obtain safeguards regarding the impact of the commitments to trade liberalization and reform required under WTO membership on its domestic economy. In the nature of the negotiations for accession, the more such safeguards the government seeks to obtain through for example, the provision of transition periods for the implementation of certain provisions or the reduction of trade barriers, the more members of the WTO will seek to maintain provisions which inhibit full access of Chinese products in their markets thereby giving an opportunity to their producers to adjust to Chinese WTO membership. V. China s Accession Against this background, and assuming that the accession process is completed in 2000, the protracted negotiations undertaken by China if one excludes the period when the negotiations were on hold for political reasons-- would only have been slightly longer than it has taken to complete accession for other countries e.g. Bulgaria, Estonia, Latvia which are much smaller and have had much more liberal trade regimes to start with. China is by far the largest trading country and has had the most complex negotiations both regarding market access and other aspects of the rules that would govern its accession. 5 Sometimes the delays have resulted not so much from the accession to the WTO per se, but from the links between commitments related to the WTO, e.g. in the area of agriculture or services and the possible future association of the countries with the EU. For example, Estonia, with a very liberal trade regime in agriculture, has had to propose much higher ceiling bindings in agricultural products, otherwise the EU, consistent with GATT Article XXIV, would have to had to "compensate" its trading partners at the time of Estonia's entry to the EU for the increase in its level of protection. Both Estonia's and Latvia's accession, as well more recently Croatia s and Albania s have had to come to grips with EU- US disagreements over the appropriate commitments in the audio-visual service sector. 17

18 It is also important to keep in mind that some of the general issues pertaining to accession such as for example whether China is a developing country which had pre-occupied many analysts in the past, do not provide a useful basis for understanding the dynamics of the accession process ( See inter alia, Langhammer and Lucke, 1999). Of course China is a developing country, as well as a country going through a variety of transitions towards the market. But in the WTO, the developing country designation is unilaterally determined by each country, based on the principle of self selection and there is no official definition of a developing country or a transition economy. In any case, neither of these designations are helpful in understanding the adjustments that China will have to make at accession, in large part because neither designation is particularly meaningful when it comes to obligations under the WTO for acceding countries. As I have discussed elsewhere (Michalopoulos 2000), the WTO agreements contain many references to special and differential treatment to be provided to developing countries. Some of these pertain to commitments by developed countries to provide market access or otherwise implement WTO agreements on more favorable terms to developing countries. But none of these developed country commitments are legally enforceable because they are all either of a voluntary nature or involve general best effort kinds of obligations. There are two other types of commitments however, which are legally enforceable: those which permit developing countries certain kinds of flexibility regarding the implementation of certain obligations, e.g. the binding of tariffs, the provision of subsidies or aggregates measures of support to agriculture; and those that give developing countries additional transition periods to implement certain obligations. But the way the accession process has worked, each of these flexibilities are negotiated individually with each acceding country, which is asked to specify a particular tariff schedule ( with all items bound or to be bound over a period of time); specified levels of support to agriculture as well as specific transition periods ( if any) regarding the implementation of other aspects of the agreements. Thus, the relevant questions to ask relate to what are the likely adjustments that China will have to make in the light of what is known about past accession agreements, as well as what has become publicly known regarding specific bilateral agreements China has reached, e.g. with the US. At the same time, many of the specific transition periods originally provided under the WTO agreements have expired. Many developing countries have indicated their need for extensions, as the 18

19 periods have proven inadequate. But is has so far not been possible to find general rules for extension of these periods for all developing countries and their situation, so far has been addressed on a case by case basis. It is also too soon to make final judgements regarding the implications of WTO accession because a number of important bilateral negotiations, notably with the EU have not been completed. And the US Congress has yet to approve the extension on MFN ( Normal Trade Relations) to China. Detailed analysis of the implications must await the issuance of the final agreed protocol of accession with the accompanying detailed schedules of commitments regarding tariffs on industrial products, agricultural support commitments, service obligations and other pertinent specific rules and provisions. Nevertheless, some preliminary implications are explored of key elements of the emerging agreement; and some potential issues are identified. A. Implications for domestic policy and adjustment There are three main areas of adjustment in Chinese policy and institutions required under WTO accession: (1) changes in rules, regulations and standards in trade related areas; (2) changes in policies which would result in greater liberalization of the domestic market; (3) changes in policies which affect Chinese exports. 1. Rules, Regulations and Standards The main areas where changes will be required relate to the laws regarding intellectual property rights (TRIPS), technical barriers to trade (TBT), phyto-sanitary standards (SPS), and Customs Valuation. These changes would involve essentially changes in China s laws and regulations to bring them into conformity with the international standards used in the WTO. These standards are in part based on a number of international conventions to which China is already a party. The Chinese authorities have been making a great deal of progress in ensuring that these laws and regulations are changed to bring them into conformity. The key challenge for the future would be to ensure that regional and local authorities are familiar with and are able to enforce these standards consistent with the obligations which China s government will assume. 19

20 2. Implications of Provisions Resulting in Market Liberalization The WTO agreements will result in reductions in the level of protection afforded to domestic producers and increased competition in all sectors. This will ultimately be beneficial to the productivity and efficiency of China s economy and the welfare of its consumers. In the industrial goods sectors WTO accession will involve reductions in the average level of tariffs and progressive elimination on non- tariff barriers to trade. The reductions will be phased in over a period of time with the final levels reached in This will provide an opportunity for non-competitive sectors to adjust. In this connection, perhaps the greater impact will be felt in the state-owned enterprise sector which has been among the weakest performers in recent periods. WTO membership will increase the urgency of reform in the sector, both because of the pressure of increased competition and because of government commitments to reduce subsidies to the sector. An analysis of the reforms needed in state owned enterprises goes beyond the scope of this paper. But other analysts have suggested that the key issues that need to be addressed in this sector have to do with: (a) clarification of property rights; (b) establishment of new organizational structures; (c) improved corporate governance structures; and (d) implementation of international financial accounting and auditing practices (Broadman, 2000). WTO accession as such does not require the elimination of state owned enterprises rather the notification of their activities. The key issue is whether the enterprises in question are operated on commercial, market principles. As long as that is the case, they can continue to operate. It is their operation on commercial principles however, which will pose a problem, if they are not competitive. At the same time it is important to recall, that if these enterprises can not be demonstrated to operate on market principles, their exports could be subjected to anti-dumping measures using the less advantageous and more opaque methodology reserved for non-market economies. In agriculture, the level of protection envisaged after WTO accession will be higher than in industry, a pattern that characterizes the agricultural sector worldwide. Tariff-quotas will be established, following a pattern present in several WTO members. But China can be expected to increase these quotas over time as well as to increase the portion of agricultural trade in which private companies will be able to operate. This again will tend to put pressure on increasing the efficiency of the state trading entities in the sector. 20

21 It should be noted that with respect to reductions in trade barriers, the emerging provisions of Chinese accession suggest that China will retain higher levels of protection and phase in the reductions in trade and non trade barriers over longer periods than has been the case for other countries that have recently became WTO members. Typically, countries have been given only two-three years before reaching the final levels of bound tariffs. Also, they have not been permitted to retain non-tariff barriers after entry whereas China will be able to phase them out over a period of years. This implies that China has a longer time to adjust but also of course, that the benefits from liberalization will also be postponed. Perhaps even more important than liberalization of trade in goods, China s accession to the WTO will involve a very substantial liberalization of service provision, some at the time of accession and some phased over transition periods. The key elements include:?? Trading and Distribution liberalization will permit foreign firms to have trading rights the right to import and export as well as to own or manage distribution networks, wholesaling outlets or warehouses, as well as services ancillary to distribution ( rental and leasing, advertising etc).?? Telecommunications China is expected to become a member of the Basic Telecommunications Agreement, which entails the introduction of pro-competitive regulations and permit foreign investment in the sector.?? Insurance Under accession the government would be expected to enlarge the scope of activities of foreign firms both in terms of the type of insurance (health, pension) which they will be able to provide as well in terms the geographical areas where they would be permitted to operate (i.e. beyond Shanghai and Guangzhou).?? Banking major changes can be expected resulting in foreign banks having the same rights (national treatment) as Chinese banks within designated geographical areas; progressive elimination of geographic and customer restrictions and increase in the range of business foreign banks may conduct ( e.g. local currency transactions).?? Additional liberalization in the provision of services in Securities, Audio-visual, Travel and Tourism and for foreign Professionals ( lawyers, accountants etc). 21

22 3. Limitations on Export Incentives Beyond these provisions which are likely to result in liberalization and increased competition of imports of both goods and services, WTO accession will involve changes in the scope of incentives that China can provide to its export industries, to bring them in line with rules and practices that apply to WTO members. There are two key aspects of these limitations: Export Subsidies and the TRIMS agreement.?? Export Subsidies, will have to be phased out, thus reducing a key incentive for many firms. In turn the fact that firms would not be able to obtain export subsidies will place a heavier burden on macro-economic and exchange rate policy to ensure that the exchange rate is maintained at levels that permit export oriented firms to maintain their competitiveness.?? The TRIMS agreement will require that China eliminate and cease to enforce trade and foreign exchange requirements or local content requirements or condition approval of investments or import licenses on performance requirements of any kind, including technology transfer conditions, other than those consistent with WTO provisions, as specified for example under the TRIPS agreement. B. Market Access While China can be expected to improve its market access following WTO accession for the reasons discussed above, certain limitations are likely to continue. For example, it appears that the agreement with the US would permit the latter to phase out the non-market designation of China for antidumping over fifteen years. This designation, as noted earlier will be imposed on a product by product basis. In order to avoid it, it would be important for China to establish market conditions in as many products as possible. `Similarly, the US would be able to impose what is called a selective safeguard policy on Chinese imports which goes beyond the safeguard mechanism employed generally under the WTO. Under the latter, if a domestic industry can demonstrate serious injury from imports, a safeguard is imposed (e.g. a higher duty) against imports from all sources for a period of time. In the case of China, the safeguard may be imposed only against its products, presumably in order to protect US industry against potentially damaging import surges. 22

23 Finally, regarding textiles, the US agreement calls for the quantitative limitations on Chinese exports to stay in place until 2008, which is three years longer than the quantitative limitations prevailing on other exporters in the US market. The WTO Agreement on Textiles and Clothing requires all trade in these products to be free of quantitative restrictions by VI. Some Remaining Issues As of the time of this writing there were two key outstanding issues which need to resolved before the final Working Party Report and the Protocol of Accession is agreed. First, China had not yet reached agreement in its bilateral negotiations with a some countries and most importantly with the EU. Issues with the EU included many of the same issues (but not necessarily the same products) as with the US. Specifically there are issues regarding tariff levels and quota phase outs in both industry and agriculture; and there are many issues in services, TRIMs, as well as export subsidies. The second issue whose outcome is perhaps most difficult to gauge is US Congressional approval of permanent normal trade relations (MFN) of China. While the US administration is committed to obtaining this Congressional approval, a variety of political pressures have mounted against approval. If approval is obtained quickly, then it would perhaps be reasonable to expect that China will be able to conclude speedily the remaining bilateral negotiations and gain accession to the WTO by the end of this year. If approval is delayed significantly, or not given at all before this summer after that, the presidential election campaign means that passage of any significant legislation is unlikely a variety of scenarios might develop. One alternative would be for the remaining negotiations to move forward to conclusion and the US agreeing to the Working Party Report without offering any objections to Chinese WTO accession. But without legislative approval, at that point the US would have to invoke Article XIII of the WTO which permits non-application which means that it would not provide China with unconditional MFN-- or for that matter with any other WTO rights and thus de facto has not accepted its accession. Then, China could still become a member and reciprocate meaning it would not apply the WTO provisions to the US while it accepts all rights and obligations of WTO membership as spelled out in its protocol of accession with regard to all other WTO members. 23