Should China join the World Trade Organisation?

During the last 6 years, the value of international trade and foreign direct
investment (FDI) in developing countries has increased dramatically. Many
economists stated that the World Trade Organisation (WTO) has played a major role
in this action. In 1978, China implemented an “Economic reform and open door”
policy; and as a result the Chinese economy has grown dramatically. In order to
further continue growth and become a global force in the world, China has been
lobbying for the past 13 years to gain membership into the General Agreement on
Tariffs and Trade and later its successor, the WTO, but without success (Crispin &
Gilley, 1999). However, many people in China are not certain that they can gain the
benefits from the WTO. The significant reason is that this organisation will impact
negatively on domestic industries; and also it used as an effective tool of the
developed countries to dominate them.

This leads to the question “Should China join the World Trade Organisation?”
The answer is yes. Although there are some disadvantages with China’s entry into the
WTO, it can still be tremendously beneficial to China in many areas. To fully
understand the significant role played by the WTO, this essay attempts to analyze why
China should join the WTO. The first part will be the analysis of internal, positive and
negative effects of China’s joining the WTO. The second part will focus on the
analysis of external effects of China’s WTO membership to the rest of the world.

The WTO is the only global organisation dealing with the rules of trade
between countries. Its main function is to ensure that international trade flows as
smoothly, predictably and freely as possible. It was founded in 1995 with 139
member countries in the world (WTO, 2001). Accordingly, if China gains entry into
the WTO, there will be many implications for the world.

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Domestic Challenge
After China’s entry into the WTO, even though many firms will close down
initially, various benefits will be brought into the country in the long term. First of all,
the manufacturing industry, especially in the export sector, will benefit from the large
reduction of tariffs and the elimination of all non-tariff trade barriers. However, there
are some domestic industries whose products are more expensive than imported goods
after tariffs are reduced. Evidently, many domestic industries in China closed down
because they were not able to cut their costs to compete with the new prices of
imported products (Mueller, 2000). Lawrence Ang, head of China research at
Deutsche Securities Asia in Hong Kong, states that it will be a battleground and no
one will benefit except the consumer (Saywell, 1999). Thus, there is no doubt that
being a member the WTO would initially be painful for the Chinese economy. In the
long run, however, the domestic industries as a whole would benefit since the
increased competition forces Chinese companies to improve efficiency and become
more cost efficient. That is exactly what has happened to China’s consumer-
appliance markets. In the past, each country tried to protect its domestic industries by
introducing tariffs to increase the price of goods imported from foreign countries. As
a result, there was only little competition in countries with the presence of tariffs. The
economic system in these countries was ineffective because their domestic industries
did not improve their manufacturing processes. This results in the wastage of
resources (Green and Mayes, 1999). In contrast, without tariffs, the domestic
industries have to improve their manufacturing processes to compete with the new
products imported from foreign countries. In doing so, production cost has been cut to
a minimum and possibly in the end, one could specialise in the type of product that
one could find most profitable (Oxley, 1990). For example, in the mid-1990s
Japanese companies dominated sales of goods such as color televisions and
refrigerators in China. Now, domestic brands are taking away market share previously
held by the Japanese companies. Because of competition from the Japanese, domestic
companies were forced to reinvent themselves to compete, if failure to do so would
have meant closure of business (Saywell, 1999). Therefore, it could not be said that
the WTO will impact negatively on domestic industries of China.
Similarly, China’s WTO membership will also have the same effects on the
agriculture sector. As Saywell and Yan (2000) suggested, WTO rules will mean the
end of export subsidies, while tariffs on agricultural imports will be cut from 31

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percent to an average of 14.5 percent by 2004. Chinese farmers will face the
challenge. Plenty of high quality and low price products from foreign countries will
enter the domestic market. Chinese farmers would be forced to improve the quality of
products to stay competitive by introducing the latest technology and modern
operations. Therefore, an agricultural innovation would take place. Liu Yongxing,
president of Hope Group that is one of China’s largest private enterprises, states that
farmers are taking early action to be better prepared for the WTO (Saywell and Yan,
2000).
Moreover, China’s entry into the WTO will be advantageous to the country’s
financial-services industry. If foreign-capital banks, with their rich experience in
market management, were allowed to take part in the competition in the banking
sector in China, China’s state-owned commercial banks would no longer be able to
enjoy their traditional protected-status without worry and have to work hard to catch
up with the services offered by foreign competitors. As a result, joining the WTO
means that opening up China’s financial markets will not only serve to gradually set
up an effective market mechanism in China and reduce China’s financial risk, but will
also turn the financial industry into a force that can truly drive the growth and
development of China’s overall economy (Yanfen, 2000). Capital and investment will
then flow to China more than in the past by free trade. This is a chance to increase the
employment rate in China.

Global foreign direct investment (US$ billion)

Annual inflows World total Developing countries
1987 - 1992 173 35
1996 - 1998 489 158

Inward stock World total Developing countries

1990 1968 371
1998 4088 1219
Source: The World Bank Group, 2001

Figure 1

It is highly likely that WTO agreements such as bilateral investment treaties

(BITs), regional trade agreements and certain WTO provisions, such as trade-related
investment measures, attract foreigners to invest in developing countries. As can be

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seen from figure 1, between 1987 and 1992, foreign direct investment in developing
countries was $US 35 billion and increased to $US 158 billion during 1996-1998.
From the same figure, accumulated stock (inward stock) in developing countries in
1998 increased nearly 4 times when compared with that of 1990. This is an
opportunity for developing countries to accelerate their rates of growth by generating
new jobs and providing fiscal resources for human development (Oxley, 1990).
Consequently, it implies that China, which is one of the developing countries, could
get this great benefit after joining the WTO.
Furthermore, there are some examples to illustrate the benefits of this joining
the WTO to China. For over 13 years, China has been attempting to reduce tariffs and
restrictions in investments in order to become a WTO member. There are three
obvious benefits that China receives from the above action; these are the increase in
foreign direct investment, per capita income and transfer of new technology.

Direct Foreign Investment in China

50

40
Billions of Dollars

30

20

10

0
1985 1987 1989 1991 1993 1995 1997

Source: The Asian Development Bank (2000)

Graph 1

Firstly, foreign direct investment in China increased sharply after China had
reduced restriction of investment. In the past with a different political system, China
imposed many restrictions in order to obstruct foreign investors. However, during the
last 9 years, in order to become a WTO member, China has been attempting to reduce
restrictions in investment. Therefore, as can be seen from graph 1, in 1997 foreign

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direct investment increased more than 4 times as compared with that of 1991. The
main reason why foreign investors were attracted to China was her rich abundance of
human resources and low wages (Harrigan, 1999).
Secondly, an increase in foreign direct investment leads to an increase in per
capita income for Chinese people. This is because after foreign investors operate their
enterprise in China, many new jobs have been created thereby distributing the capital
among Chinese people resulting in the increase in per capita income. According to
Harrigan (1999), from 1988 to 1998 while investment in China increased, per capita
income also increased more than 5 times from 1,119 to 5,454 Yuans in urban areas.
At the same time, per capita in rural areas increased nearly 4 times from 545 to 2,150
Yuans.
Not only economic growth and investment are created by free trade but also
the possible increase in the income of all WTO countries. Income can be increased by
generating new markets. It is highly likely that domestic companies in developing
countries are able to earn more revenue from higher sales in the new markets while
their governments are able to earn revenue from income tax. Therefore, it is certain
that all income such as national income, personal income and gross domestic products
will increase. The WTO (1999) stated that world income increased more than $US
510 billion from 1994 to 1995; this was created by the 1994 Uruguay Round trade.
Consequently, with the above results, China should join the WTO.
In addition, it is interesting that China could bring in the transfer of technology
from foreign investment. The deregulation in foreign investment has encouraged an
increase in a number of Multinational corporations (MNCs) that have helped China
towards modernisation by introducing new technologies and management techniques.
Advanced technology is important for economic development. However, to advance
the technology of other countries independently would require vast amounts of
research and development expenditure on the indigenous company (Perea, 1997).
MNCs are typically among the largest, most sophisticated and competitive
corporations. The transfer of well-established technology could be a much more
effective option (Sullivan, 1999). China’s electronics industry has been one of the
fastest growing industries in China. China has become a major manufacturer of
consumer electronics; primarily due to the foreign technology that MNCs bring. There
is data to suggest that there has been significant growth regarding China’s electronics
industry. Electronics output grew from 10 billion Yuans in 1981 to 186.5 billion

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Yuans in 1994 because of the foreign technology transfer, with 25 percent of output
being exported; roughly US$ 8 billion (Huang, 1999). Telecommunication is another
rapidly growing industry in China with the growing presence of companies such as
Motorola and Ericsson in the Chinese electronics and telecommunications market.
MNCs have also provided benefits of other intangibles such as modern management
systems including marketing and accounting. In the last few years, Chinese managers
have quickly acquired competency (Plafker, 1997). Technology transfer is considered
even more essential for China to narrow the technology gap and production levels
with the rest of the industrial countries and to develop a high-tech economy.

International Challenge
China’s entry into the WTO will also benefit other countries. The number of
economists realize that after joining the WTO, China will be very competitive in some
labor-intensive industries such as electronics and electrical industries. Obviously, it
will take trade and investment away from some developing countries. Singapore
Prime Minister Goh Chok Tong described China as becoming “a more attractive
market for investment”(Viraphol, 1999). Nonetheless, it might be incorrect to say that
developing countries have suffered from the new member. In fact, the other
developing countries should also look closely at the greater opportunity for their
exported products in the huge Chinese market. As China becomes attuned to the
international marketplace, other countries can hope to expand trade and investment
there. As Drysdale and Song (2000) suggested, China’ s partners are estimated to
benefit substantially from China’s liberalization. Generally, large gains accrue to
major trading partners such as Hong Kong, the United States and Canada, Japan, the
European Union, the Republic of Korea and Taiwan. An aspect of the great benefits
also directly moves to the other developing countries since the growing of China
demands more raw materials, grains and processed foods and industrial items. For
example, Thailand, which has strong trade and investment ties in agriculture with
China, welcomes China’s decision to slash tariffs, remove subsidies and quotas, and
do away with the requirement for a middleman in transactions. This trade
liberalization then leads to a substantial increasing in Thai major exported products,
such as rice, fruits and prawns. Thai agribusiness investment in China will also be
able to take advantage of lower import costs for commodities like soybeans and
soymeal as well (Viraphol, 1999).

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 Moreover, every existing WTO member is entitled to insist on having a
bilateral trade deal with new applicants. This would provide reciprocal provisions to
every member, and benefit ultimately. If China joins the WTO, there will be more
transparency and improvements in the legal framework that could make it easier for
other international companies to come in. Joining the rules-based global trading
system would also encourage more investment in China. For example, China would
license European insurance companies and further open the market for European
retailing and distribution of cars. An official in the China section of the Japan External
Trade Organisation Madoka Sakita believes that once China becomes a WTO
member, it will become a lot easier for Japanese firms to do business in China
(Bickers, Goad, & Charles, 1999).
In addition, after joining the WTO of China, developing countries gathering
together will have more power to negotiate with developed countries (Dexter &
Magnusson, 1999). It was argued that while it sets out to be a democratic institution,
the WTO is dominated by the leading industrialized countries and by the corporations
of these countries. According to Global Exchange (1999:Internet), they claimed that
each year the developed countries gave financial supports to the developing countries
which made them feel obligated to accept agreements offered by the developed
countries. For instance, the United States spent massive funds to assist the developing
countries. Therefore, these countries that are being helped felt obligated to return their
favor by signing the agreement. Kwa (2001) pointed out that the WTO at present is
really mainly about fast track trade liberalization in the sectors and products
benefiting developed countries with power in the organization. Developing countries
have little power within the WTO framework for two reasons. First of all, while
developing countries make up two-thirds of WTO membership and by their vote can
in theory influence the agenda and outcome of trade negotiations, the reality is that
developing countries have never used this to their advantage. Most developing
country economies are one way or another dependent on US, EU and Japan in terms
of imports, exports, aid, security etc. They usually consider their obstruction of a
consensus at the WTO too much of a threat to their overall well-being and security.
Hence while many countries may be opposed to an agreement, developing countries
did not eventually obstruct its conclusion. Secondly, trade negotiations are based on
the principle of “trade-offs”. That is, one country gives a concession in an area, such
as the lowering of tariffs for a certain product, in return for another country agreeing

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to sign on to a certain agreement. In fact, it is known in WTO circles that developing
countries almost never barter for benefits, but usually relent to the requests of the
developed countries. For the most part, negotiations and trade-offs take place between
the developed countries, and some of the richer or larger developing countries.
Thirdly, developing countries have fewer human and technical resources and therefore
often enter negotiations less prepared than their developed country counterparts (Kwa,
2001). However, last year, the WTO director’s election brought a new change and it is
likely that developing countries will not always follow developed countries in the
future. There were two candidates for the director position who were Supachai
Panichapak from Thailand and Mike Moore from New Zealand. The United States
and developed countries tried to persuade developing countries to support the
candidate from New Zealand by giving enormous benefits particularly, in financial
assistance. Nevertheless, developing countries especially in Asia still supported the
candidate from Thailand. Most of them knew that if the candidate from New Zealand
won the election, the benefits will be on the developed countries (since New Zealand
is one of the developed countries). Eventually, the Director’s position was then shared
between Thailand and New Zealand. Therefore, it can be expected that if China,
which is the biggest developing country in the world and having high influence in the
world economy, enters into the WTO, it will considerably increase third world power
to deal with the first world.

In conclusion, according to the above analysis, China’s joining the WTO is not
only beneficial to various sectors of the country but also beneficial to the rest of the
world. Nevertheless, China’s WTO membership will also bring some negative effects.
For example, some domestic industries will suffer from the free trade while the
developed countries will benefit from the WTO’s agreement. The WTO, however, has
been a turning point for China’s economic growth as well as the rise in foreign
investment, per capita income and technology transfer. Moreover, there are more
benefits in terms of people’s living standard as a whole. As long as the Chinese
companies are fully prepared for the coming challenges, they are still able to move
toward to all the advantages. In addition, as Goad (2000) points out, the direct
beneficiaries of China’s WTO membership will be Chinese consumers who will see
more choices and lower prices for a wider range of goods. Besides, economic
globalisation has become, indeed, an unavoidable reality and is a great trend that does

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not depend on human will (Long, 2000). As the biggest developing country in the
world, China’s entry into the WTO is widely expected (Saywell & Yan, 2000).
Therefore, China should join the World Trade Organisation (WTO).

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