In terms of economics, The People’s Republic of China has had a turbulent relationship with the outside world throughout its history. In the 20th century, despite having seen what isolation had done to his country over the centuries, Mao Tse-tung and his Communist party decided to shun other nations during the twentieth century and instead relied on a homegrown agricultural revolution to promote economic strength. This policy ended in disaster, leading to famine and economic decay throughout the entire country. It was not until the next generation of Communist leadership realized that China should embrace the rest of world – albeit on Chinese terms – that the country began to flourish. The path toward opening China’s borders to trade began with steps Deng Xiaoping took in the late 1970s. On July 1, 1979, China’s Communist government passed the “Chinese-Foreign Joint Venture Law,” which created conditions for firms to build joint ventures inside of China. The significance of joint ventures is that they are both a vehicle to attract foreign investment and a means to allow domestic Chinese companies to acquire technology from their foreign partners. Since 1979, the implementation of this law has created 360,000 additional foreign invested enterprises, which have resulted in more than 348 billion dollars of direct investment into the Chinese economy. The reforms of the 1970s helped to persuade the rest of the world that China could be a trusted trade partner and ultimately set the stage for China’s most dramatic feat in its economic progression – accession to the World Trade Organization (WTO). Given the poor state of the Chinese economy before the reforms of Deng Xiaoping, how did China accomplish this, and what will China’s acceptance in the WTO mean for China’s economic relationship with the US?

Even before China’s accession to the WTO became debated on the international stage, the country had been making substantial headway toward economic reforms. The reforms since the late 1970’s were formally legitimized in 1992, when Deng Xiaoping toured the southern provinces of China. The tour was significant because the southern provinces were split ideologically from the rest of China. Deng Xiaoping was able to convince the grumbling southern constituency that they were part of China and that the best way for China to grow economically was to be as one nation. In the span of Deng Xiaoping’s Reform, China set up four special economic zones: Shenzhen, Zhuhai, Shantou, and Xiamen. The four zones were in the southern coastal areas, toured by Deng Xiaoping, and were established so that China could experiment with integration into the global arena on a limited scale. For example, these were the first areas where foreign direct investment was allowed and one of the reasons that China became a favored FDI recipient among developing countries. The process of economic reforms also included the decentralization of national authority over state owned enterprises (SOEs) and the liberalization of prices for goods and services so that they would be set by market dynamics, as opposed to the government dictating how much an item, like a sack of rice, would cost.

Chinese officials discovered that a result of the openness they instigated was a promotion of crucial technological spillover into Chinese industries. Multinationals that set up in China were able to import standardized technology to enhance the productivity of industries that relied on heavy usage of manpower. China became one of the largest exporters of products created by unskilled labor. Export concentration has been mostly in textiles, apparel, electronics, and other light industries, all of which account for more than 20 percent of Chinese products sold on the foreign market. With the shift of workers from rural to urban communities, China’s pool of unskilled labor will continue to provide an engine for growth in these industries.

Despite the impact these reforms were having, China also had to revamp many of its trade and economic policies before it could enter the WTO. This process was complicated due to the issue of potential legal precedence. China was one of many nations asking for acceptance into the WTO, and the process had to be thorough enough so that future applicants would not use China as a case of leniency. Thus, on July 1, 1994 China enacted its Foreign Trade Law, which directly improved the standards of Chinese industries by unifying all actions concerning trade. To increase the transparency of areas involving foreign trade, China’s government began publishing all relevant policies and regulations in the Ministry of Foreign Trade and Economic Cooperation (MOFTEC). In addition, China continued to lift restrictions on trade and production. Nokia (China) Investment Co.’s success is a clear example of how the removal of restrictions on importing raw materials pushed domestic suppliers to improve their standards of production. Prior to the removal, the products that the companies were manufacturing did not meet high-level standards, because they were substituting some imports with lower quality production techniques. The dramatic effect of this policy can be seen in the statistics. By 1996, China’s total import volume rose to 138.83 billion dollars from the 42.25 billion in 1985. Foreign trade dependency grew from 23 percent to 35.7 percent of their total trade volume. In addition, the reforms had the effect of promoting competition between Lower echelons of management were given the authority to conduct trade, and the growing independence of state owned companies provided more competition for foreign trade. Instead of a few oligopolies maintaining control of Chinese industries, many competitive companies were operating in China.

The barriers for WTO membership, however, were not just simply economic. For years, China practiced isolationism, and the government felt that it did not need foreign assistance. Deng Xiaoping was able to convince his Communist Party otherwise, but China faced opposition both from other countries as well as from its own people. There was a large consensus among the public that was concerned that foreign competition would cause layoffs. The burden of reforming the SOEs was at times difficult to bear, but China’s population could witness the benefits for themselves on how the policies toward a market-oriented economy spurred growth and development. The creation of higher-paying jobs helped to bolster a budding middle class, that aided in convincing opponents of the value of joining the WTO. At the same time, on the international stage, there were many countries that felt threatened by China. During the prolonged negotiation, China was forced to cave on more and more issues, i.e. tariffs on agricultural products. Throughout the Clinton presidency, there were many bumps in the road which hurt US/Sino relations, i.e. the NATO warplane bombing of China’s embassy in Belgrade and the denial of many of China’s offerings during negotiations. Ultimately, the US came around and was a vocal supporter during the negotiations for admittance of China, because it wanted to use trade as a bargaining chip for other humanitarian and political issues.

Ultimately, WTO membership will promote a faster liberalization of the Chinese economy. With liberalization, China will be able to benefit from freer movement of capital – both in internal allocation and investment from multinational corporations abroad. The WTO does away with protectionism, i.e. high tariff and non-tariff barriers which benefit industries but harm the economy as a whole. Ultimately, certain industries will be hurt, but the overall economy should improve because capital will flow in a more efficient manner to industries that will provide a healthy return on investment. The WTO will also grant China the ability to argue in trade disputes, most notably against protectionist measures and unfair dumping from foreign companies. Additionally, the Most Favored Nation status (or Normal Trade Relations) grants China the ability to trade freely with the US without discrimination. Other countries will have to discontinue the quota system for textiles and apparel by 2005, and Chinese exports of clothing are expected to increase by 300 percent.

Within China, there is a concern that the technologically inefficient Chinese farmers cannot compete with international competitors. Within the US, union members are wary that the rise of China will hurt American welfare and jobs. It is true that the impact of an open door policy in China will push its economy away from agricultural commodities, hurting their domestic producers. However, consumers in China will gain with cheaper agricultural products, and US producers will gain the billions of people in China to whom to export. One major industry which stands to gain is the automobile industry, which will witness tariff reductions of 25 percent within 5 years of China’s entry into the WTO. The US also stands to gain from China’s promise to liberalize financial services, telecommunication, and distribution. Thus, the comparative gain by both parties shows why it was necessary for China’s accession to the WTO to occur. China’s comparative advantage is in labor-intensive goods, and with the lift of restrictions on labor-intensive imports from other nations, China’s comparative advantage in these goods will create net exports. Since China has such rapid industrialization and population growth, net exports for all countries will increase in the coming years.

US multinational enterprises are most likely going to be more willing to trade with China as an alternative to direct investment via joint ventures. This is because economies of scale that some of America’s largest multinationals possess provide them with lower average costs than Chinese companies can achieve. In addition, the Chinese legal reforms make it possible for American firms to set up completely owned affiliates within China. Ultimately, the decline in trade barriers means that many US multinationals will use China as a base to manufacture intermediate stages of goods, while they retain their US-based operations for final assembly.

China’s entry into the WTO eases its domestic companies’ transition into the world economy. With the domestic market opened to international competition, prices will be more subject to the laws of supply and demand, and the prices of the domestic market will soon reach equilibrium with prices abroad. The small, inefficient firms will end up being swallowed by the larger firms who will be able to compete more effectively on international standards. With the institution of market-determined prices, policy intervention will be a smaller factor in creating price distortions. Ultimately, increased competition amongst the domestic industry will help domestic companies compete on a global scale. The Chinese firms should emerge leaner and more efficient. Moreover, the domestic firms will utilize the Most Favored Nation clause and the ability for China to file complaints to the WTO when they feel that other nations are not playing fairly. In May 2002, China won its first anti-dumping suit, in which the WTO declared that the tariffs forced on two Chinese Steel companies, Iron & Steel Co. and Weifang Steel Pipes & Piping Co., were illegal.

The World Bank estimates that China’s share in world trade will triple by 2010 to 10 percent. As a result of this trade explosion, the agency also estimates that wages for China’s unskilled workers will increase nearly three-and-a-half times from 1992 to 2020. Correspondingly, Chinese skilled workers will double their wages during this period. Specifically, the industrial sector of the economy is increasing in prominence while the agricultural sector is declining in its share. For China to have further industrial growth, it will need more foreign investors to provide more technological spillover and the seeds for capital growth. As China moves to producing the goods in which it has a comparative advantage, the Chinese will demand more foreign goods. This will raise Chinese incomes and lead to a higher return to foreign investors in China. The US International Trade Commission estimates that Chinese tariff reductions will raise total US exports to China by 2.7 billion, which is an increase of 10 percent. Additionally, the rise of Chinese imports to the US will replace imports from other countries. China’s mass population means its labor-intensive goods can be produced at cheaper costs. Overall, Chinese imports and exports should rise, shifting sectors of the Chinese economy to match the rest of the world’s demands.

China’s accession to the WTO may foster economic growth as well as greater international cooperation. Studies show the double entry of China and Taiwan into the WTO will increase world aggregate demand and will raise the world’s GDP by 0.19 percent. One of the biggest qualitative benefits from China’s accession to the WTO is that China and Taiwan, which was admitted to the WTO shortly after China, should, by necessity, create stronger economic bonds and limit the outbreak of aggression on either side. Within China, the economic reforms will lead to a more democratic state. With more democratization and industrialization comes a flow of capital and friendly international relations. While China’s missteps in earlier historical stages prevented it from continuing its economic dominance, the steps taken by Deng Xiaoping and the accession to the WTO will prove fruitful.

Stuart Kottle (2007) is a second year student at Brandeis University majoring in Economics and Mathematics.

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