Despite short-term costs, China will benefit from its entry into the WTO

It is only in India that momentous events that are going to shape the future of the world economy often go almost unnoticed. The news of China’s imminent accession to WTO at the ministerial meeting in Doha in mid-November is as good an example as any.

Membership of the WTO is not coming cheap to China. It has agreed to the biggest ever concessions a country has ever given for accession. These include not only the opening up of telecommunications and financial services, such as banking and insurance, and wholesale and retail trade to foreign companies, but also special provisions that give major trading partners safeguard measures targeted solely against Chinese imports.

There are two reasons why the terms of China’s accession to WTO are so stringent. One is that post-Uruguay Round membership entails a much broader range of commitments covering aspects of services, agriculture, intellectual property rights, foreign direct investment, IT and telecommunications. The other is that because of its position in global trade today and its huge trade deficit with the US, China is perceived to be a threat whose strength will increase with its entry into the WTO.

To gain access to the WTO, China had to sign bilateral agreements with its major trading partners such as the US, the European Union, Japan and Australia. It is in these that China has made even bigger commitments than required by a WTO entrant. It has agreed to Chinese imports being treated in a discriminatory manner.

For instance, China has agreed to allow the US and other WTO members to continue to protect their industry from low-priced Chinese products by imposing anti-dumping duties in a manner that is not permitted under the WTO rules. These include using the “non-market methodology” to calculate the amount of dumping, “product specific” safeguards that require the more lenient “market disruption” norm rather than the WTO norm of “serious injury” to protect the domestic industry against Chinese imports, and China-specific safeguards for textile products.

Since China already has wide access to international markets, most countries had already granted it permanent normal trading partner (or most favoured nation, MFN) status. And since the US had also been giving it MFN status (though on an annual basis), the obvious question is what China gains from its accession to the WTO. Especially, when it is coming at the cost of so many concessions.

One view is that the Chinese need a massive fresh inflow of foreign capital. After the Asian crisis, China also suffered from the policy of international banks seeking to reduce their exposure to emerging markets. In addition, the collapse of one of China’s largest non-bank financial institutions, as also the revelation of the insolvency of a number of other Chinese borrowers, exposed the weakness of the Chinese financial system. This resulted in international banks cutting their lending to China at an accelerated pace.

Further, prospects for Chinese financial institutions and companies raising funds in international capital markets are dim. It is believed that foreign capital may be critical in preventing a slowdown in the economy.

But if this were all, China could have opened up the financial sector to foreign companies without making the commitments it has. US firms, eager to invest in the huge Chinese market for banking and insurance, would have easily entered the market, as did foreign manufacturing companies which are now using China as a major exporting base.

The shallow integration of the Chinese economy with the world economy has proved to be successful till now, so why go to the extent the Chinese leadership did? Why decide to incur the costs of a much deeper opening of the economy to international trade and investment, the costs which will be reflected in rising unemployment in some sectors that will face greater competition? While in the long term efficiency gains can be anticipated, in the short term there may be significant disadvantages.

Some experts believe that the Chinese economy has been slowing down significantly in the last few years. Official statistics hide the true picture. A modest growth of 2.5 per cent in electric power generation, shrinking of imports despite a strengthening currency, decline in the volume of cargo transported, and a sharp slump in the profits of state-owned manufacturing firms are cited as reasons why growth may be substantially lower than official numbers indicate.

Further, it is argued that since the current Chinese leadership’s appeal lies not in ideology or nationalism but in its ability to give people rising standards of living, it is willing to impose high short-term costs in order to reap benefits in the medium and long run. And, that it believes that the principal benefit of WTO membership is the increased competition it will bring to China’s domestic market. This competition is seen as an essential source of pressure on state-owned banks and enterprises, forcing them both to undertake badly needed reforms. This, it is hoped, would lead to higher growth.

In addition, there are benefits to be reaped from further globalisation. Today, 45 per cent of Chinese exports are produced by companies with foreign investment. This share has risen phenomenally from 1985 when it was only 1 per cent. A move towards more globalisation will, it is hoped, provide the base for a continuation of the use of China’s liberal foreign investment regime and low-cost flexible labour market by foreign companies, ensuring continued growth.

Whatever may be the reasons, one can be fairly sure of one thing. That China will emerge stronger and a more formidable competitor for foreign investment than it is today. When not merely foreign but even domestic investors are wary of investing in India, China’s accession to the WTO and its commitment to liberalisation and growth can only make India appear less attractive.

Since the mid-1980s, multinational corporations have been shifting production from other places to Asia to China. China is already the most important manufacturing site for a large number of low-priced items. With more liberal imports and foreign investment norms in China that will come in place as soon as it enters the WTO, the probability of production being shifted to China can only increase.

And, it should be no surprise if Indian companies also prefer to produce in China and import into India. Indeed, some evidence of such a trend is already evident in watches, telephones and electrical goods. If Indian manufacturing is not to lose out to China at an even faster pace, both in the domestic and international markets, India needs to wake up to this reality before it is too late.