China & WTO
How WTO Membership Affects China
(Article by U.S. economic minister counselor, Beijing)

Joining the WTO was good for China and good for the world economic system, says James P. Zumwalt, economic minister counselor at the U.S. Embassy in Beijing.

In an article appearing in the U.S. Department of State's January 2002 edition of the electronic journal Economic Perspectives, Zumwalt says WTO membership should help China sustain economic expansion as it continues its program of structural reform. Asian neighbors should face both more competitive challenges from China and more export opportunities, he adds.

Trade disputes between the United States and China are quite likely to increase, Zumwalt says, as China struggles to fulfill its obligations and both parties have access to WTO dispute-settlement procedures.

But the United States and other countries are working to mitigate trade frictions by offering training and other technical assistance, he says.

Following is the text of the article:

How WTO Membership Affects China
By James P. Zumwalt
Economic Minister Counselor
United States Embassy, Beijing

(This article is in the public domain; no republication restrictions.)

With its accession to the World Trade Organization (WTO) on December 11, 2001, China became one of the last major trading nations to join that organization. And the message to the world was clear: China is prepared to become a fully vested player in the global economy. WTO membership will generate tremendous benefits for China -- expanding trade, spearheading further economic reform, attracting even higher levels of foreign investment, and fostering the rule of law.

At home, WTO membership will undoubtedly thrust significant responsibilities and challenges on the Chinese leadership and the Chinese people. Abroad, it will fundamentally redefine China's relations with other countries, especially with the United States, its most significant export market, not to mention its neighbors in the Asian region.

One thing is certain: The changes wrought by China's WTO accession will reach far beyond just the trade-related aspects of its relations with other countries, engendering many benefits as well as challenges. How best to bolster the benefits and mitigate the risks remains a subject of considerable debate among policy planners, business people, and consumers.

Why China Needs The WTO

China's explosive economic expansion over the past 20 years is a well-known success story. Fueled by vigorous reform efforts, growth rates averaging nearly 10 percent annually have created a vast array of new job and investment opportunities, making China more prosperous. The effect of China's transformation from an inward-looking, planned economy to a more market-oriented, trading powerhouse has reverberated throughout the global economy, influencing everything from consumer choice to investment flows.

Rapid-fire growth has not been cost free, however. In particular, it has cast a harsh light on some of the structural weaknesses of China's economic system, particularly in agriculture, finance, and state-owned enterprises. The dilemma for China has been, and will continue to be, how best to keep the dual momentum of economic growth and structural reform going. For if one were to stall, the other might very well stumble, potentially unleashing a whole new set of economic challenges and difficulties.

In many respects, WTO membership is China's best option for sustaining the pace of economic growth and reform. As the world economy has become vastly more complex and interconnected, China's participation in it -- according to the rules of international trade -- has become that much more critical for China, as well as for the United States, Asia, and the world. As a WTO member, China will be able to participate in the formulation of rules that govern international trade and investment.

Similarly, it will be able to defend its trade interests using the WTO dispute-settlement system. Chinese exporters will benefit from the certainty that their trading partners must obey WTO rules. This means, for example, that WTO members will not be able to discriminate against Chinese products in their home markets. WTO membership will make China even more attractive to foreign investors. And more money invested in China means more high-paying jobs, more government tax receipts, and more technology transfers. China's WTO commitments will facilitate increased competition in every sector of the economy. Chinese consumers will be the direct beneficiaries as competition encourages a larger range of choices, lower prices, and higher quality, not to mention a greater awareness of and appreciation for intellectual property rights and consumer rights. Competition will foster gains in efficiency and productivity, which will strengthen China's economy over time and enhance the ability of Chinese firms to compete with the best multinationals in any market.

China's economy will benefit from the expanded range of services -- insurance, finance, distribution -- that foreign companies want to bring into China after its WTO accession. Competition in this area will, in turn, stimulate China's homegrown services sector, giving companies and consumers an even broader range of choices.

Perhaps most importantly, consumers and companies alike will benefit from an expanded rule of law as China implements its WTO commitments, particularly those designed to foster the highest degree of transparency and trade-related nondiscrimination.

China's Responsibilities Under the WTO

While China is poised to benefit greatly from joining the WTO, it is important to keep in mind that WTO membership conveys not only certain rights but also specific responsibilities. China labored through 15 years of tough negotiations, particularly with the United States and the European Union, to achieve WTO membership. The commitments China has made are extensive. For a comprehensive understanding of them, one could pore over the some 1,000 pages of China's Protocol, Working Party Report, and Schedules of Commitments on Goods and Services. Short of doing that, we can summarize the key components of China's accession package as follows:

Tariff reductions

• Industrial tariffs of greatest importance to U.S. businesses will be reduced from 25 percent to 7 percent.
• Agricultural tariffs of greatest importance to U.S. farmers will be reduced from 31 percent to 14 percent.

Services commitments

• Substantial opening of a broad range of service sectors, including important U.S. sectors such as banking, insurance, telecommunications, and professional services.

Systemic reforms

• Broad reforms in the areas of transparency, notice and comment, uniform application of laws, and judicial review will help to address barriers to foreign companies doing business in China.

Adherence to existing WTO agreements

• China will take on the obligations of numerous existing WTO agreements covering all aspects of trade, such as agriculture, import licensing, trade-related aspects of intellectual property rights, technical barriers to trade, and trade-related investment measures.

China-specific trade-liberalizing provisions

• Right to import from and export to customers in China directly within three years.
• Right to engage in distribution of all products in China within three years of accession (except that chemical fertilizers, crude oil, and refined petroleum can be distributed at the wholesale level five years after accession, and chemical fertilizers can be sold at the retail level five years after accession).
• Investment and import approvals no longer subject to trade-distorting requirements such as technology transfer, foreign exchange balancing, export performance, and local content requirements.
• Right to export to China without establishing an investment presence there.
• Phase-out of nontariff measures (NTMs) such as quotas and licenses on hundreds of products, with all WTO-inconsistent NTMs eliminated by January 1, 2005.
• Elimination of state-trading import monopolies for agricultural and industrial products.
• Requirement that state-owned enterprises must make purchases and sales based solely on commercial considerations.
• Elimination of export subsidies on agricultural goods and elimination of import substitution and export subsidies on industrial goods.

Safeguard mechanisms

• The United States and other WTO members can continue to use special nonmarket economy methodology for measuring dumping in antidumping cases against China for 15 years.
• Under a China-specific safeguard mechanism, the United States and other WTO members can restrain increasing imports from China that disrupt their markets for 12 years.

The time and effort involved in negotiating these commitments stand as a testament to China's determination to become a fully integrated player in the rules-based global trading regime. Although the battle to achieve the victory of WTO accession was hard fought, in many respects another equally worthwhile but difficult challenge confronts the nation. As can be seen from the above list of commitments, China is making enormous changes to meet its WTO obligations -- restructuring industries, publishing previously internal laws and regulations, establishing formal procedures to adjudicate disputes, and leveling the playing field for foreign companies. It has agreed to slash tariffs and to eliminate import quotas, to dismantle export subsidies, and to open service industries to foreign competition. Some of these changes will come immediately; others will be phased in over a period of a few years.

China and Its Neighbors

With its 1.3 billion people and an increasingly diverse and growing economy, China's accession (in conjunction with that of Taiwan) inextricably alters the composition and character of the trade organization, and it will have a direct bearing on China's relations with other nations, particularly its neighbors. Many Asian nations are faced with recession and are looking to a growth in exports to revive their economies. In some respects, China represents both a competitive challenge to these goals and an opportunity to gain from its strong economic performance.

Between 1995 and 2001, China's share of global exports rose from 2.9 percent to 3.9 percent while exports from Thailand and Indonesia during the same period stagnated. In the last four years, China has overtaken both Malaysia and Singapore in electronics exports to the United States.

On the other hand, China's WTO accession also can translate into improved growth in gross domestic product (GDP) for countries with high-value exports. According to a recent study by investment bank UBS Warburg, China's accession will give Taiwan's economy a boost equivalent to 1.7 percent of Taiwan's 2000 GDP by 2005. Asia's other newly industrialized economies are projected to benefit by 1.1 percent of their 2000 GDPs as China's demand for their exports increases.

For most of Southeast Asia, however, the prospects are not as bright. UBS Warburg estimates that Southeast Asian economies will lose between the equivalent of 0.1 percent and 0.2 percent of their 2000 GDPs by 2005. For India, this figure could be as high as 0.7 percent. This is one of the reasons the Association of Southeast Asian Nations and China have agreed to try to liberalize trade between them.

U.S.-China Relations

How well China fulfills its obligations of WTO membership will directly affect the future direction of U.S.-China relations. China's leaders have stated time and again their determination to implement fully their country's commitments. It is in the interests of both the United States and China to avoid a scenario in which trade frictions are exacerbated by China's inability or unwillingness to meet its many WTO commitments.

That said, trade frictions between the United States and China will not disappear with WTO accession, just as they have not disappeared between the United States and many of our trading partners who are longstanding WTO members. If anything, there is potential for an increase, at least initially, as the size and scope of our trade relationship grow. China already enjoys a burgeoning trade surplus with the United States. If American companies discover that promised access to China's markets does not materialize as quickly as anticipated, the result may be an unstable combination of sluggish U.S. export growth, a politically unsustainable Chinese bilateral trade surplus, and heightened trade frictions.

The United States and other WTO members are playing a vital role in trying to avoid just such a scenario by offering China assistance in meeting its WTO obligations. Our consulate general in Shanghai, for example, has worked with the U.S.-China Business Council to put together a video-conferencing program in which American trade-law experts speak to Chinese officials. Similarly, our embassy in Beijing is working with Beijing University and a local distance-learning institution to provide online WTO training opportunities in communities throughout China. Our commercial section is arranging a series of seminars to expose local officials to WTO principles. The European Union has allocated approximately $23 million to bring Chinese officials up to speed on WTO rules and concepts such as protection of intellectual property.

Although China is under tremendous pressure to abide by international rules and meet fully its WTO commitments, it is important to remember that trade disputes are not a one-way street. China too will have recourse to WTO mechanisms to address its trade complaints against other WTO members.

Despite the challenges that lie ahead for China, there is no question that joining the WTO is the right choice for China and good for the world economic system. WTO membership will inextricably link China to the global economic community, eventually bringing with it more employment and investment opportunities, and greater social stability, as the rule of law takes deeper root in governing economic transactions in China. Americans will benefit from greater export opportunities in China, more job creation at home, and more diverse options for overseas investment. As trade and business links between our two nations expand, so too will face-to-face contact between Chinese and American citizens, exchanges of ideas, and transfers of technology. The growing sense of interdependence engendered by the WTO should also help foster a stronger sense of common purpose as China and the United States work more closely together on a broad range of issues relevant to global economic stability, security, and prosperity.