Implications of China's accession to the world trade organization

56648 Implications of China's Accession to the World Trade Organization By Deepak Bhattasali* and Masahiro Kawai** April 12, 2001 *Lead Economist, World Bank Resident Mission in Beijing, 9th Fl., Building A, Fuhua Mansion, No. 8, Chaoyangmen Beidajie, Dongcheng District, Beijing 100027, CHINA. **Chief Economist, East Asia and the Pacific, World Bank, 1818 H Street, NW, Washington, DC, USA. Abstract: China is in the midst of four types of structural transformations--command to market, agricultural to manufacturing and services, high fertility cum low longevity to low fertility cum high longevity, and closed to open. The last of these has been occurring for over two decades, and will accelerate with WTO accession. In the short and medium term, the changes that will result from joining the WTO, though significant in themselves, are modest in comparison to the trend resource reallocations that are already taking place due to the four continuing types of transformation. In general, the agricultural sector will suffer some disruptions, particularly in employment, though labor dislocations can be more serious in certain capital-intensive manufacturing sectors. Over the longer term, Chinese agriculture will develop along lines of its comparative advantage. Depending on the roles of foreign direct investment, local protectionism, and the private sector, industrial growth will either stagnate or grow rapidly. In all scenarios, Chinese trade with the Asian region will grow rapidly, especially in grain, textiles and apparel, automobiles, and electronics, and there will be a boom in domestic services. China's share of world trade may double. Keywords: Accession to the WTO, structural transformation, trade liberalization, WTO Agreement on Textiles and Clothing, state-owned enterprise (SOE) reform. This is a revised version of the paper presented to the DIJ-FRI International Conference, "Japan and China--Cooperation, Competition and Conflict," sponsored by the German Institute for Japanese Studies (DIJ) and the Fujitsu Research Institute (FRI) and held in Tokyo on January 18-19, 2001. The authors are thankful to Elena Ianchovichina and Will Martin for discussions and data support, to Hanns G. Hilpert and other conference participants for stimulating comments, and to David Bisbee for editorial assistance. The findings, interpretations, and conclusions expressed in this paper are those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent.  1 I. INTRODUCTION The ability of China to raise per capita income by over 8 percent a year over the last two decades places it in a very small group of countries experiencing rapid economic growth. Rising standards of living, including lifting nearly 250 million people out of poverty, have been made possible through a factor-accumulation-based strategy that drew on China's immense labor resources, assisted by massive investments in physical capital and industrial infrastructure. Changes in incentives and organizations buttressed this strategy, and resulted in rising total factor productivity (TFP) averaging nearly 3 percent per year. In the 1990s, growth has slowed, reflecting a combination of macroeconomic and external sector policies and intensified structural bottlenecks. The regional economic slowdown since the beginning of the Asian financial crisis has also had an adverse effect. Visible urban unemployment (estimated to be about 9 percent of the workforce), factory closures and massive excess capacities in industry, price deflation, and a real growth rate that dipped to 7.1 percent in 1999 are some of these signs. China's desire to join the World Trade Organization (WTO), despite fears that increased competition from abroad would cause further labor market stress, stems from the belief that the net gains in economic efficiency, employment and welfare will likely be positive in the medium and long term. Its negotiating stance on specific aspects of the accession protocols has reflected its desire to backload many of the projected adverse impacts on employment and income. Underlying these positions is a temporal view of how quickly robust and self-sustaining employment creation will follow from the massive structural changes taking place in the economy. In terms of economic management, the key issue is the authorities' ability to maintain the momentum of growth with the fiscal stimulus program until job creation accelerates, to provide social safety nets to alleviate labor dislocations, and to foster more balanced development in the Western Provinces. This paper examines the implications of China's accession to the WTO for its economy, from sectoral, macro and structural perspectives, and for its major trading partners and global competitors. II. FOUR TYPES OF STRUCTURAL TRANSFORMATION IN CHINA Four major types of structural transformation have been underway in the Chinese economy. Each of these has profound implications for resource allocation, the distribution of income, and the relative emphasis given currently to specific aspects of economic policy. Briefly, these are: