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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.


there was only little competition in countries with the presence of tariffs. 2000). This results in the wastage of resources (Green and Mayes. Thus. However. will benefit from the large reduction of tariffs and the elimination of all non-tariff trade barriers. 1999). China’s WTO membership will also have the same effects on the agriculture sector. 1999). In contrast. the domestic industries have to improve their manufacturing processes to compete with the new products imported from foreign countries. especially in the export sector. production cost has been cut to a minimum and possibly in the end. states that it will be a battleground and no one will benefit except the consumer (Saywell. while tariffs on agricultural imports will be cut from 31 2 . head of China research at Deutsche Securities Asia in Hong Kong. Because of competition from the Japanese. First of all. In the long run. Lawrence Ang. That is exactly what has happened to China’s consumerappliance markets. In the past. there is no doubt that being a member the WTO would initially be painful for the Chinese economy. Similarly. it could not be said that the WTO will impact negatively on domestic industries of China. In doing so. however. Therefore. the domestic industries as a whole would benefit since the increased competition forces Chinese companies to improve efficiency and become more cost efficient. there are some domestic industries whose products are more expensive than imported goods after tariffs are reduced. The economic system in these countries was ineffective because their domestic industries did not improve their manufacturing processes. Evidently. For example. in the mid-1990s Japanese companies dominated sales of goods such as color televisions and refrigerators in China. even though many firms will close down initially. As a result. As Saywell and Yan (2000) suggested. 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. 1999). each country tried to protect its domestic industries by introducing tariffs to increase the price of goods imported from foreign countries. domestic companies were forced to reinvent themselves to compete. if failure to do so would have meant closure of business (Saywell. 1990). one could specialise in the type of product that one could find most profitable (Oxley. domestic brands are taking away market share previously held by the Japanese companies. various benefits will be brought into the country in the long term. Now. the manufacturing industry.Domestic Challenge After China’s entry into the WTO. WTO rules will mean the end of export subsidies. without tariffs.

This is a chance to increase the employment rate in China. regional trade agreements and certain WTO provisions. Liu Yongxing. 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. such as trade-related investment measures. but will also turn the financial industry into a force that can truly drive the growth and development of China’s overall economy (Yanfen. Moreover.1992 173 35 1996 . As can be 3 . 2000).percent to an average of 14. president of Hope Group that is one of China’s largest private enterprises. Global foreign direct investment (US$ billion) Annual inflows World total Developing countries 1987 . an agricultural innovation would take place. Therefore. 2000).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. Capital and investment will then flow to China more than in the past by free trade. states that farmers are taking early action to be better prepared for the WTO (Saywell and Yan. Chinese farmers would be forced to improve the quality of products to stay competitive by introducing the latest technology and modern operations. 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. attract foreigners to invest in developing countries. with their rich experience in market management. As a result. 2001 Figure 1 It is highly likely that WTO agreements such as bilateral investment treaties (BITs).1998 489 158 Inward stock 1990 1998 World total 1968 4088 Developing countries 371 1219 Source: The World Bank Group. If foreign-capital banks. China’s entry into the WTO will be advantageous to the country’s financial-services industry.

these are the increase in foreign direct investment. in 1997 foreign 4 . in order to become a WTO member. there are some examples to illustrate the benefits of this joining the WTO to China. China has been attempting to reduce tariffs and restrictions in investments in order to become a WTO member. For over 13 years. China has been attempting to reduce restrictions in investment. Furthermore. China imposed many restrictions in order to obstruct foreign investors. Consequently. 1990). which is one of the developing countries. From the same figure. per capita income and transfer of new technology. Direct Foreign Investment in China 50 40 30 20 10 0 1985 1987 1989 1991 1993 1995 1997 Billions of Dollars Source: The Asian Development Bank (2000) Graph 1 Firstly.seen from figure 1. could get this great benefit after joining the WTO. foreign direct investment in China increased sharply after China had reduced restriction of investment. accumulated stock (inward stock) in developing countries in 1998 increased nearly 4 times when compared with that of 1990. In the past with a different political system. between 1987 and 1992. as can be seen from graph 1. foreign direct investment in developing countries was $US 35 billion and increased to $US 158 billion during 1996-1998. Therefore. 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. during the last 9 years. There are three obvious benefits that China receives from the above action. However. it implies that China.

Not only economic growth and investment are created by free trade but also the possible increase in the income of all WTO countries. The transfer of well-established technology could be a much more effective option (Sullivan. it is interesting that China could bring in the transfer of technology from foreign investment. with the above results. 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. According to Harrigan (1999). from 1988 to 1998 while investment in China increased. Secondly. 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. China has become a major manufacturer of consumer electronics. an increase in foreign direct investment leads to an increase in per capita income for Chinese people.150 Yuans. The main reason why foreign investors were attracted to China was her rich abundance of human resources and low wages (Harrigan. personal income and gross domestic products will increase. Therefore. to advance the technology of other countries independently would require vast amounts of research and development expenditure on the indigenous company (Perea. most sophisticated and competitive investment increased more than 4 times as compared with that of 1991. Income can be increased by generating new markets.119 to 5. There is data to suggest that there has been significant growth regarding China’s electronics industry. many new jobs have been created thereby distributing the capital among Chinese people resulting in the increase in per capita income. The WTO (1999) stated that world income increased more than $US 510 billion from 1994 to 1995. it is certain that all income such as national income. Consequently. At the same time. China should join the WTO. In addition. per capita income also increased more than 5 times from 1. Electronics output grew from 10 billion Yuans in 1981 to 186. However. this was created by the 1994 Uruguay Round trade. primarily due to the foreign technology that MNCs bring.5 billion 5 . MNCs are typically among the largest. 1997). 1999).454 Yuans in urban areas. 1999). per capita in rural areas increased nearly 4 times from 545 to 2. Advanced technology is important for economic development. China’s electronics industry has been one of the fastest growing industries in China. This is because after foreign investors operate their enterprise in China.

the Republic of Korea and Taiwan. fruits and prawns. 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. grains and processed foods and industrial items. Japan. Singapore Prime Minister Goh Chok Tong described China as becoming “a more attractive market for investment”(Viraphol. remove subsidies and quotas. China will be very competitive in some labor-intensive industries such as electronics and electrical industries. welcomes China’s decision to slash tariffs. International Challenge China’s entry into the WTO will also benefit other countries. Generally. 1999). This trade liberalization then leads to a substantial increasing in Thai major exported products. and do away with the requirement for a middleman in transactions. the United States and Canada. Chinese managers have quickly acquired competency (Plafker. large gains accrue to major trading partners such as Hong Kong.Yuans in 1994 because of the foreign technology transfer. it might be incorrect to say that developing countries have suffered from the new member. 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. In the last few years. For example. Thailand. with 25 percent of output being exported. roughly US$ 8 billion (Huang. other countries can hope to expand trade and investment there. which has strong trade and investment ties in agriculture with China. Obviously. 6 . In fact. the European Union. The number of economists realize that after joining the WTO. such as rice. As Drysdale and Song (2000) suggested. the other developing countries should also look closely at the greater opportunity for their exported products in the huge Chinese market. China’ s partners are estimated to benefit substantially from China’s liberalization. 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. As China becomes attuned to the international marketplace. Nonetheless. MNCs have also provided benefits of other intangibles such as modern management systems including marketing and accounting. 1999). 1999). An aspect of the great benefits also directly moves to the other developing countries since the growing of China demands more raw materials. it will take trade and investment away from some developing countries. 1997).

Goad. these countries that are being helped felt obligated to return their favor by signing the agreement. They usually consider their obstruction of a consensus at the WTO too much of a threat to their overall well-being and security. developing countries did not eventually obstruct its conclusion. security etc. According to Global Exchange (1999:Internet). Developing countries have little power within the WTO framework for two reasons. the reality is that developing countries have never used this to their advantage. one country gives a concession in an area. If China joins the WTO. the United States spent massive funds to assist the developing countries. 1999). For example. and benefit ultimately. developing countries gathering together will have more power to negotiate with developed countries (Dexter & Magnusson. such as the lowering of tariffs for a certain product. 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. It was argued that while it sets out to be a democratic institution. & Charles. That is. it will become a lot easier for Japanese firms to do business in China (Bickers. For instance. First of all. every existing WTO member is entitled to insist on having a bilateral trade deal with new applicants. In addition. 1999). after joining the WTO of China. exports.Moreover. in return for another country agreeing 7 . 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. 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. aid. An official in the China section of the Japan External Trade Organisation Madoka Sakita believes that once China becomes a WTO member. the WTO is dominated by the leading industrialized countries and by the corporations of these countries. there will be more transparency and improvements in the legal framework that could make it easier for other international companies to come in. EU and Japan in terms of imports. Secondly. Hence while many countries may be opposed to an agreement. Therefore. Most developing country economies are one way or another dependent on US. China would license European insurance companies and further open the market for European retailing and distribution of cars. trade negotiations are based on the principle of “trade-offs”. This would provide reciprocal provisions to every member. Joining the rules-based global trading system would also encourage more investment in China.

to sign on to a certain agreement. Nevertheless. there are more benefits in terms of people’s living standard as a whole. Moreover. but usually relent to the requests of the developed countries. developing countries have fewer human and technical resources and therefore often enter negotiations less prepared than their developed country counterparts (Kwa. and some of the richer or larger developing countries. negotiations and trade-offs take place between the developed countries. 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. in financial assistance. the Director’s position was then shared between Thailand and New Zealand. China’s joining the WTO is not only beneficial to various sectors of the country but also beneficial to the rest of the world. they are still able to move toward to all the advantages. However. has been a turning point for China’s economic growth as well as the rise in foreign investment. the benefits will be on the developed countries (since New Zealand is one of the developed countries). however. per capita income and technology transfer. as Goad (2000) points out. according to the above analysis. The WTO. In addition. some domestic industries will suffer from the free trade while the developed countries will benefit from the WTO’s agreement. economic globalisation has become. Therefore. As long as the Chinese companies are fully prepared for the coming challenges. an unavoidable reality and is a great trend that does 8 . enters into the WTO. China’s WTO membership will also bring some negative effects. For example. indeed. For the most part. last year. Thirdly. In conclusion. Besides. which is the biggest developing country in the world and having high influence in the world economy. 2001). Eventually. Most of them knew that if the candidate from New Zealand won the election. it is known in WTO circles that developing countries almost never barter for benefits. developing countries especially in Asia still supported the candidate from Thailand. There were two candidates for the director position who were Supachai Panichapak from Thailand and Mike Moore from New Zealand. In fact. The United States and developed countries tried to persuade developing countries to support the candidate from New Zealand by giving enormous benefits particularly. 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. it can be expected that if China. it will considerably increase third world power to deal with the first world. Nevertheless.

Therefore. 9 .not depend on human will (Long. China’s entry into the WTO is widely expected (Saywell & Yan. 2000). China should join the World Trade Organisation (WTO). As the biggest developing country in the world. 2000).

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