Assess the Economic and Political Implications of Wto Accession

Assess the Economic and Political implications of WTO accession.

 The 11th December 2001 embarked on a huge national millstone for China, as they became the 143rd member of WTO. For 15 years China vigorously pushed for WTO accession, as it was vastly accepted amongst supporters of liberalization that re-joining the ‘global economy’ was paramount for China’s economical growth.  Notably China already made attempts to re-emerge itself in the global sphere by easing ‘pervasive and complex Import and export controls”, the use of special economic zones (SEZ) throughout the 1980s and attempting to broaden trade reforms and reduce tariffs in the 1990s. Since WTO accession, China have undoubtedly reinforced the remarkable economic trends shown since Deng Xiaoping’s reforms in 1978 and in many ways, WTO accession is an extension of the efforts of the reform.  

In this essay I shall critically assess the positive and negative implications of WTO accession both economically and politically. In the latter stages of this essay I shall assess evidence and suggest which economic and political implications are the most significant for China moving forward.

One of the most overt economic implications of the WTO accession is China’s emergence as an export-led economy. Since accession in 2001, China’s exports have grown dramatically: In 2009 China became the largest exporting country in the world overtaking Germany, and Japan. According to economist Yanling Wang, China’s world exports grew from 1.82% to 9.35% in periods 1987 – 20101. In addition to this China’s merchandise exports also grew from $14 billion in 1979 to a staggering $2.3 trillion by 2014.  ^[1]2

This correlation between growth in exports and WTO accession has occurred for a variety of different reasons. According to Elena Ianchovichina and Will Martin from the World Bank, WTO principles and commitments will lead to a growth in exports as “china’s markets and market access becomes more liberalized”.  ^[2]3Notably WTO principles require china to abide by the following: (1) nondiscrimination (the Most-Favored-Nation [MFN] principle, under which the best market access given to any one member is extended to all other members); (2) market opening; (3) transparency and predictability; (4) undistorted trade; and (5) preferential treatment for developing countries.  Due to these principles, China have made substantial tariff reductions and abolished many of non-trade barriers, which have, in turn, made Chinese markets more accessible for trade.  By 2005, China fulfilled commitments to reduce their industrial tariff by 9.4% and agriculture from 22% to 17%. China now has guaranteed access to American markets due to MFN-trade and this will allow China’s exports to continue to expand.   According to USTR, trade of goods and services trade with China totalled an estimated $659.4 billion in 2015

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  In addition to this China have enjoyed “preferential treatment” as China is still a developing country in the eyes of the world. Due to these principles, China is now able to relish from using its comparative advantage. For example after WTO agreements China saw the MFA (Multi fiber agreement) abolished (which was a quota imposed on developing countries on the amount of textiles they could export`) and because of this China can now reap the rewards of using their labor-intensive comparative advantage on a vast scale. According to professor Zhai Fan^[4]5, the abolition of “Multi-Fiber Agreement will further improve Chinese textile industry competitiveness, resulting in export expansion of such sector which are of comparative advantages in China” and this is supported by David Shambaugh, who shows that 93.6% of exports in 2009 were manufactured goods.^[5]6

However, according to David Shambaugh, one of the reasons for China joining the WTO was to move away from the image of being the “sweatshop of world” and instead dig its teeth deeper into the high-tech/technology industry.^[6]7 By China liberalizing their market to some extent, this has improved the chances of foreign investment and provided competition that will eventually speed up China’s growth in technology.  Notable, China signed the ITA, which saw all tariffs on informational technology products abolished and in 2010 China made a huge breakthrough, creating the world’s fastest super computer.  China has also begun to invest heavily in research and development (R&D) to enhance its credibility in technology industries, thus suggesting that a growth in the ‘high-tech’ industry will become a economical implication.^[7]7

One other implication is that China is becoming reliant on foreign trade.  As a result of China ‘opening up’ to facilitate joining the WTO, they have enjoyed stark increase in foreign direct investment. China as of 2014 has become the largest recipient of foreign direct investment, with inflows of $129 Billion and according to political scientist Xiaojun Li “Foreign trade has become China’s main engine of economic growth, contributing to over 50 percent of China’s GDP since 2002”. ^[8]8 Following WTO accession, China have relaxed rules and restrictions on the use of capital for direct investment and this has attracted FIE’S. For example, Foreign invested enterprises are now allowed to expand loans to offshore shareholders and to own some shares in SOE’S in certain sectors.  According to Razeem Sally, there are now over 90,000 FIE operating in service sectors in China totalling to over USD 160 billion something like this would be ‘unheard of’ before accession.  Notably China’s ODI has also proliferated.^[9]9 Throughout the 1990’s, it is notable that Jiang Zenim, former leader of the PRC spearheaded the “going out” policy. The ‘going out policy was used to encouraged state owned enterprises to invest abroad and although relatively small, China’s ODI still ranked third in 2014 and according to David Shambaugh this will increase.

FDI has led to an increase in regional disparity, especially in the east coast of China. In his work he outlines that in the 90’s, Shanghai alone enjoyed income double that in the northwest and 60% of that in the southwest. Fewsmith argues that due to subsequent reduction of SOE’s, the agriculture sector can no longer rely on state subsidies as much as it could prior to WTO accession and because of this 200 million jobs will be lost.  Whilst, urban areas such as Beijing will prosper due to comparative advantage and growing FDI, areas such as Guangdong will suffer as reduced tariffs enable China to import much cheaper and better quality of commodities such as grain. Whilst some parts of China attract FDI, some other parts of China just do not have the infrastructure to attract investment. ^[10]10