China’s Entry into the WTO

effect on State Owned Enterpriseseffect on State Owned Enterprises

WTO – A Big Event

Joining WTO is one of the important event in the History of Modern China

1949 1978 2001 Various dimensions, social, political,

institutional, cultural

Economics

But We start from economics

Efficient – allocation – scarce resources

Economic theories and Specialization

Economies of Scale, Welfare

History of SOE’s

Like other centrally planned Economies Before 改革开放 SOE’s were in Control

Where the governments -not the markets-determined prices & quantities

China SOE’s SOE produced 78% of total industrial output

at their peak in 1978 and 28% in 1999 Inefficiency of central planning communism ideal, remove the

unemployment that plagues capitalist economies

SOE annual losses of 6% of GDP No incentive to be efficient entrenched interest with in the structure

SOE’s

Inefficiency and problem State face hurdles (Status quo) bilateral agreements are lengthy

process China want to integrate WTO an opportunity

SOE’s The SOE enjoy administrative monopoly That prohibited the development of

private sector First, the government tried to

restructure the SOE’s on the line of conglomerates in Asian economies such

as Chaebol or keiretsu

China SOE’s

1981, self-employment and collectively-owned enterprises. (RS system)

In 1983, instead of profit – taxes 1993, small and mid size SoE’s

reformed capital markets, labor markets, and

stock markets

What is WTO? International, multilateral

organization which sets rules for global trading system 设置规则

All member states must be signatories to its about 60 agreements. 必须签署 60 个协议

Main goal is to encourage smooth and free trade 顺利和自由贸易

What is the WTO?

Resolves disputes between member states 争端

Non-discrimination Reciprocity Binding Commitment Transparency Safety

Six main parts of agreements

The Agreement Establishing the WTO

Goods and Investment (TRIMS) GAT&S IPR (TRIPS) DSU TPRM (review of govt trade policies)

Conditions for China to enter WTO

(1) the lowering of tariffs for imports,

(2) the permission of foreign firms to sell directly in the Chinese domestic markets and

(3) opening of the telecommunication and financial sectors to more foreign competition.

China entry to the WTO

China was voted in as a member on November 11, 2001 and became official member 成为正式成员 on December 11, 2001

In order for China to gain member status, China had to agree to separate negotiations 谈判 with all of the current WTO members

After 15 years of negotiations China got member status in 2001

Timeline for Qualification

1986 -- China applies to join GATT1989 – negotiations derailed due to certain political events. November 1995 -- China unveils economic and trade

reforms. slashed import tariffs by 30 percent April 8, 1999 - President Bill Clinton and Premier Zhu RongjiMay 7, 1999 -- NATO forces bombing of the Chinese

embassy in Belgrade. September 11, 1999 -- Clinton and Jiang Zemin agreementNovember 15, 1999 -- U.S. and China announce a WTO

pact. Clinton must persuade the U.S. Congress to grant China permanent normal trade relations (PNTR).

Timeline for QualificationMay 19, 2000 -- The European Union signs a WTO accession pact with

China October 10 -- Clinton signs a law giving China normal trade status with

U.S. January, 2001 -- China and some WTO members disagree on farm

subsidies. June 9 -- China and the U.S. announce consensus on issues holding up

China's entry, including farm subsidies, after meetings on the sidelines of an APEC trade ministers' meeting.

June 20 -- The European Union says it has resolved outstanding bilateral issues with China over its accession.

September 14 -- WTO members agree on terms for China's entry at an informal meeting, clearing the way for the nation to join by the end of the year.

November 10 -- Trade ministers from across the world officially approve China's entry. The move was approved unanimously at the WTO meeting in the Gulf state of Qatar

December 11 -- China ends its 15-year quest to join, officially becoming a fully-fledged member of the international trading system.

SOE’s and WTO In 2000, the SOE sector produced 24% of

industrial output, and accounted for 42% of urban employment

two types of subsidies: direct and capital Agreement on Subsidies and

Countervailing Measures (SCM) economic gains of restructuring the SOE

sector derived from WTO accession Taking in account the benefits of SOE’s,

the benefits of trade liberalization is substantial

Effect

distribution system or mode of doing businesses, ownership structure, and human capital

scale and scope economies FDI: Learning by doing and by

Watching Government overcame on

bureaucracy

Winners vs Losers Winners The private

sector Consumers Exporters Transport: containers Services: household and professional Textiles and apparel Light manufactures, e.g. electronics, toys Non-farm activities in rural areas

Losers Many state-owned companies Banking Insurance Telecommunications Automobiles Heavy industry, e.g. steel, aluminum Farmers; e.g., grain, soybeans & cotton State trading companies

China had to relax over 7,000 tariffs, quotas and other trade barriers. Some feared that foreign competition would uproot farmers and upend rusty state-owned enterprises (SOEs), as to some extent it did.

WTO as a Panacea 万应灵丹 the enforcement of reforms is much easier

through the WTO than through the domestic bureaucracy.

Entire SOE’s in debt and WTO was an agenda

The former Premier Zhu Rongji stated explicitly that WTO accession was a decision made by the government to promote further reforms and open up the economy

What has been changed/reformed?

More openness and access Transparency Got rid of inefficient organizations

and management China participation in the WTO's

dispute settlement system Eliminate trade subsidy 补助金 Efficiency and proper allocation of

resources

Effect on SOE’s

The term ‘efficiency’ can be termed in different ways,

as Pareto efficiency, technical efficiency, allocative efficiency, exchange efficiency, X-efficiency and market efficiency

Alternate

Simply by formally changing the state enterprises to share-holding companies does not lead to the replacement of former managers and the adoption of new ways of managing the enterprises. As pointed out in Chow (2002, p. 391) private ownership is neither sufficient nor necessary for enterprise efficiency

success

Chinese State-owned Enterprises (SOEs) are making news with a number of them appearing on the global lists

Geely’s volvo marque from Ford

Incentives

In summary, through different stages the SOE reform went from microeconomic adjustment, to limited autonomy, to privatization; and from giving no economic incentive to workers and managers, to giving partial incentives, to full incentive in the case of privatized SOE.

Effect of WTO Entry GDP grew by 8% in the year following entry

to the WTO Increase of 18.4% in trade volume with USA

China’s exports increased by 19.7% in a year

WTO , increase in confidence and Influx of foreign investment

Private Sector WTO policies forced China to treat all

enterprises equally Private Sector has seen rapid growth Ban on Private sector to engage in

foreign direct trade removed Private sector got access to finances In Zhejiang Province, for example, 80 %

of the 1,700 enterprises that were granted the right to conduct foreign trade in 2005 were private firms.

Tariff Reductions

WTO and Economic Growth

first is the gain from specialization through international trade.

The second is the gain from increase in efficiency within each industrial sector and economies of scale

Western firms got from China’s joining the WTO

Cost and Benefits

WTO and competition Encouragement of market power private ownership is neither

sufficient nor necessary for enterprise efficiency

Consumer cost and benefits Decline in state control

What does the future hold for China in the WTO? Economic growth will continue and

more reforms will be made China will have access to advanced

technology China’s tariffs will eventually reduce Banks/stock will begin to launch

massive market oriented reform programs to prepare for competition from outside markets

Business standards will continue to rise

Thanks