WTO Accession, Policy Reform and Poverty Reduction in China

Deepak Bhattasali, LI Shantong and Will Martin

DRC and World Bank

February 2005

2

Introduction

The entry into WTO is the continuity and

development of China's reform and open

policy.

The entry into WTO is the strategic choice

made by Chinese Government in accordance

with the trend of economic globalization and

the political development, and consideration

of China’s long term interests.

3

Introduction Economic globalization is the major trend of

today's world. China’s target is to actively take on the international obligations, at the same time to further share the benefits brought by the economic globalization

To inject great power into China's reform the establishment of market system is to be perfect the reform of SOE and finance system is on the process monopoly in some areas has not been broken yet social credit system is to be confirmed the market order is not satisfactory

Fulfilling our commitments and adjusting the regulations will promote China's reform effectively

4

Introduction

To promote to convert its comparative advantage to competitive advantage.

China can allocate its resources more effectively in a broader global environment

China can improve its level of specialization in international division of labor

To create the efficient market circumstances for investment and development of industry in China

To bring a relatively steady external circumstance to China, which is propitious to vindicate its legitimate rights.

5

Introduction

China has to respect her solemn legal commitments, but these are not a recipe

Retains flexibility to pursue development goals eg by minimizing antidumping, using TRIPS

flexibilities, liberalizing services, lowering tariffs, opening sectors currently subject to state trading

The key is to focus on good economic policy

And WTO membership means an opportunity to push for better policies in China’s trading partners

6

Accession Involves

Non-discrimination between suppliers and between domestic and imported goods

Uniform administration and transparency Liberalization of Trading rights Protection substantially reduced Abolition of all NTBs except state trading Abolition of TRIMs Abolition of MFA quotas on textiles

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Other Key Features

Trade-Related Intellectual Property Rights Retention of state trading for oil and key

agricultural products Tariff-rate-quota regime for some imports Non-market economy treatment in

antidumping for 15 years Product-specific safeguards for 12 years Special textile safeguards for 3 years

8

Policy reforms pre-accession

Transformation of the trading system from plan to market

Elimination of nontariff barriers Reductions in tariffs

9

Moving from plan to market

Changing enterprises to respond to price signals

Moving from monopoly STCs to many trading firms

Introducing indirect trade policy instruments Eg tariffs, quotas, licences

Introducing export processing regimes

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Dualistic foreign trading regimes

China had established two separate trading regimes by 1986-87.

One is the export processing regime, which is extremely open, not subjected to tariff or NTBs restrictions.

The other is traditional, but increasing reformed, ordinary trade regime.

Since 1990s export processing has grown rapidly, which accounts for more than half of all exports.

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China’s economic structure and market openness

Agricultural sector account for 50%of China’s labor employment.

China is a net exporter of labor-intensive manufactures and a net importer of capital-intensive manufactures

China is net importer of grain, but has trade surplus of other agricultural products.

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Structure of Factor Endowments in China

Land Capital

Labor

USA 13%

USA23.3%

USA

5.1%

China6.7%

China28.8%

China1.4%

S. Asia17.4%

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China’s economic structure and market openness

There is significant difference between nominal tariff rate and the actual collected rate, because of processing trade and import duty exemption.

China’s tariff and NTBs provides high protection for manufacturing sector, especially the capital-intensive sectors and final consumption goods.

Due to the high share of import for processing trade, the effects of high tariff and NTBs are very limited in some sectors.

Economic Structure and Market Openness in China, 1997 (%) Output Import/

Domestic Use

Export/ Outputs

Ordinary Exports/

Total Exports

Ordinary Imports/

Total Imports

Nominal Tariff Rate

Collection Tariff Rate for

Total Imports

Rice 1.2 0.9 0.9 100 92 1.0 0.4 Wheat 0.7 7.9 0.0 - 78 1.0 0.2 Corn 0.4 1.1 7.9 100 21 1.0 0.0 Cotton 0.3 10.7 0.0 100 17 3.0 0.6 Wool 0.0 56.0 8.9 100 6 15.0 0.7 Vegetable oil 0.6 12.3 4.3 19 46 17.0 5.3 Food 2.6 2.5 9.7 72 18 23.2 3.7 Textiles 4.6 10.1 18.4 60 1 41.8 0.7 Apparel 1.9 3.6 37.0 45 2 35.5 0.3 Leather 1.1 13.2 32.6 29 1 14.4 2.5 Petroleum refineries

1.6 11.8 5.7 69 62 8.7 4.8

Chemicals 4.0 16.7 8.3 80 31 10.8 3.0 Machinery 2.5 13.3 5.9 61 35 13.7 4.2 Road vehicles 1.6 4.2 1.9 63 73 50.7 32.6 Electric machinery

2.8 9.6 15.9 21 20 17.9 3.1

Electronics 2.5 34.7 36.3 9 20 11.8 2.1 Total/Average 100.0 6.4 7.7 51 32 11.2 2.5

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Reduction in NTBs

Licenses &

Quotas State

Trading Designated

Trading Any NTB

No NTBs

% % % % % 2001 12.8 9.5 6.2 21.6 78.4 1996 18.5 11.0 7.3 32.5 67.5

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Reduction in Tariffs

Weighted Unweighted

1992 41 43

1995 30 36

2001 14 17

Post-accession 6.8 9.8

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Reductions in agric protection

2001 Post-

accession Rice -3.3 -3.3 Wheat 12.0 12.0 Feedgrains 32.0 32.0 Vegetables & fruits -4.0 -4.0 Oilseeds 20.0 3.0 Sugar 40.0 20.0 Livestock & meat -15.0 -15.0 Dairy 30.0 11.0 Processed food 26.2 9.9

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Agriculture

Huang and Rozelle study shows agricultural protection rates generally low in China Export subsidies must be abolished– important for

maize and cotton Some reductions in protection are likely to be

required but minor relative to many assessments

Barriers against agricultural exports 4 times as high as those against manufactures

Green box and decoupled support policies not subject to 8.5% limit on domestic support

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Cuts in manufactures tariffs

1995 2001 Post-

accession Beverages & tobacco 137.2 43.2 15.6 Textiles 56.0 21.6 8.9 Apparel 76.1 23.7 14.9 Light manufactures 32.3 12.3 8.4 Petrochemicals 20.2 12.8 7.1 Metals 17.4 8.9 5.7 Automobiles 123.1 28.9 13.8 Electronics 24.4 10.3 2.3 Other manufactures 22.0 12.9 6.6

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Manufacturing

Six percent decline in protection required, vs 33 percent undertaken since 1992

Big reductions in tariffs on beverages/tobacco and motor vehicles

Massive restructuring of automobile sector required– should allow output to rise

Consumption tax policies will affect consumption and imports of beverages/tobacco

21

Abolition of MFA Quotas

Removes a major burden from China’s exporters of textiles and clothing

China’s clothing exports up over 100%, employment up more than 50% Much stronger demand for cotton

But other countries are likely to reform and increase their competitiveness China will need to continue reforms to allow

rapid adjustment and growth in this industry

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AD & Safeguards: big problem

WTO rules on antidumping are too weak Allow protection when there is no dumping

China suffers greatly from AD measures Faces twice as many AD actions as the USA

and seven times as many per $ of exports Non-market economy treatment serious

Product-specific safeguard against China a major concern

Increased use of AD in China raises costs Much better to press for tighter WTO rules

23

GATS

General principles of transparency and MFN treatment

China has committed to opening in 57% of sectors and modes vs 38% in other large developing countries & 47% in rich countries “The most radical services liberalization ever

negotiated in the WTO” Many reservations on geographical,

ownership, business scope geographical restrictions may encourage

agglomeration in favored areas/exclusion of other areas, if not eased

24

Logistic Services

Logistics costs currently very high in China 30-40% of wholesale prices vs 5-10% in USA Lower costs big gains in remote areas

China’s commitments cover all the components of logistics Provide a basis for perhaps 10% cut in costs

through greater competition, efficiency But many complementary reforms needed–

remove discrimination, end local protection, improve infrastructure

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Telecom Services

Allows entry to a wide range of services

Key issue is the regulatory reforms involved in the reference paper

No commitment to allow more than 49 percent foreign ownership Will this prove to be an effective way to

achieve China’s development objectives?

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TRIPS

China will have a modern structure for intellectual property rights Patents, copyright, trademarks, trade secrets

Uses the flexibility in the agreement consistent with China’s development needs But proposals for stronger protection– eg

patent protection for software– too strict Concerns with administration and

enforcement

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Incorporating special features

Use a standard global general equilibrium model– the GTAP model Global trade analysis project

But adapt to incorporate the effects of Duty exemptions on inputs used for

exports Labor market rigidities

Imperfect land tenure & hukou system

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Impacts 2001-2007

Output

% Employment

% Rice -2.1 -2.3 Wheat -2.0 -2.3 Oilseeds -7.9 -8.4 Sugar -6.5 -7.4 Plant based fibers 15.8 16.4 Beverages & tobacco -33.0 -33.1 Textiles 15.6 15.5 Apparel 57.3 56.1 Light manufacturing 3.7 3.7 Autos 1.4 -2.2 Electronics 0.6 0.4 Other manufactures -2.1 -2.2

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Changes in China’s trade

Exports Imports% %

Feedgrains -77.8 -2.4Vegetables and fruits 14.6 -6.3Sugar 13.9 24.1Cotton -51.8 7.7Other food 11.4 62.6Beverages & tobacco 9.7 112.4Textiles 32.7 38.5Apparel 105.8 30.9Petrochemicals 3.1 11.8Autos 27.7 24Other manufactures 4.1 18.9Commercial services -0.4 35.4Other services 1.4 33.6Total 16.8 17.3

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Estimated real income effects

Impact

1995-2007 Impact

2001-2007

North America US $bn

6 5.3 Western Europe 18 14.2 Japan 6 2.5 China 41 9.5 Taiwán, China 3 1.4 India -3.3 -3.0 World 74 28

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Complementary labor market policies needed- post 2001

Accession

alone With hukou

removal With increases in

education Farm unskilled wages -0.7 16.8 1.6 Rental price of land -5.5 -9.7 -6.4 Nonfarm unskilled wages 1.2 -3.8 2.7 Skilled labor wages 0.8 -1.7 -6.3 Rental price of capital 1.3 -1.4 0.9 Price of capital goods -0.9 -3.6 -1.1 Migration* 6 28 10

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Labor Markets Are Critical

WTO commitments, and China’s growth & development will require massive movements of workers

Many barriers to mobility between agriculture & other sectors Poor education, lack of experience, formal

barriers (eg hukou), inability to sell land use rights, all limit mobility

Hukou seems to be a small, but important, barrier

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Impact on Rural Households

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Vingtile

EV

as

pe

rce

nt

of

inc

om

e

Ag-specialized

Diversified

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Impact on Urban Households

0.0

0.4

0.8

1.2

1.6

2.0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Vingtile

EV

as

pe

rce

nt

of

inc

om

e

Labor specialized Diversified

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Household Impacts

WTO benefits urban more than rural workers

Indications that some poorer rural households may suffer significantly

Best solutions to this problem lie in policies with long-run beneficial impacts for the poor eg improve: labor mobility, educational

opportunities, agricultural technology, social safety nets

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Implications for Policy

Some policy reforms follow directly from the agreement, but it’s not a recipe

Important policy issues remain: The level of tariffs relative to tariff bindings What investments will support development? How to improve the regulatory framework? How can China use the WTO to achieve its goals?

Improve market access, strengthen rules on AD Should China reduce barriers to labor mobility?

Development impact can guide policy choices

37

Conclusions

WTO accession builds on the reform process, but still a major turning point

Implementation will involve major changes in areas like agriculture & automobiles

Benefits substantial but some poor rural people may be hurt Complementary reforms needed to obtain

the full benefits