Saturday, December 10, 2011

China - A decade in WTO

China's entry into the WTO multilateral trading system completes a decade. The entry, its impact on China as well as the impact on the world economy is a subject of intense scholarly research.

An interesting piece in the New York Times summarised the ten year ascendancy of China in the multilateral system.

The article suggested that China has been able to take advantage of the multilateral rule based system to its own advantage due to the special terms on which it entered the WTO. this has implicitly protected its domestic producers while taking full advantage of the reduced barriers to trade in other markets. While the products it exports are priced very low in the international market, imported products into China (especially automobiles) are priced high due to high tariffs, amongst other reasons. It noted,

"Sunday is the 10th anniversary of China’s joining the World Trade Organization — a membership that helped turn China into the world’s biggest economy after the United States. Companies and consumers worldwide have benefited from China’s emergence as a top trading partner. And yet, because of special breaks and loopholes for China when it joined the W.T.O., it still shields its domestic markets from foreign competition much more than any other big nation."

The devil is always in the details. And in this case, the details are the accession agreements and commitments China agreed to when it entered the WTO, which were specific to it as a developing country (now the 2nd largest economy). The piece states,

"After negotiating for 15 years to be admitted to GATT and then to the W.T.O., China was finally let in after agreeing to accept the W.T.O.’s broad free trade rules. But as all new members do, Beijing also had to negotiate a lengthy document, known as an accession agreement. It spelled out thousands of details tailored to the specifics of the economy of China, which then was still very much a developing country.
The agreement required China to lower its tariffs to levels below those of many other developing countries. But compared with most industrialized countries, China was allowed to impose considerably higher tariffs — tariffs China has retained even as its economy has subsequently grown to No. 2 in the world.
The clearest example of W.T.O. ascendance China-style may be in automobiles. Even though China’s auto manufacturing industry and car market are now both the world’s largest, China continues to shelter them behind the highest trade barriers of any large industrial economy.
It retains a prohibitive tariff of 25 percent on imported cars, for example, which helps explain why imports represent only 4 percent of the light vehicles sold in China."

The Economist has a series of articles on China's accession. This piece has argued that the tariffs in China are much lesser compared to other developing countries. However, tariffs in specific sectors (that China wants to protect have prohibitively high tariffs) are high.

There is also a view that the entry of China into WTO would further lead to "democratisation" and opening up of the Chinese State. China as opened up many sectors of the economy to foreign competition. An interesting parallel is the FDI in retail, a debate that was raging in India a week ago. It would surprise many that Wal-Mart has 353 outlets in China. It would be interesting to study the conditions under which the supermarket store has been allowed access in China.

It is clear that China has made the best of the WTO system and has used it to its "national advantage". Well, don't all countries attempt to do just that? While agreeing to the principles of free trade and reduction of barriers, member countries constantly seek to protect local, national interests in the multi-lateral forum.

The ascendancy of China is perhaps historic. The critics argue that it hs gained more than given to the multilateral system and that it continues to use various methods (like currency undervaluation0 to protect its domestic industry. Aaditya Matoo and Arvind Subramanian's article has argued that unless China becomes the focal point of future negotiations, the Doha round would not mean much.

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