Progress Report – China in the WTO
May 1, 2003

After more than a decade of negotiations, The People’s Republic of China was officially granted membership to the World Trade Organization (WTO) on December 11, 2001. Under the terms of the accession document, the Chinese economy is now subject to the rules-based system of the WTO, enhancing economic competition and creating a more open environment for trade and foreign investment.

Many changes will occur over the long term. However, in the past year, despite some serious global challenges - a downturn in the world economy, tensions in the Middle East - China has managed to make notable progress, suggesting they are serious about opening themselves up to the global economy.

The Rules
Commitments made by China for entry into the WTO are extensive. In particular, China agreed to concessions such as sweeping tariff reductions, removal on non-tariff barriers, and the implementation of market-enhancing initiatives. In addition, China pledged to provide non-discriminatory treatment to all WTO members and to eliminate dual-pricing practices to goods produced for domestic sale. Price controls will no longer be used to protect domestic industries. China also promised to end all export subsidies for agricultural products, in addition to limiting subsidies for agricultural production.

Changes in the Last Year
According to business executives in the region and those who are monitoring China’s compliance, the Chinese government has made solid efforts to ensure that the various levels of local authority understand the commitments made at the state level.

China’s Ministry of Foreign Trade and Economic Cooperation (MOFTEC) reported that while they expected to receive many complaints from State-Owned Enterprises (SOE’s) about the entry of foreign companies, the opposite has been true. SOE’s have fared reasonably well and the new standards have motivated many of them to become more efficient. Others are establishing joint ventures with multinationals to take advantage of their advanced technology and management practices.

Business executives in the region report that China has been reducing tariffs and has been very active in encouraging foreign investment.

“ The government organizes trade fairs overseas to explain the advantages of operating in China,” said Jim Thompson, President of the American Chamber of Commerce in Hong Kong and Chairman of the Crown Worldwide Group, a provider of employee relocations, logistics, and records management services. “There is stiff competition among cities and provinces for foreign investment and many offer land or other incentives for companies to establish offices in their areas.”

Chinese businesses are realizing that a liberalized trade system affords them opportunities as importers or retailers of foreign products. Their companies can expand globally and export their product overseas.

A greater number of Chinese nationals trained or educated overseas are returning to the country for job opportunities, enabling multinationals to localize their sites more quickly.
The biggest industries for foreign investment in the region have come from manufacturing due to China’s inexpensive labor force. On the other end of the spectrum, consumer and electronic companies have been expanding as the wealth of the nation grows.

Challenges Encountered
With many new rules and regulations for the Chinese government to follow, some foreign investors find it challenging to get clarification on the WTO guidelines. Other investors complain of China’s excessive capitalization for banks to enter the market and being restricted to certain cities in which they can operate.

The government has also issued a new policy for poorly performing SOE’s. They must either close or sell their businesses if they report three consecutive years of losses.

China is also facing opposition from other countries regarding its business practices. The United States issued a complaint to the WTO regarding China’s imposed restriction of genetically modified soybeans, a major export crop from the U.S.

In a recent report from the Ministry of Economy and Industry (METI), Japan openly criticized China for not doing enough to improve its intellectual property rights infringements, including counterfeiting and piracy.

Long Term Prospects
Although it will take time for China to fully comply with WTO guidelines, business executives remain optimistic about its integration into the world economy. Citigroup economists forecast foreign direct investment to increase 10% to US$58 billion in 2003.

“China’s stable political environment will allow greater attraction for multinationals,” said Gary Clinton, Managing Director, Asia-Pacific Region, Global Relationship Banking for Citibank in Hong Kong. “As the global economy recovers, multinationals will continue their expansion in the country, increasing the demand for expatriates.”

Francis Cheung, General Manager for Crown Relocations’ operations in Shanghai agrees. “In the last seven months, there has been an estimated 30% increase in the number of expatriates working in China,” said Mr. Cheung.

With the country’s first quarter GDP growth for 2003 reported at 9.9%, the fastest quarterly growth in six years, it is clear that China will be a dominant player in the world economy for years to come.

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