On September 19th 2000, the US Senate gave final approval
to a bitterly contested bill granting permanent normal trade relations (PNTR)
to China, despite stiff opposition from organised labour and human rights groups.
This final Senate vote came four months after a seriously divided House of Representatives
approved the bill. Democratic Senator Daniel Moynihan of New York called it one
of the most important votes since World War II. The passage of the bill finally
removed the major hurdle that stood in the way of China joining the WTO in the
near future. Why is opinion so divided about Chinas accession to the WTO
both inside and outside of China, and what are the implications of this accession,
if it happens, for major trading partners such as the US, for potential trade
competitors among developing countries like Korea and for China itself? The ramifications
of the liberalisation of Chinas trading activities will be positive and
negative. This paper will look briefly at the implications of Chinas accession
to the WTO for the US and Korea. Its major focus, however, will be on the implications
for China, and the issues and challenges confronting the Chinese economy.
Policy changes following Chinas admission to the
As a result of PNTR and Chinas entry into the WTO, the
US government will have to end its twenty-year annual ritual of reviewing Chinas
progress in the areas of human rights and labour, as well as its trading status.
The US, as a member of the WTO, will not have to make any changes to its trade
policies. It will simply have to guarantee Chinese goods and services the same
low-tariff access to the US market as it has been doing for other WTO members,
i.e., the most favoured nation (MFN) status. However, China has already been enjoying
this status even though it was a status that was subject to annual review. From
now on, China will enjoy that status permanently without undergoing this annual
review by the US. In other words, China may only save some annual transaction
costs in accessing the US market. Major new action required on the part of the
US will be to include China in the phasing-out of quotas and other non-tariff
barriers on textiles and apparel imports from China in accordance with the WTO
Agreement on Textiles and Clothing (ATC) by January 1st 2005. But what will the
US gain from Chinas joining the WTO?
China will have to significantly reduce its tariffs, remove
non-tariff barriers (NTBs), especially those on agricultural and service imports,
and strengthen protection of intellectual property rights. The NTBs include licensing
and quotas, tendering restrictions, differential treatment between domestic products/
services and imports, lack of transparency of legislative provisions, regulations
and procedures, lack of independent and impartial review and settlement of trade
disputes, exclusive trading rights among state entities, incentive payments by
sellers, technology transfer requirements, local content requirements, trade and
foreign exchange balancing requirements, etc. The Chinese government agreed to
open up a wide range of markets from agriculture to telecommunications under the
terms of the landmark Sino-US Trade Agreement of November 1999. A similar agreement
was also made with European Union (EU) countries in May 2000. Consequently, US
opportunities to export to and invest in China will in theory increase considerably.
If the deal is so good for the US, does China gain net benefits from joining the
WTO? If not, why is China so interested in joining the WTO?
This article shows that the economic benefits of Chinas
entry into the WTO are relatively small compared to the overall size of the economies
and trades involved. It also shows the importance of non-economic benefits and
that China will have to pay economic adjustment costs, which are so large that
implementation of the trade agreements will actually take much longer, and will
pose great political risk to Chinas leaders.
Effects on the US
Economic effects on the US
The political importance of PNTR and Chinas admission
to the WTO is indirectly supported by the relatively small economic benefits that
will accrue to the US Despite the large size of Chinas economy (seventh
largest in the world with a population of 1.3 billion), its total GDP of US$ 1.1
trillion is only 14% of US GDP. US-China trade in 1998 was estimated at US$ 89
billion, which is less than 1.15% of US GDP (Table 1).
Table 1 - USs major trading partners and the role
of China, 1998
Source: FMI, Direction of Trade Statistics Yearbook,
Economic effects on the US economy of Chinas entry into
the WTO can best be analysed in accordance with the action that China will have
to take with regard to its trade policy. First, the economic impact of the removal
of NTBs is difficult to isolate since Chinese NTBs operate as part
of an industrial policy. However, the impact of the removal of NTBs on the US
economy can be estimated on the basis of measuring NTBs in tariff equivalents.
Studies of protectionist regimes in China show that the tariff equivalent level
of NTBs in China (22.1%) is comparable to the average level of tariffs (21.7%)
(Table 2), and so is the impact of removing the NTBs on the US economy. In fact,
the removal of all NTBs will probably have a greater impact than the tariff reductions
themselves. The average tariff level after Chinas admission to the WTO will
be about 10%, and the net reduction in the average tariff will be only about 7%
since in 1997 China slashed import duties on average to 17%.
Table 2 - Tariffs and tarrif equivalent of non-tariff
Source: Sazanami et al., Measuring the Costs of Protection
in Japan, IIE, Washington DC, 1994 ; Kim, Measuring the costs of Visible
Protection in Korea, IIE, Washington DC, 1996 ; et Zhang et al., Measuring
the Costs of Protection in China, IIE, Washington DC, 1998.
The relative importance of removing the NTBs is also confirmed
by the US International Trade Commission (USITC). A USITC study found that the
effects of eliminating NTBs in 25 products, covering only 30% of Chinas
imports, in conjunction with a hypothetical 50% cut in Chinas tariffs, would
effectively double the positive impact of the tariff reductions on such variables
as growth in US GDP and terms of trade((1). The US Embassy in Peking estimated
that Chinas current barriers to US service suppliers alone result in US$
3 to US$ 5 billion in lost sales each year.
Second, the USITC study also found that by 2005 the impact
on the US economy of the April 1999 tariff reductions offered by China will likely
be positive, but minor in terms of growth in US GDP, total exports and imports,
consumption and wages. Even when the dynamic effects of the tariff reductions,
such as productivity growth and capital accumulation associated with Chinas
trade liberalisation, is considered, the impact on those economic variables are
still small (less than 0.05%). A more significant impact is found on US-China
trade flows. Owing to the tariff reductions in China, US exports to China would
likely be about 10% higher immediately (US$ 2.7 billion). This level is similar
to the estimate (US$ 3.1 billion) made by the International Institute of Economics
(IIE), which has been strongly supportive of Chinas entry into the WTO((2).
The US sectors most positively affected by Chinas trade reforms would be
agriculture, food and beverages, paper and pulps, chemicals, rubber and plastics,
other transport equipment, and machinery and equipment. A fully dynamic analysis
shows a much larger gain (US$ 13 billion by 2005) as competition takes hold in
the Chinese marketplace and foreign direct investment increases following Chinas
trade liberalisation, which would stimulate US exports as well((3). Goldman and
Sachs Corporation estimates that Chinas trade will nearly double from US$
324.0 billion in 1998 to US$ 600.0 billion in 2005. And Foreign Direct Investment
(FDI) will also double from US$ 45.0 billion to US$ 100.0 billion. The US, as
well as EU countries, would increase their direct investment in China, especially
in heavy and infrastructure industries and information technology, finance and
other service industries, which have so far been closely guarded from foreign
competition (Table 3). The IIE also estimates that the induced increase in world
exports to China would be US$ 21.3 billion((4).
Table 3 - FDI inflows to China by country, 1990-1997
Source: OCDE, International Direct Investment Statistics
As trade liberalisation in China will help make its export
sectors more competitive, US imports from China are also estimated to be set to
increase almost 7% (US$ 4.4 billion) by 2005. As a result, the US trade deficit
with China (about US$ 43 billion in 1998) will increase (Figure 1). However, the
USITC study estimates that the overall US trade balance will remain unaffected
since US bilateral trade balances with other trading partners will likely improve.
Figure 1 - US trade with China
Source: FMI, Direction of Trade Statistics, 1996 and
Third, the USITC study found that the overall impact of Chinas
participation in the ATC would be positive. The economy-wide welfare gains for
the US in terms of increases in household consumption could amount to about US$
2.4 billion in 2006, while GDP could increase by US$ 1.9 billion in the same year.
These results would occur among lower-priced textiles and clothes imported into
the US and efficiency gains from factor reallocation in the US economy. The USITC
study also suggests that inclusion of China in the ATC quota phase-out will likely
have a small impact on US imports of textiles and a large impact on US imports
However, three qualifications should be made of the increases
in US imports of textiles and apparel. One is that US import increases in textiles
and apparel will probably have adverse effects on the manufacturers and workers
in the US textiles and apparel industries. Some estimates have been made that
American job losses will stand at 870,000 over the next ten years((5). Although
such estimates may be overstated, almost three-quarters of US imports from China
consist of apparel, virtually all of which are covered by some type of quota.
Although apparel products in China are of low to medium quality, they are becoming
increasingly more high-value goods. Apparel production in China is highly labour-intensive,
and China has an abundant supply of skilled and low-cost labour.
Another is that these increases will come at the expense of
other suppliers to the US market and will have relatively small net negative effects
on the US textiles and apparel industries. A study estimates that about 76% of
the increases in Chinas exports to the US market beyond its traditional
constant market share in 1997 actually displaced third-country exports to US markets((6),
meaning that only 24% of Chinas exports in textiles and clothing industries
would create net negative effects on the US
Still another qualification is that the adverse effects of
the removal of the quotas are likely to be accelerated only after the end of the
phasing-out period (December 31st 2004) because the quota growth rates for China
will remain low up to the time the quota system is completely phased out. Chinas
share in the US textile market would increase slightly, to about 11% by 2010.
However, Chinas share of the US apparel market would rise by about 18 percentage
points, reaching to 30% of the US import market((7).
Finally, US capital-intensive exports to China would increase
by more than US$ 300 million a year after elimination of the quota restrictions
in 2005. This is because the expansion of Chinas production and trade in
labour-intensive manufactures will likely result in a higher demand for capital-intensive
manufactured goods in China.
In summary, Chinas accession to the WTO will have only
a small impact on US macroeconomic variables such as GDP, total exports and imports,
and terms of trade. Although it will have positive effects on US-China trade flows,
the impact is relatively small compared to total US trade and GDP. By 2005, Chinas
admission to the WTO will have a positive effect equivalent to some US$ 6 to US$
10 billion or about 0.7% of US exports. US imports will also increase by about
US$ 5 billion or 0.7%. Rather than the economic benefits, non-economic benefits,
such as the political and security implications of Chinas accession to the
WTO, appear to be more significant.
Non-economic effects on the US
Indeed, some analysts emphasise the political overtone of
the PNTR bill over its economic implications((8). Perhaps this is why Senator
Moynihan called it the most significant vote since World War II. US leaders seem
to believe that it is critically important to engage a rising superpower in the
global leadership structure on a timely basis. A failure to integrate China now
would risk a repeat of the historical follies in connection with Germany and Japan
before and after World War I, which resulted in an international security disaster((9).
In his contribution to the New York Times after the Senate vote on the
US-China PNTR bill, US President Bill Clinton also called the attention of the
reader to the non-economic benefits of the bill. He sees Chinas joining
the WTO as a means of bringing China into the international system and in line
with international institutions. Just as China has joined the nuclear non-proliferation
movement and added its voice to the prohibition of the production of bio-chemical
weapons, China has indicated its willingness to work within the framework of the
international trade system. Through Chinas accession to the international
system, he expects that China will assimilate itself into the world order and
that this will narrow the differences between China and the rest of the world
in non-economic fields((10).
US Trade Representative, Charlene Barshefsky, made the political
and security points more explicitly: The accession of China to the World
Trade Organization will deepen and speed a process that has been of enormous importance
to peace and security in the Asia Pacific region
((11). Rather than
emphasising the economic implications, she focused on the non-trade issue of peace
and security. Her focus may underscore the US concern expressed in a recent report
by the US Joint Chief of Staff, Joint Vision 2020. It sees China as
a hypothetical enemy and reviews ways to increase US military forces in the Asia
Pacific region as part of the USs drastic shift in its world-wide security
and defence strategy.
A Hong Kong legislator also sees the economic opening eventually
leading to greater freedom and the end of communism in China. Impartial rules
of trade among nations could thus help convince China of the importance of equal
rights under the law in the domestic sphere, too((12).
Effects on Korea
The economic benefits that will accrue to Korea, Chinas
largest trading partner among developing countries, would be significant. As a
member of the WTO, Korean exporters will also benefit from Chinas tariff
reductions and the removal of NTBs. A study by the Bank of Korea estimates that
by 2005 Korean exports to China would increase by US$ 2,700 million, while Korean
imports from China would rise by only US$ 300 million. This will further improve
Koreas trade balance with China by 50% or US$ 2,400 million on top of the
current surplus of US$ 4,800 million in 1999 (Figure 2). However, the positive
effects on the overall trade balance would be much more modest, about US$ 1,400
million since imports from third countries would also increase by about US$ 1,000
million to produce the increased exports to China. Therefore, the net effects
on the Korean trade balance will be an increase of about US$ 1,400 million, or
1% of total exports in 1999((13).
Figure 2 - Korea trade with China
Source: IMF, Direction of Trade Statistics, 1996 and
This Bank of Korea analysis does seem optimistic. It starts
with the premise that trade relations between China and Korea are not competitive,
but are, rather complementary. While the mainstay of Korean exports is skills-intensive
and heavy and chemical industry manufactures (70% of total exports), Chinas
export sector is led by labour-intensive light industry products, such as textiles,
apparel, footwear, toys and travel accessories (40% of total exports) (Table 4).
However, Chinas export structure is changing rapidly, especially with the
restructuring of industries as a result of active foreign direct investment. For
example, textile products are catching up to the Korean level in terms of their
share in total exports (5.0% as against 7.3%), and electrical and electronic products
have been rapidly becoming Chinas major export items (12.8% in 1995 to 16.9%
Table 4 - Export competition between Korea and China
by commodity, 1999
Source: Chung and Lee, 2000.
The Bank of Korea analysis also assumes that while Korean
export markets in third countries will lose due to the improvement in Chinas
competitiveness following its trade liberalisation, the losses will be equally
offset by the expansion of Korean export markets in third countries owing to the
expansion of international trade after Chinas entry into the WTO. This rather
optimistic assumption was adopted because Korean exports, which are in competition
with Chinese products in third markets, account for only 18% of total Korean exports
to third countries. However, China will benefit indirectly from increased foreign
direct investment, technological transfer and management improvement as a result
of its trade liberalisation, and this will further strengthen its international
competitiveness. Moreover, low-priced Chinese goods will pound Koreas export
markets in third countries, especially in those labour-intensive manufacturing
products such as apparel, footwear, toys, travel accessories and furniture. The
sum of the two effects may be much greater than the expansion of Korean exports
in third markets. A study suggests that as a result of Chinas technological
development following its entry into the WTO, Koreas major export items
(such as electrical and electronic products, machinery and steel products) will
lose share in the US market by between 0.1 and 1.5 percentage points by 2002((14).
Moreover, Chinese exports share in the US markets has been on a steady increase
(6.1% in 1995 to 7.8% in 1999), while Korean exports share in the US markets
has been declining (3.3% in 1995 to 2.6% in 1998).
Therefore, it would be prudent to consider the USITCs
more conservative estimates of an increase in Korean exports of US$ 2,200-US$
2.400 million and an increase in imports of US$ 600-US$ 700 million, with a consequent
trade balance improvement of US$ 1,600-US$ 1,700 million. If the increased imports
from third countries are assumed to be at the same level of US$ 1,000 million,
the net positive effects of the trade with China would be only US$ 600-US$ 700
million, or less than 0.5% of total exports in 1999. This level of trade balance
is only half the Bank of Korea estimates((15).
Effects on China
The most significant ramifications of Chinas accession
to the WTO will still be for China itself. With its accession to the WTO, on the
one hand, the Chinese economy would cease to slow down and would get back on to
the fast-growth track owing to the liberal trade regime, expanded export market
and resumption of foreign direct investment. Goldman Sachs estimates that as a
result of the reduction in tariffs and the removal of NTBs, Chinas trade
with other countries would double from US$ 324 billion in 1998 to US$ 600 billion
by 2005. It also suggests that as a result of the improved domestic and external
environment, foreign direct investment to China will increase from US$ 45 billion
in 1998 to almost US$ 100 billion by 2005((16). The State Councils think
tank, the Development Research Centre, estimated that WTO membership would boost
Chinas economic growth by 1.53% in 2005, and exports by 26.9% and imports
American analysts, however, expect a much more modest increase
in Chinas GDP and trade. The USITC estimates that in 2005 Chinas total
exports would increase by 12%, taking into account growth effects, and its total
imports would increase by 14%. While China will have to open up its domestic markets
further by reducing tariffs and removing NTBs, China already has access to major
export markets like the US, which is Chinas largest export market and accounts
for 21% of its total exports (Table 5). The inclusion of China in the WTO Agreement
on Textiles and Clothing would increase Chinas competitive edge in its labour-intensive
major exports by cutting customs duties between 10%-30% and all quotas, as well
as 6%-7% of export costs for transhipment of exports through non-restricted countries.
However, these positive effects would come mostly after the end of the quota phase-out
period, i.e., December 2004. Moreover, capital-intensive imports would increase
sharply as the expansion of Chinas exportation of labour-intensive manufactures
would accelerate the demand for capital-intensive goods such as machinery and
equipment. Furthermore, the former export products manufactured by foreign enterprises
will be sold in the domestic markets, taking up the domestic enterprises
market share, and reducing export volumes. At present, much of the exporting activity
is carried out by foreign-invested enterprises. For example, in Weihai, a city
in Shandong province, foreign-invested enterprises are responsible for 50% of
the total export volume((18). In sum, growth in Chinas exports and imports
would be much more modest, and Chinas exports would not expand as much as
its imports. Moreover, the USITC study also found that by 2005 Chinas economy
would grow by 4% as a result of trade liberalisation, taking into account the
efficiency gains that would include further investment and thereby expanded production((19).
Table 5 - Chinas major trading partners and the
role of the US, 1998
Source: FMI, Direction of Trade Statistics Yearbook,
The positive economic effects of Chinas admission to
the WTO would provide a timely fillip to reverse the downward economic trend.
The worlds greatest economic miracle in the last two decades was the growth
record of the Chinese economy. Since 1978, China has implemented limited but open
trade and investment policies. Thanks to the open door policy, together with sound
macroeconomic policies, the Chinese economy grew at an average annual rate of
almost 10% in the 1990s. However, the economy topped out in 1992, when growth
reached 14%. Since then, Chinas economy has slowed for seven consecutive
years, and this has had negative impact on several economic fronts, but most ominously
on the labour market. The unemployment rate rose sharply into double digits, especially
after the onset of the Asian financial crisis, creating both social and political
concerns (Figure 3).
Figure 3 - China GDP growth
Source: China Statistical Publishers, China Statistical
As a result of resumed economic growth in China, free market
economy, and equal treatment of national and non-national enterprises, foreign
enterprises will be encouraged to invest and compete in China more, in particular
in newly open areas such as finance, telecommunications, distribution and professional
services. Consequently, employment opportunities would expand, and peoples
living standards would rise again. Together with these, advanced technology, management
skills, and a market-oriented new business culture and entrepreneurship would
also be developed, creating private sector-led economic growth.
On the other hand, Chinas accession to the WTO will
lead Chinese enterprises to suffer the double loss of protection of high customs
duty and quota-based import restrictions, and confront fierce international competition.
The impact of the competition will be felt particularly in such capital-intensive
industries as the automobile, shipbuilding, machine and instrument manufacturing
and petrochemical industries, where China is relatively disadvantaged in terms
of efficiency. Agriculture, especially grain sectors, are also likely to be adversely
affected by cheap North American farm products. Bankruptcy among enterprises and
unemployment will be unavoidable. This negative impact would be most severe among
small and medium township and village enterprises (TVEs) and state-owned enterprises
(SOEs). While 6,600 large and medium-sized SOEs made a loss in 1997, by 1999 this
number had fallen by 63% to 1,910. However, the amount of the losses sustained
fell only 13 %. Surplus labour in SOEs was laid off to the figure of 6.1 million
in 1999, following the 6.0 million laid off in 1998, which is greater than the
total urban unemployment recorded for 1997. The government estimates 12 million
more will be made redundant in 2000. Only about two-thirds of workers made redundant
from SOEs find jobs, often in the same SOEs or their subsidiaries((20).
SOEs currently account for about 70% of total assets, 62%
of total capital, 50% of output value, 54% of investment in fixed assets of Chinas
industrial sector, 60% of country-wide employment and 44% of urban employment.
However, they have been continuously earning a low rate of return or making losses,
incurring a high level of debts in the state-owned banks, which, in turn, threatens
the onset financial crisis. Some 80% of the countrys bank loans are to SOEs,
and a large portion of these loans (as much as 25% of GDP), will never be repaid((21).
In fact, some analysts see Chinas accession to the WTO
as a powerful tool to force a speeded reform of Chinas SOEs. Premier
Zhu Rongji has tried virtually every possible means to transform Chinas
ailing state sector, ranging from management restructuring, technological upgrading,
and mergers to labour layoffs (xiagang) and outright closure, but mostly
without conspicuous success. By opening up SOE-dominated sectors such as automobile,
petrochemicals and other heavy industries to fierce foreign competition, Zhu hopes
to succeed in forcing SOEs to change for the better through the working of the
market mechanism((22). Premier Zhu Rongji must be confident that Chinas
economy has become much stronger and is resilient enough to stand any potential
shock from joining the WTO, and that WTO membership could be beneficial to China
in speeding up its domestic reform process, especially reform of the SOEs.
However, not everyone would make such a sanguine judgement.
Because the provinces are financially autonomous, the central government has to
persuade provincial governments and SOE management to undertake the reform. Moreover,
although the positive effects may outweigh the negative effects in the long run,
the adjustment process in the short and medium terms would be turbulent. Unemployment
in urban areas is expected to rise in 2000 by a total of 8 million above the official
figure of 6.5 million in 1995. The urban unemployment rate is currently estimated
at between 8%-9%, compared with the official statistics of 2.74% in 1997. In addition,
there is a floating population of about 100 million, who left rural areas in search
of jobs in urban areas((23).
The prospects for foreign direct investment in China will
also depend on the outcome of the Chinese economys adjustment process in
the aftermath of its accession to the WTO. The prospects for the foreign direct
investors would also differ depending on their objectives and the nature of their
investment in China. Many analysts indicate that there are broadly two groups
of foreign direct investment in China. One group (such as Korea, Japan, Hong Kong,
Taiwan) tries to take advantage of Chinas relatively lower wage rates vis-à-vis
those of the source country. Another group (such as the US and EU countries) attempts
to increase its share in what is potentially the largest market in the world.
The first group would benefit more if the adjustment process takes a longer period
of time and there is a high level of unemployment, since wage rates would be maintained
at a low level. However, the second group would benefit more if the adjustment
process is smoother and takes a shorter period of time. Wage rates would rise
because of the increasing demand for skilled workers. And domestic consumption
would be maintained at a robust level. Depending on the economic prospects for
China, foreign enterprises investing directly in China will have to change their
strategies as well. Therefore, we need to look more closely at the potentially
negative impact of Chinas accession to the WTO on the Chinese economy.
Social challenges and risks for China
China has enjoyed high rates of economic growth since 1991
without incurring a high level of inflation and any balance of payments problems
(Figure 3). Through 1994, growth rates registered were greater than 12%, and total
trade (exports and imports) expanded sharply from less than 30% of GDP to more
than 42% (Figure 4). Although China was negatively affected by the Asian financial
crisis in 1997 and the effects have continued, it successfully staved off critical
contagion. The major reason for this lucky situation was that China was a relatively
large and insulated economy. Its trade and capital account were not open and liberalised.
Foreign direct investment was the mainstay of the foreign capital inflows, restricting
more volatile portfolio equity investment flows and commercial bank loans. The
major commercial banks are state-owned, and the level of government debt is low((24).
However, the central government recently realised that the Chinese economy can
no longer sustain a high level of growth and employment with weakened domestic
consumption and international competitiveness.
Figure 4 - China total trade as % of GDP
Source:The World Bank datasheet, Global Development Finance
and World Development Indicators. This datasheet can be found at: http://www.worldbank.org/research/growth/GDNdata.htm
The major issue facing the Chinese economy since 1998 has
been how to cope with slow growth and weakened domestic demand in the midst of
the Asian crisis and the global economic slow-down. The growth rates of GDP and
domestic consumption slowed from more than 10% in the first half of the 1990s
to less than 10% in the second. In particular, real household income rose less
in rural areas than in urban areas in both 1997 and 1998, which was a reversal
of the trend of the previous few years((25). This slow growth in rural consumption
is significant in the context of China. Contrary to the situation in many advanced
countries, the size of total consumption in the rural areas has been equal to
that in the urban areas. The rural sector in China accounts for about 50% of GDP.
The agricultural sectors represent some 20% of GDP and the non-agricultural sectors
in the rural areas account for another 30%. For the overall economy to recover
and for the promotion of employment, therefore, it is essential that the same
growth rates be maintained in rural areas as in urban areas. The rural work force
accounts for 70% of the national work force, and any increased release of labour
in the rural areas would aggravate the urban unemployment situation. It would
be a challenge for the Chinese government to hold on to the rural labour force
despite declining rural income and consumption. The hukou (residence control)
system has helped in the past, but the government has relaxed the system somewhat
A slow-down of the overall economy and Chinas accession
to the WTO will accentuate the need to address the social agenda. The issue of
weakened domestic consumption has now become more challenging mainly because China
has to turn towards external demand and investment. This requires the Chinese
economy to strengthen its international competitiveness and carry out enterprise
reform, meanwhile minimising any adverse impact on financial sectors, the labour
market, and workers living standards. With the advent of its admission to
the WTO, the Chinese government will also have to open its economy to the fully.
As a result of severe competition between imported goods and services and domestically
produced goods and services with foreign direct investment in China, SOEs will
be continually forced to rationalise their operations. Rationalisation of SOEs
has highlighted the number of workers that have been made redundant from then
and has already produced a large number of unemployed workers. In the course of
the accentuated enterprise rationalisation and adjustment, it is inevitable that
enterprises will lay off an enormous number of workers. The central government
will therefore be faced with the challenges of having to encourage state enterprises
to reform on the one hand, but of having to find ways to minimise unemployment
and maintain workers living standards on the other. Besides the rapid increase
in numbers, the unemployment problem has become particularly serious in China
for several reasons. First, the social safety net is weak; second, funding of
social protection schemes remains inadequate and requires a greater amount of
fiscal resources; and, finally, the social protection schemes do not adequately
target poverty groups or worse affected areas such as the central and western
After becoming Chinas premier in March 1998, Zhu Rongji
laid out an ambitious reform agenda to reform the countrys SOEs, the financial
sector, and the government structure within three years. And the government has
made serious efforts to initiate the reform agenda. For example, in SOE reform,
the government put a great deal of funding into management restructuring, technological
upgrading, mergers and acquisitions, and worker layoffs. These reform efforts,
however, have not yet shown any truly positive results. In the SOE sector, almost
2,000 large and medium-sized firms made net losses in 1999. The government has
only begun to address the weaknesses in the sector. Moreover, the progress of
the financial sector reform has been constrained by the lack of progress in the
SOE reform. It is for this reason that the Chinese government is alleged to be
using its accession to the WTO as a strategic instrument for forcing the reform
of its SOEs.
In the course of reforming its SOEs, however, China will have
to bear considerable short-term adjustment costs. Because of the decline in rural
consumption in recent years, labour absorption by the rural sectors has weakened
considerably. During the period 1990-94, employment in rural agricultural sectors
declined at a rate of 1.5% per year, and rural secondary sectors absorbed the
rural labour force at a rate of 7.1% per year. By contrast, during the period
1994-97, employment in rural primary sectors declined at 0.2%, but rural industrial
sectors absorbed the labour force only at a rate of 2.7% per year (Table 6). In
1997 rural industrial employment dropped 4%. In 1998, it plunged 18%, leaving
a reservoir of unemployed youth in the countryside((26). In the urban areas, employment
growth has not been sufficient to absorb the natural growth in the urban labour
force, migration away from rural areas, and workers involuntarily disengaged by
SOEs, TVEs and other non-SOEs. During the period 1994-97, urban primary sector
employment declined at 18.5% per year, but urban industrial sector employment
expanded only at 2.6% per year (Table 6). As a result, urban unemployment now
stands at a historically high level of around 8%-9% (about 16 to 18 million workers).
Table 6 - Annual average growth rate of GDP and employment
Source: China Statistical Publishers, China Statistical
The greatest question with regard to the unemployment problem
is whether it will improve with Chinas accession to the WTO. Despite the
slowing economic growth in recent years, the Chinese labour market has demonstrated
a certain resilience. While Chinas GDP grew at an average annual rate of
14% during the period 1991-94, urban employment rose at a rate of 2.7% (Table
6). However, when GDP grew at a much slower rate of 6.5% during the period 1994-97,
urban employment rose at a higher annual rate of 3.1%. While industrialisation
progressed continuously in China (from 42% to 50% of GDP), the urban labour absorption
elasticity actually increased from 0.12 in the years 1991-94 to 0.48 in the years
1994-97. This is contrary to the labour market trend in many developing countries,
where a decline in labour absorption elasticity in the industrial sector was often
offset by employment growth in the service sector. In China, labour absorption
elasticity declined sharply in the primary sector (from 0.83 to 4.63),
but increased in the industrial sector (from 0.05 to 0.33), as well as in the
tertiary sector (from 1.27 to 2.07).
However, this increased capacity for absorbing the labour
force in the industrial sector does not seem to be the result of an intensive
use of labour, but is rather an indication of surplus labour in the sector, particularly
in SOEs. The increase in urban employment during the period 1994-97 was greater
in SOEs, compared to collectively owned units, TVEs, and other types of enterprises.
In fact, urban employment levels have declined in collectively owned units since
1992, but in SOEs only from 1996, and the SOEs share of employment declined
more slowly than the share of collectively owned units (Table 7).
Table 7 - Urban employment by type of economic units
Source: China Statistical Publishers, China Statistical
In the face of the fierce international competition likely
to result from Chinas accession to the WTO, it would be a great challenge
for China to continue to harbour the surplus labour in the industrial sector,
especially in SOEs, and still maintain as high a level of growth in the future
as in the period 1991-94. New foreign direct investment enterprises would be able
to absorb some of the surplus workers laid off by SOEs. In particular, the foreign
direct investment in the labour-intensive sectors of the economy would be able
to absorb the redundant workers laid off by SOEs. However, a large part of this
investment would be concentrated in the capital-intensive infrastructure and heavy
industry sectors. As mentioned above, the most common type of foreign direct investment
would outweigh in the future depends on the speed of adjustment and the prospects
for the Chinese economy and the labour market.
It would therefore be useful to make projections as to the
unemployment levels in 2000 and 2003, and ascertain whether they are socially
and politically acceptable to permit the SOE reform as it is presently envisaged
by the government. A fundamental assumption adopted in this exercise is that the
labour force will increase at the same rate as in the past six years, and that
the rural labour force will be fully employed, i.e., no increase in the urban
influx of rural workers. At the same time, it is assumed that labour absorption
elasticity in the future will be maintained at the same level as the average absorption
elasticity during the period 1991-97, which covers both more rapid and slower
economic growth sub-periods. Labour absorption elasticity indicates the rate of
the increase in employment in response to the rate of GDP growth by economic sector
in rural and urban areas. The official urban unemployment level would therefore
vary according to the level of the rate of growth of GDP. If the GDP growth rate
becomes relatively high (12% per year) as a result of Chinas joining the
WTO, there would be full urban employment in both 2000 and 2003. However, if the
economy grows more or less at the same rate as in recent years (9% per year),
the official urban unemployment level would rise from 2.7% in 1997 to 3.3% in
2000 and 3.7% in 2003 (Table 8).
Table 8 - Employment by sector (000 persons)
Source: China Statistical Publishers, China Labour Statistical
Yearbook, 1999, and projections.
Further, if the growth rate is relatively low, at 5% per year,
the official level of urban unemployment would be 7.9%. Since the official unemployment
rate is currently lower than the estimated actual unemployment rate by about five
to six percentage points, the estimated market unemployment rates would be 13%-14%
and 17%-18% in 2000 and 2003, respectively. At these levels, the growth in employment
would be inadequate to absorb even the natural growth of the urban labour force
of 2.1-2.2 million persons, which could put social and political stability in
jeopardy. Wage rates would be suppressed for quite some time, and living standards
would not improve sharply as envisaged by the government. Under these circumstances,
it would be a real challenge for the government to carry out the SOE rationalisation
as announced, i.e., 12 million xiagang in 2000 and a higher level in the
With the advent of Chinas accession to the WTO, everyone
seems to be better off. Both advanced countries like the US and the middle income
countries like Korea are set to reap economic benefits in terms of growth in trade.
However, the relative size of such benefits in the total economy seems small,
in particular for the US. A more important benefit for the US and other members
of the WTO may be the introduction of a new rising economic and military power
into the rule-based democratic and market-based international economic and political
system. China, of course, would benefit the most economically through the opening
of its economy and by improving its efficiency through the expansion of trade
and an increase in foreign direct investment. The economic benefits from WTO membership
would provide the Chinese government a timely policy tool to reverse the slowing
economic trend and get the economy back on to a faster growth track.
For Chinese leaders, however, Chinas accession to the
WTO will be a tremendous challenge. In return for the benefits that China wants
to gain, the Chinese economy will have to pay considerable adjustment costs in
terms of rationalisation of its enterprises, in particular its SOEs, and relatively
high incidences of unemployment. This is the reason why the whole world will have
to be particularly vigilant during the implementation stage of Chinas membership
at the WTO. The adjustment of the Chinese economy and the implementation of Chinas
commitment to free trade and investment may take not only a much longer period
of time than currently envisaged, it may also ba a bumpy and winding road. Undoubtedly,
the Chinese leaders will be facing a big economic and political gamble. So will
the world. The gamble may pay off, but it is likely to be at a considerable cost.
1. USITC, Assessment of the Economic Effects of Chinas
Accession to the WTO on the United States, Publication 3329, September 1999.
2. Daniel H. Rosen, China and the World Trade Organization:
An Economic Balance Sheet, Washington DC, International Institute of Economics,
3. Fred Hu, Global Economics, Paper No. 14, Hong Kong,
Goldman Sachs, 1999.
4. See Daniel H. Rosen, op. cit., 1999.
5. The Washington Post, Study: China Deal May
Hurt Deficit, May 23rd 2000.
6. See Marcus Norland, US-China Economic Relations,
in Robert S. Ross ed., After the Cold War: Domestic Factors and US-China Relations,
Armonk, NY, M.E. Sharpe, 1998.
7. USITC, Assessment of the Economic Effects of Chinas
Accession to the WTO on the United States, Investigation No. 332-404, Washington
8. John Wong, Chinas WTO Membership: Politics
First, and Economics Later, Seoul, paper presented at the Korea-China Economic
and Business Forum, June 2000.
9. See Rosen, op. cit., 1999.
10. The New York Times, Sept 25th 2000.
11. The East-West Center Observer, Spring 2000.
12. The Asian Wall Street Journal, May 22nd 2000.
13. Chung Jong In and Lee Han Nyung, Comparative Analysis
of the Export Structure of Korea and China, and Effects on the Korean Trade of
Chinas Accession to the WTO, Research series 2000-4, Seoul, The Research
Department of The Bank of Korea, 2000.
14. Daewoo Economic Research Institute, Prospects for Chinas
Accession to the WTO and its Effects, No.99-D-05, Seoul, Daewoo Economic Research
15. See Chung and Lee, op. cit., 2000.
16. Fred Hu, op. cit., 1999.
17. The Hong Kong Standard, Think Tank Expects
Growth Boost, November 18th 1999.
18. Wang Yu-Ci, Development Policy of Weihai Citys
Hightech-Industry, Seoul, paper presented at the Korea-China Economic and
Business Forum, June 2000.
19. See USITC, op. cit., 2000.
20. David Wall, Chinas SOEs, the WTO and Social
Welfare, Seoul, paper presented at the Korea-China Economic and Business
Forum, June 2000.
21. The Economist, Chinas State-Owned Enterprises,
September 30th 2000.
22. See Wong, op. cit., June 2000.
23. See Wall, op. cit., June 2000.
24. The World Bank, China: Weathering the Storm and Learning
the Lessons, Washington DC, The World Bank, 1999.
26. David Zweig, The Asian Wall Street Journal, October