On 10^th November 2001 on global economic platform, a much-awaited event happened. China became the 143^rd member of WTO after arduous 15 years of negotiations - The dragon entered the arena of world trade officially. Induction of China into WTO is the apogee of gradual opening of this once-protected economy - The apex point in realization of Deng Xiaoping’s dream of “socialist market”. It would be interesting to see what impact would China’s entry into WTO have on its own economy.

 

Ask some students of economics “What are the major implication of opening up of any developing economy?” the most common answer would be “opportunities for outsiders and challenges for insiders”. The same is true even for China.  But China has to manage some more complex implications, thanks to the prevalent and still strong Maoist regime. In China, economic units play a very crucial social role also. You can comfortably concur with the view that every economic unit is a quasi-social unit also.  Apart from profitability and efficiency, employment and equality are major socio-economic objectives for any organization. Due to such a structure, any change in economy or economic policy has a profound impact on sociopolitical structure of the country as well. Besides, China off late has emerged as one of the fastest growing economies of the world. In many industries, it has assaulted external markets on the basis of abysmally low levels of prices in a very successful and aggressive manner. In these circumstances, one needs to see whether the entry of China in WTO will strengthen the present Chinese economy or will impoverish it.  Here on the basis of extensive literature study, an attempt has been made to understand the implications of WTO accession on various spheres of Chinese economy and allied economies like Hong Kong and Taiwan.

 

On the path of becoming the economic suzerain: Let us start with a macro perspective and analyze the impact of WTO on overall growth prospects of the Chinese economy. In 1995, China enjoyed 3.7% of total world exports. As per World Bank statistics that was expected to grow up to 4.8% in 2005 without WTO membership, But with WTO accession, China’s share of global trade will be 7.3%. Thus prima facie, the WTO accession will open a lot of opportunities of growth for China. If we look at the value of the economy, official figures indicate the figure of $ 1 trillion, but if we take into account parallel economy also, the figure could be $1.4-1.5 trillion. Japan is a titanic among all Asian economies with a value of $ 4.5 trillion. At present, China is growing at a rate of 7-8% a year, while Japan is contracting at 1-2% since 1997. In these circumstances, taking into account, the advantages that WTO would bring to China, within 10 years, there will be a banal difference between China and Japan in terms of size of economy. Can we conclude that China is moving ahead to challenge Japan as the economic suzerain of Asia?

 

From macro, lets shift our focus to micro perspective. It is a well known fact that gradually China is emerging as a manufacturing super-power. The major advantage that has shaped China’s competitiveness is abundant cheap labour including technically qualified labour. However, the critical question is ‘are all industries equally competitive?’ or ‘ will all industries have a similar impact of WTO’? In order to answer these questions, we will have to analyze the impact of WTO on all major industries of China. Tony Perkins and Steve Shaw, directors of McKinsey’s Beijing and Hong Kong offices respectively, immediately after china’s nomination to WTO came out with a study of Chinese economy in an article titled “What WTO really means for China” in McKinsey Quarterly of October 2000. The conclusion of their study was beautifully presented in the form of a matrix in that article. The matrix actually plots various industries on the basis of current degree of protection enjoyed and likely impact of WTO membership. Let’s analyze a few industries on the same lines, i.e. analyzing the likely impact in the light of current degree of protectionism.

Computer manufacturing has been taken separately from electronic equipments because the factors driving the industry are totally different from other electronic equipments. China is likely to pass Japan and become the biggest PC-market of Asia with a volume of 10 million PCs under its belt. Moreover, low-cost advantage of China has already attracted a few MNCs in this business. For example, Dell Computer announced in September 2001, that it would start making desktop PCs bound for Japan in its plant in Amoy, China. Since May 2001, Dell has been moving some production facilities from Malaysia to China. In fact, in anticipation of WTO membership, Dell has already put in plans to penetrate Chinese markets as soon as they are left open, by developing a special low-cost model for Chinese markets only. Companies like Intel and Motorola are also moving their production facilities to China. WTO membership will enable China to give Malaysia and Taiwan a run for their money as hubs of computer hardware manufacturers. Some Taiwan based companies have already expressed their desire to move their manufacturing base to China. The increased dynamism in PC market will disturb local companies like Legend Computer, China's largest PC maker, and other local PC companies as they would see increased price-based as well as quality-based competition. Legend computers which has a highly profitable distribution business also (which distributes foreign-made PCs in China) fears stiff competition there too.

Financial services – especially banking and insurance sectors are likely to witness a massive transmutation. However, these sectors are likely to be dominated by majority of foreign players in post-WTO economy. That is the reason why financial services is one of those sectors for which China bargained to retain some specific rights. The local players, both in terms of size as well as sophistication, are much behind their alien counterparts. Foreign Banks will have the right to open 100%-foreign-owned branches anywhere in China and take deposits from the Chinese in local currency. The lifting of restrictions in these sectors will enable the foreign players to compete on the basis of technology, innovative products, ability to cater to a larger clientele and a strong knowledge-base. As far as insurance sector is concerned McKinsey’s article states that Chinese insurance firms are starved of capital and are largely underdeveloped. Despite having all the competitive advantages, the only factor that can stand in the way of success of foreign players in banking and insurance is - ignorance of Chinese customers - which is very crucial in any service industry. So new entrants in the sector are likely to adopt alliance with a local partner, as an entry strategy. The local company would provide the knowledge of needs, attitudes and culture of the target market; on the other hand, the foreign partner would bring in technology, skills and brands. The resultant synergy would be sufficient to make any alliance invincible in the given circumstances.

Telecom is another sector wherein China wanted to retain specific access rights. China made it a point of negotiation and was smart enough to capitalize upon the period of negotiation to develop indigenous capabilities. China in recent past has taken up rigorous restructuring exercise in this sector. Moreover, mid-size companies like Ji Tong communications have recently severed their state-owned branches and they possess highly competitive low-cost structures. In post-WTO regime foreign telecom operators are allowed to partake freely in Chinese networks, set up their own distribution networks and will not have to work through Chinese intermediaries. By the year 2005, even imports in telecom equipments would be duty-free. China boasts of a very lucrative telecom market. China has already passed U.S. as the world's biggest user of mobile phones. China is considered to be world’s biggest wireless market also. By 2005, the number of cell-phone users in China is expected to more than double, to at least 260 million. However, looking at the competitive structure of the industry most of the foreign players would like to enter by taking stakes in some local companies only. In view of internal competencies of Chinese telecom sector, chances of local companies divesting in favour of aliens are few. As a result, telecom is one sector, which does not seem likely to undergo much of a change.

The impact on Auto sector is not very clear. McKinsey report states that automobile sector may not be affected much. However, a hard look at the industry gives a different feeling. Automobile sector in China is not very well developed. China produces 750,000 cars a year and most of them are beyond the reach of a vast middle class. Reduction in tariff restrictions is likely to spur a gush of imports, which will increase the competitive pressure on the local industry. The local industry is already undergoing a consolidation phase. Before a decade there were around 100-auto manufacturing companies, today the number has been reduced to 40. Local players are in no position to match their foreign counterparts in terms of quality or efficiency. Many global giants have already expressed a possibility of developing China as the global production hub. So automobile sector on one hand, offers vast opportunities for foreign players while on the other, it poses some serious problems for current local manufacturers. Only those companies who already have forged alliances with a foreign players or those who are in the process of doing so are likely to survive. As a proactive strategy, some local organizations have joined hands with foreign companies. For example, Shanghai Automotive Industry Corp. has a joint ventures with Volkswagen and General Motors Corp., while Tianjin Automotive has teamed up with Toyota Motor Corp. However, once MNCs are equipped with the requisite learning of local market, they may exit from such alliances and create their independent capacities. Thus, local players in automobile sector are going to face a trying time.

Electronic sector is one where the degree of protection is considerably low. Therefore, in terms of regulations, WTO will not have a conspicuous impact. Local Chinese companies like TCL and The Konka group are emerging as very strong players in the consumer electronic goods sector in the international arena. They are likely to benefit more than international players, as with reduced duties they will be in a position to improve their quality along with cost structures. However, some foreign companies are eyeing this sector also. Flextronics, for example,  a New Jersey based contract –manufacturing company is rapidly expanding its two manufacturing complexes in China, where it now makes cell phones and computer products. Their presence in China suggests prevalence of low degree of protection on the sector. TCL who is a strong $ 1 bn company in the field of consumer electronics has also hived off its state-owned branches and have made their presence more formidable in the market. One can easily conclude that unlike auto sector, this sector is one, which presents more growth opportunities to local players than MNCs.

 

Well, this was a brief round up of some notable industries of China. However, One impact - which is likely to be equal in nature and depth for all sectors, is possibilities for anyone to innovate in terms of distribution or retailing. The nature of distribution sector in China is quite a passé. Moreover, the opening up of the economy will make after sales services, distribution etc. more important. As a result, area of distribution services or retailing is likely to emerge in a new way in China.

 

Let’s go for a small visit to neighbours. Two economies that will be invariably affected by the likely changes in Chinese economy are Hong Kong and Taiwan. Hong Kong has come under Chinese rule since 1^st June 1997 and is ruled under one country two systems. Dragon’s entry into WTO is likely to bring a mixed bag of fortunes for Hong Kong. Hong Kong will definitely benefit from China’s growth but is likely to receive some disadvantages as well. At present, Hong Kong acts as an agent for most of the Chinese international trade. According to one estimate, Hong Kong retains around 8% of the value of the trade that takes place through its shores, as an intermediary and provider of ancillary services like financing, warehousing, shipping and/or other services. When China joins the WTO, Hong Kong is expected to lose some of that business to other global competitors. Moreover, China’s efforts to develop Shanghai as the Chief commercial center of the country may also cause some harm to Hong Kong. However, Hong Kong has an edge over China in form of an economy that is more open and a stronger and freely convertible currency unlike China.

 

Along with China Taiwan is also entering WTO.  For Taiwan also, this entry brings a mixed bag of fortunes. Taiwan is world’s biggest manufacturer of computers, mice, notebooks and other computer hardware. China’s globalization is likely to snatch some of this business. However, the major area of concern is the attitude of both the countries towards each other. With cooperation, both of them can create a formidable and indomitable alliance. But China treats Taiwan as a renegade province and takes punitive steps against companies or organizations that treat it as a separate nation. Such a policy is likely to create some problems for Taiwan in coming days. On the other hand, Taiwan has also imposed lot of restrictions on local companies to invest in China or trade with Mainland China. For the information of the reader, there are no legal flights between the two countries. Still in the post-WTO regime, Taiwan is likely to emerge as a logistical and design center, as well as a cultural go-between for China and the West.

 

Concerns for the international community: However, there are a few areas for concern for China as well as for others, which should be addressed. The world at large has welcomed China’s entry into WTO but with caution. What they fear is Beijing’s honesty in implementing required legal reforms wholeheartedly. Chinese financial as well as legal systems are neither advanced nor capable to enforce required reforms. According to one estimate, in order to make necessary amendments in Chinese laws in order to bring them in line with WTO requirements, China will have to amend at least 1300 acts of its constitution. Many countries want China to drop dual-pricing and dumping policies, which has killed many industries in other countries. However, they doubt whether China will do it given the non-transparent and undemocratic nature of its polity. China’s induction in WTO will make it subject to WTO norms of international trade, and that is the reason why many people fear a spree of antidumping suits, intellectual-property infringement cases, and other legal actions by member nations. Corruption is another headache which foreign companies keep complaining about. So joining WTO will force China to undertake a mammoth task of broad based legal reforms to increase confidence level of foreign players.

 

China’s concerns:

v     Sociopolitical concerns: There are some problem areas for China as well. The biggest, being the likely social impact of WTO induction. On one hand, most of Chinese enterprises will have to part with its quasi-social status by putting aside its social objectives. On the other hand, increased unemployment will just aggravate social instability. Chinese Social structure is witnessing a rise of a new social class of displaced peasants, forlorn workers and extremely poor laborers. In order to make itself efficient Chinese state-owned enterprises have retrenched 50 million workers over the past three years and are likely to shed 20 million more in order to compete with MNCs’ economic attack. China will have to reduce all the restrictions on food imports, which is likely to add considerable volume to the class of displaced peasants. In addition, 12 million workers join the total Chinese workforce every year. According to the data available, which is up to 1999 only, around 100 million peasants have scurried to cities in search of work, and there were around 100000 protests and demonstrations against low wages, unpaid pensions and corruption. The threat of severe social instability is looming over China.

v     Economic Concerns: On economic front, also China needs to exercise unmatched fiscal prudence. The level of import duties, which was around 44% in 1992, has already come down to 15% and is likely to be reduced to 9% in near future. This is likely to increase the fiscal deficit of Chinese economy. We should not forget that Chinese financial system, banking system and currency (Renminbi) are not very strong.

v     Learning from Mr. Krugman: Lets try to recollect some learning from Paul Krugman’s stirring thesis of 1994 wherein he mentioned for the first time that East Asian growth was a bubble and was destined to burst as it was purely asset-intensive and not driven by productivity gains. The thesis gave the noted economist overnight popularity when he was proved alarmingly right with collapse of Asian Tigers in 1997. Flow of capital would be easier in China now and China will have to take care that it does not fall into the same expansion-trap in which erstwhile tigers fell. It will have to exercise lot of economic sagacity to manage fiscal balance and improve indigenous productivity and strengthen the currency over a period of time. 

 

Thus, China’s entry is likely to have a deep impact on the global trade scenario. It is going to give rise to a number of new socio-economic equations. We can make lot of permutations and combinations in anticipation probable gains and losses. Only Time will tell as to where goes the Dragon!