1. WTO Accession, Policy Reform and Poverty Reduction in China Deepak Bhattasali, LI Shantong and Will Martin DRC and World Bank February 2005

2. 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. 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. 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. 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. 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

7. 7 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. 8 Policy reforms pre-accession  Transformation of the trading system from plan to market  Elimination of nontariff barriers  Reductions in tariffs

9. 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

10. 10 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.

11. 11 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.

12. 12 Structure of Factor Endowments in China Land Capital Labor USA 13% USA 23.3% USA 5.1% China 6.7% China 28.8% China 1.4% S. Asia 17.4%

13. 13 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.

15. 15 Reduction in NTBs

16. 16 Reduction in Tariffs

17. 17 Reductions in agric protection

18. 18 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

19. 19 Cuts in manufactures tariffs

20. 20 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. 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

22. 22 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. 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. 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

25. 25 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?

26. 26 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

27. 27 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 xImperfect land tenure & hukou system

28. 28 Impacts 2001-2007

29. 29 Changes in China’s trade

30. 30 Estimated real income effects

31. 31 Complementary labor market policies needed- post 2001

32. 32 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

33. 33 Impact on Rural Households

34. 34 Impact on Urban Households

35. 35 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

36. 36 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. 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