The Consequences of China's WTO Accession on its Neighbors

Abstract

Southeast Asian industrial exports are facing intense competition from Chinese industrial exports. How much more will competition increase as a result of China's recent accession to the World Trade Organization? Will Indonesia, Malaysia, the Philippines, and Thailand (the ASEAN-4) de-industrialize and return to the roles they had in the 1950s and 1960s as primary commodity exporters? Or will there be sufficient lucrative niches within the manufacturing production chains in which the ASEAN-4 could specialize? Our simulations of a range of scenarios using a dynamic multisector and multicountry macroeconomic model suggest that, beyond the underlying international repercussions generated by China's emergence into the international economy, China's WTO accession per se is likely to generate additional substantial benefits for China and have little additional impact on the OECD economies. Furthermore, the simulations indicate that the full integration of China's huge labor force into the international division of labor might create significant welfare losses in the ASEAN-4, but only if foreign direct investment is significantly redirected away from these countries to China and, even in this case, only if the ASEAN-4 countries fail to absorb new foreign technologies quickly and to engage in indigenous technical innovations.

If the ASEAN-4 do not fall behind technologically, then they will be able to find lucrative niches within the international manufacturing production chains. The ASEAN-4 must therefore give the highest priority to deepening and widening their pools of human capital by speeding up the diffusion of new knowledge to their scientists and managers and by providing appropriate retraining programs for the displaced workers. It is, however, important to emphasize that the growth rate of a country depends on several other critical factors besides technological capacity. For market economies, factors such as economic openness, a meritocracy, adequate infrastructure, efficient and incorruptible government, high-quality financial institutions, and astute macroeconomic management are of fundamental importance in economic growth. The general low ranking of the ASEAN-4 in these other dimensions, along with their low ranking in technological capacity, help explain why these countries have performed poorly in the final index for growth competitiveness computed by the World Economic Forum for 59 countries.