Problems on the Road to Liberalisation

Nicholas R. Lardy
Nicholas R. Lardy Anthony M. Solomon Senior Fellow

March 15, 2002

Now that China has joined the World Trade Organisation, attention has shifted to the prospects of it being able to comply with the substantive commitments it has made.

There are grounds for optimism. China has already gone a long way towards dismantling the pervasive protectionism that characterised its trading system two decades ago.

By the time China entered the WTO last year tariffs had already fallen by three-quarters, to an average of only 15 per cent. It is already on a glide path that should allow it to meet relatively easily its commitment to reducing its average tariff to only 9 per cent by 2005.

Prior to entry, it also reduced non-tariff barriers at a similarly brisk pace. By last year quotas and licensing requirements restricted only 5 per cent of all imports, compared with about half a little more than a decade ago.

China has pledged to eliminate the remaining import quota and licence restrictions by 2005, a pace of opening that is actually less rapid than the recent past. Restrictions on trading rights, which at one time gave a single or small number of state companies a monopoly on the right to import all goods, have been slashed and now apply to little more than a dozen products.

The government has committed itself to phasing out restrictions on trading rights for about half of these commodities over a three-year period—a pledge that China should have no difficulty fulfilling.

At least four factors, however, suggest that China’s compliance could be somewhat problematic.

First, China’s commitments in services—including telecommunications, finance and distribution—extend further than those for goods.

But market access in services depends more on the rules written by domestic regulators than the tariffs, quotas and licences fixed by China’s Ministry of Foreign Trade and Economic Co-operation (Moftec).

In its WTO negotiations, China’s Moftec negotiators made commitments in services without sufficiently consulting with the relevant domestic regulators.

Without continuous monitoring by the highest levels of the Chinese government, these regulators may issue rules and administrative guidance that reduce market access for foreign service providers to levels that fall short of China’s WTO commitments.

Second, China has made a number of unique commitments that far surpass those made by other countries entering the organisation. Some of these constrain the government’s ability to smooth what will inevitably be a socially painful restructuring.

For example, China has agreed to provisions that substantially limit its ability to provide low-income or resource-poor farmers with subsidised agricultural inputs, such as fertiliser.

Developing country members of the WTO are normally exempt from including such subsidies within their subsidy limits. Since China’s commitment to providing greater market access to imported agricultural crops is forecast to lead to significant reductions in farm income and employment, the subsidy limitation poses a challenge to government policy.

Third, the less-than-fully-developed state of domestic institutions, especially the legal system, increases the prospect that China will fall short of full compliance.

China has made substantial progress in amending its domestic laws to make them consistent with WTO obligations. But it will take years to achieve fair, uniform and impartial implementation of these laws and to ensure that judgments are enforced.

Finally, China’s ability to comply could be potentially impeded by limits to market access for Chinese goods in foreign markets.

In its accession package, for example, China accepted a transitional product-specific safeguard clause that allows other WTO members to limit imports of Chinese goods—this under much softer conditions than those spelled out in the Uruguay Round treaty that established the WTO.

For a country to impose restrictions on Chinese imports, for example, it can claim only that it disrupts the market, rather than that it causes serious injury to the domestic industry. WTO members will be able to employ this safeguard until 2013.

In another WTO-plus commitment, China agreed to a special safeguard that allows other WTO members to impose quotas on imported Chinese clothing until December 31 2008.

The Uruguay Round treaty requires phasing out by the end of 2004 the system of quotas on textiles and clothing that has governed world trade in these commodities for decades. That means that for four years China will be the only country in the world potentially subject to such restrictions on its apparel exports.

China also agreed to accept for 15 years discriminatory WTO-plus terms in anti-dumping cases brought against its goods in other markets. In the US, in particular, these procedures almost guarantee that if a domestic company claims that competing Chinese goods are being dumped, the Department of Commerce will determine that Chinese goods are being sold for substantially less than their “normal value” and impose high margins on the imported goods.

Unfortunately, the inclusion in China’s accession package of all these safeguards against Chinese companies has created expectations in many sectors that governments will use these commitments to severely limit the growth of imports from China. This is true not only in the US and other advanced industrial economies, but also in developing country markets, such as India and Mexico.

As China implements its WTO commitments, it will be faced with rising domestic unemployment in agriculture and other capital-intensive industries that will be subject to drastically increased imports and international competition.

If China is unable to increase significantly its exports of apparel and other labour-intensive goods in which it has a strong comparative advantage, it is unlikely to be able to maintain unemployment at politically acceptable levels. Thus, if other WTO members employ the potentially protectionist provisions of China’s WTO accession package, they will increase the probability that China will fall short of its commitment to opening its markets.