China and WTO: Winners and Losers

Do you feel lost in the jungle of verbiage about China and the
WTO? I do. Indeed, the harder one looks the more difficult it
becomes to make generalisations.

So we must us step back and try to see forest for the trees.
Can we construct a simple primer to the principle issues which
may indicate how important it really is, who wins and who
loses? Can we answer the question: how long is a WTO string?

The sudden agreement and after days of brinkmanship had little
to do with the minutiae of the deal. It was the result of a
political calculation on the part of both Bill Clinton and
Jiang Zemin. Clinton had long ago tacitly acknowledged that
he had erred badly by failing to accept China's offer in
April. History books were beckoning -- not the career
prospects of Al Gore who has nothing to gain from the heated
debate in Congress which will preface the passage (probably
only just) of the necessary US legislation.

As for Jiang, he had always been in favour of a WTO deal and
This belief was strengthened by his recent trip to Europe
which flattered his ego and his view of China's position in
the world. But this was now his deal, not that of a Zhu Rongji
chastened by the events of mid-year, whatever the similarity
of the detail. 

This final political impetus, more surprising on the Beijing
than on the Washington side, in no way devalues the event. All
major trade accords need political goals to drive them. But it
does remind us too that politics is also the key to
implementation of the agreement, or at least the degree of
implementation expected by economists and brokerage analysts
poring over the details.

In reality, there has been much fudging of key issues, and
there will be even more in the future as China has to appear
to live up to commitments. But fudging is now bad thing either
if it has helped to defuse one potential timebomb in
international trade. Put it another way. If this did not
happen now it would be unlikely to happen till well after the
US presidential election a year away. By early 2001 it is
quite likely that the US, the world's most profligate nation,
will be heading into a recession which could prove as
difficult as the ten-year event from which Japan is just
emerging. In which case, China with no WTO and a trade surplus
with the US of between US$30 bn and US$75 bn (depending on
method of calculation) would not only stand no chance of WTO
entry. It would be first in the firing line for trade
retaliation which would certainly damage interentional trade
and might well result in an illiberal and nationalistic
backlash in China.

Notwithstanding the the problems of actually making profits on
the mainkland, entry will raise the status of China as a place
to invest. It might even cause a re-rating of H shares, which 
are cheap, at least compared to the fancy values put on Hang
seng index stocks thanks to the juveniles of the fund
management industry and the manipulations of the government.

But what about those specifics? Tariff reductions, elimination
of non-tariff barriers (a China specialty) and opening up of
services to competition and foreign investment? Will this
happen? And if so who will gain and who will lose?

WTO certainly helps the cause of enterprise reform in China.
The tariff issues are relatively transparent. But whole-
hearted reform is still going to need political impetus in
Beijing. That is the problem. By most calculations, WTO will
bring few initial specific benefits to China. Imports,
competing with inefficient sectors, will rise faster than
exports, which are already quite competitive, even allowing
for the withdrawal of some tax incentives. China's terms of
trade will probably deteriorate and even the optimists reckon
the direct impact on GDP growth will be small.

In economic terms, the gain are mostly long term and result
from the dynamic liberalising impact of the various WTO
promises. Specifically, they should cause a major shift
resources towards efficient sectors -- notably the labour
intensive ones -- and spurring better use of capital by the
SOEs which currently soak up the lion's share of China's
household savings but do not earn enough to pay the interest.

But one has to question whether a few paper commitments is
going to be enough to undermine the vested interests of the
SOEs, which have strong political connections. It also has to
be asked whether the political leadership has the
determination to withstand some short term pain from WTO in
hope of major long term gain.

The same applies to opening up of the service sectors such as
insurance, banking and telecoms. These are all largely the
preserve of state-owned behemoths. Foreigners will be fed some
crumbs and there will be some transfer of technology. But an
open market where the foreigners can make the profits they
have been dreaming about for so many years already? As they
say, time will tell. Sometime.

Certainly the US is going to be praying that service sector
opening means something. It has precious little else to get
excited about as far as the specifics are concerned. According
to the calculations of its own International Trade Commission,
US exports to China will increase faster than imports in
percentage terms. But as the gap is already so wide, the
actual deficit will increase as a result of the deal -- even
assuming that membership causes China's GDP growth to
accelerate. Of US exporters, the farmers will be the main
gainers -- not the GMs and Boeings who have been lobbying so
hard in Washington. The trade consequences of WTO entry for
the US ensure that the China deficit will remain a hot
political issue for the forseeable future.

Whilst the US struggles to get real trade benefits, the Asian
neighbours particularly Japan, Korea and Taiwan will alll
benefit from better access for their intermediate goods, cars
and quality consumer durables into the mainland. They and the
Europeans will pick up most of the increase in capital
equipment imports which, at least in theory, will follow
faster growth and a pick up in foreign investment resulting
from WTO. On the other hand the southeast Asian and
subcontinental exporters of labour intensive products --
particularly garments will find themselves facing increased
competition in western markets. At the very least, importers
will feel less at risk from arbitrary trade barriers when
sourcing from China. 

As for Hongkong, it is hard to imagine that it will not
benefit absolutely from increased foreign interaction with
China. But its relative position will slip if financial sector
liberalisation proceeds at anything like the pace the US
hopes, in which case Shanghai's role will become ever more
dominant. So the lesson for Hongkong must be to avoid sitting
back and relying on picking up its percentage on increased
China business. The more China as a whole integrates with the
world economy the more effort Hongkong must make to retain its
status as a regional and international city.




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