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China in the WTO

Crying Wolf

While openness to both foreign and domestic investment has led to prosperity in many industries in China, the prospect of increased competition still has the power to spook

January 2012 Issue | by Li Jia

The wolves are coming!” was a popular Chinese catchphrase in 2001, the year when China finally became a member of the World Trade Organization after 15 years of tough negotiation. While encouraged by the prospect of expanding the Made in China brand on the global market and attracting more foreign investors to China, there were worries within the country over potentially devastating competition from superior foreign products and the meddling influence of investment from both within and beyond the border.

Contrary to the pessimistic forecasts on China’s export prospects by many international and domestic institutions, the “wolves” have turned out to be somewhat toothless; today, while major economic blocs worldwide struggle to balance the books, China ponders how best to spend the world’s largest foreign exchange reserves, built largely on its exports over the past 10 years. In 2010, China replaced Germany as the world’s top goods exporter.

China’s success story so far has not resulted from protectionism, but from openness, which to a large extent was driven by China’s accession into the WTO. Where the market is open to competition, foreign and private companies play a much larger role than State-owned enterprises (SOEs) and there is higher economic efficiency. The manufacturing sector has long been the first destination of foreign capital in China. According to the Ministry of Commerce, in 2010, foreign-funded enterprises, accounting for only 3 percent of all companies incorporated in China, contributed 27.1 percent of all industrial output value, 21.2 percent of tax revenue,  about 45 million direct job opportunities and more than half of China’s foreign trade. The textiles and clothing industry, which provides more trade surplus and jobs than any other sector, is dominated mainly by private small and medium-sized Chinese companies.

Their performance has far outshone SOEs, which hold 70 percent of the economic resources but account for a meager 30 percent of GDP in the world’s second largest economy, and that 30 percent contribution is founded largely on their government-backed monopolies over energy, natural resources and telecommunications.

The success of openness, however, has not silenced cries of “wolf” and calls for protection, particularly in the service sector where openness lags far behind the manufacturing industry. In those areas, development is slow and competitiveness is weak. That, according to some experts, is not a coincidence; further opening to both domestic and international players in those areas could help sustain China’s growth miracle for another 30 years.

Contenders

To foreign consumers, the most familiar Made in China products are clothing and shoes. Despite various attacks from global competitors, including a “bra war” with the EU in 2005, Chinese clothes and shoes have consolidated their dominance on the world market. A joint statement by US and Asian guilds in 2003 urging extension of the quota system is evidence that Chinese exports in this sector are a force to be reckoned with.

“We don’t grow just because we have cheap labor. We boast one of the most market-based, internationalized industries in China,” said Zhao Hong, director of the international trade office at the China National Textile and Apparel Council. “Facing the international market, producers have to invest hugely to adapt to different standards in different markets,” he noted.

Even in areas where China is not endowed with a comparative advantage, there have been some pleasant surprises. There was concern over the fate of China’s auto industry, regarded as an “infant industry” needing special protection in China’s post-WTO accession era. Now, domestic brands like Geely and Chery drive alongside locally built BMWs and Toyotas on China’s roads. “No-one could have predicted that China’s auto industry would become the world’s largest in production and sales,” said Li Guanghui, a senior researcher at the Chinese Academy of International Trade and Economic Cooperation.

Perhaps the clearest example of how openness has facilitated growth can be found in the IT industry. “Opposition from certain ministries towards signing the WTO Information Technology Agreement (ITA), which subjected some 290 kinds of IT products to zero tariffs, was extremely strong,” recalled Professor Zhang Hanlin, president of the China Institute for the WTO at the University of International Business and Economics. It was not approved until then-Chinese Premier Zhu Rongji confirmed that many other developing countries, such as Indonesia and Thailand, had already signed up. As a result, this industry has attracted more foreign investment and technology than any other sector, making China the world’s largest producer and exporter of more than 200 items on the list.

But the fact that most profits have been scooped by foreign companies has attracted criticism in China. “A series of estimates based on true domestic content can cut the overall deficit (of the US in its trade with China)…by half, if not more,” wrote Pascal Lamy, director-general of the WTO, in an article for the Financial Times early this year. Professor Lang Xianping, famous for exposing various pitfalls in China’s economic Reform and Opening-up, argued that multinational giants aimed to control the flow of China’s manufacturing with an “industrial chain conspiracy”, which was also the name of his book on the subject. Professor Zhang Hanlin played down the theory: “You have to be part of the chain to have any chance of moving up. That is exactly what China is trying to do, though it takes time to achieve it,” he said.

The retail sector may be a good example for the prospect of advancement. At the end of 2004, China removed all restrictions on foreign investment in the retail sector to fulfill WTO regulations. Since then, international giants like Walmart and Carrefour expanded so aggressively in China that warnings about “national economic security risks” posed by foreign “wolves” have risen. However, in early November, New Hua Du Supercenter, a privately-owned Chinese retailer based in Fujian province, announced its purchase of six outlets of the South Korean discount store E-Mart, the first acquisition of a foreign retail business by a Chinese company. The case has been hailed by Chinese media as an example of how Chinese retailers have gone from start-ups to competitors, and are now even taking the lead as they continue their dance with the wolves.

In Need of Service

Even if half of China’s GDP comes from the service sector by 2015, as predicted by the government, that goal is still five percent lower than the current average for developing countries. In this sector, deficit has been reported for the ten years since China’s WTO accession, with the US as the largest source.

One of the most obvious examples of a lack of openness in the sector is the absence of agricultural insurance. In a country where more than 200 million rural residents have become industrial workers over the past 30 years, and where natural disasters cost at least 100 billion yuan (US$15bn) per year, Chinese farmers are incredibly vulnerable.

“Only with a job in a city can we buy food and pay other expenses without waiting for months to sell grain or livestock for a poor return or sometimes a loss,” said a migrant worker surnamed Jia living in Beijing. She recalls “hopeless days” working in the countryside, when torrential rain would frequently destroy the family’s crops.

But agricultural insurance has long been available on the international market. Indian farmers have benefited hugely from insurance schemes, with foreign and domestic private insurers playing an important role under the support and supervision of the Indian government. Professor Zhang Hanlin thinks this is a model that China should learn from.

Scare Tactics

Without openness, change is unlikely. In the banking and telecom sectors, where China is particularly disadvantaged on the international market, the SOE monopoly is very strong. For years, European and American business groups have urged China to relax restrictions on foreign investment in banking. Recently, there have been unprecedented calls for easier access to the private capital market.

Even in more conventional service sectors where China’s performance is much better than in finance or telecom, there is widespread opposition to openness. “Even today, some experts think openness to tourism would necessarily lead to the legalization of the sex industry in China, because they believe that the two go hand-in-hand in foreign countries,” said Professor Zhang, adding that “this lack of knowledge of the outside world proves that we are clearly in need of more openness.”

The trend of increasing market openness to domestic and international players seems to have slowed in the past three years; wolf rhetoric is back in fashion. Nearly every time a foreign brand moves to acquire a Chinese one, there is an outcry for “protection of our national brands” and renewed alerts on “national economic security.” Dirk Moens, secretary-general of the European Union Chamber of Commerce in China, told NewsChina that due to the slowdown in market liberalization, the EU now suffers the same hindrances to growth as Chinese private companies.

Professor Wang Zhile, international trade and investment consultant to a UN Global Compact Working Group, utterly rejects the notion that the wolves are, or ever have been, conspiring to harm China economically. In his research, he has not found a single instance of a foreign acquisition in China putting China’s national security at stake. Sentiment against acquisitions by foreign companies, either in China or in the US, he thinks, has been exploited by groups whose commercial interest would be affected.

In industries where openness has been encouraged, China has exerted strong competitiveness, and its sizeable trade surplus and relatively stable economy would suggest that it is well placed to continue doing so; China would risk little and have much to gain from increased partnership and competition. But with the public highly susceptible to scare tactics, talk of wolves at the door may keep change on hold for the time being.

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