Chapter 2 New Circumstances and Strategic Considerations after 3 Years¡¯ WTO Accession
Over the years from 2005 to 2007, China will complete the implementation of all of its WTO accession commitments. As the Doha Agenda negotiation progresses, there will be new commitments to further open the market. In 2005, the global textile quota will come to an end. Global trade in textiles will enter a post-quota era. Meanwhile, 2005 and the following years will be the crucial years for China to build a well-off society in an all-round way. It is therefore of great importance for Shanghai to analyze the circumstances three years after WTO accession in order to further reform and opening up and build Shanghai into the economic locomotive and the ¡°four centers¡± as well as a cosmopolitan city.
I. Basic Features of the Post-Transitional Period after WTO Accession
1. Start of Transitional Arrangements after WTO Accession
According to China¡¯s WTO Accession Protocol, there is a transitional arrangement between China and other WTO members, lasting for 15 years since the day China joined the WTO. The transitional arrangements towards China include ¡°Non-Market-Economy Treatment¡± in anti-dumping cases against China (15 years), transitional safeguard measures for specific products (12 years), special safeguard measures for textile products (8 years), and transitional review mechanism (8 years).
The transitional arrangements taken by China towards other WTO members include commitments on WTO rules (4 years), commitments on import products subject to tariff quota (6 years), commitments on tariff concessions (7 years), commitments on the removal of major non-tariff measures (3 years), and commitments on market access for service industries (6 years).
Over the past three years, other WTO members have all started to use the four transitional arrangements against China. The honeymoon between China and other WTO members is over. In the post-transitional period, there will be increasing trade frictions between China and other WTO members. Anti-dumping, countervailing and safeguard measures against Chinese exports will become the major risks for China in the post-transitional period, worsened by the uncertainties caused by frequent use of non-tariff barriers such as quality, technical, sanitary and environmental standards.
2. Acceleration in Market Opening
Over the past three years after accession to the WTO, China has progressively opened its market, as evidenced by the lowering of tariffs, the removal of non-tariff measures, and the modest opening of its service market. By the end of 2004, China¡¯s general tariff level has lowered from the 42.7% in 1992 to 10.4%, with even larger tariff reductions in certain important manufactured goods. For instance, tariff level for cars was 80%-100% before China joined the WTO, and was slashed to 43.8% at the end of 2002. With regard to information technology products, China joined the Information Technology Agreement and tariff for products covered by the agreement will be lowered to zero by the beginning of 2005. Further concessions have also been made on agricultural products. In 2002, tariff level for agricultural products was lowered from 54% to 18.5%. It was further lowered to 16.8% in 2003 and 15.6% in 2004.
In 2005, the general tariff level of China will be lowered to 10.1%, of which 9.3% for industrial products, and 15.6% for agricultural products. All non-tariff measures will be removed. According to the Protocol, China will remove by January 1 2005 at latest all existing non-tariff measures for over 400 tariff headings, and basically eliminate non-tariff barriers.
While opening wider in the field of trade in goods, China will also accelerate the opening in service industry. Beginning from 2005, major service industries will be opened, including 9 major sectors and over 90 sub-sectors such as commerce, communication, construction, distribution, education, environment, finance, tourism, and transportation.
Starting from December 11 2004, China will allow foreign majority ownership in wholesaling and retailing, and allow foreign banks to provide RMB business to Chinese enterprises.
On January 1 2005, China shall remove the quota and license control for motor vehicles, and further slash the import duties for motor vehicles and auto parts. By July 1 2006, tariff level for motor vehicles will be lowered to 25%, with the average tariff level for auto parts lowered to 10%.
After 2005, China will allow foreign insurance companies to provide health insurance, group insurance and pension insurance, remove the compulsory re-insurance requirement, lower the overall capital requirement for foreign-funded insurance brokerages, and allow wholly foreign-owned insurance brokerages.
Beginning from 2005, China shall allow wholly foreign-owned construction and distribution enterprises.
Beginning from 2005, China shall allow wholly foreign owned courier, road transport and freight forwarding agencies.
By the end of 2006, China shall eliminate restrictions on ownership, operation and form of establishment against foreign banks, including the restriction on branching and licenses. Foreign-funded banks will be allowed to provide RMB business to Chinese clients and will be granted national treatment.
By 2007, China shall remove the geographical restriction on basic telecommunications, allowing for up to 49% foreign ownership.
3. Profound Changes in Basic Trading System
The Foreign Trade Law of P.R.C was approved on April 6 2004 by the 8th Session of the Standing Committee of the 10th National People¡¯s Congress and took effect as of July 1 2004. Under the new Foreign Trade Law, the 50-year-old examination and approval system for foreign trade rights was turned to the registration system, and foreign businesses invested or registered in China shall be granted national treatment. The implementation of this commitment shall bring about profound impact on the decades- old basic trading system.
4. Dual Impact from the Removal of Textile Quota
The removal of quota will on the one hand bring about great market opportunities. On January 1 2005, all WTO members will eliminate textile quotas, which will inevitably lead to the further expansion of China¡¯s export potentials.
On the other hand, however, the ¡°post-quota era¡± may also trigger a surge of Chinese textile exports and further fall of prices as a result of over supply plaguing the Chinese textile industry for many years. It is also noteworthy that removal of quota doesn¡¯t mean ¡°total free trade¡± for Chinese textiles. Conversely, it might trigger other protectionist restrictions such as antidumping against textile products, special safeguard measures for textile products, and transitional safeguard measures for specific products.
The textile industry in Shanghai, therefore, must develop the ability to adapt to market changes by improving its product design, building brand image, increasing added-value of products and optimizing its position in the global textiles value chain.
II. Challenges and Opportunities in the Post-Transitional Period after WTO Accession
In terms of security and development for industries, there are four major challenges confronting the post-transitional period.
1. Increasing Challenges Posted by Protectionism
Due to the uneven development of world economy, trade frictions have at some time become a means to resolve issues. It has already become apparent in recent years that countries around the world will continue to use such measures as anti-dumping or special safeguard to restrict Chinese products. As some major trading partners haven¡¯t recognized China¡¯s full market economy status, coupled by the comparative price advantages of most Chinese products, we will see continued challenges in this aspect, even after 2006. If oil prices remain at a high level, which posts a risk of recession for the world economy, we will see even more serious trade protectionism.
2. Challenges Posted by High Openness of the Service Industry
On the one hand, China has the strong desire to develop its service industry, especially the modern service industry and to attract foreign investment. On the other hand, China is still weak in the competition of modern service industry. So far some foreign capital has already managed to penetrate in a roundabout way into certain sensitive service areas in China, with some beyond China¡¯s commitments.
3. Challenges Posted by Further Opening of Certain Manufacturing Industries
The challenges in this area don¡¯t come all of a sudden. Rather, they come progressively. The more sensitive the industry is and the longer the industry is protected, the greater difficulties it will face. For example, the lack of competitiveness in the steel industry lies in scarce product variety and poor product quality. The real impact on the petrochemical industry doesn¡¯t come from lower profit, but from the energy insecurity and risk of macro economic recession arising from the wide fluctuations of oil prices and international incidents.
4. Impact on Agriculture
Over the past three years, the impact of WTO accession on agriculture was not so serious as predicted, mainly thanks to the changes in the world market. However, as the world market becomes more complicated, and as problems in the domestic market begin to surface, China will face greater difficulties in the post-transitional period, with increasing fundamental and structural challenges.
However these challenges are not necessarily insurmountable. If China is able to address these challenges from the angle of system reform by setting up effective mechanisms and measures, challenges can be turned into opportunities and harmonious social and economic development can be realized.
1. Opportunities to Raise Efficiency and Transparency in Government Administration, and to Improve System Environment for Market Economy
On the basis of the features in the post-transitional period, the most pressing task for Shanghai remains to be the improvement of efficiency and transparency in government administration so as to offer quality services to businesses in Shanghai. The creation of a favorable market and economic environment in line with international rules is key to the raising of comprehensive competitiveness of Shanghai and its participation in the increasing fierce international competition during the post-transitional period.
2. Opportunities to Push Forward Modern Service Industry in Shanghai through Systematic Opening and Service Trade Expansion
Since the great adjustment experienced by global manufacturing industry and trade in goods in the 1990s, a new round of changes is in full swing worldwide in service industry and trade in services. Worldwide investment in service industry has for years in a row exceeded investment in traditional manufacturing industry. The growth rate of trade in services has also been faster than that of trade in goods for several consecutive years. In China, Shanghai is best equipped to grasp this opportunity presented by the worldwide adjustment of service industry. It should not lose the opportunity of developing its modern service industries by expanding trade in services and attracting foreign investment.
3. Opportunities to Upgrade Manufacturing through Trade Friction
Trade frictions are not necessarily negative. Many industries may suffer a setback in export due to trade remedies against China. But on the whole, total exports will increase with the rise of export prices. In addition, internationally competitive businesses will obtain increased share of production and export as a result. If government agencies, trade associations and enterprises can utilize the monitoring and early-warning system for trade remedies, and formulate clear industrial restructuring policies, pressure can be turned into driving forces to upgrade the manufacturing industry in Shanghai.
4. Opportunities to Explore a New Mode for Sustainable Growth
With the overall expansion of foreign trade, export has created profits, job opportunities and tax revenues as well as new trade frictions and uncertainties in the market. The increased exports of certain products, especially resource products have also brought about great environmental and resource pressure. Therefore, in the post-transitional period, foreign trade should not simply seek further expansion in volume, but rather aim at improving its economic efficiency. Otherwise, there will be more frictions and conflicts, which are not worthwhile.
III. Strategic Considerations in the New Circumstances
Joining the WTO is a strategic decision made by the central government. Over the past three years since accession to the WTO, many positive changes have taken place in China, particularly in Shanghai, which have fully demonstrated the effectiveness of the strategy, namely, ¡°to promote reforms through opening¡±, and ¡°to promote development through opening¡±. During the post-transitional period, we will face a whole array of new issues. It is therefore necessary to make new strategic considerations on the basis of the features of the post-transitional period and the real situations of Shanghai.
1. Adhere to Opening Up with Continued Support to the Multilateral Trading System and Regional Free Trade Arrangements
Open cities have increasingly become important links in the global economic network because of their direct participation in international division of labor and global competition. As an international metropolis, Shanghai is at the forefront of economic globalization and can benefit from the worldwide free allocation of resources. This is the shared experience of Shanghai and other international cities. Shanghai will make positive efforts to strengthen communication with other international cities so as to learn from other¡¯s strength to offset its own deficiencies. Through a cooperation mechanism among international cities, the multilateral trading system and regional trade cooperation can enjoy stronger growth.
2. Pursue Development-Oriented Trade Policy and Domestic Policy
Trade is only a means serving the ultimate goal of development. To avoid trading for its own sake, trade policy must be integrated into the holistic consideration of development policies after an analysis of its contribution to economic and social development. For instance, it is not sensible to make heavily polluting products or illegally force down wages of the workers merely because of the need to be competitive in the international market. After all, it is sustainable development and improving of living standards that is our goal. Mankind is now in the 21st century. Trade must serve the purpose of sustainable development and improvement of livelihood. As stated in the Preamble of the General Agreement on Tariffs and Trade (1994), ¡°Recognizing that their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, developing the full use of the resources of the world and expanding the production of and trade in goods and services, while allowing for the optimal use of the world¡¯s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development¡±.
3. Accelerate the Opening of Service Industry to Improve the Market Economy System
Unlike traditional manufacturing industries, trade in services and the development of service industries play a unique role in the national economy and in upgrading the functions of a city. On the one hand, professional services such as legal and accounting services serve as a catalyst to the market economy. The raising of ethics and professionalism in legal and accounting services is extremely important to the promotion of equity and assets exchange and the establishment of modern corporate system. On the other hand, banking, transportation and logistics services serve as lubricants to the market economy. The fast development of these industries can vastly reduce the transaction cost. Therefore, the opening of trade in services can not only raise the overall level of modern service industry, but also help to improve the market economy system and better serve manufacturers.
In the next few years, Shanghai should draw upon the experiences of other WTO members and cities in the development of service industries in order to promote the trade in services with them and boost the development of priority service industries. Many developed WTO members and some developing members have accumulated a wealth of experience in creating system environment, providing policy support, conducting market regulation and training human resources for the development of service industries. By ¡°going outward¡± or ¡°introducing inward¡±, Shanghai should further strengthen its service trade and technological exchanges with developed areas.
4. Trade associations in Shanghai should play an active role in the discussion and formulation of trade policies.
The driving force of modern political progress comes from the society and the business community. In the area of international trade policy, businesses and the society create demand, while government serves to meet and balance these demands. These demands come from two aspects. First is participation in the procedure. Trade associations should take an active part in surveys and studies conducted by the government, take initiatives to analyze the demand of its own industry, and send the message to the government in order to avoid the lack of information when government takes part in trade negotiations or formulate relevant policies. Second, businesses should undertake their social responsibilities by attaching enough importance to such issues as environmental standards, safety standards and working rights. They should work together with the community or government to ensure the social compliance in their production so as to achieve social progress.
Meanwhile, during the period of 2005 to 2006, Shanghai should build on the progress achieved in the first three years of WTO membership and give priority to the following seven areas:
1. To further the amendment and enforcement of foreign laws and regulations.
Considerable efforts have been made in this area over the past years. Still there remains much work to do in formulating laws and regulation not existing in China involving WTO rules and China¡¯s commitments. Particular attention should be paid to ensuring their consistency with national laws and regulations, as well as improving transparency by publicizing any law or regulation before enforcement.
2. To further transform government functions and raise the level of administration by law.
It is the aim of Shanghai to create an even better environment by applying international practices and further transforming government functions. Government agencies should conduct their function of administering the economy on the basis of open and consistent laws and regulations rather than internal documents. Further efforts are needed to review the current examination and approval procedures in order to further standardize the government¡¯ line of authority in administration and improve transparency in administration procedure.
3. To further improve market regulation
After joining the WTO, China has progressively opened its service markets such as telecommunications, banking, insurance and distribution. While presenting challenges to domestic enterprises, it has also brought about new difficulties for government regulation. On the one hand, opening of service areas must take into account the differences among industries and the disparity of development level. A gradual approach is necessary in opening different industries together with careful consideration in formulating appropriate market access policy. On the other hand, regulation should be strengthened towards foreign invested businesses and clear strict technical standards be formulated to protect consumers.
4. To further strengthen industrial safety and public security system.
Continued efforts are needed to improve the mechanisms of responding to anti-dumping cases against Chinese products, and protecting domestic industries and markets in order to ensure fair trade. Meanwhile, it is also important to enforce the product certification system, amend relevant standards about product quality, safety, and environmental protection, and strengthen the quarantine examination and epidemic monitoring against imports.
5. To further train professionals familiar with WTO rules
Shanghai has been leading other cities in the training of professionals and has achieved considerable progress in this respect. For instance, it has launched the so-called 50100 Project for the training of top WTO professionals. This leading position should be maintained with more training to be followed in international trade, international economic law, international politics and economics, international negotiation, trade association management and other areas in order to better prepare Shanghai for the increasingly complicated situation after accession to the WTO.
6. To further enhance the comprehensive service function of Shanghai, and further expand and deepen opening up.
After three years¡¯ growth since joining the WTO, Shanghai has gained encouraging achievements in economic development. It has testified to the positive effect of WTO accession, and has laid a solid foundation for a new round of development. The priority in the next stage is to further raise the quality of foreign investment, drive forward the development of advanced manufacturing and modern service industry, and further upgrade industrial structure and international competitiveness.
7. Further strengthen the port function of Shanghai and promote trade facilitation so as to achieve the goal of building Shanghai into ¡°four centers¡±.
Shanghai should further promote the construction of electronic port and trade facilitation so that its comprehensive function can be enhanced and it can better serve the development of the Yangtze River Delta and the nation as a whole.