Comparative Foreign Policy

China’s Accession to World Trade Organization

(WTO)

Submitted to:

Ms. Jean Franco

Submitted by:

Arah Camille Almelor

Julie Ann Sandoval

Rona Ysais
 FOREIGN POLICY DYNAMICS OF CHINA'S ENTRY TO WTO

INTRODUCTION

China's economic liberalization and structural change have proceeded for

several decades now. For many years, China was called the "Sleeping Giant" for its
development was too slow. This was brought about as the country secluded itself
from the rest of the world. The once sleeping giant has proven it to be a nation with
a mighty and stable economy. And these rapid changes, which occurred in its
economy, can be attributed to its entry to the WTO. However, before the discussion
on China's entry to the WTO and how it changed its foreign policy, we must also
consider trade liberalization as a significant issue involved in the multifaceted
debate on globalization and how it has impacted the current situation of many
country's economies especially that of China.

For many countries like China, Globalization is now considered inevitable and
thus significant to one's economic development. It has been defined as " the
integration of national economies into the international economy through trade,
direct foreign investment, short term capital flows, and flows of technology." It also
refers to the growth of the cross-border economic activities. As an outcome,
globaization refers to the emergence of highly interdependent national economies
(Oatley, 2005).

As the concept of a "borderless world" becomes widely accepted, so is the

idea of capitalism, democracy and the "free market". In addition, “international
trade is said to provide nations with the opportunity to specialize in production
according to their comparative advantage”. It has helped many nations realize a
more efficient utilization of their resources (Hoekman, 1995). Similarly, it is believed
that when WTO takes place it provides an indication that liberalization
strengthened export growth of many countries. Such effects are probably one of the
many reasons why China which was once a closed and conservative economy
opened itself to the world.

WTO as an International Organization

In order to understand more the reasons why a country such as China

entered the WTO, it is important to identify first what the WTO really is.
 The World Trade Organization (WTO) is the policeman of global trade. Its
decisions are absolute and its members must abide by its rulings. It has four aims:
(1) expanding free trade concessions equally to its members; (2) establishing freer
global trade with fewer barriers; (3) making trade more predictable through
established rules; and (4) making trade more competitive by removing subsidies
(Date Retrieved: Oct. 1, 2007/ http://news.bbc.co.uk).

The WTO's main goal is "to improve the welfare of the peoples of its member
countries, specifically by lowering trade barriers and providing a platform for
negotiation of trade". The organization seeks to realize "free trade" through
neoliberal restructuring of the world's economy. In its eleven years of existence, the
WTO has resulted in the wide scale removal of protective barriers to international
trade such as import bans, import quotas, tariffs and so on. It has also brought more
and more countries into this regime of international trade as well as open up various
concerns to support trade enhancements such as patents, customs procedures and
so on (IBON,2005).

It also helps trade to flow smoothly, settles trade disputes between

governments, and organises trade negotiations. As such, it has become closely
associated with "globalization". Its supporters say, that by expanding world trade,
the WTO in fact helps to raise living standards around the world.

China's Reasons for Joining the WTO

Before its admission to the WTO, China was the largest economy, after the
United States and Japan; and the world's tenth largest trading economy. It was a
rapidly growing competitor and market and a relatively lightly protected economy
with strong interests in reform at the WTO. China has no choice but to engage in
global competition according to the rules of the WTO because of the awareness that
isolation from the global system would deny it the opportunity to catch up with the
most advanced countries of the world. Chinese leaders recognize that China has
been a major beneficiary of the existing international economic order, and it seeks
to influence its gradual integration into the system rather than oppose it.

Furthermore, it also viewed its membership in the WTO as central to the

country’s economic future. They finally recognized that globalization means that
there must be production of an increasing range of goods in global rather than
national. And that they would benefit from greater participation in this global trend.
The Chinese have come to realize that their liberal foreign investment regime and
low-cost labor markets give them a wonderful opportunity to participate in these
cross-border production networks, and that deeper participation in these global
networks could provide a new and sustainable base for the continued growth and
development of their domestic economy (Lardy, 2001).

There are also obvious reasons why China would view its WTO membership
as beneficial. First, China stands to benefit from the recognition and prestige that
WTO membership brings. WTO membership will also deepen China's integration into
the world economy and signal its status as a world economic power. Conversely, the
costs of remaining outside of the WTO may well exceed the costs of joining. WTO
membership will give China a more stable access to foreign markets because it will
reduce disruptions in foreign trade that are caused by unpredictable policy shifts.
The economic benefits derived from China's WTO membership are not confined to
static gains in efficiency from the re-allocation of resources among industries and
among firms. In the long run, dynamic gains from increased competition brought
about by China's entry into the WTO will be even more important. Increased
competition on level playing fields will reward efficient and innovative firms,
regardless of whether they are local or foreign, private or public (Cheng, 2002).

According to Shi Guangsheng, China's minister of foreign trade, "China's

entry to the WTO is also necessary for the nation's participation in economic
globalization". One important objective of the WTO is to promote the liberalization
and facilitation of world trade and investment. Therefore, the WTO plays a vital role,
not found in any other international economic organization in the world. He also
stated that, "joining the WTO marks the beginning of China’s participation in
economic globalization in a more dynamic and active way". He emphasized that it
will help the Chinese understand the global trends of trade, grasp the rules and
practices, pursue the good while avoiding the harm, speed up the realization of
China's scientific and technological progress, economic restructuring and the
upgrading of industries, and take an advantageous position in international
competition in the new century.

Impact on China

"Joining the WTO is a strategic decision made by the Chinese government

under the new situation of economic globalization, it is consistent with China's aims
of reform, opening up and establishing a socialist market economic mechanism." It
marked a new stage in China's opening to the outside world.

China's WTO entry has significant impacts not only in the country's economic
aspect but also in its political and socioeconomic development. Upon its accession,
foreign companies have easier access to the China market thus signifying the
country's being open to a more liberal and free market. WTO membership also
forced China to engage in a process of liberalizing its own rules on investment,
foreign ownerships, tariffs, and other trade barriers. While much remains to be
accomplished in these areas, WTO membership and the initial steps taken by China
to honor its commitments have provided confidence to foreign investors, business
partners, and importers that China would not be subject to unpredictable changes in
the business climate. Thus, the investment and purchase orders have poured in.
Through changes in China's imports and exports, the principal trade-related impacts
of China's WTO accession on other countries were great (Palanca, 2001).

China has emerged as a major player in the world trading system since
joining the WTO in 2001. The dramatic growth of China's exports in the three years
following accession, when it doubled its growth and vaulted China to the world's
third largest exporter, were a dramatic sequel to the 15 years of frequently exciting
negotiations that led up to accession. China made substantial progress in reducing
the coverage of non-tariff barriers, reducing tariffs, and abolishing the trade
distortions created by the exchange rate regime as its policy reforms deepened
during the 1990s. The implications of its accession cannot be fully assessed without
an understanding of the policies that preceded it, and the path of reform in the
period leading up to accession (Palanca, 2001)

In addition, according to Halverson's article entitled: "China's WTO Accession:

Economic, Legal, and Political Implications", China's experience in the WTO is
unique in a number of respects: (1) it is by far the largest economic power among
developing country members; thus, China is both a developing country and an
economic powerhouse; (2) it is only the major WTO member that is still a
Communist. China's reform effort has continued at an extraordinary pace as it
sustains its high levels of economic growth.

Similarly, the essential function of the WTO has also been described as
providing a means to "resolve conflicts of interest within, not between, nations."
WTO accession acts not just as a lever to force reform, but it also serves to lock in
economic reform and make it irrevocable. In adopting the rules in China's protocol
of accession, the WTO framework acts as a sort of constitution, imposing economic
discipline by constraining the ability of those in China's government who might wish
to take a different course of action. Thus, China's recent accession illustrates how
the commitments imposed as a condition of WTO membership may provide the
political leverage necessary to move difficult economic reforms to the next stage.
The most direct form of discipline that WTO accession brings is the increased
competition that China's state-owned sector will face from opening up to foreign
trade (date retrieved: July 27,2007/ http://www.bc.edu/schools/law/lawreviews/meta-
elements/journals).

China's WTO membership has not only brought about significant economic
changes but also paved the way for fundamental changes to its government. The
economy has long been affected by abuse of governmental functions and confused
and obscure laws. These problems conflict with the WTO rules. And in order to meet
the requirement of its WTO membership, the government has initiated a campaign
to clarify and unify governmental regulations to meet the WTO rules. More
beneficial conditions in an advantageous position in the global agricultural market
were also achieved by the country (Date Retrieved: Sept. 20, 2007 Source:
www.china.org.cn)

China's commitments to further open its economy in order to gain

membership in the World Trade Organization include: (1) significant reductions in
tariffs that will bring the average level to under 10 percent; (2) introduction of a
tariff-rate quota system that brings the tariff rate for key agricultural commodities,
such as wheat, almost to zero for a significant volume of imports; (3) the gradual
elimination of all quotas and licenses that have restricted the flow of some imports;
(4) a substantial reduction in the use of state trading as an instrument to control the
volume of imports of agricultural and other key commodities; and (5) the opening of
critical service sectors such as telecommunications, distribution, banking,
insurance, asset management, and securities to foreign direct investment.

In addition, the protocol governing its accession sets forth China's

commitment to abide by international standards in the protection of intellectual
property and to accept the use by its trading partners of a number of unusual
mechanisms that could be used to reduce the flow of Chinese goods into foreign
markets (Lardy, 2001).

Changes in China's foreign policy after its entry to the WTO

The question on how China's foreign policy changed with its accession to the
WTO is considered to be a significant issue for it covers the unparalleled economic,
legal, and political change that has confronted China during its accession. China's
long road to its accession and how this process worked for the country is in fact said
to be a unique process.

As liberalization of investment is the global trend of development, China has

to honor its commitments following its entry into the WTO. In accordance to the
WTO rules, there have been many visible changes in its foreign policy. China has
opened further to the outside world after its entry to the WTO, suggesting that
changes would continually be made to the country's policies on foreign investment.
The adjustment of its domestic policies have also provided an opportunity for the
development of the export-oriented economy, import and export trade has tended
to become more brisk, transnational companies have whipped up a new round of
investment heat which puts China in an initiative position in international
competition.

China's deeper integration in the global economy has made the country a
more constructive participant in a new round of global trade liberalization. China's
leadership already has recognized the economic advantages of increased
globalization and has even gone so far as to suggest the formation of a free trade
area with the Association of Southeast Asian Nations, something that would have
been unthinkable even a few years ago. These are just but some of the visible
effects in China’s entry to the WTO.

In political science we use three widely accepted levels of generalization to

help understand highly complex problems in world politics which we call the “levels
of analysis in international relations” (Webber, 2003). This three (3) levels of
analysis, each with its own distinct strength, reveals three different ways of
understanding international relations.

Using the levels of analysis we can explain and identify China's entry to the
WTO as an interstate level for it “focuses on the anarchic characteristic of the
system or with international and regional organizations and their strengths and
weaknesses” (Waltz, 1954). It also involved trade agreements which basically
comprise the activities in the WTO. Diplomacy through alliance in international
organizations (in this case, the WTO) are formed. Bargaining and Reciprocity
between states and nations are also vivid in the interstate level of analysis.

China's entry to WTO and the foreign policy dynamics which occurred along
with it can be explained using the theory of Neoliberalism; which is basically an
economic theory in favor of laissez-faire and the free market. And as we all know,
free market or free trade is the main concept promoted by the WTO. As mentioned
earlier, China's entry didn't only affect its economy but also its access to a more
democratic or open political system. Although it has not completely given up being
a Communist country, through its entry to the WTO, it has gained access to a fair
mechanism for trade dispute settlement; thereby safeguarding the rights of Chinese
exporters in international trade.

Neoliberalism promotes "economic liberalism" and "free trade" which means

the removal of trade barriers, like tariffs, subsidies, and regulatory barriers. Many
advocate that the current international system is characterized by growing
interdependence which is the exact opposite of Realism which only beliefs in the
sole responsibility or power of a state. This growing paradigm shift can be attributed
to the present era of globalization, particularly with international economic
interaction. The role of international institutions such as the WTO and the
widespread acceptance of a number of operating principles in the international
system, reinforces ideas that relations are characterized by interdependence.

Neoliberals are focused on increased cooperation on an international level.

Another major focus for the neoliberals was free trade, which is main principle of
the WTO. It was argued that if free trade was practiced internationally, the
economic benefits of such a global exchange would be felt by all countries alike,
and the disparity between the industrialized and unindustrialized nations of the
world would lessen.

As manifested in China's experience over the few years after its entry to the
WTO, it has proven that "power" in the international system is more on the
economic side rather than on the military. Although this has been a controversial
issue for quite some time now. But for many who believe in the concept of
Capitalism and free trade along with its promise of development, it is still one of the
best instruments to fight poverty, hunger and inequality.

CONCLUSION

There is no question, therefore, that after China's entry to the WTO in 2001 it
has emerged as a great economic power which will rank as one of the major issues
confronting the international system. China which was once a "sleeping giant". Now
as the world's fastest growing major economy, it is often called a "waking giant" and
the 2nd largest economic power of the world which is geared to continous and
"unstoppable" development. Thanks to dramatic progress in technology,
transportation, communications system, especially in foreign trade, China will wield
far more power in the global economy.
 Dramatic changes in its foreign policy especially on trade can explain its
economic and political strength. If not for the country's continous efforts to reform
and open up its doors to the outside world, China would not be as it is today. China
is also better prepared to be a world economic leader today for it has come to
realize and accept the significance of interdepence in a borderless world such as
ours.

China now is an important engine for economic growth across the globe. It's
reforms led to rapid growth and a more market-based economy. Because it has
allowed liberal trade policies to attract investment it challenged its market for new
innovations which paved for more economic developments. Although many argue
that it has also paved for more inequalities and it didn't restrain corruption in its
local government. Nonetheless, China will continually seize to amaze the
international community over its developments which have an impact on almost all
people around the world. As China's size within the world economy grows, so will its
influence, in the way that its domestic economic decisions affect the rest of the
world economy.

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