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Almost a year into its ascension to the World Trade Organization, China is continuing fundamental changes that will make it a major economic player on the international stage, said speakers at a recent session at the John F. Kennedy School of Government at Harvard University.
However, views differed slightly on how the WTO arrangement will play out over the coming years and the impact it will have both on the world economy and on China itself.
Often when people look to China, they see one of two scenarios, said Liqun Jin, China's Vice Minister of Finance. The first scenario envisions a powerful and massive Chinese economy becoming a threat to the financial well-being of other countries. The other scenario, diametrically opposite, concludes that China will implode from the massive changes required to become a member of the WTO.
Both views are absurd, Jin said, insisting that the Chinese are dedicated to meeting WTO requirements. The Chinese are very much cognizant of questions about the country's willingness or ability to live up to WTO protocols. He said the country is on the right path toward addressing issues ranging from the fate of state-owned enterprises to civil service to tariffs, but it cannot solve all problems overnight.
Experience over the last twenty years tells us that integration with the world economy pays off. |
Liqun Jin, Chinese Vice Minister of Finance |
Jin shared his views in a session titled "China One Year After WTO Ascension" held at the Kennedy School on October 1 and attended by about 150 students and scholars. Jin took the podium to discuss China's prospects, along with three Harvard professors: Yasheng Huang of Harvard Business School, and Anthony Saich and Jeffrey Frankel of the Kennedy School.
Though all four were supportive of China's ascension and in agreement that China is of immense importance to the world economy, they offered slightly different viewpoints on how it stands to work with the WTO.
China's joining the WTO was an historic event, said Frankel, who worked on WTO issues as a member of President Clinton's council of economic advisers from 1996 to 1999.
"To take a very broad sweep of history, if we go back not too many centuries, China was the number-one economy in the world," he said. "It fell substantially behind in the 19th and 20th centuries and a big part of that was that it was not interacting economically with the rest of the world. It was cut off to a large extent from outside contact. Over the last twenty-five years, that has all changed completely."
Pressure from outside and inside
As vice minister since 1998, Jin is in charge of external economic affairs as well as the budget for administrative expenses of the Chinese government. China is now only ten months into the WTO process, Jin said, and its progress needs to be measured in the context of its overall policy environment after fifteen years of protracted negotiations. One of the most important results of joining the WTO is that the WTO will help empower China to confront difficult issues and bring about transparency, he said.
"WTO membership's fundamental importance is that we will change the way we manage our economy. We will change the way we govern our state. We think it's very, very important and critical to revamp the traditional approval system, [which was] sacrosanct under the former planned economy," he said. "Experience over the last twenty years tells us that integration with the world economy pays off."
China's efforts to meet its WTO requirements will further the prosperity of not just China but also the world, he said. "We are not just doing business, but we are making friends," he said.
For example, since the September 11 terrorist attacks in the United States, China has been working with other nations to cut off the financing of terrorism. "[It is] very important for us to work together. Terrorism is a real threat for economic prosperity and peace for all the world, not just for American people and Chinese people," Jin said.
According to Anthony Saich, Daewoo Professor of International Affairs and Faculty Chair of Asia Programs and the China Public Policy Program at the Kennedy School, the pressure China feels from the WTO should help it overcome its own bureaucratic obstacles. People elsewhere may sometimes interpret its lack of capacity as unwillingness to meet the obligations, he said.
"The enormity of the challenges, I think we have to remember, are just mind-boggling," said Saich. China has been given fifteen years to accommodate the protocols where other countries would be given thirty. Fifteen, he believes, is "ridiculously short." The banking and financial sectors should have full foreign access within five years, but he wondered whether the financial system is "robust enough" to accommodate that time frame.
China has made great progress on a number of fronts, said Frankel. It has cut tariffs on manufactured goods from 25 percent (the tariff in 1997) to 9 percent. It has made similar cuts in agricultural products and in auto tariffs, the latter reduced from 100 percent to 24 percent. The monopoly of state-owned trading organizations ended, which paved the way for U.S. multinational corporations to import into China without having to work through local intermediaries.
Developing countries for the first time will be able to sit at the table with equal weight as the U.S. and the E.U. |
Professor Jeffrey Frankel |
However, Frankel wondered whether it is really possible to separate political and commercial considerations. He also emphasized the need for a social safety net. "This adjustment will be difficult for China, as we've already heard. ... When state-owned enterprises have to shrink or be closed down, that's going to create real problems."
In September, several U.S. business groups told the office of the U.S. Trade Representative that China has fulfilled some WTO promises, but not others. For example, China was praised for cutting tariffs on most imported goods. But the U.S. Chamber of Commerce charged that China has done little to protect intellectual property rights and has actually added to regulations in some cases to protect local industries.
Three reasons
There are three main reasons why WTO ascension is good for China, Frankel said. First, trade in general is good, he said. Second, China as a member of the WTO is officially a major player, providing developing countries for the first time equal weight at the table with the U.S. and the E.U. "In the past, the U.S. and the E.U. would work out a deal, and Japan and everyone else could take it or leave it, and they generally took it," Frankel said. "Now I think developing countries will have a bigger say from the beginning, and there is potential for China to play a leadership role."
The third and most important advantage for China, however, is a commitment to reform, said Frankel. He compared China's experience under the WTO to Mexico's under NAFTA. Regional trade agreements for Mexico meant that it needed to confront entrenched sectors that in the past had resisted measures to become more competitive or thought of the government as the place to go for protection. "They changed philosophy when they realized that they were going to have to compete," Frankel said, suggesting that Chinese sectors will do the same.
Domestic power
According to HBS professor Yasheng Huang, China's WTO ascension needs to be viewed in light of its domestic impact just as much as its impact on international trade and capital movement.
Since the early 1980s, he said, the Chinese government has been trying to open the Chinese economy both internally and externally. The first significant policy development came in 1997, when the government explicitly endorsed a partial privatization program. Then in 1998, Huang said, the government shifted banking practices from those based on quotas to those based on commercial viability. Later, export licenses were granted to private firms to sell overseas directly.
Other changes followed, he said, including a controversial proposal in 2001 by President Jiang Zemin to allow private entrepreneurs into the ranks of the communist party. "I think [it] goes a long way toward addressing the political and legal status of entrepreneurs in a way that is even more effective than direct economic measures," Huang said. These and other reform measures carry important implications for the Chinese economy.
On an anecdotal level, Huang said when he taught in China this past June at an HBS-sponsored program, he was surprised by the energy and enterprise of the private entrepreneurs he met there. Most of them dated their corporate expansion back to 1998 and 1999 when these initial reforms took hold.
"I thought they'd be investing near where they lived," Huang said. "But no. They said they were investing all over the country.
"They were eager to learn how to manage these different investment operations," he added. "One entrepreneur told me that the reason he wanted to learn about organizational science is because he had run out of relatives."