China’s Entry into the WTO
effect on State Owned Enterprises
WTO – A Big Event
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Joining WTO is one of the important
event in the History of Modern China
1949
1978
2001
Various dimensions, social, political,
institutional, cultural
Economics
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But We start from economics
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Efficient – allocation – scarce resources
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Economic theories and Specialization
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Economies of Scale, Welfare
History of SOE’s
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Like other centrally planned Economies
Before 改革开放 SOE’s were in Control
Where the governments -not the
markets-determined prices & quantities
China SOE’s
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SOE produced 78% of total industrial output
at their peak in 1978 and 28% in 1999
Inefficiency of central planning
communism ideal, remove the unemployment
that plagues capitalist economies
SOE annual losses of 6% of GDP
No incentive to be efficient
entrenched interest with in the structure
SOE’s
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Inefficiency and problem
State face hurdles (Status quo)
bilateral agreements are lengthy process
China want to integrate
WTO an opportunity
SOE’s
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The SOE enjoy administrative monopoly
That prohibited the development of
private sector
First, the government tried to
restructure the SOE’s on the line of
conglomerates in Asian economies such
as Chaebol or
keiretsu
China SOE’s
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1981, self-employment and collectivelyowned enterprises. (RS system)
In 1983, instead of profit – taxes
1993, small and mid size SoE’s
reformed
capital markets, labor markets, and
stock markets
What is WTO?
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International, multilateral organization
which sets rules for global trading
system 设置规则
All member states must be signatories
to its about 60 agreements. 必须签署60
个协议
Main goal is to encourage smooth and
free trade顺利和自由贸易
What is the WTO?
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Resolves disputes between member
states争端
Non-discrimination
Reciprocity
Binding Commitment
Transparency
Safety
Six main parts of agreements
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The Agreement Establishing the WTO
Goods and Investment (TRIMS)
GAT&S
IPR (TRIPS)
DSU
TPRM (review of govt trade policies)
Conditions for China to enter WTO
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(1) the lowering of tariffs for imports,
(2) the permission of foreign firms to
sell directly in the Chinese domestic
markets and
(3) opening of the telecommunication
and financial sectors to more foreign
competition.
China entry to the WTO
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China was voted in as a member on
November 11, 2001 and became official
member 成为正式成员on December 11, 2001
In order for China to gain member status,
China had to agree to separate negotiations
谈判 with all of the current WTO members
After 15 years of negotiations China got
member status in 2001
Timeline for Qualification
1986 -- China applies to join GATT
1989 – negotiations derailed due to certain political events.
November 1995 -- China unveils economic and trade
reforms. slashed import tariffs by 30 percent
April 8, 1999 - President Bill Clinton and Premier Zhu Rongji
May 7, 1999 -- NATO forces bombing of the Chinese
embassy in Belgrade.
September 11, 1999 -- Clinton and Jiang Zemin agreement
November 15, 1999 -- U.S. and China announce a WTO
pact. Clinton must persuade the U.S. Congress to grant
China permanent normal trade relations (PNTR).
Timeline for Qualification
May 19, 2000 -- The European Union signs a WTO accession pact with
China
October 10 -- Clinton signs a law giving China normal trade status with
U.S.
January, 2001 -- China and some WTO members disagree on farm
subsidies.
June 9 -- China and the U.S. announce consensus on issues holding up
China's entry, including farm subsidies, after meetings on the sidelines
of an APEC trade ministers' meeting.
June 20 -- The European Union says it has resolved outstanding bilateral
issues with China over its accession.
September 14 -- WTO members agree on terms for China's entry at an
informal meeting, clearing the way for the nation to join by the end of
the year.
November 10 -- Trade ministers from across the world officially approve
China's entry. The move was approved unanimously at the WTO
meeting in the Gulf state of Qatar
December 11 -- China ends its 15-year quest to join, officially becoming a
fully-fledged member of the international trading system.
SOE’s and WTO
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In 2000, the SOE sector produced 24% of
industrial output, and accounted for 42% of
urban employment
two types of subsidies: direct and capital
Agreement on Subsidies and Countervailing
Measures (SCM)
economic gains of restructuring the SOE
sector derived from WTO accession
Taking in account the benefits of SOE’s, the
benefits of trade liberalization is substantial
Effect
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distribution system or mode of doing
businesses, ownership structure, and
human capital
scale and scope economies
FDI: Learning by doing and by
Watching
Government overcame on bureaucracy
Winners vs Losers
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Winners The private
sector Consumers
Exporters Transport:
containers Services:
household and
professional Textiles
and apparel Light
manufactures, e.g.
electronics, toys Nonfarm activities in rural
areas
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Losers Many stateowned companies
Banking Insurance
Telecommunications
Automobiles Heavy
industry, e.g. steel,
aluminum Farmers; e.g.,
grain, soybeans &
cotton State trading
companies
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China had to relax over 7,000 tariffs,
quotas and other trade barriers. Some
feared that foreign competition would
uproot farmers and upend rusty stateowned enterprises (SOEs), as to some
extent it did.
WTO as a Panacea 万应灵丹
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the enforcement of reforms is much easier
through the WTO than through the domestic
bureaucracy.
Entire SOE’s in debt and WTO was an agenda
The former Premier Zhu Rongji stated
explicitly that WTO accession was a decision
made by the government to promote further
reforms and open up the economy
What has been
changed/reformed?
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More openness and access
Transparency
Got rid of inefficient organizations and
management
China participation in the WTO's dispute
settlement system
Eliminate trade subsidy 补助金
Efficiency and proper allocation of
resources
Effect on SOE’s
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The term ‘efficiency’ can be termed in
different ways,
as Pareto efficiency,
technical efficiency,
allocative efficiency,
exchange efficiency,
X-efficiency and market efficiency
Alternate
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Simply by formally changing the state
enterprises to share-holding companies
does not lead to the replacement of
former managers and the adoption of
new ways of managing the enterprises.
As pointed out in Chow (2002, p. 391)
private ownership is neither sufficient
nor necessary for enterprise efficiency
success
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Chinese State-owned Enterprises
(SOEs) are making news with a number
of them appearing on the global lists
Geely’s volvo marque from Ford
Incentives
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In summary, through different stages
the SOE reform went from
microeconomic adjustment, to limited
autonomy, to privatization; and from
giving no economic incentive to workers
and managers, to giving partial
incentives, to full incentive in the case
of privatized SOE.
Effect of WTO Entry
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GDP grew by 8% in the year following entry
to the WTO
Increase of 18.4% in trade volume with USA
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China’s exports increased by 19.7% in a year
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WTO , increase in confidence and Influx of
foreign investment
Private Sector
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WTO policies forced China to treat all
enterprises equally
Private Sector has seen rapid growth
Ban on Private sector to engage in foreign
direct trade removed
Private sector got access to finances
In Zhejiang Province, for example, 80 % of
the 1,700 enterprises that were granted the
right to conduct foreign trade in 2005 were
private firms.
Tariff Reductions
WTO and Economic Growth
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first is the gain from specialization
through international trade.
The second is the gain from increase in
efficiency within each industrial sector
and economies of scale
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Western firms got from China’s joining
the WTO
Cost and Benefits
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WTO and competition
Encouragement of market power
private ownership is neither sufficient
nor necessary for enterprise efficiency
Consumer cost and benefits
Decline in state control
What does the future hold for
China in the WTO?
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Economic growth will continue and more
reforms will be made
China will have access to advanced
technology
China’s tariffs will eventually reduce
Banks/stock will begin to launch massive
market oriented reform programs to prepare
for competition from outside markets
Business standards will continue to rise
Thanks