China's Entry into the WTO: What Lies Ahead

Home>>Business

Last updated at: (Beijing Time) Thursday, November 22, 2001

China's Entry into the WTO: What Lies Ahead

China's Entry into the World Trade Organization, expected to take effect on Dec. 11, is a monumental move toward economic integration worldwide. It will create new sets of business winners and losers for years to come. But perhaps more important, it presents a fresh opportunity for governments, industries and individual companies to reshape the very nature of the global economy. In a report prepared in collaboration with journalists from Beijing-based People's Daily Online, writers from Knowledge@Wharton interviewed a number of experts for their assessment of what lies ahead for China.

Wharton management professor Marshall Meyer was in Beijing meeting with Chinese executives the day China's entry was approved at the full meeting of the WTO in Qatar. "In typical Chinese fashion they were low key about it," said Meyer. "They approach WTO with trepidation. Arrogance was not expressed in that culture. The attitude I picked up is, 'We're a little apprehensive about it.'"

News reports from China confirm that impression. Unlike two other historic nights in China this year, July 13 and October 7 - when thousands of people held carnivals to celebrate Beijing's successful bid to host the 2008 Olympiad and China's victory in securing a ticket to the World Cup - there were no fireworks displays or galas on Nov. 10.

From the president of China to university students, Chinese people consider China's entry into the international trade body to be a double-edged sword. "As a member of the WTO," said President Jiang Zemin, "China will have precious opportunities as well as great challenges."

Chinese economist Wu Jinglian suggested that these opportunities are, in fact, down the road, while the challenges are more immediate and demanding. But if Chinese enterprises and government agencies play by the rules of the WTO, he added, this "will surely drive administrative and corporate reforms forward." Another leading Chinese economist, Li Yining, pointed to economic sectors such as financial services, manufacturing and agriculture which he expects will "accelerate the reform process."

N. T. Wang, a senior research fellow at the East Asian Institute of Columbia University, in an interview with Fang Cui, editor of the English edition of People's Daily Online, maintained that China's integration into the international trading system was "inevitable. China is a major economic and political power," said Wang. "It is the seventh largest country in terms of foreign trade and the second largest in foreign direct investment. It has had strong economic ties with the United States and many European countries. It should join in the multilateral system."

China has already been an active member in other international organizations, he added, citing the United Nations, the International Monetary Fund and the World Bank. As for the overall impact of China's entry, Wang said "the country will suffer from economic, political and social unrest in the short term. But it will not collapse. Above all, China has a competitive edge in the world market. The past 20 years have clearly demonstrated so. After joining the WTO, China will draw capital, technology and management experience from the multinationals. And China's labor costs are relatively low, about one tenth of that in the United States and much cheaper than in Japan and Hong Kong."

Thomas Bernstine, a politics professor at the School of International and Public Affairs of Columbia University, who was also interviewed by Fang Cui, predicted that the WTO accession will have "a great impact on China's political reform. Post-WTO, the Chinese political system will be under much more pressure, and the market will force governments and other institutions to apply [the rules of fair play]." At the same time, he added, "China is a not a banana republic and it will control how transnational corporations operate."

The WTO As Crowbar

According to Meyer, one case for China's concern for the future is that Chinese companies are small by global standards, which could put them at a disadvantage when competing with large Western multinationals at home and abroad. "Even though China is a huge country with a rapidly growing economy, the size of the firms, except for the biggest of the state-owned petroleum companies, is not large by global standards yet."

New foreign competition will be another problem for the country's troubled state-owned enterprises, he added. These companies, already struggling with inefficiencies, are likely to face strong competition from abroad that could drive them out of business. That, in turn, would create social problems for China since these companies still employ tens of thousands of workers.

But overall, Meyer said, entry into the WTO will be good for China even as the Chinese have no choice but to move into the global trading regime. "It's simple," Meyer stated. "The central government, in order to govern, has to have money." The revenue will come from stronger economic performance based on greater efficiencies and the free trade standards incorporated in the WTO. "To improve living standards the Chinese know they need to reform ?The WTO is the best crowbar they have."

Different types of Chinese companies will be changed by WTO entry in different ways, Meyer added. For China's large trading firms and industrial conglomerates, such as the Haier Group, an electronics and appliance firm, WTO membership will mean greater access to global markets. "The industrial conglomerates will try to extend outside China, but will face competition within China." Some companies, which are still controlled by the state, act like private companies and are learning Western-style business methods that could position them to do well post-WTO. "Many are Hong Kong-based and Hong Kong-listed and they will tell you, 'We operate as a private firm,' even though the ownership is through a holding company controlled by the state."

But for those companies with an eye to the outside, WTO entry will give them a boost forward. As an example, Meyer pointed to China International Marine Container Corporation Ltd., a joint venture of two state-owned companies. CIMC has many international customers and does 90% of its business in dollars. Its headquarters is in Shenzhen near Hong Kong, its chief executive has a global mindset and, once free of restrictions on capital accounts, CIMC will be poised to expand globally. "Companies like this, though few and far between, are ready to leap at opportunities."

Some Chinese firms, however, will face obstacles in learning to manage workers overseas, Meyer added. "It will be a new experience for Chinese managers to hire non-Chinese managers." In Confucian culture, Meyer pointed out, bosses have a lot more authority than in the West. Executives in China may struggle over how to direct their country managers abroad. "One of the things you hear discussed is, 'If I send out country managers do I tell them to obey me or obey the market?' That's a dilemma. In the West it's a no-brainer; you do what the market requires."

Those most likely to be hurt by China's entry into the WTO, Meyer said, are other Southeast Asian nations that cannot compete with China's price structure which is rooted in its vast labor pool and economies of scale. "Southeast Asians are quaking in their boots over the prospect of Chinese entry into the WTO."

A Look at the Auto Industry

Ming-Jer Chen, founding director of the Global Chinese Business Initiative at Wharton and now a professor at the Darden School of Business, pointed to the enormous pressures that China's state-owned industries will face as a result of WTO membership. "Inefficient state-owned enterprises are likely to become even more uncompetitive. Some may combine or even disappear." On an industry level, he said, Chinese firms will face tremendous competition in automobiles while shoes and consumer electronics will remain a strength. As for telecom, the future remains to be seen because the industry could be singled out for short-term protection under provisions of the WTO.

A close look at the auto industry in particular gives a glimpse of what's ahead for the country. According to sources interviewed by Davis Shu, managing editor, English edition, People's Daily Online, the industry will be affected in several ways. First is price. The tariff on autos will be cut from the current 80%-100% to 25%, and the tariff on auto parts to an average of 10% by July 1, 2006. The first cut will take effect on Jan. 1, 2002.

The import quota on autos starts at $6 billion and will increase 15% every year until it is cancelled five years later. By 2006, the total tax rate on autos in the Chinese market will be 50-59%, one-half of the current 122-154%.

The price of imported autos, especially high-end sedans, is expected to fall. Recently, the Chinese auto market suffered a decline. In October, a total of 182,500 autos were sold, a decrease of 14.1% from September, but still a 6.55% increase over October 2000. The tariff cuts and cancellation of quotas, though carried out gradually in five years, will give imported autos a superior advantage in the market.

China's auto companies will face a severe challenge. Many of them may have to stop operations while even those that survive may not be able to compete in the high-end market and will begin to produce cheap autos instead. The auto-parts companies will be even more vulnerable since domestic-made parts will no longer be required, thus opening the way to competition from foreign auto parts companies.

Overseas companies will be allowed to handle auto trade directly, and can participate in such areas as after-sale service, repairs and transportation. And overseas financial institutions will be allowed to handle care-related financial services. Finally, joint ventures will be freed from the most discriminatory measures, such as certain 'China made' requirements. Foreign companies may increase their shares in the joint venture to a maximum of 50%.

According to Chen, however, looking at industries does not tell the full story. "It is more useful to look at �individual companies" which will play a key role in establishing how business will be conducted going forward. "If they can pull their act together individually, that will become a very important driving force for the whole country's transformation." Chen cited some firms with a strong domestic position, such as Haier and Legend Computer, which are positioned to use that strength to build a global company.

"To me, the significance of China's WTO entry is that we are going to see a truly global economy emerge," said Chen. "Previously we left out the country with the world's largest population, so to talk about globalization has not been accurate." Eventually China will be the acid test for global business people, the one market that all must master, Chen added. "From my point of view, China will become the only battlefield where all the major players of different national origins compete. In the long-term we will all be winners."

But there are potential pitfalls for all involved in the massive cross-cultural economic integration that is to take place, Chen said. One problem could be what he called "reciprocal readiness." Western companies must acknowledge that China may move at a slower pace, even as the Chinese will have to brace for a more compressed Western view of time. "Because of the limited history of open door policy and the transitional nature of the Chinese economy, you have to be realistic about your expectations and how you can make things happen."

Western companies should take careful note, he added. "They overestimate the practicality of their own business models. That's how problems start to emerge." Western managers are often frustrated by the bureaucracy and the time it takes to get projects underway in China. But Chinese businesspeople, he said, are equally frustrated by the Western focus on quarterly earnings. "This is the time to think about what it would take to develop a compatible enterprise system so people can talk in a common language," Chen noted. "Unless we can find this compatible enterprise situation we will continue to have these ups and downs."

Insurance, Banking and the Legal System

Insurance is likely to be a key Chinese market for Western companies drawn to a huge, security-minded population, said Wharton insurance professor Neil Doherty. Even though Chinese consumers remain divided largely between a small elite and a vast poor population that cannot afford insurance, there is a small but growing middle class. Even a slight percentage growth in this segment could translate into a huge number of new customers, he said.

"The other attractive thing about the Chinese market is that it is exhibiting growth, there is urbanization and, while the average level of income is low, there is growth potential." On the downside, however, it will be difficult for Western companies to make quick progress in China even with the WTO behind them. "There are cultural barriers and bureaucratic barriers and expectations about doing a lot of business quickly are often dashed," Doherty said. "It does take time and patience. You need a fair chunk of capital to tide yourself over until you really have your feet in the door there."

Many western insurers are already poised to push into the Chinese market, with the WTO liberalization of regulation of service and financial industries. A notable example is American International Group. The company was founded in Shanghai in 1919 and relocated to New York in 1939 as unrest spread across China and East Asia. AIG was the first foreign firm to go back into China in 1992.

Meyer said banking could be another Chinese business that will be vulnerable to foreign competition after WTO. The WTO treaty requires banks to recognize and write off bad assets, something that remains a challenge for Chinese banks. "Settling transactions on normal business terms is not always customary in China," he said. "There are debt chains in which one company owes another and etc. etc. That's not allowable under WTO ?The banking issue is a real sticking point. As soon as folks are able to use the deposit and loan facilities of Western banks they will rush to them. Look at the experience of Citibank in Japan."

China's entry into the WTO will also mean changes to its legal system, which actually have been underway for some time already, said Eric Orts, a Wharton professor of legal studies. "A lot of reformers in China are looking at the possibility that China's joining the WTO will be a method of continuing the opening of China's legal system as well as its economic system."

He said there is some concern that China could develop a "dictatorship of law." "The focus should be on building the legal infrastructure for business. Not that you can ignore human rights violations, but it's better to focus on the kinds of things you can solve. You can't expect American-style constitutional rights immediately."

Orts predicted that the WTO provisions could also prompt a look into the legal structure of Chinese companies.

On the question of Taiwan (which was admitted into the WTO one day after China), Orts said China's new legal structure, prompted by WTO entry, could open the door to a creative way to deal with the issue. While most people are focusing on the positive aspects of expanding international trade for both economies, he said there is also a possibility that greater integration could lead to more conflict.

China Signs WTO Accession Protocol

WTO Approves China's Membership

Interview: Long Yongtu on China's WTO Entry

>> Full Coverage