Senior Fellow, RIETI
On 11 December 2001 China became the 143rd nation to join the WTO, bringing to a conclusion negotiations that stretch back 15 years to 1986 when China first applied to enter the General Agreement on Tariffs and Trade (GATT).
Tsugami Toshiya discusses the transformation-through "reform and opening"-of the Chinese economy that has taken place during that time.
In short, the essence of the WTO is the principle of market economics. The WTO is based on the idea that the overall welfare of the global economy will be maximized by introducing the market economy principle to every nook and cranny of the world's economy and by doing its utmost to eliminate trade barriers and discriminatory measures. The proselytizers of the market economy at the WTO displayed their character even more strongly when they lowered tariff barriers and made new rules during consecutive rounds of negotiations, in particular when they expanded the scope of regulations to include trade in service and the protection of intellectual property rights, when the shift was made from GATT to the WTO.
Even so, the WTO is a system that has always approached problems in a member country from the viewpoint of foreign trade and investment, and it lacks the clout to force the internal systems of all countries to harmonize in a market economy focus. That's why problems arose in the negotiations on entry for China-a country that was in a state of transition (and was thus known as a "transition economy") from a traditional socialist economy to a market economy-involving how far a market economy could be developed in China by utilizing WTO rules.
INCONGRUITY OF THE TRANSITION ECONOMY
The reform and opening of China in the 1980s was generally limited to the conspicuous introduction of foreign investment in "special economic zones" in coastal areas such as Shenzhen. In the 1990s, a genuine movement to switch the domestic economy to a market economy began. Substantive negotiations on China's membership in the WTO, then known as GATT, began in 1994. But coming just five years after the Tiananmen Square incident in 1989, the "reform and opening" policy was still in a precarious position. As a result, people were repeatedly asking, "Will China really not backpedal on its reform policies to open up to the outside world?"
The negotiations on China's accession initially began with the seemingly interminable process of confirming whether or not there was significance in having China join the WTO and indeed whether or not China was qualified to do so. For example, under its traditional planned economic system, prices of goods and services as well as supply and demand were controlled by the government, and almost all companies were state or public-owned enterprises under the influence and guidance of the government, on matters from production and sales to personnel and finance. The relationship in between was purely hierarchical. It was naturally thought then that even if the customs duties of such a country were reduced, the government might still continue to decide for the country how much to import, instead of leaving the decision up to the market.
Responding to these concerns, the delegation from China emphasized their plans to consecutively abolish price controls and import restrictions and to end direct government involvement in the management of state-owned enterprises in the future. They probably had the feeling that "the cup is already half full," but the WTO member countries not only felt that "the cup is still half empty," they also wondered whether they could even believe China's claims that the cup is really being filled. In 1994 and 1995, another serious problem was that virtually no preparations were being made for opening China's service market, a field whose importance rivaled that of trade in goods.
Facing these problems, however, not only did China declare unilateral market opening measures in 1994, 1996 and 1997, but as the negotiations dragged on, China also attempted to show its desire to join by implementing those measures one by one. But there was another factor underlying China's more-than-a-few unilateral market opening measures, even though no decision on China's WTO membership was in sight.
"REFORM AND OPENING": A DRIVING FORCE FOR MARKET OPENING
China promised unilateral market opening measures to the WTO because the promised measures were also necessary from the standpoint of the domestic "reform and opening" policy.
The nature of China's "reform and opening" can be roughly summarized in three points. First was state-owned enterprise reform, under which state-owned enterprises, long the main vehicle for economic activity, should become independent of the government, acquire the authority to manage themselves, and become more responsible actors. The second point is the switch in government functions. The government role should change from drafting economic plans, giving orders to companies, and managing them, to making and overseeing the rules of economic activity, building infrastructure and redistributing income through taxation and expenditure. These two points work in combination to achieve the aim of handing over the economy from the government to the market, where rule-based competition was expected to prevail. And the third point is market opening. China lacks both capital and technology. Open markets are a means by which China can obtain the products, capital and technology it needs from foreign countries. Simultaneously, market openness enables it to invite the products, companies and the market economy model that it should follow.
So this "reform and opening" represents a policy for obtaining the essential elements of production, including the capital and the technology necessary for economic development, and for adopting market mechanisms that were supposed to make the economy operate more efficiently.
Needless to say, the purpose of all this was to bolster the Chinese economy, escape from poverty and underdevelopment, and restore China to the pantheon of great nations in the twenty-first century. China's willingness to institute many painful reforms during negotiations was superficially to gain entry to the WTO, but its real driving force came from the desire to become wealthy and advanced. It is only a slight exaggeration to say that the WTO membership negotiations were, in a sense, a way in which domestic Chinese reforms, which needed to be adopted sooner or later, were "sold" to members for a good price.
MEMBERSHIP NEGOTIATIONS AND REFORM/OPENING
But at the same time, the prerequisites for WTO membership were viewed by pro-reformers as "foreign pressure" that worked well for winning over anti-reformers, and so the desire for membership was valuable for accelerating "reform and opening" and not allowing them to slip back. This was particularly striking in the process that led up to the November 1999 U.S.-China bilateral accord. The market opening measures that China promised then were so bold in nature that they caused gasps from the WTO negotiators. Those measures could not possibly have been achieved without the strong motivation to achieve a settlement with the United States, the most important gateway on the path to WTO entry.
It is also necessary to note that the WTO provided various institutional frameworks for ways to reform and liberalize the domestic economy, and it also played a role as a pacesetter. China learned much from WTO member countries' demands for market opening and from the requirements of the rules of GATT and GATS (General Agreement on Trade in Services). It was particularly so when China was formulating timetables for opening markets for services such as finance and electronic communications as well as when it was formulating the policy for reforming the import-export control system.
It may be said that China's entry into the WTO and "reform and opening" have proceeded as if they were two sides of the same coin. With the advance of domestic reform and opening in China and its track record of unilateral market opening measures in 1997 to 1998, a feeling grew among the WTO member countries that the time to reach an agreement might be coming close.
RAPID PROGRESS OF PRIVATIZATION
It may be said that until the early 1990s, China viewed the introduction of foreign capital and advanced technology as a major (if not the only) means of promoting economic growth. This was because China's domestic capital accumulation was extremely meager and it suffered a vast technological lag. This was a time when China's economic growth depended on foreign countries, and for that reason, accession to the WTO was a pressing issue.
This aim of China basically remains unchanged today. However, a new aspect to China's economic growth has developed recently because of the permeation of the market economy, the improvement of China's economic level, and in particular, domestic capital accumulation. Part of this new aspect is the rapid progress of the "privatization" of China's economy.
Even in China, a socialist country with a system of state ownership, privately owned companies appeared in the 1980s. For ideological reasons, however, they were neglected and discriminated against for a long time. But with the spread of the market economy and the weeding out of weak companies, the private companies that survived suddenly came to the forefront and began to be bathed in attention. Recently, a clutch of venture companies modeled after those in Silicon Valley and launched by highly educated businesspeople has emerged. In fact, the share of China's GDP accounted for by the "state-owned economy" has already declined to roughly 25 percent. The reason why privatization occurred so rapidly in China can be easily understood if one considers the situation from the aspect of "capital."
An adequate supply of capital is necessary for the sound growth of a market economy, and the national government must invest capital in companies as long as it means to protect the ideology of a state-owned system of companies. However, China does not have the financial wherewithal to supply capital commensurate with the size of the country's economy and to keep up with the speed of its economic growth. As a result, starting in the mid-1990s, China was forced to choose between protecting its ideology and maintaining its growth. There was no other way for the Chinese Communist Party but to say farewell to the ideology that had served as its base in convincing the people of the legitimacy of its rule and take the path that would lead to greater wealth.
Today China is a country that already has personal deposits close to the equivalent of ¥100 trillion. What needed to be done was to allow those who have money to supply capital. This led in 1999 to a revision of China's Constitution wherein private companies and non-government companies, hitherto only seen as "supplement" constituents of the socialist economy, were promoted to "important organizational constituents of the socialist market economy." Thus began the abolition of systemic discrimination against private enterprises. The private economy had been given full recognition.
During this process, to differentiate from opening to foreign interests, a new phrase was coined, namely "inward liberalization." To gain entry to the WTO, China allowed entry on a large scale by foreign companies into sectors that had traditionally been monopolized by state-run enterprises, including finance and telecommunications. The new phrase coined in response to this carried the meaning of, "If you are going to allow the entry of foreign companies, then you should also allow the entry of domestic private companies and thus come even closer to a level playing field." This way of thinking is intriguing as a case study to show how the concept of competition is taking root among the Chinese people.
In just this last one or two years, yet another new trend has emerged. This is the change in the forms of corporate ownership, which is made utilizing the capital market. To be specific, large state-owned companies are being listed on the overseas stock exchange, and managers and employees are buying out the smaller but sound state-owned companies and the public-owned companies in agricultural regions (so-called xiangzhen giye). Trading on the Chinese stock market opened at the beginning of the 1990s, but it was then nothing more than a place to raise "public money." But the spread of the market economy endowed the stock market with two new meanings. The stock market is going to replace the government as the supervisor of companies and represent an exit for capital that the government had previously invested. A policy was started for state-owned companies that carried heavy social burdens (like pensions and welfare) wherein the good part of the company that could survive is split off from the rest that needs to be liquidated, and the liquidation expenses for the latter are met with the proceeds gained from listing the former on the stock exchange. Recently, China's leading state-owned companies, such as oil and steel manufacturing, were listed on the New York Stock Exchange.
One cannot deny that the stock market in China still faces numerous problems, but the concept of "capital" is steadily changing the nature of the Chinese economy. Such rapid privatization was not anticipated by anyone among the WTO member countries during negotiations. The changes may be seen as another step toward the market economy, although no agreement in the WTO obliges China to proceed with such privatization. Once things have come this far, it does not really matter whether or not you call China a socialist country, at least with regard to its economy.
THE FATE OF THE CHINESE ECONOMY
Of course, not every outcome of WTO membership or the spread of the market economy has been positive for China. One negative is the fact that regional wealth disparities have probably widened, and another is the uncertainty that surrounds the future of farming and farm villages, following market-opening measures.
The regions that have emerged winners are the coastal areas, and the southern coastal area in particular. Even there, massive numbers of people have become unemployed because of the restructuring of state-owned enterprises, but the well-developed private economy is absorbing them. Consequently, reforms there are proceeding smoothly. But the impact of market-opening measures is reaching the interior regions, where the outcome is reversed.
It is possible that the problems of agriculture will be the greatest challenge China faces in the coming 10 years. As the result of obsessional policies for increasing food production in the past, Chinese agriculture today is surprisingly inefficient, and there is a big negative spread between the prices of major grains in China and the international market price. Henceforth, the prices of agricultural products will inevitably fall with bold market opening measures, and when that happens, economically borderline farm families will no longer be able to earn a living. Chinese farm villages, which have traditionally served as overflow basins for the surplus labor supply and which together are home to some 800 million people, will soon be unable to support so many people. Most likely the only choice will be to move the excess population to the cities, particularly those in the coastal areas, where they will be able to eat. But this will entail moving a population in excess of 100 million, and the social impact will be incalculable.
The key to alleviating these kinds of inconsistencies is government finance. However, there are actually massive hidden liabilities that will become evident in the future, including future pension liabilities and the disposal of non-performing loans that accumulated in the past. To alleviate the inconsistencies while avoiding financial ruin, the only solution is for high growth to continue for as long as possible. The prospects for the future of the Chinese economy certainly are not clear, and so it remains to be seen whether China can safely navigate its way through this narrow pass.
However, the reform and opening of China have clearly progressed since 1998 when Chinese President Jiang Zemin and Prime Minister Zhu Rongji joined forces. What is admirable is how they are allowing the people to enjoy success in promoting reforms that will open the door to the future, even if times are tough now. In reality the Chinese economy has a multitude of serious problems. If there is a bright side to the Chinese economy now, it should be viewed that the efforts of the Chinese people, who have accepted a number of hardships to promote reforms, are beginning to produce dividends. Although the situation is still far from perfect, given that they have come so far in such a short period of time, one can only take a fair attitude as a rival and say, "Well done!"
THE IMPLICATIONS OF CHINA'S WTO MEMBERSHIP FOR JAPAN
In Japan, concerns have recently been raised over the negative repercussions of China's WTO membership. However, membership negotiations are basically a process for unilaterally opening the market of the candidate country, and undoubtedly the net effect on Japan will be positive. This year, Japanese exports to China are likely to see a fairly large increase. As the World Bank has pointed out, Japan is likely to be the biggest beneficiary of China's WTO membership.
The reason why some are nonetheless voicing concern over the negative fallout is not because of the WTO membership itself but rather because at least some elements of the Chinese economy have rapidly posted real gains in power and efficiency because of the "reform and opening" that proceeded in tandem with the membership negotiations. Last year saw trade friction between Japan and China in agricultural products, but trade friction between the two countries is likely to occur routinely now. "What's wrong with selling high-quality products at low prices?" was a line the Japanese frequently repeated to the Americans during past bouts of trade friction between the United States and Japan. Recently, however, in an increasing number of situations Japan is likely to be in the same position as the United States was in then.
With the Chinese economy rising before our eyes, the "Chinese economic threat" is a hot topic of debate in Japan. However, if the growth of the Chinese economy is interpreted as reward for China that has taken very difficult "reform and opening" measures, then it becomes clear that the correct response to the challenges presented by China is for Japan to work on its own reforms, so as not to be outdone by the Chinese. Japan must recognize the rise of China and work to reform itself, a process that must include changes to its industrial structure. In that process, a search for a win-win relationship with China will likely yield the maximum benefits to both parties.
* The original article appeared in Look Japan, May 2002. No reproduction or republication without written permission of the author and Look Japan.
May 2002 Look Japan
September 2, 2003
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