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Skip Navigation LinksHome :: Back Issues :: The WTO dilemma

September 2000

The WTO dilemma


Membership of the World Trade Organization has taken China 14 years of campaigning. It's almost there.




       
Chinese consumers want the product not the bran
Membership of the World Trade Organization for China has taken 14 years of campaigning, and theoretically it could still be frustrated by a handful of the WTO's existing members that have yet to conclude their bilateral negotiations with Beijing. It seems almost certain, though, that the People's Republic will be joining within the next six months.
Beijing-watchers see it as a shrewd piece of political manoeuvring on the part of the Chinese government. "From a domestic political point of view, China's leadership can't be seen to be the prime mover of radical changes that will inevitably lead to job losses," explains a Beijing banker. "Joining the WTO is a very convenient way for the leadership to blame any social hardship on outside forces." Another banker says: "China needs external pressure, and the best source of external pressure is uncle Sam." Superficially at least, China's accession to the WTO looks like an enormous gamble on the country's ability to compete internationally, given that in the short-term it will tear down tariff and non-tariff barriers to trade and open the domestic market to international competitors. The more positive impact of increased inflows of foreign direct investment (FDI) and technology transfer, and hence job creation, will all materialize later, leading, think most economists, to a classic J curve of short-term pain in exchange for long-term gain. Adam Williams, general manager of China Business at Jardine Fleming in Beijing, says that a handful of local industries will be left "reeling" by the impact, with several analysts pointing to the automotive industry as a prime example. Under the WTO guidelines, Beijing is committed to cut tariffs in the auto sector to 25% by 2006 from the present rate of 80% to 100%. In several other sectors, however, Chinese industry may not be hurt nearly as badly as some external analysts seem to suggest.
Anthony Lok, head of regional bank research at Nomura in Hong Kong, says that the presupposition that Chinese SOEs all churn out lousy products that nobody wants (as do many of their Russian counterparts) is a nonsense. As he points out, if China manufactures a pile of rubbish, how come the US complains so vociferously about Beijing's high trade surpluses? "People tend to make the silly assumption that everybody in China will want to buy goods from Sony or Whirlpool or Frigidaire rather than Heier, for example," he says. "But the fact is that in the lower and mid-tech sectors, which means everything from basic televisions to refrigerators, Chinese-made products are very competitive. A 29-inch TV set made locally costs the Chinese consumer about Rmb1,500 [$181], whereas a similar set made by Sony would cost between Rmb6,000 and Rmb7,000."
This, says Lok, is one of the reasons why many multinational companies that have thrown billions of dollars at developing their local Chinese businesses have packed their bags and left.
Among those overseas investors that have successfully launched Chinese ventures recently, Ericsson and Nokia have been successful because consumers perceive a need to own mobile telephones, not because there is any cachet to the brands. To 99.9% of Chinese consumers, it is a mystery why anybody should want to sign their name with a Mont Blanc pen when a plastic ballpoint will do the same job at a fraction of the cost.
By the same token, few can understand why they should be persuaded to drink foreign beers, for example, when local brews such as Yanjing and Tsingtao are equally thirst-quenching. That, combined with the huge fragmentation of the market, is why a company such as Carlsberg has had such a hard time trying to make a decent return on its Chinese investment. Although local demand for beer is growing at 7% a year, with Carlsberg's sales up an annual 22% over the past three years, CSFB's research reckons that at Carlsberg's historical rate of growth it will be 10 years before the brewer starts to turn in a profit.
Chinese policymakers are not blind to the impact that unfettered foreign competition may have on local industry. Far from it. Speak to any analyst of the Chinese economic system and he will tell you, emphatically, that the government's principal objective today is the avoidance of social instability. Forget about non-performing loans in the banking system, increased trade Flows, refinements to the capital market and so on, they say. If any of these developments threaten to stoke social unrest on a broad scale, the government is likely to start back-pedalling on its WTO commitments with alarming speed. Already, several isolated incidents among laid-off or threatened workers have sparked confrontations, with the army called in to control about 20,000 miners in the city of Yangjiazhanzi earlier this year, and analysts say that a severe escalation in social tensions of this kind is viewed by Beijing as public enemy number one.
"You already have countless migrant workers roaming around the cities looking for work, which creates a huge problem for the authorities because these people are dificult to track and control," warns one Hong Kong-based analyst. "If economic growth stalls and the despair of these people could be channelled into anger against the government, and if a charismatic leader were to emerge to organize them, it could create major trouble." The same analyst points out that this is unlikely, given that most of these individuals are "uneducated farmers who have an unbelievably high tolerance for hardship." Analysts do not appear to believe that China would respond to social upheaval by pulling out of the WTO altogether. "China is too dependent on international trade to risk the consequences of non-compliance," notes Morgan Stanley Dean Witter's Hong Kong-based China analyst, Andy Xie.
It is probable that China will be able, if necessary, to pull any number of strings in order to protect its interests irrespective of guidelines laid down by the WTO. As Salomon Smith Barney warns in a recent analysis: "We believe regional protectionism is alive and well in many key industries. Given the vested interest, lax governance and unclear regulations, we expect many of the hidden barriers at the regional level will not disappear immediately after WTO. For example, taxi companies in places like Shanghai and Changqun still buy most of their new cars from the local car assemblers." ING Barings makes a similar observation in a recent report on the oil and gas industry in China. "We believe that state influence in the petrochemical sector will remain even after China's entry into WTO," this advises. "There might be further liberalization, but this will proceed at China's own pace. In conclusion, when we get down to details, we believe that China will not have given away any favours that do not, in the end, work to its own advantage."






This proposal goes against the heart of Basle II

Alexander Batchvarov, Merrill Lynch

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