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China’s Entry into the WTO

China’s Entry into the WTO. effect on State Owned Enterprises. WTO – A Big Event. Joining WTO is one of the important event in the History of Modern China 1949 1978 2001 Various dimensions, social, political, institutional, cultural. Economics. But We start from economics

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China’s Entry into the WTO

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  1. China’s Entry into the WTO effect on State Owned Enterprises

  2. WTO – A Big Event • Joining WTO is one of the important event in the History of Modern China • 1949 • 1978 • 2001 • Various dimensions, social, political, institutional, cultural

  3. Economics • But We start from economics • Efficient – allocation – scarce resources • Economic theories and Specialization • Economies of Scale, Welfare

  4. History of SOE’s • Like other centrally planned Economies Before改革开放 SOE’s were in Control • Where the governments -not the markets-determined prices & quantities

  5. China SOE’s • 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

  6. SOE’s • Inefficiency and problem • State face hurdles (Status quo) • bilateral agreements are lengthy process • China want to integrate • WTO an opportunity

  7. SOE’s • 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 • asChaebol or • keiretsu

  8. China SOE’s • 1981, self-employment and collectively-owned enterprises. (RS system) • In 1983, instead of profit – taxes • 1993, small and mid size SoE’s reformed • capital markets, labor markets, and stock markets

  9. What is WTO? • 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

  10. What is the WTO? • Resolves disputes between member states争端 • Non-discrimination • Reciprocity • Binding Commitment • Transparency • Safety

  11. Six main parts of agreements • The Agreement Establishing the WTO • Goods and Investment (TRIMS) • GAT&S • IPR (TRIPS) • DSU • TPRM (review of govt trade policies)

  12. Conditions for China to enter WTO • (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.

  13. China entry to the WTO • 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

  14. 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).

  15. 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.

  16. SOE’s and WTO • 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

  17. Effect • 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

  18. Winners The private sector Consumers Exporters Transport: containers Services: household and professional Textiles and apparel Light manufactures, e.g. electronics, toys Non-farm activities in rural areas Losers Many state-owned companies Banking Insurance Telecommunications Automobiles Heavy industry, e.g. steel, aluminum Farmers; e.g., grain, soybeans & cotton State trading companies Winners vs Losers

  19. China had to relax over 7,000 tariffs, quotas and other trade barriers. Some feared that foreign competition would uproot farmers and upend rusty state-owned enterprises (SOEs), as to some extent it did.

  20. WTO as a Panacea 万应灵丹 • 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

  21. What has been changed/reformed? • 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

  22. Effect on SOE’s • The term ‘efficiency’ can be termed in different ways, • as Pareto efficiency, • technical efficiency, • allocative efficiency, • exchange efficiency, • X-efficiency and market efficiency

  23. Alternate • 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

  24. success • Chinese State-owned Enterprises (SOEs) are making news with a number of them appearing on the global lists • Geely’s volvo marque from Ford

  25. Incentives • 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.

  26. Effect of WTO Entry • GDP grew by 8% in the year following entry to the WTO • Increase of 18.4% in trade volume with USA • China’s exports increased by 19.7% in a year • WTO , increase in confidence and Influx of foreign investment

  27. Private Sector • WTO policies forced China to treat all enterprisesequally • 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.

  28. Tariff Reductions

  29. WTO and Economic Growth • first is the gain from specialization through international trade. • The second is the gain fromincrease in efficiency within each industrial sector and economies of scale

  30. Western firms got from China’s joining the WTO

  31. Cost and Benefits • 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

  32. What does the future hold for China in the WTO? • 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

  33. Thanks

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