China's past
behavior in the
global economy
shows that the
country is likely
to conform
to WTO norms

China has acted in its own interest...

It would be naive to think that China's rapid integration into the global economic system has been driven by anything but self-interest. As Yong Wang's article (see p.54) makes clear, even economic liberals in China believe that the first goal of economic policy should be to create a strong industrial economy that can carry China into the future. There is continual debate within the PRC, at all levels of government and society, over how best to achieve this goal. In this respect, China is no different from any other country, including the United States.

...but has not been a "system buster"

Yet in its attempt to create a modern economy through economic integration with the outside world, China has not been a disruptive power. China has adapted to the existing system, not vice versa. Moreover, throughout the integration process thus far, the global trade, investment, financial, and institutional systems have remained stable, and have proven quite capable of handling this newcomer.

In understanding China's track record, it is useful to look at three distinctive types of interaction: busine ss-to-business transactions, PRC policymaking on trade and investment, and the PRC's posture in international economic organizations.

Business transactions

A simple and powerful--but too-often overlooked--point can be made about China's commercial dealings: in merely 20 years, the volume of business-to-business transactions engaged in by PRC firms has risen from zero or nearly zero to among the highest in the world. Its annual foreign trade rose from a mere $21 billion in 1978 to $324 billion in 1998. Even more dramatic, the amount of incoming capital rose from zero in 1978 to a high of about $110 billion in 1993, though it has hovered around $50 billion in each of the past several years. In the early and mid-1990s China was second only to the United States as a recipient of foreign direct investment (FDI).

Granted, a significant portion of this amount was (and to some degree still is) attributable to "round-tripping"--efforts by PRC firms to send money abroad and then reinvest it in China under the more favorable terms offered to foreigners. Yet the basic point--that the amount has increased dramatically--cannot be ignored. China's investment abroad has also risen from a handful of politically motivated aid projects to commercial business ventures.

In th e last 10 years, China has become a commercial borrower of note in the financial markets, though it experienced some fallout from the Asian financial crisis. And China has participated in international capital markets by issuing both stocks and bonds overseas. In the 1990s it became one of the few transition economies with an investment-grade credit rating on its sovereign external debt, currently rated "BBB" by Standard and Poor's Corp.

Beyond the story told by the sheer volume of activity, there is also evidence of the kind of actor China has been. The market is a natural, quick, and unbiased enforcer of its own rules. It is an enforcer that the Chinese, for the most part, accept; in stark contrast to the days of Mao, current Chinese leaders tend to view market norms and market enforcement as neutral and apolitical. Indeed, the Chinese are keenly aware that there is nowhere else but the established international market for them to go.

Moreover, the rapidity of China's integration into the world economy has not torn the global system apart or even made it list unsteadily. It is the Chinese who have traveled up the learning curve. Of course, there have been market dislocations to some producers as competition from Chinese goods has emerged, particularly in East and Southeast Asia. Yet this is a natural occurrence in global markets.

Evolution of PRC policies

When China first decided in the late 1970s to open its economy to the outside world, Chinese leaders argued to internal critics that by using strong regulatory controls it would be able to absorb the benefits of integration while avoiding the harmful effects on China's economy, sovereignty, and culture. In pursuit of this goal, the government established a host of regulations designed both to attract and control foreign business.

Since that time, however, the overall pattern has been one of erosion of such controls and greater acceptance of the norms of the global trade regime. Chinese reformers, disappointed in the levels and quality of incoming investment--particularly from the West and Japan--not only clarified but also eased controls. Changes have occurred in numerous sectors and functional areas, including restructuring and decentralization of the foreign-trade system, tariff reduction, liberalization of controls on foreign exchange and profit-repatriation, greater transparency, and the establishment of rules for dispute resolution and contract enforcement. Foreign companies have gained greater market access in sectors including light industry, foodstuffs, automobiles, petroleum, chemicals, and (more recently) financial and other information services.

Some liberalization came in the wake of acrimonious disputes with the United States. This was the case, for example, with changes made in the domestic regime for intellectual property rights (IPR) protection. What is often forgotten amid the ongoing tension is that China has made far-reaching changes in its basic conception of IPR protection, and the resources it has devoted to it, since 1979. The official norm has moved away from the view of intellectual creations as social goods subject to state control and toward the view of intellectual creations as the property of the creator. China has drafted numerous domestic regulations on copyright, trademarks, and patents; established institutions responsible for oversight and enforcement; and joined a number of international conventions and organizations, such as the World Intellectual Property Organization (see The CBR, January-February 1998, p.16).

Direct pressure was not the only impetus for many of China's policy changes; liberalization also took place with an eye toward China's bid for eventual WTO membership. Chinese leaders recognized that they not only had to "talk the talk" by promising changes at the negotiating table, they had to "walk the walk" by introducing concrete policy shifts. Indeed, while outside pressure has been instrumental at some junctures in influencing change in Chinese policy, virtually none of these changes would have occurred if economic reformers did not believe that, on the whole and in the long run, they were best for the Chinese economy.

Liberalization of the regulatory environment has not been without its ups and downs, of course, and some industries have benefited more than others. Moreover, China has by no means given up all efforts to tailor regulations to meet its development goals. Yet the effort to make China a more hospitable environment for foreign capital, both in terms of rules at the sovereign level and operations on the ground, has continued slowly and steadily. Even after the events at Tiananmen in 1989, government reformers made substantial efforts to protect foreign business from adverse reaction by conservatives, and made it a point to continue with liberalization.

China's behavior in international organizations

China's likely beha vior in the WTO is also predictable based on its record in other international economic organizations, particularly the World Bank and International Monetary Fund (IMF). Here, the record is unambiguous. To use the terminology Samuel Kim, senior research scholar at Columbia University, applied to China's role in the United Nations, China has become a "system maintainer" rather than a "system transformer" (see China Joins the World: Progress and Prospects, Council on Foreign Relations, 1999).

The World Bank's experience with China is extensive. Since joini ng the bank in 1980, China has acquired long-term funding, technical assistance, and strategic advice on reforming its economy. The bank has become China's largest single source of long-term foreign capital, and China became the bank's largest client in 1993. As of June 1999, the bank had committed a total of $32.5 billion to China.

World Bank officials often cite China as a model member. The quality of the bank's project portfolio in China is one of its best. According to bank officials, China projects are well implemented, within budget, and on time, and China has grown from a quiet presence to a mature partner. Over time, the Chinese officials and economists posted to the bank have gained confidence as well as knowledge, and have become more able to contribute to the bank's daily operations.

China's profile has been lower in the IMF. The PRC has borrowed minimally and repaid immediately. More important, China has been an active recipient of IMF advice, particularly in the steps it has taken toward currency convertibility.

China is not perceived as a disruptive force in either of these institutions. Rather, China has absorbed the advi ce offered by experts in these organizations and has made institutional changes in its own governing structure to accommodate their presence. The World Bank and IMF have served as a kind of airlock between the Western financial world and China, providing Chinese reformers with a training ground and a cushion until they could bring their personnel and expertise up to speed. Far from resenting these foreign institutions, Chinese reformers often have benefited from China's participation in them. In domestic debates in particular, Chinese officials were able to use World Bank and IMF standards in conjunction with China's desire to be an accepted member of global organizations as an impetus for economic liberalization.

Problem areas should not be ignored

In understanding how much China has adapted to the existing global economic system, it is important to remember that reforms in the country's foreign economic and trade policy continue to be works in progress. The effective transmission and enforcement of central-level laws and policies to the local level remains a particular concern for businesspeople. This means that China's development of a legal environment supportive of contract enforcement and dispute adjudication must continue in all areas of the country. Such problems still plague efforts to support IPR protection in China, for example (see The CBR, January-February 1999, p.8).

Though China's legal enforcement record is improving, it remains spotty and haphazard. These changes take time, of course; the notion that major institutional and normative developments such as the rule of law can take place overnight is unrealistic.

The fractiousness within China over trade policy also remains a concern, and cannot be expected to wane soon. It is somewhat ironic that the more extensive the exposure of Chinese industries to the global economy, the more those industries that stand to be hurt by competition--such as automobiles and telecommunications--have mobilized to protect their own interests. This phenomenon contributed to the slow pace of China's WTO accession negotiations.

Because of China's complex political environment and its still less-than-ideal state of institutional development, there will continue to be a role for pressure from external institutions. At the same time, having China as a member of global institutions allows for a partnership with government reformers and businesspeople inside the PRC who have used and will continue to use external expectations to press for internal change.

Will China be a responsible WTO member?

Thus, despite the remaining problems and the clear role for continued monitoring of Chinese behavior by the WTO and its members, China's past record is quite clear: the country has shown itself able to meet the expectations of the global economic system, whether measured at the level of business transactions, government policy, or behavior in international financial institutions. China's integration into the world economy, far from being apocalyptic, has been accomplished with little of the friction predicted of a rising power.

It would be foolhardy to give Pollyanna-ish predictions about China's behavior, for China will continue to operate in its own interest. But China has gone far in its WTO offer to indicate that it is willing to play by the rules. And its behavior over the past 25 years gives foreign companies ample reason to expect strong efforts to live up to those commitments.