Focus: China's WTO Anniversary
Letter from Washington: Five Years On
It's time to take stock of China's progress—and look at what still needs to be done
by John Frisbie
Ten years ago, I was working for General Electric Co. (GE) in Beijing, helping to establish their business units in China. I spent most of my time trying to put together a structure that would allow us to do some pretty basic things without having to go through too many contortions.
These included
- Hiring our employees directly;
- Setting up our own after-sales service capability in-country;
- Figuring out how to convert currency for our in-country operations; and
- Importing our own product ourselves and controlling our own inventory.
Ten years on, these problems have nearly all disappeared. Some of the changes were initiated by China as it became more comfortable with foreign enterprises, and some were achieved by China's entry into the World Trade Organization (WTO) in December 2001.
Benefits for both sides
China's WTO entry agreement set out a series of market opening measures that China has been obliged to implement over a period of five years or so. The first five years have nearly passed, and only a few new commitments remain ahead. China has made great efforts to achieve these sector openings--it has reviewed and revised thousands of laws and administrative processes to comply with its WTO commitments.
China's WTO entry has clearly benefited US businesses. The entry agreement has introduced significant market openings in China and, as a result, US companies enjoy far greater market access than they did five years ago. China has
- Cut import tariffs by nearly 40 percent and eliminated tariffs on information technology products;
- Virtually eliminated import licenses and quotas;
- Relaxed many ownership restrictions on foreign businesses in China;
- Allowed foreign companies to participate in many sectors in which they were previously prohibited; and
- Eliminated or reduced restrictions on foreign investment in banking, insurance, freight and courier services, packaging, and distribution and trading services.
These changes have had an impact on the US-China trade relationship. US imports from China have been growing quickly—creating a $202 billion trade deficit last year—but few people realize that US exports to China have more than doubled since China's WTO entry, jumping from $19.2 billion in 2001 to $41.8 billion in 2005.
Earlier this year, China surpassed the United Kingdom to become the fourth-largest market for US exports. China and Hong Kong combined have passed Japan to become the third-largest US export market, after Canada and Mexico—both neighbors with which the United States has free-trade agreements.
Besides being one of our largest export markets, China is also growing far faster than any other major market for US products. US exports to China grew more than 20 percent a year, on average, from 2000 to 2005—nearly five times faster than exports to our second-fastest-growing major export market, Belgium. And US exports to China have accelerated this year, increasing 36 percent between January and May 2006 over the same period of 2005.
These figures show the positive impact of China's first four years of WTO membership, when US companies were just beginning to take advantage of many of the phased-in market openings. A few more openings, mostly in services, where US companies have strong competitive advantages, are yet to come. As China opens its markets further, US goods and services companies will increase their sales and operations there, bringing real economic benefit to the United States.
China is also benefiting from its WTO entry. Foreign investment has poured into the country in recent years, creating jobs and helping to reduce poverty. Even more important, China's WTO entry commitments have pushed it to begin making systemic reforms—improving transparency, reforming the legal system, and overhauling the financial system, to name a few—that, with further progress, will create a more predictable business environment for all firms operating in China and lay a foundation for sound economic growth over the long term.
But problems remain
That is not to say that challenges do not exist—they do, and some are significant. The enforcement of intellectual property rights (IPR) and further improvements in transparency, market access in services, and the setting of product and technical standards are all examples of areas where improvements need to be made.
Intellectual property
The creation and enforcement of a workable legal framework for the protection of IPR is one of the most important issues facing foreign companies in China. IPR problems affect a broad range of industries: media, software, publications, industrial goods, consumer goods, pharmaceuticals, and even food products. China has yet to ensure that the rights of patent, copyright, and trademark holders are adequately protected within China and to curb the export of counterfeit products to other countries. Importantly, the central government now appears to understand that IPR protection is in China's interest if it is to foster its own innovative capability and continue economic growth over the long run. The application of criminal sanctions to deter IPR violators and consistent enforcement of relevant laws throughout the country are now the key issues.
Market access in services
In many instances, PRC regulators are using a two- pronged approach to implement China's services commitments. China often enacts basic laws that "allow" or "permit" new investment in previously restricted sectors as required by its WTO commitments, but sets the bar for entry prohibitively high. US investors in China's service sectors, including financial services, telecom, insurance, direct selling, and construction, say these restrictions and the lack of transparency in the regulatory system prevent complete market openings. Such market openings would also benefit China. The introduction of international practices and more competition into the domestic market would create stronger Chinese firms and provide better services to Chinese customers.
Transparency
Though government transparency has improved since 2001, industry rules and regulations are still frequently issued without adequate comment periods. National laws, regulations, decrees, and any other type of administrative act should be published for comment, and interested parties notified, prior to their issuance or amendment. Regulatory decisionmaking also needs to be more transparent. Lack of transparency creates an uncertain regulatory environment for all firms operating in China, whether foreign or Chinese. The PRC State Council's new requirement that all government agencies publish new trade-related regulations in the Ministry of Commerce gazette helps to address this concern.
Standards
US companies continue to face difficulties related to China's standards-setting process. The standards development process remains opaque, and comment periods on standards, when offered, are often too short to allow meaningful response. US companies are also concerned that China formulates standards outside of the established international system and uses technical standards to promote domestic companies at the expense of international competition. Although such an approach could give domestic companies within China an advantage, it could in the long run hurt Chinese companies that want to compete internationally. China would be best served by a more transparent standards-setting process and by more actively participating in international standards-setting processes.
The next stage
China has made great efforts thus far to implement the vast majority of its WTO commitments. But differences in interpretation, ambiguous laws and regulations, and in some cases, the unwillingness of local or industry officials to implement them still create difficulties for foreign companies in China. Matters have been complicated over the last year by rising protectionist sentiment in both the United States and China. Neither side will be well served by protectionist measures, and the business community must continue to educate policymakers and the general public in both countries about the benefits of trade and investment.
To take its economic development to the next level—to move to an economy less dependent on exports and investment and to create world-class companies—China will have to make even more changes. The first five years of change resulting from China's WTO entry is just the beginning. China needs to make more adjustments to integrate fully into the world economy. Such integration is the best way for China to achieve long-term economic growth and prosperity, as well as the level playing field required to ensure a mutually beneficial trade relationship between the United States and China for decades to come.
John Frisbie is president of the US-China Business Council.
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