JingWei/ImagineChina

Focus: China's WTO Anniversary

China in the WTO: A Chinese View

How is China assessing its first five years with the WTO, and what does the future hold?

by Wang Yong

The year 2006 marks the fifth year of China's accession to the World Trade Organization (WTO). The country is set to fulfill the bulk of its WTO commitments by the end of this year and, in the words of PRC Premier Wen Jiabao, is entering the "post-WTO transition period." But governments and businesses inside and outside China have different expectations for the future. Some warn that the real challenges facing the country are further market openings and the ability of the PRC leadership and economy to withstand such tests. Others, however, are looking forward to more market opportunities and progress on issues such as the protection of intellectual property rights (IPR).

China—and the world—transformed

When PRC leaders decided to speed up WTO accession negotiations in the late 1990s, they had a clear goal in mind: to accelerate domestic reforms by introducing external pressures.

When PRC leaders decided to speed up WTO accession negotiations in the late 1990s, they had a clear goal in mind: to accelerate domestic reforms by introducing external pressures. By committing to China's WTO accession agreement, they attempted to overcome stumbling blocks that hindered the government's reform efforts. These reforms have been aimed at weakening the links between state-owned enterprises (SOEs) and bureaucrats and at streamlining and reinvigorating the declining state-owned sector, inefficient but powerful government agencies, and the poorly performing financial sector.

In the five years since China joined the WTO, the country has changed in many positive ways. The ideas of market economy and trade and investment liberalizations have been integrated into popular thinking. More important, the Chinese public now widely accepts core WTO concepts such as transparency, accountable governance, and national treatment. For example, private domestic companies, with the support of media and scholars, have pressured policy- makers to treat them on par with SOEs and foreign companies. In 2004, the PRC Constitution was revised to include concepts of property rights and human rights. The public has become more involved in policymaking than in the past in part because the media frequently publishes commentary on government policy that stimulates public discussion. In addition, government bodies release draft laws and regulations for public comment and often host public hearings to which companies and private citizens are invited. That these developments have happened in the first five years of China's WTO accession seems to support the argument that economic liberalization helps foster greater openness.

China's WTO accession has also changed the global economic landscape. The Chinese economy has grown rapidly over the last five years and recently surpassed the United Kingdom to become the world's fourth-largest economy. China has also become the world's third-largest trading country after the United States and Germany, with trade expanding nearly 29 percent annually, on average, between 2001 and 2005; its total trade volume hit a record $1.4 trillion in 2005. The country has also become one of the most popular destinations for foreign direct investment, attracting nearly $230 billion between 2002 and 2005.

The inflow of international capital has deepened China's integration with the global economy. First, the country has become a major global manufacturing center. Though consumers around the world benefit from the lower prices of products made in China, the country's rapidly rising exports have become the frequent target of antidumping suits. In addition, when its foreign exchange reserves hit $875 billion at the end of March, China surpassed Japan as the world's largest holder of foreign exchange. At the end of 2005, roughly $257 billion of this foreign exchange was held in US Treasury bills, raising concern in the United States.

While encouraging foreign investment in China, the PRC government has also promoted outbound investment to help the country secure access to energy, raw materials, and foreign markets. The country's outbound direct investment totaled more than $50 billion between 2001 and 2005. Some mergers and acquisitions involving Chinese companies, such as China National Offshore Oil Corp.'s attempted acquisition of Unocal Corp., have raised concerns and even political opposition abroad.

From 2001 to 2005, imports from the United States rose more than 21 percent each year on average, while overall imports grew 28.6 percent annually.

Though China's economic expansion has brought certain pressures to bear on the rest of the world, the Chinese economy, along with the US economy, is one of the world's greatest engines of economic growth. Since its WTO entry, China's imports have soared. For example, from 2001 to 2005, imports from the United States rose more than 21 percent each year on average, while overall imports grew 28.6 percent annually on average. China has also actively participated in regional and global economic integration. Indeed, it signed the landmark free-trade agreement (FTA) with the Association of Southeast Asian Nations in 2002 and also inked an FTA with Chile in 2005. China is currently negotiating FTAs with more than 20 countries (see China's "Win-Win" Policy).

China's economic relations with the rest of the world are still in flux as a result of its WTO entry. Although problems have emerged, China has more in common with the rest of the world than it did before 2001. Both China and the global community benefit from international investment and trade, and the country now has a higher stake in keeping the multilateral trading system open.

China's attitude toward its WTO commitments

The PRC government is serious about meeting its WTO obligations and has reviewed and revised thousands of laws and regulations to ensure their consistency with WTO rules. The WTO review of China's trade policies has acknowledged China's progress in this area, though it also notes that enforcement of laws and regulations has been uneven.

Complaints about China's policies are concentrated in several areas. First, many observers criticize the widespread violations of IPR and the weak enforcement of China's IPR laws and regulations, particularly with respect to movies and software. For example, the Motion Picture Association estimates that 93 percent of films sold in China in 2005 were pirated. Recognizing these problems, the PRC government has made great efforts to crack down on IPR violations. For instance, though starting from a low base, the annual number of infringement cases investigated by the PRC General Administration of Customs has nearly quadrupled between 2001 and 2005. More recently, the PRC government has adopted a more fundamental solution to software piracy, which requires all manufacturers of personal computers in China to pre-install licensed operating system software.

China has made progress in educating the general public about the importance of IPR, but it will take more time to promote adequate understanding across China's huge population. Moreover, as the country undergoes a significant transformation, the government's attention is naturally diverted to other urgent issues such as peasant and worker riots. As a result, most Chinese think foreigners should take a broader view of the IPR issue in China.

The second area of controversy concerns technical barriers to trade. For example, in 2001 China issued rules on biotechnology safety, testing, and labeling that slowed exports of genetically modified crops to China. China has also begun to set standards, some of which differ markedly from those that are widely accepted internationally. For instance, the Ministry of Information Industry in 2003 attempted to establish a new wireless standard—Wireless Local Area Networks Authentication and Privacy Infrastructure (WAPI)—in the name of information security. In early 2004, three cabinet members of the US government signed a letter to PRC leaders on the WAPI issue, urging China not to impose WAPI as a mandatory standard. Subsequently, the United States and China were able to settle these two disputes peacefully. The PRC government issued final safety certificates for several kinds of genetically modified crops and indefinitely suspended the implementation of WAPI as a mandatory standard for wireless encryption.

The third controversial issue concerns China's industrial policies, especially subsidies to domestic enterprises. These include different forms of preferential tariff and value-added tax treatments that help reduce the costs of local products competing against imports. In 2004, foreign companies that export semiconductors to China objected to the preferential value-added tax treatment extended to domestic semiconductor firms; the dispute was subsequently resolved through negotiation after the United States took its case to the WTO. This past spring, the United States, European Union, and Canada filed a case concerning tariffs on auto parts with the WTO, accusing China of implementing local content requirements inconsistent with WTO rules. (As the CBR went to press, the parties were unable to resolve the dispute negotiation, but the United States, European Union, and Canada had not yet requested the formation of a WTO dispute settlement panel.)

Though there is still a gap between China's current policies and its WTO commitments, its record of WTO implementation has generally been good, as recognized by the WTO itself and most countries. The attitude of the US business community in China supports this assessment. Forty-nine percent of US companies surveyed this year by the US-China Business Council (publisher of the CBR) gave China a grade of "excellent" (you ) or "good" (liang ) in the implementation of WTO obligations, while another 38 percent said it has done a "fair" (yi ban ) job. More important, 54 percent said their profits from China increased in 2005, and nearly two-fifths said their China operations earned profits higher than their global average (see Companies Speak). At the same time, according to a survey by the American Chamber of Commerce in China, most US companies are satisfied with market access in China. In 1999, only 24 percent of respondents said they had successfully entered the PRC market, but in 2005, 72 percent said they had increased the number of their products and services available in China.

New development strategies

WTO accession has accelerated China's economic opening and reform. The great potential once stifled by tight government planning and protectionism has been unleashed, and the country is turning into a firm supporter of economic liberalization and globalization. To ensure that the country can adapt to future challenges, China's 11th Five-Year Plan (2006-10) offers a new development strategy focused on technological innovation and growth driven by domestic demand.

To boost consumption, the plan sets out key policies such as improving rural infrastructure and strengthening the economy of the interior. PRC leaders believe that accelerating industrialization and urbanization in the interior will create more domestic demand and thus reduce China's dependence on exports. Highlights of the technological innovation strategy include strengthening local research and development (R&D) capabilities and creating more competitive and value-added Chinese companies and brands. To help domestic firms achieve these goals, the government plans to increase financial and other support for R&D.

Although the world is warily eyeing these developments, which could result in policies heavily skewed in favor of Chinese firms, there are several reasons to be cautiously optimistic about the future of China's business environment. First, PRC policymakers are sensitive to international pressure and insist that all new policies be consistent with WTO rules and withstand the scrutiny of China's major trading partners. Second, Chinese consumers and businesses have more confidence in the quality of international brands and technologies, which will help international exporters and investors maintain their edge over domestic firms for at least the near future. Third, IPR protection will improve, as the government and the public both recognize that achieving China's goal of promoting technological innovation requires better IPR enforcement. Fourth, to maintain social and political stability, the country will have to keep attracting foreign capital. Indeed, labor is still in oversupply, and job creation remains a top priority for PRC leaders.

Last but not least, China's decentralized political system may once again derail national leaders' ambitious industrial policies. Competition among local governments for invest ment has characterized China's dynamic growth and has intensified since China entered the WTO, especially as the central government has transferred more power to local levels to approve foreign investment in their jurisdictions. This local-level competition—and protectionism—can disrupt the plans of China's leaders, as it did the 1994 auto industrial policy, which failed to consolidate dozens of automakers into six national firms largely because local governments protected local auto companies. Recent attempts at consolidating the cement and steel industries have also met resistance at the local level. Thus, the central government may once again be disappointed as it attempts to implement national industrial policies during China's post-WTO transition period.

Uncertain future

China and the international community have changed significantly as a result of China's WTO entry. The business environment, in particular, has greatly improved, and trade and investment have grown. Now that most of China's commitments have phased in, the post-transition period looms. What this period will bring is uncertain. Foreign businesses are pressing for changes beyond those contained in China's WTO commitments, but voices within China are cautioning against further market openings. At the same time, the PRC government has laid out a new economic strategy focused on boosting domestic consumption and indigenous technological development.

Nevertheless, optimism may be warranted. Indeed, China and its trade partners have learned to resolve dis agreements through negotiation and the WTO dispute-res olution mechanism. Moreover, the changes that China's WTO entry has ushered in, along with a host of other con siderations, will likely sustain the progress made to date.

The Trade Debate within China

Official PRC media and leaders tend to focus on the positive impact of China's World Trade Organization (WTO) accession and its efforts to open its economy. But some scholars, journalists, and other critics within China have more negative assessments of China's trade and investment policies, and it may be useful for US politicians and the general public to know about this discourse. Indeed, PRC policymakers take these criticisms seriously, allowing them to color the debate and their own attitudes toward China's participation in the WTO.

Is China too dependent on trade?

China's total trade volume has surged in recent years, and critics now often say that China's economic growth is overly dependent on foreign trade, warning that the ratio of trade to GDP—the foreign trade dependence ratio—is too high. Indeed, China's dependence on trade reached 80 percent in 2005, higher than that of many other countries, including the United States, Japan, and India, according to a study by the Chinese Academy of Social Sciences. China's reliance on exports has, in turn, caused friction with trading partners while potentially harming China's economic security, the critics note. Those on the other side of the domestic debate have questioned the calculation of the ratio: The size of China's GDP has largely been underestimated because it has only recently begun to take into account the service sector. Thus, China's dependence on trade is probably smaller than what critics suggest.

Do FIEs reap more benefits?

The critics also insist that foreign- invested enterprises (FIEs) are the largest drivers, and beneficiaries, of China's booming exports. According to the PRC Ministry of Commerce, FIEs accounted for more than 60 percent of Chinese exports in 2005. Besides causing deficits with major trade partners that create political difficulties, these investments, mainly in assembly and processing trade, may be keeping China at the lower end of the international value chain. Because Chinese firms and labor contribute only 10-15 percent of the added value of these products, the "rise" of the Chinese economy is actually an illusion, these critics claim. Opponents of this argument say that China's export of low-end manufactured goods simply reflects the country's current comparative advantage. Moreover, China benefits from the creation of jobs, the training of its workers, and greater knowledge of international markets. They contend that this stage is necessary to prepare China to move into the higher value-added industries.

Critics also argue that Chinese companies have not reaped the profits or gained the technologies that they had hoped for after WTO accession. China's industrial policies, largely aimed at strengthening domestic firms, are now largely toothless because WTO rules prohibit restrictions on local content and forced technology transfers. Moreover, the critics claim, foreign investors have given up local partners in existing joint ventures (JVs) in favor of wholly foreign-owned enterprises. Critics worry that multinational corporations are thus tightening control over their technologies to the detriment of Chinese domestic enterprises.

Critics often cite the auto industry as an example of Chinese companies not benefiting from partnering with foreign investors. In the run-up to WTO accession, many state-owned automakers believed that "the wolf was coming." In their hurry to form JVs with top international automakers, many Chinese firms signed deals that gave control to foreign investors, who now make decisions that range from the types of vehicles the JVs produce to the sourcing of parts and components. Even more strikingly, leaders of these state-owned enterprises, who focused only on short- term profits, were willing to abandon decades of research and development (R&D) efforts. For instance, soon after partnering with Nissan Motor Co., Ltd., Dongfeng Motor Corp. increasingly neglected independent R&D as it received product models from foreign partners. This eventually led to the departure of many engineers from Dongfeng.

Some observers argue that Chinese companies can grow by working with foreign investors, especially by learning how to develop a global sales network. Others endorse the notion that state- owned auto companies should cultivate leading Chinese brands, but they also believe that this does not necessarily preclude cooperation with international investors from whom Chinese companies can nevertheless learn.

Is China subsidizing foreigners?

Critics also insist that some of Beijing's policies make China—a developing country—subsidize developed countries and their companies. These policies, often used at the local level to attract foreign investment, include preferential treatment on taxes and land-use fees. Critics claim that such measures distort prices and that China's massive foreign exchange reserves are also part of this distortion. They argue that China's purchase of US Treasury bills directly subsidizes the US economy.

Is China treated fairly?

Finally, many journalists, scholars, and officials do not believe that western countries treat Chinese exporters fairly and cite research to support the view that China deserves to have market economy status. For instance, a study by Li Xiaoxi of Beijing Normal University shows that the Chinese economy's marketization was as high as 73.8 percent in 2003. The critics thus argue that it is unfair for the United States, Japan, and European Union to withhold market economy status from China. Ironically, the United States and European Union granted Russia such status in 2002, even though Russia and China received comparable scores in the 2006 Index of Economic Freedom compiled by the Heritage Foundation and the Wall Street Journal.

—Wang Yong

Wang Yong (yowang@pku.edu.cn) is an associate professor of international political economy and director of the Center for International Political Economy at Beijing University.

Subscribe/Renew CBR Archives Advertise in CBR Print Advertising Online Advertising Request Media Kit Business Directory Online Store Links Departments China Conference Calendar China Business USCBC Bulletin US & PRC Contacts Travel Savvy NEW! Business Resources Short Takes Critical Eye Commentary Interview Company Profile Opportunities Reviews Last Page Join the CBR mailing list to receive updates and announcements. Timely, relevant publications on the Chinese business climate	Home About Us Contact Staff Join Our Team For Contributors For Journalists FAQ
	JingWei/ImagineChina Focus: China's WTO Anniversary China in the WTO: A Chinese View How is China assessing its first five years with the WTO, and what does the future hold? by Wang Yong The year 2006 marks the fifth year of China's accession to the World Trade Organization (WTO). The country is set to fulfill the bulk of its WTO commitments by the end of this year and, in the words of PRC Premier Wen Jiabao, is entering the "post-WTO transition period." But governments and businesses inside and outside China have different expectations for the future. Some warn that the real challenges facing the country are further market openings and the ability of the PRC leadership and economy to withstand such tests. Others, however, are looking forward to more market opportunities and progress on issues such as the protection of intellectual property rights (IPR). China—and the world—transformed When PRC leaders decided to speed up WTO accession negotiations in the late 1990s, they had a clear goal in mind: to accelerate domestic reforms by introducing external pressures. When PRC leaders decided to speed up WTO accession negotiations in the late 1990s, they had a clear goal in mind: to accelerate domestic reforms by introducing external pressures. By committing to China's WTO accession agreement, they attempted to overcome stumbling blocks that hindered the government's reform efforts. These reforms have been aimed at weakening the links between state-owned enterprises (SOEs) and bureaucrats and at streamlining and reinvigorating the declining state-owned sector, inefficient but powerful government agencies, and the poorly performing financial sector. In the five years since China joined the WTO, the country has changed in many positive ways. The ideas of market economy and trade and investment liberalizations have been integrated into popular thinking. More important, the Chinese public now widely accepts core WTO concepts such as transparency, accountable governance, and national treatment. For example, private domestic companies, with the support of media and scholars, have pressured policy- makers to treat them on par with SOEs and foreign companies. In 2004, the PRC Constitution was revised to include concepts of property rights and human rights. The public has become more involved in policymaking than in the past in part because the media frequently publishes commentary on government policy that stimulates public discussion. In addition, government bodies release draft laws and regulations for public comment and often host public hearings to which companies and private citizens are invited. That these developments have happened in the first five years of China's WTO accession seems to support the argument that economic liberalization helps foster greater openness. China's WTO accession has also changed the global economic landscape. The Chinese economy has grown rapidly over the last five years and recently surpassed the United Kingdom to become the world's fourth-largest economy. China has also become the world's third-largest trading country after the United States and Germany, with trade expanding nearly 29 percent annually, on average, between 2001 and 2005; its total trade volume hit a record $1.4 trillion in 2005. The country has also become one of the most popular destinations for foreign direct investment, attracting nearly $230 billion between 2002 and 2005. The inflow of international capital has deepened China's integration with the global economy. First, the country has become a major global manufacturing center. Though consumers around the world benefit from the lower prices of products made in China, the country's rapidly rising exports have become the frequent target of antidumping suits. In addition, when its foreign exchange reserves hit $875 billion at the end of March, China surpassed Japan as the world's largest holder of foreign exchange. At the end of 2005, roughly $257 billion of this foreign exchange was held in US Treasury bills, raising concern in the United States. While encouraging foreign investment in China, the PRC government has also promoted outbound investment to help the country secure access to energy, raw materials, and foreign markets. The country's outbound direct investment totaled more than $50 billion between 2001 and 2005. Some mergers and acquisitions involving Chinese companies, such as China National Offshore Oil Corp.'s attempted acquisition of Unocal Corp., have raised concerns and even political opposition abroad. From 2001 to 2005, imports from the United States rose more than 21 percent each year on average, while overall imports grew 28.6 percent annually. Though China's economic expansion has brought certain pressures to bear on the rest of the world, the Chinese economy, along with the US economy, is one of the world's greatest engines of economic growth. Since its WTO entry, China's imports have soared. For example, from 2001 to 2005, imports from the United States rose more than 21 percent each year on average, while overall imports grew 28.6 percent annually on average. China has also actively participated in regional and global economic integration. Indeed, it signed the landmark free-trade agreement (FTA) with the Association of Southeast Asian Nations in 2002 and also inked an FTA with Chile in 2005. China is currently negotiating FTAs with more than 20 countries (see China's "Win-Win" Policy). China's economic relations with the rest of the world are still in flux as a result of its WTO entry. Although problems have emerged, China has more in common with the rest of the world than it did before 2001. Both China and the global community benefit from international investment and trade, and the country now has a higher stake in keeping the multilateral trading system open. China's attitude toward its WTO commitments The PRC government is serious about meeting its WTO obligations and has reviewed and revised thousands of laws and regulations to ensure their consistency with WTO rules. The WTO review of China's trade policies has acknowledged China's progress in this area, though it also notes that enforcement of laws and regulations has been uneven. Complaints about China's policies are concentrated in several areas. First, many observers criticize the widespread violations of IPR and the weak enforcement of China's IPR laws and regulations, particularly with respect to movies and software. For example, the Motion Picture Association estimates that 93 percent of films sold in China in 2005 were pirated. Recognizing these problems, the PRC government has made great efforts to crack down on IPR violations. For instance, though starting from a low base, the annual number of infringement cases investigated by the PRC General Administration of Customs has nearly quadrupled between 2001 and 2005. More recently, the PRC government has adopted a more fundamental solution to software piracy, which requires all manufacturers of personal computers in China to pre-install licensed operating system software. China has made progress in educating the general public about the importance of IPR, but it will take more time to promote adequate understanding across China's huge population. Moreover, as the country undergoes a significant transformation, the government's attention is naturally diverted to other urgent issues such as peasant and worker riots. As a result, most Chinese think foreigners should take a broader view of the IPR issue in China. The second area of controversy concerns technical barriers to trade. For example, in 2001 China issued rules on biotechnology safety, testing, and labeling that slowed exports of genetically modified crops to China. China has also begun to set standards, some of which differ markedly from those that are widely accepted internationally. For instance, the Ministry of Information Industry in 2003 attempted to establish a new wireless standard—Wireless Local Area Networks Authentication and Privacy Infrastructure (WAPI)—in the name of information security. In early 2004, three cabinet members of the US government signed a letter to PRC leaders on the WAPI issue, urging China not to impose WAPI as a mandatory standard. Subsequently, the United States and China were able to settle these two disputes peacefully. The PRC government issued final safety certificates for several kinds of genetically modified crops and indefinitely suspended the implementation of WAPI as a mandatory standard for wireless encryption. The third controversial issue concerns China's industrial policies, especially subsidies to domestic enterprises. These include different forms of preferential tariff and value-added tax treatments that help reduce the costs of local products competing against imports. In 2004, foreign companies that export semiconductors to China objected to the preferential value-added tax treatment extended to domestic semiconductor firms; the dispute was subsequently resolved through negotiation after the United States took its case to the WTO. This past spring, the United States, European Union, and Canada filed a case concerning tariffs on auto parts with the WTO, accusing China of implementing local content requirements inconsistent with WTO rules. (As the CBR went to press, the parties were unable to resolve the dispute negotiation, but the United States, European Union, and Canada had not yet requested the formation of a WTO dispute settlement panel.) Though there is still a gap between China's current policies and its WTO commitments, its record of WTO implementation has generally been good, as recognized by the WTO itself and most countries. The attitude of the US business community in China supports this assessment. Forty-nine percent of US companies surveyed this year by the US-China Business Council (publisher of the CBR) gave China a grade of "excellent" (you ) or "good" (liang ) in the implementation of WTO obligations, while another 38 percent said it has done a "fair" (yi ban ) job. More important, 54 percent said their profits from China increased in 2005, and nearly two-fifths said their China operations earned profits higher than their global average (see Companies Speak). At the same time, according to a survey by the American Chamber of Commerce in China, most US companies are satisfied with market access in China. In 1999, only 24 percent of respondents said they had successfully entered the PRC market, but in 2005, 72 percent said they had increased the number of their products and services available in China. New development strategies WTO accession has accelerated China's economic opening and reform. The great potential once stifled by tight government planning and protectionism has been unleashed, and the country is turning into a firm supporter of economic liberalization and globalization. To ensure that the country can adapt to future challenges, China's 11th Five-Year Plan (2006-10) offers a new development strategy focused on technological innovation and growth driven by domestic demand. To boost consumption, the plan sets out key policies such as improving rural infrastructure and strengthening the economy of the interior. PRC leaders believe that accelerating industrialization and urbanization in the interior will create more domestic demand and thus reduce China's dependence on exports. Highlights of the technological innovation strategy include strengthening local research and development (R&D) capabilities and creating more competitive and value-added Chinese companies and brands. To help domestic firms achieve these goals, the government plans to increase financial and other support for R&D. Although the world is warily eyeing these developments, which could result in policies heavily skewed in favor of Chinese firms, there are several reasons to be cautiously optimistic about the future of China's business environment. First, PRC policymakers are sensitive to international pressure and insist that all new policies be consistent with WTO rules and withstand the scrutiny of China's major trading partners. Second, Chinese consumers and businesses have more confidence in the quality of international brands and technologies, which will help international exporters and investors maintain their edge over domestic firms for at least the near future. Third, IPR protection will improve, as the government and the public both recognize that achieving China's goal of promoting technological innovation requires better IPR enforcement. Fourth, to maintain social and political stability, the country will have to keep attracting foreign capital. Indeed, labor is still in oversupply, and job creation remains a top priority for PRC leaders. Last but not least, China's decentralized political system may once again derail national leaders' ambitious industrial policies. Competition among local governments for invest ment has characterized China's dynamic growth and has intensified since China entered the WTO, especially as the central government has transferred more power to local levels to approve foreign investment in their jurisdictions. This local-level competition—and protectionism—can disrupt the plans of China's leaders, as it did the 1994 auto industrial policy, which failed to consolidate dozens of automakers into six national firms largely because local governments protected local auto companies. Recent attempts at consolidating the cement and steel industries have also met resistance at the local level. Thus, the central government may once again be disappointed as it attempts to implement national industrial policies during China's post-WTO transition period. Uncertain future China and the international community have changed significantly as a result of China's WTO entry. The business environment, in particular, has greatly improved, and trade and investment have grown. Now that most of China's commitments have phased in, the post-transition period looms. What this period will bring is uncertain. Foreign businesses are pressing for changes beyond those contained in China's WTO commitments, but voices within China are cautioning against further market openings. At the same time, the PRC government has laid out a new economic strategy focused on boosting domestic consumption and indigenous technological development. Nevertheless, optimism may be warranted. Indeed, China and its trade partners have learned to resolve dis agreements through negotiation and the WTO dispute-res olution mechanism. Moreover, the changes that China's WTO entry has ushered in, along with a host of other con siderations, will likely sustain the progress made to date. The Trade Debate within China Official PRC media and leaders tend to focus on the positive impact of China's World Trade Organization (WTO) accession and its efforts to open its economy. But some scholars, journalists, and other critics within China have more negative assessments of China's trade and investment policies, and it may be useful for US politicians and the general public to know about this discourse. Indeed, PRC policymakers take these criticisms seriously, allowing them to color the debate and their own attitudes toward China's participation in the WTO. Is China too dependent on trade? China's total trade volume has surged in recent years, and critics now often say that China's economic growth is overly dependent on foreign trade, warning that the ratio of trade to GDP—the foreign trade dependence ratio—is too high. Indeed, China's dependence on trade reached 80 percent in 2005, higher than that of many other countries, including the United States, Japan, and India, according to a study by the Chinese Academy of Social Sciences. China's reliance on exports has, in turn, caused friction with trading partners while potentially harming China's economic security, the critics note. Those on the other side of the domestic debate have questioned the calculation of the ratio: The size of China's GDP has largely been underestimated because it has only recently begun to take into account the service sector. Thus, China's dependence on trade is probably smaller than what critics suggest. Do FIEs reap more benefits? The critics also insist that foreign- invested enterprises (FIEs) are the largest drivers, and beneficiaries, of China's booming exports. According to the PRC Ministry of Commerce, FIEs accounted for more than 60 percent of Chinese exports in 2005. Besides causing deficits with major trade partners that create political difficulties, these investments, mainly in assembly and processing trade, may be keeping China at the lower end of the international value chain. Because Chinese firms and labor contribute only 10-15 percent of the added value of these products, the "rise" of the Chinese economy is actually an illusion, these critics claim. Opponents of this argument say that China's export of low-end manufactured goods simply reflects the country's current comparative advantage. Moreover, China benefits from the creation of jobs, the training of its workers, and greater knowledge of international markets. They contend that this stage is necessary to prepare China to move into the higher value-added industries. Critics also argue that Chinese companies have not reaped the profits or gained the technologies that they had hoped for after WTO accession. China's industrial policies, largely aimed at strengthening domestic firms, are now largely toothless because WTO rules prohibit restrictions on local content and forced technology transfers. Moreover, the critics claim, foreign investors have given up local partners in existing joint ventures (JVs) in favor of wholly foreign-owned enterprises. Critics worry that multinational corporations are thus tightening control over their technologies to the detriment of Chinese domestic enterprises. Critics often cite the auto industry as an example of Chinese companies not benefiting from partnering with foreign investors. In the run-up to WTO accession, many state-owned automakers believed that "the wolf was coming." In their hurry to form JVs with top international automakers, many Chinese firms signed deals that gave control to foreign investors, who now make decisions that range from the types of vehicles the JVs produce to the sourcing of parts and components. Even more strikingly, leaders of these state-owned enterprises, who focused only on short- term profits, were willing to abandon decades of research and development (R&D) efforts. For instance, soon after partnering with Nissan Motor Co., Ltd., Dongfeng Motor Corp. increasingly neglected independent R&D as it received product models from foreign partners. This eventually led to the departure of many engineers from Dongfeng. Some observers argue that Chinese companies can grow by working with foreign investors, especially by learning how to develop a global sales network. Others endorse the notion that state- owned auto companies should cultivate leading Chinese brands, but they also believe that this does not necessarily preclude cooperation with international investors from whom Chinese companies can nevertheless learn. Is China subsidizing foreigners? Critics also insist that some of Beijing's policies make China—a developing country—subsidize developed countries and their companies. These policies, often used at the local level to attract foreign investment, include preferential treatment on taxes and land-use fees. Critics claim that such measures distort prices and that China's massive foreign exchange reserves are also part of this distortion. They argue that China's purchase of US Treasury bills directly subsidizes the US economy. Is China treated fairly? Finally, many journalists, scholars, and officials do not believe that western countries treat Chinese exporters fairly and cite research to support the view that China deserves to have market economy status. For instance, a study by Li Xiaoxi of Beijing Normal University shows that the Chinese economy's marketization was as high as 73.8 percent in 2003. The critics thus argue that it is unfair for the United States, Japan, and European Union to withhold market economy status from China. Ironically, the United States and European Union granted Russia such status in 2002, even though Russia and China received comparable scores in the 2006 Index of Economic Freedom compiled by the Heritage Foundation and the Wall Street Journal. —Wang Yong Wang Yong (yowang@pku.edu.cn) is an associate professor of international political economy and director of the Center for International Political Economy at Beijing University. Further Reading The China Effect The Emerging Asian Union WTO: Year Five Counterfeiting in China: A Blueprint for Change Made in China Top of Page Table of Contents
	Permissions Copyright Information Privacy Policy The US-China Business Council © 1997-2008 by the US-China Business Council. All rights reserved.

Departments