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					               China and the WTO


Agricultural Challenges after its Accession to WTO




                 Claudia Sullivan
                International Trade
                   Final Paper
              Prof. Steven Beckman
China and WTO


Who is really benefiting from it?


The membership of Taiwan Province of China in the International Monetary Fund and
the World Bank in the early 1980s contributed to ending China‟s isolation of its economy
from the world.
By 1986, China had started lobbying to be readmitted to the General Agreement on
Tariffs and Trade after it had left it in 1949 when the People‟s Republic of China was
founded.


As the result of 15 years of laborious negotiations, on December 11 2001, China
officially became the 143rd member of the World Trade Organization, and while an
economy as large as China can cause commotion for developing countries in the short
run, it must also be noted that it should benefit China‟s trading partners in the long run.


While China transitioned from a centrally planned economy to a market-oriented one, its
exports grew from $10 billion in 1978 to $278 billion in 2000, making it the sixth largest
trading nation in the world (from the original 30th position it enjoyed in the 1970s). The
trade-to-GDP ratio, (often called the trade openness ratio, is the average share of exports
and imports of goods and services in GDP) increased from a 10% to about a 40% in the
late 1990s. China‟s inflows of foreign direct investment, which according to the IMF may
lead developing countries to regard it as the private capital inflow of choice, reached $47
billion in 2000, second in size only to the United States.


Because it‟s inevitable that the inclusion of China to the global economy will lead to
shifts in the world production, trade, investment and employment, there have been
provisions in China‟s Protocol of Accession to WTO (which requires resolution of
critical questions about China‟s future status within the organization).




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What exactly is China’s commitment?


According to the IMF, China has agreed to reduce its tariffs, eliminate export subsidies
and increase the volume of tariff-rate quotas on some of their imports.


China has also promised to end quantitative restrictions, to cut the average tariff from
24.6% to 9.4% by 2005, and sign the Information Technology Agreement, which should
result in the elimination of all tariffs on telecommunications equipment, semiconductors,
computers and computer equipment and other information technology products. China
has promised to open its telecommunication, financial services, distribution and many
other industries to foreign services providers.
In addition, China has agreed to eliminate all prohibited subsidies, liberalize trading
rights and require state trading companies to conduct their operations in a commercial
manner. China has agreed to subject its state-owned enterprises (SOEs) to applicable
WTO rules, to refrain from establishing new non-tariff barriers to trade, and to phase out
existing GATT-inconsistent quotas and related measures in accordance with schedules


The United States in return has granted China, permanent most favored nation (MFN)
status, which was previously subject to an annual US Congress renewal, and as such the
level of trade concessions expected to make in negotiations is reduced.


Quotas on textiles and clothing will end by 2005 in accordance with the ATC (Agreement
on Textiles and Clothing) and other quotas will also end according to negotiated
schedules under the WTO.


Even though China has a lot to gain from opening up its economy to the world, there are
certain risks to these gains.


Under a 12 years transitional product specific safeguard mechanism China‟s trading
partners may impose restrictions on Chinese imports based on “market disruption or
threat of market disruption”. Unlike the normal WTO standard, which only calls for



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restrictions to be imposed only in the event of “serious injury” or “threat of serious
injury”.


Although all quotas in the textile and clothing exports of China are to end by January 1 of
2005, there is a special safeguard mechanism in place until the end of 2008, which allows
importing countries to restrict Chinese imports when they stem from market disruption.


In addition Chinese exporters can be faced with dumping charges, in which case the
importing countries can also use the prices or costs of similar products in third countries
instead of Chinese prices to determine whether Chinese firms are dumping. Similar rules
apply to determine whether Chinese exporters are being subsidized.


There is no question however of the economic impact the WTO will have on China. The
Chinese consumers will benefit greatly from a more efficient economy even though in the
short run the heavily protected sector will be harmed as their barriers fall.


Studies indicate that: “Chinese industries will need to adjust. Labor intensive industries
such as textile and clothing will expand, and heavily protected industries like automobile
and petrochemicals will contract”. Following adjustments can lead to Cournot
Equilibrium where each firm concludes that their output should match their competitors
at a quantity above the shared monopoly.


Agriculture may contract due to the loss of comparative advantage in the land intensive
grain industry (>$25/mo income per agricultural labor, and due to water shortage because
of construction from the big cities, China is becoming drier), China also has 7% of the
arable land of the world even though over 20% the world population.


Though labor-intensive agricultural industries such as fruits and vegetables still enjoy a
comparative advantage. If villagers have more money, this will translate into more
prosperity to the countryside and the population there will not live in the past. However
there will be more subsequent environmental problems (less protected areas).



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Other state dominated fields such as the financial sector, will likely experience pressure
from the impending entry of foreign firms.


With the effects of competition, productivity growth should rise. Though some 12 million
jobs in the auto and agriculture industries are expected to disappear. Income inequality
could increase in the short run but employment growth is expected to increase over time
given liberalization of trade.


But how exactly will the WTO affect Chinese Agriculture?


Traditionally an agriculture-based society, China's current rural population, accounts for
more than two-thirds of the country‟s entire population and contributes to only one-third
of the total consumption (National Bureau of Statistics).
For that reason alone Agriculture is of great importance to China‟s national economy.
Issues concerning agriculture, farming, land use rights and rural labor working in rural
and urban areas are of primary importance to the well being and growth of China.


According to a study done by Economists Li Shi and Yue Ximing from the Institute of
Economics at the Chinese Academy of Social Sciences (CASS) and based on a Survey on
Urban and Rural Income Disparity in China organized by CASS, China's urban-rural
income gap has continued to widen. In 2001, per capita income of urban residents was
nearly three times that of people from rural areas. In 2002, the ratio of urban-rural income
was 3.1 to one, up from 2.8 to one in 1995. It was 1.8 to one in the mid 1980s. If non-
currency factors are taken into consideration, China's urban-rural income gap is the
widest in the world” (Shi, Ximing).


The study also indicated an alarming increase in income disparity, which leads to growth
stagnation. Even though data has shown that between the years of 1994 and 1997 urban-
rural income disparity had narrowed since then the gap has widened again. The study
found that the urban-rural income gap is wider in the western part of the country than in
the eastern part, where the economy is more developed. In 2002 only a 6% of the
population, which represents the highest income earners, took home an amazing 26.1% of

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China‟s entire income, raising the country's Gini index in 2002 by two percentage points
since 1995 (CASS).


Certainly, economic reform has already brought many losers and it will be imperative
that the government does what it can to help those who are left behind.


In order to attack these challenging issues, which are destined to otherwise worsen due to
China‟s entry to the WTO, the government is said to be committed to help reduce
farming costs through tax rebates, encourage adoption of advanced farming technology
and tools, and make so called “favorite policies” to increase the value-added sector of the
rural economy, through the building of high quality grain production bases. The Chinese
Government will also invest some 6 billion Yuan (US$730 million) through 2005 in the
agricultural sector to help boost efficiency. These measures will in time benefit the rural
households where educational and health-care opportunities are diminishing.


Other recommendations to consider aimed at minimizing the immediate effects of
WTO‟s membership on agriculture relate to promoting the migration of people from rural
areas to move to non-agricultural sectors. An unbroken rule this far. Building small
townships to absorb rural population, and encourage and attract enterprises such as
private businesses and small and medium sized enterprises to emerge, should absorb rural
labor. The working conditions for rural labor working in urban areas should be improved,
and training should be organized to help rural people improve employment
competitiveness and opportunities.


China‟s entry into the WTO has a unique opportunity to use foreign trade and investment
reforms as a means to offer the People of the Republic of China a richer, freer world
where more people have more choices about how they want to lead their lives.


The well being of rural labor working in urban areas is however a major concern that
deserves attention. China‟s current resident registration system divides the total
population into two main categories: the rural people and the urban residents. Within this
system, rural people working in the cities cannot change their status and as long as they

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continue to be categorized as rural people, they cannot enjoy the social benefits designed
for urban residents, including education, medical care, pension etc. Measures need to be
taken to prevent rural labor from forming new substandard housing in cities. It‟s known
that first generation of immigrants generally do not change in social status, but if their
children face discrimination in terms of education and later employment opportunities,
the society will eventually have to pay a price for its social injustice.


Further, since China‟s commitments to the WTO will lead to a rapid increase in the
import of agricultural products and an oversupply in the domestic market, rural
employment and farmers‟ incomes will inevitably be affected (Douglas Irwin).


This is because their domestic prices in most cases exceed the prices on the world market.
If consumption in rural areas cannot be stimulated, the full expansion of domestic
demands, engine for economic growth, will be threatened. Zhang Xiaoshan, director of
the Rural Development Research Institute under CASS, has said that: “Slow income
growth will hinder overall economic development and even undermine social stability''.


While there are several issues on the table, which deserve immediate action given the
vast amount of people they affect, China‟s entry into the WTO, has brought numerous
opportunities for agricultural development as well, which will help restructure Chinese
agriculture, attract foreign investment, bring up to date technology, which ultimately help
increase the competitiveness of Chinese agricultural products.


China‟s Minister of Agriculture Du Qinglin, has recently stated that “the agricultural
structure will focus on four main areas to restructure rural employment: adjusting and
optimizing the mix of agricultural products and making the most of regional advantages;
accelerating development of high quality special purpose and pollution free agricultural
products and improving the quality of their products across the board; developing the
processing industry for agricultural products to increase the added value of these products
and finally pushing forward the restructuring of rural employment and accelerating the
transfer of surplus rural labor”.



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The Chinese government has indeed made great efforts in optimizing and restructuring
scientific research institutes for agriculture. Specifically they are attempting to transform
application oriented scientific research institutes into agricultural enterprises based on
science and technology, as well as popularize agricultural technology with a new system
supported by state funding and market guidance with free and paid services.


Increasing investment in agriculture, accelerating infrastructure construction in rural
areas, letting more farmland revert to forest, and deepening the reform of rural taxes and
administrative charges to reduce the burden on farmers are said to be the Chinese
Government priorities to increase the per person net income of farmers in the near future.


Chinese President Hu Jintao has maintained that increasing the income of rural people
and the development of agriculture are essential for the sustainable and coordinated
development of the national economy, as well as social stability.


Transferring of rural population to other sectors is an inevitable factor in the development
of modernized agriculture and the creation of a freer farm produce market.


The restrictive laws against migrants in places like Beijing, for example have already had
unexpected consequences. Migrants have created a migration business. Migrants are
forced to cooperate with locals in order to get into the market. Locals protect them for a
fee. Migrants tend to work harder and spend less. The hostile legal environment they are
in enables them to survive and achieve considerable economic independence. In turn,
their economic achievement gives them more bargaining power to strengthen their
cooperation with locals and gain an actual presence in the city


Not only that, China will need to adapt its agricultural policies through continuing tax
reforms in rural areas, and will need to move to raise income for agriculture workers,
especially for grain producers.




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“Greater efforts should be made to help surplus rural laborers find jobs in cities, while
removing discriminatory regulations and unreasonable charges for migrant workers”,
have been President Hu Jintao‟s exact words.


In a country where „used to be‟ agricultural sectors have already been abandoned due to
water shortage that comes from the construction in the big cities, China will need to at the
same time create the most rigorous system in the world to protect farmland from being
depleted for excessive industrial development, and the illegal use of farmland for non-
agricultural development should be penalized.


Instead of exerting control on agricultural production, through quotas, tariffs and price
regulation, the Chinese Government has slowly adopted policies to promote free trade of
agricultural products in domestic markets as well as the efficient import and export of
products abroad.


If the Government leaves to the people to make the choices of where to live and where to
work, Chinese will finally be allowed to experience competition, with free flow of
information, in markets where no participant can influence price and where everything is
up to the there is a large number of buyers and sellers.


Information gathered and compiled by the US China Economic and Security Review
Commission (USCC), concluded that production shifts into China (a total of 58 out of
154 cases coming from the US) is a global rather than just an American phenomenon.
China is offering easy access, reduced shipping times and costs to a wide number of
countries worldwide.


It is undeniable that China‟s entry will signal an era of increased world trade and greater
prosperity and security for its people. Industrialized countries are also expected to
benefit from China‟s inclusion to the WTO. The United States and Australia will be
likely to increase their exports to China of capital and technology-intensive manufactures.
In time, China will provide these industrialized countries with significant trade and
investment opportunities.

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It will be important to see whether as a truly global trade organization, the World Trade
Organization, will be able to legitimize their implicit role of allowing countries
worldwide a fighting chance against poverty


On the other hand China, as a developing economy and emerging superpower will be key
to bridge between the developed and developing member countries in an effort to voice
the need to balance wealth amongst all nations.




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Bibliography:
“Free Trade under Fire”, Chapter 6, Douglas A. Irwin
“How China Opened its Door”, Susan L. Shirk
“China and the WTO”, Supachai Panitchpakdi, Mark L. Clifford.
“How Reform worked in China”, Yingyi Qian
Lectures from International Trade, Prof. Dr. Steven Beckman
World Trade Organization, www.wto.org

Other Articles and Works Cited:
Rural income rises, but growth slow ( 2004-01-26 08:58) (China Daily)
http://www.chinadaily.com.cn/en/doc/2004-01/26/content_300981.htm
US China Economic and Security Review Commission (USCC)
(http://www.uscc.gov/researchpapers/2004/cornell_u_mass_report.pdf
A Yawning Urban-rural Income Gap
Li Shi, Yue Ximing
http://www.caijing.com.cn/english/2004/040220/040220coverstory.htm
China‟s Agriculture: New developments since the WTO Entry
Tan Xingyu, A.Lei
www.china-pictorial.com
Chinese Academy of Social Sciences
CASS
www.cass.net.cn

Organisation for Economic Co-operation and Development, OECD
http://www1.oecd.org/publications/e-book/92-2003-04-1-7294/C.2.1.htm

International Monetary Fund, IMF
What will WTO Membership mean for China and its trading Partners?
Ramesh Adhikari and Yongzheng Yang
http://www.imf.org/external/pubs/ft/fandd/2002/09/adhikari.htm

Comrades or Competitors?
Trade Links Between China and Other East Asian Economies.
By Prakash Loungani
http://www.imf.org/external/pubs/ft/fandd/2000/06/loungani.htm

The American Society of International Law
http://www.asil.org/insights/insigh13.htm

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