China's Entry into the WTO

In November 1999, the Chinese and U. S. governments agreed to accession terms by which China could join the WTO. This agreement set the tone for agreements that China made with other countries over the ensuing year and a half. In the fall of this year, after further intense negotiations, China finally was admitted into the WTO. The basic terms of the agreement are as follows (Lardy, 2002; U. S. Trade Representative)

Agricultural tariffs fall to an average of 17. 5 percent by 2004, liberalization of imports of major agricultural commodities, import and distribution rights granted to foreigners; 20 Of course, as the experience of many other countries will show, an industrial policy structure is neither a necessary nor sufficient condition for government corruption. Average tariff on industrial products falls to 9. 4 percent by 2005, including elimination of all tariffs on high-technology products; auto tariffs fall from 80-100 percent to 25 percent by 2006;  Eliminates import quotas and licensing requirements by 2005;

Grants import and distribution rights to foreign corporations, allows them to set up whollyowned distribution, sales (including retail), shipping, and service networks over a three year phase-in period;  Financial services - banking, insurance, and securities - increased access phased in over five years, culminating in full market access in all activities and regions, and national treatment for foreign banks; minority ownership in domestic securities firms and most insurance business; •Telecom - ends ban on foreign investment, allows 50 percent ownership in value added (internet) and paging services within two years after accession; 49 percent ownership in mobile telecom, domestic and international services phased in over five to six years;

Other services - increased market access for professional services, including accounting, consulting, engineering, medical, and information technology; Safeguards and Protections for the United States Allows the United States to continue to treat China as a non-market economy in antidumping cases for 15 years after accession; this methodology generally results in the application of larger anti-dumping margins against Chinese imports; Permits the United States to implement a product-specific safeguard to prevent large import surges from China; this safeguard, which allows the United States to impose restrictions on imports from China more easily than imports from other WTO members, would remain in effect for 12 years after China’s WTO accession;

Allows the continuation of a safeguard mechanism to prevent textile import surges until the end of 2008. As these last points make clear, the Chinese government made many concessions to join the WTO, and indeed, made more concessions than virtually all other countries that joined. (Lardy, 2002). Why were the Chinese leaders so anxious to join? Many have argued that the principle reason was because they believed that joining would accelerate the flow of foreign investment into China and that foreign investment has been the engine of growth. This certainly seems to be true for some of the policy makers. But, another view is more compelling. As an official of the Ministry of Foreign Trade and

Cooperation (MOFTEC), perhaps the most active supporter of WTO admission in the government, pointed out in an interview, the most important reason to join the WTO is to keep the process of liberalization moving forward. 21 China is entering a difficult period as it tries to move further down the capitalist road. As state-owned enterprises continue to lay off workers, social unrest and political pressure to reverse the liberalization process is certainly bound to increase. Having signed an international agreement to liberalize further, it will be difficult for these political forces to block further liberalization. Foreign investment is an important aspect of this process, but it is not the main goal of joining.

WTO, FDI and Employment Generation As we indicated above, one of the motivations for joining the WTO was as a way to attract more foreign direct investment. Part of the motivation was to provide employment to help absorb employees laid-off as a result of the increased competition SOE's will face from foreign competition. However, as we have shown, the role of FDI in employment generation has not been great. Some have argued, though, that the role can be increased with WTO entry because then China will have access to more export markets and exports can significantly expand.

But as is shown in UNCTAD (2002) and other studies, the role of exports is severely constrained by the sheer size of the Chinese labor force. To absorb a large amount of Chinese labor, the Chinese world export share would have to climb to politically unsustainable levels in a number of industries. Moreover, the role of FDI in the balance of payments may also be a constraint on the success of this strategy. UNCTAD (2002) reports that profits earned by FIE's in China exceed their export surpluses by a wide margin (UNCTAD, 2002). If these profits are exported back to the home country, then the inflows of new FDI, over the long term, may significantly harm the balance of payments. Finally, we have seen that FDI not only generates exports; it also generates a great deal of imports.

In short, the labor-intensive exports are also import intensive, and as a result, not only do they not generate a large amount of employment, they also fail to generate a high level of value added. (UNCTAD, 2002, p. 155-156). The key, then, for FDI to play a substantial role in improving labor outcomes would involve the upgrading of FDI: to produce more domestic capital goods and to generate more inputs and value added at home.

However, it is precisely this ability to restrict FDI to higher value added channels which will be constrained. WTO's rule of national treatment mans that China will have to eliminate performance requirements over FIE's unless it can extend them to domestic firms as well. Moreover, there will be pressure on the Chinese government to extend tax breaks and other special treatment from FIE enterprises to local ones, further undermining the Chinese government's ability to conduct industrial policy and generate the upgrading of FDI and domestic investment as well.

Of course, such upgrading will occur to some extent through general market 21 Interview with MOFTEC official, Beijing, April, 2001. forces. But the Chinese government will not be able to accelerate and channel this process as it has done relatively successfully for the last several decades. Hence, just at a time when joining WTO is likely to generate large scale employment loses in SOE's (see Minqi, 2002; UNCTAD (2002)) the promise of FDI as an employment generating substitute is unlikely to bear fruit.