C H I N A A N D T H E WTO ACCESSION, POLICY REFORM, AND POVERTY REDUCTION STRATEGIES Editors Deepak Bhattasali · Shantong Li · Will Martin China and the WTO Accession, Policy Reform, and Poverty Reduction Strategies China and the WTO Accession, Policy Reform, and Poverty Reduction Strategies Editors Deepak Bhattasali, Shantong Li, and Will Martin A copublication of the World Bank and Oxford University Press © 2004 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. A copublication of the World Bank and Oxford University Press. 1 2 3 4 07 06 05 04 The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Cover collage created by Tomoko Hirata using the following photographs: © Michael S. Yamashita/CORBIS (farmer); © Enzo & Paolo Ragazzini/CORBIS (woman); © Yang Liu/CORBIS (automobile factory); © How-Man Wong/CORBIS (man). Library of Congress Cataloging-in-Publication Data China and the WTO: accession, policy reform, and poverty reduction strategies / edited by Deepak Bhattasali, Shantong Li, William J. Martin. p. cm. ­ (Trade and development series) Includes bibliographical references and index. ISBN 0-8213-5667-4 1. China--Commercial policy. 2. World Trade Organization--China. 3. Foreign trade Regulation--China. 4. Agriculture and state--China. 5. Poverty--Government policy--China. 6. China--Economic policy--2000-. I. Bhattasali, Deepak. II. Li, Shantong. III. Martin, Will, 1953- IV. Series. HF1604.C4426 2004 382'.3'0951--dc22 2004044097 Contents Foreword xi Acknowledgments xii About the Editors and Authors xiii Acronyms and Abbreviations xiv 1. IMPACTS AND POLICY IMPLICATIONS OF WTO ACCESSION FOR CHINA 1 Deepak Bhattasali, Shantong Li, and Will Martin Part I. Policy Reforms Associated with Accession 19 2. WHAT CHINA'S WTO ACCESSION IS ALL ABOUT 21 Jeffrey L. Gertler 3. CHINA IN THE WTO: ANTIDUMPING AND SAFEGUARDS 29 Patrick A. Messerlin 4. INTELLECTUAL PROPERTY RIGHTS IN THE WTO ACCESSION PACKAGE: ASSESSING CHINA'S REFORMS 49 Keith E. Maskus 5. CHINA'S AGRICULTURAL DEVELOPMENT AND POLICY READJUSTMENT AFTER ITS WTO ACCESSION 69 Chen Xiwen 6. THE NATURE OF DISTORTIONS TO AGRICULTURAL INCENTIVES IN CHINA AND IMPLICATIONS OF WTO ACCESSION 81 Jikun Huang, Scott Rozelle, and Min Chang Part II. Economic Impacts of Accession 99 7. THE IMPACTS OF WTO ACCESSION ON CHINESE AGRICULTURE AND RURAL POVERTY 101 Kym Anderson, Jikun Huang, and Elena Ianchovichina 8. THE SERVICES DIMENSION OF CHINA'S ACCESSION TO THE WTO 117 Aaditya Mattoo 9. LOGISTICS IN CHINA: IMPLICATIONS OF ACCESSION TO THE WTO 141 Wenping Luo and Christopher Findlay v vi Contents 10. TELECOMMUNICATIONS SERVICES IN CHINA: FACING THE CHALLENGES OF WTO ACCESSION 157 Mari Pangestu and Debbie Mrongowius 11. ACCELERATING FINANCIAL MARKET RESTRUCTURING IN CHINA 181 Deepak Bhattasali 12. WTO ACCESSION AND THE STRUCTURE OF CHINA'S MOTOR VEHICLE SECTOR 191 Joseph F. Francois and Dean Spinanger 13. ECONOMIC IMPACTS OF CHINA'S ACCESSION TO THE WTO 211 Elena Ianchovichina and Will Martin Part III. Impacts on Households and on Poverty 237 14. EARNINGS AND LABOR MOBILITY IN RURAL CHINA: IMPLICATIONS FOR CHINA'S ACCESSION TO THE WTO 239 Terry Sicular and Yaohui Zhao 15. WELFARE IMPACTS OF CHINA'S ACCESSION TO THE WTO 261 Shaohua Chen and Martin Ravallion 16. IMPLICATIONS OF WTO ACCESSION FOR POVERTY IN CHINA 283 Thomas W. Hertel, Fan Zhai, and Zhi Wang 17. COPING WITH AND ADAPTING TO JOB LOSSES AND DECLINES IN FARM EARNINGS IN CHINA 305 Athar Hussain Index 325 Boxes 9.1 Local Policies and Their Implications for Logistics Operations 148 10.1 Summary of China's WTO Commitments 166 10.2 Coverage and Definition of China's Telecommunications Sector 167 10.3 Experience of Chile, Peru, South Africa, and Hong Kong (China) with Universal Access 175 11.1 Modeling State Bank Performance: Can the State Banks Survive Liberalization? 188 12.1 Summary of Developments in China's Automotive Sector 193 17.1 Advantages and Disadvantages of Decentralization 312 Figures 8.1 Country Services Commitments by Mode 119 8.2 Sequence of Telecommunications Reform in Nine Asian Countries, 1989­99 135 9.1 Choice of Transport Modes: China, 1970­2000 143 Contents vii 10.1 Mobile and Fixed-Line Use in China, 1996­2003 163 10.2 Internet Users in China, 1996­2002 164 10.3 Restructuring of China's Telecommunications Industry, 1994­2003 170 10.4 Share of Revenue by Operator, 2001 and 2002 172 12.1 China's Production of Motor Vehicles since Adoption of the Open-Door Policy 194 12.2 Scale and Average Cost (with a CDR of 0.125) 201 12.3 Motor Vehicle Production in China and United States 201 12.4 Import Share of Total Auto Parts 203 12.5 Location of Automobile Production in China 208 15.1 Poverty Incidence Curves, Rural 268 15.2 Poverty Incidence Curves, Urban 269 15.3 Mean Gains by Provinces: Absolute Gain in Yuan Per Capita 270 15.4 Mean Gains by Provinces: Proportionate Gains in Percent 270 15.5 Mean Gains by Provinces: Percentage of Gainers by Provinces 271 15.6 Mean Gains in Yuan by Income Percentile 271 15.7 Mean Percentile Gain by Income Percentile 272 15.8 Percentage of Gainers by Income Percentile 272 16.1 Change in Sector Output due to WTO Accession, China 298 16.2 Impact of WTO Accession on Rural Households 300 16.3 Impact of WTO Accession on Urban Households 300 Tables 1.1 Some Measures of Import Protection in China's Agricultural Sector 6 3.1 Top 10 Antidumping Users, Measures in Force, 1995­2001 30 3.2 Major Antidumping Targets, Measures in Force, 1995­2001 31 3.3 Shares of Antidumping Measures in Force against Imports from China, 1995­2002 32 3.4 Antidumping Measures in Force in the World by Sector, 1995­2000 34 3.5 EC and U.S. Echoing Antidumping Cases against Chinese Producers, 1980­99 37 3.6 China's Antidumping Measures in Force and Investigations, as of 30 June 2003 40 3.7 Do Antidumping Investigations Really Look at Dumping? 42 4.1 Substantive Requirements of the TRIPS Agreement in the WTO 51 4.2 An Assessment of China's IPRs System for Development Purposes 58 4.3 Patent Applications by Type and Nationality, 1994­2000 62 4.4 Patent Grants by Type and Nationality, 1994­2000 63 4.5 Bilateral Invention Patent Applications, 1994­98 63 4.6 Bilateral Invention Patent Grants, 1994­98 64 4.7 Patenting Indicators for Top Patenting Regions, 1985­96 and 2000 64 5.1 Changes in Farm Output Value Shares 70 5.2 Sources of Farmers' Incomes, 1997­2000 71 5.3 Declines in Per Capita Farm Incomes in Six Key Provinces 72 5.4 Changes in Farm Household Spending, 1997­2000 72 5.5 Share of Farmers in Consumer Spending at County and Lower Levels 73 5.6 Changes in Urban and Rural Resident Income and Spending, 1996­2001 75 6.1 Changes in Nominal Rates of Protection Over Time of China's Major Agricultural Commodities, 1978­2000 83 6.2 China's Agricultural Trade (US$ millions) by Factor Intensity, 1985­97 83 6.3 Subsidies and Tax Rebates for Exports of Selected Agricultural Commodities in China, 2001 85 viii Contents 6.4 Disaggregated Nominal Rates of Protection for Selected Grains in China, October 2001 87 6.5 Average Nominal Protection Rates for Major Imports and Exports in China, October 2001 88 6.6 Percentage of Market Pairs that Test Positive for Being Integrated Based on Dickey-Fuller Test in Rural China, 1988 to 2000 89 6.7 Soybean, Corn, and Wheat Village Price Regression, 2000 93 6.8 Transmission Coefficients for Rice and Maize Measuring the Percentage of Price Shock at Port that Is Transmitted to Inland Markets in China, 1996­2000 93 7.1 Growth Rates of China's Economy, 1970­2000 103 7.2 Farm and Rural Enterprise (RE) Developments in China, 1980­99 103 7.3 Changing Structure of China's Economy, 1970­2000 104 7.4 China's Grain Production, Trade, and Consumption, 1980­2000 104 7.5 Structure of China's Food and Feed Trade, 1980­99 105 7.6 Nominal Rates of Protection (NRP, Applied Tariff or Tariff Equivalent), Agricultural Products: China, 1995­2007 106 7.7 Rural Income, Employment, and Food Output by Region: China, 2000 108 7.8 Income and Its Distribution: Rural and Urban China, 1980­99 108 7.9 Sectoral Volume Effects of China's WTO Accession Reforms (Core Case), 2002­07 110 7.10 Change in China's Real Factor Prices and National Economic Welfare Attributable to WTO Accession, 2001­07 111 7.11 Changes in China's Farm Output, Employment, and Trade Volumes: Without WTO Accession, 1995­2007, and Resulting from China's WTO Accession Reforms, 2002­07 113 7.12 Effect on Agricultural Self-Sufficiency of China's WTO Accession without and with Cuts in Agricultural Protection in OECD Countries 114 8.1 Coverage of Specific Commitments by China to Services in Trade 120 8.2 China's Commitments: Past, Present, and Future 122 9.1 Starting Position of China's Logistics Sector 145 9.2 Position of China's Logistics Sector One Year after WTO Accession 146 9.3 Position of China's Logistics Sector Three Years after WTO Accession 146 9.4 Summary of Indirect Effects of WTO Accession on China's Logistics Sector 147 9.5 Logistics Costs as a Share of Total Revenue, Europe and Asia, 2001 149 10.1 Network Operators and Licensing, China 159 10.2 Network Operators in China: Description of Network and Coverage 160 10.3 Impacts of Reforms on China's Telecommunications Industry, 1998­2003 165 11.1 China's Financial Services Industry, 2001 183 11.2 China's WTO Commitments in the Financial Services Sector 186 12.1 GNP, Population, and Stocks of Cars: Selected Countries, 2000 192 12.2 Auto Production by Plant in China, 1995­2002 195 12.3 Import and Domestic Shipment Values of China's Motor Vehicle Industry, 1997 196 12.4 Tariffs on Chinese Motor Vehicles 196 12.5 Regional and Sectoral Breakdown of the Model 198 12.6 Mainland China's Pre- and Post-WTO Accession Tariff Rates 199 12.7 Impact of WTO Accession of Greater China on Output 202 12.8 Mainland China Motor Vehicle Market 203 12.9 Impact of Greater China Accession on Value Added 204 12.10 Impact of Greater China Accession on Value of Exports 205 12.11 Impact of Greater China Accession on Value of Exports 206 Contents ix 12.12 China Export Shares: Baseline and Scenario 207 13.1 Import Coverage of Nontariff Barriers 214 13.2 China's Average Statutory Rates 215 13.3 China's Import Protection before and after WTO Accession 216 13.4 Projected Growth in Factor Inputs and Total Factor Productivity 1997­2007 218 13.5 Changes in China's Key Economic Indicators after 2001 as a Result of WTO Accession 220 13.6 Change in Real Factor Prices in China as a Result of Accession, 2001­07 221 13.7 Welfare Change and Sources of Welfare Change as a Result of China's WTO Accession 222 13.8 Change in Output and Employment in China as a Result of WTO Accession and Other Reforms 225 13.A.1 Tariff Lines Subject to Import NTBs, China, 2001 227 13.A.2 The Import Coverage of Nontariff Barriers in China, 2001 228 13.A.3 Commodity Import Shares by NTB Measure 229 13.A.4 Elasticity of Substitution and Changes in Real Consumer Prices due to China's WTO Accession 230 13.A.5 Changes in China's Key Economic Indicators in the Baseline, without WTO Accession, 1995­2007 231 13.A.6 Changes in China's Key Economic Indicators due to WTO Accession for the Period before 2001 232 13.A.7 Sensitivity Analysis with Respect to the Elasticity of Transformation (2.67) 233 14.1 Descriptive Statistics, CHNS, 1997 244 14.2 Income Generation Functions 245 14.3 Descriptive Statistics for Variables Used in the Income Generation Functions, CHNS, 1997 246 14.4 Decomposition of Household Net Earnings Differentials between Households Belonging to the Top and Bottom 20 Percent 248 14.5 Agricultural Production Function 251 14.6 Nonagricultural Production Function 252 14.7 Shadow Wage Equations for Household Agricultural and Nonagricultural Production 253 14.8 Employed Wage Equation 254 14.9 Summary Statistics for Wage Rates and Shadow Wages 255 14.10 Household Labor Supply Equations 257 15.1 Predicted Price Changes from GTAP Model and Per Capita Net Gain or Loss for Rural and Urban Households, 1995­2001 266 15.2 Predicted Price Changes from GTAP Model and Per Capita Net Gain or Loss for Rural and Urban Households, 2001­07 267 15.3 Summary Statistics on Aggregate Welfare Impacts, 1995­2001 and 2001­07 268 15.4 Regression Results for Level of Gain (Yuan) in Rural Areas of Three Provinces, 2001­07 274 15.5 Regression Results for Percentage Gains in Rural Areas of Three Provinces, 2001­07 275 15.6 Regression Results for Level of Gain (Yuan) in Urban Areas of Three Provinces, 2001­07 276 15.7 Regression Results for Percentage Gains in Urban Areas of Three Provinces, 2001­07 277 15.8 Average Impacts for Agriculture Households in Selected Countries, 2001­07 278 15.A.1 Rural Gains and Losses by Province, 2001­07 280 15.A.2 Urban Gains and Losses by Province, 2001­07 281 16.1 Per Capita Income by Location, Stratum, and Vingtile 285 16.2 Economic Structure and Market Openness in China, 1997 287 16.3 Summary of Baseline Calibration 293 16.4 Summary of Experiments 294 16.5 Implications of China's WTO Accession, 2007 296 x Contents 16.6 Sector Impacts of China's WTO Accession in 2007: Percentage Deviation from Baseline 297 16.7 Household Impacts of China's WTO Accession, 2007 299 17.1 Classification of Schemes and Measures 308 17.2 Differences between Social Insurance and Social Assistance 310 17.3 Income Maintenance Schemes in China 311 Foreword China's era of reform has seen enormous progress number of training courses undertaken by the in reducing poverty at the same time as increasing World Bank Institute and partner organizations in integration with the world economy. The process of different parts of China. This book will provide a accession to the WTO contributed to a decisive lasting reference to this major step in the evolution deepening of the process of integration with the of the Chinese economy. world and a move to a much stronger emphasis on This book is the result of a number of years of rules-based reform. However, in recent years, there work by a team of Chinese and foreign scholars. has been increasing concern about an increase in Just as China and her trading partners have bene- inequality within China and a rising gap between fited from the win-win nature of international the fortunes of urban and rural families. trade, members of this team have benefited from The aim of the project on which this book is one another's knowledge and understanding of based was to bring together information on the different facets of this enormously complex and implications of China's WTO accession agreement-- dynamic economy. The work is testimony to the an enormous and complex watershed agreement-- success of the partnership between the World Bank and to assess the overall impacts for households and the Development Research Centre of State throughout China. This required the collection of Council--a partnership that has contributed a information and the analysis of the policy reforms great deal to both of our organizations. We look involved in the accession agreement, followed by an forward to even stronger cooperation between our assessment of the effects of these policies on the two organizations in the future, as China enters the major elements of the economy. Finally, drawing on next phase of development. this analysis, the impact of the reforms on individual households--and especially those of the poor--was François Bourguignon evaluated. The results of the analysis provide a basis Senior Vice President and Chief Economist for recommending policies to capitalize on the bene- The World Bank fits resulting from accession and to mitigate the adverse impacts. The work on which this book is based has been Wang Mengkui disseminated in China through numerous presen- Director tations and seminars and through inputs into a Development Research Centre of State Council xi Acknowledgments We owe a debt of gratitude to the United Kingdom organizing the many workshops and interim publi- Department for International Development (DFID) cations associated with this project. for its generous support to this project. Particular Many others have assisted by commenting on thanks are due to the DFID staff who provided sup- drafts of this book, through participation in the port and encouragement at critical times in the life workshops, or by providing advice. Among others, of the project--in particular, Paul Whittingham for we would like to thank Long Yongtu, François his encouragement in the original design; Catherine Bourguignon, Christopher Hum, T. N. Srinivasan, Martin for her continuing advice and encourage- Kong-Yam Tan, L. Alan Winters, Justin Yifu Lin, ment from Beijing; and Fiona McConnon, Clare Wang Xinkui, Nicholas Lardy, Ke Binsheng, Wang Roberts, and Kebur Azbaha for their assistance with Jun, Bernard Hoekman, Liu Xiaofan, Xu Lin, Wang the implementation of the project. Yan, Lu Feng, Yu Jianhua, Sarah Cook, Yang In addition to our authors--from the Develop- Guohua, Yu An, Sheng Laiyun, Wang Pingping, ment Research Center (DRC) of the State Council Wang Yongjuan, Huang Langhui, Li Yan, Chen of China, the World Trade Organization, the World Xiaodong, Zhang Xiangchen, Wang Kan, Nicholas Bank, and other institutions around the world--we Bridge, Gillian Cull, Yukon Huang, Charles Piggott, would like to thank numerous staff within the Jeffrey Liang, Li Shi, Edwin A.L.M. Vermulst, and DRC, especially Sun Zhiyan and Liu Peilin, who Jianguang Shen for this help. assisted this project at every step, including the final We are very grateful to Mary Fisk for her excel- dissemination workshop in Wuhan. lent editorial assistance and to Santiago Pombo- At the World Bank, we would like to thank Bejarano for his enthusiastic support in converting Jianqing Chen, Leona Luo, and Rebecca Martin for the manuscript into a finished volume. We would the superb support and assistance they have pro- also like to thank the anonymous reviewers, who vided throughout the life of the project. The assis- provided excellent comments on the manuscript; tance of the Beijing Office was invaluable also in may their tribe increase! Deepak Bhattasali, Shantong Li, Will Martin xii About the Editors and authors Editors Athar Hussain, Department of Economics, London Deepak Bhattasali, Lead Economist, Poverty School of Economics, London Reduction and Economic Management Sector Elena Ianchovichina, Economist, Poverty Reduc- Development, World Bank, Beijing tion and Economic Management, World Bank, Shantong Li, Director, Department of Develop- Washington, D.C. ment Strategy and Regional Economy, Develop- Wenping Luo, Professor, Shanghai Maritime Uni- ment Research Center of the State Council, P.R. versity, Shanghai China, Beijing Keith E. Maskus, Professor, Department of Eco- Will Martin, Lead Economist, Development nomics, University of Colorado, Boulder Research Group, World Bank, Washington, D.C. Aaditya Mattoo, Lead Economist, Development Research Group, World Bank, Washington, D.C. Authors PatrickA.Messerlin,Professor of Economics, Insti- Kym Anderson, Centre for Economic Studies, Uni- tutes d'Etudes Politiques, Groupe d'Economie versity of Adelaide, Adelaide, Australia Mondiale de Sciences Po, Paris Min Chang, Graduate Student, Department of Debbie Mrongowius, Independent Researcher, Agricultural and Resource Economics, Univer- Shanghai sity of California, Davis Mari Pangestu, Director, Centre for Strategic and Shaohua Chen, Senior Information Officer, International Studies, Jakarta Development Research Group, World Bank, Martin Ravallion, Research Manager, Develop- Washington, D.C. ment Research Group, World Bank, Washington, Christopher Findlay, Professor, Asia-Pacific School D.C. of Economics and Government, The Australian Scott Rozelle, Professor, Department of Agricul- National University, Canberra tural and Resource Economics, University of Joseph F. Francois, Professor, Tinbergen Institute, California, Davis Rotterdam, and Fellow, Centre for Economic Terry Sicular, Associate Professor of Economics, Policy Research, London University of Western Ontario, London, Ontario Jeffrey L. Gertler, Legal Affairs Division and for- Dean Spinanger, Professor, Institute for World mer Secretary, Working Party on the Accession Economics, Kiel University, Kiel of China, World Trade Organization, Geneva Zhi Wang, Economic Research Service, United Thomas W. Hertel, Distinguished Professor, States Department of Agriculture, Washington, Department of Agricultural Economics, and D.C. Executive Director, Center for Global Trade Chen Xiwen,Vice President (Vice Minister), Devel- Analysis, Purdue University, West Lafayette, opment Research Center of the State Council, Indiana Beijing Jikun Huang, Director and Professor, Center for Fan Zhai, Department of Policy and Fiscal Affairs, Chinese Agricultural Policy Institute for Ministry of Finance, Beijing Geographical Sciences and Natural Resource Yaohui Zhao, Professor of Economics, Beijing Uni- Research, Chinese Academy of Sciences, Beijing versity, Beijing xiii Acronyms and Abbreviations ADSL asymmetric digital subscriber line NME non-market economy AQSIQ Administration for Quality NRP nominal rate of protection Supervision, Inspection and OECD Organisation for Economic Quarantine Co-operation and Development CAAC Civil Aviation Administration of PBC People's Bank of China China PCT Patent Cooperation Treaty CGA Customs General Administration PTA provincial telecommunications CGE Computable general equilibrium authority CHNS China Health and Nutrition Survey PTNR permanent normal trade relations CIRC China Insurance Regulatory SARFT State Administration of Radio, Film Commission and Television CJV contractual joint venture SCIO State Council Information Office CPI consumer price index SDPC State Development Planning CSRC Chinese Security Regulatory Commission Commission SETC State Economic and Trade DDA Doha Development Agenda Commission EC European Community SEZ special economic zone EJV equity joint venture SILG State Information Leading Group FDI foreign direct investment TCSC Tariff Commission under the State GATS General Agreement on Trade in Council Services TDSCDMA time division synchronous code GATT General Agreement on Tariffs and division multiple access Trade 3PL third-party logistics GDP gross domestic product TPS transitional product-specific GSM global system for mobile safeguard communications TRIPS Trade-Related Aspects of GTAP Global Trade Analysis Project Intellectual Property Rights HTS Harmonized Tariff System TRQ tariff-rate quota IP Internet protocol TVE township and village enterprises IPR intellectual property rights URAA Uruguay Round Agreement on ISDN integrated services digital network Agriculture MEI Ministry of Electronics Industry VAT value-added tax MFA Multi-Fiber Arrangement VoIP Voice over Internet Protocol MFN most favored nation WCDMA wideband code division multiple MII Ministry of Information Industry access MOFTEC Ministry of Foreign Trade and WIPO World Intellectual Property Economic Cooperation Organization MPT Ministry of Posts and WTO World Trade Organization Telecommunications xiv 1 impacts and policy implications of wto accession for china Deepak Bhattasali, Shantong Li, and Will Martin After 15 arduous years as a candidate, China's There is every indication that China's policy- application for membership in the World Trade makers see China's WTO accession agreement as Organization (WTO) was accepted at the WTO's a means to fulfilling broader goals. One broader Doha ministerial meeting in November 2001. As strategic goal is to facilitate the peaceful emergence expected by observers such as Panitchpakdi and of China as a great trading nation--and to avoid Clifford (2002), China has become an active and the trade tensions associated with the emergence of prominent member of the WTO, and has sharply major new traders in the past. Another goal is to increased its share of world trade since joining. accelerate the process of domestic reform--with Domestically, however, China faces many chal- the WTO acting, in the colorful words of Jin lenges, particularly in dealing with the widening gap (2002), as a wrecking ball for what remains of the between urban and rural incomes. The objective of earlier closed economy (Jin 2002). The process of this study is to analyze the impacts of China's acces- accession has also unleashed a massive process of sion to the WTO and the policy reforms needed to reforming the laws covering trade issues (WTO help facilitate China's economic development. 2002), with the result that many reforms go beyond Of the many approaches that might be used to those narrowly required by the WTO accession analyze China's accession to the WTO, an important agreement. In addition, China's policymakers have one deals with the legal rights and responsibilities-- also clearly recognized the need to deal with the that is, the challenges involved in meeting China's yawning gap between urban and rural incomes--a legal commitments and in ensuring that China's gap that has become more evident since China's rights are maintained. Another focuses on the trade accession to the WTO (Wen 2004). and policy changes required to open China's econ- The importance of China's accession to the omy and integrate it into the global economy. Yet WTO has been widely recognized and studied. Both even though these are important, they are not a the China Quarterly (see Fewsmith 2001) and complete characterization of the implications of China Economic Review (see Chun, Fleisher, and accession. For us, perhaps the most compelling Parker 2001) have published special issues on the aspect is one identified by Woo (2001): WTO acces- topic, and it has been the subject of books, includ- sion as a key component in the restructuring of the ing those by Panitchpakdi and Clifford (2002) and Chinese economy. Lardy (2002). Other investigators have undertaken 1 2 China and the WTO quantitative studies of the effects of trade liberal- balance between creating incentives for innovation ization on China (McKibbin and Tang 2000; and restricting competition by giving monopoly Ianchovichina and Martin 2001; Gilbert and Wahl power to the inventor. The TRIPS agreement is dis- 2002). Some studies, including those by Martin and cussed at the end of this section. Ianchovichina (2001) and Shafaeddin (2004) have The general principle of nondiscrimination looked into the implications of China's WTO requires that WTO members give equal treatment accession for other countries and for the WTO to competing suppliers (the most-favored-nation system itself. The studies presented in this volume principle), and that they not discriminate between attempt to go beyond previous studies in examin- domestically produced and imported goods or ing, within an integrated framework, China's policy services in their internal markets. The application reforms and their implications for the Chinese of this general principle to China involved some economy and for individual households. additional commitments, including the elimination This volume is divided into three parts. The first of dual pricing systems, the phasing out of restric- part contains studies that cover the most important tions on trading, and the introduction of more uni- policy reforms associated with accession to the form administrative arrangements and of judicial WTO. The second part consists of studies that review. These commitments are important not just examine the consequences of reform for the econ- for the central authorities, but also for the lower omy and for particular sectors. The studies in the tiers of government that deal with internal trade third part build on the earlier studies and examine and regulation. the implications of reform for households, and In China's accession, the market opening principle particularly for those households vulnerable to had three major dimensions: (1) commitments by poverty. Only with the insights available from these China to abolish nontariff barriers, reduce tariffs, three approaches is it possible to provide sound and open service sectors; (2) commitments by the policy recommendations. In the remainder of this importing countries to abolish the quotas on textiles chapter, we review and summarize some of the key and clothing originally imposed under the Multi- findings emerging from the entire set of studies. Fiber Arrangement (MFA); and (3) agreement by the United States and other countries to impose MFN tariffs on China. Analysis in chapter 13 by China's Policies and the Reforms Elena Ianchovichina and Will Martin suggests that Associated with Accession the tariff cuts offered by China were very substantial, In chapter 2 of this volume, Jeffrey L. Gertler de- and will result in a reduction in the weighted average scribes the long process that culminated in China's tariff from 12 percent in 2001 to 6.8 percent at the recent accession to the WTO. As in other acces- end of the implementation period.1 However, these sions, the process involved bilateral negotiations on reductions are quite small relative to the reduction issues of market access and a multilateral process in of 29 percentage points between 1992 and 2001. The which the accession agreement was formulated and analysis reported by Aaditya Mattoo in chapter 8 the best market access given to any one member suggests that China's commitments to liberalize was extended to all other members under the most- trade in services are extremely large relative to those favored-nation (MFN) rule. of almost all other countries.Indeed,Mattoo goes so The five basic principles of the General Agree- far as to say that China's accession commitments on ment on Tariffs and Trade (GATT) and the WTO services constitute the most radical reform of trade outlined by Gertler are useful in organizing our in services ever undertaken under the WTO. He assessment of the implications of China's accession. notes, however, that China's commitments were The five principles are: (1) nondiscrimination, more frequently subject to qualifications or reserva- (2) market opening, (3) transparency and pre- tions than those of other countries. Details of the dictability, (4) undistorted trade, and (5) prefer- liberalization in specific sectors are considered in ential treatment for developing countries. The the next section, as a prelude to assessing the likely agreement on Trade-Related Aspects of Intellectual impact of accession on the Chinese economy. Property Rights (TRIPS) incorporates some of Although most of the market opening agreed in these principles as well as others, such as striking a China's accession, like in other WTO accession Impacts and Policy Implications of WTO Accession for China 3 agreements, is to be carried out by the acceding China has made more stringent commitments, country, China's trading partners made an impor- including one to refrain from using export subsi- tant "concession" in agreeing to abolish the quotas dies on agricultural goods. on textiles and clothing originally imposed under The issue of antidumping and safeguard meas- the MFA. This agreement appears likely to be ures is troubling, particularly because it concerns extremely important for China given its strong China's market access opportunities. As Patrick A. comparative advantage in textiles and clothing, Messerlin notes in chapter 3, the WTO rules on although it is qualified by the ability of the im- antidumping are biased toward finding dumping, porters to impose special textile and clothing safe- even where no economically meaningful dump- guards for one year at a time during a transition ing exists. The situation is worse for China than period up to 2008. Another important "concession" for other WTO members, because 70 percent of by almost all existing members of the WTO was to China's exports are products most vulnerable to refrain from invoking nonapplication provisions antidumping measures. Furthermore, China will of the type widely invoked against Japan when it potentially remain vulnerable, for up to 15 years, to joined the GATT. As a result, China has received highly discriminatory non­market economy provi- most-favored-nation treatment in virtually all mar- sions. These provisions dramatically increase the kets. Clearly, this status is important because it frees probability that dumping will be found. And when China from onerous, one-sided review procedures,2 antidumping duties are applied, they are generally such as the former annual review of MFN in the much higher than when market economy provi- United States, and increases the confidence of sions are used--in the United States, the average investors in China's export industries that foreign 40 percent duty applied using nonmarket economy markets will be available to them on a continuing provisions was more than 10 times as high when basis. normal approaches were used. The transparency and predictability of trade pol- A particularly worrying feature of the accession icy are enhanced through both the general WTO agreement is the product-specific transitional safe- policy rules, such as the need to publish trade rules guard provisions that may be applied by any WTO and regulations, and some of the specific commit- Member, and may then trigger actions against ments made by China, such as those on uniform diversion of Chinese exports to other markets application of the trade regime and independent (Panitchpakdi and Clifford 2002). These provisions judicial review, as well as the provision of a mecha- are, in a sense, worse than the provisions on nism through which concerned parties can bring non­market economy treatment in that they intro- problems of local protectionism to the attention of duce an entirely new form of protection, targeted the central government.3 Another important con- specifically against China, more readily triggered tributing factor is China's binding of its entire tariff than regular safeguards and available to China's schedule for goods, almost always at tariff levels trading partners for up to 12 years from the date of below prior applied rates. The transitional review accession (Anderson and Lau 2001). The trade held each year for eight years after China's accession diversion measures allowed under this agreement provides additional information about China's are especially troublesome, because they provide trade regime and its reforms during that period. even less procedural protection than is available China's commitments to phase out restrictions under regular safeguards. on trading rights for all products except a short list Messerlin believes that China has two major of commodities that may remain subject to state choices in responding to these measures: to retaliate trading are important for increasing transparency. by, for example, increasing use of antidumping and Commitments to allow entry into distribution and contesting safeguard actions in dispute settlement; wholesale services provide further transparency as or to mount a concerted campaign for reform of a side effect of liberalization of these important the rules in the Doha negotiations, most particu- service activities. larly in the area of antidumping. Clearly, China will The WTO principle of undistorted trade involves have to contest unjustified actions through dispute disciplines on issues such as subsidies and counter- settlement. However, a retaliatory approach of vailing measures, antidumping, and safeguards. launching antidumping actions could be extremely 4 China and the WTO costly to China's economy both by reversing liberal- multilateral trade reform as a means of creating ization and by increasing the degree of uncertainty market access opportunities. about trade policy. Even though this approach is A central aspect of the WTO agreement for likely to be politically attractive, as is confirmed China is the TRIPS agreement. In response to its by the recent upsurge in antidumping actions in recognized need to stimulate innovation in China China--and the dramatic upsurge in these actions and access foreign technology and in response in developing countries such as Argentina, India, to pressure from its trading partners, China has Mexico, and South Africa--the economic costs to strengthened its intellectual property rights regime. China in particular suggest it needs be avoided as Since 1990, China has updated its laws on copy- much as possible. rights, trademarks, patents, and trade secrets, and If China elects instead to lead a push for reform adopted protection for new plant varieties and of the antidumping and safeguard rules that would integrated circuits. reduce the abuses of these protectionist measures, it Intellectual property rights involve a fine balance could greatly improve the performance of its own between creating the incentive to innovate and economy in the short run and the global trading restricting competition in the market for the goods system in the longer term. Here Messerlin provides and services that result from innovation. The bal- two specific suggestions. On non­market economy ance between these two objectives differs between treatment, he argues that China could press for new developed and developing countries, so that im- rules on the automatic granting of market economy plementing an appropriate intellectual property status in a particular commodity as long as the regime in a developing country is not simply a mat- country meets basic conditions such as low rates of ter of emulating the state-of-the-art regime of a protection, an absence of core gray-area measures, developed country. Such a regime may inhibit and an absence of state monopoly in the distribu- growth by limiting innovation and diffusion, and tion of that good. On antidumping measures more may result in excessive transfers to foreign producers generally, China could put forward, or strongly of intellectual property. Appropriate regulations are support, proposals to narrow the use of antidump- needed to ensure that markets remain competitive ing measures and to reduce their severity. China without excessive reductions in the incentive to might also seek similar relief on the product- innovate.The TRIPS agreement generally appears to specific safeguards. allow the needed flexibility, but taking advantage of Preferential treatment for developing countries such flexibility is a nontrivial task. was a particularly vexing issue throughout the In chapter 4, Keith E. Maskus assesses China's WTO accession negotiations. Although China is intellectual property regime--that is, its provisions clearly a low-income country, because of its size for patents, trademarks, trade secrets, and copy- and growth performance WTO members were rights. He bases his assessment in part on a com- reluctant to give it full developing-country treat- parison of China's, intellectual property rights ment. In many areas of the agreement, it is likely to (IPR) with benchmark standards for middle- have full access to the developing-country provi- income developing countries (World Bank 2001, sions, although in some others--such as agricul- and on interviews with market participants). He ture where it had to accept a limit of 8.5 percent on concludes that China's TRIPS regime is broadly de minimis domestic support versus the usual appropriate to China's situation. He believes, in 10 percent limit for developing countries--it faces particular, that China's policy of public procure- tighter restrictions than other developing countries. ment of pharmaceuticals at negotiated prices is At the same time, China obtained specific transi- appropriate for providing public health services. He tional arrangements in areas, such as the phasing also concluded that, with the reforms underway at out of quotas and licenses and phased entry of accession, the regime would be fully consistent with foreign enterprises, that are not generally avail- TRIPS requirements. able to developing-country Members. Special and Maskus does, however, raise some important differential treatment in the form of preferential concerns about China's policies related to TRIPS. access to industrial-country markets is not impor- For example, he believes proposals to extend tant for China, which increases the importance of patent protection to computer software--a level of Impacts and Policy Implications of WTO Accession for China 5 protection currently provided only in the United agriculture and services in China, and nontrivial in States, Japan, and Australia--may be excessive in a manufacturing. The evaluation must then take into young industry such as China's. Maskus also raises account the implications of the policy measures the serious problems of IPR enforcement, particu- being introduced. Only then can it take into account larly of trademarks, patents, and trade secrets. He the impact of these measures on economic variables believes these enforcement problems will inhibit such as output and trade levels by sector, and on the the transfer of technology in China and the devel- income levels of people, and particularly poor peo- opment of innovative domestic businesses. A ple. We first examine the impacts on agriculture, broader problem relates to China's current low then on manufacturing, then on services. allocation of resources to research and develop- ment and the therefore limited benefits of protect- Agriculture ing Chinese innovations. Important issues for the future include enhancing pricing regulations on Many authors have raised concerns about the pharmaceuticals as patent protection becomes impact of WTO accession on China's agricultural stronger and developing a broader competition sector and the many poor people engaged in this policy regime to deal with abuses of IPRs such sector. Much of this concern has been based on as monopoly pricing and restrictive licensing comparisons of China's statutory tariffs on agricul- arrangements. ture in the 1990s with the rates agreed in the In chapter 5, Chen Xiwen explores the situation accession process (e.g., Schmidhuber 2001). Other of the agricultural sector in China from the per- authors, such as Johnson (2000) and Lin (2000), spective of a senior policymaker. For basic foods, have recognized that these statutory tariff rates he emphasizes the shift from a supply-constrained bore little relationship to the protection (or taxa- environment to a demand-constrained environ- tion) actually experienced by China's agricultural ment. The demand for food has grown very slowly, sector. However, the evidence about the actual rates while the growth of supplies has accelerated. Mean- of protection applying to agriculture has remained while, farmers' incomes grew very slowly in the sec- extremely limited and frequently contradictory. ond half of the 1990s. In this environment, Chen Agricultural trade in China has been influenced suggests that Chinese agricultural policymakers by a bewildering array of policies on imports and give priority to, among other things, improving exports, including state trading, designated trading, the quality of food produced and moving toward quotas, licenses, tariffs, and tariff-rate quotas. Many higher-value labor-intensive commodities more studies have attempted to deal with this problem by suited to China's comparative advantage and to summarizing the protective impact of agricultural raising farmers' incomes. He sees very clearly that trade policies through the price distortions created it is important to allow many farmers to leave by these measures. The more restrictive the trade the agricultural sector, and believes the coordi- measure, in general, the larger will be the gap nated expansion of cities and small towns is between the domestic price and the international central to achieving this relocation of labor. Given price. that the shift from supply-constrained to demand- A number of studies have estimated the magni- constrained has been, to a degree, fortuitous and tude of the agricultural price distortions using the unexpected, a key question is whether the tradi- available series on domestic and international tional emphasis on food self-sufficiency will prices. Unfortunately, the results obtained have var- reemerge as a policy driver when imports of key ied wildly. Huang, Chen, and Rozelle (1999), for agricultural commodities increase. example, estimated the protection applying to rice, wheat, and maize in the mid-1990s at 4 percent, 20 percent, and 25 percent, respectively. By contrast, Economic Impacts of Accession Tuan and Cheng (1999) estimated these protection A comprehensive evaluation of the effects of major rates to be 29 percent, 62 percent, and 15 percent, changes in trade policy must be based on an assess- respectively. Carter (2000, p. 80) relied on producer ment of the stance of policy prior to accession-- price data and found generally negative price an assessment that was particularly difficult in distortions. More generally, Carter (2000) and 6 China and the WTO Martin (2001) believed that WTO accession would farm level. Rather, it is collected only on intermedi- require relatively little agricultural liberalization in ate inputs into production. China, while Schmidhuber (2001) and many others Once the implications of agricultural policies believed that the agricultural liberalization required have been assessed, it is possible to begin to assess by accession would be dramatic. Clearly, when the implications of China's accession commitments scholars reach such different conclusions from the for agricultural markets. For those products pro- same facts, a new approach is required, especially tected by ad valorem tariffs, this evaluation is given that the policy implications are so large. straightforward. The reduction in the tariff corre- For this project, Jikun Huang, Scott Rozelle, and sponds quite directly to the reduction in the domes- Min Chang adopted a new approach by basing tic price of the good, and this change, together with their analysis of policy impacts on detailed inter- information on the slope of the import demand views with participants in China's agricultural mar- curve, can be used to estimate the cost of protec- kets rather than on readily available price series (see tion. For those products protected by both a tariff chapter 6). This approach provides a much clearer and an export subsidy, it may be necessary to indication of the implications of agricultural trade consider changes in both variables. The situation policies for product prices, and of the real-world becomes considerably more complex, however, impacts of policies, than would otherwise be possi- when products are being protected, or are to be ble. Their research reveals, for example, that a protected, using tariff-rate quotas. In this situation, major source of the discrepancies in earlier the impact depends greatly on whether the in- research is differences in the quality of domestic quota or out-of-quota tariff determines the price of products and those traded internationally. They the good. When the quota will be filled in some also identify important features of the trade years but not in others, the average rate of protec- regime, such as export subsidies for maize and cot- tion may be a combination of the two tariff rates. ton, that have important impacts on product mar- Some key assessments that have been made of kets. Finally, they raise an important question the implications of the level of protection and the about the implications of the manner in which the changes associated with WTO accession are given value-added tax (VAT) is collected, at a 13 percent in table 1.1. The statutory tariff rates for 1998 used rate, for imported agricultural commodities. It by Schmidhuber and others are given in the first appears that, for administrative reasons, this tax is column of the table; Huang, Rozelle, and Min's esti- not collected on domestic agricultural output at the mates of the actual protection provided in 2001 are TABLE 1.1 Some Measures of Import Protection in China's Agricultural Sector (percent) Postaccession 1998 Statutory Tariffs 2001 Protection Protection Rice 127 3.3 3.3 Wheat 133 12.0 12.0 Maize 130 32.0 32.0 Vegetables and fruits 15 4.0 4.0 Oilseeds 132 20.0 3.0 Sugar 30 40.0 20.0 Cotton 3 17.0 20.0 Livestock and meat 35 15.0 15.0 Dairy 46 30.0 11.0 Note: The third column of the table shows anticipated average rates of import protection after accession taking into account the reforms required by accession and likely market outcomes. Sources: Average statutory rates taken from Schmidhuber (2001) and www.chinavista.com. Estimates of protection in 2001 provided by the authors. Impacts and Policy Implications of WTO Accession for China 7 given in the second column. The third column the importance of the discretion remaining to shows the anticipated average rates of import China's policymakers even after implementation of protection after accession taking into account the such comprehensive commitments on agriculture. reforms required by accession and the likely market Removal of the negative protection applying to outcomes. labor-intensive products would also be consistent Huang, Rozelle, and Min estimated the average with WTO rules, and is likely to be particularly rate of protection for rice to be slightly negative, helpful for employment in rural areas, as well as implying that China's system of state trading for rice economic efficiency. operated to tax rice exports slightly in 2001. After Participation by China in the WTO agricultural accession this rate is expected to remain the same, negotiations being conducted under the Doha because accession to WTO does not require reduc- Development Agenda could potentially reinforce tions in such protection for a state-traded commod- these benefits by opening large, and currently ity. For wheat, protection averaged an estimated highly protected, markets for China's labor- 12 percent. This rate of protection need not be intensive agricultural exports. Unfortunately, the greatly reduced, on average, because it seems likely high rates of agricultural protection that arose that wheat imports will exceed the tariff-rate quota when GATT rules on agriculture were extremely reasonably frequently (see Martin 2001), allowing weak mean that China faces barriers to its agricul- imposition of a tariff of up to 65 percent. For maize, tural exports that are four times higher than those it the rate of import protection utilized was higher, at faces on its other merchandise exports (Martin 32 percent, because of an export subsidy. Although, 2001). on average, the level of import protection need not In chapter 7, Kym Anderson, Jikun Huang, and change greatly because there is a significant proba- Elena Ianchovichina examine the implications of bility that the tariff-rate quota will bind by the end China's agricultural commitments for agricultural of the decade (Martin 2001), the export subsidy protection and for the agricultural sector. They find must be abolished, implying a potentially substan- that the basic WTO accession commitments to tial reduction in the price support given to maize. reduce agricultural import protection and elimi- Labor-intensive vegetables and fruits, like livestock nate agricultural subsidies will make those farm products, experienced negative rates of protection households dependent on agriculture worse off in 2001, and the WTO accession commitments are relative to urban households. If China elects as well unlikely to require changes in protection. to remove the negative protection of important Oilseeds present an entirely different picture in commodities such as rice, vegetables, and meats, which the principal form of protection has been a then returns to unskilled rural labor, and to farm- tariff, and the tariff is being reduced substantially. land would rise slightly, and the impact of accession The protection provided to sugar must be reduced and the elimination of negative protection on rural to meet China's commitments to a bound tariff of wages would be 0.5 percent instead of the 20 percent. As for cotton, import protection will ­0.7 percent observed in the accession case. They not change greatly, but export subsidies, such as the also highlight the importance of China pursuing 10-percent export subsidy observed in 2001, are improvements in agricultural market access, ruled out in the future. Protection of livestock and citing results from Yu and Frandsen (2002) that meat could remain negative as a consequence of suggest that agricultural liberalization by member export restrictions to markets such as Hong Kong. countries of the Organisation for Economic Finally, protection of dairy products can be Co-operation and Development (OECD) would expected to decline to meet China's tariff-binding benefit China and improve its agricultural trade commitments. balance. The reductions in protection between second and third columns of table 1.1 are just one possible Industrial Products outcome in a situation in which rates of agricul- tural protection can vary substantially, particularly In chapter 13, Ianchovichina and Martin examine if import levels exceed the tariff-rate quotas. How- the reductions in protection under way in manufac- ever, the agricultural protection measures illustrate turing and services as well as in agriculture. Within 8 China and the WTO industry, they find that accession builds on the sub- textiles and clothing. Because these barriers require stantial reductions in tariffs undertaken during the an exporter to purchase an export quota--or to 1990s, when weighted average tariffs on manufac- forego the opportunity to sell quotas already tures fell from 46.5 percent in 1992 to 25 percent in held--they impose a cost on exports that is similar 1995. By the time of accession in 2001, weighted to an export tax. Based on information on quota average tariffs on manufactures had fallen to around prices, this tax was estimated to be about 15 percent 13 percent. With full implementation of China's for clothing and 10 percent for textiles.5 accession commitments, they will fall to 6.9 percent. The estimates of the extent of merchandise trade The six-percentage-point reduction in average tar- liberalization used in this study omit some impor- iffs to be implemented after accession is important, tant and potential elements of trade policy. One but very small relative to the 33-percentage-point is the possibility of antidumping and safeguards reduction undertaken since 1992. measures being applied against China. Another is The largest reductions in industrial tariffs are the increasing use of measures of this type in required for beverages and tobacco--an almost China. The potential use of the product-specific 28-percentage-point reduction from 2001 levels. In safeguards against China would be particularly automobiles, the reduction was just over 15 per- important in this respect, because no such measure centage points. Although large, these reductions targeted specifically at China existed prior to were very much smaller than those undertaken China's accession. The risk that China will increase since 1995. The reduction in protection to the auto- its use of antidumping and safeguard measures mobile sector is particularly important because of beyond the current levels is also a concern for the high profile of this industry and its pervasive development policy. Such an action would be a linkages throughout the economy. Other industries triumph of a rules-focused approach to WTO in which substantial reductions in tariffs were implementation--it is legal; therefore, we should required included textiles, clothing, electronics, and do it!!!--over the sharp focus on promoting devel- light manufactures. Many of these industries are opment that has characterized China's trade policy relatively labor-intensive ones in which China has a agenda since the beginning of the reform era. comparative advantage and in which liberalization will help maintain efficiency and competitiveness. Services The liberalization considered in this project is, apart from the export quotas on textiles and Trade in services was a key area in China's WTO clothing, focused entirely on tariffs. This emphasis accession negotiations. To obtain a clear under- understates the degree of liberalization resulting standing of the implications of China's commit- from China's accession, because it ignores the abo- ments in this area, and the potential usefulness of lition of nontariff barriers such as designated trad- the WTO process for China's economic develop- ing, quotas, and licenses. The seriousness of this ment, we consider first Mattoo's overview of exclusion is much less than it would have been in China's commitments in services (chapter 8), and earlier years because of the dramatic reduction in then detailed case studies of logistics (chapter 9), the coverage of nontariff barriers in China--the telecommunications (chapter 10), and the financial frequency of import licenses, in particular, fell from sector (chapter 11). almost half4 in the late 1980s (Lardy 2002) to under Chapter 8 by Aaditya Mattoo compares the lib- 5 percent in 2001. Given the great uncertainty eralization undertaken by China in services with about the protective impacts of nontariff barriers that undertaken by other groups of countries, and in China and their limited remaining coverage, it concludes that China's services reform is the most Ianchovichina and Martin concluded that it was radical ever negotiated in the WTO. In cross-border perhaps better to use tariffs only when considering trade (mode 1), consumption abroad (mode 2), liberalization, and therefore to present something and establishment trade (mode 3), China has made of a lower-bound estimate of the benefits of the lib- more commitments in more service sectors than eralization associated with accession. the industrial countries, other developing coun- It is also important to take into account the tries, or the group of countries that recently reduction in the barriers facing China's exports of acceded to the WTO. Of course, any assessment of Impacts and Policy Implications of WTO Accession for China 9 the importance of these commitments depends on Chinese authorities from moving ahead faster than their implementation, which has drawn reserva- the minimum to which they have committed in tions from Whalley (2003). However, the first two some cases. Given the risks of exacerbating the reviews of China's services commitments at the already substantial inequalities between coastal and WTO appear to indicate that considerable progress interior provinces, there would appear to be good has been made (see WTO 2003a, 2003b). development reasons to phase out these geographic Mattoo notes, however, that China's commit- restrictions more quickly than is required by the ments to service market liberalization were not WTO commitments. indiscriminate. The number of sectors with guar- Imposing regulatory requirements is an impor- anteed unrestricted access is lower for the first two tantroleof government.Someof themostimportant modes than that in most other countries, and objectives of regulations are to make competition essentially zero for mode 3. An important feature of work,improve the availability of information to con- China's commitments is that they focus on market sumers, and ensure universal service. Making com- access and provide national treatment in not petition work is particularly important in network discriminating between domestic and foreign industries such as telecommunications, where indi- suppliers. vidual firms frequently do not find it in their interest Frequently applied restrictions on the establish- to allow interconnection by new firms. Improving ment of services enterprises include: the availability of information is especially impor- tant in financial services.Finally,developing efficient · restrictions on the form of establishment provisions on universal service is important for · restrictions on geographic scope ensuring that all parts of China have access to tele- · regulatory requirements. communications services. In chapter 9, Wenping Luo and Christopher Restrictions on the form of establishment, such Findlay provide a detailed assessment of the re- as requirements for joint ventures, have a long forms required by WTO accession in the range of history in China and have frequently been justified service activities that make up the logistics chain. as a means of achieving technology transfer or as They note that although China has made substan- means of obtaining a share of monopoly rents. tial progress in many of the component activities, Mattoo, however, points out that requirements to logistics costs are disproportionately high in China, form joint ventures might inhibit the transfer of and service quality is lower than is desirable, in part technology. He also points out that a more thor- as an enduring legacy of the planned economy. Luo ough approach to the problem of monopoly rents and Findlay conclude that logistics accounts for would be to ensure that competition between 30­40 percent of the wholesale cost of manufac- firms, whether domestic or foreign, eliminates tured goods, as contrasted with 5­20 percent in the these rents. United States, implying that the scope for gain from Restrictions on geographic scope also have a liberalization is particularly large. High logistics long history--from an era when experimentation costs are a particularly important problem for peo- with market-oriented approaches had to be isolated ple in the poorer areas of China, whose ability to because of the inconsistencies between, for exam- trade, and consequently their real incomes, are sig- ple, planned and market prices. Confining foreign nificantly reduced by these excessive costs. ventures, such as insurance, to five cities for five China's WTO commitments on logistics apply years might encourage agglomeration of these to a range of specific General Agreement on Trade activities in these cities that will not be reversed in Services (GATS) service sectors, including pack- when the geographic restrictions are later lifted. aging and courier services; maritime and rail trans- Moreover, such an approach may reduce the portation; freight forwarding; and storage and opportunities for other parts of China, such as inte- warehousing services. The commitments made in rior cities with a potential comparative advantage these sectors promise to increase competition in in these activities, to get started in these activities. some key areas, including road transport, rail trans- Yet China's WTO commitments represent only a port, warehousing, and freight forwarding. The lower bound, and so they have not prevented breadth of these commitments also provides a 10 China and the WTO much stronger basis for development of integrated will be phased out over several years, China has not third-party logistics firms able to reduce the costs committed to allowing more than 49 percent for- and increase the quality of logistics services in eign ownership for important services such as China. If the envisaged reductions in logistics costs mobile telephony. Because allowing higher levels are brought to fruition, Luo and Findlay conclude of foreign ownership would be consistent with that the costs of a wide range of goods and services China's GATS obligations, China may do so in the might be reduced by about 10 percent. future if such a move appears to promise worth- Yet the commitments outlined in the GATS agree- while gains in a particular activity. ment are not sufficient to achieve the full potential of Clearly, the challenge of establishing a telecom- logistics in China. Regulatory reforms are needed to munications sector that makes the maximum remove discrimination against particular enterprise contribution to China's overall growth and devel- types, to separate local administrations from enter- opment will require further expansion of the regu- prises, and to eliminate local protectionism. In addi- latory framework. Pangestu and Mrongowius tion, substantial investments in infrastructure are believe the central issues here will include ensuring needed to improve the timeliness and reduce the cost the independence of the regulator, ensuring that of providing logistics services. interconnection works adequately, and making In chapter 10, Mari Pangestu and Debbie pricing regulations more flexible. Mrongowius explore China's commitments in In chapter 11, Deepak Bhattasali examines the telecommunications--commitments that take on implications of China's commitments in the finan- particular importance given that China is expected cial sector, including banking, security trading, fund to be the largest market for telecommunications in management, and insurance. According to the world by 2010. These commitments are pro- Bhattasali, reforms up to 1997 focused on institu- found in that they allow foreign entry to a wide tional diversification and strengthened administra- range of activities that are currently closed to foreign tive oversight. Since 1997, reforms have addressed investment. Furthermore, this entry takes place in a the portfolio problems of the banks and governance sector that was monopolized by China Telecom until of the financial sector in preparation for WTO 1994 and is currently dominated by a small number accession. In 2001, however, the four large state of state-owned firms (see DeWoskin 2001). banks still accounted for 67 percent of bank deposits In basic telecommunications, China has com- and 56 percent of total financial assets. The share mitted to the disciplines of the WTO reference of loans going to small and medium-size non­ paper on the regulatory framework for telecommu- state enterprises--the most dynamic part of the nications. The objective is to create a competitive economy--remains small, a finding evident in environment in which interconnection between enterprise survey work reported by Dollar (2002). systems is allowed under reasonable and nondis- Another key concern is the dearth of the informa- criminatory conditions, and it allows for universal tion needed to assess the performance of the finan- service provisions. It also requires the existence of a cial sector. regulator independent of the telecom provider and Although a large number of foreign banks was sets criteria for licensing entry and for allocating active in China on the eve of accession, they scarce commodities such as the mobile telephone operated almost exclusively on an offshore or spectrum. enclave basis and accounted for less than 3 percent In the context of a basic telecommunications of bank assets. However, two years after accession system governed in line with the regulatory paper, they became able to provide local currency services China's other GATS commitments cover value- to Chinese enterprises, and they will become added services such as voice mail and online infor- eligible to offer these services to individuals within mation services; mobile voice and data services; five years. Other areas of financial services, such as and domestic and international services such as stockbroking, fund management, and insurance are private leased circuit services. Most of these ser- also being opened up on quite short timetables. vices are initially subjected to a combination of Like other scholars such as Langlois (2001), ownership restrictions and geographic restrictions Bhattasali believes that the reforms agreed upon in within China. Although the geographic restrictions this vitally important sector were a clear attempt to Impacts and Policy Implications of WTO Accession for China 11 increase competition, performance, and the range sharp decline in output achieved through wide- of products available in financial services. The key spread plant closures. challenges will lie in managing the transition to a Francois and Spinanger conclude that restruc- market-based system without serious problems or a turing in the industry to achieve scale economies in financial crises. He believes that the state banks will final assembly would reduce costs by about 20 per- come under serious pressures from their nonper- cent. This reduction would more than reverse the forming loans, weak management systems, low negative impact on output of the reduction in pro- operating margins, and the strong competition tection from 1997 levels, allowing the industry to they will face. His assessment is that financial re- expand relative to the no-accession case--and to engineering and fairly radical actions to reduce expand dramatically as China's growth and shifting operating costs will be required, but that, given comparative advantage shift resources into sectors suitable reforms, the rehabilitation of the state such as motor vehicles. There also would be impor- banks is unlikely to present major problems. tant changes within the motor vehicle sector. According to the analysis by Francois and Spinanger, the increase in efficiency of the final Impacts on the Economy assembly industry relative to the production of Because China's reforms are so broad-ranging, and intermediate parts is likely to increase the demand their economy-wide interactions are so extensive, for imported parts substantially, with their share they must be evaluated on an economy-wide basis. rising from 39 percent to 52 percent. If the restruc- In chapter 13, Ianchovichina and Martin assess the turing of the industry is achieved successfully, impacts of liberalization on agriculture, manufac- exports of finished motor vehicles are projected to tures, and services. Previous research, however, increase very rapidly, resulting in an increase in revealed that undertaking any such assessment in a total exports of vehicles and parts of over US$4 bil- satisfactory manner required special attention to lion6 a year. Clearly, the reforms associated with the motor vehicle sector. In an analysis in which accession will require major changes through- they did not account for the restructuring of this out the industry and considerable restructuring, industry, Ianchovichina and Martin (2001) found although this process has perhaps been eased by the that output in this industry would decline abso- very rapid growth in demand during recent years. lutely over the period to 2007, despite the strong In chapter 13, Ianchovichina and Martin ana- increases in the Chinese demand for automobiles lyze the impacts of liberalization associated with and the shift in China's comparative advantage to accession in agriculture, manufactures, and serv- more capital- and skill-intensive products such as ices,7 and the opportunities arising from the elimi- motor vehicles. nation of the quotas against China's (and other In their contribution to this study, Joseph F. countries') exports of textiles and clothing. Their Francois and Dean Spinanger examine China's analysis takes into account China's important motor vehicle industry (chapter 12). Like previous export processing arrangements, and it builds on studies such those by Harwit (2001) and the the labor market study by Sicular and Zhao (chap- Chinese Academy of Engineering and National ter 14), a study by Shi Xinzheng (2002) on labor Academy of Engineering/National Research Coun- markets, and the Francois and Spinanger analysis of cil (2003), they conclude that it has been shaped by automobile industry restructuring (chapter 12). policies that have encouraged market segmentation The resulting changes in the specification of their and suboptimal plant size--a structure that is seen model greatly increase the realism of their analysis frequently in countries with highly protected auto- and have very important implications for their mobile industries. As a result, the industry is very results. inefficient, with most plants operating well below Ianchovichina and Martin divide the effects of global standards for efficient production. Unless WTO accession into a component of liberalization these problems can be overcome, the industry is undertaken between 1995 and 2001 in preparation expected to respond to the fall in protection, and for accession and the remaining component to be the increased competition for labor from expand- undertaken after 2001 in order to meet China's ing sectors such as textiles and clothing, with a accession commitments. The choice of 1995 as a 12 China and the WTO starting period is somewhat arbitrary in view of the trade barriers, there are also substantial increases in fact that China reformed its trade regime through- imports of services. The increase in imports of bev- out the 1990s. However, 1995 was an important erages and tobacco is the largest because of the sharp turning point, when China had to forgo its hope reduction in the tariffs for these commodities. of resuming its seat in the GATT and apply as a The biggest change in employment after acces- newcomer to the WTO under a process much more sion is an increase in employment in the apparel focused on the commercial implications of the sector of more than 50 percent. Employment in the accession package. Ianchovichina and Martin rec- textile sector and in plant fibers also increase to ognize that China's product mix and the world's meet the demand from the apparel sector. Trade demand for China's exports are changing rapidly. reform leads to small reductions in employment in They therefore superimpose the impact of liberal- most agricultural sectors and in manufacturing ization on a situation in which China's industrial sectors such as petrochemicals, metals, and auto- structure and output and trade patterns are veering mobiles. Overall, however, the movements of labor sharply toward more capital- and skill-intensive between sectors are generally small relative to the goods in response to high rates of investment and changes in trade patterns. rapid growth in educational levels. The overall welfare gains to China are substan- The authors find that the liberalization associ- tial, particularly from the liberalization undertaken ated with WTO accession results in substantial between 1995 and 2001 to prove China's bona fides growth in trade relative to output, with the total and to prepare for accession. The benefit from the volume of exports rising by 17 percent as a conse- liberalization undertaken during this period is quence of the liberalization after 2001. The most estimated to be a continuing gain of about $30 bil- rapid growth in exports is in apparel; exports lion per year. The smaller reduction in protection expand by over 100 percent in response to the abo- between 2001 and the end of the implementation lition of the export quotas on clothing. Exports of period will generate incremental gains to China of most agricultural products rise because of a decline $10 billion a year. The measured gains in export in agricultural input costs and constraints on the and income growth are very much lower-bound out-migration of labor from the agricultural sector. estimates in that they ignore the benefits from abo- However, exports of plant-based fibers (predomi- lition of nontariff barriers and they involve serious nantly cotton) are projected to fall in response to aggregation biases. Moreover, models of this type the increase in demand for use in export produc- appear to greatly understate the implications of tion. Feed grain exports also fall because of the abo- major trade liberalizations, particularly those asso- lition of the export subsidy on exports of maize. ciated with the rapid emergence of new products Exports of automobiles rise substantially because (Kehoe 2002), which Martin and Manole (2003) of the increase in the efficiency of the sector as it have found to be a major feature of China's reform exploits economies of scale and the greater trade experience. exposure of the industry in the more liberalized The gains from reform do not accrue evenly postaccession economy. None of the increases in within China, with wages of skilled and unskilled exports takes into account the possible benefits urban workers rising modestly and wages for to China of being able to expand its market unskilled farm workers declining by 0.7 percent in access through participation in WTO negotiations. real terms. Ianchovichina and Martin also examine The expansion in textile and clothing exports is, the implications of some potential complementary in fact, a delayed benefit from the Uruguay Round, policies that might be able to deal with this prob- previously denied to China as a nonmember of lem. Reform of the hukou system (a system of the WTO. residence permits regulating movement between Imports rise in a range of sectors in which there urban and rural residence) and other labor market are substantial reductions in trade barriers, includ- barriers is highly desirable because of the ineffi- ing beverages and tobacco, processed food, textiles, ciencies and inequities associated with this segmen- clothing, oilseeds, dairy products, and sugar. tation of the labor market. However, such reform Because Ianchovichina and Martin have repre- increases in importance after WTO accession sented trade liberalization in services as reducing because of the partial liberalization of the Impacts and Policy Implications of WTO Accession for China 13 agricultural sector, which increases the pressures between urban and rural workers and because of for workers to leave agriculture. Adding abolition the explicit policy barriers resisting the movement of the hukou system to the policy package is found of labor between urban and rural sectors. to result in an increase in rural wages of almost In chapter 14, Terry Sicular and Yaohui Zhao 17 percent. Hukou removal completely overwhelms examine the options that households in China face the reduction in rural wages associated with trade in selling their labor--the most important resource liberalization, as an estimated 28 million agricul- of the poor. They find substantial differences tural workers leave the agricultural sector. Com- between the earnings of rural and urban house- plete abolition of the hukou system would put holds. Although some of these differences stem downward pressure on unskilled wages in urban from differences in the quality of labor and other areas, although this reduction of an estimated resources, much is attributable to differences in 3.8 percent would be much smaller than the gain to the earnings received for resources of the same rural workers. quality--a finding that is consistent with the exis- Another complementary reform that tence of substantial barriers between urban and Ianchovichina and Martin consider is an expansion rural labor markets. These barriers appear to be in access to education--a change that would help particularly strong for poorer households, con- to raise unskilled wages in both urban and rural tributing both to depressed income levels and to areas. Improving agricultural technology is another difficulty in adapting to changes in economic policy option with potentially large benefits for opportunities. poor rural households that are able to adopt the Another important feature of Chinese labor new production techniques. markets captured by Sicular and Zhao is the reluc- The results of this quantitative analysis are tance of China's farm households to transfer labor highly stylized, because they assume that enter- from agriculture to other sectors. Although such prises and households are able to adjust success- reluctance is frequently observed in countries that fully to the changes in incentives created by WTO are attempting to transfer labor out of agriculture, accession. As the OECD (2002) has pointed out, it is exacerbated in China by restrictions on the sale successfully making these changes is likely to of farmland usage rights. Permanent movement is require considerable strengthening of the economic likely to require families to relinquish their land system in areas such as enterprise governance and rights without compensation. A main objective of reform of the banking system. the study by Sicular and Zhao is to provide esti- mates of the responsiveness of rural workers to changes in relative returns. They find rural house- Impacts on Households and holds quite responsive to movements in agricul- on Poverty tural returns relative to market wage rates, with The simplest possible approach to capturing the an estimated response elasticity of 2.67, but the effects of WTO accession at the household level response to changes in the ratio of agricultural and requires an assessment of its impacts on the prices nonfarm business returns is much lower. Although consumers pay; on the prices that owners of labor, labor is not perfectly mobile between urban and capital, and other factors receive for their resources; rural labor markets, these results make clear that it and on the government's ability to provide transfers is also far from immobile. or public goods. In addition, it is useful to be able Two studies in this volume integrate the findings to assess the ability of households to adjust to the of the different studies and analyze their implications changes resulting from accession, perhaps by for poverty. They make these assessments by using changing occupations or activities. general equilibrium models of China's economy to Because ongoing work on trade and poverty has evaluate the implications of reform for the prices and found that impacts through factor markets are con- factor returns faced by China's households and then sistently more important than impacts through examining the effects on particular households. consumer prices, it is important to examine factor The study by Shaohua Chen and Martin market effects carefully. This is especially true in Ravallion presented in chapter 15 considers the China because of the large income differences impact of WTO accession on income distribution 14 China and the WTO and poverty drawing on the simulation model takes a longer-run perspective than the Chen and results provided by Ianchovichina and Martin. This Ravallion study, and it assumes that households are study uses a sample of 84,000 households--17,000 more able to move labor between agriculture and urban and 67,000 rural--from surveys by China's other activities, with an elasticity of transformation National Bureau of Statistics. The price impacts of 2.67 for the movement of labor between agricul- implied by Ianchovichina and Martin's Global tural and nonagricultural activities. Like Chen and Trade Analysis Project (GTAP) model analysis are Ravallion, the authors find that urban households applied to the households, taking into account the benefit substantially more than rural households impacts on the prices households must pay for from WTO accession. However, in this longer-run their consumption goods and purchases of inputs, analysis even agriculture-specialized households and the prices they receive for their sales of goods gain on average. Only in a shorter-run experiment, and of labor and other factors. The loss of govern- where households are much less able to move ment revenue from falling tariffs is restored very between sectors, do some agricultural households simply a tax that raises the price of all consumption suffer small losses. goods to maintain government revenues. Hertel, Zhai, and Wang also consider a range of Chen and Ravallion's analysis is focused on the complementary policy reforms that might help to short run, in which households are limited in their deal with adverse impacts on rural households. responses to changes in prices, and on the period Abolition of the hukou system is found to be after accession in 2001, when the impact on the strongly beneficial for rural workers, as are expan- average household and on poverty rates was very sions in education. Both of these reforms are found small. They consider the impacts on individual to be substantially favorable for rural households. households and find sharp differences, particularly In chapter 17, Athar Hussain analyzes the between urban and rural households. Most urban Chinese system of social protection and its value as households, and especially the relatively poor a safety net for shocks of the type involved in WTO urban households, gain from WTO accession, with accession. In his view, China's social protection sys- the poorest urban group gaining by about 1.5 per- tems should not attempt to compensate losers from cent of initial incomes. This is not true for rural the reforms; it is simply too difficult to determine households. The very poorest rural households the magnitude of compensation that is appropriate. experience a sharp reduction in their living Rather, Hussain believes the focus should be on standards--about 6 percent for the poorest per- preventing poverty. He notes that the wide distri- centile. This reduction reflects a combination of bution of land ownership by rural households has falling rural wages and increases in the prices of played an important role in maintaining living consumption goods--items consumed in substan- standards and providing insurance against adverse tial quantities by members of this group. Overall, shocks, but views this insurance as less valuable almost 90 percent of urban households gain from against shocks to grain prices resulting from liber- WTO accession, while over three-quarters of rural alization than against shocks such as the loss of an households lose, although the losses are generally urban job. quite small. The estimated losses to rural house- Hussain observes that China's systems for holds are larger in the Northeast than in other income maintenance and poverty relief have three areas, with average losses to rural households of broad characteristics: a stark dichotomy between over 2 percent in Heilongjiang and Jilin. urban and rural systems; a focus on the reduction The study by Thomas W. Hertel, Fan Zhai, and of absolute poverty; and a high degree of decentral- Zhi Wang in chapter 16 uses a model of the ization in financing. He finds the system in urban Chinese economy that takes into account impor- areas relatively comprehensive, but views the sys- tant features such as the duty exemptions for tem in rural areas as seriously deficient. The locally intermediate goods used in the production of funded system in place in many areas is unable to exports. Because of limitations on the availability deal with a large-scale shock of the type likely to of household data for analytical purposes, it occur with accession to WTO--"the social safety focuses on the three relatively diverse provinces of net is full of holes." Hussain goes on to argue for Liaoning, Sichuan, and Guangdong. This study extending basic safety net protection into rural Impacts and Policy Implications of WTO Accession for China 15 areas. One first step might be to extend a mecha- software and about problems with inadequate nism like the urban unemployment insurance enforcement of IPRs that reduces the incentive to schemes to wage employees in township and village provide innovations. enterprises. However, Hussain believes the central Agriculture is being liberalized by less than was element is the development of a national scheme, suggested by some earlier studies that began from such as the Minimum Living Standard Scheme, the assumption that agricultural protection would that targets poor rural households. be reduced from initial statutory tariff levels. Signifi- cant liberalizations have been achieved in areas such as maize, cotton, and sugar, and it appears that the Conclusions adjustment pressures in these industries will be sig- China's WTO accession agreement calls for sub- nificant. There will, however, be opportunities to stantial reductions in protection, for a strengthen- expand exports of some labor-intensive exports ing of intellectual property rights protection, and as part of a broader policy reform and by seeking for adoption of a framework of trade rules at home increases in agricultural market access in the Doha and abroad to facilitate trade growth. While requir- negotiations. ing many policy changes, it leaves open a wide The industrial sector will face substantial adjust- range of policy choices and, in these, China should ment pressures in key sectors such as automobiles, continue to focus strongly on its development and beverages and tobacco, where external protec- needs--the central perspective that has guided the tion is being substantially reduced. Restructuring of steady transformation of its trade regime, and its scale-intensive sectors such as the automobile sec- economy generally as it moves from a planned to a tor will be essential and can generate substantial market economy. productivity gains. Overall, however, most of the One key concern in the accession agreement is adjustment in this industry has already occurred, the provisions on antidumping and safeguards. The and what remains is an expansion of both imports nonmarket provisions that countries are permitted and exports. to invoke against China for up to 15 years are likely China's GATS commitments represent perhaps to result in antidumping duties substantially higher the most thorough-going liberalization of the serv- than those in other countries--in a situation in ices trade ever undertaken in the GATT. The range which China faces seven times as many antidump- of commitments is extremely broad, although some ing actions per dollar of exports as the United commitments involve restrictions on ownership, States. The special product safeguards applicable business scope, or region. Critical sectors such as against China for the next 12 years are a new form telecommunications, logistics, and financial serv- of protection, applicable only against China. The ices are to be confronted with renewed competition, provisions on trade diversion lack even basic proce- and they are likely to see a burst of innovation and dural restraints, and pose a potentially serious productivity growth as restructuring proceeds. threat to China's export development. The tempta- The impacts of China's WTO commitments-- tion to retaliate, particularly with antidumping and China's successful economic development-- actions of its own, will be strong but would damage depend heavily on the ability of China's labor China more than other countries. A better option markets to reallocate labor from agriculture to for China would be to seek reform of WTO rules in other activities. Analysis reported in this volume these areas. concludes that these markets are adversely affected China's TRIPS arrangements generally appear to by a range of regulations such as the hukou system. have been implemented in a manner consistent Other features of the labor market, such as the "tie" with both the legal requirements of the agreement to the land where households have use rights to and China's development needs. They generally land but cannot sell it because property rights are provide a reasonable balance between incentives to not sufficiently well defined, restrict the mobility of innovate and access to those innovations. Some labor out of agriculture. These features of the econ- concerns have emerged about proposals that might omy inhibit the adjustment needed after accession strengthen protection too much to allow access to and increase the vulnerability of poor people to innovations such as those for patent protection on downturns in agricultural prices. 16 China and the WTO We report in this volume two studies that evalu- process--with its emphasis on continuing reform ate the impacts of trade reform on poverty. Both designed to improve economic performance--with studies find that the rural sector is more vulnerable the rules-oriented approach of the WTO. The ben- to this reform than is the urban population, and efits of accession to China will be substantial, but both conclude that urban households benefit more reaping them will require continuing reforms in the than rural households from the package of reforms adventurous spirit of China's economic reforms-- associated with accession. The study that looks at reforms that focus on economic development and the shorter term finds rural households are more go beyond trade policy into areas such as labor subject to negative shocks. Although these impacts market reform and rural development. are in general relatively small, they affect most rural households. The effects are largest in proportional Notes terms among the poorest households, and tend to 1. See chapter 13 for a discussion of the methodology used be geographically concentrated, particularly in the for these computations. northeastern provinces such as Heilongjiang and 2. Although China's transitional review at the WTO allows Jilin. The second study provides a relatively opti- other WTO members to seek information and raise concerns mistic longer-run picture, where virtually all about China's trade policies, the process is multilateral, and China can raise concerns about implementation of other Mem- households gain from the reform. bers' commitments in the protocol. These models and the overall modeling studies 3. Although internal protectionism appears to have abated suggest that the answer to mitigating these prob- in recent years, survey results suggest that problems remain, par- ticularly local government interventions in labor markets and lems is to include reforms such as reductions in the administrative discrimination (DRC 2003). These interventions barriers against movement of labor out of agricul- appear to hinder foreign investment (Amiti and Javorcik 2003). ture. Removal of the hukou system would increase 4. Two-thirds of exports were also subject to licensing. 5. See www.chinaquota.com. rural wages substantially, with a relatively modest 6. All dollar amounts are current U.S. dollars. negative effect on higher-income households. A 7. The estimated liberalization of services is very crudely range of other policy options directed toward approximated by halving the barriers to trade in these activities improving the welfare of rural people, such as rural estimated by Francois. research and development, improvements in rural infrastructure, expansion of educational opportu- References nities in rural areas, and improvements in rural The word processed describes informally reproduced works that health services, are all fully WTO consistent and may not be commonly available through libraries. could have powerful beneficial effects in both the Amiti, M., and Javorcik, B. 2003. "Trade Costs and Location of Foreign Firms in China." Paper presented at Workshop on short and the long run. As an important WTO National Market Integration. 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Global Economic Analysis. Taipei, June 5­7. Part I Policy Reforms Associated with Accession 2 What China's WTO Accession is All About Jeffrey L. Gertler With the gavelling of the accession package at China would leave the GATT. Although the govern- the conclusion of the Working Party meeting on ment in Beijing never recognized this withdrawal September 17, 2001, the negotiation on China's decision, nearly 40 years later, in 1986, China noti- accession to the World Trade Organization (WTO) fied the GATT of its wish to resume its status as a finally was concluded. The WTO Ministerial Con- contracting party and its willingness to renegotiate ference subsequently approved the terms of China's the terms of its membership. accession in Doha, Qatar, on November 10, 2001, A working party to examine China's status and the Chinese Government notified its accept- established in March 1987 met for the first time in ance on November 11. In line with customary prac- October of that year. The GATT Working Party on tice and as set out in China's Protocol of Accession, China's Status met on over 20 occasions but with- China formally became a Member of the WTO out conclusion. With the formation of the WTO in 30 days later on December 11, 2001. 1995, the GATT Working Party was converted into Each accession to the WTO is a unique event, a WTO Working Party on the Accession of China. but China's accession has been particularly note- The Working Party, chaired by Ambassador Pierre- worthy. China had been one of the 23 original con- Louis Girard of Switzerland, met 18 times. tracting parties to the General Agreement on Tariffs Article XII of the Marrakesh Agreement Estab- and Trade (GATT) in 1948. However, the applica- lishing the WTO (the "WTO Agreement"), which tion process for readmission to the multilateral governs accessions, is striking in its brevity. The trading system took 15 years from its submission in operative provision reads: "Any State or separate July 1986, making it easily the longest and most customs territory . . . may accede to this Agree- arduous accession negotiation in the history of the ment, on terms to be agreed between it and the GATT/WTO. A review of the application process WTO." By early April 2004, more than 20 new contributes to an understanding of the overall members had joined the WTO since its establish- process and highlights some key features of China's ment, bringing membership to 146, including Accession agreement. three separate customs territories (Chinese Taipei,1 After China's revolution in 1949, the govern- Hong Kong [China], and Macau). Cambodia and ment in Taiwan (China) announced in 1950 that Nepal had been accepted for membership but 21 22 China and the WTO were still in the process of completing ratification BILATERAL NEGOTIATIONS procedures. China's importance as a trading nation generated The final stages of the China accession process considerable enthusiasm for its participation in the can be classified rather naturally under three accession negotiations. Some 44 WTO members, headings: including the 15 member States of the European Union as one entity, expressed interest in conclud- · conclusion of bilateral market-access negotia- ing bilateral market-access negotiations with China. tions As these bilateral deals were struck and notified · conclusion of multilateral negotiations in the to the WTO, China's consolidated Schedule of Con- Working Party and the corresponding documents cessions and Commitments on Goods and its con- that together stipulate the terms of China's solidated Schedule of Specific Commitments on accession, including the draft Protocol and its Services were prepared with assistance from the Annexes, and the Working Party Report WTO Secretariat. Thereafter, they were reviewed · approval and acceptance of these terms of in the Working Party and multilateralized, that accession by WTO members and by China, is, extended on a most-favoured-nation (MFN) respectively. basis to all WTO members, as China's Goods and Services Schedules, annexed to the Protocol of Before delving into a description of these three Accession. In this way, these bilateral commitments steps, it is worth reviewing briefly the many ups and became part of the multilateral treaty terms of downs China experienced in the course of the China's membership in the WTO. accession process. I refer in particular to significant China was only able to make rapid progress in progress made just prior to the Tiananmen "inci- concluding its bilateral negotiations with most dent,"followed by almost two-and-a-half years with other WTO member governments once it reached virtually no accession activity, China's subsequent bilateralagreementwiththeUnitedStatesinNovem- participation in the Uruguay Round negotiations, ber 1999 and then with the European Communities and its failure to conclude negotiations on its status in May 2000. Thereafter the negotiations proceeded as a GATT-contracting party in time to become an apace. original member of the WTO. Next were the con- Only in the final days of the Working Party was version of the GATT Working Party into a WTO China able to conclude negotiations with Mexico, accession working party in December 1995, the the last of the 44 WTO members seeking bilateral considerable optimism about an accelerated pro- market-access commitments. The sticking point cess in early 1997, the near-conclusion of a bilateral had been the hundreds of antidumping orders that agreement with the United States in April 1999, the Mexico continued to maintain against products of U.S. bombing of the Chinese Embassy in Belgrade Chinese origin. Mexico eventually agreed to termi- the following month, and the conclusion of a bilat- nate these allegedly WTO-inconsistent measures eral agreement with the United States in November six years after China's accession. In addition, 1999. These developments were followed by a spate El Salvador, which recognizes Taiwan (China) and of additional bilateral agreements in the first half of not China (as is true of other WTO members), 2000, including that with the European Union in did not request bilateral negotiations with China May. Further hiccups occurred subsequently, in- and invoked the non-application provision of cluding the downing of a U.S. spy plane over the Article XIII of the WTO Agreement against China. Straits of Taiwan, the Bush administration's aggres- One element contributing to pressure on China sive enthusiasm for a new form of the Strategic and Members to conclude bilateral accords was the Defense Initiative called the Missile Defense System, U.S. administration's agreement with China. As a and finally, the terrorist attack in the United States quid pro quo for China's market-access concessions, and the U.S.-led retaliatory actions since that time. the United States would provide China with per- Clearly, China and WTO members have been on a manent MFN status, thereby eliminating the annu- roller-coaster ride of major proportions over much ally renewed conditional MFN provided under the of the accession period. Jackson-Vanik Amendment to the U.S. trade act of What China's WTO Accession Is All About 23 1974. After much debate, the U.S. Congress finally · trading rights passed unconditional MFN status (what it calls · standards and technical regulations. permanent normal trade relations or PNTR) for China in September 2000. Additional agreements were reached on the following: MULTILATERAL STEPS · a special transitional provision lasting 15 years With the bilateral market-access negotiations near- on price comparability in determining subsidies ing completion, members and China showed and dumping renewed interest in wrapping up the many out- · the establishment of both a transitional standing multilateral elements of the accession product-specific safeguard mechanism and a package. In order to finalize the negotiated package separate transitional textile safeguard and in recognition of the fact that much of the · immediate implementation of the Agreement information China had submitted to the Working on Trade-Related Aspects of Intellectual Prop- Party was incomplete or out of date, the Working erty Rights (TRIPS) Party requested that China submit updated · a transitional review mechanism to oversee information--including notifications of laws, reg- compliance with the terms of the Protocol ulations, and other policy measures--on all key · a host of technical sectoral issues in trade in aspects of China's trade regime. services. Clearly, such information was indispensable to assessing the congruency of China's trade regime While China has reserved the right to exclusive with WTO rules. It was also indispensable to final- state trading for products such as cereals, tobacco, izing negotiations on key provisions of the Protocol fuels, and minerals, and to maintain some restric- and the Report. Identifying the trouble spots and tions on transportation and distribution of goods agreeing on the timing--including possible tran- inside China, many of the restrictions that foreign sition periods--for China to bring any WTO- companies currently face in China will be phased inconsistent policy measures into compliance with out over a three-year transition period. During a WTO obligations, presented major challenges. 12-year period after accession, WTO members will The final meeting of the Working Party in have access to a transitional safeguard mechanism September 2001, with informal sessions the week in cases where imports of products of Chinese ori- of September 10 and the formal meeting on gin cause or threaten to cause market disruption to September 17, was devoted to completing the tech- member's domestic producers. nical cleanup and verification of the Goods and Upon accession China became a party to the Services Schedules, followed by an overall review of Agreement on Textiles and Clothing; accordingly, the documents to ensure consistency among the as for all WTO members, quotas on textiles will end various elements of the accession package. on December 31, 2004. However, a special, negoti- China and Working Party members finally ated, safeguard mechanism will remain in place reached agreement on all outstanding issues: until the end of 2008, permitting WTO members to take action to curb imports in case of market · preambular and general provisions disruption caused by Chinese exports of textile · the administration of the trade regime, includ- products. ing uniform administration, special economic Several areas of negotiation were problematic areas, transparency, and judicial review until very late in the process. First, there was lack of · nondiscrimination, special trade arrangements, agreement on the availability to China of WTO state trading, nontariff measures, tariff-rate provisions for developing countries in areas such as quota administration, import and export licens- domestic support to agriculture and industrial sub- ing, price controls, taxes and charges levied sidies. The United States, in particular, objected to on imports and exports, export subsidies and providing China with the full benefit of developing domestic support in agriculture, and sanitary country provisions in these areas. The matter even- and phytosanitary measures tually was resolved; China agreed not to resort to 24 China and the WTO certain of these WTO provisions and accepted a cap The Protocol and Working Party Report essen- of 8.5 percent on domestic support in agriculture, tially contain a one-way set of commitments (from below the 10 percent available generally to develop- China's side only), although these documents also ing country members under the WTO Agreement. contain some "soft" commitments by Members, for Because this 8.5 percent cap is still well above exist- example, regarding the non-abuse of domestic pro- ing budgetary outlays by the Chinese government, cedures in anti-dumping actions and restraint in it is doubtful whether the cap will have a major the use of the special safeguard. Additionally, there impact on China's ability to help its farming sec- is an unusual Annex to the Protocol, containing tor adapt to the new and evolving conditions of commitments by certain Members to phase out competition. inconsistent measures maintained against China A second area that was among the last resolved over a transition period lasting up to five years. was the regime relating to trading rights. The basic regime eventually agreed to calls for a fully liberal- APPROVAL AND ACCEPTANCE ized right for foreign companies to gain trading rights in China after a three-year transition period; Once consensus was achieved in the Working Party state-traded products remain an exception. on the final accession package, this was forwarded A third area of considerable difficulty was agree- to the General Council for decision. Given the ment on China's handling of its regime dealing with timing of the Fourth Ministerial Conference in technical regulations and standards; the key issue mid-November 2001, it was decided that these doc- was how to ensure nondiscrimination (national uments should be forwarded to Doha for approval treatment) in the application of this regime. After by Ministers, rather than be decided upon at the repeated urging spanning several years, China level of the General Council in Geneva. finally committed to unifying its administrative In accordance with established procedures, the structure responsible for the inspection and con- Ministerial Conference approved the Decision on formity assessment procedures (under the Admin- Accession and the Protocol on the terms of China's istration for Quality Supervision, Inspection and accession on November 10, 2001. China accepted Quarantine [AQSIQ]) for both domestic and the WTO's Protocol of Accession on November 11, imported goods, thereby allaying many of the con- 2001, and became a Member of the WTO 30 days cerns raised by the dual and separate systems of later. Notifying the Director-General that the Stand- inspection that previously existed. ing Committee of the People's Congress had rati- As part of the concluding phase, the Working fied the terms of accession, China became the 143rd Party also reviewed and obtained amendments and member of the WTO on December 11, 2001.2 clarifications to many of the transitional Annexes Article XII:2 of the WTO Agreement provides of the Protocol. This was done on the basis of that "the Ministerial Conference shall approve the updated and revised drafts of these Annexes agreement on the terms of accession by a two- provided by China. They included the following thirds majority of the Members of the WTO." annexes: However,pursuant to Article IX:1 of the same agree- ment and a 1995 decision of the General Council, · Products subject to state trading all accession decisions are to be approved by con- · Products subject to designated trading sensus (with possible recourse to voting only where · Nontariff measures subject to phased consensus is not achievable). All 16 WTO accession elimination decisions to date, including China's, have been · Products and services subject to price controls taken by consensus. · Notification and phase-out of subsidies · Export taxes and charges CHINA'S ACCESSION IN THE CONTEXT · Restrictions maintained against China OF THE WTO'S BASIC PRINCIPLES · Issues to be addressed in the transitional review · the Schedule of Concessions and Commitments It could be interesting to consider briefly how on Goods, as well as the Schedule of Specific China's accession fits within the context of the five Commitments on Services. fundamental principles of the GATT and the WTO. What China's WTO Accession Is All About 25 Simply put, these principles cover the following: progressively and substantially open up its services sectors to foreign competition also is undeniable. · Nondiscrimination Moreover,China has already demonstrated its inten- · Market opening tion to play a significant role in the Doha Develop- · Transparency and predictability ment Agenda. · Undistorted trade · Preferential treatment for developing countries. Transparency and Predictability These are key elements of the multilateral trading Non-Discrimination system. The basic transparency principle, contained Two types of nondiscrimination are of interest: in GATT Article X, calls on member governments to the MFN principle and the national treatment prin- promptly publish all trade-related laws, regulations, ciple. Under the MFN principle, a member may not judicial decisions, and administrative rulings of discriminate between its trading partners: goods general application; to administer all such measures and services and service providers are to be accorded in a uniform, impartial, and reasonable manner; MFN, that is, equal, treatment. At the same time, a and to provide for independent judicial review pro- member must provide national treatment: it may cedures for the prompt review and correction of not discriminate on its internal market between its administrative actions. The predictability principle own and foreign products, services, and nationals. is ensured through a legal hierarchy giving prefer- Where do things stand in terms of China's acces- ence to tariffs over less transparent and less secure sion vis-à-vis the principle of nondiscrimination? non-tariff measures such as quotas and licences, China, like other members, has committed itself and through encouraging members to "bind" their to abide by all WTO agreements, including those market opening commitments in goods and serv- provisions requiring application of MFN and ices. In the goods area, this binding amounts to national treatment. In its Protocol of Accession, setting ceilings on customs tariff rates. China has agreed to undertake additional commit- China has committed to abide by the WTO's ments to ensure the smooth phasing in of these non- transparency obligations across the board-- discrimination principles. Of particular note are including with respect to uniform application of its commitments to eliminate dual pricing practices trade regime and independent judicial review-- and to phase out within three years most of the and has made additional commitments in each of restrictions on importing, exporting, and trading these areas. While difficulties may exist with respect currently faced by foreign enterprises. All foreign to variations in treatment in different parts of enterprises, including those not invested or regis- China's customs territory, as well as with the per- tered in China, are to be accorded treatment no less ceived lack of independence of the judiciary, there favorable than that accorded to enterprises in China. can be little doubt that the Chinese government is committed to carrying through the necessary reforms to implement these obligations in a uni- Market Opening form and impartial manner. Also, as noted, China's The principle of market opening is promoted in accession commitments will be the subject of a the WTO through successive rounds of multilateral special transitional review mechanism for the first trade negotiations aimed at the progressive lower- 10 years of membership. ing of trade barriers. New members are pressed to With China as a member, her producers and liberalizetheirtraderegimes during accession nego- exporters will more confidently be able to make tiations. Trade ministers also initiated the latest long-term business decisions on the expansion of round of multilateral negotiations at the Doha their activities.The more open the Chinese economy Ministerial Meeting in November 2001. becomes, the more China will benefit from the legal With respect to market opening, China has sig- security of the rules-based trading system. Not just nificantly reduced its tariff and nontariff barriers as foreign investors, exporters, and importers, but also part of its bid to join the WTO. The breadth and all Chinese citizens,will benefit from the more open, depth of the cuts are evident. China's willingness to nondiscriminatory reforms China is undertaking. 26 China and the WTO In terms of producing a more predictable and countries and countries in transition to market secure trading environment, China has bound all economies to adjust their systems to many of its import tariffs in the goods area. China also has the new obligations resulting from the Uruguay committed to the phased reduction and removal of Round. A Ministerial Decision gives additional tariff barriers, mostly by 2004, but no later than flexibility to the least-developed countries in imple- 2010. China's average bound tariff level will menting the various Uruguay Round agreements decrease to 15 percent for agricultural products, and calls on developed country Members to accel- ranging from 0 to 65 percent, with the higher rates erate their implementation of market access applied to cereals. For industrial goods, the average commitments on goods exported by the least- bound tariff level will go down to 8.9 percent, with developed countries. a range from 0 to 47 percent, with the highest rates Although China has not been granted across- applied to photographic film and automobiles and the-board preferential treatment as a developing related products.In services,China has made a more country, it has negotiated specific transitional comprehensive set of initial commitments than arrangements in certain areas of its trade regime. those offered by most developed countries during Examples include the phasing out of quotas and the Uruguay Round. Of particular note are China's import licenses, and the phased liberalization of commitments in services sectors covering telecom- the right for foreign entities to trade in China. In munications, banking, and insurance. contrast, despite the availability of more preferen- tial treatment under the WTO agreements, China has accepted a special cap on its ability to provide Undistorted Trade domestic production subsidies in agriculture, has The WTO system also promotes undistorted agreed not to use export subsidies, and has com- trade through the establishment of disciplines on mitted to immediate implementation of the TRIPS subsidies and dumping, allowing members to Agreement. respond to unfair trade through the imposition of countervailing or antidumping duties. The treaty INSTITUTIONAL IMPLICATIONS allows individual members to impose temporary safeguard measures, under strict rules, when faced No one can contest that China's participation in the with a sudden surge in imports causing serious WTO will affect the operations of this organization injury to a domestic industry. in substantial ways and over the long term. China is As in other areas, China has agreed to abide by joining as the seventh largest exporter and eighth all WTO disciplines relating to subsidies and coun- largest importer of merchandise trade and as the tervailing measures, protection provided under twelfth leading exporter and tenth leading importer rules for antidumping, and safeguard measures. of commercial services. It has the largest popula- As noted above, it has also committed not to use tion and largest potential market of any WTO export subsidies on either industrial or agricultural member. goods and has accepted special provisions sought Undoubtedly, China's membership will have by other members in relation to determinations of implications for the regular work of the WTO's dumping or subsidies, as well as a special product- many committees administering the many agree- specific safeguard mechanism and a separate textile ments of this institution. China will surely be active safeguard. China has indicated its intention to join in the newly launched and future rounds of multi- the plurilateral Agreement on Government Pro- lateral trade negotiations, in agriculture, and in curement, which is aimed at ensuring fair competi- services, but also in other areas of mutual concern. tion rules in purchases by government procurement It will participate in fashioning the improved insti- agencies. tutional operations of the WTO. Clearly, China's membership is likely to result in expanded recourse to the dispute settlement procedures of the WTO, Preferential Treatment for Developing Countries both by China and by other members in relation to This principle permeates the entire WTO Agree- China's implementation of its WTO commitments. ment, providing transition periods to developing The first such case was that recently brought by What China's WTO Accession Is All About 27 China, similar to that brought by many other WTO it has had to use until now, to shape its trade members, against the U.S. steel safeguard measures. with its major trading partners, with a single, We should, of course, expect to see some new faces multilateral trade relationship with the rest of in the Secretariat. the world. Of course, what lies beyond China's accession is the major, continuing, and, in many ways, impon- CONCLUDING REMARKS derable task of implementation by China of its Since the mid-1980s, the process of reform in WTO accession commitments. A question upper- China has matured considerably, and China's trade most in the minds of many Chinese and foreigners performance has reflected this maturation. China alike is whether and how China will be able to has become a very important player in interna- ensure uniform and impartial implementation of tional trade, on both the import and the export trade commitments. sides. Moving from an earlier phase of import plan- At this stage, it is difficult to predict the speed ning to one of import licensing and then, more sig- with which WTO members and China will resort to nificantly, to one of import tariffs, has brought the WTO's dispute settlement procedures. There is prices and the market mechanism into play as key little doubt, however, that China and its trading determinants of China's future trade relations with partners will eventually take full advantage of WTO the rest of the world. mechanisms to resolve trade disputes. While con- Accession should allow China to lock-in the siderable emphasis has been placed on the 10-year accumulated benefits of the trade reform process transitional review mechanism provided in China's that the Chinese government has undertaken to Protocol, this mechanism does not contain any date, and it should provide a platform from which enforcement provisions. China can sustain its reform process into the future. It is hard to overstate the difficulties many sec- By placing China's reforms within the broader tors of Chinese society will face in the months and context of trade liberalization by all WTO mem- years following accession. The impact on loss- bers, Chinese producers and exporters can increase making state industries, less developed agricultural the returns from trade reform in China through communities, and myriad government-financed reciprocal market access abroad and help the projects throughout the country will be dramatic. Chinese government resist pressure domestically to Moreover, the adjustment to new, more competi- reverse the process of reform. tive market conditions, will, for many millions of For China, WTO accession will provide the individuals and families, mean unemployment and 1.3 billion Chinese people with secure, predictable, significant displacement. It will take many years for and nondiscriminatory access to the markets of large segments of China to establish a new equilib- 143 trading partners. It will also give this same rium, during which time many citizens may well enormous population secure and nondiscrimina- face considerable hardships. tory access to the goods and services of these other However, we should bear in mind that this WTO members. adjustment process has already begun. The Chinese However, from China's perspective, membership people are hardly strangers to this process. Already also for the first time commits this new WTO in the early 1990s China had introduced a player at the international level to implement legal bankruptcy law and other legislation making state and domestic policy reform, ensuring much greater industries in principle responsible for their own transparency and security on a uniform basis. profits and losses. For at least the past decade, China has made impressive strides at reform over China has radically reduced state subsidies and the past 20 years. However, committing itself to encouraged development of private enterprise in abide by international treaty rules and the rule of many sectors. Since the mid-1990s in particular, law in the conduct of trade and in domestic policy and as a member of the International Monetary reform is likely to take this process forward at an Fund, China has rationalized and liberalized even more impressive pace. handling of its foreign exchange market. In addi- Accession will also mean that China can replace tion, China has progressively and dramatically the many risky and uncertain bilateral relationships reduced its import tariffs and other nontariff 28 China and the WTO restrictions on foreign participation in the Chinese Notes market. 1. The nation of Taiwan (China) became a member of the The difficult adjustment is far from complete. At WTO as Chinese Taipei. this stage, therefore, we can do little more than wish 2. Chinese Taipei, whose terms of accession were approved by Ministers on 11 November 2001, became a WTO member on China and its people "bon courage" as they venture 1 January 2002. down the extremely challenging path that stretches before them. 3 China in the WTO: Antidumping and Safeguards Patrick A. Messerlin A few weeks prior to China's acceptance as a full These include continued use of non-market econ- member of the World Trade Organization (WTO), omy (NME) status in antidumping investigations chief negotiator Long Yongtu had ranked stricter and the use of a special transitional product-specific antidumping rules second among China's priorities safeguard (TPS) provision. These two provisions in the WTO. Antidumping rules define the condi- are scheduled to last 15 and 12 years, respectively.1 tions under which a WTO member can, if it wishes, Second, China, by far the main target of existing counter-balance dumping, that is, the fact that for- antidumping measures,to date is one of the smallest eign firms exporting to the markets of this WTO users of such measures. However, the past decade member price their products more cheaply in these has shown how quickly large developing countries markets than in their own domestic markets. At that willing to use antidumping rules can become inten- time, the United States was still fighting to exclude sive users of this instrument, and the evolution of antidumping from the topics to be discussed at China's antidumping enforcement in 2002 and early the WTO Doha Ministerial, and the European 2003 raises legitimate concerns in this respect. Community (EC) was adopting an ambiguous The chapter is organized as follows. The first sec- position. tion describes the current situation. Antidumping is In the early stages of the negotiations under the used massively by only 10 countries (four industrial Doha Development Agenda (DDA), China finds and six developing), and a strong asymmetry, best itself in an unique situation on the antidumping and illustrated by China, exists between countries safeguard issues. (Safeguard rules define the condi- enforcing antidumping measures and those targeted tions under which a WTO member can, if it wishes by antidumping measures. The second section so, give a transitional relief to a domestic industry examines how China could minimize exposure to facing an unforeseen surge in competing foreign foreign antidumping cases--an option that would imports.) First, the WTO accession protocol of be a recipe for both trade success and China's lead- China includes very special provisions that China's ing role in reforming WTO antidumping rules. trading partners may use against Chinese exports. The third section analyzes China's antidumping I would like to thank Mike Finger, Edwin Vermulst, Will Martin, and two anonymous referees for very useful comments on earlier drafts of this paper. 29 30 China and the WTO regulations and first cases, including their crucial two main results. First, worldwide antidumping relations with the existing web of the U.S. and EC enforcement is thus highly concentrated in less antidumping cases. The fourth section examines the than a dozen countries. The top 10 antidumping opportunities that the DDA offers to China for nego- users enforce 90 percent of the antidumping meas- tiating stricter disciplines both on WTO contingent ures notified in the WTO; they represent 70 per- protection, and on the use of the NME and TPS pro- cent of the world GDP and 50 percent of world visions by China's trading partners. The conclusion trade. summarizes the crucial choices to be made by China Second, the situation prevailing during the with respect to antidumping and safeguard policies. Uruguay Round--antidumping users were almost exclusively industrial countries--is no longer the The Current Situation case. Six "new" antidumping-intensive users (all of them developing countries: Argentina, Brazil, During the November 2001 Doha WTO Ministerial India, Mexico, South Africa, and Turkey) have Conference, antidumping was perceived as an issue almost caught up with the four major "old" users. pitting developing countries anxious to discipline These new users implement more than one-third of the use of this instrument against the United States, the total number of antidumping measures in force which was (and still is) very reluctant to change its in 2002, compared with less than one-fourth in own antidumping regulations. However, a close 1995. Meanwhile, the share of measures of the four examination of the current situation suggests a old users has declined from more than two-thirds much more complex picture. This examination is to half of the total number of antidumping meas- based on the antidumping measures in force at the ures in force during the period. A last worrisome end of each year of the period 1995­2002 that are sign is that the rest of the developing countries, notified to the WTO Secretariat by members.2 while still small users individually, have doubled their global share of measures in force during the Antidumping Users vs. Targeted Countries: observation period.3 A Key Asymmetry Table 3.2 presents the stock of antidumping Table 3.1, which presents the stock of antidumping measures in force by targeted country for the measures in force by antidumping users, illustrates period 1995­2002. It shows a marked asymmetry TABLE 3.1 Top 10 Antidumping Users, Measures in Force, 1995­2001 Number of Measures in Forcea Average Average Number per Applied User Country 1995 1996 1997 1998 1999 2000 2001 2002 Importb Tariffc U.S. 265 271 271 281 282 202 227 239 0.29 4.3 EC 140 138 138 139 159 175 175 183 0.19 4.6 Australia 78 46 40 49 39 44 59 38 0.77 5.8 Canada 79 78 78 65 72 71 85 83 0.38 4.8 Mexico 93 92 81 86 80 77 61 55 0.72 12.6 South Africa 12 29 42 56 87 96 94 80 1.81 15.0 India 13 15 24 44 58 94 115 181 1.28 39.6 Argentina 15 30 33 39 45 42 45 60 1.17 13.7 Turkey 37 37 34 34 35 14 16 30 0.61 12.7 Brazil 21 28 23 28 38 43 49 54 0.51 12.5 All Others 50 59 84 102 122 117 97 -- 0.04 -- of which China -- -- 0 0 4 8 11 17 0.03 15.8 All countries 803 823 848 923 1017 975 1023 -- 0.21 -- a. Antidumping duties and undertakings in force as of 31 December of the year. b. Per thousand of US$ of the 1997 imports of the user country. c. Average applied tariffs (WTO 2001). Sources: WTO Reports on Antidumping (G/ADP/N series), WTO trade data 2001; Author's computations. China in the WTO: Antidumping and Safeguards 31 TABLE 3.2 Major Antidumping Targets, Measures in Force, 1995­2001 Number of Measures Targeted Number per Countries 1995 1996 1997 1998 1999 2000 2001 2002a Exportb U.S. 60 66 66 68 66 62 57 67 0.09 EC 77 88 89 102 132 149 99 (98) 0.13 Australia 5 6 5 6 5 5 5 5 0.08 Canada 19 19 19 19 20 18 8 8 0.08 Mexico 11 15 17 17 19 21 17 17 0.15 South Africa 7 10 11 11 12 15 16 24 0.39 India 15 15 15 21 29 35 42 44 0.72 Argentina 9 8 7 7 7 7 9 8 0.30 Turkey 9 9 6 8 10 13 12 18 0.37 Brazil 48 51 52 45 42 43 34 51 0.85 All others 543 536 561 619 675 611 724 -- 0.29 of which China 143 148 180 193 202 207 199 212 0.99 All countries 803 823 848 923 1017 979 1023 -- 0.22 a. Incomplete estimates for the EC. b. Per thousand of US$ of the 1997 exports of the targeted country. Sources: WTO Reports on Antidumping (G/ADP/N series); WTO trade data; Author's computations. between antidumping users and targets. The top 10 an indication of the incentives of these export users are the targets of less than one-third of all the interests to contribute to the opening of the mar- measures in force, with a strong amplification of kets of their country. These numbers can be use- this gap in 2001 and 2002. In sum, antidumping is fully compared to the symmetrical numbers of an instrument enforced by a few large countries antidumping measures in force by thousands of against the smaller economies of the rest of the U.S. dollars imported by the country in question world--hence, the absence of incentives coming (shown in table 3.1), which can be interpreted as an from the rest of the world that would induce the indication of the strength of the incentives existing antidumping-intensive users to restrain of these import-competing interests to induce their use of antidumping actions. their own government to use antidumping. The Combining tables 3.1 and 3.2 shows that for all observed imbalance between export interests and top 10 antidumping users, with the exception of import-competing antidumping beneficiaries in Brazil, the country's interests hurt by foreign anti- the top 10 antidumping users suggests that it also is dumping measures are smaller than those benefit- unlikely that domestic coalitions are strong enough ing from domestic antidumping protection. This is to support antidumping reforms in the WTO in based on the well-known economic proposition users that are key WTO players. that analyzes protection more as a conflict between This situation raises a question that should be domestic forces (namely export interests versus carefully examined in the future. Table 3.1 suggests import-competing interests) than as a conflict that one could reasonably argue that antidumping between countries. To capture this aspect, one measures enforced by the six major developing can calculate the number of foreign antidumping country antidumping users impose welfare costs measures in force imposed on exports from a top on their own domestic economies higher than the user adjusted by the size of the country's exports costs imposed on industrial economies by the (in thousands of U.S. dollars). Such a trade- developed country­imposed antidumping meas- adjusted number of measures (shown in table 3.2) ures for two reasons. First is the marked difference mirrors the intensity of the foreign pressures between the number of measures imposed by imposed on the export interests of a country, giving developing countries and industrial countries, 32 China and the WTO once adjusted by trade size. The average number China's Special Situation of measures in force per thousands of U.S. dollars Table 3.2 shows that China has been the main target of goods imported in 1997 by an antidumping of all the antidumping measures enforced in the user is a better indicator of the potential harm world--18 percent of the antidumping cases in done by antidumping on the domestic economy 1995, almost 20 percent in 2001­2002. Table 3.3 than the mere absolute number of measures. This refines this information by presenting the unad- indicator is much higher for developing countries justed number of antidumping measures imposed than for industrial countries: it ranges from 0.5 on Chinese exports by the top 10 antidumping (Brazil) to 1.8 (South Africa), whereas it ranges users, and this number once adjusted by the trade from 0.2 to 0.4 for industrial countries (with the value between each trade partner and China (in exception of Australia). These differences would be other words, the average number of cases imposed much larger if the number of antidumping meas- by foreign antidumping users per thousand U.S. ures to be adjusted were to take into account the dollars of exports from China to these users). Both number of tariff lines concerned, since developing sets of numbers show that China is much more countries tend to cover many more tariff items targeted by the developing countries than by the with antidumping cases than industrial countries. industrial countries--especially when one looks at The second reason for arguably higher welfare the figures adjusted for trade size. In fact, China is costs from antidumping measures in major devel- almost exclusively targeted by the top users, all of oping country users is that available (though not them relatively large economies. systematic) information suggests that antidump- The above information on antidumping users ing duties enforced by developing countries are, versus targets raises a key question about China's on average, more severe than those imposed by role in future world antidumping activities. Will industrial countries--and economic analysis China follow the same evolution as the other large shows that welfare costs increase more rapidly developing countries, that is, will it increase rapidly than tariffs. TABLE 3.3 Shares of Antidumping Measures in Force against Imports from China, 1995­2002 Average Shares of Antidumping Measures Against Chinaa Average Number per Share Export from User Countries 1995 1996 1997 1998 1999 2000 2001 2002 (excl. 2002) Chinaa U.S. 12.8 13.7 15.1 14.6 14.5 16.5 18.5 18.0 15.1 1.72 EC 20.7 21.7 23.2 23.0 20.8 19.4 19.4 15.8 21.2 1.04 Australia 9.0 4.3 10.0 8.2 7.7 4.5 5.1 7.9 7.0 0.71 Canada 7.6 7.7 10.3 10.8 8.3 8.5 10.6 10.8 9.1 1.83 Mexico 33.3 28.3 40.7 38.4 36.3 35.1 44.3 41.8 36.6 60.27 South Africa 8.3 27.6 28.6 23.2 19.5 18.8 19.1 22.5 20.7 11.98 India 38.5 46.7 33.3 27.3 32.8 22.3 25.2 27.1 32.3 10.66 Argentina 33.3 20.0 30.3 35.9 31.1 21.4 15.6 20.0 26.8 9.98 Turkey 13.5 13.5 14.7 17.6 17.1 14.3 25.0 40.0 16.5 4.37 Brazil 14.3 14.3 21.7 28.6 28.9 25.6 22.4 20.4 22.3 4.67 All Others 34.0 28.8 26.2 22.5 18.9 12.8 15.5 -- 22.7 -- Total (number)b 143 148 180 193 202 179 199 -- 174 -- in % of total 17.8 18.0 21.2 20.9 19.9 18.3 19.5 -- 19.4 -- a. in percent of the total number of antidumping measures in force imposed by the user country. b. Per thousands of US dollars of the 1997 imports from China of the user country. c. provisionally based on Lindsey and Ikenson 2001. Sources: WTO Reports on Antidumping (G/ADP/N series). WTO trade data; Author's computations. China in the WTO: Antidumping and Safeguards 33 the number of antidumping cases? Or will China ing this hypothesis is shown below. In such a case, adopt a different approach, that is, will China the worldwide spread of antidumping regulations minimize its own antidumping use and invest and the increase of antidumping measures are its negotiating strength in the WTO to obtain seen as a positive development by the firms in ques- stricter antidumping rules, as claimed by its chief tion, rather than as incentives to discipline anti- trade negotiator? Clearly, China's choice between dumping use. Examining such deeper aspects of these alternatives will have a decisive impact on the antidumping protection requires looking at the evolution of world antidumping enforcement and distribution of antidumping measures in force by on WTO trade disciplines. sector or product rather than by country. Minimizing China's Exposure A Few "Antidumping-Intensive" Sectors to Foreign Antidumping Table 3.4 provides a broad picture based on the China's second alternative will be a difficult exer- number and average shares of antidumping meas- cise, particularly in the coming years. The usual ures in force by the most aggregated section of the slowness of WTO negotiations means that China Harmonized Tariff System (instead of specific prod- could not get reforms of WTO antidumping rules ucts, as below). It shows that antidumping measures before two (and more likely four) years. In the are concentrated in a handful of Harmonized Tariff interim, it will be hard for Chinese authorities System (HTS) sections. Antidumping measures in to resist pressures from import-competing firms metals, chemicals, machinery and electrical equip- based in China that demand intensive use of China's ment, textiles and clothing, and plastics and rubbers antidumping procedures. This difficulty raises the amount to 75 percent of the total number of meas- following question: could China adopt policies ures, whereas trade in these sectors amounts to less minimizing, as quickly as possible, its exposure to than half of total world trade. These few HTS sec- foreign antidumping measures--thereby alleviat- tions happen to be key sources of exports for ing the political costs of playing a reforming role in dynamic developing countries in the first stages of WTO antidumping rules? their industrial development. Second, these HTS Trade problems are fundamentally domestic sections are characterized by a high proportion of conflicts between export-oriented and import- relatively standard products and by oligopolistic competing industries. Country-based data, as those market structures. The metals and chemicals sec- provided above, do not permit examination of this tions clearly fit these features.The other HTS sectors deeper aspect of protection. They can even be mis- require a closer look at subsectors.Few antidumping leading. For instance, they can suggest that the actions in the machinery and clothing subsectors are strong asymmetry between antidumping users and characterized by many firms and highly differenti- targets observed in tables 3.1 and 3.2 would ated products, and most of the antidumping actions progressively disappear because each WTO mem- in the electrical equipment and textiles subsectors ber would be induced to introduce antidumping are characterized by relatively standard products regulations and to enforce them--with such a and by oligopolistic firms.These features explain the worsening of the situation ultimately inducing wide use of antidumping measures in the textile WTO members to adopt collectively stricter disci- subsector since the late 1980s, before any effective plines. (Arguments have already been presented liberalization of the Multi-Fibre Arrangement quo- suggesting that the top antidumping users will tas,as decided by the Uruguay Round (GATT,1994). be unlikely to follow this path.) Taking into account Such a pattern strongly suggests that complain- firms' behavior suggests that an even darker ing firms use antidumping as an additional--cheap scenario is quite plausible. Firms that are the and powerful--instrument for segmenting the petitioners--hence the driving forces in antidump- markets that ongoing or scheduled trade liberaliza- ing enforcement--may well want to lodge similar tions aim at making more competitive. It also sug- antidumping complaints in several key countries to gests that the spread of antidumping cases to segment the world markets of their products certain sectors, such as clothing, should be expected through antidumping measures; evidence support- to the extent that these markets will be increasingly 34 China and the WTO c Lines ariffsT 0.0 1.2 5.9 0.0 68.6 78.2 30.0 12.6 18.0 43.4 12.1 26.1 15.7 29.2 30.1 61.9 21.5 96.3 25.0 67.2 25.0 38.7 <10% ariffT with not b are s verageA Applied ariffT 9.6 9.4 9.8 4.1 14.4 21.0 15.9 23.8 17.7 13.4 28.4 21.3 23.2 14.3 20.2 18.9 40.6 13.0 16.4 12.6 10.9 15.8 states China' 9.2 8.0 7.4 7.3 2.8 0.8 3.1 0.8 1.9 0.2 3.6 0.4 1.7 1.0 0.5 0.0 4.1 5.0 8.0 37.8 10.9 Import Pattern 00.01 member EC 6.7 4.7 3.2 3.7 1.6 0.7 2.1 2.1 4.8 3.4 7.1 1.1 1.7 0.1 7.3 0.0 0.3 0.1 2.0 29.2 19.8 Export Pattern 100.0 various by a 88.9 70.3 89.7 44.4 -- 66.7 -- -- -- product ADMs Growth 117.0 104.1 116.1 114.2 108.4 101.6 115.5 207.6 129.4 104.0 122.2 161.9 112.0 Indexes . same HS 9.2 6.4 6.1 4.0 4.0 3.1 3.1 2.1 1.6 1.5 1.4 8.0 5.0 5.0 5.0 2.0 1.0 0.0 0.0 the 33.5 21.6 of ADMs Pattern by Section 100.0 sector by 81 79 74 30 40 93 27 22 61 32 14 11 401 228 lines, imports 2000 1103 on es 1995­2000, 70 66 43 44 44 28 23 31 02 12 11 tariff 372 217 100 1999 1081 Measur total imposed 95 54 53 42 42 44 31 24 71 9 of 13 Sector 316 210 976 1998 cent ADMs by 94 61 55 40 37 12 9 per 29 19 10 14 in 3.3, orld Anti-Dumping 305 204 921 1997 c. to W of 85 60 54 40 37 71 3.1 31 19 16 11 15 the 290 203 899 2001, 1996 in in Number tables b. ce 81 48 53 42 34 81 6665 434677 999211 000999 333300 001111 000000 000000 35 15 21 14 14 276 201 874 with For 1995 in 1997­1995. contrast case. articles In EC and products Measures y cement, products oils 2001. one equip. products in equipment industr plaster paperboard, fats, instruments wood leather articles manufactured of y 1998­2000 Ikenson animal allied SystemSections electrical,y paper stone, products skins, and metal clothing rubbers transport foodstuffs headwear, of cinema aggregated Antidumping articles vegetable products ammunitions jeweller between animals, hides, objects Lindsey 3.4 Metals, Chemical, Machiner extiles,T Plasters, ehicles,V oodpulp, Articles W reparedP egetableV ood, Footwear Optical, Miscellaneous W Live Animal, Mineral Arms, Raw Gems, Art ce: Growth 6 7 4 2 9 1 3 5 8 Harmonized 15 16 11 17 13 10 12 18 20 19 14 21 otalT a. Sour systematically ABLET China in the WTO: Antidumping and Safeguards 35 subjected to product differentiation and imperfect sion but rather should expect to continue to face a competition (based on such factors as trademarks, large number of antidumping cases. Of course, goodwill, and distribution channels). In sum, the WTO membership gives China access to the WTO observed sectoral pattern of antidumping reflects dispute settlement mechanism, which could pro- the increasing privatization of trade policy by firms vide some relief to Chinese exporters harassed by that enjoy enough initial oligopolistic power to foreign antidumping. However, this relief probably fully use the pro-collusive bias embedded in will be only marginal and short-lived. For instance, antidumping regulations--a key lesson that should the 2001 WTO dispute settlement ruling banning be kept in mind when implementing these regula- the averaging method is already in the process of tions, in China as elsewhere. being circumvented by alternative procedures (hastily developed by creative petitioners) that may hurt the defendants differently, but not necessarily China's Sensitivity to Antidumping-Intensive less than the condemned averaging method. Sectors A more promising route for minimizing China's Does China tend to import products pertaining to exposure to foreign antidumping measures may be antidumping-intensive HTS sections (that is, to Chinese policies--and pre-eminently China's own industries subjected to many antidumping meas- trade policy. If China still imposes high tariffs in ures in the world)? If that is the case, one should antidumping-intensive sectors at the end of the expect Chinese authorities to be under strong pres- accession period, it may not adopt many or severe sures for taking and enforcing antidumping meas- antidumping measures on imports from the rest of ures on imports of such goods--that is, for the world in these products (though section 1 participating to the worldwide segmentation game shows that the top developing country antidump- in this sector that constitutes the ultimate goal of ing users have not hesitated to add high antidump- antidumping enforcement. Table 3.4 shows that the ing measures on the top of unfinished trade five most antidumping-intensive HTS sections rep- liberalization). However, such a costly tariff policy resent almost 70 percent of total Chinese imports, for China will not ensure less foreign antidumping opening the possibility that Chinese firms or foreign cases against Chinese exports. On the contrary, firms producing in China could table antidumping high Chinese tariffs will facilitate the introduction complaints to segment world markets. of foreign antidumping measures against Chinese China's sensitivity to antidumping-sensitive exports in antidumping-intensive sectors. This is sectors could also be assessed from an export per- because high Chinese tariffs will allow the existence spective. Table 3.4 underlines how sensitive Chinese of high prices in China, making the existence of exports are to the worldwide antidumping activity, dumping by Chinese exporters easier to prove, all particularly in machinery-electrical equipment and the more because the Chinese exports in question in textiles and clothing. The above observations on consist mostly of basic products, for which Chinese the key role of economic characteristics (type of exporters are likely to align their prices to those product, market structure) as the dominant factors prevailing in foreign markets since there is minimal driving world antidumping activity suggest China or no premium for differentiation. as a target of foreign antidumping measures much Accordingly, a first way to minimize exposure to more because of the intrinsic economic features of foreign antidumping measures would be the adop- her exported products (differentiation level and tion by China of a relatively uniform and moderate oligopolistic markets) than because it was not a tariff policy to reduce distortions in the domestic WTO member. production pattern, foreign antidumping investi- gators interpret such distortions as sources of dumping as much as possible. Table 3.4 provides the Chinese Policies as the Best Ways to Minimize average applied tariffs by HTS section that China Exposure to Foreign Antidumping imposed in 2001. Though averaging tariffs for such A key corollary of this conclusion is that China widely defined sectors gives very imperfect infor- should not expect to face less antidumping meas- mation on the tariff structure (peak tariffs within ures in the coming years because of her WTO acces- each sector are eroded by low tariffs), it suggests that 36 China and the WTO tariff peaks in China are concentrated in HTS sec- instrument that petitioners are successfully tions that are not antidumping-intensive activities, using in a strategic way to segment the two with the exception of textiles and clothing. largest world markets. This observation leads to Implementing a uniform tariff policy may an important corollary. Assessing the welfare help China to shift export products away from costs of antidumping measures should take antidumping-intensive sectors for another reason into account not only the severity of the meas- already observed in certain countries, such as Hong ures per se (the high level of antidumping Kong (China), Japan, the Republic of Korea, duties, or the restrictiveness of quantitative Singapore, and Taipei. These five industrial coun- restrictions), but also the fact that the level tries have reduced their exposure to foreign of competition prevailing in the importing antidumping measures by upgrading their markets is dramatically reduced by such exported products--to the point that one could measures. "Indirect" welfare costs generated by argue that, in fact, foreign antidumping measures antidumping-caused collusion compound the may have accelerated the economic development of direct welfare costs generated by the antidump- these industrial countries by inducing them to shift ing duties. faster to anticipated comparative advantages in · Second, U.S. antidumping duties are, on average, highly differentiated products. higher than EC duties: 104 percent and 38 per- cent, respectively. However, comparing in detail the measures in the EC and U.S. echoing cases is EC and U.S. Antidumping "Echoing" against China difficult because of the differences in regulations Exports and the lack of sufficiently detailed information. Table 3.4 relies on sectors too broad for capturing For instance, some EC cases are terminated by antidumping protection as embedded in the product the withdrawal of the complaint by the petition- strategies of a few large firms. This aspect requires ers. The effective impact of such withdrawals is information at the product level. Table 3.5 provides hard to assess. It may be limited to a "chilling" such detailed information for the EC and U.S. effect on Chinese exporters who may be forced antidumping actions against China. More precisely, to export less, or at higher prices, or both, Table 3.5 provides the list of the EC and U.S."echo- to limit the risks of facing new antidumping ing" cases, that is, those cases that have targeted the complaints. However, withdrawals may merely same products exported by China between 1980 and reflect a lack of cooperation of the domestic 1999. However, the European Community and the industry or a failure to get the minimum num- United States are the top antidumping users in terms ber of EC member states to support an EC Com- of the absolute number of measures in force, and mission proposal to impose measures. They also they represent the two largest markets for Chinese may reflect the fact that petitioners have been exports (15 and 21 percent, respectively). able to impose quantity or price restraints on Table 3.5 provides two general observations: Chinese exports on a "private" basis--with the corresponding full-fledged impact to be · First, the number of echoing cases is large: 58 expected from these hidden restraints. cases, that is, 75 and 68 percent of the total number of antidumping cases initiated against Chinese exports by the United States and the China's Antidumping Enforcement: European Community, respectively. All of these At the Crossroads cases echo each other generally within a year or less, though of course they subsequently may The following first assessment of China's anti- follow different developments in these markets. dumping regulations and enforcement procedures All but three (cycles, hammers, and pocket should be taken as provisional because it is con- lighters) resulted in antidumping measures of strained by the limited number of ongoing cases to some kind. Such a large proportion of echoing date; a substantial number of cases is often needed cases and the similarity of their outcomes con- for a robust assessment of the effective antidump- stitute signs that antidumping is a protectionist ing enforcement by a country. China in the WTO: Antidumping and Safeguards 37 TABLE 3.5 EC and U.S. Echoing Antidumping Cases against Chinese Producers, 1980­99 Decisions Dumping Antidumping Initiating Margin Positive Negative Duties Years Country Products (EC) EC U.S. EC U.S. EC U.S. 1992 EC antimony trioxide 43.2 noi 1991 U.S. antimony trioxide N 1988 EC barium chloride 50.1 D 25.8 1982 EC barium chloride 75.0 Ds 1983 U.S. barium chloride N 1983 U.S. barium chloride A 14.5 1999 EC brushes, hair 1992 U.S. brushes, hair T 1986 EC brushes, paint 100.0 Und 1992 EC brushes, paint noi 1985 U.S. brushes, paint A 127.1 1999 U.S. brushes, paint 1994 EC coumarin 50.0 Ds 1994 U.S. coumarin A 160.8 1991 EC cycles 30.6 D 30.6 1995 U.S. cycles N 1984 EC cycles, chains 45.0 Und 45.0 1999 EC cycles, forks 1999 EC cycles, frames 1996 EC cycles, parts 30.6 D 30.6 1999 EC cycles, wheels 1992 EC ferrosilicon 49.7 D 49.7 1992 U.S. ferrosilicon A 137.7 1995 EC furfuryl alcohol 1994 U.S. furfuryl alcohol A 45.3 1999 EC glycine 1994 U.S. glycine A 155.9 1985 EC handtools: hammers 1990 U.S. handtools: hammers A 45.4 1994 U.S. lighters, disposable N 1990 EC lighters, pocket 16.9 D 16.9 1991 EC magnesium oxide 27.7 Und 1994 U.S. magnesium, alloy A 79.4 1994 U.S. magnesium, pure A 108.3 1997 EC magnesium, unwrought 31.7 D Und 31.7 1994 U.S. manganese, metal A 143.3 1992 EC manganese, unwrought 1996 U.S. persulfates 1994 EC persulfates, peroxodisulfates 110.1 D 83.3 1982 U.S. polyester, cotton cloth A 36.2 1990 EC polyester, yarn 23.5 D 23.5 1986 EC potassium permanganate 94.5 D Und 28.0 1983 U.S. potassium permanganate A 39.6 1984 EC silicon carbide 31.5 Und 1993 U.S. silicon carbide N 1989 EC silicon, metal 38.7 Ds 18.7 1991 EC silicon, metal 178.0 Ds 1990 U.S. silicon, metal A 139.5 38 China and the WTO TABLE 3.5 (Continued) Decisions Dumping Antidumping Initiating Margin Positive Negative Duties Years Country Products (EC) EC U.S. EC U.S. EC U.S. 1994 EC steel, pipe or tubes fittings 58.6 D 58.6 1999 EC steel, pipe or tubes fittings 49.4 D 49.4 1991 U.S. steel, pipes A 182.9 1985 U.S. steel, pipes N 1988 EC tungstate, ammon. para- 75.7 noi 1988 EC tungsten, carbide 73.1 D Und 1988 EC tungsten, metal powder noi 1991 U.S. tungsten, ore A 151.0 1989 EC tungsten, ores 50.3 D Und 1988 EC tungstic, oxide & acid 85.8 D Und Total 58 Average margins and duties 59.2 29 15 5 7 37.8 104.5 Sources: Bloningen 2001 for the U.S.; Official Journal of the EC. Notes: EC decisions: D ad valorem duty; Ds specific duty; Und undertaking; with withdrawal; noi no injury. ep expired deadline. U.S. decisions: A affirmative; N negative. China's Antidumping Regulations complaints (a condition that domestic monopo- lies, oligopolies, or cartels fit much more easily China adopted its first antidumping regulations on than do competitive industries) March 25, 1997, and the antidumping guidelines · possibility of ex officio initiation of cases by the necessary for implementing the law later the same Chinese authorities year. Following accession to the WTO, this "old" · screening of the complaints by the antidumping regulation was replaced by the "new" regulation in office, exposing this office to strong and hidden January 2002 with another set of guidelines (see, pressures by vested interests on the WTO website, G/ADP/N/1/CHN1 and · possibility of withdrawal by the petitioners, G/ADP/ N/1/CHN2; see also Wang 2003 for a legal facilitating private collusion between them and analysis). the defendants Chinese regulations follow the usual structure of · cumulation of imports, facilitating the demon- antidumping legislation, including proof of the stration of injury and widening the geographical existence and estimate of the magnitude of dump- scope of protective measures ing and of material injury, and proof of the causal · recourse to constructed normal values, enabling relation between dumping and injury. However, manipulation of costs and reasonable profit in they have a few striking features. First, many details case of the absence of comparable prices in the are left to the detailed guidelines or to case-by-case exporting country practices. This is often the case among countries · broad definition of the confidentiality of the that have recently adopted antidumping regula- information limiting the rights of the defen- tions. However, it has the great inconvenience of dants (and arguably having equal impacts on generating a high level of legal uncertainty in the domestic and export firms) process as a whole. · possibility of imposing undertakings as anti- The second feature is that all the well-known dumping measures and the mandatory provi- protectionist biases of the WTO antidumping pro- sion that antidumping duties shall be borne by visions are included in China's regulations, as the importers (the no-absorption provision) shown by the following non-exhaustive list: · possibility of imposing retroactive antidumping · use of the concept of "a major proportion" of duties in the case of a history of dumping, that the industry as the threshold level for accepting is, recurrent antidumping complaints China in the WTO: Antidumping and Safeguards 39 · possibility of taking "appropriate" measures in WTO for the cases under the new regulation. case of circumvention of the antidumping Sixty-nine cases have been initiated, with a very measures by the foreign firms. uneven time pattern: after a slow start in 1997­98, the number of cases has increased rapidly (some The third feature of the Chinese antidumping cases under the Old Regulation are left with regulations prior to the 2003 government reform unknown status), reaching 24 cases in 2002 and 11 was a highly complex coordination of the various cases for the first five months of 2003. This increase administrative agencies involved in antidumping can only be a source of serious concern. It remains investigations. The Fair Trade Administration to be seen whether it simply mirrors cases that for Import and Export (FTA) of the Ministry were "in the pipeline" for a long time, or whether of Foreign Trade and Economic Cooperation China has begun to follow the drift observed in the (MOFTEC) received complaints, decided those it six top developing country antidumping users and would accept or reject, and was involved in the will soon become another antidumping intensive whole investigation and process. The State Eco- user, putting in danger her so-far successful nomic and Trade Commission (SETC) joined liberalization. MOFTEC for determining the existence of injury at Although it is too early to know whether the preliminary stage and for the final investiga- China's first antidumping measures will be repre- tions. The Customs General Administration (CGA) sentative of future antidumping enforcement, joined MOFTEC for some parts of the investiga- these measures deserve a few observations. First is tions. For the imposition of antidumping duties, that antidumping measures have been taken in MOFTEC made proposals to the Tariff Commis- almost all the cases. This is a very high percentage, sion under the State Council (TCSC), which took compared to generally observed levels of 60­70 per- the decisions. The merger of SETC and MOFTEC cent in industrial countries. The second observa- in early 2003 brought these two functions into one tion is the relatively high level of the measures ministry. adopted by the Chinese authorities, although it Lastly, the Old Regulation included the follow- seems that the most recent measures are less severe ing Article 40: "In the event that any country or than the ones taken under the Old Regulation. region applies discriminatory antidumping or The main countries targeted are industrial and countervailing measures against the exports from advanced developing countries--not quite the pat- the People's Republic of China, the People's tern observed for the other developing country Republic of China may, as the case may be, take antidumping users. counter-measures against the country or region in The cases initiated since 2001 deserve an addi- question." It is not known whether this provision tional remark. Their product pattern is closer to has led to cases, but clearly it opened the possibil- what is observed for the other antidumping users, ity for China to use her antidumping rules as a as best illustrated by the steel cases (echoing the EC retaliatory instrument. Interestingly, Article 56 of and U.S. safeguards) and by the ethanolamine cases the New Regulation is only slightly more diplo- (observed in several other antidumping users). This matic: "Where a country (region) discriminatorily increasingly similar product pattern suggests that imposes antidumping measures on the exports China's antidumping enforcement may be starting from the People's Republic of China, China may, on to be part of the ongoing process of segmenting the basis of the actual situations, take correspon- world markets through worldwide antidumping ding measures against that country (region)." activity. It also raises the issue of a progressive cap- ture of China's trade policy by firms, similar to what is observed in the 10 major antidumping Antidumping Enforcement by China users. In this context, it would be important to Table 3.6 provides the list of the antidumping cases know whether petitioners in China are Chinese initiated by China between 1997 and May 2003, firms (private or state-owned) or whether they are based on information provided by MOFTEC for firms having strong links (such as joint ventures, the cases under the old regulation and on China's technical relations, vertical integration) with for- latest notification (G/ADP/N/105/CHN) to the eign firms well experienced in "antidumping art." 40 China and the WTO TABLE 3.6 China's Antidumping Measures in Force and Investigations, as of 30 June 2003 Provisional Definitive Antidumping Antidumping Duties (percent) Duties (percent) Initiation Year Country Products Minimum Maximum Minimum Maximum Cases initiated under the old regulation 1997 Canada newsprint 17.1 78.9 9.0 78.0 1997 Korea, Rep. of newsprint 17.1 78.9 9.0 78.0 1997 U.S. newsprint 17.1 78.9 9.0 78.0 1999 Russia steel, cold-rolled silicon 11.0 73.0 0.6 62.0 1999 Korea, Rep. of polyester film 21.0 72.0 13.0 46.0 1999 Japan steel, cold-rolled stainless 4.0 75.0 17.0 58.0 1999 Korea, Rep. of steel, cold-rolled stainless 4.0 75.0 17.0 58.0 1999 EC Germany acrylates 24.0 74.0 0.0 0.0 1999 Japan acrylates 24.0 74.0 31.0 69.0 1999 U.S. acrylates 24.0 74.0 31.0 69.0 2000 EC Britain methylene chloride 7.0 39.0 6.0 39.0 2000 EC France methylene chloride 28.0 75.0 28.0 75.0 2000 EC Germany methylene chloride 67.0 67.0 66.0 66.0 2000 EC Netherlands methylene chloride 10.0 58.0 9.0 57.0 2000 Korea, Rep. of methylene chloride 7.0 28.0 4.0 28.0 2000 U.S. methylene chloride 49.0 58.0 49.0 58.0 2001 Japan polystyrene a a a a 2001 Korea, Rep. of polystyrene a a a a 2001 Thailande polystyrene a a a a 2001 Indonesia lysine a a a a 2001 Korea, Rep. of lysine a a a a 2001 U.S. lysine a a a a 2001 Korea, Rep. of polyester, chips a a a a Cases initiated under the new regulation 2001 Korea, Rep. of polyester, staple fiber 4.0 48.0 2.0 48.0 2001 Korea, Rep. of pet chips 6.0 52.0 5.0 52.0 2001 Indonesia acrylates 11.0 24.0 11.0 24.0 2001 Korea, Rep. of acrylates 11.0 20.0 2.0 20.0 2001 Malaysia acrylates 13.0 38.0 4.0 38.0 2001 Singapore acrylates 46.0 49.0 30.0 49.0 2001 EC Belgium caprolactam 6.0 16.0 6.0 16.0 2001 EC Germany caprolactam 28.0 38.0 28.0 38.0 2001 EC Netherlands caprolactam 9.0 18.0 6.0 18.0 2001 Japan caprolactam 5.0 21.0 5.0 18.0 2001 Russia caprolactam 6.0 29.0 7.0 16.0 2002 Korea, Rep. of polyester, film -- -- 0.0 0.0 2002 India anhydride, purified 33.0 33.0 b b 2002 Japan anhydride, purified 66.0 66.0 b b 2002 Korea, Rep. of anhydride, purified 14.0 33.0 b b 2002 Japan styrene butadiene 0.0 33.0 b b 2002 Korea, Rep. of styrene butadiene 10.0 27.0 b b 2002 Russia styrene butadiene 16.0 46.0 b b 2002 Kazakstan steel, cold-rolled products 21.0 48.0 b b 2002 Korea, Rep. of steel, cold-rolled products 9.0 40.0 b b China in the WTO: Antidumping and Safeguards 41 TABLE 3.6 (Continued) Provisional Definitive Antidumping Antidumping Duties (percent) Duties (percent) Initiation Year Country Products Minimum Maximum Minimum Maximum 2002 Russia steel, cold-rolled products 9.0 29.0 b b 2002 Taiwan (China) steel, cold-rolled products 8.0 55.0 b b 2002 Ukraine steel, cold-rolled products 12.0 22.0 b b 2002 Japan polyvinyl chloride 32.0 115.0 b b 2002 Korea, Rep. of polyvinyl chloride 10.0 76.0 b b 2002 Russia polyvinyl chloride 34.0 82.0 b b 2002 Taiwan (China) polyvinyl chloride 10.0 27.0 b b 2002 U.S. polyvinyl chloride 25.0 83.0 b b 2002 Japan toluene 19.0 49.0 b b 2002 Korea, Rep. of toluene 6.0 22.0 b b 2002 U.S. toluene 23.0 28.0 b b 2002 Japan phenol 7.0 144.0 b b 2002 Korea, Rep. of phenol 10.0 10.0 b b 2002 Taiwan (China) phenol 7.0 20.0 b b 2002 U.S. phenol 29.0 29.0 b b 2003 EC Germany ethanolamine b b b b 2003 Iran ethanolamine b b b b 2003 Japan ethanolamine b b b b 2003 Malaysia ethanolamine b b b b 2003 Mexico ethanolamine b b b b 2003 Taiwan (China) ethanolamine b b b b 2003 U.S. ethanolamine b b b b 2003 EC chloroform b b b b 2003 India chloroform b b b b 2003 Korea, Rep. of chloroform b b b b 2003 U.S. chloroform b b b b 69 All cases average antidumping 17.2 43.4 9.8 23.7 duty a. Status unknown; b. Ongoing investigations. Sources: MOFTEC, WTO Semi-annual report G/ADP/N/105/CHN, 22 August 2003. China's Options in the WTO sound "interpretation" of the specific provisions on Negotiations on Contingent antidumping. Such an interpretation could create Protection strong incentives in China for both restraining its own antidumping use and fighting for stricter China's antidumping enforcement needs to take WTO rules on antidumping. It also could give into account an aspect that the six top developing strong incentives to China's trading partners to ease country antidumping users have not had to China's transitional period of accession. It is fair to address: China's WTO accession protocol incorpo- say that dealing with the provision on safeguards rates specific provisions on antidumping and safe- seems more difficult. This provision is so much in guards (for a legal analysis, see Vermulst 2000). The contradiction with the general WTO rules and section argues that this special feature that is ini- spirit that its use will raise a large systemic risk for tially a handicap can be turned into a positive the whole WTO. However, various options are instrument. More precisely, it could induce China examined at the end of the section. to negotiate, in the DDA, a more economically 42 China and the WTO Linking China's Effective Liberalization to a Better negotiate an economically sound interpretation of Treatment of Exports by Antidumping Users the use of the NME status by WTO members. The benefits from such an interpretation rely on the fact China's protocol of accession allows China's trading that China and her trading partners have a com- partners to use the non-market economy (NME) mon interest in establishing the strongest possible status in their investigations against allegedly link between Chinese effective liberalization and dumped Chinese exports. This NME status, which the elimination of the NME use by foreign is scheduled to last 15 years until 2017, allows for- antidumping authorities against Chinese exporters. eign antidumping investigators to use proxies for It is important to underline that what is at stake is estimating the home market prices or costs of not the elimination of the NME provision itself Chinese exporters. Such proxies make the proof (once again impossible to obtain) but its effective of the existence of antidumping much easier use in the future.5 than under the antidumping rules for market The argument aims at mobilizing the export economies, and they inflate the magnitude of the interests in both China and the rest of the world estimated antidumping margins compared to during the implementation period of China's those, already high, imposed on market economies. accession to the WTO. On the one hand, if Chinese Table 3.7 gives a sense of the intrinsic biases of exporters know that they will face a less unfair the NME procedure by summarizing the informa- treatment (i.e., that they will not be subject to the tion available from 208 EC and U.S. antidumping NME status) in foreign antidumping cases, they cases initiated between 1995 and 1998 (Lindsey will be induced to monitor China's liberalization 1999; Messerlin 2000a). It shows that the further more closely--to check whether China is effectively from pure price comparisons the methodology opening her markets in accordance with her acces- used for estimating dumping margins stays, the sion protocol--and to provide stronger support to higher these margins have been: from 3 percent it, including stricter use of China's antidumping (U.S.) and 22 percent (EC) under pure price com- regulations. On the other hand, if foreign exporters parisons, to 14 percent (U.S.) and 24 percent (EC) are convinced that they will get more effective and under a mix of price comparisons and constructed stable access to Chinese markets, they will be values, and to 25 percent (U.S. and EC) under the induced to fight for restraining the antidumping various constructed value methods. Moreover, use enforcement by their own authorities, in particular of NME status is clearly linked to the highest for limiting the use of the NME status. dumping margins found (40 percent in the U.S. and 46 percent in the EC).4 Doing so could be achieved by implementing the following simple rule. Foreign antidumping It is almost impossible to eliminate a provision investigators will automatically grant the market- included in a country's protocol of accession. economy status to Chinese exporters of any given However, during the DDA, it may be possible to TABLE 3.7 Do Antidumping Investigations Really Look at Dumping? U.S. Cases (1995­98) EC cases (1995­97) Number Average Number Average Bases of Estimated Normal Values of Cases Dumping of Cases Dumping of Exporters Examined Margins Examined Margins Price comparisons only 5 3.2 8 22.7 Price comparisons and constructed values 33 14.2 33 24.4 Constructed values 20 25.1 12 25.1 Non-market economies 47 40.0 12 45.6 "Best available facts" 36 95.6 2 74.5 All cases examined 141 44.7 67 29.6 Sources: Lindsey 1999 for the U.S. cases; Messerlin 2000a for the EC cases. China in the WTO: Antidumping and Safeguards 43 product that would meet the three following partners should grant to China is the unconditional conditions: benefit of market economy status in the antidump- ing investigations faced by the Chinese exports · The Chinese MFN tariff on the product involved meeting these conditions.6 is moderate (e.g., 10 percent or less). This thresh- Three final observations are necessary. First, the old tariff will be one of the core components of a negotiations on the improved implementation of more economically sound "interpretation" of the NME status for China should be as swift as pos- China's NME status to be agreed upon during sible. Second, the conditions can be easily defined the DDA. It could be stable over time, or it could on a tariff line (HTS) basis. For instance, China increase as time passes--showing an increasing could notify the WTO, on a regular basis, of the confidence in the ongoing Chinese liberalization tariff (HTS) lines for which these conditions are process among China's trading partners. met; this procedure could readily be included in the · No "core grey measures" shall be imposed on the general monitoring procedures of China accession product in question by the Chinese authorities. process. Cross-notifications by China's trading The list of the core gray-area measures to be partners could be added to the process, under the introduced in the interpretation agreement also condition that they will not slow it. Finally, weaker should be negotiated during the DDA. It should variants of the above suggestions could be exam- be short (e.g., specific tariffs, quantitative ined, if necessary. For instance, the NME status restrictions, and minimum prices) and only the could only be eliminated for the goods notified measures listed should be considered as parts of after a specified period, for example, one year the conditions. instead of immediately. Suggesting weaker variants · No state-owned monopolies shall distribute in is beyond the scope of this paper and is left to trade China the competing foreign and Chinese vari- negotiators. However, it is worth noting that any eties of the product in question. Chinese state- weakening of the suggested approach may have owned sole producers are acceptable because, huge costs in terms of decreasing incentives for as shown by economic analysis, a protection export interests in both China and the rest of the granted exclusively by a moderate tariff elimi- world to support the transition process of the nates the risk of monopoly power of the domes- Chinese accession to the WTO. tic sole producer. Stricter Rules on Antidumping Table 3.4 shows that Chinese ad valorem tariffs applied in 2001 lower than 10 percent amount to Ambassador Long Yongtu's desire to introduce 38 percent of all the tariff lines. The fact that the stricter rules on antidumping in the WTO is a Chinese tariff schedule has only roughly 7,000 tariff "natural" extension of the negotiation on the NME lines suggests that it does not offer many opportu- use proposed above because it focuses on the nities to create narrow niches of protection for antidumping rules faced by allegedly dumped carefully defined tariff items. Applying the above exports from market economies. China's efforts to conditions thus would substantially reinforce the introduce stricter rules on WTO antidumping could rights of Chinese exporters in the antidumping follow two very different approaches. cases lodged in these two HTS sections. However, A cautious approach would be to merely table a China should take some initiatives for improving series of proposals or to support those already the situation in the other antidumping-intensive tabled in Geneva by a few WTO members for HTS sections, in particular in textiles and clothing. improving WTO-based antidumping regulations at The rationale for the three conditions is that the margin. For instance, the following suggestions, they make unlikely the fact that Chinese exporters derived from proposals tabled by the Swedish would dump for other reasons than those econom- Kommerzkollegium 1999, could receive China's ically sound, such as differences in demand pattern, support: and need to meet foreign demand and to make Chinese products known in foreign markets. · Dumping should be the principal cause of mate- Hence, the minimum that WTO China's trading rial injury. 44 China and the WTO · Double protection (for instance, antidumping much easier for WTO members to impose safeguard measures imposed on the top of quantitative measures against Chinese exports during the next restrictions) should not be allowed. 12 years, until 2014 (for a detailed description from · Measures should last a maximum of five years a legal perspective, see Andersen and Lau 2001). (implying stronger limits to review). All the terms defining the use of a safeguard action · Repeated initiations in a short period of time in the traditional GATT-WTO context (under should not be allowed. Article XIX) have been systematically weakened: no · Cumulation of imports from different countries requirement of "unforeseen circumstances," no should be banned or severely restricted, unless MFN requirement, the need for "material" rather they come from the same firms or from the sub- than "serious" injury, fewer factors related to the sidiaries of the same firms. condition of the domestic industry, a weaker causal · Aggregating products under the"one single prod- link between increased imports and injury, the uct"procedure should be severely restricted. absence of a non-attribution causation analysis. · All zeroing practices (only export transactions The most important--and potentially the most that have been found to be dumped are used to devastating for the WTO--provision of Section 16 calculate dumping margins) should be banned; of the WTO China Protocol states that WTO mem- all export transactions should be included in the bers have the unprecedented possibility to use a investigation. "trade-diversion" clause. This means that, as soon · The antidumping authorities should produce as one WTO Member implements a TPS measure disclosure documents. against Chinese exports, all the others could · The use of the de minimis rule should be enforce a similar measure at almost no cost in expanded in an economically sound way. terms of legal procedures (e.g., no investigation, no prior notification, no input from Chinese parties). Alternatively, China could adopt a bolder In short, the trade-diversion clause makes almost approach. For instance, reforming antidumping unchallengeable the hypothesis that Chinese could take, as often as possible, the form of negoti- exports will be diverted from the first closed market ated "quantitative thresholds" (Messerlin 2000b). to the rest of the world. WTO members could agree that no antidumping All these features put the TPS largely in contra- measure should be imposed in cases where the diction with the WTO's usual deep concerns about level of injury losses is less than an agreed thresh- a fair balance of rights and obligations. It is a provi- old of the complainants' revenues of the year(s) sion so unbalanced that one can fear that its use used as the reference (pre-dumping) period. An will trigger feelings in China close to those associ- approach based on quantitative thresholds is con- ated to the "Unequal Treaties" of the nineteenth ceptually equivalent to a tariffication process. This century. As a result, it represents a serious systemic approach tends to give a sense of the magnitude risk to the WTO regime. of the concessions granted by both sides, bringing One may argue that the TPS is such a politically it more in line with usual WTO negotiating tech- aggressive instrument that one may wonder niques. It is also flexible enough to permit incre- whether it will be ever used. This argument is far mental reforms and to deliver the progressive from convincing. Its politically explosive content liberalization that WTO members seek through makes the TPS unlikely to be initiated by a WTO progressive increases of the thresholds, thereby member other than a very large industrial country avoiding the current deadlock of binary choices (the United States, the European Community, or between fully enforcing antidumping regulations Japan). However, all the other WTO members that or rejecting them totally. would have waited for such a move would benefit from the "trade diversion" clause as soon as a large industrial country takes the lead. The TPS Provision and the General Issue What are the possible actions left to China if the of Contingent Protection in the WTO TPS were to be invoked? A first possibility would be Section 16 of the China Protocol of Accession cre- to negotiate the same "preemptive" approach as for ates the TPS mechanism. The TPS makes it legally the NME provision by negotiating during the Doha China in the WTO: Antidumping and Safeguards 45 Round an interpretation agreement on the effective use the dispute settlement mechanism as soon as a use of this procedure. WTO members would agree WTO member notifies TPS use to the WTO Secre- not to use the TPS when Chinese products would tariat. Lawyers tend to overstate the benefits of such meet the three conditions listed above. Rather, they an approach, by ignoring the full development of would use the normal WTO safeguard provision the trade conflicts. It is almost certain that WTO under Article XIX. dispute settlement cases dealing with the TPS Putting antidumping and safeguard regulations would leave the two parties in a difficult political on a par would make a lot of sense from the per- situation. A more aggressive approach by China spective of the global WTO architecture. Most would be based on Article 56 of the New Regula- WTO members use antidumping as a substitute for tion. However, such an approach should not ignore safeguards, with many antidumping measures in the basic principle of deterrence: trade deterrence, fact being safeguard actions dealing with industries as nuclear deterrence, is good as long as it remains a in difficulties. In fact, the TPS provision expands threat--as long as it stops short of being an effec- China's strong stake in substantial improvements of tive action. antidumping rules to the whole WTO contingent protection regime--that is, antidumping and Conclusion safeguard regulations. As a result, during the DDA, China may not only be very active in the antidump- The chapter provides two results of prime impor- ing negotiations but could also try to expand these tance for China. First, the countries that would gain negotiations to safeguards--so far not explicitly most from better disciplines on antidumping rules included in the Doha negotiating program--to are the few developing countries which, since the make the whole WTO contingent protection regime 1995 Uruguay Round, are intensive antidumping more consistent. users. Because antidumping measures imposed by A promising way to improve the current WTO these developing countries tend to be more fre- Safeguard Agreements would require tying together quent and severe than those imposed by industrial the concept of temporary protection embedded in countries, they hurt developing countries' domestic safeguards and the basic concept of renegotiation economies much more than industrial country- under GATT Article XXVIII (Messerlin 2000b). imposed antidumping measures harm theirs. If For instance, at the end of the second period of China wants to continue to enjoy successful liberal- enforcing a safeguard measure allowed by the cur- ization, it should not become an intensive anti- rent Safeguards Agreement (based in turn on dumping user. GATT Article XIX), the country shall be requested Second, few economic and political forces would to choose between two alternatives: either to rene- introduce some automatic counterweights and gotiate the tariff of the product subjected to the restraints to the situation currently existing in terms safeguard measure in question, or to eliminate the of antidumping enforcement. Major current users safeguard measure (using then antidumping or any have few incentives to reform their very discrimina- other trade remedy should be prohibited since all tory use of the antidumping instrument, mostly the instruments of contingent protection are sub- targeting other countries than the top 10 users if stitutable). The logic of the mandatory aspect of one accepts, of course, the economically sound such a choice is that current safeguard and welfare-based incentive that protection is harmful antidumping procedures transform what should be to the economy of the country imposing it. Mean- transitory protection into permanent protection. while, smaller countries have few incentives to use The possibility remains that such a global the antidumping instrument in a retaliatory move. approach to antidumping, safeguards, and TPS As a result, China is at crossroads--and with measures may face entrenched hostility from WTO China, so is the rest of the world, and in particular, members, in particular from the top 10 antidump- the United States and the European Community, ing users. In such a case, the remaining options for the world's largest economies. On the one hand, China would rely on some kind of threats of retali- China may be increasingly tempted to use anti- ation. The least aggressive approach would be for dumping rules more intensively for several reasons: China to announce its intention to systematically as a back door of old-time protection, at the risk of 46 China and the WTO unraveling her scheduled trade liberalization; as a Notes progressive integration in the worldwide collusive 1. In Spring 2002, the EC and the United States declared that dimension of antidumping, used as an instrument they will consider Russia as a market economy for purposes of for segmenting world markets for the benefit of antidumping investigations. However, the case for the introduc- tion of a TPS provision in Russia's accession protocol seems still large firms; and as a retaliatory instrument against open. It would be interesting to make a parallel between the con- foreign antidumping measures. This last reason is ditions imposed on Japan's accession to GATT, and those specific to China, and it deserves a comment. Retal- imposed on China in its accession to the WTO. iatory antidumping measures can have some appeal 2. Tables 3.1 to 3.3 treat measures taken against different individual member-states of the EC as one aggregated measure only for countries with markets large enough to if adopted at the same time and for the same product (data generate some deterrence power. Chinese markets for 2002 are still not totally complete). By contrast, table 3.4 are not yet large enough to meet this condition. follows the notifications of EC trading partners that vary in their treatment of the EC (as one entity or as a set of distinct However, strong Chinese growth will change this member-states). situation relatively rapidly, and China's increasingly 3. Are antidumping measures used by developing countries credible threat of antidumping retaliation implies as a "safety valve" for softening the impact of their ongoing trade liberalizations? Rather, comparing the intensity of antidumping that WTO disciplines on antidumping should use with three indicators capturing key aspects (simplicity, irre- become increasingly attractive to major trading versibility, and openness, as estimated by Laird and Messerlin partners (if the United States and the European (2002) of the trade policy of the six developing countries, which Community are not myopic). Since WTO Rounds are intensive antidumping users, suggests a correlation between antidumping intensity and a flagging trade liberalization. tend to last for extended periods, this evolution 4. For instance, under the NME status, it is possible to use should be taken into account by the United States industrial countries (such as the United States or Sweden) as and the European Community as early as the cur- "reference" countries for China. That introduces systemic errors about the product and/or the production process. For instance, rent Doha Round--thereby triggering a potentially it makes no sense to consider, without deep economic analysis, "virtuous" dynamic game. the calcium metal produced in small quantities by a U.S. On the other hand, being still a small antidump- monopolist for its own use as similar to the calcium metal produced by China and Russia in large quantities for sales on ing user and a key target of foreign antidumping international markets. The U.S. product is likely to have charac- measures, China has expressed the desire to impose teristics in terms of quality and/or availability making it very stricter WTO antidumping rules. It will be one of different from the Russian or Chinese calcium metal, and it is the main beneficiaries of such a move because it sold and bought in a market structure very different from the markets of its Russian and Chinese counterparts. In the same would allow it to preserve its successful trade liber- vein, trying to estimate production costs by combining input alization. Such a move may have another key posi- prices in industrial countries and input quantities used in a tive outcome: it will help China to negotiate an developing country makes little economic sense. 5.Antidumping authorities in the EC and the Untied States in economically sound interpretation of the special some cases already adopt more liberal interpretations vis-a-vis provisions on antidumping and safeguard included Chinese exporters than the Protocol allows them. In the European in its WTO accession protocol. This new interpreta- Community, for example, this would be the case where the authorities accept individual treatment or market-economy tion of these special provisions should be based on status with respect to individual Chinese exporters. a few key and economically sound conditions to 6. It could be argued that market forces in China for these be met by China: low tariffs, no "core gray" meas- relatively unprotected products could be distorted by Chinese ures, and no distribution monopolies. Such an regulations on inputs for such goods (for instance, subsidies). However, there are WTO instruments for addressing such interpretation relies on the following strong eco- an argument (which could be applied to most China trading nomic and political argument. China and its trad- partners). ing partners have a common interest in establishing the strongest possible link between Chinese effec- tive liberalization and the elimination of the use References of these special provisions by foreign authorities Andersen, Scott, and Christian Lau. 2001. "Hedging Hopes with against Chinese exporters. In other words, the sug- Fears in China' Accession to the World Trade Organization: gested interpretation of the specific antidumping The Transitional Special Product Safeguard for Chinese Exports." Mimeo. Geneva: Powell, Goldstein, Frazer and and safeguard provisions included in China's acces- Murphy. sion protocol is an effort to mobilize the export Bloningen, Bruce. 2001. Database on U.S. Antidumping Cases. interests in both China and the rest of the world (www.uoregon.edu). GATT Secretariat. 1994. The Results of the Uruguay Round during the difficult implementation period of the Multilateral Trade Negotiations. Geneva: World Trade Chinese accession to the WTO. Organization. China in the WTO: Antidumping and Safeguards 47 Kommerzkollegium. 1999. Further Actions within the EU in Messerlin, Patrick A. 2000b. "Antidumping and Safeguards." In the Field of Antidumping. Stockholm: Kommerzkollegium. Jeff Schott, ed. The WTO After Seattle. Washington, D.C.: Photocopy (17 June). Institute for International Economics. Laird,Sam,and Patrick A.Messerlin.2002."Trade Policy Regimes Vermulst, Edwin. 2000. "Contingent Protection Provisions in and Development Strategies: A Comparative Study." Mimeo. China's Draft Protocol on Accession to the WTO." Seminar Washington, D.C.: InterAmerican Development Bank. on Antidumping and Safeguards. Department of Interna- Lindsey, Brink. 1999. The US Antidumping Law: Rhetoric versus tional Trade and Economic Affairs. Beijing: Ministry of Reality. Washington, D.C.: Cato Institute. Foreign Trade and Economic Cooperation. Lindsey, Brink, and Dan Ikenson. 2001. Coming Home to Roost: Wang, Lei. 2003. "China's New Antidumping Regulations: Proliferating Antidumping Laws and the Growing Threat to Improvement to Comply with the WTO Rules." Mimeo US Exports. Washington, D.C.: Cato Institute. (1wang@ealawfirm.com). Beijing: East Associates. Messerlin, Patrick A. 2000a. "An Economic Perspective on World Trade Organization (WTO). 2001. Market Access: Unfin- Antidumping and Safeguard." Seminar on Antidumping ished Business, Post-Uruguay Round Inventory and Issues. and Safeguards. Department of International Trade and Special Studies 6. Geneva. Economic Affairs. Beijing: Ministry of Foreign trade and Economic Cooperation. 4 Intellectual Property Rights in the WTO Accession Pack age: Assessing China's Reforms Keith E. Maskus After a long period of rapid growth and significant property laws. Since 1990 the government has structural change, the Chinese economy increas- updated its laws covering copyrights, trademarks, ingly makes use of advanced production technolo- patents, and trade secrets (or "anti-unfair competi- gies, while demand shifts toward higher-quality tion") and has adopted protection for new plant goods and services. Chinese enterprises place grow- varieties and integrated circuits. The country has ing emphasis on developing brand-name recogni- joined nearly all major international IPRs conven- tion, reputation for quality, and product innova- tions and is a member of international agreements tion. In such an environment, the provision and on classification of patents and trademarks and the enforcement of intellectual property rights (IPRs) deposit of microorganisms. help promote further economic development. With Most recently China made further revisions to substantial structural reform ongoing in Chinese conform to the requirements of the Agreement on enterprises, it is important to establish incentives Trade-Related Aspects of Intellectual Property for the development and expansion of businesses in Rights (TRIPS) in the World Trade Organization high-growth sectors and to support innovation in (WTO). In its accession agreement with WTO consumer products. Properly structured, IPRs can members, China agreed to implement intellectual help achieve these goals. property laws that are fully consistent with TRIPS. The Chinese central government recognizes the When legislative reforms are fully implemented, need for a workable IPRs system. Support is also China will have a modern structure for IPRs on a growing among innovative Chinese enterprises, par with many developed economies. which are likely to suffer the largest losses from China also has established education and train- trademark and copyright infringement in the econ- ing programs in IPRs, upgraded its administrative omy. Chinese enterprises understand that their and legal systems for enforcing these rights, and access to new foreign technologies depends partially undertaken numerous anticounterfeiting pro- on IPRs. grams. Nevertheless, problems remain in the areas In response both to changes in internal prefer- of administration and enforcement. Victims of ences and to considerable external pressure, China infringement complain about weak monetary has undertaken a dramatic reform of its intellectual and civil penalties, delays in administrative and 49 50 China and the WTO court procedures, and "local protectionism" Chinese economic development could be affected that makes enforcement difficult in regional by stronger IPRs jurisdictions. · conclusions and recommendations. The evolving system presents both opportuni- ties and challenges for the Chinese economy. The WTO Commitments opportunities arise from the improved environ- ment for technical innovation, product develop- Since the mid-1980s China has implemented a ment, and inward technology and investment number of laws and administrative regulations cov- flows. The challenges include moving resources out ering intellectual property protection (see Lacroix of infringing activities into legitimate businesses, and Konan 2002; Maskus, Dougherty, and Mertha coping with higher costs of imitating products and 1998; Potter 2001). External pressure has been an technologies, and absorbing the costs of adminis- important impetus for legal change. Many of these tering a stronger system. changes were made as a result of three agreements, Over time, stronger IPRs will shift incentives each a Memorandum of Understanding, with the away from encouraging static competition through United States. copying and imitation toward promoting dynamic This regulatory process has culminated in the competition through innovation, technology introduction of numerous changes in China's IPRs absorption, and product design. The latter incen- regime, both in anticipation of joining the WTO tives are increasingly appropriate for China, which and in becoming fully compliant after the country's plans to become a leader in technology develop- accession in late 2001. For example, a substantial ment. However, stronger intellectual property pro- second revision of the patent law was achieved in tection will place competitive pressures on lagging 2000, becoming effective in July 2001. This revision enterprises and will raise concerns about the distri- establishes full TRIPS compliance in patent regula- bution of costs and benefits among individuals, tions and clarifies and strengthens certain adminis- enterprises, and regions. trative and judicial procedures, including the use of The ultimate objectives of an IPRs system are to preliminary injunctions. In June 2003 the govern- increase competition through innovation and tech- ment issued procedures for issuing compulsory nology acquisition and to encourage innovators licenses for patented inventions, consistent with to make their products available to consumers. TRIPS Article 31, while the patent law itself was Strengthening IPRs improves such incentives but is revised in August 2003 (WTO 2003). not sufficient on its own. Rather, the system needs Similarly, in 1997 the government promulgated to be developed within a broader set of policies, new rules on the protection of new plant varieties, including further enterprise reform, development establishing sui generis, TRIPS-consistent protec- of financial and innovation systems, expansion of tion along the lines of the 1978 Union for the educational opportunities, and means for sustain- Protection of New Varieties of Plants (UPOV) ing competition in Chinese markets. treaty.1 A new set of regulations for the protection This chapter contains the following sections: of layout designs of integrated circuits came into force October 1, 2001. · a description of the progress in China's WTO Just prior to China's accession to the WTO at the commitments in the IPRs area Doha Ministerial in November 2001, some differ- · an overview of the economic rationale for intel- ences with required TRIPS standards remained.2 lectual property rights Table 4.1 provides a list of areas in which standards · a discussion of the intricate relationships are mandated, the norms (minimum standards) in between IPRs and economic development, TRIPS, the status of China's laws and regulations including a review of available evidence on that just before Doha, and China's actions in cases subject and assessment of the potential of the where a divergence exists. Most of these discrepan- China's regime to encourage growth cies arose in the trademark and copyright areas. For · an analysis of recent trends in the use of IPRs this reason, on October 27, 2001, the People's Con- in China, considering both data and informa- gress enacted a substantial revision to its trademark tion learned from a series of interviews in 1998 and copyright laws to make both consistent with and 2001, and some simple indications of how TRIPS obligations.3 Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 51 TABLE 4.1 Substantive Requirements of the TRIPS Agreement in the WTO Pre-WTO Status of TRIPS Norm Chinese Law Actions General Obligations National Treatment Applied for persons Discrimination in copyright Remove enforcement, trademark discrimination agents, and trade secrets protection Most Favored Nation MFN with reciprocity Member of Berne Convention; exemptions for copyright TRIPS-compliant Copyrights and Neighboring Rights Term of protection Life 50 years; 50 years TRIPS-compliant corporate Computer software CR Copyright TRIPS-compliant Discussing patents Data compilations Copyright Not protected Protect with copyright Phonogram producer Right to prevent fixation, Inconsistent with TRIPS Clarify compensation and performer rights reproduction, or system; strengthen broadcasting for rights 50 years Broadcast rights Right to prevent fixation, Inconsistent with TRIPS Provide right of reproduction, or communication to broadcasting for 20 years, public or copyright Rental rights Right to prohibit rental of Not protected Provide rental rights computer programs and movies Discrimination in National Treatment Foreigners could not use Remove discrimination enforcement local copyright bureaus procedures Trademarks Well-known marks Protected without requiring No criteria for defining Protect well-known registration "well-known"; none granted marks; establish to foreigners criteria Use restrictions Use not required for registration; Law is unclear on prior use Comply with TRIPS import restraints cannot be used to invalidate use Symbols protected Rights extend to distinguishing Certain signs are ineligible Comply with TRIPS names, letters, numerals, colors Geographical Indications Basic protection Prevent misleading claims Not protected Comply with TRIPS of origin Wines and spirits Prevent use of such words as Not protected Comply with TRIPS "style" or "like" Patents Eligibility Basic exemptions Probably TRIPS-compliant Clarify compatibility with TRIPS Pharmaceutical Covered; interim marketing TRIPS-compliant products rights Living organisms Micro-organisms and biological TRIPS-compliant; plant and Considering patents production processes covered; animal varieties excluded "higher-order" life optional Term of protection 20 years from filing TRIPS-compliant 52 China and the WTO TABLE 4.1 (Continued) Pre-WTO Status of TRIPS Norm Chinese Law Actions Patents Rights Exclude others from production, TRIPS-compliant use, or distribution Compulsory licenses Wide scope for use with TRIPS-compliant compensation and limiting conditions Burden of proof in Falls on defendant TRIPS-compliant process patent infringement Industrial Designs Term of protection 10 years from filing TRIPS-compliant Textile designs Covered Protected by copyright Considering design patents Plant Varieties Basic protection Plant breeders' rights to Plant breeders' rights with prevent commercial farmer's privilege and production or marketing research exemption of propagating material (UPOV 1978) Stronger protection Patents optional No patents Integrated Circuits Term of protection 10 years from filing TRIPS-compliant Rights Prevent distribution of IC's TRIPS-compliant or IC-using products Exceptions Non-voluntary license TRIPS-compliant Trade Secrets Protection from Defines boundaries of unfair TRIPS-compliant unfair disclosure practices Test data for Protection from disclosure Unfair use not prohibited Protection for six pharmaceuticals for unspecified period and years from date and agricultural unfair use of undisclosed of marketing chemicals data approval Control of Anti- Competitive Practices Compulsory licenses Wide latitude for use subject to Weak consultation provisions Comply with TRIPS conditions and consultations Exhaustion No standard Depends on form of IPR Enforcement Sanctions Civil and criminal sanctions In existence but weak Enhance and border measures enforcement action enforcement Provisional measures Preliminary injunctions and Not fully available Comply with TRIPS seizures Damages Adequate to compensate Generally low or no Comply with TRIPS victim of infringement compensation Administrative actions Enforcement may be through Available but costly and tends Enhance administrative actions to result in small fines enforcement Judicial review Must be available Not widely available Enhance review procedures The trademark law establishes the right of indi- association (e.g., for producing fruits and vegeta- vidual Chinese persons to apply to register trade- bles of a given quality standard) may use jointly. It marks. It clarifies the definition of collective marks, also establishes joint ownership and protects collec- which are marks that several firms in a collective tive marks and certificate marks for the first time. It Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 53 further broadens the range of symbols that may be The Nature of Intellectual used as a distinctive mark, extends protection of Property Rights well-known trademarks to their unauthorized use To analyze how IPRs influence economic develop- on different products, and sets out criteria for ment, it is important to understand their economic ascertaining well-known marks. These regulations underpinnings. The need for IPRs arises from the on well-known marks were further updated and social objective of promoting the creation of new adopted by the National Industrial and Commer- types of information adding to the economy's cial Administration in June 2003 (WTO 2003). The knowledge base. These types of information trade mark law also sets out protection for geo- include new products and technologies; new liter- graphical indications in accordance with TRIPS. ary, musical, and artistic expressions; and indica- The copyright law establishes a communication tors of product quality. An intellectual property right over the Internet, sets out fair use limitations right defines the extent to which its owners may for electronic content consistent with two new legally prevent others from taking actions that treaties reached under the aegis of the World Intel- infringe or damage the property. It also may be lectual Property Organization (WIPO), clarifies defined as the legal ability to set terms on which it broadcast and rental rights, and recognizes that may be used, subject to public-interest limitations databases are copyrightable. Further changes were on the scope of that ability. For example, patents made in August 2002 with respect to rental rights, provide exclusive use of a technology, but they are performance rights, rights of communication and granted only for a fixed period of time and in broadcast, and database protection. return for disclosing sufficient technical informa- Both the trademark and copyright laws clarify tion to allow competitors to understand it and try the amounts of compensation available to plaintiffs to improve on it. and the methods for their calculation. In copy- Public intervention is needed because the out- rights, foreign firms are now permitted to plead come of some intellectual effort may be potentially their cases with local copyright bureaus in addition valuable but also easily copied and used by others, to the National Copyright Administration, remov- leaving little incentive to incur the original invest- ing a prior form of discrimination. A number of ment costs or to improve it. Without public sup- clarifications regarding enforcement, administra- port for innovation, the economy suffers from tion, and penalties were made in 2002 and 2003 insufficient incentives to develop new products, (WTO 2003). technologies, and cultural works, making citizens This recent and ongoing activity should make worse off in the long run. An additional problem is China's IPRs legal regime fully consistent with that the social value of information is often greater TRIPS in the near term. It is evident that the prom- than its private value because there are external ise of WTO membership significantly accelerated benefits from new inventions. Examples include China's legal reforms in IPRs, because consistency spillover cost reductions from new technologies to with at least minimum TRIPS standards is a neces- input users and network efficiencies from software sary condition for accession (Maskus 2000a). systems. Moreover, China's commercial interests in innova- At the same time, IPRs generate costs. Legal tion, development of consumer products, and excludability imposes a static cost on users, reflected access to high-level foreign technologies provided by the excess of price over marginal production significant domestic motivation for such reforms. cost. In the case of intellectual creations, this distor- Nevertheless, because China remains a country tion can be significant because the marginal cost of with relatively low per-capita income and techno- supplying additional blueprints, digital video discs logical development has not spread widely through (DVDs), and computer programs is small. Addi- the economy, it is likely that significant problems tional costs are incurred because IPRs encourage with enforcement will remain for some time. China duplication of investment in research and develop- may become one focus of dispute resolution cases ment (R&D) through patent races, and generate at the WTO as intellectual property interests from wasteful efforts to assert and defend ownership developed countries demand stronger enforcement rights and to extend those rights beyond the scope and protection. granted. Enforcement costs may be substantial. 54 China and the WTO Thus, there are complex tradeoffs facing the A related form of industrial property is plant design of IPRs. China needs to strike an appropriate breeders' rights (PBRs), which permit developers to balance among the needs of creators, developers, control the marketing and use of new plant vari- and users, in accordance with minimum standards eties. These rights operate much like patents, pro- required by TRIPS. viding for fixed terms, requirements of distinctive- One alternative to IPRs is direct government ness in new plant strains, and disclosure rules. They support for invention, including public monopolies are intended to encourage development of new in technology development, research institutes in seed strains for agricultural use. agriculture and industry, and government sub- Rights to market goods and services under sidies to university research. Many such programs exclusive names and symbols are protected by are important complements to IPRs in national trademarks and service marks. Registration may be innovation systems. However, the performance renewed indefinitely, subject to use requirements. of China's public organizations and state-owned An important related device is the geographical enterprises in commercializing products and serv- indication, which permits the use of a particular ices has been poor. This failure arose largely from place name where a good was produced to ensure inadequate incentives within public research insti- that the product embodies quality characteristics tutions to focus on new and marketable inventions. of that region. Trademarks provide incentives for firms to invest in brand-name reputation and Intellectual Property Rights and product quality and for their licensees to produce Economic Development and sell high-quality goods. If marks were not pro- tected, rival firms would ruin their value by selling Relationships between IPRs and economic develop- cheaper items under those marks. Thus, the social ment are extremely complex and available evidence benefits from trademarks include greater product is difficult to interpret (see Evenson and Westphal variety and lower consumer search costs due to the 1997). However there is a growing consensus that absence of confusion. stronger IPRs can improve development prospects Firms develop technological know-how that is if they are structured properly. important for production but may not be patentable or may have greater economic value if it remains Types of Intellectual Property Rights undisclosed. Such trade secrets are protected by It is useful to provide a brief description of the legal rules against unfair misappropriation. There is main forms of IPRs. Rights to exploit inventions no exclusive right to the process if it is discovered with commercial uses are granted through patents, by fair means, such as reverse engineering. Trade utility models or petty patents; these terms refer to secrets protection is important because it supports short-term exclusive rights for small and incremen- the introduction of sub-patentable technological tal innovations, and industrial designs. Patents pro- processes into commerce and also promotes compe- vide the right to prevent for a fixed time (20 years tition through reverse engineering. under TRIPS) the unauthorized making, selling, or Artistic and literary creations are protected by using of the product or process described. Utility copyrights, which are exclusive privileges to copy models provide exclusive rights for a shorter period and distribute particular creative expressions for a to inventions that embody only a small inventive fixed term. Related IPRs include neighboring rights step. The scope of patent coverage is limited to uses of performers and broadcasters and moral rights of of the novelty claimed by the inventor and recog- original creators to prevent future alterations of nized by patent examiners. The technology must their works. Copyrights are subject to limitations meet technical criteria for novelty (or non- for social purposes, with the most prominent obviousness), inventiveness, and industrial utility exception being the fair-use doctrine, under which and must survive procedures challenging validity. others may use copies for scientific and educational Patent applications are published for inspection by purposes. Countries vary widely in the scope of interested persons. The essential tradeoff in patents their fair-use exceptions to copyrights, particularly is to create a protected market position in return with regard to reverse engineering of computer for disclosure of technical knowledge. programs. Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 55 Some new technologies do not fit easily within stimulates the entry of small and medium-sized this framework. Computer software contains ele- enterprises into specific markets. Second, it encour- ments of both literary expression and industrial ages more successful enterprises to grow and take utility, raising questions about whether it should be advantage of scale economies through interregional covered by copyrights or patents. The TRIPS stan- production and marketing. Some may even become dard is for copyright protection; the United States, significant exporters as they improve quality. Japan, and other countries also provide patent pro- Similar comments apply to copyrights. Sectors tection. Similar questions arise regarding semicon- that are dependent on copyrights, such as publish- ductor chip designs, which achieve a special form of ing, recorded entertainment, and software, will protection under TRIPS. Electronic transmissions experience limited entry by local firms in their of Internet materials, databases, and broadcasts absence. Creation of new films, music, and software also raise concerns about the adequacy of copyright is expensive and little worth the investment by local protection to encourage their development. entrepreneurs if their products will be copied. IPRs are enforced both to deter and punish Accordingly, society's long-run cultural and eco- infringement and to discipline rights holders that nomic development is impaired. abuse their market power. Enforcement against Innovation goes beyond developing new prod- basic infringement involves seizing unauthorized ucts to establishing marketing and distribution net- copies, destroying the associated facilities if neces- works. It is difficult to do this in an environment of sary, and imposing fines and criminal sanctions. weak IPRs because rights holders cannot readily However, as claims about infringement or abuse, prevent infringement. IPRs improve the certainty particularly in the patent realm, become more com- of contracts, and permitting better monitoring plicated, courts must decide on their legality, which and enforcement of rights at all levels of the supply requires considerable legal and scientific expertise. network. In turn, both innovative firms and their distributors are more willing to invest in marketing and brand-name reputation. How IPRs Stimulate Economic Development As firms build reputations through trademarks, IPRs protection can spur economic development incentives grow to deter false use of those marks. and growth in several ways. A weak regime can stifle Fake products sold under a misappropriated trade- both invention and innovation even at low levels of mark can ruin reputations, particularly for new economic development. Most inventions are spe- firms, and overcoming such damage can be costly. cific to local market circumstances and can benefit Thus, effective trademark enforcement should from patent or utility model protection. Innovation increase the average quality of products over time usually involves minor adaptations of existing tech- and permit consumers to be less wary of counter- nologies, management systems, and quality control feit goods. This is particularly important in cases of mechanisms, which can stimulate growth. Such beverages, foodstuffs, and medicines. investments tend to have high economic and social Finally, IPRs can help disseminate knowledge. returns by raising productivity toward international Patent claims are published, and competitors may levels. Evidence from Brazil and the Philippines use the disclosed technical knowledge to develop suggests that effective systems of utility models can further inventions. This cumulative process of in- promote innovation (see Maskus and McDaniel vention, which depends on the narrowness of 1999). Another study demonstrated econometri- patent claims, can be an important source of tech- cally that Japan's system of utility models con- nical change (see Maskus and Penubarti 1995; tributed positively and significantly to its postwar Smith 1999). Moreover, patents provide a legal rise in productivity (see Scotchmer et al. 1991). basis for trading and licensing technologies. Trade- Trademarks provide incentives for the entry of marks and trade secrets facilitate information new firms and the development of new products, exchange through ensuring that licensees do not even in poor nations. Firms find it easier to innovate abandon their contracts. cumulatively as they grow larger and their trade- Considerable evidence suggests that interna- marks are better recognized. This process has two tional flows of technology depend on the strength positive effects on industrial development. First, it of IPRs, among many other factors. For example, 56 China and the WTO international trade in manufactures is positively and rapid growth, making it easier to shift workers affected by the strength of patent regimes in large into legitimate activities. China has mixed prospects developing countries (see Coe, Helpman, and on this score, in part because of restrictions on Whoffmaister 1997). This trade often embodies internal labor mobility. It is conceivable that copy- technical knowledge that may be learned in recipient right and trademark enforcement will contribute countries and adapted to local technological capa- significantly to looming unemployment problems bilities (see Maskus 1998a; Lee and Mansfield 1996). associated with economic reform. Foreign direct investment, joint ventures, and Because IPRs raise the costs of copying and imi- technology-licensing contracts also transfer produc- tating products and technologies, acquiring tech- tion knowledge. It is clear that the strength of IPRs nological knowledge through simple imitation influences choices by multinational firms on where could become more expensive in China. Consider- to invest and whether to transfer advanced tech- able anecdotal evidence suggests that firms operat- nologies. Studies of U.S.-sourced foreign direct ing in China lose technologies to potential rivals investment (FDI) find evidence that firms limit their through such avenues as defection of technical per- investments in countries with weak patents (see sonnel, misappropriation by input suppliers, and Mansfield 1995; Contractor 1980). Survey evidence copying of blueprints. Without effective trade indicates that the level of technology transferred secret protection, these activities are common and depends on the ability to maintain control over help establish competition. However, some impor- the technology through defense of intellectual prop- tant practical effects are that foreign firms tend to erty (see Yang and Maskus 2001). Licensing also transfer older technologies, engage in less techni- tends to rise with stronger IPRs because of reduced cal training, hide key aspects of know-how from contracting costs and greater legal certainty.4 subcontractors and suppliers, and not establish first-rate R&D facilities. Accordingly, stronger IPRs entail a balancing How IPRs Limit Economic Development act. Stronger IPRs make uncompensated imitation Tightened IPRs also impose economic costs. Poor more difficult but improve the quality of technol- countries may experience net losses in the short- ogy flows. Countries wishing to become significant run because the dynamic gains tend to take a long technology developers should favor IPRs for that time to emerge. reason. The costs of administering and enforcing a Stronger IPRs create market power, from which modern IPRs system are high. For China they easily firms may be able to raise prices to monopolistic will amount to annual sums in excess of $10 mil- levels. This concern is particularly relevant in devel- lion (see Watal 1999; Lanjouw 1998). These costs oping countries for two reasons. First, applications include training of examiners, judges, lawyers, and for protection come overwhelmingly from foreign enforcement officers, along with the costs of run- firms, meaning that the associated profits are trans- ning various offices. Many of these costs may be ferred abroad. Second, market competition may be covered by administrative fees charged to apply for weak, supporting monopolization. As will be dis- and register patents and trademarks, while others cussed in the next section, China is in an intermedi- may be reduced by using international registration ate position in this regard. Patent applications by agencies such as the Patent Cooperation Treaty domestic firms are rising rapidly but lag behind (PCT), as does China. foreign applications. Broader economic reforms The most visible aspect of IPRs infringement in have improved competitive processes, but the econ- China is unauthorized copying of recorded enter- omy remains far from a situation of free entry and tainment and software and selling of products vibrant competition in technology and product bearing counterfeit trademarks. Undoubtedly, sig- markets. nificant amounts of labor are employed in copying Chinese authorities may be especially concerned and retailing illegitimate products in China, and an about the implications of patent rights for the important short-run cost of stronger IPRs will be prices of medicines. There is evidence that patents labor displacement. The adjustment costs tend to can support markedly higher prices for pro- be smaller in economies with flexible labor markets tected drugs than for copied and generic drugs.5 Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 57 However, the extent of these price increases A Scorecard for China's IPRs Regime depends on the competitive aspects of markets. The With this background it is useful to assess infor- more competitive the local drugs market is before mally the legal standards China has adopted in patents are awarded, the larger is the share of drug terms of how these standards may affect prospects production that consists of copies of patentable for technical change and the provision of certain drugs; the more inelastic the demand for medicines public goods.6 For this purpose, China's regula- is, the higher will be the price increases caused by tions in several critical areas are compared against patents. These conditions suggest that countries benchmark standards consistent with TRIPS with extensive drug imitation and high demand requirements for middle-income countries as set could experience substantial price increases for out by the World Bank (2001). China has character- protected drugs. In this regard, China's policy istics of the dynamic middle-income countries, of public procurement at negotiated prices is including a growing base of human capital and appropriate for ensuring the continued provision sophisticated capabilities in science and technol- of public health services. ogy, suggesting that this comparison may be appro- Another area of concern is computer software. It priate. However, it also suffers from substantial is often claimed that software would be much more rural and urban poverty, and many of its enter- expensive with enforced copyrights because the prises use technologies that lag significantly behind current prices of legitimate copies in developing those in the modern sectors. Accordingly, it is diffi- nations are very high compared to prices of unau- cult to provide a definitive analysis of the nation's thorized copies. However, in countries with high laws in this context, and the following analysis piracy rates software producers or their distributors is offered largely for purposes of illustration and tend to sell at low volumes and high markups, discussion. reflecting small markets with inelastic demand. In An overview is provided in table 4.2. In the China such markets are largely limited to foreign- copyrights area, China provides TRIPS-standard owned enterprises and government agencies. As terms of protection for creative goods, such as a markets broaden under copyright enforcement, once-renewable 25-year term for software copy- foreign and domestic firms should supply more rights (50-year maximum period). The essential legitimate copies at lower prices, suggesting that question is whether the particular conditions of ultimate price increases could be modest (see legal protection are appropriate for China's devel- Potter 2001). opment prospects. For example, it is recommended Thus, there are legitimate concerns about that middle-income countries provide fairly wide market power supported by IPRs. However, com- exceptions for fair use of copyrighted materials in petitive markets and appropriate regulation can education and scientific research. China's Copy- mitigate these impacts without unduly reducing right Law embraces this concept, permitting free innovative incentives. IPRs need to be introduced use of copyrighted material in journals, periodicals, into markets in which other competitive processes, and broadcast media for purposes of disseminating such as firm entry, labor flexibility, distribution news. It also allows the uncompensated making of systems, and international trade, are operating copies for classroom use and scientific research and effectively. allows a free right to translate works from Han into Competition is important because IPRs may be minority languages. In software, users are permitted abused, as shown by litigation problems in the a limited right of decompilation for purposes of United States, the European Union, and elsewhere. developing new programs, which should help the Such abuses include bad-faith lawsuits, hidden industry remain fairly open to incremental innova- ownership of intellectual property, restrictive tion and competition. However, the government patent pooling agreements, refusals to license tech- is considering extending patents to computer nologies, tie-in sales in related markets, and insis- programs, a standard that would exceed TRIPS tence on exclusive rights to competing technolo- requirements and is found only in the United States, gies. Thus, China must develop mechanisms for Japan, and Australia (see Caves 2000). For a soft- ensuring competition maintenance in markets ware sector that remains young and subject to affected by IPRs. 58 China and the WTO TABLE 4.2 An Assessment of China's IPRs System for Development Purposes China's Post-WTO Area of IPRs Middle-Income Standards Standards Commentary Copyrights Fair use Liberal exceptions for Same Important for research and exceptions education and research technology access Computer Copyrights with decompilation Permit limited decompilation Patents may be overly software and fair use and fair use; considering protective patents Market Improve collection societies Weak institutions Improvement would be institutions and rights contracts beneficial WIPO treaties Adopt minimum standards Considering ratification Could improve internet content and access Data Copyrights with creativity Same Avoid EU-type protection compilations requirement Trademarks Well-known Narrow definition of sectoral Unclear Clarify scope and recognize marks coverage well-known marks Domain names Protect against fraudulent Same Important for promoting registration internet use Confidential Information Test data Short period of protection Six years of protection Stronger than U.S. from disclosure standard Disclosure Limited restraints on what Unclear limitation on Ambiguity may be restraints employees may reveal to "promise of gain" detrimental new employers Patents Exemptions Exemptions for discoveries, Same Appropriate to retain from eligibility algorithms, medical exemptions treatment methods, plants and animals Novelty Consider oral prior art Oral prior art in China Scope could be widened Inventiveness High step Notable progress Unclear Scope of claims Narrow claims and narrow Single claim; scope Depends on examiners doctrine of equivalents unspecified Experimental use Permit experimental use Not permitted May be overly strong Exhaustion International exhaustion National exhaustion Strong protection Government use For clear public interest Same Appropriate Compulsory Permitted under TRIPS Same Appropriate licenses conditions Utility models Short duration, low 10-year duration, same Appropriate and designs inventiveness Plant Varieties Farmers' privilege Recognize farmers' privilege Recognized Appropriate Breeders' Use for breeding and Permitted Appropriate exemption scientific research permitted considerable cross-fertilization through learning institutions for realizing economic returns to and reverse engineering, such a choice seems ques- creative activity, including collection societies for tionable for the medium term. Neither should licensing recorded music and gathering royalties. China extend patents to methods of instruction or Indeed, only under the Amended Copyright Law of doing business. of 2001 were copyright owners given the right to Other important issues exist in the copyright authorize collection associations to administer their area. China has relatively weak complementary rights. Further, because contract enforcement can be Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 59 weak and uncertain, the ability of enterprises to allo- may be costly in terms of sorting out the scope of cate rights in creative works is limited. Such institu- unfair competition in this area. tions are important for providing a full framework China does not patent higher-order life forms or within which the development of artistic and literary biological research tools. In its 2001 patent law, work can grow beyond intermediate stages (see also China retains appropriate exemptions from cover- Dahlman and Aubert 2001). To date China protects age for discoveries of nature, mental methods of databases solely with copyright protection, as man- arriving at results (such as computer algorithms dated by TRIPS, and clarifies that such protection and mathematical formulas), diagnostic and surgi- cannot interfere with the independent rights of cal treatments, and plant and animal varieties. those who develop components of compilations. These limitations are widely advocated for develop- This minimum standard is appropriate for a country ing countries with emerging biotechnology sectors with a strong interest in access to information data- in order to avoid locking up critical technologies bases, and China should be wary of moving toward that support additional research and learning. the much stronger standards of the European China's patent law does not permit experimental Union. Finally, ratification of the WIPO Copyright use of patented materials, however, which may be Treaty and the Treaty on Performances and Phono- overly strong in the context of its development grams could be beneficial in sorting out copyright strategies. The country's standards covering gov- protection for Internet transmissions, so long as ernment use, compulsory licenses, and utility mod- appropriate fair-use limitations are provided. els and designs are typical of middle-income The Amended Trademark Law of 2001 clarifies economies. the definition of well-known trademarks by setting Finally, China's plant variety law also seems out five criteria for achieving protection without appropriate for its needs. The patent law excludes registration. It remains to be seen whether these such inventions from coverage, leaving them to criteria will limit the unauthorized use of such variety protection. China's regulation permits the marks by others, and the regulation is unclear farmers' privilege to use propagating materials about how widely the restrictions on use will apply for re-planting and also permits experimental use across sectors of business. This law also recognizes for science and for rival breeders to develop new that well-known marks should be applicable to varieties. domain names on the Internet, a provision that should promote wider content available to Chinese The Issue of Enforcement Internet users. Protection of confidential test data from disclo- The largest remaining obstacle to effective use of sure provides applicants for patents in pharmaceu- IPRs in China is weakness in enforcement proce- tical and chemical products a period of exclusivity dures. Recent legal changes increased the scope of in the use of results from clinical trial. It seems enforcement considerably. As noted in table 4.1, advisable for middle-income economies with criminal sanctions are now available for cases of domestic research capabilities in medicines and willful infringement, while the maximum permis- biotechnology to provide such exclusivity for some sible monetary sanctions were increased. Prelimi- period, but TRIPS is silent on the length of any nary injunctions and orders for seizure of sus- such requirement. Surprisingly, China has opted to pected infringing goods may be issued, which are protect it for six years from application date, in important components of timely relief for IPRs comparison to the U.S standard of five years. owners. Courts may order compensatory damages, China's law may be overly protective from the though this standard is weaker than what might be standpoint of the encouragement of domestic required to deter infringement a priori. Finally, competition. Next, China's law on unfair competi- enhanced access to judicial review is provided, tion has no explicit language on the legality of which is consistent with prior efforts by the restraints on the ability of employees to reveal tech- Chinese government to strengthen its enforcement nical secrets to rivals that may hire them, other than mechanisms. to declare void unfair "promises of gain." It is Looking forward, perhaps the most significant unclear what this statute covers, and the ambiguity issue for China with respect to IPRs and the WTO 60 China and the WTO is that country's commitment to enforce against represented a mix of state-owned enterprises infringing activities and prevent exports of pirated (SOEs), private Chinese enterprises, joint ventures and counterfeited goods. Because China remains a with international firms, and majority-owned sub- country with relatively low per-capita income and sidiaries of multinational enterprises. Most firms in technological development has not spread widely the last category are in high-technology sectors and through the economy, it is likely that significant have significant R&D programs in their home problems with enforcement will remain for some countries, although some undertake R&D in China time. Because the scale of activity in China is so as well. Thus, the sample is not representative of the large, weak enforcement against domestic infringe- bulk of Chinese industry at this time but is more ment would attract the concerns of patent, trade- focused on product and technology development. mark, and copyright holders. Thus, China may Overwhelmingly, enterprise managers believe become one focus of dispute resolution cases at the that the legal structure for IPRs in China has WTO as intellectual property interests from devel- improved markedly and is adequate. However, the oped countries demand stronger enforcement and majority think the enforcement environment protection. remains quite weak, while the rest find it to be weak Whether improvements in enforcement are but improving. Interestingly, Chinese enterprises liable to be in China's favor as a development issue tend to view the system as improving more rapidly depends on how economic agents respond to the than do foreign-owned enterprises and joint ven- changed incentives. As noted above, it is likely that tures. Many high-technology Chinese enterprises this factor will generate higher equilibrium inflows applaud the new legal climate, which allows them of technology transfer. However, the essential ques- scope for defending their intellectual property. tion is whether it will expand incentives for local Unquestionably, inadequate enforcement is the business development. The following section pro- main problem facing firms wishing to exploit intel- vides evidence that this expansion is likely to occur. lectual property in China. There can be long delays in enforcement actions and court rulings. Prior to the legislative changes in 2001, monetary penalties The IPRs Situation in China were small even in cases of significant infringe- Two sources of information about the current situ- ment, and there was little scope for criminal prose- ation regarding the use and adequacy of IPRs pro- cution of willful and ongoing violations. The vide more concrete perspective on the potential new laws increase maximum fines and clarify the impacts of IPRs reform. First, the results of inter- nature of criminal activity, but some interviewees views of public officials, university scholars, and thought these changes would be insufficient to enterprise managers conducted in 1998 and 2001 deter infringement. Enforcement actions may be paint a consistent picture that has not changed sig- taken arbitrarily and may lack transparency. The nificantly over the three-year period. In fact, a central government and certain regional and number of interviewees described the situation municipal governments are taking steps to reduce with respect to enforcement of IPRs to have deteri- these problems, and several enterprise managers in orated in that period. Second, analysis of recent 2001 positively commented on this change. patent and trademark statistics in China suggest There are several structural sources of weak that the use of formal IPRs is growing rapidly enforcement: but significant regional disparities exist. Overall the analysis suggests that the IPRs regime for inven- · Trademark infringement and illegal copying tion and innovation is improving in China but remain profitable and face little opposition, significant problems remain.7 especially in rural and inland regions. · Enterprises engaged in infringement often are important employers and sources of revenue for Discussion of Interview Findings local governments. Management officials and intellectual property · Low salaries for public officials may reduce managers of enterprises from several IPR-sensitive their effectiveness as enforcement agents, while industries were interviewed. The enterprises administrative programs may be underfunded. Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 61 · Legal and technical expertise for administrative Defection of technical and managerial employ- and judicial operations is limited despite the ees remains a basic problem for both foreign- existence of special training programs in IPRs. owned and Chinese enterprises. In economic terms a balance is needed between promoting mobility of Among these problems, "regional protection- skilled labor, which raises diffusion and competi- ism" in IPRs is regarded as the most difficult to tion, and discouraging uncompensated losses of confront by enterprises suffering infringement. technical knowledge, which can reduce competi- There is little coordination among regional bureaus tion over time. Both foreign and domestic enter- of the Administration for Industry and Commerce prises attempt to manage the problem with tempo- (AIC). Moreover, the regional AICs have weak rary anti-disclosure clauses, but such contracts administrative powers and actions of municipal have been difficult to enforce in China and recent governments may supercede them. Municipal gov- changes in the law have not clarified this issue. ernment officials may well have priorities that take Most respondents agreed that the environment precedence over IPRs enforcement. for selling copyrighted materials is improving in Managers of both Chinese and foreign-affiliated China, although pirating of software, games, DVDs, enterprises expressed the view that weak enforce- and music remains common. While large foreign ment of IPRs results in widespread copyright and firms claim significant harm from such copying, it trademark infringement. A major problem is that is likely that relatively larger losses are suffered by trademark violations often target innovative Chinese entertainment and publishing interests. Chinese enterprises and thereby deter local business For its part, the Chinese software industry is grow- development. Examples were given of problems ing rapidly, largely because of a substantial base of facing Chinese-brand producers of such consumer skilled software engineers and managers. However, goods as medicines, soft drinks, processed foods, according to many interviewees, such firms concen- tobacco products, and clothing. Enterprises selling trate on developing small-scale programs that electronics products seemed particularly vulnera- attract less copying, such as business applications ble. Once brand recognition is achieved, domestic or limited-run games. This problem could delay the enterprises find their trademarks applied to unau- establishment of Chinese-developed software stan- thorized products of lower quality, damaging the dards and networking software. original enterprise's reputation. In some cases, Significant differences exist between Chinese and Chinese enterprises either had to give up on their foreign-owned businesses in their ability to deal trademarks and become licensees of better-known with trademark and other IPRs-related violations. enterprises or undertake extensive private and pub- Foreign companies have more resources to combat lic enforcement actions. It is impossible to know the infringement than domestic enterprises. Insofar as extent to which this problem hampers industrial an enforcement action is a significant expense for a development, but the impact could be significant. small or medium-sized Chinese operation, enforce- Weak enforcement also impedes efficient use of ment difficulties are biased against Chinese business patents and trade secrets. Patent infringement development. Furthermore, foreign companies, seems to be most common in utility models, which particularly Western ones, are more inclined to seek are easy to copy but are overwhelmingly owned by legal solutions to IPRs problems. Chinese enterprises. Several foreign enterprises also Foreign companies may undertake more defen- claimed to have lost patented technologies through sive actions in the presence of weak IPRs. Managers unfair means, such as the selling of design specifi- of most foreign enterprises indicated a reluctance cations and technical manuals by former employ- to locate R&D facilities in China, although this ees. According to one industry association, such is changing rapidly as the legal environment cases are becoming more common and increasingly improves. Nearly all indicated that in the past they targeted on sophisticated technologies. Interview- transferred technologies that are at least five years ers claimed that many foreign companies are behind global standards in the expectation that considering more carefully whether they wish to those technologies would be lost to local competi- transfer advanced technologies into the Chinese tion, or they brought in technologies that would be economy. obsolete quickly. Foreign enterprise managers are 62 China and the WTO often reluctant to license technologies, preferring Patent and Trademark Activity in China joint ventures and majority-owned subsidiaries in Despite these problems, data on patent and trade- which they can exercise greater control of propri- mark use indicate that both foreign and domestic etary secrets. Enterprises are unlikely to integrate enterprises are applying for more protection. fully their Chinese operations, splitting various Table 4.3 presents figures on applications to the production processes among facilities in order not State Intellectual Property Organization for all to reveal fully the underlying know-how. three types of patents from 1994­2000. Domestic Other defensive measures are used by both enterprises more than doubled their applications Chinese and foreign companies. One is to sell only for invention patents, while foreign applications to established customers that need assured quality, rose by 235 percent. From 1996 through 1999 for- such as hospitals, large enterprises, and public eign applications considerably exceeded domestic agencies. This acts as a barrier to the entry of small applications. A significant rise in Chinese domestic firms needing the associated products or inputs. A applications in 2000 virtually equalized the number second is to establish strict vertical supply and for that year, however. Chinese enterprises now distribution chains to permit monitoring of qual- apply for nearly as many invention patents, with ity. A third is to employ technical safeguards, such their higher inventive content, as do foreign as software locks and encrypted source codes that enterprises.8 must be decoded to operate software upgrades. In contrast, applications for utility models and It is impossible to know how these distortions design patents overwhelmingly are filed by Chinese associated with weak IPRs contribute to economic organizations. In both categories domestic applica- inefficiency in China, although the effects presum- tions rose far faster than foreign applications. Thus, ably are significant.If so,stronger IPRs over time will these rewards aimed at encouraging small-scale generate important static and dynamic efficiencies. invention seem to be having their desired effect on Public officials often raise concerns about the domestic innovation. potential impacts of stronger IPRs on prices and Table 4.4 shows data for patent grants and competition. Some officials also recognize that the ratio of cumulative grants to cumulative stronger IPRs need to be accompanied by other applications over the same period. Grants of inven- policy measures to build technological capacities tion patents to both domestic and foreign appli- and maintain competition. However, this recogni- cants increased rapidly, with the former nearly tion only recently has been translated into such catching up to the latter by 2000. The aggregate policy initiatives as the Standards Office within the grants ratios for invention patents are surprisingly State Industry Commission, which will establish low, perhaps reflecting long examination delays. uniform national standards for information net- Grant rates are much higher in utility models and works, including copyright provisions. TABLE 4.3 Patent Applications by Type and Nationality, 1994­2000 Invention Patents Utility Models Design Patents Total Patents Domestic Foreign Domestic Foreign Domestic Foreign Domestic Foreign 1994 11,191 7,876 45,188 323 11,428 1,729 67,807 9,928 1995 10,018 11,618 43,429 312 15,433 2,235 68,880 14,165 1996 11,471 17,046 49,341 263 21,395 3,219 82,207 20,528 1997 12,713 20,953 49,902 227 27,456 2,957 90,071 24,137 1998 13,726 22,234 51,220 177 31,287 3,345 96,233 25,756 1999 15,596 21,098 57,214 278 37,148 2,905 109,958 24,281 2000 25,346 26,401 68,461 354 46,532 3,588 140,339 30,343 Growth 126.50% 235.20% 51.50% 9.60% 307.20% 107.50% 107.00% 205.60% Total 100,061 127,226 364,755 1,934 190,679 19,978 655,495 149,138 Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 63 TABLE 4.4 Patent Grants by Type and Nationality, 1994­2000 Invention Patents Utility Models Design Patents Total Patents Domestic Foreign Domestic Foreign Domestic Foreign Domestic Foreign 1994 1,659 2,224 32,611 208 5,507 1,088 39,877 3,520 1995 1,530 1,863 30,195 276 9,523 1,677 41,248 3,816 1996 1,383 1,593 26,961 210 11,381 2,252 39,725 4,055 1997 1,532 1,962 27,185 153 17,672 2,488 46,389 4,603 1998 1,655 3,078 33,717 185 26,006 3,248 61,378 6,511 1999 3,097 4,540 56,094 274 32,910 3,241 92,101 8,055 2000 6,177 6,506 54,407 336 34,652 3,267 95,236 10,109 Growth 272.30% 192.50% 66.80% 61.50% 529.20% 200.20% 138.80% 187.20% Total 17,033 21,766 261,170 1,642 137,651 17,261 415,954 40,669 Grants Ratio 17.00% 17.10% 71.60% 84.90% 72.20% 86.40% 63.50% 27.30% Source: State Intellectual Property Office 2000. TABLE 4.5 Bilateral Invention Patent Applications, 1994­98 1994 1996 1998 by China in China by China in China by China in China Country in Foreign by Foreign in Foreign by Foreign in Foreign by Foreign U.S. 190 8,105 246 14,892 436 25,634 Japan 137 3,742 145 7,212 373 11,301 Germany 172 2,094 210 3,631 624 6,599 U.K. 188 2,028 224 2,656 627 4,216 Australia 87 692 101 746 295 1,067 Korea, Rep. of 84 569 97 1,645 309 2,076 Brazil 85 20 100 39 290 104 India 21 8 54 6 15 21 design patents, which are easier to examine and in China during 1985­96 and 2000. Residents of carry shorter protection periods. Guangdong applied for over 21,000 patents in Tables 4.5 and 4.6 indicate trends in bilateral 2000, while people in Hebei applied for less than invention patenting activity between China and key 4,000. Better measures of inventive capacity are trading partners.9 Chinese patent applications given in the final two columns as applications per abroad rose sharply between 1996 and 1998 in all million people and applications per million yuan of countries listed except India, suggesting an increas- regional GDP. In these rankings Beijing is at the top ing international orientation of Chinese innovation. of the list, with far more applications per capita and However, China remains well behind most devel- per unit of output than any other province. This oped countries in terms of bilateral applications reflects both Beijing's status as a technology devel- flows, with the United States and Japan together oper and the fact that many patent registrations applying for some 37,000 patents in 1998 in that come through legal offices in the capital. Shanghai country. Despite the increase in Chinese applica- has the second highest applications per person but tions abroad, only Japan actually granted rising ranks sixth in applications per yuan of GDP. Fujian numbers of invention patents to Chinese inventors. and Hebei rank low in both categories. Table 4.7 provides a breakdown of total domestic The middle column ranks these regions in patent applications for the top 11 patenting regions terms of average income per capita. There are large 64 China and the WTO TABLE 4.6 Bilateral Invention Patent Grants, 1994­98 1994 1996 1998 to China by China to China by China to China by China Country by Foreign to Foreign by Foreign to Foreign by Foreign to Foreign U.S. 48 701 46 449 72 785 Japan 5 579 29 445 7 927 Germany 16 213 15 148 7 318 U.K. 21 94 29 66 12 133 Australia 4 24 5 20 14 36 Korea, Rep. of 0 48 0 49 2 149 Brazil 2 4 0 1 5 2 India 5 2 1 0 0 3 Note: Data include applications under Patent Cooperation Treaty. Source: WIPO, various years. TABLE 4.7 Patenting Indicators for Top Patenting Regions, 1985­96 and 2000 2000 Applications 2000 Applications Applications 2000 GDP per per Million of per Million Yuan of Region 1985­96 2000 Capita, Yuan Population GDP Guangdong 42,159 21,123 11,180.55 487.84 436.33 Shanghai 21,758 11,337 27,187.57 1,299.76 478.07 Beijing 54,348 10,344 17,936.32 3,932.56 2,192.51 Zhejiang 29,197 10,316 12,906.56 624.27 483.68 Shandong 37,082 10,019 9,408.97 408.44 434.09 Jiangsu 34,983 8,211 11,538.99 470.33 407.60 Liaoning 38,768 7,151 11,017.23 914.77 830.31 Sichuan 27,046 4,496 4,814.86 324.72 674.41 Fujian 11,027 4,211 11,293.86 317.69 281.29 Hunan 26,400 4,117 5,732.76 409.94 715.08 Hebei 20,584 3,848 7,545.91 305.22 404.48 Correlation with GDP per capita 0.54 0.78 Sources: The Patent Office, Annual Report, 2000; State Statistical Bureau, China Statistical Yearbook 2000; Author's calculations. regional disparities in income levels, ranging from and applications per million yuan of GDP is higher Sichuan at the bottom to Shanghai at the top. The (0.78). Accordingly, higher incomes are associated difference between them is a factor of 5.6, which is with greater innovation propensities, which in turn extraordinarily high for regions within a country. raise regional economic growth. It is interesting to correlate per-capita GDP with Data for trademark registrations not shown here the relative patent application figures; there is a tell a similar story. In particular, trademark applica- strong positive correlation (0.54) between GDP per tions have risen rapidly since 1994, especially those capita and patent applications per million people. through the Madrid Protocol. Far more domestic Thus, richer provinces apply for more patents marks are registered than foreign ones, but foreign (develop more products) per person than poor applications have increased at a faster pace. In provinces. The correlation between GDP per capita terms of regional performance, Guangdong had Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 65 the largest absolute number of applications in IPRs limits incentives to develop products and 2000, followed by Zhejiang and Jiangsu. Scaled by brand names, especially on the part of small and population, however, Shanghai ranked first by a medium-sized domestic enterprises. This structural large margin, followed by Beijing, Zhejiang, and difficulty likely limits entry of new firms and the Guangdong. There is a very high correlation (0.81) development of entrepreneurial skills. It also between per-capita GDP and per-capita applica- restricts the ability of enterprises to market nation- tions, reflecting again that trademark applications ally and to take advantage of economies of scale,and rise with income levels. tends to reduce investment in quality improve- Thus, the use of patents and trademarks is rising ments. Over time, this situation could make it rapidly in China for several reasons: increasingly difficult to break into export markets for high-quality and high-technology goods. · Laws have been strengthened and fees reduced, Second, Chinese enterprises and research organ- encouraging more applications. izations are engaging in more innovation, as · As trademark and patent infringement have suggested by the patent and trademark statistics. increased, both domestic and foreign enterprises However, the country remains behind global stan- recognized the importance of establishing intel- dards in allocating resources to R&D and science lectual property protection, even in an environ- (Maskus, Dougherty, and Mertha 1998). Moreover, ment of weak but improving IPRs. interviewees noted that SOEs and state research · Chinese markets are getting deeper as income institutions face structural difficulties in commer- grows, despite the substantial barriers to inter- cializing the results of invention. This points out regional integration, And registration of IPRs is the importance of continuing to develop a technol- important for exploiting deeper markets. ogy innovation system that encourages innovative · Chinese research organizations and enterprises activity.10 The state has important roles to play in are engaged in more inventions, and Chinese promoting pre-competitive research and removing firms are undertaking more innovative activity. disincentives to commercialization.China has made progress toward these goals, with support programs in information technology, biotechnology, and Conclusions and Recommendations other important areas, along with efforts to raise the In recent years China has made significant progress flow of knowledge from institutes and universities on the legislative end of intellectual property rights, to producing enterprises. Nonetheless, ambiguities especially in preparation for its entry into the remain about effective ownership of intellectual WTO. The specific standards it has adopted across property rights. This is another reason that the new the range of intellectual property regimes are system of IPRs should be an important component largely consistent with what might be recom- of the evolving innovation system. mended for middle-income developing countries Third, stronger IPRs alone are not sufficient to with strong innovation potential. However, in some establish effective conditions for further technology dimensions the new Chinese standards may be development and growth. Rather, they must be overly protective for an economy that remains embedded in a broader set of complementary largely a net importer of new technology and infor- initiatives that maximize the potential for IPRs mation. At the same time, China continues to expe- to be pro-competitive over the long term. An rience severe enforcement problems. Enforcement important complement is development of human is likely to be problematic for the intermediate term capital through education in science, technology, because of structural difficulties with the system and and law, and acquisition of skills through training because costs of copying and counterfeiting remain in enterprises. Enterprises should be more willing small relative to prices of legitimate products. to undertake such training under an improved China is undergoing a long process of increasing IPRs regime. Both directly and indirectly, then, sophistication in technology use and development. effective IPRs can help Chinese enterprises raise Three important problems arise with IPRs that their technological capabilities, which is critical for may influence the pace and characteristics of this adaptation of foreign technologies and innovation transformation. First, inadequate enforcement of of new products. 66 China and the WTO Another supporting factor is to ensure that com- Notes petition on domestic markets is sufficient to prevent 1. See "Draft Protocol on the Accession of China," July 10, stronger IPRs from becoming a damaging source of 2001. market power. Further enterprise reform and dereg- 2. For policies taken before 2003, the description in these paragraphs relies on information from an interview with a sen- ulation are important in this context. Over time the ior judicial official in Beijing and on Lehman, Lee and Xu, China liberalization commitments made in the WTO will Intellectual Property Newsletter: Special Issue, 2001. provide important competition as well. 3. For extensive reviews see Evenson and Westphal (1997), Finally, China like other countries, has the right Maskus (2000a), and Primo Braga, and others (1998). 4. UNCTAD (1996) presents estimates of such costs in to safeguard its interests in competition and social several developing countries. objectives through effective regulation of IPRs as 5. Prices of copyrighted goods have fallen sharply in Taiwan those rights become stronger. Thus, the govern- since the aggressive crackdown on counterfeiting in the mid- 1990s, in part because of additional competition from legitimate ment should further analyze the appropriate form local developers. of pricing regulations and compulsory licensing 6. The European Union has moved recently toward the in its drug procurement programs as medicines provision of patent protection. 7. It is conceivable that the increase in Chinese applications receive stronger protection. come primarily from joint venture partners of foreign enter- Moreover, an opportunity arises for China to prises but unfortunately the available data do not make this consider what form of competition regime it will distinction. implement as it shifts further toward the market. 8. Because these data were taken from WIPO, they include applications made under the Patent Cooperation Treaty. Currently China tries to maintain competition 9. Dahlman and Aubert (2001) discuss this in detail. through centralized regulation of market structure, 10. See Maskus (2000a) for more detailed discussion. ownership, and innovation, a system that will become increasingly incompatible with needs for References technological change. A shift toward antimonopoly regulation of such IPRs abuses as monopoly pric- Caves, Richard E. 2000. Creative Industries. Cambridge: Harvard University Press. ing, restrictive licensing arrangements, and refusals Coe, David T., Elhanan Helpman, and Alexander Whoffmaister. to deal is important. China also may need to employ 1997. "North-South R&D Spillovers." The Economic Journal compulsory licenses for this purpose. To be effec- 107: 134­49. tive, such regulation needs to be well defined, non- Dahlman, Carl J., and Jean-Eric Aubert. 2001. China and the Knowledge Economy: Seizing the 21st Century. Washington, discriminatory, and professionally applied by the D.C.: World Bank. competition authorities and courts. This points Dougherty, Sean M. 1997. "The Role of Foreign Technology in again to the need for building legal expertise in IPRs Improving Chinese Productivity." MIT Science and Technol- ogy Initiative, Beijing. over the long term. Evenson, Robert E., and Larry E. Westphal. 1997. "Technological The authorities in China expect that the stronger Change and Technology Strategy." In Handbook of Develop- IPRs regime set in place by new legislation and ment Economics: Volume 3. Amsterdam: North-Holland. Jiang, L. 1996. "Technological Innovation in Business Strategy." increased efforts at enforcement will support Science and Technology International 1: 60­3. dynamic gains in technology acquisition and inno- Lacroix, Sumner, and Denise Eby Konan. 2002. "Intellectual vation. This outcome seems achievable in those Property Rights in China: The Changing Political Economy regions and sectors that are technologically of Chinese-American Interests." The World Economy 25: 759­88. dynamic. At the same time, however, substantial Lanjouw, Jean O. 1997. "The Introduction of Pharmaceutical differences in incomes, education, and entrepre- Product Patents in India: `Heartless Exploitation of the Poor neurship persist among regions, while much of the and Suffering'?" Discussion paper no. 775. New Haven Connecticut, Economic Growth Center: Yale University. country remains poor. Developing a comprehensive Lee, Jeong-Yeon, and Edwin Mansfield. 1996."Intellectual Prop- approach to regulating the use of IPRs that helps erty Protection and U.S. Foreign Direct Investment." Review bring these poorer regions and groups more fully of Economics and Statistics 28: 181­6. Ma, Chi, and Gao Chang Lin. 1998. "Technological Innovation into the modern commercial system will pose a in China's Manufacturing," State Science and Technology significant challenge for China. In the long run, Commission, Beijing, manuscript. however, the technological dynamism that should Mansfield, Edwin. 1995. "Intellectual Property Protection, be facilitated by the new IPRs regime will greatly Direct Investment, and Technology Transfer." Discussion paper 27. Washington: International Finance Corporation. assist the country in its efforts to spread widely the Maskus, Keith E. 1998. "The International Regulation of Intel- gains from competition. lectual Property." Weltwirtschaftliches Archiv 123: 186­208. Intellectual Property Rights in the WTO Accession Package: Assessing China's Reforms 67 ------. 2000a. Intellectual Property Rights in the Global Economy. Smith, Pamela J. 1999. "Are Weak Patent Rights a Barrier to U.S. Washington D.C.: Institute for International Economics. Exports?" Journal of International Economics 48: 151­77. ------. 2000. "Intellectual Property Rights in Lebanon." In B. UNCTAD (United Nations Conference on Trade and Develop- Hoekman and J. Zarrouk, eds. Catching Up with the Compe- ment). 1996. The TRIPS Agreement and Developing Coun- tition. Ann Arbor: University of Michigan Press. tries, Geneva: UNCTAD. Maskus, Keith E., and Christine McDaniel. 1999. "The Impacts Watal, Jayashree. 1999. "Pharmaceutical Patents, Prices and of the Japanese Patent System on Post-War Productivity Welfare Losses: A Simulation Study of Policy Options for Growth." Japan and the World Economy 11: 557­74. 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Sepulveda. 1998."Intellectual Property Rights and Economic Weltwirtschaftliches Archiv 137, 1, 58­79. Development." Manuscript. Washington, D.C.: World Bank. Scotchmer, Suzanne. 1991. "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law." Journal of Economic Perspectives 5, Winter, 29­42. 5 China's Agricultural Development and Policy Readjustment after Its WTO Accession Chen Xiwen At the time of its accession to the World Trade to 15.9 percent, 4.6 percent lower than in 1995. The Organization (WTO), China was following the reduced share of agriculture in the national econ- ninth Five-Year Plan for the Development of the omy, which is a normal development in a period of National Economy and Society. The Plan required accelerated industrialization, does not alter the China to accomplish two major goals in its national important position of agriculture in the national economic and social development: to establish the economy. The agricultural growth was remarkably system of the socialist market economy at the pri- higher than the population growth; annual popula- mary stage and to attain a higher standard of living. tion growth on average was 0.91 percent, having Accomplishing these two goals would provide an provided a reliable guarantee for improvements in important foundation for reform and development the standard of living, especially diet and nutrition. and for the accomplishment of the third step, the The agricultural and rural economic structures strategic goal of modernization. While remarkable have improved gradually.In agricultural production, achievements had been made in agriculture and the share of forestry, animal husbandry, and fishery rural economy during the ninth Five-Year Plan, sig- continued to increase compared to crop farming. nificant problems had developed that could not be Promoted by technical progress, the capacity of ignored. crop farming to ensure provision of farm produce and support agricultural restructuring is increasing (table 5.1). Agriculture and Rural Development At the same time, the percentage of farmers' during the Ninth Five-Year Plan incomes derived from secondary and tertiary indus- tries has been increasing. In 1995, the average net During this period, the gross value of agricultural income from secondary and tertiary industries production in China grew from RMB1199.3 billion accounted for 32.65 percent of the net productive in 1995 to RMB1421.2 billion in 2000, an average incomes; this percentage increased to 46.65 percent annual increase of 3.5 percent in constant prices, in 2000. The value-added of township and village 0.5 percent lower than annual growth during the enterprises (TVEs) was equivalent to 121.7 percent eighth Five-Year Plan. In 2000, the share of agricul- of the gross value of agricultural production in ture in Gross Domestic Product (GDP) decreased 1995 and increased to 191.1 percent in 2000. 69 70 China and the WTO TABLE 5.1 Changes in Farm Output key link" was stressed for years to alter the situation Value Shares (percent) of food shortage, but the problem was not resolved. The grain rationing system was terminated as late Crop Animal as 1992, producing improvements in the food Year Farming Forestry Husbandry Fishery supply situation. Beginning in 1995, China had 1995 58.43 3.49 29.72 8.36 enjoyed good harvests in grain production for five 2000 55.68 3.76 29.67 10.89 consecutive years. In the first four years of the Plan period, the annual grain production surpassed Source: China Statistical Yearbook 2001. 500 million tons, leading to a continuing situation of supply exceeding the demand. The average standard of living of farmers con- Four causes contributed to the significant growth tinued to improve. In the ninth Five-Year Plan, even in grain production during the ninth Five-Year though the growth of farmers' income slowed Plan period: down year by year, the per capita net income increased from RMB1,577.7 in 1995 to RMB2,253.4 · The basic rural policies were improved continu- in 2000, an average annual increase of 4.7 percent ously. The household contract responsibility sys- after adjustment for price changes. This growth ex- tem featuring a combination of centralization ceeded the target of 4 percent set in the outline of and decentralization played an important role the ninth Five-Year Plan. Farmers' standard of liv- in expanding grain production. In November ing also continued to improve. In 1995, spending 1993, the central government explicitly extended on food made up 58.62 percent of per capita living the land contract for another 30 years after expenses of farmers; this percentage was reduced to the expiration of the original 15-year contract 49.13 percent in 2000. Compared with 1995, elec- period. This policy gave farmers a sense of sta- tric fans owned by every 100 farmers' households bility in terms of land contract rights and stimu- increased by 34 sets, black-and-white televisions by lated their initiative to increase investment 38 sets, color televisions by 32 sets, refrigerators by in farmland. Many farmers have been digging 7 sets, washing machines by 12 sets, and motor motor-pumped wells and irrigation ditches on cycles by 17 sets. The per capita housing space the contracted land and purchasing sprinkler increased from 21 to 24.82 square meters. irrigation devices to develop water-saving irriga- The most remarkable achievements were the tion. The area of irrigated farmland increased by significant expansion of the production capacity of 68.55 million mu or 9.3 percent. grain and other major farm produce and the histor- · Increases in the contract purchase price for grain ical transition from the long-standing short supply provided an incentive for farmers to increase pro- of major agricultural products to balance in aggre- duction. In 1994, consumer prices rose. To make gate and surplus in years of good harvests. up for the effect of these rises on farmers, the The achievements in grain production made government raised the contract purchase price during the ninth Five-Year Plan period are of his- for grain by 40 percent; the price was further torical significance to the development process of increased to 42 percent in 1996. the Chinese economy and society. The pressure of · Scientific and technological progress has been population growth on demand for food has been responsible for nearly 40 percent of the agricul- a significant economic and social problem con- tural growth in China. The extension of several fronting China for close to 400 years. In the late key technologies, in particular, played an impor- Ming Dynasty and the early Qing Dynasty, China's tant role in increasing grain production. The population was less than 100 million and had 800 "seed project" introduced a large number of million mu of farmland. By 2000, the total popula- improved varieties and eliminated poor varieties tion had grown to 1.266 billion, while the farmland that did not suit market needs. The "White area only expanded to 1.924 billion mu. The popu- Revolution" extended mulching technology in lation grew over 11-fold, while the farmland area the cold and dry areas in the northern part of increased by a factor of little more than two. After China to advance sowing time and prolong the the country's founding in 1949,"taking grain as the period of crop production while improving soil China's Agricultural Development and Policy Readjustment after Its WTO Accession 71 moisture conservation and repressing weed 4.3 percent in 1998, 3.8 percent in 1999, and growth. Water-saving irrigation technologies 2.1 percent in 2000. have been developed, and demonstration coun- The decreasing growth in farmers' net income in ties where these technologies are being applied recent years is only a symptomatic manifestation of have been designated. The flood irrigation prac- the problem. The severity of the problem lies pri- tice has been replaced by wide application of marily in the sustained decrease of income from spraying, trickle, and micro-irrigation methods agricultural production. Table 5.2 shows the com- to meet the needs of crop growth with less water. position of and changes in per capita net income of · Favorable climatic conditions produced adequate farmers from 1997 to 2000. rainfall that alleviated long-standing drought It can be clearly seen from Table 5.2 that, while conditions and facilitated increases in grain pro- the productive net income of farmers in 2000 duction. The most serious threat to agricultural increased by RMB142 over 1997, the net income production in China traditionally has been from agricultural production decreased by 132, a drought. reduction of 10.4 percent. Between 1998 and 2000, the average farmer's income from agricultural Generally, the agricultural policies during this production declined progressively, decreasing by period were stable and explicit, and many of the RMB30 between 1998 and 1997, RMB57 between scientific achievements facilitated growth in grain 1999 and 1998, and further by RMB44 between production. However, factors such as major rise in 1999 and 2000. According to the statistics in the prices and favorable climatic conditions are incon- agricultural survey, 59 percent of the rural house- sistent, and reliance on a confluence of such favor- holds in China are "pure farmer households" (i.e., able factors in the future would be imprudent. the family members are mainly engaged in farm- Accordingly, the long-term development of grain ing), and another 18 percent are "farmer house- production remains an issue meriting ongoing seri- holds with combined occupations" (i.e., the ous attention. number of family members engaged in farming is more than those engaged in nonfarm occupations). These two types of households with farming as The Biggest Problem in China's Rural their main source of income account for 78 percent Economy: Raising Farmers' Incomes of households in rural China. Accordingly, due to The decreasing growth in farmers' income was the the progressively reduced income from agriculture most outstanding problem during the ninth Five- in the last three years, the per capita net income of Year Plan period. Changes in the patterns of supply the households with farming as the main source of and demand produced an excess of supply for most income actually declined. farm produce, leading to declines in prices and new It was under just such circumstances that part difficulties in raising farmers' incomes. In 1996, of the agricultural provinces and the western farmers' net income increased by 9 percent, but the provinces with underdeveloped nonfarm industries rate of growth declined to 4.6 percent in 1997, faced a severe reduction in the per capita income of TABLE 5.2 Sources of Farmers' Incomes, 1997­2000 Productive Net Income from Net Income from Net Income from Net Income Primary Industry Secondary Industry Tertiary Industry Year (Yuan/Person) (Yuan/Person) (Yuan/Person) (Yuan/Person) 1997 1987 1,268 438 281 1998 2040 1,237 499 303 1999 2079 1,180 564 334 2000 2130 1,136 598 395 2000 vs. 97 +142 -132 +160 +113 72 China and the WTO TABLE 5.3 Declines in Per Capita Farm Incomes in Six Key Provinces Yuan Yuan Yuan Yuan Yuan Yuan Reduction in Shanxi Liaoning Jilin Heilongjiang Gansu Xinjiang income in 1999 86 79 123 87 36 127 Reduction in Guangxi Liaoning Jilin Heilongjiang Shaanxi Ningxia income in 2000 184 145 238 18 12 30 TABLE 5.4 Changes in Farm Household Spending, 1997­2000 Household Total Operation Living Spending Spending on Spending Spending Expenses on Food Garments Year (Yuan/Person) (Yuan/Person) (Yuan/Person) (Yuan/Person) (Yuan/Person) 1997 2,537 706 1617 890 109 1998 2,457 652 1590 850 98 1999 2,390 600 1577 829 92 2000 2,652 654 1670 821 96 farmers. In 1999 and 2000, farmers in six provinces There were successive declines in 1998 and 1999 and regions experienced decreases in their per in per capita spending on farm household opera- capita net income over the previous year. Table 5.3 tions, with a cumulative 15 percent reduction shows the provinces and amounts of the reduction between 1997 and 1999 (a reduction of RMB106). in income. The increase in per capita spending on farmer Per capita income decreased for two consecutive household operations in 2000 constituted some- years in the provinces of Liaoning, Jilin, and thing of a recovery, but it still left spending over Heilongjiang. The reduction in Jilin was as much as 7 percent lower than in 1997. On the other hand, RMB361 in the same period, and per capita income this increase was indirect, the result of increases in in the province was 15 percent lower in 2000 than drought relief expenses and the rise in prices for in 1998. fuels. The net income from farming declined for years The changes in the per capita consumer spend- running, while the tax burden on farmers' house- ing of farmers have similar characteristics: succes- holds mainly included taxes on agricultural and sive declines in 1998 and 1999, with spending in animal products, taxes on special products, and 1999 at 2.5 percent (RMB40) below the level in a contract land deduction. These factors have 1997. Although the per capita living expenditures deepened the feeling of households in which farm- increased by RMB93 in 2000 compared with the ing is the main source of income that "income can previous year, the change was to a large extent not go up and burdens can not come down." This passive. First, the per capita spending on food con- situation has forced some farmers to seek work tinued to decrease after the successive decrease for from other sources to offset payment of agricul- two years, while per capita spending on garments tural taxes and fees with income; more farmers increased slightly but was still lower than the levels have had to reduce their spending on production in 1997 and 1998. Second, much of the spending and living expenses. Since 1998, the per capita increase resulted from the rise in service prices, spending on operation and living expenses has such as medical expenses that increased by RMB18 decreased or stopped increasing. Table 5.4 shows or 25 percent, transport by RMB24 or 35.5 percent, the changes in this regard. and education and entertainment devices and China's Agricultural Development and Policy Readjustment after Its WTO Accession 73 TABLE 5.5 Share of Farmers in Consumer WTO Accession and the New Spending at County and Lower Stage of Development of Chinese Levels (percent) Agriculture and Rural Economy Year Percent The Initiation of the New Stage and its Central Tasks 1996 40 In October 1998, the Third Plenary Session of the 1997 39 15th Central Committee of the Communist Party 1998 39 of China (CPC) adopted the Decisions of the CPC 1999 39 Central Committee on Major Issues of Agriculture 2000 38 and Rural Work. The judgment of balance in aggre- gate and surplus in harvest years for grain and other major agricultural products was made in the services by RMB18 or 11 percent. The above expen- Decisions. Based on this judgment, the central gov- diture increases, which were basically passive, ernment stated at the National Conference on increased by RMB60 or 65 percent of the total Rural Work at the end of 1998 that the develop- increase in living expenses. Therefore, even though ment of Chinese agriculture and rural economy farmers' per capita spending on living had had entered a new stage. The main basis for the new increased, the amount of the spending that could stage thinking is the major change in the pattern of be used to improve their quality of life was very agricultural supply and demand. One of the key limited. features of the situation is that the quantitative The data on per capita expenditures on produc- contradictions in the supply of and demand for tion and living of farmers are only national aver- agricultural products have been relieved. Another ages, and, very often, average figures conceal many is that past agricultural production had been disparities. The situation was more serious in terms restricted by natural resources; presently, however, of the reduction in spending for most of the farmer restrictions of market demand on production have households that mainly depend on farming for become more acute. What farmers are worrying incomes. This is one of the major reasons for the about is not whether enough products can be pro- decline in farmers' share of rural consumption evi- duced, but whether the products can be sold at dent in table 5.5. good prices. Precisely because of such changes, the Thus it can be seen that the decrease and stagna- central government explicitly directed at the end of tion in farmers' spending has actually produced 1999 that the central task for agriculture and rural negative impacts on the expansion of the domestic economy in the new stage should be implementa- market and healthy development of the national tion of strategic restructuring. economy. As the central government pointed out at the Central Working Conference on Rural Issues, The Crux of the Strategic Restructuring the issue of increasing tangible benefits to farmers of Agriculture and Rural Economy is central to the continuation of the progress achieved in agriculture productivity. If the purchas- Since China adopted reform and open economic ing power of farmers does not continue to improve, policies, Chinese agriculture has experienced the policy for expanding domestic demand will not restructuring. The starting point of the strategic achieve the desired results. If farmers' living stan- restructuring lies in the adjustment of variety and dards cannot be improved, the risk of increased quality instead of quantity. The adjustment in the social instability in the rural areas will increase. If area of crop sowing is no more than which crop the ability of agriculture to save and accumulate should have more sowing area and which should cannot be constantly strengthened, it will be diffi- have less. This kind of adjustment was effective in cult for China's agricultural products to compete the past, is effective at the present, and will be effec- in the global marketplace. If Chinese agriculture tive in the future. However, adjustment in quantity experiences major setbacks, the development of has major limitations. For example, judging from the whole national economy and society will be the existing production level and consumer demand affected adversely. for grain in China, the total sowing area for grain 74 China and the WTO crops should be maintained at 1.65 billion mu to conference in Anhui Province on the reform exper- 1.7 billion mu, with only about 50 million mu as a iment in rural taxes and fees to explore fundamen- margin for adjustment. tal solutions to the burdens on farmers. At the turn Strategic restructuring differs substantially. of the century, the central government held a series Adjustment can be made on every piece of land of major conferences on rural restructuring, within more than 2.3 billion mu of sowing area, increasing farmers' income, and alleviating burdens such as replacing the unmarketable poor quality on farmers. varieties with high quality marketable ones. Adjust- Securing income growth for farmers is by no ment can be made not only on cultivated land, but means a simple matter. The most important also in forest products, fruits, animal products, and immediate cause of the slow increase in farmers' aquatic products. Accordingly, adjustments empha- income is the current difficulty in selling agricul- sizing optimizing varieties, improving quality, and tural products and the declines in prices. However, efficiency can be made everywhere. Only by such problems of product sales and price declines are strategic restructuring focused on quality and effi- not only evident in agriculture, but in most other ciency can the overall quality of Chinese agriculture industries as well. Therefore, the current difficul- be improved to meet the requirements and chal- ties facing farmers' income are to a great extent lenges posed by WTO accession and economic glob- related directly to the economic cycles at both alization, to ensure improvement in the people's home and abroad. Achievement of sustained living standards, and to accelerate the process of growth in farmers' income is a complicated project agricultural modernization in China. of system engineering. One or two specific policies cannot be expected to provide fundamental solu- tions. The key is to make great efforts in all aspects The Fundamental Objective of the Strategic of agricultural and rural work. This also depends Restructuring to a large degree on the improvement in the The new stage of strategic restructuring was initi- national economy as well as the world economy so ated early in 2001 when the central government as to create a broader market for the agricultural specified that the fundamental objective of the development. strategic restructuring is to ensure increases in farmers' income. After entering the new stage and The Basic Direction of the Strategic Restructuring basically solving the quantitative contradiction of Agriculture and the Rural Economy in agricultural supply and demand, increasing farmers' income has increasingly become a priority As directed by the Chinese government, the central of the Chinese central government. In November task of the new stage of agricultural development is 2000, Secretary General Jiang Zemin and Premier to implement strategic restructuring of agricultural Zhu Rongji stressed at the National Economic production. This restructuring is strategic for two Conference that increasing farmers' income should reasons. The first is to put the long-standing prac- be a key goal in the entire economic work program. tice of pursuing quantitative growth in agricultural The government has paid close attention to issues products on the track of stressing optimized variety concerning agriculture, rural areas, and farmers, and improved quality and efficiency. The second is with the focus on increasing farmers' income. The that the ongoing development of Chinese agricul- fundamental objective set at the Central Working ture needs to continue to consider the constraints Conference on Rural Affairs at the beginning of on the resource side and to pay more attention to 2001 was to achieve growth in farmers' income. constraints from demand side. To achieve this, the In mid January 2001, the central government con- regulation of agricultural production by market vened a National Conference on Agricultural forces should be expanded. Science and Technology, at which a group of agri- It can clearly be seen that WTO accession will cultural scientists was commended and the Outline accelerate agricultural restructuring and adjust- for the Development of Agricultural Science and ment in agricultural policies. The agricultural Technology in the Next 10 Years was adopted. In restructuring consistent with the above goals will February 2001, the State Council held a working require changes in the relevant policies. Although China's Agricultural Development and Policy Readjustment after Its WTO Accession 75 these policy adjustments primarily resulted from 2. Expand processing of agricultural products. major changes in the patterns of agricultural supply Agricultural processing will become more and more and demand in China, they are fundamentally important in agricultural development in China. consistent with the direction of China's WTO com- With continuous increases in people's incomes and mitments. Even if no WTO accession issues are pre- living standards, the Engel coefficients and income sented, such adjustments in agricultural policies elasticity of demand can be expected to fall, which would be required. could pose a grave challenge to the continued devel- The restructuring of agriculture and rural econ- opment of agriculture. omy, revealed at the end of the ninth Five-Year Currently, the main factor restricting the growth Plan, has five major orientations: of farmers' income is the decrease of income from agricultural production. This is related to the stage 1. Optimize varieties of farm produce and of social and economic development in China. improve the overall product quality. Optimization Profound changes have taken place in the current of varieties and improvement in quality and effi- consumption structure of residents. One is the ciency should be the main orientation of adjust- decrease of the Engel coefficient and the associated ment for all agricultural production, including crop decline in the income elasticity of demand for food. farming, animal husbandry, fishery, forestry, and In 1991, the Engel coefficients of China's urban and fruit production. With the issue of quantity in agri- rural residents were 54 percent and 58 percent, cultural supply and demand resolved, optimizing respectively. These declined to 38 percent and varieties and improving quality will constitute an 48 percent in 2001. objective requirement for the current stage of agri- The decline in the propensity of households to cultural development facing supply and demand spend their income on food is evident in Table 5.6. changes. It is preferable in agricultural production Between 1996 and 2001, per capita disposable to have smaller quantities of higher quality prod- income increased by RMB2 021 and consumer ucts to avoid wasting the human, financial, and expenditure increased by RMB1,390, while food material resources of farmers. To this end, the cen- expenditure only increased by RMB109, even tral government announced the termination of though expenditures on food eaten outside the purchasing at protective prices for long-grained home increased by RMB128. Thus, the urban resi- nonglutinous rice, northeastern spring wheat, dent expenditures on grain, oil, meat, and vegeta- southern winter wheat, and other unmarketable bles decreased by RMB131. varieties, starting in 2000. The purpose of this Only by expanding farm produce processing reform was to guide farmers to replace inferior and encouraging the consumption of higher varieties with superior ones. quality, more nutritious, and safer food can the TABLE 5.6 Changes in Urban and Rural Resident Income and Spending, 1996­2001 2001 (Yuan) 1996 (Yuan) Per capita disposable income 6,860 4839 Per capita consumer expenditure (total) 5,309 3919 Food 2,014 1905 Grain 188 272 Oil 59 69 Meat, poultry, and products 413 439 Aquatic products 152 132 Vegetables 194 207 Tobacco 104 84 Liquor and beverage 104 85 Fresh and dried fruits 131 118 Dining out 314 186 76 China and the WTO continued expansion of agricultural markets be giving play to local comparative advantage in agri- achieved. Food processing can not only increase the culture. China has a large population and little value of agricultural products, but it also can guide land. Most of the land-intensive agricultural prod- consumption and develop new markets to make it ucts, such as grain, cotton, and edible oil are rela- possible to continuously increase farmers' income. tively high-cost in China. Most labor-intensive Two concepts should be altered in terms of devel- agricultural products, such as animal and poultry oping agricultural processing industry. First, food products, aquatic products, and horticultural prod- processing should not be regarded as an industry ucts (fruits, vegetables, flowers, and bonsai), have a with low-technology content and without the need comparative advantage in international markets. for substantial investment. On the international Currently, there is an urgent need for Chinese agri- market, brand-name and marketable processed culture to foster strengths and circumvent weak- foods all have high-technology content. These nesses and to give full play to China's comparative products simply can not be produced without the advantage in international market competition. To application of advanced technology. Second, it tap the comparative advantage of Chinese agricul- should not be believed that unsaleable fresh prod- ture on the international market, it is first necessary ucts can be processed into high-quality processed to bring into full play the agricultural comparative products. The raw materials for food processing advantages of different domestic regions. In this should be special-purpose farm produce, such as way, it will be possible to create a pattern of mutual special wheat and special grapes, which are distinc- benefit and complementarity between regions to tive from those directly used for food. Therefore, improve the competitiveness of Chinese agricul- adjustments should be made in the varieties of tural products on international markets and to agricultural products to achieve better results from promote the development of China's agriculture food processing. as a whole. 3. Bring into play the local comparative advan- 4. While continuing to support the develop- tages in agriculture. In the past, widespread short- ment of TVEs, make positive and steady efforts to ages of agricultural products left localities with advance urbanization. In the second half of the no choice but to pursue higher degrees of self- ninth Five-Year Plan period, the per capita net sufficiency. Now that the supply and demand situa- income of farmers increased, although income tion has changed, local authorities should be from farming declined. This increase depended liberalized from such traditional thinking and almost entirely on income growth from nonfarm bring into play local comparative advantage in sectors. This shows that the fundamental way to agriculture. Particularly, the coastal regions and enrich farmers is to reduce the number of farmers. suburbs of large and medium cities should make Agricultural resources are limited and efforts use of capital and technology-intensive techniques. should be made to transfer rural labor and popula- These localities should properly reduce their grain tion to allow the farmers remaining on the land to production and develop higher value-added animal expand their scale of production. The township husbandry, fishery, and horticulture so as to give and village enterprises (TVEs) in the countryside more market space to the main grain-producing have provided 130 million job opportunities to regions in a pattern of mutual benefit and relative farmers, and their role in alleviating the unem- complementarity. At the same time, the various ployment problem can hardly be replaced. TVEs localities should be encouraged to develop their should be guided to conduct restructuring and own agriculture with distinctive features. institutional innovation to promote their further To promote restructuring of the regional distri- development and to make a greater contribution bution of agriculture, the central government to increasing the employment and income of decided in 2001 to liberalize grain markets in the farmers. main coastal grain-consuming regions, including Another major source of income growth of Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, farmers during the ninth Five-Year Plan was tran- Fujian, Guangdong, and Hainan. Particularly, in the sient employment of farmers in towns and cities. face of the challenges and opportunities after WTO This part of income has provided an increasing accession, much more attention should be paid to share in the net income of farmers. According to an China's Agricultural Development and Policy Readjustment after Its WTO Accession 77 estimation by Sichuan, 6 million farmers in the towns. Medium and small cities should be devel- province seek transient employment and remit oped, the regional center cities should have distinc- nearly RMB30 billion each year. The transient tive features, and large cities should bring into play employment of farmers, which should be encour- their leading role and growth pole functions. aged, should be managed to keep it orderly. How- However, measured with the goal of transferring ever, many large and medium cities have set up the rural population, developing small towns is various restrictions and rules on employing farm- more realistic. Presently, large and medium cities ers, and many of these rules and regulations are frequently provide job opportunities for transient both unreasonable and ineffective. On one hand, farmers and opportunities for them to accumulate these transient farmer workers should be guided to capital, but it is very difficult for these farmers to flow in an orderly manner and to abide by relevant settle in these cities. After a certain period of capital laws and regulations. On the other hand, the vari- accumulation, rural residents typically leave the ous rules and regulations restricting farmers seek- large cities, but not all of them return to rural areas. ing jobs in urban areas should be reviewed so as to Some of them settle in small towns. This process of alleviate the burden on the transient farmers. In the resettlement will provide practical opportunities process of economic development in China, the for the development of small towns. However the transient employment of farmers will certainly be a development of small towns should not rush head- long-term process. A large number of farmers will long into mass action and "blossom" everywhere, be transferred to nonfarm employment, but the or the results will be counterproductive. There are transition to settlements in towns will occur over about 45,000 towns and townships in China, in time and will require an extended period of tran- which 19,000 are governmentally nominated town- sient employment. Conscientious research should ships. Considerations of how many small towns be conducted, and effective policies should be should be established should proceed from realistic adopted to guide and manage such a large scale and assessments of China's actual conditions and long-term population flow. national strength. Towns with better basic condi- Developing small towns is an important way to tions and development potential should be given transfer rural population and accelerate the process priority in construction. The most important pre- of urbanization in China. In the decisions adopted condition for the development of small towns is a at the Third Plenary Session of the 15th Central prosperous local economy. Committee of the Chinese Party Congress, it was Construction of small towns differs from that specified that developing small towns would be a of residential quarters. A residential district can major strategy for the development of the rural accommodate several thousand residents and has economy and society. sound living environments and complete living There are two schools of thought on the specific facilities; however, most of the residents are not ways in which urbanization should be advanced. employed within the district, that is, residential dis- The first places the emphasis on large and medium tricts have no function to create job opportunities. cities. Through a host of analyses and researches, The basic function of small towns is to attract the many scholars think that large cities can generate transferred farmers and provide job opportunities. higher economic benefits and provide a large num- Accordingly, emphasis should be laid on giving play ber of job opportunities. The second school of to functions of towns; the basic function is to create thought stresses the effect of developing small a prosperous local economy and to provide towns. Its advocates believe that the basic goal of employment. The most basic judgment on whether urbanization at the current stage is to speed up the conditions exist for constructing a town is whether transfer of rural surplus labor and rural popula- a planned town can become a source of economic tion, and these advocates view developing small growth. Only by making this judgment can we towns as a more effective means of achieving this achieve the goal of accelerated transfer of rural sur- goal. plus labor and population, provide better condi- The path to urbanization should be one with tions for agricultural and rural development, and Chinese characteristics, featuring coordinated provide more opportunities for income growth of development of large and medium cities and small farmers. 78 China and the WTO 5. Intensify the construction of ecological farmers to produce high-quality, low-residue, environment and implement sustainable devel- and safe farm produce opment. In ecologically vulnerable regions such as · adjust the existing supportive and protective those along the upper reaches of major rivers policies for agriculture and establish a domestic and arid areas, the government should provide protective system for agriculture that conforms financial aid for farmers to return grain plots to to WTO rules forestry to conduct ecological construction includ- · accelerate the innovation of agricultural man- ing re-vegetation and soil and water conservation. agement system; develop an integrated agri- Starting in 1999, experiments on returning grain cultural management system with "company plots to forestry were conducted in some provinces plus farmer households" as the main form to and regions. By the end of 2001, 11 million mu of improve farm organization and farmers' access grain plots had been returned to forestry nation- to markets wide. In 2002, the central government officially · further reform and perfect the circulation sys- adopted policies for returning grain plots to tem for grain and other major agricultural prod- forestry. The government will subsidize 300 jin of ucts to reduce circulation expenses and improve grain to farmers in the southern part of China and competitiveness 200 jin to farmers in the north for every 1 mu of · further restructure the rural financial system grain plots returned to forestry, plus RMB50 for and explore the establishment of an agricultural each mu incurred in sapling and grass seed insurance system that suits the national condi- expenses and RMB20 in living expenses. Under this tions in China policy, implementation of returning grain plots to · restructure the agricultural science and tech- forestry not only can recover balance of ecology nology research and extension systems and effectively, but it also can offer opportunities for intensify international cooperation and technol- farmers to receive direct benefits. By the end of ogy import to accelerate technical progress in 2002, the total area of returning grain plots to agriculture forestry reached 34 million mu and is expected to · reform the household registration system in small reach 100 million mu during the whole tenth Five- towns and encourage the rural population that Year Plan. has met necessary conditions to settle in small towns. Policy Orientations for Promoting Restructuring of Agriculture and Remaining Policy Issues the Rural Economy A number of policy issues needs to be examined in To promote the strategic restructuring of agricul- more detail in the future. Some of the most impor- ture and rural economy and to improve the over- tant of these issues are as follows: all quality and international competitiveness of Chinese agriculture, the government is accelerating · Correct analysis of price issues for staple agricul- a series of policy readjustments to meet the needs tural products, particularly grain, soybeans, and of current agricultural development. The main cotton. The relationship among producer prices, readjustments include the following: wholesale prices, and retail prices should be dis- tinguished, and the actual gap between prices · accelerate the establishment of market informa- for China's staple agricultural products and tion systems for agricultural products and international market prices should be analyzed provide farmers with timely, comprehensive, objectively. Monopoly still exists in the circula- accurate, and authoritative market information tion of staple agricultural products. Therefore, it on agricultural products is absolutely possible to reduce the circulation · accelerate the establishment of quality, security, expenses of China's staple agricultural products and standards systems, and improve the means by further reforming the agricultural circulation of inspection and testing for agricultural prod- system to reduce the gap between the Chinese ucts, particularly food products, guiding the and international market prices. China's Agricultural Development and Policy Readjustment after Its WTO Accession 79 · The comparative advantages of Chinese agricul- the international agricultural markets. Both tural products; labor costs give China a clear com- research and preparations for the new round of parative advantage in many animal and aquatic WTO agricultural negotiations are inadequate. products. However, given the aggravated "green The central government should set up special barriers" in international agricultural trade, low bodies to intensify research on the relevant labor costs are not enough to constitute interna- policy recommendations. tional competitiveness. The key is to find ways to produce agricultural products that meet References international quality and safety standards. At the same time, the question remains whether other "The Outline of the Ninth Five-Year Plan (1996­2000) for National Economic and Social Development and the Long- WTO members will open their markets to range Objectives to the Year 2010." Delivered at the Fifth Chinese agricultural products. Plenary Session of the 14th Central Committee of the Com- · Reforming the foreign trade system for agricul- munist Party of China. Xinhua News Agency, September 28, 1995. tural products. The key is to properly resolve National Bureau of Statistics. Statistical Yearbook of China 2002. the problems in giving nonstate firms that Beijing. China Statistics Press. have met the necessary conditions of foreign National Bureau of Statistics. Statistical Yearbook of China 2001. trade rights for importing and exporting agri- Beijing. China Statistics Press. "The Decisions of the CPC Central Committee on Major Issues cultural products. of Agriculture and Rural Work." Delivered at the Third Ple- · Both tariff concessions and tariff-rate quotas for nary Session of the 15th Central Committee of the Commu- imports of agricultural products are hard to bear nist Party of China. People's Daily. October 15, 1998. The Outline for