China's Accession to the WTO: Economic Benefits

2001 was a landmark year for China, who finally gained accession to the World Trade Organization (WTO, 2011) after 15 years of negotiations. China’s accession to the WTO has helped both the Chinese and the world economy. China’s accession resulted in astounding growth of exports, and a reduction in tariffs both on imports into China and tariffs placed on Chinese products. A burgeoning export market and looser investment restrictions led to growth in Chinese capital. The accession requirements placed upon China brought the nation into a period of greater trade liberalization, weakened state-run enterprises, and giving more power to private interests. The WTO accession agreements also caused China to make international trade law more transparent and even. Other nations have benefited from more access to Chinese markets and vice versa. This article is available in The Park Place Economist: http://digitalcommons.iwu.edu/parkplace/vol20/iss1/8 The Park Place Economist, Volume XX 13 2001 was a landmark year for China, who finally gained accession to the World Trade Organization (WTO, 2011) after 15 years of negotiations. The WTO is a multilateral trade organization whose purpose is to help trade flow freely while preventing negative side effects, as well as to serve as a place for settling international trade disputes and negotiations through unbiased legal procedures. The WTO was formed from the General Agreement on Tariffs and Trade (GATT), which was signed by 23 nations in 1947 (Fung, 2006). One of the original contracting nations was China. One of the GATT’s main topics was the most-favored-nation (MFN) clause, which gave fellow contracting nations the exact same treatment as other contracting nations, meaning no single country could gain an advantage through lighter customs rates or lower tariffs. One fault of the GATT, however, was that it lacked any mechanism for enforcing cooperation or negotiation. In 1949, only 2 years after signing the GATT, the Chinese nationalist government located in Taiwan withdrew China’s membership from the GATT (Fung, 2006). 30 years later in 1979, however, China entered a period of trade liberalization, though the Open Door Policy (Bhatt, 2004). In 1986, China submitted an application to the GATT to resume their status as a contracting party, and negotiations started (Fung, 2006). In 1995, the GATT changed its policies and renamed itself the WTO (Bhatt, 2004). Upon formation of the WTO, China requested the conversion of its status as Working Party to Full Membership. In 2001, after 15 years in total of ongoing negotiations, China was unanimously voted into the WTO (Fung, 2006). Today the WTO consists of 153 member nations and is one of the largest trade organizations in the world. China’s accession to the WTO has helped both the Chinese and the world economy. China’s accession resulted in astounding growth of exports, and a reduction in tariffs both on imports into China and tariffs placed on Chinese products. A burgeoning export market and looser investment restrictions led to growth in Chinese capital. The accession requirements placed upon China brought the nation into a period of greater trade liberalization, weakened state-run enterprises, and giving more power to private interests. The WTO accession agreements also caused China to make international trade law more transparent and even. Other nations have benefited from more access to Chinese markets and vice versa. WTO accession has led to an increase in Chinese exports, resulting in greater economic growth. Accession to the WTO gave China better market access to its 152 WTO trade partners (Bhatt, 2004). The MFN clause of the WTO agreements helps prevent discrimination against Chinese exports in other WTO nations (WTO, 2011). Greater foreign market access created a surge in the export of Chinese products. From 2002 to 2007, net exports as a share of GDP in China increased from 2.6% to 7.7% (Chen, 2009). By 2010, China’s current account balance was $305 billion (Google public data, IMF). China’s exports have primarily been labor-intensive manufactured goods due to China’s abundance of inexpensive labor (Chen, 2009). This focus on labor-intensive manufacturing shifted workers away from the primary sector towards the secondary sector (Marti, 2011). The percentage of workers employed in agriculture decreased from 50% in 2001 to 11.2% in 2010 (World Bank, 2011). Furthermore, the percent of GDP that is attributed to the primary sector decreased from 23.5% in 1994 to 11.7% in 2006 (Marti, 2011). As more labor-intensive products are manufactured, there is a greater demand for labor to continue production. This higher demand resulted in rising real wages in China across industries. From 2001 to 2006 real annual wages across industries doubled from 12,000 yuan on average to 24,000 yuan, in terms of 2007 yuan (Yang, 2010). This increase in real wages was not limited to the Chinese upper class. It included typically lowwage industries such as manufacturing and retail. China’s export market also greatly benefited from increased foreign direct investment (FDI) inflows due to accession. In the early 1990s, FDI inflows CHINA’S ACCESSION TO THE WTO: ECONOMIC BENEFITS