# 1. **Introduction**

China's WTO accession will have major implications for China and present both opportunities and challenges for the East Asian economies. A number of factors highlight the importance of China's deeper integration into the world economy. The Chinese economy is large in absolute terms. Purchasing power measures suggest that China is the second largest economy in the world, constituting half of the Asian economy and 11 percent of the world economy in 1996 compared to 21 percent for the U.S. (IMF, 1997).3 China's trade has grown rapidly with the share of exports almost tripling, and that of imports more than doubling over the period 1990-1996.4 In terms of merchandise trade, last year China ranked as the 7th largest exporter and the 8th largest importer in the world.<sup>5</sup> Despite the fact that China's capital account is not fully convertible, China is an important player, both as a recipient and a lender, in global capital markets. By the midnineties, China had become the second largest host country for foreign direct investment (FDI) after the U.S.,<sup>6</sup> the 8th largest capital supplier in the world and the largest one among developing countries (World Bank, 1997).7 Due to capital account restrictions, China's absorption of portfolio investment is still limited. However, China's role as a capital supplier is likely to expand given continued growth, high saving ratio and the gradual relaxation of capital controls.

With WTO accession, China will continue the process of opening its markets to other countries' exports and improving its business climate. This will lower input and transaction costs and benefit both China and its trading partners. Increased exports from China to the region will also lower the import prices of its trading partners and improve their competitiveness. However, accession will also present challenges. Countries that produce similar products will face increased competition for market share in third markets. Accession is likely to increase China's attractiveness as a destination for foreign investment, leading to concerns that investment may be diverted away from other countries in the region towards China.

The complexity of the anticipated changes in China, the lack of clarity as to what the counterfactual is, and the uncertainty associated with the policy response in China and elsewhere<sup>8</sup> make the task of assessing the impact of China's WTO accession on the East

> 3 If measured at 2001 exchange rates China is important, but not dominant. Its current income is 9 times smaller than the US GDP and accounts for only 3.7 percent of world GDP and 4.4 percent of total trade (Source: World Bank).

> 4The rapid increase in China's exports occurred over two stages - with the initial opening (1980-1985), when trade grew faster than GDP, the trade share increased from 0.7% to 2% of world trade, and with trade reform after 1987, when both trade and GDP grew and the trade share rose to 4 % in 2000. China's trade performance over the period 1970-2000 is consistent with the performance of other Asian economnies (Source: Goldman Sachs Research).

5 Source: Customs General Administration, People's Republic of China.

6It is difficult to judge the accuracy of the FDI data as they reflect 'round-tripping' investments undertaken from China to take advantage of concessions enjoyed only by foreign investors.

'These outflows do not include flows through Hong Kong (China).

8 The outcome in other East Asian countries will depend to a large degree on the trade and investment policies adopted by these countries in response to the post-accession changes in China.

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