[asia-apec 1697] China's Liberalization

[Aaron James]

Specific WTO demands for China's agriculture and textile sectors, Part II 
This second piece in a two-part series explores in-depth how WTO accession
will affect tariffs and exports in a few of China’s most important sectors.

By William Martin, Elena Ianchovichina and Emiko Fukase
The World Bank

(13 December 2000) A comprehensive assessment of the implications of
accession for trade barriers requires a comparison of the protection
prevailing after accession to what would have prevailed in the absence of
accession.

Given the rapid changes in China’s protection rates since the early 1990s,
it is obviously not clear what the counterfactual rate of protection would
have been. In general, we assume that the rate of protection applying in
1997 would have continued to apply in the absence of accession.

We then estimate the protection applying after accession as the lesser of
the initial applied rate and the bound rates of protection agreed in the
WTO. In agriculture, we need to take a more careful look at the situation
for those products subject to Tariff Rate Quotas (TRQs).

The reform scenario

Following accession to the WTO, China will retain the tariff rate quota
system for a small set of agricultural commodities: wheat, corn, rice,
oilseeds, sugar, wool and cotton. Other products will be subject to a pure
tariff system.

China has agreed not to use export subsidies, although it could presumably
levy export taxes on some commodities. Thus, the only protection that China
will be able to provide to its agricultural sector will be that provided
through tariffs; protecting export-oriented commodities will be ruled out.

The protection to an importable commodity by a tariff rate quota system
depends critically on whether import demand at the in-quota tariff rate is
above or below the TRQ level.

If import demand falls below the TRQ level, imports are subject to the
in-quota tariff. If imports exceed the TRQ level, they are subject to the
out-of-quota tariff. 

The most important impact of WTO accession is on China’s output of apparel:
production rises by 263.5 percent.  

>From analysis of various figures, it is clear that there has been a
consistent upward trend in import levels of each of the aforementioned
commodities, with considerable volatility around this trend. Whether the
in- or out-of-quota tariff applies depends on whether the volume of imports
exceeds the quota. 

Some numbers highlight the substantial nature of the tariff offer for
industrial products. On average, tariffs on imported manufactures in China
drop from 24.27 percent to about 7 percent.

Protection of textiles and apparel products fall dramatically (from 57.1
percent to 9.39 percent), as does protection of automobiles (from 129.1
percent to 13.7 percent), electronics (from 21.69 percent to 3.44 percent),
and petrochemicals (from 20.17 percent to 6.94 percent).

The sharp decline in protection of electronics is undoubtedly related to
China’s agreement to implement the Information Technology Agreement as part
of its accession package. The actual reduction in protection of the
automobile sector is even larger than is suggested by these tariff results,
since quota protection to this sector is also to be phased out.

Overall, China’s offer lowers the weighted average tariff protection on
imports to the country from 21.41 percent to a mere 7.85 percent.

Growth in the work force

China’s economy seems likely to continue growing at a relatively high rate
in the early years of the new century, and this process of growth will
cause substantial changes in the composition of output.

In addition, the liberalization associated with WTO accession is likely to
have important implications for the structure of output, and the
orientation of production between domestic and international markets.

To evaluate the impact of the latest available offer (which is based on the
November 1999 agreement with the United States), we assess the likely
future growth in China’s economy.

The rate of growth in the work force in China is projected to slightly
outpace the growth of the population over the projection period, although
not greatly because much of the demographic dividend1 resulting from the
sharp decline in the Chinese birthrate has now passed.

Most important for the growth and structure of the economy are the very
high projected growth rates for skilled labor and for physical capital.
This augmentation of physical and human capital can be expected to have
profound implications for growth and structural change.

There is some uncertainty regarding the estimated growth rate for skilled
workers, and this element of the projection may require revisiting.

Projected increases for exports

Under the baseline scenario for textiles, tariff rates on all industrial
products are held constant, and the Multifiber Agreement (MFA) quotas are
projected to grow at the rates determined in each country’s agreements.

Tariff rates on agricultural products are also held constant, in line with
the move to tariffication in the Uruguay Round. Since the MFA quota growth
rates for WTO members are subject to quota growth rate acceleration but
those for nonmembers such as China are not, the MFA quota growth rates
become an increasing burden for China in the absence of WTO accession.

The implications of China’s liberalization due to accession and its growth
till 2005 provide the basis for a number of interesting conclusions. The
first one is the rapid growth in China’s shares of world output and exports
even in the absence of WTO accession.

Without accession, China’s share of world output is projected to increase
between 1995 and 2005 from 3.38 percent to 5.26 percent, and its share of
exports from 3.71 percent to 4.78 percent.

While the accession offer has almost no impact on the share of output, it
has an enormous impact on the share of trade. With the implementation of
the accession offer, China’s share of world export markets rises to 6.76
percent, and of world import markets, to 6.61 percent.

Textiles

At the sectoral level, the most important impact of accession is on China’s
output of apparel. Production of apparel rises by 263.5 percent over the
same 10-year period, compared to 57 percent in the baseline. It also
results in an increase in China’s share of world output of apparel, from
8.84 percent in the baseline to 20.10 percent in the case of accession.

This share rises dramatically because of the lifting of the burdens imposed
by the MFA on China’s exports, and by China’s protection on the cost
structure of the industry. China’s apparel exports also increase
dramatically rising by 375 percent over the decade, compared to 45 percent
in the case of no accession, for the same reason. 

As a result China’s share of world export markets for apparel also
increases substantially, to more than 47 percent. The expansion of the
apparel sector stimulates input demand for imported textiles, which
increase by 272 percent by 2005. 

How other sectors fare

The automobiles sector, and a number of high-tech sectors, experience very
substantial increases in their exports under the accession scenario, as
their costs are reduced following liberalization. Despite this increase in
exports, the output of the automobiles sector contracts in the case of
access, as protection to this sector falls dramatically as well.

The projection results suggest that between 1995 and 2005 the wages of
unskilled workers in China are going to grow twice as fast as the wages of
skilled workers. This is expected given China’s growth of unskilled labor
over the same period is 12 percent compared to 43 percent for skilled labor.2

The expansion of the wearing apparel sector under accession is projected to
increase demand for labor in China over the decade. Other big employers of
both skilled and unskilled labor under accession include agriculture,
extractive industries, electronics and construction.

The high-tech sectors among which petrochemicals and other manufactures are
projected to increase demand for skilled labor only. The increase in demand
for labor under accession translates into a slightly higher growth in wages
under accession compared to the baseline.

It is likely that this slight strengthening of the market for labor would
have favorable impacts on inequality and poverty.3 

Agriculture

On the import side, China becomes a much bigger market for its trading
partners following accession to the WTO. Despite the fact that China’s
protection of the agricultural sectors is assumed to remain largely
unchanged, China increases its agricultural imports of oilseeds, meat and
various food products.

This increase in the importance of agricultural imports reflects the strong
shift in comparative advantage away from agriculture implied by the
baseline growth scenario. This structural change is an outcome of
successful economic development.

It is also a sign of improved food security of the population in the sense
of people’s ability to acquire the food they need. It is associated with
growth in agricultural production in addition to positive growth in
agricultural imports and a decline in agricultural exports.

Conclusions

The trade reforms associated with China’s accession to WTO are part of a
long-term movement to greater openness and integration into the world
economy. Their full effects can only be understood if they are considered
in the context of China’s existing trade policies, and particularly the
important duty exemptions provided for processing trade.

China has committed to make substantial reductions in the tariffs applying
on manufactures trade—a set of reductions that we estimate will reduce the
weighted average tariffs applied on these products from 24 percent in 1997
to 7 percent after the accession commitments are fully phased in.

In agriculture, it is much more difficult to ascertain the extent of any
liberalization. In the long run, however, it is likely that accession will
help China retain an efficient agricultural sector. Another important
aspect of liberalization will be the phase-out of the MFA quotas that have
hampered China’s textile and clothing sector.

With accession, China’s share of world exports rises from 3.7 percent in
1995 to more than 6.8 percent. While accession has a large impact on
China’s export shares, its effect is smaller than it was in earlier
analyses where we had omitted the effects of duty exemption schemes in the
base.

At the sectoral level, the most important impact of accession is on the
apparel market, where China increases its share of world export markets to
47 percent. While enormous, this is much smaller than estimates obtained
previously without taking the implications of tariff exemptions into account.

In our analysis, accession appears to have favorable impacts on the demand
for both skilled and unskilled labor. This follows from the expansion of
labor-intensive sectors such as clothing, modest expansions in some
labor-intensive agricultural sectors such as meat production.

Due to further lowering of the trade distortions under the new offer,
China’s gains from joining the WTO will be magnified as a result of the
improved efficiency of the Chinese economy and increased investment flow
into the region.

 

Click here to read Part I of "Specific WTO demands for China's agriculture
and textile sectors."

 

About the author:

William Martin is the acting research manager at the World Bank Group,
where his current responsibilities include managing research on trade
policy issues. He can be reached at Wmartin1 at worldbank.org. This paper was
prepared and presented for the World Bank’s discussions on the WTO and is
reprinted here with the authors’ permission. 

 

Notes:

1.Bloom, D. and Williamson, J. G. 1998. "Demographic transitions and
economic miracles in emerging Asia," World Bank Economic Review, 12(3):419-56.

2. Ahuja, and Filmer, D. 1995. "Educational attainment in developing
countries: New estimates and projections disaggregated by gender," Policy
Research Working Paper 1489, World Bank.

3. Wang, Zhi and Fan, Zhai 1998. "Tariff reduction, tax replacement, and
implications for income distribution in China," Journal of Comparative
Economics 26:358-87.

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