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Global Policy Forum - Social and Economic Policy China-EU WTO Deal
Agence France Presse
A Double-Edged Sword For Chinese Firms
May 19, 2000China's upcoming accession to the World Trade Organization will be a double-edged sword for Chinese industry, buoying up firms in foreign trade but cutting down laggards in the state sector. "In the long-run, WTO will lead to a more efficient China but over the medium-term many inefficient Chinese companies will be going down the drain especially in the petrochemical, steel and automobile sectors," said Chi Lo, regional head of treasury research at Standard Chartered.
China and the European Union inked a deal on China's WTO membership Friday, overcoming the last major hurdle of its 14-year marathon bid to join the global trading body. China now only has to seal bilateral trade deals with Costa Rica, Ecuador, Guatemala, Mexico and Switzerland before it can join the WTO -- possibly this year.
The trade concessions won by EU and US negotiators will be phased in over a number of years and can be undermined by non-tariff barriers in some sectors. Nevertheless, greater foreign competition will be a huge spur to efficiency in most industrial sectors and could result in bankruptcy for the most inefficient of China's state-owned firms
While the exact details of the Sino-EU deal are yet to emerge, the following is a brief summary of some of the winners and losers of China's accession to the WTO:
TEXTILES: China exports more textiles and apparel than any other country in the world despite the fact that these products are subject to quotas in most parts of the world. Since these trade barriers will be lowered after China joins the WTO, textile manufactures and associated industries stand to gain the most in the years to come, analysts said.
According to a study by the Ford Foundation, textile exports will increase by more than 60 percent while apparel exports will rise by over 200 percent. The snowball effect should push China's production of textiles and apparel up by 25 percent and 74 percent respectively, creating around 5 million new jobs, the study predicted.
AGRICULTURE: China's farmers are set to suffer, as quotas on agricultural imports are converted into tariffs, which will be gradually whittled down from 31.5 percent to 14.5 percent over a five-year period.
Andy Xie, China regional economist at Morgan Stanley Dean Witter sums up China's main problem with agriculture as "too many people and not enough land". Grain prices are artificially high, principally to ensure a steady supply of grain to China's cities and secondly to protect the livelihoods of China's farmers -- 60 percent of China's population still lives in rural areas.
Today, prices of domestic wheat, soybeans, corn and oil are 20-50 percent above international market prices and the production cost of grain has risen by ten percent annually for the past ten years, according to a report by Roland Berger and Partners.
Labor-intensive products such as flowers, plants, fruit and vegetables could win a share of the export market. But growing those products will be more viable for peasants in China's prosperous south, than farmers in the poorer grain-baskets of the country's north and north-east.
AUTOMOBILES: Many Chinese state-owned car producers will not survive the changes WTO will bring to China's car market because their products are highly priced and of lower quality than foreign equivalents.
Tariffs on imported cars will be slashed to 25 percent within five years from 100 percent for luxury cars and 80 percent for smaller models. Auto-leasing will be allowed and car manufacturers will be allowed to operate their own distribution and maintenance networks.
Finally, production of cars will be further liberalized, making it easier to obtain licenses to produce locally and abandoning local content requirements. The Development Research Center under China's State Council estimates that the number of firms currently operating in China's automotive industry will be reduced substantially.
BANKS: China's banks were conduits for policy-directed lending to inefficient state-owned firms until the early 1990s and bank managers were little more than party apparatchiks.
Although the government has made huge strides in cleaning up the mountain of non-performing loans weighing down China's largest banks, much remains to be done.
"WTO is a big challenge for Chinese banks. Although the situation has improved, still government policies are a very important factor in making loan decisions," said Gordon Chang, a lawyer in Shanghai writing a book on China's financial reforms.
Foreign banks will be able to take yuan deposits and make loans to Chinese firms within two years of China joining the WTO and to individuals within five years. Chinese banks have huge retail networks and have built up customer loyalty with millions of customers so foreign banks won't be able to offer an immediate challenge, according to a report by Standard and Poor's.
But over the long-term, Chinese banks will have to improve their customer service, back office operations and their ability to assess risk if they hope to compete with foreign intruders.
TELECOMS: Foreign firms will get greater access to China's telecom market on accession to the WTO, but the odds will remain skewed in China's favor for years to come, largely because of security concerns.
With tensions across the Taiwan Straits escalating and the possibility of war with Taiwan growing, China is reluctant to hand over control of its telecom sector to foreigners.
Telecom services will remain dominated by local giants, China Telecom, China Netcom and China Unicom. Some 94.4 percent of mobile phone owners subscribed to China Telecom in 1998, and the Chinese government is determined to maintain a stranglehold on the market. However, foreign firms such as Ericsson, Siemens, Nokia and Motorola have done well in China in recent years, selling telecom hardware and that market is set to grow.
The number of mobile phones in China is expected to rise from 40 million last year to 60 million by the end of 2000, 100 million in 2001 and 250 million by 2004, according to Chinese telecom sources. The Goldman Sachs Group has estimated the Chinese phone equipment market is likely to be worth 45 billion dollars in 2003 from 20 billion now. Furthermore, K.W.Lam, head of communications at French telecom giant Alcatel said foreign firms will be able to export more telecom hardware made in China once the country joins the WTO.
INSURANCE: Foreign insurance firms are set to gain as China will open more than a dozen more cities to foreign life insurers after joining the WTO and has agreed to grant licenses on prudential criteria alone. Currently, there are only 13 foreign firms with licenses to operate in China and they are limited to Guangzhou, Shanghai, Foshan and Shenzhen.
To date, insurance licenses have been granted on a country-by-country basis as rewards for political good behavior and insurers agree that WTO membership should take a lot of the politics out of the business.
However, there will not be an overnight revolution. Hans Jorg Probst, chief representative of German insurance giant Allianz, said "there may have to be a period of adjusting the legal framework to WTO conditions for a year or two.
He said he doubted whether the number of foreign insurers in China would dramatically increase in the near future. Over the long-haul though, China needs foreign insurance firms for know-how and technology transfers and to attract large foreign-investment projects. Both foreign and Chinese firms stand to gain as the industry grows.
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