December
17, 2001
REALITY
CHECK: Could
China Have Picked a Worse Time to Join the WTO?
by Dan Ewing
After fifteen years of arduous negotiations, China finally joined the World Trade Organization (WTO) when the National People's Congress ratified membership on Tuesday. But the celebrations are already winding down and China's leaders will soon confront the harsh realities of accession. With the global economy slipping downward more quickly after September 11, a major domestic leadership succession on the horizon, and diverging income equality, Beijing may wish that it could have joined the trade group at a more hospitable time. Indeed, China almost joined the GATT in 1988 and came close on other occasions. This may be a particularly bad time to throw open the doors of the Chinese economy to a storm of foreign competition.
The changes imposed on China by the WTO will themselves have wrenching social and economic consequences. Foreign corporations will compete fiercely in a broad range of sectors from insurance to distribution services. A flood of cheap high quality American produce could hit China’s agricultural sector, which employs half of the nation’s workforce. Job losses in this sector alone are estimated to reach 10 million people. China's rickety banking system, dependent on a steady stream of local savings, will compete against the slickest global players.
As if these changes weren't hard enough, China is confronting a rare synchronized global recession. The world's major economic engines - the U.S., Europe, and Japan - are all reporting disappointing figures, and the International Monetary Fund has cut its world GDP growth forecast to just 2.4 percent. Global investment flows are plunging and stagnant world trade has slowed China's trade growth from nearly 28 percent last year to only 5 percent this year. The lost export revenue will dampen job creation. Although the economy is growing faster than other nations, China’s expected seven percent growth rate for 2001 is it’s lowest in a decade.
The People's Republic also faces political stresses at home. China will experience a senior leadership succession for only the third time in its fifty-two year history. Over the next two years - right in the middle of the WTO phase-in period - Jiang Zemin will retire from his positions as President and General Secretary of the Communist Party. Five of the seven members of the Politburo Standing Committee (China's highest leadership group) are also expected to step down. New blood may be good for long run political stability, but it comes at a precarious time. Jiang and Zhu Rongji - China's two top reformers - will likely relinquish formal power. As Mao Zedong and Deng Xiaoping’s successions indicate, leadership transitions are a turbulent time for China's personality-driven political structure. Who knows how Hu Jintao, who is expected to take over China’s reins, will react when the WTO honeymoon is over and the country is wrestling with the most profound social and economic changes since 1978?
Compounding the political uncertainty, social instability is rising in China as well. That instability stems from three developments that WTO membership and economic dislocations could exacerbate. First, unemployment will surely grow in the coming years as competition pressures inefficient sectors. Second, the shift toward more competitive industries will increase income inequality. Third, as the rural economy contracts and urban centers thrive, the 'floating population' – now 100 million or so rural workers roaming cities looking for employment - will increase, aggravating social tensions and straining public resources.
Because of these unfavorable global, political, and social conditions, China's leaders may wish they were joining during more tranquil times. But, Beijing has reason to believe that their negative effects on development will be mitigated. Although some changes are immediate, many WTO commitments will be phased in over a five-year period with some of the more significant changes occurring in 2006. In addition to giving Beijing time to adjust, this delay may provide sufficient time for the world economy to recover from its current slump. Thus, China's economy may be opening most when the world economy is growing again.
Next, foreign investment in China will continue to be a major economic catalyst. Not only does it bring foreign technology and management expertise, it also helps boost productivity and fuel growth. Although total global foreign direct investment levels have plunged 40 percent this year, China is one of only two of 2000’s top twenty five recipients of foreign direct investment to increase its investment levels in 2001. Moreover, the opening of previously restricted industries to foreign ownership under WTO rules will expand inflows of productive capital.
Lastly, China's leadership has been preparing for these challenges for years. Yes, the changes will be difficult. But the government has pushed this process forward because it believes that joining the global economy is in China's long-term national interest. For China’s leaders, WTO is a crowbar that will leverage further domestic reforms. Though likely out of office in a few years, Jiang Zemin and Zhu Rongji will remain influential and committed to economic reform. From their perspective, China cannot retreat from its obligations and the fourth generation of leaders will have to see them through.
(Dan Ewing is
Assistant Director of Chinese Studies at The Nixon Center.)
