Turning a Page? Beijing Signs for Open Trade

By Philip Bowring - International Herald Tribune

HONG KONG - China's entry into the World Trade Organization will be a political outcome that in itself is a major contributor to world stability. But the economic consequences are as yet uncertain, and the benefits will be ery unevenly distributed. Both China and the United States need to keep quiet about the consequences of full implementation in order to mollify domestic critics.

If remaining hurdles - notably the U.S. Congress - are overcome, there is also now less chance that the next American recession will lead to China being singled out for trade punishment, with knock-on effects for world trade generally and Chinese economic reform in particular.

But for China itself, the main benefits will be long-term.

The impact from tariff cuts will, by the calculations of the U.S. International Trade Commission, be to increase imports faster than exports and cause a deterioration in China's terms of trade.

The direct economic benefits add up to just 0.9 percent of GDP. The kicker is in the assumed knock-on impact on growth from the productivity gains and better allocation of resources resulting from the combination of tariff cuts, abolition of various nontariff barriers that are especially forbidding in China, and entry of competition and foreign capital into distribution, finance and other service sectors.

These benefits could, in theory, add 4 percent to GDP growth, according to the USITC. But they would require full compliance with liberalization, not just token concessions.

They require a much more radical reduction in the role of capital-intensive state-owned enterprises and much faster opening of service sectors - banking, import/export, telecoms - than the ministry-affiliated monopolies are likely to concede. WTO commitments will be a help to economic reform in China, but domestic political considerations will still dominate the pace of change in Beijing.

While the United States hopes for broader access for its services, direct trade benefits for America are likely to be few. The main one will be in agriculture, not high technology. U.S. exports to China are likely to grow faster, in percentage terms, than imports as a result of the deal.

But the trade gap in China's favor is now so wide (from 3 to 1 to 6 to 1, depending on the method of calculation) that the deficit in dollar terms (already running at an annual rate of $60 billion, according to U.S. datawill continue to widen. So China trade will remain a hot political issue in the United States.

The bigger beneficiaries of China-trade liberalization are expected to be the developed East Asian neighbors Japan, Taiwan and South Korea, and the European Union. The nearby countries are efficient producers of intermediate products like steel, and they and the EU are suppliers of capital goods and of quality transport equipment and consumer durables that will now have a better chance to compete with inefficient local industries.

They will have better local market access for their mainland factories now producing for export, and WTO membership will give them more confidence in using China as an export platform.

The main losers are likely to be other developing countries. They will face greater Chinese competition in labor-intensive products, especially apparel, as a result of the phasing out of the current system of national quotas. Any market-oriented shift in resources within China will favor the labor-intensive industries where its comparative advantage lies. Some of these have hitherto been discouraged from export by the high cost of local materials.

China is likely to increase its share of American and European markets at the expense of the likes of Indonesia, Thailand, Mexico and Bangladesh.

Paradoxically, however, full WTO implementation would in the longer run make China less dependent on foreign trade. As its trade surplus and rising share of world trade indicate, its export industries (mostly foreign-funded) are competitive. It is the state-supported, nontraded and service sectors which are not. More efficiency there would mean higher domestic growth and thus less reliance on foreign investors to create export-led growth.

The foreigners meanwhile would at last profit from a chance to spur productivity in domestic industries. That would be good for everyone. But it may be too good to be true.