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The author wishes to thank Hans Peter Lankes, Thomas Rumbaugh, Nicolas Blancher, Ali Kutan, and Yiping Huang for their helpful comments. Warwick McKibbin and Wing Thye Woo’s prompt clarification of their simulation results is greatly appreciated. Mary Jo Marquez provided excellent editorial assistance.
Makin (1997), Bergsten (1997), and The Economist (1997) are among those who share this view. Diwan and Hoekman (1999), Fernald and others (1999), Parker and Lee (2000), and Loungani (2000), among others, disagree with this view.
For a summary of this debate, see “China Is Becoming the World’s Manufacturing Powerhouse,” Transition Newsletter, available on the Internet at http://www.worldbank.org/transitionnewsletter/octnovdec02/pgs4-6.htm.
See Supachai and Clifford (2002) for a detailed account of the concerns. The concerns over a possible devaluation of the renminbi following WTO accession turned out to be unfounded. One would expect that China’s trade liberalization would result in downward pressure on the value of the renminbi in the short run as prices of foreign goods fall relative to domestically produced goods (Rees and Tyers, 2002). Empirical evidence shows that import growth tends to outpace export growth in the first two years of accession to the General Agreement on Tariffs and Trade (GATT) and WTO, but the long-term effect on the trade balance is uncertain (Li and Li, 2000). Contrary to this theoretical and empirical prediction, the renminbi has been under pressure to revalue since China’s WTO accession, in part owing to increased FDI inflows. The exchange rate issue will not be further discussed in this paper.
Inlcude Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central Afr. Republic, Chad, Comoros, Congo, Democratic Rep. of, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, The Gambia, Guinea, Guinea-Bissau, I Iaiti, Kiribati, Lao, PDR, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Samoa, Sao Tome & Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Tanzania, Togo, Tuvalu, Uganda, Vanuatu, Republic of Yemen, and Zambia.
The trade-GDP ratio is much lower if China’s GDP is valued on a purchasing power parity (PPP) basis.
This number is likely to have been overstated as “round-tripping” FDI is a prevalent problem.
It is beyond the scope of this paper to evaluate China’s implementation of its commitments, whose first annual reviews were completed by the WTO in late 2002 under the transitional review mechanism.
Under the Uruguay Round Agreement on Agriculture, domestic support of up to 5 percent of the value of total agricultural production may be exempt from reduction commitments. For developing countries, this so-called de minimis threshold is 10 percent.
Under the ITA, developed country participants must eliminate all tariffs on specified IT products by January 1, 2002, and developing country participants may have an extended deadline of 2005 for at least some products.
The terms of WTO accession are the outcomes of negotiations between the acceding member and the existing members, and hence may not be consistent with general WTO principles or provisions.
There are already many studies of the impact on developed countries of China’s accession to the WTO and trade liberalization in general, and almost all of these studies conclude that developed countries will benefit. See OECD (2001) for a survey. The discussion here therefore focuses on the impact on developing countries.
Anecdotal evidence suggests that there have been sharp increases in China’s demand for agricultural and other commodities from Latin America. See the Financial Times, September 26 and 29, 2003.
Similar terms of trade effects will be felt in the world agricultural market as China’s imports increase.
There have been sharp increases in Chinese exports of products for which quotas were removed in 2002 under the Agreement on Textiles and Clothing (ATC). At the same time, many developing countries suffered export losses in these products. Also see IMF and World Bank (2002) for the adjustment issues facing developing countries arising from the liberalization of the textile and clothing sector.
The standard GTAP model and its corresponding databases were developed under the Global Trade Analysis Project at Purdue University (Hertel, 1997). Database version 5 is documented in Dimaranan and McDougall (2002). The model is run using GEMPACK.
There is also an issue of the benchmark against which the impact of China’s accession to the WTO is measured. While the results in the table show the effects of removing quotas facing Chinese exporters only after those facing other developing countries have already been removed, other available results may be calculated assuming simultaneous removal of MFA quotas on all developing countries, including China. The latter approach will show a smaller increase in China’s exports, and changes in other countries’ exports may differ from those in Table 2 depending on the extent of restriction they currently face.
Some ASEAN countries, especially Singapore and Thailand, are net investors in China. They should benefit from likely increases in returns on their existing and new investment in China.
Tan (2001), however, offers a contrary view. Based on historical correlations between FDI flows to China and Asian newly industrialized economies, he claims that FDI flows to China and other Asian economies have been complementary rather than competing.
Oxford Analytica, “South-East Asia: China Challenge,” January 8, 2002.
Small GDP declines of the magnitude in the first two scenarios may not translate into welfare losses. The falls in GDP result primarily from investment relocation to China. Increased foreign investment in China raises the income of capital-exporting countries. Such results are shown by Walmsely and others (2001).
These are mostly traditional CGE models of the real economy, with Rees and Tyers (2002) and McKibbin and Woo (2003) being notable exceptions.
Notwithstanding the differences in model structure, the simulation underlying the results presented in Table 4 is equivalent to the “FDI diversion” case in the McKibbin and Woo (2003) study except that it includes the effects of removing MFA quotas, which account for the bulk of the negative effects on other developing countries. As in the McKibbin and Woo simulation, the risk premium in China is assumed to decline by one percentage point as a result of WTO accession. Data on tariff reductions are based on Deutsche Bank (2001). It is assumed that China’s tariff-rate quotas will be filled. See Martin (2002) for the likelihood of such an outcome. Also see Ianchovichina and Martin (2001) for how simulation results might be affected by explicitly incorporating processing trade in the model.
A similar set of results using the same model but incorporating productivity changes and excluding risk premium shocks is reported in Dorsey and others (2003).
See Sumiya (2000) and Balassa (1988) for detailed analyses of changes in Japan’s trade patterns after World War II. Krause and Sekiguchi (1976) provides an overview of Japan’s economic relations with the rest of the world from the 1950s to 1970s.
Of course, WTO accession is also likely to accelerate factor accumulation and technological progress. This effect should again be comparatively small.
Technically, the simulations involve exogenously reducing the size and openness of the Chinese economy to its 1975 levels relative to industrial countries and comparing the resulting counterfactual equilibrium with the actual global economy in 1995. The exogenous shocks include those to primary factors, commodity composition of trade, trade-GDP ratio and implied capital account changes, global transport cost, and industrial country trade policy. For further details, see Yang and Vines (2000).