How WTO membership made China the workshop of the world

Ten years ago this week, when China joined the World Trade Organization (WTO) and opened its economy to the world, many Chinese commentators warned that the country was "dancing with wolves," laying itself bare to attack by ravenous competitors in a foolhardy and possibly fatal misstep.

Today, the tables have turned. "Those who dance with wolves," opined an editorial in Monday's issue of the People's Daily, the ruling Communist Party's official organ, "can show a hero's mettle."

Indeed, China has become the workshop of the world, while whole industries have disappeared from America and Europe. Membership in the WTO, which sets global rules for trade and investment, has proved to be an unmitigated success for China, priming the economy for its fastest-ever 10 years of growth. Foreign businessmen, though, see a more nuanced picture.

"They've figured out how to get around the rules," says James McGregor, senior counselor with the APCO business consultancy in Beijing. "The state-capitalist system they have developed is incompatible with much of the WTO structure."

It is hard to imagine the world economy today without China in the WTO, if only because its membership reflects the fact that "China can't leave the world, and the world needs China," as deputy Commerce Minister Yu Jinhua said last month.

The WTO has "deeply integrated China into global production networks," says Scott Kennedy, who heads Indiana University's Research Center for Chinese Politics and Business. "We'd have seen a very different pattern of globalization if China had not been in [it]."

The benefits that Beijing has reaped, even at the cost of significant concessions to its trading partners during the 14 years of negotiations that led to its WTO accession, are obvious. Its trade has leapt fivefold over the past 10 years, and China is now the biggest exporter in the world and the second-largest importer, after the United States.

Most of China's success due to WTO

"Seventy percent of China's economic achievements this decade can be attributed to our membership in the WTO," says Zhang Hanlin, head of the WTO Studies Institute at the University of International Business and Economics in Beijing.

That trade boom has helped other nations, too. Chinese imports "have become a major driving force for global economic growth," argues a government white paper issued earlier this month, and created 14 million jobs abroad, Mr. Yu estimates.

Foreign companies that have invested in China have saved on costs, which has kept inflation low in consumer countries such as the US, and China has loaned more than $1 trillion of its trade surplus to Washington, allowing consumers to continue to spend.

Though millions of jobs have been lost in the West, "overall, the positive side is far better than the downside" for China's trading partners, argues Professor Kennedy.

Not that China has completely kept all the promises it made when it joined the WTO. At the top of foreign companies' complaints is Chinese firms' brazen theft of their intellectual property, which the government has failed to stop.

Microsoft chief Steve Ballmer said recently that though almost as many computers are sold in China as in the US, software piracy is so rife that Microsoft's revenues in China are just 5 percent of its US revenues.

Though the government promised last month to set up a top-level enforcement structure to protect intellectual property rights, "violations of WTO norms are still pervasive," according to a paper published earlier this year by the Peterson Institute for International Economics in Washington.

At the same time, large areas of the Chinese economy are still effectively off limits to foreign investors, such as government procurement, much of the financial sector, telecommunications, and other services – in some cases because the government has resisted passing the laws that would bring it fully into line with its WTO commitments, and in others because it does not properly enforce such laws.

More broadly, though, critics say that China has slowed the pace of its market reforms in the face of the global economic and financial crisis and built an economy very different from the free market envisioned when Beijing joined the WTO.

Native firms get many advantages

Even before the government decided to use state-owned enterprises as the main vehicles through which it pumped $586 billion in stimulus funds into the economy in 2008, Beijing was boosting "national champion" firms in key high-tech sectors. It is pursuing "indigenous innovation" policies to favor domestic industries, and the government has myriad other ways of bulking up local firms until they are ready to take on the world.

Foreign competitors complain that Chinese companies are sometimes given one or more of a range of advantages: free land, low-interest loans, cheap electricity, sneak previews of government policy before it is announced, and bids rigged to suit them.

"Many of these advantages are not quantifiable, and that makes them hard to challenge in the WTO," though they constitute illegal subsidies, says Mr. McGregor.

"There is certainly a familiar whiff of old-fashioned planned economics," agrees Robert Kapp. As the head of the US-China Business Council a decade ago, Mr. Kapp played a major role in persuading the US Congress to approve China's joining the WTO.

"But WTO rules do envision economies operating under a wide variety of regimes," he adds. "There is room for latitude," and the world is better off with China inside the WTO, he says, because the organization "is an antidote to lethal bilateral trade conflicts" and one that can resolve disputes calmly.

Indeed, China has complied with seven of the eight WTO rulings that have found Beijing at fault in trade disputes. But as it increasingly "plays along the edges of the rules," says Kennedy, it is likely to face increasing challenges from its trade partners frustrated with China's "interventionist policy that gives competitive advantage to its industry."

Holding out another carrot for China

It is that policy that has led the US and the European Union to deny China "market economy status" – a stance that makes it easier for Washington and Brussels to slap higher duties on goods they believe China is dumping on foreign markets at unfairly low prices.

Chinese Premier Wen Jiabao recently hinted that if Europe were to grant China market economy status, Beijing might be readier to help the Continent out of its economic woes. That suggestion, though so far unrequited, was a sign that inside or outside the WTO, China today has the sort of global economic clout that traditional powers cannot ignore.

Under those circumstances, says Kapp, "it is better to have the Chinese government acknowledging WTO rules than to let them act unfettered."