Information about Asia and the Pacific Asia y el Pacífico
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II International Trade and the Challenges of WTO Accession

Author(s):
Eswar Prasad
Published Date:
June 2004
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Information about Asia and the Pacific Asia y el Pacífico
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Thomas Rumbaugh and Nicolas Blancher 

China’s integration with the global economy is reflected in its rapidly growing role in international trade. China’s exports and imports have grown faster than world trade for more than 20 years. While dramatic, thus far this is not an unprecedented event and is similar in magnitude to the surges in trade associated with earlier integration of other rapidly developing economies into the global trading system. As China’s trade with the rest of the world has deepened, the composition and geographical pattern of its trade have also shifted. The share of imports by industrial economies accounted for by China has increased and exports to these markets have become more diversified. China has also become increasingly important within the Asian regional economy. Vertical specialization of production within Asia has led to an increasing share of China’s imports coming from within the region. This, together with increasing imports for domestic consumption, has made China among the most important export destinations for other Asian countries.

Trade reforms and commitments made as part of the World Trade Organization (WTO) accession agreement have been crucial in promoting China’s integration with the global trading system. These reforms, which took place over a 15-year period, have included substantial tariff reductions and the dismantling of most nontariff barriers (NTBs). Improved market access following WTO accession has also been important. While continued implementation of WTO commitments in the coming years will further facilitate China’s ongoing integration with the global economy, it may also pose significant challenges for the authorities. Moreover, the extensive safeguards provisions under the WTO agreement represent a downside risk that could constrain China’s export growth in the future.

China’s Impact on Trade Patterns

Increasing Role in World Trade

China’s international trade has expanded steadily since the opening of the economy in 1979. This process began relatively slowly in the 1980s after the relaxation of pervasive and complex import and export controls, but accelerated in the 1990s with broader trade reforms, including significant tariff reductions. Both imports and exports have increased rapidly, and China’s share in world trade has grown steadily since 1979 (Figure 2.1).1 China has also increased its penetration into advanced country markets, and has simultaneously become a more important export destination, especially for regional economies (Tables 2.1 and 2.2). While the share of developed country imports accounted for by China has risen over the last two decades, China’s role in Asian regional trade has also become increasingly important. Imports from the region are growing rapidly, and China is now among the most important export destinations for other Asian economies (Figure 2.2 and Table 2.3).

Figure 2.1.Growth in Trade1

(Index, 1970 = 1)

Source: IMF, Direction of Trade Statistics.

1 Based on the value of merchandise exports (f.o.b.) and imports (c.i.f.) in U.S. dollar terms.

Table 2.1.Market Share in Major Export Markets(Imports from China divided by total imports, in percent)
1970198019901995200020022003
Japan1.43.15.110.714.518.318.5
United States0.00.53.26.38.611.112.5
European Union10.60.72.03.86.27.58.9
Source: IMF, Direction of Trade Statistics.

Excluding intra-EU trade.

Source: IMF, Direction of Trade Statistics.

Excluding intra-EU trade.

Table 2.2.Sources of Imports(As a percent of China’s total imports)
198019901995200020022003
Asia15.041.047.153.553.152.8
ASEAN3.45.67.49.310.411.3
Japan26.514.221.917.818.118.0
Korea0.47.810.09.710.4
Taiwan Province of China11.211.312.912.9
European Union15.817.016.113.313.112.9
United States19.612.212.29.69.28.2
Sources: IMF, Direction of Trade Statistics; and CEIC database.
Sources: IMF, Direction of Trade Statistics; and CEIC database.

Figure 2.2.China’s Trade with the Region1

(In percent)

Source: CEIC database.

1 Region comprises Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, and Taiwan Province of China.

Table 2.3.Exports of Selected Economies to China(In percent of their total exports)
1980198519901995200020022003
Japan3.97.12.15.06.39.613.6
Korea0.00.00.07.010.714.720.5
Hong Kong SAR6.326.024.833.334.539.342.7
Singapore1.61.51.52.33.95.57.0
Indonesia0.00.53.23.84.55.17.4
Malaysia1.71.02.12.63.15.610.8
Philippines0.81.80.81.21.73.912.0
Thailand1.93.81.22.94.15.27.1
India0.30.30.10.91.84.26.4
European Union10.81.81.22.22.73.44.2
United States1.71.81.22.02.13.23.9
Germany0.61.20.61.51.62.22.6
Source: IMF, Direction of Trade Statistics.

Adjusted for intra-EU trade.

Source: IMF, Direction of Trade Statistics.

Adjusted for intra-EU trade.

While a landmark development with implications for both the global and regional economies, China’s integration with the world economy thus far is not unprecedented in either its scope or speed. The earlier experiences of Japan and the newly industrialized economies of Asia (NIEs)2 were similar in terms of their rate of growth of exports as well as with respect to their increasing share in world exports over an extended period. Measuring export growth in U.S. dollars at constant prices shows that Japan, Korea, some member countries of the Association of South-East Asian Nations (ASEAN), and other NIEs maintained double-digit export growth rates on average for about a 30-year period. In fact, China’s exports have grown at a slower rate than the earlier experiences of these countries (Figure 2.3). This historical evidence, together with the still substantial development potential of the country, suggests that China could maintain relatively strong export growth for a number of years going forward.

Figure 2.3.Exports of Selected Economies1

(Index, beginning of period = 1; log scale)

Source: IMF, Direction of Trade Statistics.

1 Annual exports in U.S. dollars deflated by the U.S. GDP deflator. Newly industrialized economies include Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.

Looking at the extent of penetration of key industrial country markets yields similar results. Using the U.S. market as an example, China currently accounts for 12 percent of U.S. imports compared with 9 percent for Japan and 3 percent for Korea. However, both Japan and Korea accounted for larger shares of U.S. imports in the past with Japan’s share increasing steadily in the 1960s and 1970s, peaking at 22 percent in 1986. While Korea had the fastest export growth rate sustained over a 35-year period, because of its smaller size (relative to China and Japan), its import penetration of the U.S. market was not as pronounced. Still, Korea’s share of U.S. imports reached 4½ percent in the late 1980s before declining slightly in recent years.

The extent of penetration of the U.S. import market can also be seen by looking at U.S. imports at the Standard International Trade Classification (SITC) 2-digit level, where the number of product categories in which China had more than a 10 percent share of U.S. imports increased from 5 in 1990 to 16 in 2002. However, during the earlier periods, Japan’s penetration of the U.S. market was even more pronounced, while Korea’s was somewhat less. In 1962, Japan accounted for more than 10 percent of U.S. imports in 23 product categories at the 2-digit level and this level of import penetration was largely maintained throughout the 1970s before beginning a gradual decline to only 8 product categories in 2002. For Korea, the number of product categories that accounted for more than 10 percent of U.S. imports increased from 0 in the 1960s to 4 in the 1970s and 1980s before declining again to only 1 product category by 2002.

Changes in the Composition of Trade

China’s export base has become diversified from an initial heavy reliance on textiles and other light manufacturing. In the early 1990s, light manufacturing accounted for more than 40 percent of China’s exports. These products largely consisted of footwear, clothing, toys, and other miscellaneous manufactured articles. A large part of the remaining exports was accounted for by manufactured goods (mostly textiles) and machinery and transport (small electronics). In recent years, China has made substantial gains in other export categories, including more sophisticated electronics (office machines and automated data processing equipment, telecommunications and sound equipment, and electrical machinery), furniture, travel goods, and industrial supplies. For example, the proportion of China’s exports represented by machinery and transport (which includes electronics) increased from 17 percent in 1993 to 41 percent in 2003, while the share of miscellaneous manufacturing declined from 42 percent to 28 percent.

Statistical indicators of dispersion illustrate an increase in overall export diversification. Detailed data on China’s exports at the 2-digit SITC level are available only from 1994. The Herfindahl index and the coefficient of variation (which measure changes in the dispersion of export shares across categories) both indicate a significant increase in diversification between 1994 and 2000, while there was little change or even a marginal reversal during 2000–02 (Table 2.4). More extensive information available from detailed U.S. import data is also consistent with increased diversification of exports based on changes in the share of U.S. imports accounted for by China. These data also show a significant increase in diversification between 1990 and 2000 at both the 2-digit and 3-digit levels (Table 2.5).

Table 2.4.Indicators of Export Dispersion

(Share of total exports by SITC 2-digit)1

199420002002
Coefficient of variation21.911.721.79
Herfindahl index30.0730.0620.066
Sources: CEIC; and IMF staff estimates.

A lower number indicates more diversification (i.e., less dispersion in shares of each category in total exports).

Coefficient of variation (standard deviation relative to sample mean).

Herfindahl index (sum of squared export shares).

Sources: CEIC; and IMF staff estimates.

A lower number indicates more diversification (i.e., less dispersion in shares of each category in total exports).

Coefficient of variation (standard deviation relative to sample mean).

Herfindahl index (sum of squared export shares).

Table 2.5.Measures of Dispersion of Exports to the United States1(Based on share of U.S. imports by SITC classification)
1990199520002002
SITC 1-digit
CV21.391.571.381.32
H30.420.420.380.37
SITC 2-digit
CV1.881.861.701.61
H0.120.110.090.09
SITC 3-digit
Category 6
CV1.481.321.151.15
H0.080.070.060.07
Category 7
CV2.001.501.411.23
H0.120.080.090.10
Category 8
CV1.101.061.050.95
H0.130.130.130.12
Total 6, 7, 8
CV1.611.481.301.20
H0.070.060.050.05
Sources: CEIC and World Integrated Trade Solution databases.

A lower number indicates more diversification (i.e., less dispersion in shares of each category in total exports). Categories 6, 7, and 8 refer to basic manufacturing, machinery and transportation, and miscellaneous manufacturing, respectively.

Coefficient of variation (standard deviation relative to sample mean).

Herfindahl index (sum of squared export shares).

Sources: CEIC and World Integrated Trade Solution databases.

A lower number indicates more diversification (i.e., less dispersion in shares of each category in total exports). Categories 6, 7, and 8 refer to basic manufacturing, machinery and transportation, and miscellaneous manufacturing, respectively.

Coefficient of variation (standard deviation relative to sample mean).

Herfindahl index (sum of squared export shares).

The composition of imports reflects a high degree of vertical specialization of production within the Asia region. This can be seen from several indicators. First, a high share of imports for processing is embodied in China’s exports. The ratio of imports for processing to total imports increased from about 35 percent of all imports in the early 1990s to about 50 percent by 1997 and has remained at about that level since. Similarly, imports for processing are estimated to be embodied in over 40 percent of China’s exports. The impact of increased vertical specialization can be clearly seen in the rapid increase in imports of electronic integrated circuits and microassemblies—key components used in the assembly of electronic products (Figure 2.4). Second, strong FDI inflows in China have come increasingly from countries in the region, especially the NIEs. During 2000–2002, NIEs plus Japan accounted for about 60 percent of the FDI in China, with the United States and Europe accounting for about 20 percent. Finally, the pattern of trade has changed substantially with increasing imports from Asia and a corresponding increase in exports going to developed economies, largely the United States and Europe.

Figure 2.4.Trade in Electronic Products: Monthly Imports of Electronic Components

(In millions of U.S. dollars; three-month moving average)

Source: CEIC database.

Changes in Regional Trade

China’s trade has been growing rapidly, with imports from nearly all trading partners growing at double-digit rates. Over the last two years (2002–2003), imports from Asia in U.S. dollar terms have increased at an average annual rate of 36 percent, while imports from Europe and the United States increased by average rates of 20 percent and 14 percent, respectively. On the export side, the average growth rates to industrial economies have been greater than within the region; exports to the United States and Europe grew at an annual rate of 31 percent and 33 percent, respectively, and exports to Asia by 26 percent. While processing trade is an important contributor to the growth in imports from the region, imports for domestic consumption are also increasing rapidly. As a result, China’s imports from other parts of the world are increasing dramatically. For example, in 2003, imports increased by 81 percent from Latin America and 54 percent from Africa, and China is now the third largest importer of developing country exports after the United States and the European Union.

While China’s overall trade balance did not change significantly during 2001–2003, these changes in regional trade patterns caused a significant shift in bilateral trade balances. China’s trade surplus with the United States and the European Union increased significantly from 1997 to 2002, but this was offset by an increasing trade deficit with the rest of Asia. These trends continued in 2003 as the deficits with Asian countries continued to increase, producing a decline in China’s overall trade surplus, to $25 billion, compared with $30 billion in 2002 (Table 2.6). Adjusting for the large volume of China’s trade that transits through Hong Kong SAR does not change this basic conclusion.3

Table 2.6.China’s Bilateral Trade Balances with Selected Economies(In billions of U.S. dollars)
China plus Hong Kong SAR1China
199720022003199720022003
United States417488164355
European Union9182951018
Japan14-18-303-5-14
Korea-12-19-30-6-13-21
Taiwan Province of China-24-42-51-13-31-37
Hong Kong SAR374861
ASEAN-10-18-300-8-15
Others6-7-11-1-13-22
Total-4-12-35403025
Source: CEIC database.

By taking mainland China and Hong Kong SAR together, this measure includes imports and exports to the mainland that are intermediated through Hong Kong SAR. During 2002–2003, Hong Kong SAR intermediated about 22 percent of the mainland’s trade.

Source: CEIC database.

By taking mainland China and Hong Kong SAR together, this measure includes imports and exports to the mainland that are intermediated through Hong Kong SAR. During 2002–2003, Hong Kong SAR intermediated about 22 percent of the mainland’s trade.

WTO Accession: Commitments, Opportunities, and Risks

China’s Commitments and Compliance

The tariff reductions planned by China in the context of its WTO accession are largely the continuation of a long-standing trend. This trend is reflected in the decreasing level and dispersion of tariffs and the continued reduction in NTBs, especially since the early 1990s (Table 2.7). Past reforms also introduced widespread import tariff exemptions, especially for processing trade and foreign investment and, therefore, a majority of China’s imports were in effect not subject to any tariffs in 2000. Under its WTO commitments, China will further reduce its average tariff rate to 10 percent by 2005 (Box 2.1). Overall, under the WTO agreement, its trade regime will be increasingly tariff-based and more transparent.

Table 2.7.Tariffs
Unweighted Average1Weighted Average1Dispersion (SD)Max
198255.6
198543.3
198843.7
199144.1
199242.940.6220.0
199339.938.429.9220.0
199436.335.527.9
199535.226.8220.0
199623.622.617.4121.6
199717.616.013.0121.6
199817.515.713.0121.6
200016.4
200115.39.112.1121.6
200212.36.49.171.0
Sources: Chinese authorities; United Nations Conference on Trade and Development; World Bank; WTO; and IMF staff estimates

The unweighted average is based on a simple average of the statutory rates for the relevant year. The weighted average is based on the statutory rates weighted by the value of imports in each category.

Sources: Chinese authorities; United Nations Conference on Trade and Development; World Bank; WTO; and IMF staff estimates

The unweighted average is based on a simple average of the statutory rates for the relevant year. The weighted average is based on the statutory rates weighted by the value of imports in each category.

In contrast with the continuity in tariff reductions, China’s recent commitments on trade in services and other trade-related activities represent milestones.4 Plans include the opening of key services sectors where foreign participation was previously nonexistent or marginal, notably telecommunications, financial services, and insurance. In those sectors, full access will eventually be guaranteed to foreign providers through transparent and automatic licensing procedures. China will also remove restrictions on trading and domestic distribution for most products. Apart from market access, China made major commitments on trade-related activities, such as national treatment and nondiscrimination principles, and with respect to Trade-Related Investment Measures (TRIMs) and Trade-Related Aspects of Intellectual Property Rights (TRIPs). Compliance with such commitments is likely to have far-reaching implications domestically, including by encouraging greater internal integration of domestic markets (through the removal of inter-provincial barriers). Moreover, the commitment to comply with the principles and rules of the international trading system will improve the transparency of the domestic policy environment.

A special WTO procedure, the Transitional Review Mechanism, was established as part of China’s Protocol of Accession. It requires that China’s compliance be reviewed by the WTO on an annual basis in the early years. The 2002 and 2003 reviews did not reveal any major source of contention with regard to China’s implementation of its WTO commitments, and a widely shared assessment seems to be that specific difficulties reflect primarily technical problems instead of a broad pattern of noncompliance.5 Looking ahead, China’s compliance with agreed commitments will be continually tested, as it requires adequate enforcement of new rules, including at the provincial and municipal levels, where vested interests and capacity constraints may hamper progress.

Box 2.1.Selected Aspects of China’s WTO Accession1

Trade in Goods

All tariffs on imported goods are to be eliminated or reduced, mostly by 2004. Tariffs on industrial goods will be reduced to an average of 9 percent, and import quotas will be removed by 2005. Tariffs on agricultural goods will be lowered to an average of 15 percent.

Trade in Services

Foreign access is to be ensured through transparent and automatic licensing procedures in various sectors, including banking and insurance, legal and other professional services, telecommunications, and tourism. Specifically:

  • Right to trade and distribution. Within two years foreign service suppliers will be permitted to engage in the retailing of all products (implemented at end-2003); within three years (by end-2004) all firms will have the right to import and export all goods except those subject to state trading monopolies (e.g., oil and fertilizers); within five years (by end-2006), foreign firms will be allowed to distribute virtually all goods domestically.
  • Banking. Foreign financial institutions were permitted to provide services without client restrictions for foreign currency business upon accession; local currency services to Chinese companies within two years (implemented at end-2003); and services to all Chinese clients within five years (by end-2006).

Trading and Investment Regimes

  • National treatment/nondiscrimination. Measures and practices that discriminate against
  • Export subsidies. Upon accession, all forms of export subsidies inconsistent with WTO rules, including grants and tax breaks linked to export performance, were eliminated.
  • Trade-Related Investment Measures (TRIMs). Foreign investment approvals will no longer be subject to mandatory requirements (e.g., technology transfer or local content requirements).
  • Trade-Related Aspects of Intellectual Property Rights (TRIPs). China will enforce the rights protecting intellectual property within China.
  • Agricultural subsidies. China has agreed to limit domestic agricultural subsidies to 8.5 percent of the value of production (i.e., less than the 10 percent limit allowed for developing countries under the WTO Agreement on Agriculture), and to eliminate all agricultural export subsidies upon accession.

Trading Partner Safeguards

  • Transitional product-specific safeguard mechanism. As provided under the WTO Agreement on Safeguards, a country may impose restrictions on imports if it can demonstrate that they cause or threaten to cause serious injury to domestic firms producing similar products.
  • Special safeguard mechanism for China’s textile and clothing exports.
  • Antidumping. Under the WTO agreement, other members can invoke “nonmarket economy” provisions to determine dumping cases for 15 years following accession. Nonmarket economy provisions imply that domestic prices cannot be used as a reference point and make it much easier to reach a positive finding in an antidumping investigation.
1 A more complete description of the terms of China’s WTO accession is available at http://www.wto.org/english/news_e/pres01_e/pr252_e.htm. imported products or foreign companies will be removed.

Market Access Prospects

Increased market access overseas is the most immediate benefit from WTO accession for China. China was permanently granted most-favored-nation (MFN) treatment by other WTO members, a significant step toward normalizing its trade relations. Upon accession, several trading partners eliminated many of their restrictions on imports from China. Over time, easier access to foreign markets is likely to boost China’s exports in a number of sectors. In the case of textiles and clothing, for example, WTO accession implies that China has formally been included in the Uruguay Round Agreement on Textiles and Clothing (ATC) and, like other ATC members, will eventually obtain unrestricted access to textile and clothing export markets. China’s world export market share in this sector could then surge significantly.6 China will also benefit from the treatment of future trade conflicts within the multilateral dispute settlement procedures under the WTO. However, China’s accession protocol also incorporates provisions that could constrain China’s export market gains in the early years. While such provisions reflect WTO principles, they are widely seen in the case of China as going beyond usual practice in recent WTO accession cases.7

Box 2.2.The International Impact of China’s WTO Accession

Methodologies. Research aimed at quantifying the impact of China’s WTO accession intensified in the late 1990s. It has focused on the specific impact of WTO-related trade reforms in China against baseline projections incorporating Uruguay Round trade reforms. The welfare impact has been assessed based on global general equilibrium models: the Global Trade Analysis Project (GTAP) developed at Purdue University, which focuses on terms of trade and trade flow effects, is one of these models; other studies are based on the G-Cubed Asia Pacific Model developed at the Australian National University.

Results. Most studies concur that China’s WTO accession will entail an overall welfare gain for China and the world as a whole. However, since China’s tariffs have already been lowered substantially, this effect is not likely to be sizable in the future. Another general result is that countries will tend to benefit (or lose) in proportion to the degree of complementarity between their trade patterns and China’s. More detailed results include the following:1

  • Sustaining China’s growth momentum should provide benefits to most of its trading partners: in addition to the prominent role played by processing trade, imports for domestic use have increased rapidly and outbound tourism grew by 37 percent in 2002. Multinational companies are increasingly investing in China to meet local final demand rather than solely for reexport purposes. China’s energy and mineral imports are also expected to continue to increase rapidly, providing benefits to resource-rich countries. These developments have contributed to maintaining strong growth in the Asian region despite low growth in the rest of the world.
  • The NIEs of Asia, in particular, would gain from China’s expanding trade: most of them have a complementary trade pattern with China and are benefiting from processing trade, as reflected in the rapid increase in their exports of intermediate products and components to China. However, China’s exports are moving up the value-added chain and domestic production of components is rising. While China could pose a more direct competitive threat to these economies in the future, the benefits from growing intraindustry trade are likely to dominate.
  • ASEAN countries and South Asia are also experiencing benefits as exports of all countries to China are expanding rapidly. However, to the extent that there is competition in the export of labor-intensive products, some of these economies may have to undergo significant adjustments. For example, the expected future growth in China’s clothing exports could have an adverse impact, especially for quota-dependent low- and middle-income economies—although this impact could be mitigated for some countries by increased opportunities for textile exports to China as inputs for China’s clothing exports. ASEAN countries may also have to adjust to a greater share of FDI in the region going to China, and take steps to ensure that technological innovations and productivity improvements continue to take place in their economies.

Limits to existing research. The actual impact of China’s WTO accession on the rest of the world may prove greater than such analyses would suggest. First, most existing models have several technical limitations, including uncertainties in estimated trade elasticities stemming from rapid changes in the structure of China’s and the region’s international trade. More fundamentally, most models fail to take into account key aspects of China’s WTO membership, such as the opening of trade in services or reforms that will remove obstacles to foreign investment and further change China’s role as a global export base.

1 See, for example, Adhikari and Yang (2002), Hertel and Walmsley (2000), Ianchovichina and Martin (2003), and Panitchpakdi and Clifford (2002). For the impact on developing countries, see Yang (2003).

Potential Implications of China’s Role in World Trade

While China will benefit from its WTO accession, especially through efficiency gains and direct benefits for Chinese consumers, the world economy will also gain from China’s transformation into a leading international importer of both industrial and consumer goods. Key steps in this regard are China’s decisions to open sectors that are crucial to its partners and to substantially improve its business environment. In the Asian region, the benefits associated with further trade specialization, as well as China’s own increased domestic consumption, are substantial. Indeed, these trends have already contributed to support sustained trade and growth in the region despite slow growth in the rest of the world.

Empirical analyses predict moderate welfare gains for the world economy and a net impact on individual countries that would depend on the degree of complementarity between their trade patterns and China’s (Box 2.2). In particular, Asian economies that have a complementary trade pattern with China, including the NIEs, are benefiting from processing trade. However, since China’s exports are moving up the value-added chain, China could pose a more direct competitive threat even to these economies in the future. Also, some ASEAN countries and South Asia may have to undergo some adjustment to the extent that they compete with China in the export of labor-intensive products. Asian economies may also have to adjust to a greater share of FDI in the region going to China, and will need to take steps to sustain technological innovations and productivity improvements.

Individual countries can maximize their gains from China’s emergence and minimize the associated costs by increasing the flexibility of their economies through structural reforms. A successful response to China’s emergence will involve significant intersectoral mobility. As resources move to more productive areas, transitional problems may arise, particularly for less-skilled workers. Affected countries would do best to speed up their own liberalization and integration, which will improve resource allocation and allow them to better pursue their own comparative advantage. For advanced countries, this will likely entail shifting factors of production to skill- and capital-intensive activities. For middle-income developing countries with relatively well educated workforces, enhanced labor flexibility, together with efforts to upgrade human capital through education and training, will help them move up the value-added chain. Countries with a relatively large pool of less-skilled workers will face a more difficult task, but they will need to speed up reforms to create employment opportunities for less-skilled workers and increase investment in workers’ training and skill upgrading. Broader trade liberalization, especially by the advanced countries, could significantly aid this process by removing constraints on these countries’ exports.

Beyond the impact on individual countries, the expansion of China’s role in international trade raises several challenges. There may be a greater risk of trade disputes and retaliatory measures as a result of the use of the extensive safeguards procedures with potentially negative impacts on international trade volumes. There are also risks on the domestic front, as growth sustainability could be threatened by the impact of WTO-related reforms on the agricultural sector and rural income, on SOE and financial sector losses, and on various vested interests, especially at the provincial level.

However, WTO accession will likely mitigate some of these risks and help ensure that the benefits of China’s emergence in world trade are distributed broadly. Since China can be expected to maintain strong export growth for a number of years going forward, the steps it has taken as part of its WTO accession to open its own markets are especially important. For example, and as noted above, the benefits to the Asian region are already substantial as China has become a major export destination for other Asian countries, and is increasingly importing from other regions of the world as well. That this process is taking place within global rules defined in a multilateral context rather than through regional or bilateral trade arrangements should help to ensure that the benefits of China’s increasing integration into the world trading system are spread more broadly throughout the global economy.

1China’s trade is measured by merchandise exports (f.o.b.) and imports (c.i.f.) as reported by China’s statistical authorities. Hong Kong SAR is treated as a separate customs territory unless otherwise noted.
2Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.
3The role of Hong Kong SAR in China’s trade is the primary explanation for the discrepancy in official trade statistics between China and the United States. China’s customs statistics show a trade surplus with the United States in 2002 of $43 billion. Taking into account statistics from Hong Kong SAR on imports from the mainland that are reexported to the United States, and imports from the United States that are reexported to China produces an adjusted estimate of $74 billion.
4Indeed, some observers have argued that they represent the most radical services reform program negotiated in the WTO to date (Lardy, 2002; and Mattoo, 2002).
6The recent increase in China’s footwear exports (which are not subject to quota restrictions) provides an indication in this regard: while China’s world export market shares in textile and clothing products remained at about 15 percent from 1990 to 2002, its market share in footwear increased from 7.3 percent in 1990 to 28.4 percent in 2000.
7See, for example, Lardy (2002), pp. 80–89.

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