By Martin Regg Cohn
Toronto StarDecember 9, 2001
China enters the World Trade Organization on December 11, 2001. The entry will set the Chinese economy on an irreversible capitalist course, including economic liberalization, the opening of world's largest consumer market, and the phasing out of trade barriers.GUANGZHOU A half-century after walking away from the world's capitalist trading system, China will come in from the cold on Tuesday. That's when the world's fastest-growing economy formally joins the World Trade Organization (WTO), the global watchdog that enforces freer trade in goods and services.
For Beijing, which vowed for so long to build "socialism with Chinese characteristics," the changes will sound the death knell for the Communist revolution that once coddled state-owned enterprises and kept foreign competitors at bay.
By promising to phase out its protective trade barriers starting Dec. 11 — a month after it signed the latest WTO deal — China is setting itself on an irreversible capitalist course.
The reforms will extend across every facet of China's booming economy, from farmers' fields to the high-tech world of telecommunications and from auto factories to life insurance offices. The political impact will be equally far-reaching, cutting red tape and reducing the power of provincial bureaucrats to play favourites and thwart foreign firms.
For outside investors, including big American multinationals and a few well-placed Canadian firms, China's entry into the WTO is an opportunity to exploit the world's largest consumer market. The biggest impact of China's entry, however, is that it will lock in the two decades of reforms that followed the death of Communist China's founder, Mao Zedong. During the 1980s and '90s, the door to economic liberalization was opened only partially. Companies faced sudden changes in the rules of the game. Often, they were forced to find joint-venture partners and operate in only one city.
Now, after years of keeping foreign firms in a straitjacket, China is belatedly giving them the chance to compete on a level playing field. That opportunity for growth explains why companies that chafed under the old restrictions have become the loudest cheerleaders for Beijing's entry into the WTO.
Amway (China) Co., the U.S.-based cosmetics giant, is among the biggest boosters because the company was so badly bruised during its first decade of doing business in China.
Amway invested more than $150 million in production facilities, built up a force of more than 100,000 salespeople and seemed poised for handsome profits.
But in 1998, the government abruptly banned door-to-door sales, citing fears that naí¯ve consumers were being duped by unscrupulous agents pushing pyramid schemes and promoting cults. Amway, although not the particular target of the countrywide crackdown, felt its effects. The company survived by negotiating a compromise that allowed it to open 58 stores across China as an alternative, though it didn't make up for the lost revenue from door-to-door sales.
The face-saving deal, typical of behind-the-scenes bargaining between foreign firms and the government, illustrates how the private sector had to navigate the shoals of an unpredictable bureaucracy.
"WTO access is the single most important thing for foreign-invested companies operating in China," says Eva Cheng, head of Amway's China operations.
"The one thing that's been bothering us is the regulatory framework (that) has subjected us to huge volatility over the years."
From his perch in Amway's 41st-floor offices overlooking the gleaming office towers and gritty industrial sprawl of Guangzhou's rapidly expanding cityscape, Amway sales executive Matthew Du reflects on the long march that has brought him and his foreign employers to this watershed moment.
"Amway will have a bright future within five years, after China's accession to the WTO," Du says.
In the heart of Guangzhou's economic development zone, 700 Amway workers, many clad in caps and hygienic white booties, produce everything from Nutrilite Protein Powder to Dish Drops soap.
Company officials say the key to keeping the ultra-modern production lines humming lies with Amway's direct-sales techniques, which the WTO will once again make possible.
"If that is in place, it will be much easier for Amway to do business in China," predicts Du.
"Their interests and business would be protected by law and, with legislation in place, they will know what is legitimate and what is not, what is ethical and what is not."
Still, many observers warn against getting carried away by WTO hype. "I caution business that because of the phasing-in schedule and the reality of doing business on the ground, things are not going to change overnight," says one trade analyst at the Canadian embassy in Beijing. China is Canada's fourth-largest trading partner, with two-way trade reaching $15 billion last year.
But it's not an inspirational image of the New Economy. By far, Canada's greatest export to China is wood pulp ($800 million), followed by auto parts, fertilizers and canola oil. In future, officials hope for increased sales of canola, soy beans and wheat as China drops quotas and other barriers.
No one is expecting miracles for Canadian exporters post-WTO, but there are a few bright lights, including Nortel Networks and Manulife Financial. With the liberalization of financial services over a three-year phase-in period, Manulife hopes to expand its insurance sales from Shanghai to the rest of the country, says Vic Apps, executive vice-president for Asia.
"China is really a huge market," he says, "and it is still really underserved." Manulife got off to a fast start, selling 100,000 insurance policies over the last five years with a sales force of 3,500. But Apps warns it won't be smooth sailing for every Canadian company.
"An awful lot of people have made big investments on the promise of China, but the number of people who have really built anything significant is really quite small."
For Robert Mao, head of Nortel Networks in China, the best opportunities will come not from lower tariffs on telecommunications equipment, but from the overall economic growth that will bring increased demand for Nortel's products.
As the service sector expands in areas such as retail, banking and telecommunications, Nortel expects to expand its markets significantly. Steady and predictable growth will be the key as companies order communications systems.
"It will be huge, but not a quantum leap," Mao says. "Now, there can be no reversal, no downshifting. And that provides a definite accelerating force, all of that expands the market."
What's good for big foreign-owned corporations will not necessarily be good for the Chinese, at least initially.
Reduced tariffs will expose many previously protected sectors to stiff foreign competition, leading to layoffs of millions of workers. Cutting tariffs and breaking down other barriers will amount to a kind of economic shock treatment for state-owned industries and banks. More than 100 ailing auto companies will have to cut costs as tariffs are lowered from 100 per cent to 25 per cent over the next few years. Telecommunications firms will lose their monopolies as foreign firms sniff out investment projects.
More than 10 million farmers who grow wheat, cotton and rice could be thrown out of work by cheaper imports, exacerbating rural poverty even as the income gap with China's booming coastal cities is growing wider. The resulting surge in unemployment, with minimal welfare and insurance benefits available, could spark a mass migration of jobless peasants to the big cities.
"There is huge, hidden unemployment in the countryside that is underestimated by most observers," warns Jean-Pierre Cabestan, head of the Hong Kong-based French Centre for Studies in China. "There will be social problems down the road. I'm sure of that."
A World Bank study predicts that about 12 per cent of workers in capital-intensive Chinese industries could lose their jobs as tariffs fall from an average of 24 per cent in 1997 to about 7 per cent over the next five years.
China already has excess manufacturing capacity in the appliance industries, which makes factory closings a certainty for workers who will no longer be able to count on social services provided by their employers. That scenario — short-term pain for jobless farmers and industrial workers, with few visible gains until several years down the road — will present political challenges to China's leadership.
But analysts believe Premier Zhu Rongji, who spearheaded China's WTO drive in the home stretch, is willing to accept the trade-off because it's the best way to entrench economic reforms and attract future investment. The Communist party hopes to foster greater economic growth — and cement its hold on power — by shifting its role from omnipotent player to rule-maker.
Some of the negative impact will be cushioned by the phase-in periods for different sectors of three to five years. And despite the optimistic talk about a brave new world of transparency, political scientists believe local officials will find ways to subvert WTO requirements outlined in the 900-page agreement.
There are also fears about the timing of China's entry into the WTO. The global economic downturn will put pressure on the country's export industries, which depend on the U.S. market for robust sales. "China's government is getting into the WTO at the wrong time," says Cabestan. "I'm afraid that the flow of investment will be smaller in the coming years."
On balance, however, Cabestan is optimistic that accession to the WTO will usher in reforms to China's creaky legal and administrative systems. Compliance with trading rules will force the government to be more consistent in the implementation of laws, he says.
But with so many imponderables, political scientist James Tang says the impact of WTO entry could easily be overestimated. Rather than a panacea, he sees it more as a codification, or locking-in, of China's gains to date. "The impact will probably be less dramatic than what people expect," says Tang, who teaches at the University of Hong Kong.
"After all, China is already pretty much part of the global economy. Lots of companies are already there."
The alternative, if China had continued to stay outside of the global trading system, was a loss of confidence on the part of foreign investors. Companies such as Amway have grown frustrated with the vagaries of China's legal system.
"If they didn't liberalize, they would have faced an invisible ceiling," says Tang.
For joint-venture firms that have gambled on China's economic potential, the next few years will be a crucial test. After China joins the WTO, there won't be any more magic bullets to energize the system and enforce discipline within the bureaucracy.
"I would not be so naí¯ve as to think that things will change overnight," says Amway's Cheng. "It will take time for officials at the provincial level to buy in and really deliver."
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