Global Policy Forum

By Craig S. Smith

China is girding itself to defend its huge yet fragile economy from an invasion by foreign companies once its membership in the World Trade Organization is ratified.

Many Chinese applauded the completion of talks on China's entry to the global trading system, which were overshadowed by the terrorist attacks on the United States. After 15 years of on-and-off work, the talks were scheduled to wrap up in Geneva the week of Sept. 10; the attacks pushed them back a week. The formal gathering set to ratify China's accession, scheduled for Doha, Qatar, in November, seems likely to be relocated and perhaps postponed because of security concerns.

But China's membership is now certain by early 2002, starting a process that will transform its economy in ways that are already causing anticipation and anxiety among those who expect to be affected.

"Friends, you clap, but even I don't yet know how big the competition is that we'll face after we enter the WTO," China's prime minister, Zhu Rongji, told a gathering of private businessmen in Nanjing the week the Geneva talks concluded. "My heart isn't yet very settled."

The market-opening process will be gradual, taking at least five years as threatened industries find ways to thwart WTO rules. But there is no doubt about the course China has set, one the leadership hopes will ultimately strengthen the economy despite the dangers encountered along the way.

China's beleaguered farmers are among those most threatened by the changes the country agreed to make to become a WTO member. Duties on imported agricultural products are to be reduced over time to 17 percent from an average of 22 percent now, and the reduction will be even greater for some American farm produce. Import quotas will be relaxed. Both changes will greatly increase the competition farmers face from imports.

Already, Chinese farm incomes are falling, and poverty is spreading in some areas where rural households depend on money sent home by relatives working on construction sites in cities. Labor is plentiful and cheap in the countryside, but total production costs on China's small farm plots are actually higher than in the West, where large mechanized farms provide economies of scale.

China dropped a ban on imports of American wheat last year, and it can now be bought in China for about $36 less a ton than can domestic wheat, putting downward pressure on local prices. That pressure will intensify after China raises its ceiling on wheat imports from the current 2 million tons annually, to 9.3 million tons by 2004.

Competition from efficient foreign agriculture is expected to hasten the already huge migration of people from the countryside into China's cities. The influx will strain urban social services and worsen urban unemployment, which has already risen sharply in recent years as the country has shaken up its industrial sector. China's state-owned industrial concerns have already shed about 35 million jobs the last five years, and government-controlled collectives laid off 16 million more. Economists estimate that another 30 million jobs are in jeopardy after China joins the WTO.

Competition for talent will also pose a problem, as many of the best and brightest managers and experts gravitate to multinational companies.

Among manufacturers, the country's fledgling automobile industry may be most vulnerable. Domestically built cars are sold for more than twice what similar models fetch in other countries, in large part because of high production costs. But by 2005, the quotas that limit competition from imports will be abolished, and tariffs are scheduled to slide steadily from as high as 100 percent now to just 25 percent. It is hard to imagine how domestic carmakers, few of which are profitable now, will be able to compete with cheaper, higher-quality imports.

Foreign companies threaten to grab vast chunks of the Chinese market in other fields where, despite years of government goading, domestic businesses are highly inefficient by global standards.

China's banks, for example, may lose as much as half of the market for fee-based banking services to foreign competition once foreign banks begin handling trade financing, credit card transactions and cash management. Foreign banks will be allowed to offer all of those services to both corporate and individual customers anywhere in the country five years after the country's membership becomes effective.

"Given the weak self-discipline and self-development mechanism, the weak infrastructure and the heavy historical burden, domestic institutions are not in an advantageous position," Dai Xianglong, China's chief central banker, said last month.

Foreign financial institutions will be allowed to own stakes of up to 49 percent in fund management companies within three years, and up to one-third in Chinese stock and bond underwriters.

Foreign companies are also expected to build their own modern retail and wholesale distribution networks that could quickly come to dominate distribution of many products, both domestic and imported.

Today, foreign companies may not legally distribute products in China other than those they make here. Nor can they own or manage distribution networks or wholesaling outlets.

China has promised that once it is a member of the WTO, those restrictions will be phased out within three years for most products.

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