China2
Prior to 1978, China's trade was conducted under a strict system of state trading where approximately a dozen foreign trade corporations monopolized all foreign trade. Under the central planning regime, imports were minimized and exports authorized only to the extent needed to pay for imports. Over the last twenty years, the system has changed dramatically and China's trade has expanded enormously. Its share of world trade has risen from 1% to 3% over the last quarter century and the World Bank projects that it will triple again by 2020, making it the world's second largest trader.
However, China's trade regime retains many of its of its pre-reform trade structures, despite the massive changes that have occurred. A number of the original foreign trade corporations continue to operate, and some of them retain state trading monopoly rights on particular products. Another group of products is subject to nontariff barriers, which include licenses, quotas and tendering arrangements. Licenses and quotas are largely overlapping, with licenses used to administer the allocation of quotas. Both of these measures are concentrated in agricultural and food products, and in machinery and electronics. Import tendering is used for some machinery and electronic products, and involves the use of competitive bidding to allocate import rights.
Not surprisingly, there is considerable uncertainty and confusion about the nature of the resulting trade regime. This uncertainty appears to have played a role in making the negotiations on China's admission to the World Trade Organization (WTO) more difficult and protracted, with the lack of transparency associated with state trading frequently raised as a concern.
Boosting China's Economy
Reforms to simplify China's trade regime and to lower protection have the potential to generate enormous benefits both for China and its trading partners. A recent World Bank study found that China stands to realize annual income gains of over $110 billion per year once the full package of reforms associated with WTO entry are phased in. These reforms include the tariff reductions offered by China, the elimination of nontariff barriers, and the benefits to China from the abolition of the Multifibre Arrangement quotas on textiles and clothing. The gains to the NAFTA countries from China's entry would also be substantial, at around $8 billion per year. Japan and the Western European countries would benefit even more, at over $15 billion per year each. A substantial part of the gains to China and to the industrial countries comes from removing the byzantine controls imposed under the Multifibre Arrangement.
The real gains from China's accession to the WTO will be even greater than those that can be measured using economic models. The greater transparency associated with the post-WTO trade regime will provide enormous benefits by allowing traders to focus on identifying and meeting market needs in import and export markets, rather than on complying with the frequently complex trade-policy measures. The agreement on services will provide China as yet unmeasured improvements in access to foreign skills and expertise in this increasingly important part of the global [next page]