China, the WTO and Globalization: Looking Beyond Growth Figures

[Français]

By Dorothy Guerrero*

Beijing’s pre-Christmas announcement of its readjusted 2004 gross domestic product (GDP) made an international stir and sent economists scampering to their calculating tables so they can revise their predictions concerning when China may overtake the US as the world’s biggest economy. There is a 17 percent difference between the Chinese government’s previous report about its gross national income of $1.65 trillion and the recomputed figure, which amounted to $2 trillion. The new calculation carries a significant implication: it means that China is a much bigger economy than we thought. It means that it already climbed to the fourth slot in the world’s ranking of largest economy all this time, which are two notches higher from previous position of number six.

There is no doubt that this advance in the pack is impressive. Official statistics illustrate two decades of very strong annual growth rate of real GDP, which has averaged around 9.2 percent. Since 2001 it is the world’s number two in purchasing power parity (PPP). Many countries envy its record of economic progress. However, this record-growth produces a big misconception that it is a big winner of globalization. Although there is truth to the claim that on-going market reforms and China’s opening to the global economy gave millions of Chinese people an increased standard of living, many new and critical documents are also arguing that there are more Chinese people that are suffering because of its rapid transition to market-based economy.

For the majority of the Chinese people the more meaningful and important question is not “when will China become the world’s number one?” Rather, they are asking, “When will the benefits of China’s rise to superpower status start to affect our lives positively?” True enough, being number one – as in the case of the US for a long time – does not necessarily guarantee an end to poverty for marginalized people and the likelihood of better opportunities and access to resources. New studies on the relationship between poverty reduction and inequality show that there is no necessary connection between free trade and poverty reduction. (1) In fact, a close study of China’s case as a catch-up economy since reform started in 1978 shows that greater openness to external trade was not the driving force behind its success.

In the recent 6th World Trade Organization Ministerial Conference in Hong Kong, which was held from December 13 to 18, the spotlight was on China. Its economic performance after WTO accession is probably one of the most highly watched developments since it will support or smash notions about free trade and economic liberalization as necessary preconditions for economic development. Although China displayed a not-so energetic host posture and is still finishing its transition stage that will end in 2013, its fulfillment of its WTO obligations concerns many. 

China joined the WTO in December 2001. Since then, it amended more than 2,500 of its national laws and regulations and abolished more than 800 others to fulfill WTO rules. (2) Until now, there is no accurate general calculation about the implications of these changes on people’s livelihood. Some of the estimated negative impacts are minimal or negative employment growth in the sectors such as agriculture, automobiles, machinery and instruments. On the other hand employment gain occurred in industries such as plant-based fibers, livestock and meat, clothing, light manufacturing and electronics. (3) What is clear, however, is that membership to the multilateral trade body further deepened the Chinese economy’s dependency on external trade and foreign investment.

Prior to its integration into the international trade regime, WTO supporters within the Chinese government argued that accession would help China further expand its market, accelerate the restructuring of its industries and improve its legal system. The Chinese Ministry of Commerce report in the second quarter of 2005 shows that the total volume of international trade in 2004 has exceeded one trillion US dollars and that China is now the third biggest trader worldwide. The report also shows that foreign investment reached US$53.51 billion that year while the estimate for 2005 is that it will exceed US$60 billion. The fourth quarter report for 2005 shows that four hundred and fifty of the world’s top 500 companies have invested in China. (4)

China became the favorite destination of foreign direct investments (FDI) because of the attractive benefits it offers. China has a very friendly business environment that includes adjusted tax rates for FDI, which is half the rate that state-owned enterprises normally pay. It gives good conditions for guaranteed profits for transnational corporations (TNCs) such as low rent, cheap natural resources and lax rules for its exploitation, low wages for workers, absence of independent trade unions, no-strike laws and many others.

The international business community was happy to note during the WTO ministerial in Hong Kong that Beijing complied well with its commitments to the WTO. China cut its overall agricultural tariffs from 54 percent in 2001 to 15.3 percent in 2005 and this will be further reduced to 15.2 percent in 2006. No single member has made such a huge cut in such a short period of time in the WTO history. The average agricultural tariff worldwide is now 62 per cent.

The future of the agricultural sector was one of the most important concerns during the talks in Hong Kong. The dominant view among economists within China is that agriculture is comparatively unimportant relative to other promising and more beneficial sectors since China is not a major exporter of agricultural products. The agricultural sector only contributes 15 percent to China’s GDP. However, the number of people that depends on agriculture for survival and development is still huge.
 
Huge adjustments were also made on import tariffs, financial services and government procurement. Import tariffs for 2005 were cut to an average of 9.4 percent from 15.3 percent in early 2001. Tariffs on information-technology products, including computers and telecommunications gear, have fallen to zero from 13.3 percent over the same period. (5) Since December 2004, foreign banks were allowed local currency operations in 18 Chinese cities.

Beijing agreed to begin talks on joining the WTO Government Procurement Agreement during the second half of 2005. When such agreement is fully reached, it will grant foreign companies nondiscriminatory access to government purchases. At the moment, Chinese government agencies are required to purchase equipment and technology only from Chinese-owned companies unless there is no existing commercially viable alternative. 

It is not a secret anymore that 250 million Chinese people live on less than $1 per day. Another 700 million or 47 percent of the population, live on less than $2 a day. The work conditions of Chinese laborers – the people who provide the world with every affordable consumer products from T-shirts and bras to home appliances and computers – are far from pleasant. They often work between 60 to 70 hours weekly.

In sparkling modern cities like Shenzhen in Guangdong province, modernity has two sides: one is the US-educated corporate executives and technical experts who work in impressive high-rises, the other is the millions who sweat in mindless, repetitive factory work in the “special economic zones”. Those who belong to the second category receive as little as $100 per month. Most complain about the tasteless food in their cafeterias and cramped dormitories where 10 to 20 workers share a small room. The majority of them are migrant workers from rural areas who lack access to many basic social benefits, have few possibilities for upward mobility and have no security of employment. This vast “floating population” is driven to the cities by the hopeless situations in their villages and the increasing gap between life in the cities and the countryside.

Economic growth has been uneven and unfair to those in the agricultural sectors. Agricultural wages are stagnant despite China’s phenomenal economic rise. Unemployment in the rural areas is now in an alarming state – the government estimate is that the unemployed and underemployed rural labor now number around 100-120 million. (6)

The pattern of migration to urban areas is comparable to Japan’s experience during the period of post-war industrialization. In 1947, 700 million people or 50 percent of Japan’s workforce used to be involved in agriculture. This was reduced to less than three percent by 2002. (7) China’s case is more rapid and more dramatic, entailing bigger demands for adjustments and posing bigger problems to the expanding cities than Japan. Three hundred million Chinese are expected to migrate from the rural areas into the cities before 2020. This is one of the largest migrations in human history.

China’s problems about its “surplus labor” present many daunting challenges as it transforms itself into a knowledge and service-based economy. It is not easy to create productive employment for its 744 million-strong labor force.  China needs to create 300 million new jobs within the next decade to absorb or re-employ those who lost their jobs in the agricultural sector as well as former state-owned enterprises (SOEs) and provide work for the new members of the labor force. (8)

The lack of jobs and poor conditions in the rural areas are bound to result in the loss of the already limited agricultural land to development as well as diminished income because of excessive taxation. The central government is saying that some policy measures to improve the situation in the country side are starting to be implemented and are in fact generating positive results. However, the general development in the rural areas is still lagging behind the urban areas by ten years. The state of the environment is also deteriorating and this is increasingly affecting people’s health and livelihoods. Protests and rioting triggered by generally felt injustice and environmental problems are now an almost daily occurrence in the countryside.

A 2005 World Bank study notes that China’s farmers were already suffering declining income in the years before WTO entry (9). But the linking of China’s fortunes to foreign markets has aggravated the trend, particularly as China removes tariffs that once protected local farmers from imports.

From 1995 to 2001 the number of workers in state enterprises was reduced by 40 percent (46 million), while workers in collectively owned urban enterprises decreased by 60 percent (18.6 million). Laid-off state workers (registered) are around 34 million. Many of these laid-off workers only received partial payment when their SOEs closed down. At the local level, problems are now arising due to the uncertain future of 23 million town and village enterprises (TVEs), which employ around 135 million people. The TVEs, which served as the driving force of the local economy in the 1980s, are now saddled with rising costs and competition from foreign firms. Overall urban and rural unemployment rate in China is estimated at approximately 30 percent. 

China’s courtship of foreign investment dramatically affected SOEs. According to Hart-Landsberg and Burkett in their book “China and Socialism” (10) the loss of profitability of state enterprises is connected with the increased reliance to foreign investors. Since state enterprises pay relatively high taxes (compared to foreign investors) as well as employment, investment and employee-welfare responsibilities (pension, housing, health care) they became increasingly uncompetitive compared to private enterprises. The decrease in the SOEs profitability, coupled with management problems as well as corruption, resulted to their indebtedness. As their overdue debts increased in volume, the government opted to privatise them as a way to unload the government burden.

Privatisation encouraged greater dependency on foreign investors, who started purchasing the ailing state enterprises. The state enterprises’ share of industrial output fell from 64 percent in 1995 to 30 percent in 2002. The SOEs are now operating at a loss of about one percent of GDP each year. (11)

Exports took a leading role and to continue the rapid growth, the economy relied more and more on foreign enterprises especially in high-tech industries. The increasing centrality of exports and foreign investments rationalized the economy’s dependency to global trade and investment agreements and, above all, the WTO.
 
China’s rapid growth was indeed achieved with many social and environmental trade-offs.  It now symbolizes the many wrongs that come with corporate-driven form of economic globalization. Privatization and the increasing power of local elites and foreign enterprises in China are magnifying the already huge division between the winners and losers of such growth. The UNDP’s Human Development Report for 2005 illustrated an alarming increase in the country’s income disparity. China’s Gini coefficient (a measure of equality/inequality: 0 means everyone has the same income; 1 means one person has all the income) hit 0.465 in 2004, and it is estimated to approach up to 0.47 in 2005. (12)

While China’s rise is giving expectations that it will become the “new empire”, the world’s fastest and largest developing country seems to harbor no intention of establishing itself as the advocate of the world’s poor. The other big players, India and Brazil — no doubt in their own interests —  have assumed this role. During the process of negotiations prior to the Hong Kong WTO meeting, China did not put any important proposals on the table.

China’s entry to the WTO probably extended the level of transparency in China on issues that are of prime interest to corporations, which includes contracts, regulation of foreign investments, intellectual property rights and other concerns. However, the full exercise of corporate responsibility within China is still far from ideal, and the reality of greater crackdowns on independent organizing efforts by Chinese workers remains.

The rise of China contradicts the earlier commonly held view in the West, particularly in Europe, that there is a decline in the nation-state development framework. Less than a decade ago, many adhered to the idea that the future belongs to unions of nation-states, along the model of the European Union and ASEAN. The current trend, which is showing the rise of countries such as China and India, seems to indicate the ascendancy of a new kind of mega-nation-state. It will be very important to see how China as a new power will interact with the US, the EU, Japan and even Russia. China is now convincing the rest of the developing countries and the old powers that its rise is peaceful, and it is mainly, but not exclusively, increasing its influence through economic relations. How these relationships develop will be crucial to follow.

* Dorothy Guerrero is a research associate with Focus on the Global South. <[email protected]>

NOTES
1. Martin Ravallion, “Looking Beyond Averages in the Trade and Poverty Debate”, paper for WIDER Workshop: The Impact of Globalisation on the World’s Poor, October 2004.
2. “China Tackling Challenges in WTO Transition”, Xinhua News, December 11, 2004.
3. Ianchovina, Elena, W. Martin, “Economic Impacts of China’s Accession to the World Trade Organization, World Bank Working Paper, the World Bank, May 2003.
4. Asia Times online news, December 20, 2005.
5. Murray Hiebert, “Good Marks for China’s WTO Obligations”, Wall Street Journal, November 28, 2005.
6. See Dale Wen’s “China Copes with Globalization”, a report published by the International Forum on Globalization, December, 2005.
7. Ezra Vogel, “The Emperor is Far Away: Understanding the Challenges Faced by the New Leader”, Harvard International Review, China: Vol.25 (2).2003.
8. Douglas Shihua Zheng, “China’s Employment Challenges and Strategies after the WTO Accession”, World Bank Policy Research Working Paper 3522, February 2005.
9. WTO Status Hurts China’s Rural Poor: World Bank, Agence France-Presse, February 22, 2005.
10. Martin Hart-Landsberg and David Burkett, China and Socialism: Market Reforms and Class Struggle, Monthly Review Press, 2005.
11. Shariff Shuja, “The Limits of Chinese Economic Reform”, Jamestown Foundation China Brief, Vol.5 Issue 17, 2005.
12. China Economic Net, September 21, 2005. http://en.ce.cn/Insight/200509.shtml