• China's Accession to WTO
  • May 5, 2003
  • Law Firm: Fredrikson & Byron, P.A. - Minneapolis Office
  • After 15 years of negotiations, China finally became a full member of the World Trade Organization ("WTO") on December 11, 2001. China's entry into the WTO will accelerate its movement toward a market-oriented economy, open up new markets for foreign goods and services, and have a huge impact on the Chinese and global economies. At the same time, it will impose tremendous responsibilities on the Chinese government and people.

    China's open door policy over the past 25 years and concurrent economic gains make up a remarkable success story. By 1986, when China first applied to resume its membership in the GATT, exports grew from 5% to 10% of China's GDP, and China was accounting for over 1% of global exports. Today, the central planning system is waning in most sectors; market-oriented economics is turning China into a major trading nation and super power. However, some structural weaknesses remain, especially in China's state-owned enterprises. WTO membership should significantly accelerate the globalization process; China will participate in making rules that govern international trade and investment; and other WTO members will be unable to discriminate against Chinese products in their home markets.

    According to an official report from China, the first half of 2002 saw double-digit growth in both imports and exports in China. Statistics show that the total import and export volume during such period exceeded US$270 billion. In addition, China attracted a total of US$44 billion in foreign investment during the first six months of 2002, 31.5% more than the same period of 2001. This created more job opportunities for local residents and will certainly bring benefits to foreign investors.

    However, China accepted some 900 pages of legal agreements in order to join the WTO, therefore, it also means assuming extensive obligations. China's accession agreement will help U.S. companies doing business in China by cutting import barriers imposed on American products and services and addressing problems these companies have experienced. U.S. firms can expect the following key changes in China's business environment:

    Transparency

    To promote transparency, China will regularly publish laws and regulations in official journals, including the responsible government agency and the effective date. Notice will be given of laws and regulations soliciting comments, with translations provided prior to implementation or enforcement. Laws and regulations concerning trade in goods and services will be implemented in a uniform manner throughout the country.

    Tariffs

    China has agreed to significantly reduce its tariffs on industrial products to 8.9%, with tariffs on agricultural products reduced to 15%. Some tariffs will be eliminated and others reduced mostly by 2004, but no later than 2010.

    Services

    • Telecoms
      Foreign service suppliers will be permitted to establish joint venture enterprises and provide services in limited areas. Foreign investors may not own more than 25% of these joint ventures. Within one year of accession, the areas will be expanded and foreign investors will be able to own up to 35%; potential foreign ownership will increase to 49% within three years of accession. After five years, there will be no geographic restrictions.

    • Banking
      Foreign financial institutions will be permitted to provide services in China without client restrictions for foreign currency business. For local currency business, foreign financial institutions will be permitted to provide services to Chinese enterprises within two years of accession and to all Chinese clients within five years of accession.

    • Insurance
      A Chinese government officer recently announced that China will gradually lift the ban on foreign insurance companies entering China's market, increasing cooperation with counterparts around the world. Foreign non-life insurers will be permitted to establish branches or joint venture companies with 51% foreign ownership. Within two years of accession, foreign non-life insurers will be permitted to establish wholly-owned subsidiaries. Furthermore, China has agreed to significantly remove market access restrictions in legal and accounting professional services.

    Trading Rights

    China currently limits the number of companies that have the right to import and export goods. After its entry into the WTO, China has committed to eliminate state trading import monopolies for industrial and agricultural products; trade-distorting requirements such as export performance, technology transfer and foreign exchange balance, and export subsidies on agricultural and industrial goods. Within three years of accession, all enterprises will have the right to import and export all goods, with limited exceptions.

    Adherence to Existing WTO Agreements

    China assumed obligations of existing WTO trade agreements, including import licensing, intellectual property rights, and technical barriers to investment measures.

    Despite the many challenges, there is no question that China's accession to the WTO will benefit China, the United States, and the entire global economic system. WTO membership will link China to world trade, resulting in increased employment and investment opportunities. Americans will gain more export opportunities, creating more employment and overseas investment options. Trade and business cooperation will generate more face-to-face contacts between Chinese and Americans and further understanding between the two governments.

    However, while WTO accession may enable American firms to enjoy more market access and flexibility, the absence of a well-defined business plan or lack of understanding of the Chinese culture may still result in failure. American companies have to define their investment objectives clearly and work closely with Chinese government officials and their local business partners in order to achieve its goals in China.