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China faceschallengesof accedingto the WTO

DISCUSSING CHINA'S ENTRY into the WTO, Chinese trade negotiator, Long Yongtu (龍永圖), said, "Vendors selling from hand-held vegetable basket can flout the rules of the agricultural market. They can run when they see the business and trade authorities coming. But if you want to have a permanent position in the market and sell more vegetables, then you have to abide by the rules of the agricultural market."

Anyone who has visited China has been astonished by the vast quantities of pirated CDs, VCDs, computer software and counterfeit products everywhere. These raise questions about the massive social price China will have to pay after WTO accession.

From the perspective of game theory, China's economic reforms between 1978 and 1993 were a win-win game. In other words, all social groups benefited from them, even though a few small groups gained more than the rest. In the second phase of reforms that began in 1994, however, unemployment rose and the gap between rich and poor widened. Some groups -- for example, private business owners and employees of foreign companies -- reaped even greater benefit, while some of the groups that had benefited from the first round of reforms became losers in the second -- farmers and laid-off workers.

This has turned the second phase of China's economic reforms into a zero-sum game. China's overall economy is manifesting a dangerously high imbalance of income.

The effects of this game will intensify after China's entry. On the one hand, the number of foreign enterprises will increase dramatically in China's three major cities -- Beijing, Shanghai and Guangzhou -- due to the attraction of China's much-fabled market and low wages. WTO entry will also boost the development of China's service industry. The newly increased job opportunities will be taken by professionals with relatively high educational backgrounds, who will be the biggest beneficiaries of China's WTO entry.

On the other hand, economic development outside the three major cities will lag far behind. China's inland provinces rely on agriculture and manufacturing. After China's WTO entry has brought down the country's tariff barriers, sectors with high tariff rates, such as tobacco, liquor, agricultural products, and automobiles, are bound to be affected. China's entry into the WTO will undoubtedly be an added blow to the losers in China's second phase of economic reforms, most of whom live outside the three major cities.

As it tries to win a permanent place in the international marketplace, China is coming to understand the impact of WTO entry, and has begun to build a welfare system that will act as a defense for social stability.

The successful operation of a social welfare system, however, relies on tax revenues. The question of whether tax revenues will be sufficient relates directly to the government's ability to collect them.

China's social welfare system faces two challenges. The first is serious corruption and tax evasion. The second and equally terrible challenge is unemployment. After China enters the WTO, we will be able to see the urban middle class in department stores, buying personal items at cheaper prices. But we will also see even more laid-off workers and farmers from inland provinces worrying about how they are going to support their families.

How should the government deal with all this? What collective actions will the victims take? Will there be another Guangzhou "blind flow" (an unregistered population flow caused by migrant workers)? We will find out, of course, but not until China has acceded to the WTO.

Hsu Tung-ming is a freelance writer based in Beijing.

Translated by Francis Huang and Scudder Smith
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