As China headed into a weekend of speeches celebrating its 10 years as an official member of the global trade community, the rest of the world might have wanted to contemplate the exported US$49 microwave oven and the imported US$85,000 Jeep Grand Cherokee.
Sunday marked the 10th anniversary of China’s joining the WTO — a membership that helped turn China into the world’s biggest economy after the US. Companies and consumers worldwide have benefited from China’s emergence as a top trading partner. And yet, because of special breaks and loopholes China got when it joined the WTO, it still shields its domestic markets from foreign competition much more than any other big nation.
Consider that US$49 microwave oven and US$85,000 Jeep.
Microwave oven prices have plunged in the West over the past decade, largely because China has combined inexpensive labor, excellent infrastructure and heavy factory investment to produce the ovens and a wide range of other consumer goods for export, making creature comforts more affordable to customers around the world. And WTO rules against protectionism have made it difficult for countries in the West to limit China’s sixfold surge in exports during those 10 years, even as the Chinese flood of products has forced factory closings and layoffs elsewhere.
However, price tags on imported cars at dealerships in Beijing, Shanghai and other Chinese cities signal how China has continued to protect its home market under the special terms of the WTO agreement it negotiated before joining the trade group.
In the US, prices for a Detroit-made Jeep Grand Cherokee start at US$27,490. However, in China, after tariffs and other protective fees, it sells for US$85,000 or more in China. (It’s no surprise that Chrysler has sold fewer than 2,500 of them so far this year in China.)
Foreign trading partners often chafe at the way China uses the WTO rules to its advantage.
The Chinese economy’s “spectacular rise would not have been possible without the open global trading system that China was able to benefit from during the past 10 years,” EU Trade Commissioner Karel De Gucht said in an e-mail.
“At the same time, China is having to increasingly recognize and respect not only the legal responsibilities it now faces as a member of a global rules-based body, but also the WTO “spirit” of promoting open markets and nondiscriminatory principles,” he said.
Chinese officials have been effusive in the run-up to their WTO anniversary.
“We believe that our 10-year arrangement has been successful — the results of the past 10 years are welcome and a valuable inspiration,” Chinese Assistant Minister of Commerce Yu Jianhua (俞建華) said at a news conference last month in Beijing.
The roots of China’s economic model trace to the singular terms under which the nation joined the WTO, which now has 153 members.
Based in Geneva, Switzerland, the WTO was established in 1995 as the successor to an international framework called the General Agreement on Tariffs and Trade — GATT, as it was known — that had been mapped out in the early years after World War II.
After negotiating for 15 years to be admitted to GATT and then to the WTO, China was finally let in after agreeing to accept the WTO’s broad free-trade rules. However, as all new members do, Beijing also had to negotiate a lengthy document, known as an accession agreement. It spelled out thousands of details tailored to the specifics of the economy of China, which back then was still very much a developing country.
The agreement required China to lower its tariffs to levels below those of many other developing countries. However, compared with most industrialized countries, China was allowed to impose considerably higher tariffs — tariffs China has retained even as its economy has subsequently grown to No. 2 in the world.
The clearest example of WTO ascendance China-style might be in automobiles. Even though China’s auto manufacturing industry and car market are now both the world’s largest, China continues to shelter them behind the highest trade barriers of any large industrial economy.
For example, it retains a prohibitive tariff of 25 percent on imported cars, which helps explain why imports represent only 4 percent of the light vehicles sold in China.
Japan, by comparison, no longer has any tariffs on imported cars, while South Korea has an 8 percent tariff and the EU a 10 percent tariff. Meanwhile, the US has a tariff of only 2.5 percent for imported cars, minivans and sport-utility vehicles.
However, the 25 percent tariff is only one reason a Grand Cherokee costs three times as much in Chongqing as in Chicago. In the name of energy conservation, China also assesses a sales tax of up to 40 percent of the vehicle’s price based on its engine size. Small, fuel-sipping Chinese cars pay the lowest rate, while gas-guzzlers from the US and Europe pay the highest rate.
China also collects a 17 percent value-added tax on almost everything sold in the country, whether imported or domestically produced. However, like many European nations, China uses a WTO provision that allows the tax to be fully refunded to China’s export producers, who often pass along the savings to foreign buyers.
What’s more, China limits foreign manufacturers to no more than 50 percent ownership of car assembly plants in China. That special rule, which China managed to negotiate for its WTO accession agreement back when its auto industry seemed tiny and vulnerable, has forced multinationals to set up numerous joint ventures in China and to transfer a wide range of technology to those Chinese partners.
China’s WTO agreement did open many service sectors of the Chinese economy, such as transportation, banking and retailing, to foreign competition.
For example, FedEx has expanded rapidly in China and now has 9,000 employees in the country. The company also relies heavily on US-made Boeing 777-Fs, with mostly US pilots, to ferry an ever-rising tide of Chinese goods to the FedEx hub in Memphis, Tennessee.
And Wal-Mart has been able to open 353 retail stores in China, despite the hostility of many small, local retailers.
China’s WTO agreement had some big omissions, including the thorny question of whether to let foreign companies bid on Chinese government projects — an issue that remains unresolved.
China got many of its breaks because the WTO and its members, including the US, were eager to accept it into the international trade group to encourage Beijing’s embrace of capitalism and to make it a more fully vested participant in the global community.
However, trade officials say that they never expected all the terms of China’s accession agreement to last as long as they have. Instead, China and other trading nations had been expected to reduce trade barriers further in the so-called Doha Round of global trade talks, which were supposed to be completed in Hong Kong in 2005.
However, the Doha Round dragged on and then effectively collapsed in 2008 — despite periodic efforts to revive it, including a minister-level meeting set for this week in Geneva.
While China is acutely aware of other countries’ concerns about its tariffs, it is leery of lowering them unilaterally without matching concessions from other emerging countries in its region, said He Weiwen (何偉文), a council member of the China Society for WTO Studies in Beijing.
He said China was pursuing matching concessions in regional trade agreements in Asia. For the West, the open question is whether China’s high tariffs and other market protections will be allowed to remain in place indefinitely. Just as worrisome: A few provisions in the agreement that were meant to blunt the competitive impact of Chinese exports on Western industries are starting to expire.
The most notable of these is China’s current designation under its WTO agreement as a “non-market economy.” The label makes it fairly easy for overseas industries to accuse Chinese companies of dumping goods into their markets at prices below cost and to seek steep tariffs on their shipments.
That is just the sort of accusation, in fact, that US solar panel manufacturers have leveled at China in a trade case pending at the US Department of Commerce in Washington — a case the US industry is widely expected to win.
However, under the WTO agreement, China will automatically be relabeled a market economy in 2016. That status will make it harder for companies in other countries to win anti-dumping decisions against China — and will probably clear the way for Chinese businesses to further increase their market share around the world.
Ideally, that could mean a lot more products like US$49 microwaves on Western shelves — even if means a Grand Cherokee from Detroit might never be affordable in China.
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