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GTAP Resource #1236

"Regional Impact of China’s WTO Accession"
by Ianchovichina, Elena and Terrie Walmsley

China’s WTO accession will have major implications for China and present both opportunities and challenges for the East Asian economies. With accession China will continue the process of opening its markets to other countries’ exports and improving its business climate. This will put downward pressure on input and transaction costs and will benefit both China and its trading partners. Increased exports from China to the region will also lower the import prices of its trading partners and improve their competitiveness. However, accession will also present challenges. Countries that produce similar products will face increased competition for market share in third markets. Accession is likely to increase China’s attractiveness as a destination for foreign direct investment, leading to concerns that FDI may be diverted away from other countries in East Asia towards China.

The objective of the paper is to provide a framework for understanding the channels by which China’s entry to the WTO will have an impact on regional economies and a qualitative and quantitative assessment of this impact. The paper improves upon earlier work on the topic by (i) taking into account duty drawbacks in China and Vietnam; (ii)constructing a baseline that reflects most recent growth projections and major trade commitments in the region; (iii) using China’s final WTO offer and recent estimates of nominal rates of protection and subsidies in agriculture; (iv) representing efficiency gains in China’s automobile sectors induced by the reform process, and (v) the liberalization of cross-border trade in services.

The quantitative evaluation is conducted using a dynamic general equilibrium model (GTAP-Dyn) and version 5 GTAP data base. It suggests that as a result of China’s accession to the WTO, Japan and the NICs will increase production in those sectors for which exports to China increase. Output of the textile and processing industries in Japan, Taiwan, Korea and Hong Kong will rise as a result of the increased demand for these products to be used as intermediate inputs in China. However, with the removal of quotas on Chinese apparel and textiles in developed country markets in 2005, Hong Kong will scale down its apparel production as North America and Western Europe increase apparel imports from China. Japan, Taiwan, Hong Kong and Singapore's electronics and other manufacturing sectors will expand as a result of the fall in protection and the increased demand for these products in China. Japan’s and the NICs’ automobile sectors however may contract as China becomes a more efficient producer of motor vehicles.

China’s WTO accession hurts the most the apparel industry in the developing East Asian economies as quotas on Chinese apparel and textiles in North America and Western Europe are removed in 2005. The textile industry in the developing East Asian counties is also negatively affected, though nearly not as much, as some of these countries start exporting textiles to China and other NICs. With time, the South East Asian economies will overcome the negative impact on their apparel and textile sectors by expanding their processing, electronics and other manufacturing industries. This move is largely driven by increased demand for these products in China and the NICs.

China’s accession to the WTO provides a powerful stimulus for investment in China. The tariff cuts lift the rental price of capital and lower the price of capital goods causing the rate of return on Chinese capital to rise relative to the baseline and relative to returns in other regions. The liberalization of the services sectors and the improvements in the business climate that are expected to occur with the implementation of the WTO agreement will also have a positive impact on investment. The NICs’ rates of return to capital rise relative to the baseline, but not as much as the increase in returns to capital in China. This positive outcome is a result of the fact that the NICs are suppliers of raw materials to China rather than competitors, and hence the price received for their exports tends to rise. This in turn implies that the NICs will not see a net outflow of investment as a result of China’s WTO accession. However, foreign investment in developing East Asian countries could fall as investors move to China and other NICs in search of higher returns to capital.

The industrialized and newly industrialized economies in East Asia will largely benefit from China’s accession to the WTO. These countries are important suppliers of materials to China rather than competitors, and hence experience an improvement in their terms of trade. The developing economies in East Asia are likely to incur small declines in real GDP and welfare losses since with the removal of quotas on Chinese textile and apparel exports to developed country markets China will become a formidable competitor in areas in which other developing countries have comparative advantage such as textiles and apparel. As economic growth of the developing countries in the region slows down, these countries may lose investment to China.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2003 Conference Paper
Status: Published
By/In: Presented at the 6th Annual Conference on Global Economic Analysis, The Hague, The Netherlands
Date: 2003
Created: Ianchovichina, E. (4/28/2003)
Updated: Bacou, M. (9/27/2003)
Visits: 5,888
- Baseline development
- Asia (East)

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