Post-WTO economic effects on state-owned enterprises in China

Beiske, Ben

Post-WTO economic effects on state-owned enterprises in China

von Ben Beiske (Autor:in)

Zusammenfassung

Inhaltsangabe:Abstract:
The importance of the World Trade Organisation (WTO) for international free trade today has enticed China to join the WTO in December 2001. The significance of WTO membership for China cannot be underestimated, inevitably speeding up much-needed economic reform in the country. The gradual transition from a planned- to a market-economy is expected to continue in the future. The severity of the impacts for the economy will depend on how successful China is in providing policies that will assist the nation in the major adjustment problems that it faces in the future.
The expected, actual, and needed implications for Chinas state-owned enterprises (SOEs) resulting from WTO membership will be investigated in detail; in the process, the significance of SOEs to the Chinese economy will be highlighted. SOEs are mostly ill- prepared for a post-WTO China, and the dismal state of these companies has already led to the decline of market share in the past decade. For the future, the retreat of the state is likely to continue. The main implications for SOEs from Chinas WTO membership are seen in the areas of competitiveness, corporate governance, privatisation, mergers and acquisitions, property rights, unemployment, and attracting and retaining qualified personnel. This dissertation offers one of the first detailed insights into the challenges facing Chinas SOEs today and the implications of Chinas WTO membership for these companies, while also highlighting the areas that require future attention. The understanding of the role and meaning of SOEs for the Chinese economy is of immense importance for foreign investors wanting to invest in the country, already cooperating with Chinas SOEs, or looking into the possibility of such.

Inhaltsverzeichnis:Table of Contents:
I.Table of Contents
II.LIST OF TABLESIV
III.LIST OF FIGURESV
IV.GLOSSARYVI
1.INTRODUCTION1
1.1AIM &OBJECTIVES2
1.2OVERALL RESEARCH APPROACH3
1.3STRUCTURE OF THE DISSERTATION3
2.THE WTO & FREE TRADE4
2.1CHAPTER INTRODUCTION4
2.2THE WTO4
2.2.1UNDERSTANDING THE WTO4
2.2.2THE STRUCTURE &WORKING OF THE WTO7
2.2.3SIGNIFICANCE OF JOINING THE WTO13
2.3CHAPTER CONCLUSION16
3.CHINA & THE WTO18
3.1CHAPTER INTRODUCTION18
3.2CHINAS LONG MARCH TO WTO MEMBERSHIP18
3.2.1PROLONGED DIFFICULTIES19
3.2.2FINAL ACCESSION21
3.3CHAPTER CONCLUSION22
4.METHODOLOGY23
4.1CHAPTER INTRODUCTION23
4.2OVERALL RESEARCH APPROACH23
4.2.1OBJECTIVITY, VALIDITY & […]

Leseprobe

Inhaltsverzeichnis

ID 7343

Beiske, Ben: Post-WTO economic effects on state-owned enterprises in China

Hamburg: Diplomica GmbH, 2003

Zugl.: Manchester School of Management, Universität, Dissertation / Doktorarbeit, 2003

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Diplomica GmbH

http://www.diplom.de, Hamburg 2003

Printed in Germany

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003

Abstract

The importance of the World Trade Organisation (WTO) for international free

trade today has enticed China to join the WTO in December 2001. The

significance of WTO membership for China cannot be underestimated, inevitably

speeding up much-needed economic reform in the country. The gradual transition

from a planned- to a market-economy is expected to continue in the future. The

severity of the impacts for the economy will depend on how successful China is in

providing policies that will assist the nation in the major adjustment problems that

it faces in the future.

The expected, actual, and needed implications for China's state-owned

enterprises (SOEs) resulting from WTO membership will be investigated in detail;

in the process, the significance of SOEs to the Chinese economy will be

highlighted. SOEs are mostly ill- prepared for a post-WTO China, and the dismal

state of these companies has already led to the decline of market share in the

past decade. For the future, the retreat of the state is likely to continue. The main

implications for SOEs from China's WTO membership are seen in the areas of

competitiveness, corporate governance, privatisation, mergers and acquisitions,

property rights, unemployment, and attracting and retaining qualified personnel.

This dissertation offers one of the first detailed insights into the challenges facing

China's SOEs today and the implications of China's WTO membership for these

companies, while also highlighting the areas that require future attention. The

understanding of the role and meaning of SOEs for the Chinese economy is of

immense importance for foreign investors wanting to invest in the country,

already cooperating with China's SOEs, or looking into the possibility of such.

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003

One must have some sort of occupation nowadays.

If I hadn't my debts I shouldn't have anything to think about.

OSCAR WILDE

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page i

Table of Contents

II.

LIST OF TABLES

III.

LIST OF FIGURES

IV.

GLOSSARY VI

1 INTRODUCTION 1

1.1

& O

BJECTIVES

1.2

VERALL

ESEARCH

PPROACH

1.3

TRUCTURE OF THE

ISSERTATION

2 THE WTO & FREE TRADE

2.1

HAPTER

NTRODUCTION

2.2

WTO 4

2.2.1

NDERSTANDING THE

WTO 4

2.2.2

TRUCTURE

& W

ORKING OF THE

WTO 7

2.2.3

IGNIFICANCE OF

OINING THE

WTO 13

2.3

HAPTER

ONCLUSION

3 CHINA & THE WTO

3.1

HAPTER

NTRODUCTION

3.2

HINA

ONG

ARCH TO

WTO

EMBERSHIP

3.2.1

ROLONGED

IFFICULTIES

3.2.2

INAL

CCESSION

3.3

HAPTER

ONCLUSION

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page ii

4 METHODOLOGY 23

4.1 C

HAPTER

NTRODUCTION

4.2

VERALL

ESEARCH

PPROACH

4.2.1

BJECTIVITY

, V

ALIDITY

& T

RIANGULATION

4.2.2

HINESE

TATISTICAL

ATA

4.3

ECONDARY

ESEARCH

4.3.1

IBRARIES

4.3.2

LECTRONIC

ATABASES

4.3.3

EWSPAPERS

& P

ERIODICALS

4.3.4

NTERNET

4.3.5

EARCH

ERMS

4.4

RIMARY

ESEARCH

4.4.1

ASE

TUDIES

4.4.2

UESTIONNAIRES

4.4.3

NTERVIEWS

4.5

HAPTER

ONCLUSION

5 MACRO-ECONOMIC ASPECTS & CHINA'S WTO MEMBERSHIP

5.1

HAPTER

NTRODUCTION

5.2

ACRO

-E

CONOMIC

SPECTS

5.2.1

OSITIVE

MPACTS

5.2.2

EGATIVE

MPACTS

5.3

ACRO

-E

CONOMIC

MPLICATIONS

5.3.1

ARIFF

& Q

UOTA

EDUCTIONS

5.3.2

NCREASING

OMPETITION

5.3.3

CONOMIC

EFORM

, O

WNERSHIP

& M

ARKET

HARE

5.4

HAPTER

ONCLUSION

6 CHINA'S SOE & WTO MEMBERSHIP

6.1

HAPTER

NTRODUCTION

6.2

HINA

SOE

6.2.1

SOE

NTRODUCED

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page iii

6.2.2

AIN

ROBLEMS

ACED BY

HINA

SOE

6.2.3

-WTO

TATUS

& D

EVELOPMENT OF

HINA

SOE

6.2.4

AIN

-WTO

CONOMIC

EFORMS

6.3

MPLICATIONS FOR

HINA

SOE

6.3.1

OMPETITIVENESS

& F

REE

OMPETITION

6.3.2

ORPORATE

OVERNANCE

6.3.3

RIVATISATION

6.3.4

OOPERATION

, C

ONSOLIDATION

& A

CQUISITIONS

6.3.5

ROPERTY

IGHTS

6.3.6

OWNSIZING

& U

NEMPLOYMENT

6.3.7

TTRACTING

& R

ETAINING

UALIFIED

ORKERS

6.4

XCURSION

: A

GRICULTURE

, C

HINA

THE

WTO 76

6.4.1

HINESE

OINT OF

IEW

6.4.2

MERICAN

OINT OF

IEW

6.4.3

XPECTED

ALCULATED

FFECT

6.4.4

GRICULTURAL

EFORM

6.5

UTURE

UTLOOK

6.5.1

SOE

: P

OSSIBLE

UTURE

EVELOPMENTS

6.5.2

OT ALL

LOOM

6.6

HAPTER

ONCLUSION

7 CONCLUDING REMARKS

7.1

ONTRIBUTION

& S

IGNIFICANCE OF THE

ISSERTATION

7.2

REAS OF

URTHER

ESEARCH

& L

IMITATIONS

7.3

VERALL

ONCLUSION

APPENDICES

VI.

BIBLIOGRAPHY

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page iv

II.

List of Tables

Table 1: WTO member countries as of August 2003 (WTO 2003), page 6

Table 2: Import/ export ratio of China and the USA, adapted from Hufbauer &

Rosen (2000), page 41

Table 3: Changing roles of Chinese enterprises, from the China Statistical

Yearbook (1999), taken from Chen (2002), page 48

Table 4: Share of total urban unemployment for major sectors (Broadman 2001),

page 50

Table 5: Breakdown of farmers' income in China between 1990 and 2000, taken

from Li (2003), page 82

Table 6: Extract of major search terms employed, Appendix One

Table 7: Shares (in %) of SOES in the industrial sector (1997). Adapted from

Chen (2002), Appendix Two

Table 8: Major tariffs and their planned reductions in the agricultural sector (Yu &

Frandsen 2002), Appendix Four

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page v

III.

List of Figures

Figure 1: WTO Organigram (WTO 2003), page 8

Figure 2: Dispute settlement procedure at the WTO (WTO 2003), page 12

Figure 3: Share of SOEs/ individually owned companies, adapted from Broadman

(2001), page 46

Figure 4: Management autonomy in Chinese SOEs, adapted from World Bank

(1996), page 62

Figure 5: The decline of SOEs and the rise of private companies (Broadman

2001), page 64

Figure 6: Employment in Chinese industrial enterprises (Broadman 2001), page

Figure 7: Per capita income of framers in China, taken from Li (2003), page 82

Figure 8: Budgetary subsidies to Chinese industrial enterprises (Broadman

2001), page 87

Figure 9: Map of China (Magellan 1993), Appendix Three

Figure 10: Agricultural regions in China. Source: University of Texas Library

Online (1989), Appendix Five

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page vi

IV.

Glossary

ASEAN

Association of Southeast Asian Nations

COEs Collectively

Owned

Enterprise

FDI

Foreign Direct Investment

GATS

General Agreement on Trade in Services

(WTO)

GATT

General Agreement on Tariffs and Trade (WTO)

Genetically Modified (typically refers to food

products)

HKUST

Hong Kong University of Science and

Technology

Industry in China

In China, industry involves non-agricultural

activities that turn physical inputs into physical

outputs, but the term excludes service activities

of any kind. Consequently, any statistics or

other measures that state, for instance, the

value of industrial output, include only industrial

output in pre-defined industries. These are

mining and quarrying, manufacturing, and the

production and supply of electricity, water, gas,

and construction.

IP Intellectual

Property

LSE

London School of Economics and Political

Science

M&A Mergers

Acquisitions

MFN

Most Favoured Nation Clause (WTO)

Openness in China

In China's situation, the term openness normally

refers to the exposure of firms to foreign

competition.

Post-WTO

Referring to [China] after joining the WTO

PRC

People's Republic of China

Pre-WTO

Referring to [China] prior to joining the WTO

PwC PricewaterhouseCoopers

Quota

A government-imposed restriction on quantity,

or sometimes on total value

SOE

State-Owned Enterprise, in this dissertation

almost exclusively referring to a SOE in China

SOEs

State-Owned Enterprises, Plural

Tariff

A tax on trade, usually an import tariff

TRC

Tariff Rate Quota; a system in which imports up

to the quota level are charged a minimal tariff -

usually one to three percent; imports above that

level are charged at a higher tariff.

TRIPS

Trade-Related Aspects of Intellectual Property

Rights (WTO)

WTO World

Trade

Organisation

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 1 of 94

1 Introduction

China's accession to the World Trade Organisation (WTO) can be regarded as

the most significant and far-reaching event about China in the last decade, with

the potential to radically transform and shape the Chinese economy and social

structure. Since the end of the Cultural Revolution in 1978, China has been on a

course of slow but steady economic reform. Today, the Chinese population is

richer than ever before in history, with the country itself having experienced

extended periods of extraordinary growth, even throughout recent events such as

the Asian Crisis.

Alongside other international organisations in operation today, the World Trade

Organisation has played an important role in liberalising and regulating global

markets. The WTO covers numerous aspects of economic and trade

globalisation, and is generally seen as advancing global liberisation through

multilateral rules. The positive effect the WTO has on international trade can be

seen in the desire of countries to belong to the WTO, or to remain a part of the

organisation for existing members.

China's marketisation and international integration are often perceived as being

below the optimal level. With WTO membership, China can rightfully expect to

become a full and respected member of the international trading arena, much in

the same way as the country made its political reappearance on the international

stage through its United Nations (UN) membership in 1972. Entering the WTO is

thus widely regarded as being of significant importance for China, both in terms

of gaining access to foreign markets, but also to use firm WTO rules to fight off

economic entrenchment. Essentially, WTO membership has the potential to

fundamentally transform the existing socialist market system in China into a

market system. International companies can, in turn, gain access to the Chinese

market according to global trade rules, bringing increasing amounts of Foreign

Direct Investment (FDI) to China on the way.

Of particular interest in this area is the current development of China's state-

owned enterprises (SOEs). These are generally seen as uncompetitive and not

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 2 of 94

operating according to market principles; Corporate Governance and sound

human resource policies are often non-existent, further adding to the dismal state

of these companies. SOEs are often regarded as one of the most negatively

affected group of companies of China's WTO membership. With WTO accession,

new opportunities but also challenges arise for these corporations. They can

now, for the first time, open branches in formerly restricted areas of China and of

course overseas. At the same time, these SOEs will be subjected to drastically

changing market conditions, to which they will have to adjust in order to compete

both at a national and international level.

1.1 Aim & Objectives

The broad aim of this dissertation will lie on investigating the economic

implications that China's WTO membership has on China itself. However, as any

casual observer of China might agree, the country develops and moves at such a

fast pace, especially in the area of economic reform, that this paper would not be

able to do justice to this complex topic.

Therefore, the specific objective of this dissertation is to investigate and highlight

the expected, actual, and needed implications and reactions in the sector of

China's state-owned enterprises. The developments in this crucial sector are

expected to shed a light on the wider implications for China. Whilst the nature of

this research is on reviewing actions and implications on a broader scale, namely

for the whole area of SOEs rather than on one specific industry, a short case

study will be used as a specific example to illustrate recent developments.

Logically following from the above, a further, secondary, objective of this report is

to understand the workings of the WTO and of the transforming Chinese

economy, essentially being able to appreciate the underlying yet fundamental

implications China's WTO membership has on the Chinese economy.

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 3 of 94

1.2 Overall Research Approach

This dissertation has employed a variety of sources mainly of secondary and

qualitative origin, though quantitative data has also received attention where

appropriate. The main information sources ranged from journals, newspapers,

electronic databases, to books. Primary data collection was regarded as not

appropriate, due to the nature of both the research question and the SOEs

involved in this research, but also the proximity of events (China only joined the

WTO in December 2001) investigated. Sufficient and foremost relevant data was

obtained through this approach, thus not affecting the overall outcome of the

study.

1.3 Structure of the Dissertation

This dissertation is structured as follows: Chapter two will introduce the World

Trade Organisation, its major functions and structure, and the main benefits for

countries looking to join the organisation. Next, Chapter three will highlight

China's long struggle to join the WTO, and its final accession in December 2001.

Chapter four then introduces the methodology adopted, and explains why

secondary research was sufficient for the purpose of this research problem.

Following this, the macroeconomic aspects and implications of China's WTO

membership are discussed in Chapter five. Chapter six, which also builds the

main part of this dissertation, focuses on the expected, actual, and needed

implications for China's SOEs. Lastly, Chapter seven concludes this dissertation

and highlights areas of possible further research.

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 4 of 94

2 The WTO & Free Trade

2.1 Chapter Introduction

This following chapter will introduce the main areas and aspects of the World

Trade Organisation. The significance of the WTO to free trade in the world will be

made apparent, and understanding will be created for why countries strive to

belong to the organisation as a member country. This understanding is

particularly important in the light of subsequent parts of this dissertation (for

instance Chapter three), where China's accession and dealings with the WTO will

be discussed in more detail.

2.2 The WTO

2.2.1 Understanding the WTO

The World Trade Organisation came into being on January 1st 1995. It was the

outcome of the lengthy (1986-1994) Uruguay round of trade negotiations under

the umbrella of the General Agreement on Tariffs and Trade (GATT). GATT was

established after the end of the Second World War in 1947, with the main

signatories being America, Europe, and Japan, which joined in 1955 (Emmot

2003). The WTO, GATT's successor, extended GATT in two major ways: Firstly,

GATT was only one of the three major trade agreements that created the WTO

(the other two being the General Agreement on Trade in Services (GATS) and

the agreements on Trade Related Aspects of Intellectual Property Rights

(TRIPS)) (McDonald & Burton 2002). Secondly, the WTO was put on a much

sounder institutional footing than GATT, with far more internationally binding rules

that member states have to adhere to.

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 5 of 94

The WTO today is a fully-fledged supranational institution with a corporate body

recognised under international law (Grady 1999). Alongside other international

organisations in operation today, the World Trade Organisation has played an

important role in liberalising and regulating global markets (WTO 2002, 2003). It

has evolved to cover numerous aspects of economic and trade globalisation such

as commodities trade, services trade, investments relating to trade, Intellectual

Property (IP) rights relating to trade, mechanisms on trade policy deliberation and

dispute settlement, transparency of regulations, and sustainable development

(Lingguang 2001). For the future, observers such as Wallach (1999) expect that

the WTO will "continue to advance global liberisation through multilateral rules".

2.2.1.1 Main Functions of the WTO

In simple terms, the WTO deals with the rules of trade between nations. Its main

function is, according to the WTO (2002) itself, to ensure that trade flows as

smoothly, predictably, and freely as possible. WTO agreements, negotiated and

signed by the bulk of the world's trading nations, set the scene for `Trade without

Discrimination'. As such, the WTO incorporates the principle of the `Most

Favoured Nation' (MFN) treatment, implying no special deals to trading partners,

guaranteeing that all members of the organisation are treated the same

(McDonald & Burton 2002). Further, it promotes fair competition and encourages

development and economic reform (Grady 1999).

At the heart of the WTO lies it multilateral trading system, which encompasses

the organisation's agreements. These agreements are the legal ground rules for

international commerce. Easiest understood as binding contracts, they guarantee

member countries the most important trade rights. They also bind governments to

keep their trade policies within agreed limits for the benefit of all WTO members,

a system that has its origin in GATT, and has thus been in place for well over 50

years today (Grady 1999).

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 6 of 94

According to the WTO (2003) itself, it sees its main purposes as:

Administering trade agreements;

Acting as a forum for trade negotiations;

Settling trade disputes;

Reviewing national trade policies;

Assisting developing countries in trade policy issues, through technical

assistance and training programmes; and

Cooperating with other international organisations.

Today, the WTO has 146 members (see Table 1 below), accounting for over 97

percent of world trade, with about 30 more countries, most notably Russia and

Vietnam, currently negotiating to join in the near future (Emmot 2003, The

Vietnamese Investment Review 2002).

Albania Georgia

Nicaragua

Angola Germany

Niger

Antigua and Bermuda

Ghana

Nigeria

Argentina Greece

Norway

Armenia Grenada

Oman

Australia Guatemala

Pakistan

Austria Guinea

Panama

Bahrain, Kingdom of

Guinea

Papua New Guinea

Bangladesh Guyana

Paraguay

Barbados Haiti

Peru

Belgium Honduras

Philippines

Belize Hong

Kong

Poland

Benin Hungary

Portugal

Bolivia Iceland

Qatar

Botswana India

Romania

Brazil Indonesia

Rwanda

Brunei Ireland

Saint

Kitts

Bulgaria Israel

Saint

Lucia

Burkina Italy

Saint

Vincent

Burundi Jamaica

Senegal

Cameroon Japan

Sierra

Leone

Canada Jordan

Singapore

Central African Republic

Kenya

Slovak Republic

Chad Korea,

Republic

Slovenia

Chile Kuwait

Solomon

Islands

China Kyrgyz

Republic

South

Africa

Colombia Latvia

Spain

Congo Lesotho

Sri

Lanka

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 7 of 94

Costa Rica

Liechtenstein

Suriname

Côte d'Ivoire

Lithuania

Swaziland

Croatia Luxembourg

Sweden

Cuba Macao

Switzerland

Cyprus Madagascar

Chinese

Taipei

Czech Republic

Malawi

Tanzania

Democratic Republic of the Congo Malaysia Thailand

Denmark Maldives

Togo

Djibouti Mali

Trinidad

and

Tobago

Dominica Malta

Tunisia

Dominican Republic

Mauritania

Turkey

Ecuador Mauritius

Uganda

Egypt

Mexico

United Arab Emirates

El Salvador

Moldova

United Kingdom

Estonia

Mongolia

United States of America

Fiji Morocco

Uruguay

Finland Mozambique

Venezuela

Former Macedonia

Myanmar

Zambia

France Namibia

Zimbabwe

Gabon Netherlands,

The

The Gambia

New Zealand

Table 1: WTO member countries as of August 2003 (WTO 2003)

2.2.2 The Structure & Working of the WTO

Under the WTO, decisions are typically made through consensus amongst all

member states. At the top of the WTO sits the Ministerial Conference, which

meets roughly once every two years. Below the Ministerial Conference is the

General Council, consisting of ambassadors and heads of delegation, based in

Geneva. This council meets several times a year (it meets additionally for Trade

Policy Reviews and dispute settlements when needed). Further down still are the

Goods Council, Services Council, and Intellectual Property Council, which report

to the General Council. Lastly, various specialised committees, working groups,

and working parties deal with the individual agreements and other areas such as

the environment, development, membership applications and regional trade

agreements (Lloyd 2001). Figure 1 below depicts the current structure of the

WTO as described above.

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 8 of 94

Figure 1: WTO Organigram (WTO 2003)

2.2.2.1 WTO Secretariat

The WTO Secretariat, situated in Geneva, employs around 550 permanent staff,

and is headed by the director-general, currently Mr Panitchpakdi. Its annual

budget is roughly 155m Swiss Francs (about 100m). Its main duties are to

supply technical support for the various councils and committees and the

ministerial conferences, to provide technical assistance for developing countries,

to analyse world trade, and to explain WTO affairs to the public and media (WTO

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 9 of 94

2003). It also provides legal assistance in the Dispute Settlement Process and

advises governments wishing to become members of the WTO.

2.2.2.2 Most-Favoured-Nation Clause (MFN)

One of the most important features of the WTO is its Most-Favoured-Nation

clause. Under the WTO's agreements, countries cannot normally discriminate

between their trading partners. If a certain favour, or punishment, is granted or

imposed on one member country, it has to be extended to all WTO members

states (McDonald & Burton 2002). The importance of this for the whole working of

the WTO can be seen in the fact that it constitutes the first article of GATT.

However, MFN is also a priority in GATS (where it is Article 2), and in TRIPS

(where it is Article 4) (WTO 2003). As these three agreements cover all main

areas of trade handled by the WTO, MFN is thus one of the most important and

omnipresent concepts of the WTO.

2.2.2.3 Trade in Goods - GATT

Trade in goods has been at the cornerstones of the former GATT and now the

WTO. From 1947 to 1994, GATT was the forum for negotiating lower customs

duty rates and other trade barriers; the text of the General Agreement spelt out

important rules, particularly non-discrimination amongst member countries. Since

1995, the updated GATT has become the WTO's umbrella agreement for trade in

goods. It incorporates sections dealing with specific sectors such as agriculture

and textiles, specific issues such as state trading, product standards, subsidies,

and actions taken against dumping violations (Lloyd 2001).

Post-WTO Economic Effects on State-Owned Enterprises in China

Ben Beiske, September 2003 Page 10 of 94

2.2.2.4 Trade in Services - GATS

More recently, the newer GATS extends the principles of free trade to service

industries such as banking, insurance, telecommunications, or transportation.

The above are thus equally protected and governed by the binding rules of the

WTO as the trade in goods is governed by GATT (McDonald & Burton 2002,

WTO 2003).

2.2.2.5 Intellectual Property - TRIPS

TRIPS, which governs Intellectual Property under the WTO, is another more

recent development at the WTO. In essence, it covers trade and investment in

ideas and creativity (WTO 2003). Similar to GATS, the basic principle of GATT

was taken and applied to copyrights, patents, trademarks, industrial designs,

integrated circuit layout-designs, and undisclosed information such as trade

secrets that should be protected when trade is involved (WTO 2002, 2003). For

instance, TRIPS can be regarded as vital to ongoing investment in China, where

IP is traditionally seen as a rather loose term, with low enforcement, and scaring

off potential investors in areas where the protection of IP is often crucial to the

investment decision.

One recent example of this is Infineon, a German semi-conductor company.

Infineon decided against building a new wafer-factory in China, and favoured

Dresden in the former eastern part of Germany instead. Though labour and

related costs are significantly higher in Germany than in China, the risks

associated with building this high-tech factory with state-of-the-art technology in

the PRC were seen as being too high (Netzeitung.de 2001).

1 Additionally, 450m German Marks (about 225) were offered to Infineon

at that time

as tax incentives to build the factory in Dresden

and not abroad (Netzeitung.de 2001)

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2.2.2.6 Dispute Settlement

Dispute settlement is one of the major areas of the workings of the WTO. The

organisation's procedure for resolving trade-quarrels under the Dispute

Settlement Process (WTO 2003) is regarded as vital for enforcing trade rules and

therefore for ensuring that trade flows smoothly. Countries can bring disputes to

the WTO if they think their rights under the agreements are being infringed. Of

more significance however, WTO members have agreed that if they believe

another WTO member is violating trade rules, they will use the multilateral

system of settling disputes, instead of taking action unilaterally.

Judgements by specially appointed, independent experts are based on

interpretations of the agreements and individual countries' commitments. One of

the more recent events under this mechanism is the complaint by the United

States concerning the EU's continued refusal to open its market to genetically

modified (GM) products. Encouraged by the Dispute Settlement Process of the

WTO, the next steps involve thorough consultation between the opponents.

Failing that, the USA and Europe can then follow a carefully mapped out, stage-

by-stage procedure that includes the possibility of a ruling by a panel of experts,

and the chance to appeal the ruling on legal grounds. Confidence in the system

is traditionally based on the number of cases brought to the WTO - around 300

cases in eight years compared to the 300 disputes dealt with during the entire life

of GATT (1947-94). Figure 2 below shows the Dispute Settlement Process in

more detail.

2 Typically, a dispute arises when one country adopts a trade policy measure or takes some action that another fellow-WTO member

considers to be breaking WTO agreements, or to be a failure to live up to agreed obligations.

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Figure 2: Dispute settlement procedure at the WTO (WTO 2003)

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2.2.2.7 Development & Trade

Over three quarters of WTO members are developing, less-developed, or least-

developed countries. All WTO agreements contain special provision for these

member states, including longer periods to implement agreements and

commitments, measures to increase their trading opportunities, support to help

them build the infrastructure for WTO work, handle disputes, and implement

technical standards. A WTO committee on trade and development, assisted by a

sub-committee on least-developed countries, looks at developing countries'

special needs (Lloyds 2001). Its responsibilities include implementation of the

agreements, technical cooperation, and the increased participation of developing

countries in the global trading system. The WO stresses that these special

provisions are not in violation of its MFN clause, but merely state a necessary

adjustment period for countries that might not have the means to implement and

establish certain agreements as quickly and thoroughly as more developed

nations (WTO 2003).

2.2.3 Significance of Joining the WTO

Having discussed the main functions and the structure of the WTO, the question

arises why being or becoming a member of this supranational body is of such

importance to individual member countries. What do prospective members stand

to gain from joining, and what keeps existing members from leaving the WTO?

Broadly speaking, the WTO sees its benefits to its members in the following main

areas and ways (WTO 2002):

The WTO promote peace;

Disputes are handled constructively;

Clear trade rules benefit all members;

Freer trade cuts the costs of living;

Freer trade provides more choice of products and qualities;

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Trade raises incomes;

Trade stimulates economic growth;

Governments are shielded from lobbying; and

The system encourages good government.

Today's international trade, with increasingly interlinked and dependant markets,

financial institutions, and technology, offer both opportunities and risks to

participants around the world (MacPherson 2001). This increasing trade,

however, is more often than not a fragile occurrence, with disagreements and

disputes frequent and often severe in outcome. Nevertheless, globalisation is a

reality today, no matter how much its opponents show their dissatisfaction, and

the WTO is at the heart of this phenomenon (Moore 2000a). Whilst it is actually

not certain that globalisation will endure the test of time, at present it is the best

model under which international commerce runs as effectively and smoothly as

possible.

McPherson (2001) believes that the WTO is a major factor in deciding if the world

"starts to become a more civilized society under globalization or just keeps

evolving into one big commercial enterprise that largely favors the industrialized

nations at the expense of others". With this, the author has struck a key issue that

the WTO sees as one of the important missions of the organisation, that of

enabling fairer trade between developing and developed nations. In today's trade

order, economic power often translates into political power, thus ensuring that

already strong nations can demand and dictate the rules of the game according

to their liking. The WTO aims at addressing this imbalance by giving a voice to

the otherwise misrepresented members of the international trading community. In

practise, this means that the WTO operates a `one-country, one-vote' system,

essentially giving each country a say in the dealings and proceedings of the

organisation (Magnus 2000). This dedication to developing countries is one of the

major attractions for those countries to join or remain in the WTO. Mr Moore of

the OECD (2000a) contests that the organisation has in fact made good progress

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in helping poorer countries, mainly in assisting these nations to "reap greater

benefits from the world trading system".

The MFN clause of the organisation ensures fair trading practices amongst all

member countries, whilst condemning unilateral dealings, which tend to favour

only a small part of trading nations, possibly only two. The recent development in

North America, where the USA is negotiating increasingly on a bilateral basis,

mainly with countries in South America and Asia, has caused much resentment

amongst other nations. It is a good example of how much more efficient and

beneficial such talks could be under the umbrella of the WTO, where the outcome

would be extended to all WTO member states.

Integration with the rest of the world, economically certainly as per the definition

of the WTO, but, extending from that, politically as well, is another area where

many developing countries see the main benefit in the WTO (The Economist

1998). The loss of such integration then is often perceived to be severe, possibly

being the main reason why countries, once a member of the WTO, hardly ever

leave the organisation (WTO 2003).

More tangibly of course are the benefits in reduced trade barriers such as tariffs

and quotas amongst member countries, which tend to significantly boost a state's

trade within the realm of the WTO (The Economist 1998) by increasing access to

worldwide markets. Competitiveness is often affected very positively, as is the

general trading volume for WTO members.

Enabling a country to push through economic and legal reforms is also helped by

WTO memberships. Reforms that might be difficult or even impossible to

implement alone, are often prescribed by the rules of the WTO, leaving a country

little choice but to obey. This can be especially useful in situations where a

domestic deadlock prevents such needed reforms, as is the case currently in

Vietnam, who uses WTO accession negotiations for just this reason (The

Vietnamese Investment Review 2002).

3 For a more detailed discussions of the measurable benefits as seen by the OECD, refer to Moore (2000a).

4 One exception here being China, who had joined GATT, the forerunner of the WTO, in 1948, only to withdraw in 1949 under the

Nationalist government (The Economist 1998).

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It must not be forgotten however, that becoming a member of the WTO is by no

means an easy undertaking. Detailed rules and regulations must be abided to,

and accession negotiations typically stretch over many years. The individual

situation of each prospective member nation needs to be assessed on a case-by-

case basis, and agreements with many existing members of the WTO negotiated.

Indeed, any interested non-member state needs to articulate to the WTO very

clearly its trading policies that could affect WTO agreements. The WTO then

establishes a working party, which firstly considers the case, and secondly starts

parallel bilateral talks with the applicant nation and interested member countries

(WTO 2003), which typically include the USA, Europe, and Japan, amongst

others whose specific interests will be affected by the new member. Once these

bilateral negotiations are completed, a draft membership treaty is created,

finalising the terms of the agreement. This treaty will then be put to a vote in the

WTO General Council or the Ministerial Conference (WTO 2003), where a two-

thirds majority is required to make the treaty binding. The case for China's

accession to the WTO, as described in the following chapter, will illustrate just

how difficult it can be for any one country to join this supranational body.

To sum up, the WTO benefits its current members in various ways, ranging from

increased access to markets to reduced trade barriers, a voice in international

trade, multilateral trading rules, dispute settlement, and economic and political

integration all the way to special consideration to less-developed nations. These

benefits are also increasingly considered vital by countries looking to join the

WTO, such as Vietnam and Russia, or China in the past.

2.3 Chapter Conclusion

This chapter has given an account of the history and the workings of the World

Trade Organisation. It was shown how the organisation operates in an

increasingly complex and open trading world, and which mechanisms are

employed to ensure the smooth trade amongst member countries, including less

developed nations. The most important of these mechanisms were found to be

the WTO's Most-Favoured-Nations clause, and the widely used Dispute

Details

Seiten
Erscheinungsform: Originalausgabe
Jahr: 2003
ISBN (eBook): 9783832473433
ISBN (Paperback): 9783838673431
DOI: 10.3239/9783832473433
Dateigröße: 1.4 MB
Sprache: Englisch
Institution / Hochschule: Manchester Metropolitan University Business School – International Business and Management
Erscheinungsdatum: 2003 (Oktober)
Schlagworte: china world-trade-organization staatsunternehmen

Autor

Ben Beiske (Autor:in)