Estimating the effects of China's Accession to the World Trade Organisation

Abstract

Accession to the World Trade Organization (WTO) marks a new era in China’s economic reform. In this new era, state capital will lose its dominance of heavy manufacturing and key services industries, heralding significant productivity gains in these so-called strategic industries. This study uses a computable general equilibrium model of China to estimate the economic benefits from China opening its heavy manufacturing and key services industries to private foreign and domestic capital. To estimate the likely productivity benefits of WTO entry, the study draws on China’s experience in the early to mid 1990s when the withdrawal of state capital from light manufacturing industries led to a massive inflow of foreign direct and local investment into these light manufacturing industries. The study anticipates that opening the previously protected heavy manufacturing and key services industries to non-state capital will boost productivity by encouraging new competition and foreign direct investment (FDI) inflows into these industries. As a result of the expected productivity gains in these previously protected strategic industries, this study concludes that WTO accession will not adversely affect production and employment in these industries. This result contrasts with the findings of most general equilibrium analyses of China’s WTO entry that focus only on resource reallocation impacts following the removal of tariff and non-tariff barriers. In the long term, productivity gains related to WTO accession should place China in a position to become an important production base for capital-intensive manufactured products as well as light manufacturing.

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