China in the WTO: Implications for International Trade and Policy Making in Agriculture

For Official Use CCNM/CHINA/CA(2000)29

Organisation de Coopération et de Développement Economiques OLIS : 10-Nov-2000Organisation for Economic Co-operation and Development Dist. : 13-Nov-2000__________________________________________________________________________________________

Or. Eng.CENTRE FOR CO-OPERATION WITH NON-MEMBERSCOMMITTEE FOR AGRICULTURE

Programme of Dialogue and Co-operation with China

CHINA IN THE WTO: IMPLICATIONS FOR INTERNATIONAL TRADE ANDPOLICY MAKING IN AGRICULTURE

Workshop on China’s Integration into the International Trading System: Issues for, and Impactson, AgricultureParis, 16-17 November 2000

For O

fficial Use

CC

NM

/CH

INA

/CA

(2000)29O

r. Eng.

This paper, submitted by Mr. Brad Gilmour, Agriculture and Agri-Food, Canada, is presented for discussionunder Session No. 3 of the Draft Agenda [CCNM/CHINA/CA/A(2000)17]. Please note that the title of the paperhas been slightly modified.

Contact: Mr. Andrzej Kwiecinski, Principal Administrator, Agricultural Policies in Non-MemberEconomies - Tel: (33-1) 45 24 95 08; Fax: (33-1) 45 24 96 72; E-mail: [email protected]

97715

Document complet disponible sur OLIS dans son format d’origine

Complete document available on OLIS in its original format

CCNM/CHINA/CA(2000)29

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CHINA IN THE WTOIMPLICATIONS FOR INTERNATIONAL TRADE AND POLICY MAKING IN AGRICULTURE

Brad Gilmour and Lars Brink1

1. Introduction

1. China is expected to join the World Trade Organization in the near future. China’s economy andtrade will soon be large enough to match the influence of other large members. As China becomes morefully integrated with the global economy by participating in the WTO, the impact of its policies andactivities on the economies of other countries grows. Conversely, the Chinese economy is increasinglyinfluenced by international developments and the actions of other countries. It is, therefore, important tocome to an understanding of the influence China may have on international trade and policy making.

2. To gain such an understanding, we must ask questions about where China’s interests lie. But, aswith any other country, China is not a grey, homogeneous monolith. Different regions, sectors, andinstitutions all have their own interests. Positions and policies are likely to either accommodate or expressthe interests of those who hold the lead in a particular area. Therefore, the implications of China’smembership in the WTO flow from at least two major factors: the inclusion of another large member inmultilateral policy making and the specific nature of China’s economy and institutions.

3. The paper first reviews discussions of possible “systems friction” and associated difficultiesposed by China’s prospective membership. Drawing on game theory and co-operation theory, the paperthen makes observations regarding the addition a large new member to the WTO. After this, similaritymatrices are employed to characterise the nature and intensity of trading relationships between countries asa tool to identify where complementarities and points of friction might exist. Next, some of the specificissues are discussed, based on assessments of China’s comparative advantage, the nature of its economy,and commercial and regulatory institutions. A summary and conclusions follow thereafter.

2. China’s WTO Membership in Relation to Systems Friction

Sources of Systems Friction

4. Throughout the post-war era, GATT agreements opened industrial country markets andcontributed to economic growth in developing countries, particularly in Asia and Latin America.�

1. Foreign Agri-Food Analysis, Research and Analysis Directorate, Agriculture and Agri-Food, Canada.

Views expressed are those of the authors alone. Views, whether explicitly states, inferred or interpretedfrom the contents of this publication, should not be represented as reflecting those of Agriculture and Agri-Food Canada. The authors thank, without implicating, Lu Feng, Colin Carter, Yang Yongzheng, ChengFang, Kathryn McKinley, and Pierre Charlebois for helpful discussion and criticism which contributed tothe development of this paper.


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Countries came to the GATT to “do business” and left political rhetoric to other forums. The systemworked by consensus: no votes on senseless resolutions; very few decisions by majority rule. Theconsensus rule was not overly abused. Developed countries, particularly the United States, EuropeanUnion and Japan, drove the GATT agenda and negotiations but did not insist on full participation (in bothrights and obligations) by all developing countries. In turn, developing countries did not block progress intrade talks—both because the accords placed modest demands on them and because they benefited fromthe commitments the developed countries extended to them on a most-favoured nation basis. Moreover,with relatively weak economic clout, they benefited significantly from a well functioning multilateralrules-based system.

5. The WTO no longer operates entirely on the principle of consensus, and the process ofconsensus-building seems to have weakened. This problem emerged long before the 1999 WTO ministerialin Seattle; indeed, it was evident already in the Uruguay Round. It has three main causes: increased numberof members; increased diversity among its members; and stricter compliance and reciprocity requirements(Schott and Watal).

6. WTO membership has greatly expanded, encompassing many developing countries thatpreviously were outsiders or passive players in trade negotiations. The GATT had 23 signatories at its 1948beginning, and 84 by the end of the Tokyo Round in 1979. More than 110 countries signed the UruguayRound accords in April 1994. As of October 2000, the WTO had 139 members with an additional 27 in theprocess of accession. As a result of domestic economic reforms, including trade liberalisation undertakenboth unilaterally and pursuant to GATT negotiations, developing countries now have a greater stake in theworld trading system and a greater claim on participation in the WTO decision-making process.

7. GATT decision making worked in the past because there were relatively few countries activelyengaged and because there was limited formal compulsion for all countries to adhere to the results.Consensus-building engaged a small group of countries; the rest were relatively passive. This process fellvictim to the GATT’s success in integrating developing economies and economies in transition more fullyinto the trading system and requiring them to be full partners in new agreements. More active participants,representing more diverse interests, complicate WTO decision-making and already contribute to “systemsfriction.” China’s membership will compound this problem by adding a sizeable economy that in manyways functions differently from those of other WTO members.

Systems Friction and WTO Decision-Making

8. Members of the WTO make collective decisions on a variety of matters, including: (1)amendment of the WTO Agreement; (2) interpretation of the WTO Agreement; (3) waivers that permitMembers to deviate from WTO rules; (4) adoption of new commitments under the GATS and TRIPSAgreement; (5) acceptance or disapproval of dispute decisions and authorisation of withdrawal ofconcessions; and (6) the management of the Organization, including budgets (Abbott 1998). In theabsence of consensus, decisions of Members are taken by a majority of votes, unless specified differentlyelsewhere in the WTO Agreement. Most important decisions require a 2/3 majority approval. The grantingof waivers and decisions that bind Members without consent requires a 3/4 majority. Even with theseprovisions, little legislative action is conventionally taken on important matters of substance if a majormember objects. China is unlikely to agree to rule changes aimed at reducing systems friction if they resultin additional disciplines on China’s practices. Therefore, with China as a member, conventional decision

2. The following paragraphs draw heavily on Schott and Watal (2000).


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making may render the WTO legislative process incapable of constructively addressing sources of systemfriction.

9. Over time and as a practical matter, negotiations of new agreements have come to rely onprocesses and conventions that are not specifically mandated in WTO laws and regulations. For example,one such process - the “Green Room” process was initially designed with the practical intent of expeditingthe drafting of clauses prior to consideration by the WTO membership at large. The expeditious nature ofthe process derives from only a small number of members participating in the process. Excluded WTOmembers have come to feel that the process has taken on more and more rule-making rather than justdrafting responsibilities. Perceptions regarding unequal access to and treatment in this and other aspects ofWTO decision-making have contributed to dissatisfaction among some members and may have heightenedmembers’ interest in bilateral, regional and plurilateral trade agreements. Consequently, informal processesmay need to be re-engineered. However, given the number of issues, their complexity, and the number ofmembers now involved in negotiations, some manner of informal process is still required: an all-inclusiveapproach would simply be too unwieldy and time-consuming.

10. China’s membership in WTO is likely to affect WTO decision-making processes. China willwant to participate in those “Green Room” type processes relevant to it. Such desires could beaccommodated by simply including China among the “insiders.” At the same time, the automatic inclusionof China in “Green Room”-type processes will need to be considered in relation to what other members seeas being in their interest. Some members who do not presently participate in these processes will feel thatChina has bypassed them in gaining participation, whatever the merits of China’s participation, such asmagnitude of population or trade. Some members may see China’s participation in informal processes as astrengthening their own voice; China would be the champion and convey the voice of some members whoare currently excluded. Others may call for a more comprehensive overhaul and possible formalisation of“Green Room”-type processes.

11. If systems friction arising from such differences cannot be addressed constructively, China’smembership could weaken the WTO as an institution. Hence, it has been suggested that new rules bedrafted dealing with state-owned enterprise conduct, transparency, commercial law and other areas ofpotential systems friction prior to China’s accession (Kerr 2000, Herzstein 2000). In the absence ofprogress in these areas, it is not clear whether China’s WTO membership is more likely to reduce andcontain systems friction or weaken the WTO as an institution (Kerr 2000). Steinberg (1997) and Mastell(2000) fear that China’s membership could contribute to decision-making gridlock, administrativeinefficiency and ineffective dispute settlement unless constructive corrective steps can be taken. Becauseof such fears, China and WTO members have sought to ensure that, when it accedes, China will be able tosubstantially comply with WTO disciplines (Miner 1998).

Systems Friction and WTO Dispute Settlement

12. While China’s leaders have abandoned formal economic planning and allocation by command,they have not exactly embraced allocation by markets. Instead, they have latched upon an official policyof managed market socialism, with the government remaining far more interventionist than is the case inmarket economies. Market socialism implies that trade in commodities or merchandise considered ofstrategic importance will continue to be managed, with state-linked enterprises still playing a large role.Competition policy is still a relatively new concept to China and is largely irrelevant from an enforcementperspective. Domestic rules and rule-making processes are not always transparent and sometimes not evenpublicly documented. The commercial legal / judicial system is still in the early stages of development andnot always independent of politics.


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13. Steinberg (1997) discusses how WTO dispute settlement procedures could come up short in thearea of competition policy. WTO dispute settlement is unlikely to provide a remedy for behaviour thatdoes not directly violate a WTO rule. GATT Article XXIII:1(b) provides a basis for the possibility of asuccessful claim by a complainant based on the idea that another member has imposed a measure thatnullifies or impairs a benefit, whether or not that measure conflicts with WTO obligations. Claims basedon such “non-violation nullification or impairment” have been rare in GATT/WTO jurisprudence. Somehave taken the text to imply that a claim is supported only if it is based on the “application” by anothermember of a measure, not if the claim is based on the failure to apply a measure. Withoutsupplementation, this means that a failure to enforce competition policy rules or rules relating to theprotection of intellectual property could not form the basis of a non-violation nullification or impairmentclaim.

14. This is worrying in light of the prevalence of large state-owned and state-linked commercialentities and the patchy enforcement of intellectual property laws in China’s economy. China could,conceivably, have WTO consistent competition policies and intellectual property regulations but choosenot to enforce them. A broad interpretation of Article XXIII:1(b) could reduce this difficulty somewhat.Although it would not require the offending party to change behaviour, it would authorise compensationfor the complainant. In contrast, a narrow interpretation could render the dispute settlement systemincapable of resolving tension associated with behaviour not explicitly covered in the WTO rules. Sincethe WTO dispute settlement process allows relatively swift and automatic action against countries that actunilaterally, a narrow reading would leave complainants with the unpleasant choice of either bearing thebrunt of systems friction or taking unilateral action that contravenes their own WTO obligations - andconcurrently weakening the WTO as an institution.

Systems Friction and China’s Conduct

15. WTO members have already called for improvements in reporting procedures. With theprospective memberships of China and many others, such calls are likely to become more forceful.Timely, regular, reliable and transparent disclosure is a necessary condition for fruitful and co-operativeinternational relations. Failure to be forthcoming or to provide information in an understandable fashionwill undermine collective trust and contribute to non-co-operative behaviour.

16. China has made some progress in this area, recently designating the MOFTEC Gazette as theofficial register for publication of all laws and regulations relating to international trade. The Gazette isupdated as new regulations are announced and is available by subscription. Finding information abouteconomic and trade regulations in the print and electronic media is becoming easier. Economicnewspapers now routinely carry the text of government policies and regulations. Many other ministrieshave also begun to publish digests of their own regulations (USTR 2000).

17. Despite this progress, access to information is still a problem in China. Chinese ministriesroutinely implement policies based on “guidance” that is not available to foreign firms and non-incumbentdomestic firms. Experimental or informal policies and draft regulations are still regarded as internalmatters and access to them remains tightly controlled by the government. It remains extremely difficult toobtain copies of draft regulations, even when they have a direct effect on foreign trade and investment.The opaque nature of customs and other government procedures continue to complicate the ability ofbusinesses to take full advantage of commercial opportunities in China. Another complicating factor isthat laws and regulations in China tend to be more general in nature than in other countries, allowing forrather flexible interpretations and inconsistency; companies may have difficulty determining preciselywhether their activities contravene regulations (USTR 2000). Finally, there are few procedures in place forappeal of regulatory decisions.


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18. WTO members will need to decide whether existing WTO requirements for members to provideinformation are sufficient in scope and nature and how they will be applied to China. In the Agreement onAgriculture, very specific requirements apply to notifications, stipulating such things as periodicity andformats. China would be expected to comply with these requirements. Notification requirements applyalso under other agreements and, additionally, the WTO Trade Policy Review would be carried out with agiven frequency.

19. While progress has been made, serious problems with transparency in policy making remain inChina. Further, commercial and regulatory agencies often have close relationships - some are easilydiscerned, some are not. As a result, it is difficult to ensure that decisions are made on a non-discriminatory basis. Such problems with transparency could lead to a large number of disputes at theWTO, creating administrative gridlock by overburdening both the Dispute Settlement Process and theSecretariat (Magnusson and Gleckman 2000, Mastell 2000). Consequently, Groombridge and Barfield(1999) argue that the goal of developing transparent institutions in China is more important than focussingon tariff reductions and negotiated market access. Failing progress in achieving transparency and arms-length arrangements, the possible consequences are worrisome. Other WTO members and prospectivemembers may insist that they too be allowed to engage in "managed trade" arrangements whererelationships between commercial and regulatory entities continue to operate.

20. One of the factors contributing to the outcome of the 1999 Seattle ministerial meeting wasgrowing disagreement between developed countries and developing countries. Speaking on 10 January2000 at the Confederation of Indian Industry’s annual Partnership Summit, Indian Commerce MinisterMurasoli Maran called for developing nations in the WTO to join together to counter the influence ofdeveloped nations. On the same day, at a Beijing press conference, a vice-minister of China’s Ministry ofForeign Trade and Economic Co-operation, Zhang Xiang, criticised the WTO for insufficiently reflectingthe interests and demand of developing countries. Zhang suggested that China’s WTO entry wouldstrengthen the hand of developing nations. This has caused some to fear a coalition between India, Chinaand other developing countries which could frustrate decision-making.

21. China has questioned the dominance of developed nations in setting the organisation’s agenda.China is emerging as a leader in countering what is perceived to be the overwhelming influence of theUnited States, European Union, and Japan in the international organisation. With China and India bothlooking to have greater influence, some friction with incumbent powers is inevitable. It would beworrisome, however, if economies that favour preferential treatment for state linked commercial entitieswere to gain the upper hand. This could lead many developed nations to reconsider the benefits of WTOmembership.

22. More than 70 percent of WTO members are developing or transition economies. The definitionsof these terms are not exactly clear-cut. A member’s developing country status could affect suchagriculture-specific provisions as de minimis entitlements and ability to provide certain kinds of support,including some export subsidies. The United States, European Union and many other WTO membersargue that China’s vast size and population and state-led economy justify it being treated as a non-traditional developing economy. Based on this special case argument, they expect that China shouldaccept the responsibilities of a developed economy in its WTO membership.

23. If China enters the WTO with developing country status, a rather large economy and trader willbe subject to less stringent disciplines than members of corresponding size. If China joins the WTO withdeveloped-country status, its pace of adjustment to international competitiveness will be faster as Chinawould be committed to stricter disciplines on trade-distorting measures. But this could lead to social andpolitical disruption within China. Deeming China “developed” and then making special allowances couldset precedents for other accession candidates. Alternatively, China might join the WTO as a developing


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economy, without availing itself of every single “special and differential” provision available todeveloping country members.

24. China's behaviour elsewhere may hint at its possible conduct as a WTO member. Within theWorld Bank and International Monetary Fund (IMF), China’s record is pretty clear - China has become a‘system maintainer’ rather than a 'system transformer'. There is some evidence that Chinese officials haveused World Bank and IMF standards in conjunction with China's desire to be an accepted member ofglobal organisations as an impetus for economic reform and liberalisation (Pearson 2000).

25. China will have a major stake in a strong WTO system. If the global trading system breaks down,China would again become a leading target for protectionist barriers. China has done fairly well in termsof living up to agreements in the economic area and the record suggests that China is not likely to sign anagreement that Chinese authorities know they would not be able to implement (Lardy 1999). Moreover,progressives among China’s leaders recognise that WTO accession will require major changes. TradeMinister Shi Guangsheng has noted that many of China’s commercial laws are in conflict withinternational law and indicated that China plans to overhaul its trade and investment rules to bring them inline with WTO requirements (China Bracing for Membership in the WTO, Associated Press, Beijing).Likewise, China’s extensive experience with central planning has convinced its leaders to gradually, albeitreluctantly, relinquish state monopolies and allow greater pluralism to take hold in the marketplace.China’s leaders are very much aware that an emasculated WTO serves no one’s interests.

Systems Friction: Overview

26. The number and the diversity of WTO members are increasing, while the issues are becomingmore complex. This increases the likelihood and potential magnitude of systems friction and means thatearlier modalities and conventions no longer suffice. The prospective membership of China - a largecountry with an economy and institutions which do not fit easily within WTO standards - amplifies thesedifficulties.

27. China’s leaders recognise that its institutions do not fit well within WTO standards and areworking to reform them. Tightening China’s laws and enforcement of competition policy, intellectualproperty law enforcement, and issues relating to members’ transparency and disclosure obligations areimportant parts of such reform. While these challenges are daunting, they are surmountable. China’srecord elsewhere suggests that progressives within China are ‘system maintainers’, not destroyers. Thissuggests that they are open to reforms and suggestions which make sense and that they may, in fact, beseeking ‘hard laws’ within the WTO through which to lever further reform in China.

3. Trade Theory, Game Theory, Co-operation Theory and Policy Making

Plurality, Capture and Conduct

28. As multilateral negotiations and trade are ongoing processes involving many players, the theoryof repetitive games and co-operation theory offer some insights. In game theory and trade theory,increased plurality of power improves efficiency and encourages movement towards rules-basedapproaches and away from power-based and precedent-based approaches. This is particularly the casewhen behaviour is guided by reciprocity (as in multilateral trade negotiations). The principles ofreciprocity and non-discrimination improve efficiency by undoing or neutralising the terms-of-trade-driven


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inefficiency that arises in the absence of a multilateral agreement (Bagwell and Staiger 1999).3 Moreover, amultilateral trade agreement will, other things being equal, be more balanced and effective the moreinclusive it is (Maggi 1999).

29. Making multilateral trade negotiations more inclusive reduces both the opportunities forcollusion among major players and the rewards to collusion.4 The possibility that agendas or outcomescould be captured by any subgroup declines while, concomitantly, incentives for good conduct increases.This stems from the reduced likelihood of collusion and from the greater possibility that a credible threatof punishment for misbehaviour (such as withdrawal of trade concessions to the offending country) will bemounted. Participation of a larger number of major players in international markets and multilateralnegotiations will alter the way in which multilateral institutions operate - affecting rule-making, disputesettlement procedures, enforcement and individual country behaviour.

30. In the Uruguay Round there was concern that the United States, European Union, and Japan weretoo dominant in influencing both the agenda and the outcome of the multilateral negotiations. Theformation of groups such as the Cairns Group and the Least Developed and Net Food-ImportingDeveloping Countries helped to counter the U.S., European Union and Japanese dominance. China’saccession to the WTO would contribute to greater plurality among major players.

Rules, Retaliation, Perceptions of Equity and Co-operative Convergence

31. Axelrod (1984) identified the conditions necessary for co-operative behaviour in repetitivegames. Subsequent work gave rise to sophisticated algorithms for achieving convergent, stable, co-operative behaviour (Mueller 1988, Hirshleifer and Coll 1988). However, Tit-for-Tat rules and behaviourhave proven almost as resilient and are much simpler to implement. Tit-for-Tat behaviour implies thatplayers expect reciprocity in terms of the incentives and punishments they face. It also implies that playerssee that there is equivalency in the incentives and punishments they face and those faced by theircounterparts. If players do not perceive equivalency in treatment, they may no longer co-operate. This“equivalency in treatment” relates to both access to rule-making and subsequent rule enforcement.Privileges and exclusions, therefore, undermine sustained co-operative behaviour.

32. The WTO is a contract between members, a process of multilateral consultation, and agovernance institution. While no member country is completely satisfied with it, as signatories they allmust have felt that the anticipated benefits exceeded the costs and concessions when they agreed tobecome members. Some dissatisfaction has been voiced, however, both by members and prospectivemembers. Two areas are of particular concern. While the WTO is an agency which increases the role ofthe rule of law in international trade, it is sometimes rule of law by precedent rather than principle. Thesecond area of contention is perceived unequal opportunity to participate in rule-making. China’saccession, possibly concurrent with negotiations in agriculture and perhaps more broadly, may result insignificant changes in these areas.

3. This comes down to an optimal tariff argument, where each country seeks to maximise its own welfare

function by levying optimal tariffs. However, as each (and every) country respond by taking similaractions, the cumulative effect is a mutual beggar-thy-neighbour result. Reciprocity and non-discriminationcorrect this.

4. These observations are influenced by the game theory literature, including Selten’s (1973) article “Where 4are Few and 6 are Many”. Selten found that collusion was more likely when major players number 4 orless and that incentives to collude fell significantly when the number of major players grew to 6 or more.


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Importance of Effective Communication

33. While it has been said that talk is cheap, game theory and analysis relating to collective actionsuggest that talk bears significant dividends. In repetitive games, face-to-face communication producessubstantial increases in sustained co-operation (Ostrom and Walker 1997). Direct communication bringsgreater benefits than other forms of correspondence or public communication, re-enforcing a virtuous cycleof co-operative behaviour (Ostrom 2000). Allowing for both communication and the presence of amediator significantly increases the likelihood of positive outcomes as well as payouts in repetitive orongoing games (Myerson 1994). Conversely, in the absence of sufficient communication or somefacilitation mechanism, most players (individuals or nations) will take other players’ actions as given andwill, consequently, act only in their narrow self-interest - eventually contributing to a breakdown in co-operative behaviour and the prevalence of “beggar thy neighbour” relationships.

34. WTO membership implies that members agree to abide by WTO rules and principles. TheWTO’s rules and principles must therefore be readily available, understandable and transparent. Likewise,information provided by members and prospective members must be readily available, understandable,transparent, replicable, and be consistent with the umbrella organisation’s guidelines. Failure by anymajor player to be forthcoming or to provide information in an understandable fashion (complying withpre-established guidelines) will undermine collective trust and contribute to non-co-operative behaviour.

35. Conversely, if players are well-behaved and forthcoming but are not granted appropriate rewards(i.e., membership or true reciprocity), they will cease to be conditional co-operators and start behaving asrational egoists. This will undermine the integrity of the game (international trade and internationalrelations in this instance) and trust of fairness. Although China has proportionally more to gain fromacceding to the WTO than the collective WTO membership has from China’s accession, the implicationsand dynamics of non-communication and exclusion are not very attractive for any party.

Game Theory: Overview

36. China’s WTO accession will result in the formal inclusion of another major player in theinternational trade “game.” The inclusion of another major player increases plurality and reduces thelikelihood that rules and processes can be captured by vested interests. This plurality, when combined withthe principles of reciprocity and non-discrimination, improves efficiency and balance in multilateralagreements. It also encourages movement toward rule-based approaches and away from power-basedapproaches. The existence of privileges and exclusions, however, undermine these positive influences anderode trust and the integrity of the “game.”

37. Direct communication brings greater benefits than other forms of correspondence or publiccommunication, re-enforcing a virtuous cycle of co-operative behaviour in repetitive games. Reliablecommunication and the presence of a mediator significantly increases the likelihood of positive outcomesand payouts. Extending these observations to the realities of the WTO, information provided by membersand new members must be timely, readily available, understandable, transparent, replicable, and beconsistent with the umbrella organisation’s guidelines. Failure by any major player to be forthcoming orto provide information in an understandable fashion will undermine collective trust and contribute to non-co-operative behaviour.


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4. Similarity Matrices - Common and Divergent Interests

Trading Indices

38. Agri-food trade “similarity matrices” can be used to assess the degree of bilateral tradeintegration between various countries.� A similarity matrix shows the importance of country j as thedestination of country i’s exports, relative to the importance of countries j and i as traders in the world. Thevector of bilateral trading indices illustrates whether selected economies have complementary or rivaltrading relationships. A trading index less than 0.5 indicates that trade between a pair of countries is notwell integrated. Values between 0.5 and 2 indicate modest integration. Values exceeding 2 suggest fairlystrong integration. The bilateral trading index between two countries may be low because of physicalimpediments to trade (i.e., geographic distance), institutional or political impediments to trade, strongsimilarities in resource endowments and comparative advantages (i.e., the countries are largely competitorsrather than possessing trade complementarities).

39. As an exporter, China’s total agri-food trade is well integrated with Hong Kong and Japan, andmodestly integrated with the European Union, followed by the United States and Russia (Tables 1, 2, and3). The columns of indices calculated for other countries suggest that India’s, Canada’s and Brazil’s totalagri-food exports are well-integrated with China, with modest integration of United States, Russian andEuropean agri-food trade. Japan’s agri-food exports also seem relatively well-integrated with China,suggesting that special niche markets may exist in China where high-value Japanese agri-food exports dowell.

Table 1. Similarity Matrix - All Agri-Food Products, 1998

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5. Following Amelung, the formula for these indices (Nij) is Nij=(Xij/Xi)/(Mj/(Mw-Mi)), where: Mi (Mj) is

country i’s (j’s) total imports, Xij is country i’s exports to country j, Xi is i’s total exports , and Mw isworld imports.


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Table 2. Similarity Matrix - Bulk Agri-Food Products 1998

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Table 3. Similarity Matrix - Consumer Oriented Agri-Food Products, 1998

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40. India’s agri-food exports are well-integrated with China, Europe and Russia, and modestly wellintegrated with the United States. Besides India, Russia’s exports are well-integrated with Europe andmodestly well-integrated with China.

41. These indices suggest that China’s total agri-food exports in 1998 did not pose serious problemsfor any of the major economies examined (table 1), although China may be a rival to the United States inJapan’s market for consumer-oriented agri-food products (table 3). Based on the indices in tables 1, 2, and3, China seems unlikely to pose a serious threat to any of these countries’ overall agri-food export marketshare.


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42. China is a relatively important destination for agri-food exports from Brazil, Canada, India, andeven Japan. It is a modestly important destination for the United States, Russia and Europe. It is,therefore, understandable why the WTO members covered in this study were all been keen to engageChina in bilateral discussions relating to its accession.

43. With time and partially dependent upon WTO membership, China may move away from theproduction of land-intensive bulk commodities and toward more labour-intensive consumer-orientedproducts, with consequent effects on China’s pattern of agricultural trade.� The sequence in which Chinadevelops its infrastructure may also affect trade in different commodities in different ways (Huang andChen 1999 a,b, Lyon and Durham 1999). For example, if household refrigeration and public refrigeration(transportation, handling and distribution) facilities develop concurrently, China’s net exports ofvegetables, pork, and temperate fruits could strengthen further while net exports in mariculture products,dairy products, and tropical and citrus fruits could decline. On the other hand, if household refrigerationfacilities remain static while public facilities develop further, vegetable, pork and temperate fruit exportswould not increase and possibly drop, while the opposite would be true of the net exports for maricultureand tropical fruit products. Such developments will affect the degree of trade complementarity or rivalrybetween China and other nations.

Implications

44. China’s agri-food exports cause only modest dislocation within the agri-food markets of themajor economies included in the above analysis. Other major developing and transitional economies neednot fear that their agri-food exports will be crowded out by China’s. This may not be true of allmerchandise exports.� Moreover, China is already an important export destination for almost all of themajor economies examined. Consequently, a static assessment suggests that major nation’s agri-foodsectors stand to gain commercially from China’s WTO membership.

45. Similarity matrices suggest that, while China and other major developing economies may havesome commonalities on principles, their commercial agri-food interests may not be as well aligned.Consequently, while they may co-operate in pushing for decision-making to be more inclusive, they areless likely to develop common positions relating to specific commercial agri-food trade policies anddisciplines.

46. The similarity matrices also suggest that China’s commercial agri-food interests may align morewith the United States. While the make-up of their agri-food exports differ, both would gain significantlyfrom further liberalisation in Japan and the European Union. China and the U.S. may reach similarpositions as far as specific commercial agri-food trade disciplines are concerned.

47. China and transitional economies could together form a powerful coalition in the WTO,particularly if Russia eventually becomes a member. Institutional commonalities make such a coalitionconceivable. But Chinese leaders are likely to be wary of such an alliance, for two reasons. First, thenature of what their institutions have in common is one of the reasons China’s economy struggled for so

6. Further integration of China into world markets will increase short-run competitive pressures on, in order

of adverse effects, Indonesia, Vietnam, India, Thailand, Malaysia, Philippines, and Korea (i.e., thosecountries under pressure as a result of the Asian Financial Crisis). However, these countries also expect tobenefit most from China’s membership in the longer run (Gilmour 1999).

7. Anderson et al (1997) and Walmsley and Hertel (2000), for instance, have shown that there will beconsiderable competition between China and India in textile and clothing markets.


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long. It is through relinquishing such institutional restrictions that China’s economy has grown soremarkably over the past 20 years. Hence, one reason for joining the WTO is surely to further reform andescape the stagnation / inertia that such institutional rigidities contributed too.

48. A second reason that such an alliance is unlikely is that it would not be in China’s commercialinterests. For that matter, it is conceivable that China looks forward at the possible demonstration effectsthat special treatment in accession might have for potential members, including Russia. For these reasons,China is unlikely to align itself with Russia unless it feels compelled to do so by the efforts of others torestrict or manage trade.

5. Specific Issues

Competition Policy and State Trading

49. Questions are being raised about the implications of public ownership and state involvement intrade. In China, many, if not most, productive enterprises and assets remain in the hands of the state. Howto address this situation is of major importance as China takes on its obligations as a WTO member. WTOmembers may push to apply strictly the rules regarding competition policy in general as well as the specificconduct of state-linked enterprises.

50. Discussions of China’s state ownership, state trading, and competition policy issues have beendifficult.� While China’s leaders recognise that change is warranted, they are reluctant to engage in suchchange overnight as it might involve throwing the good out with the bad, contributing to both economicand political instability.� Consequently, they have floated the idea of a transition period over severalyears, involving a sequence of progressive policy and regulatory changes. Key questions would includeenterprise conduct and discipline and managerial, financial and commercial separation and autonomy frompublic finances, services and regulations.

51. Monitoring developments in the area of state-linked enterprises will be difficult as it is extremelydifficult for outsiders to discern and disentangle commercial and regulatory interrelationships. WTOmembers are likely to push China to be more forthcoming in this area. If co-operation is difficult,members may push for further liberalisation of border measures. While progressive thinkers within Chinarecognise that regulatory decoupling is necessary both to meet WTO requirements and (more important tosome of them) to foster further growth, vested interests within commercial state agencies will resist suchchanges if they do not see them as being in their interests. For such reasons, China is unlikely to be aprogressive influence in this area.

8. United States bilateral discussions with China have emphasized the increased role anticipated for private

concerns (USTR 1999). The limited statements made by China simply suggest that a greater role would beplayed by non-incumbent entities, focussing more on the issue of plurality than ownership.

9. China’s state enterprises enjoy privileged access to many goods, services and credit. At the same time,they bear many social burdens which private enterprises do not. Thus, both the privileges and the socialburdens of commercial state-held enterprises need to be removed if they are to be put on a footing equal tothat of non-state held enterprises. The speed and timing of undertaking such change is under discussionboth inside and outside China (See, e.g. Lin et al 1998).


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Export Subsidies and Domestic Support

52. China has agreed in bilateral negotiations in the process of accession that it will not use subsidiesto export farm products. China is also expected to be one of the members with a zero commitment onTotal Aggregate Measurement of Support (i.e., trade-distorting domestic support). This means that Chinawill be required to keep such support below de minimis levels. So, in these areas, China’s interestscoincide with those of members with similar commitments or patterns of support. Many of these membersare also members of the Cairns Group, a constellation of members with export interests in agriculture.��

China is also likely to seek the reduction or elimination of export subsidies and trade-distorting domesticsupport on the part of high-supporting members such as the European Union, United States, and Japan.

53. China is unlikely to be accommodating of subsidies elsewhere even though its consumers maybenefit from such subsidies. This is because subsidies elsewhere lower commodity prices, which lowerrural incomes and could further exacerbate China’s difficulties in dealing with problems arising from itsmigrant labour force, most of whom originate in rural areas.

54. To the extent that non-trade concerns come to the table, China is likely to be more of a passivethan an active participant. Reform-minded leaders are likely to shudder at the thought that policies claimedto foster something as nebulous as multifunctionality could also be used to keep their products out ofexport markets. But conservative influences within China might find the concept useful to defend someaspects of state-linked enterprise behaviour in the context of providing political and social stability withinChina’s historical development.

55. China’s farm population is large both in absolute numbers and as a share of total population.This means that it will be difficult for China to provide significant direct taxpayer funded payments tofarmers, similar to those used by some WTO members. It also means that the scope for large consumer-funded support schemes, also operated by some WTO members, is limited in China. As a member of theWTO, China would therefore likely look askance at processes and precedents that erode the discipline ontrade-distorting support provided by other members. China may also find it important that such disciplinebe applied in the case of other candidate members whose accession processes are less advanced thanChina’s (such as Russia’s).

56. China is a net agricultural exporter in most years, with exports of fruits, vegetables, livestockproducts and other labour-intensive products more than compensating for bulk grain net imports. Further,the average tariff rate faced by China on its agricultural exports exceeds 30 percent, roughly four times ashigh as the average tariff faced on its exports of other products. This again supports the expectation thatChina will not be a significant drag on agricultural trade liberalisation in the longer term.

Market Access

57. According to commitments reached in bilateral negotiations, China will substantially cut importtariffs for fruits, meats, dairy products, beverages, and other agri-food products from the current range of40-50 percent to 10-12 percent. China may have been willing to accommodate tariff reductions for theseproducts because they are relatively labour-intensive and it expects indigenous production to be reasonablycompetitive. The prices of such imported products are typically much higher than domestic products and

10. The Cairns Group includes Australia, Canada, Brazil, Fiji, Argentina, New Zealand, Malaysia, Chile,

Colombia, Indonesia, Thailand, Paraguay, South Africa, Philippines, Uruguay, Costa Rica, Guatemala,and Bolivia.


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cater to the desires of a population segment with higher incomes and a propensity for higher qualityproducts.

58. For bulk grains, China continues to seek significant protection through tariff rate quotas (TRQ),an instrument that can be applied in agriculture. This is ostensibly for food security purposes and toprotect the incomes and well-being of domestic farmers. However, those familiar with the politicaleconomy and institutions in China’s grain markets suggest that vested interests within government linkedagencies gain most from protection and would lose most from liberalisation. For example, much of themuch talked about grain price support granted in the past few years has not gone directly to farmers.Rather, much of the support appears to have found its way to grain bureaux and other state marketingagencies to underwrite their accumulated debts and inefficiency. This support was possible, in part, due tothe role of the TRQ administration in restricting imports.

59. The State Development Planning Commission will oversee TRQ administration. The Ministry ofForeign Trade and Economic Co-operation’s COFCO and its provincial-level affiliates will be involved inthe procurement of the grains covered by the TRQ administration. Each agency has commercialsubordinates under its administrative umbrella. Commercial concerns and vested interests could thereforeoverride agreed upon administrative rules and procedures if vigilance is not maintained.

60. China’s currently administers and allocates TRQ on the basis of a tiered system, in which TRQ isfirst allocated to provinces, larger municipalities (like Shanghai, Beijing and Tianjin) and other authorisedentities, who are then in charge of allocations to end-users. While this could promote a degree of pluralityand ensures that imports are more in tune with end-users’ needs, this is problematic for many tradingpartners as the tiered system somewhat reduces transparency, greatly increases the resources necessary formonitoring, and makes it difficult to assure that market access commitments are kept.��

61. Given these observations and WTO members’ historical experience with China’s system of TRQadministration, they are likely to desire significant changes. Progress will be difficult, however, as currentarrangements allow many state linked quasi-commercial agencies to continue operating, whileconcurrently reducing the direct financial burden borne by the state to support such agencies. In partbecause of stated concerns regarding food security and in part because of the vested interests in the agri-food sector, China may be a drag on efforts to provide further clarity in this area.

Intellectual Property Rights

62. Regarding public policy governing intellectual property rights (IPR), many developing countriesdesire either that changes be made to the agreement on Trade-Related Aspects of Intellectual PropertyRights (TRIPS) to reflect the important contributions of indigenous knowledge and materials or that it bediscarded in its current form. Many developing countries are concerned that existing internationalagreements either undervalue or ignore completely the contributions of their seedstocks and indigenousknowledge. Some even argue that existing agreements actually encourage biopiracy, citing efforts bymultinationals to obtain patents on tumeric as a healing agent (a traditional medicine in South Asia) and onBasmati and Jasmine rice varieties, without compensating indigenous peoples.

11. China continues to restrict the types and number of entitites that have the legal right to engage in

international trade. For some goods, the government authorizes trading rights for designated agents andrequires that foreign suppliers sign exclusive contracts with a domestic counterpart. This seriously limitsthe degree to which a market can be contested (Gilmour 1999). Josling (2000) notes that the type ofallocation mechanism that causes most problems is that which gives import rights to only a limited numberof domestic concerns.


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63. Because of the strength of its own “folk” knowledge in agro-biotech, China is likely to join incalls for greater recognition of the contributions of indigenous materials and indigenous knowledge.Others are likely to call for more even-handed treatment of foreign firms within China as far as IPR areconcerned.�� However, problems relating to IPR in China may relate more to balkanisation across regionsas officials in the research community and extension hierarchy have incentives to propagate their ownvarieties and may seek to retard the adoption of superior varieties developed elsewhere, whether in Chinaor abroad (Huang, Rozelle and Hu 1997). Hence, China’s prospective membership is likely to encourageall parties to work towards a more balanced and encompassing treatment of agro-biotech IPR issues.

64. China’s leaders recognise that, to achieve targeted levels of self-reliance in future, incentivesmust be in place for the development and propagation of superior seedstock and production techniques.Neither foreign firms nor China’s domestic institutions will invest the necessary resources in developingseedstock and accompanying production technologies for China’s agri-food sector unless they anticipatebeing rewarded for their efforts. In this sense, both foreign and domestic research institutions andcommercial enterprises have a common interest in seeing that appropriate IPR legislation is passed andenforced. China’s leadership and government institutions recognise that, while short-term gains may beforthcoming when IPR are violated, over the long term the habitual violation of IPR will have deleteriouseffects on incentives to innovate and produce products and technologies for China’s agri-food sector.

Labour Mobility and Self-Reliance

65. China’s is hopeful that joining WTO will help to resolve social as well as economic issues,including those relating to internal labour migration. In the reform era, urban incomes have typically beenbetween 1.7 and 2.8 times rural incomes. Further, China’s farmers and rural residents have historicallyborne a disproportionate share of taxes in comparison to their urban counterparts. Rural residents aretypically denied access to subsidised housing, subsidised medical care, and schooling for their childrenwhich urbanites enjoy. These institutionalised and systematic inequalities encourage rural-urban migrationwhile the household registration system restrains it. China’s leaders are hopeful that WTO membershipwill help them deal with some of the problems associated with inequality and migrant labour by providingimproved market access and better returns to higher value agri-food exports, light manufactured goods, andtextile products produced by farmers and rural enterprises. China’s position on various issues will betempered by such social and political considerations.

66. China has historically extracted a surplus from the agricultural sector (with the possibleexceptions of 1998 and 1999). Despite substantial efforts to liberalise the price and market structure of theagricultural sector, many agricultural commodities continue to be heavily penalised by commodity specificpolicies through state procurement prices, policies and intermediary institutions. These result in distortedincentives, historically depressing agricultural production and redistributing income from farmers to urban

12. China has made progress relating to intellectual property rights issues in the agri-food area in the past few

years. On the domestic front, China’s Patent Law was revised in 1993. China subsequently acceded to thePatent Cooperation Treaty in 1994 (Gao, 1998). Following this, China promulgated its “Regulations forthe Protection of Plant Varieties” in 1997and is now working to meet the requirements set out in the TRIPSAgreement. In 1998, the government established the State Intellectual Property Office (SIPO) to monitorIPR protection and devise effective enforcment measures. While centralizing responsibility for IPRprotection is a positive step, SIPO has yet to establish that it can manage its responsibilities effectively. Onthe positive side, Article 238 of the PRC Civil Procedure Law provides a catch-all clause stating that wherean international treaty is concluded or acceded to by China contains provisions that differ from those of theCivil Procedure Law, the provisions of the international treaty shall apply, except treaties for which Chinahas made reservations (Clark 2000).


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consumers, intermediaries and the agro-processing sector. This means China’s farmers have maintainedrelatively high levels of self sufficiency in spite of rather than because of government intervention.

67. With China as a member of the WTO, the state is expected to intervene less in domestic marketsas well as at the border. Given China’s history, this actually means that production and marketingincentives to China’s farmers will improve. Events of the past two decades - such as the advent of theHousehold Responsibility System and the introduction of Two Track Pricing - have demonstrated thatChina’s farmers are quite responsive to improved incentives. Consequently, serious declines in China’s netself sufficiency ratio in the near future need not be anticipated as a result of WTO membership, althoughthe mix of crops produced and traded will change.

68. If self sufficiency is truly the main motivation behind the maintenance of TRQs, China’s leaderscan breathe a little easier. While the precise degree to which government-linked intermediaries impingeupon prices at the farm gate is not known, increased competition would place curbs upon their inefficiencyand anti-competitive behaviour. This would be to farmers’ benefit and result in higher prices at the farmgate and lower losses in the supply chain. This, in turn, implies that production shortfalls would not be assevere as simulations indicate. For this reason, self sufficiency in staple grains may not even fall below 90percent in the near future even if trade were unfettered.

69. If self sufficiency is the real reason behind China’s border protection, China’s leaders will alsodesire disciplines on the use of export restrictions in times of shortage and provisions to allow countries totake action against imports that threaten to disrupt markets. However, if leaders’ motivation is to protectvested interests within the Grain Bureau - Sinograin - State Administration of Grain system, tradeliberalisation will be more difficult. As with many other countries, official positions are as likely to reflectvested interests in the agri-food sector as the actual interests of the country as a whole.

5. Summary

70. WTO membership imparts both rights and obligations upon its members. Adherence to its WTOobligations will foster fundamental economic, social and institutional change within China. Through theexercise of its rights and influence as a WTO member, China will also bring about significant changes tothe WTO itself. China’s prospective WTO membership is likely to promote progress in a number of areas.In some instances, this will be because China itself will be a voice for progress. For example, China’smembership would push WTO rule-making and decision making to become more inclusive in nature.

71. With regard to intellectual property, China is playing catch up with developments elsewhere.China will, nevertheless, contribute to the agenda by joining in calls for greater recognition of thecontributions of indigenous materials and indigenous knowledge. Others are likely to call for more even-handed treatment of foreign firms within China. China’s leaders realise that foreign firms and China’sdomestic institutions will not develop production technologies suitable for China unless they anticipatebeing rewarded for their efforts.

72. China’s WTO accession will rekindle discussions regarding appropriate TRQ administration andreporting in general. While nonmarket allocation schemes have their purposes, they do not promote thecompetitive trading system that is one of the goals of the WTO; efficient producers can make littleheadway against the assured market shares of quota holders. While China has made market accessconcessions on paper, WTO members fear that the concessions may be illusory given the intended non-transparent method of allocation and reporting.

73. Having China within the WTO and committed to and subject to the world’s trading rules andrestraints is better than having China relegated to the sidelines and operating outside the system. China’s


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presence in a multilateral agreement will increase plurality of power among major players, makingcollusion and capture of rule-making and dispute settlement less likely. Moreover, via a more inclusivemultilateral agreement and adherence to the principles of non-discrimination and reciprocity, efficiencyand dynamism is likely to improve both in China and elsewhere.

74. For China, WTO accession is part of a broader strategy to lock in a tenuous transition from acommand economy to a market economy. China’s leaders have a stake in a strong WTO capable ofprotecting China’s interests; it cannot benefit from the system unless it also submits to it. But adjustmentwill take time and all parties should be conscious of the collective lack of experience with the issues nowbeing faced. The WTO interfaces with China’s MOFTEC on issues relating to China’s trade. If China’sMOFTEC and the WTO only have a finite number of issues or complaints to deal with at a particular time,they can be dealt with constructively. But if officials become overwhelmed, a culture of antagonism coulddevelop.

6. Conclusion

75. Findings from the systems friction literature, game theory, and trade intensity analysis point atsome directions and areas in which China as a WTO member could be expected to influence internationaltrade and policy making in agriculture. Some of the specifics include the following.

−� China’s membership may result in certain WTO processes (like the “Green Room”)becoming more inclusive.

−� Other members are likely to place added emphasis on disclosure and transparency issues

−� China is unlikely to be a progressive influence in the area of competition policy anddisciplines on state trading. It will be a challenge to find solutions that concurrently addressWTO member concerns regarding state trading and China’s concerns regarding social andpolitical stability in the face of rapid liberalisation and reform.

−� China is likely to push for the reduction or elimination of subsidies to export farm productsand trade-distorting domestic support.

−� China is likely to question processes and precedents that erode the discipline on trade-distorting support provided by other members.

−� China’s TRQ administration is problematic. Other members desire that its operation be mademore transparent. There are concerns that the commercial operations with vested interestshave a direct role in its administration, undermining China’s market access commitments.

−� China is likely to join those who call for greater recognition of indigenous materials andindigenous knowledge in granting intellectual property rights. Others are likely to call formore even-handed treatment of foreign firms in China as far as IPR are concerned.

−� China may co-operate with India and other developing countries in seeking a greater voice onissues of principle. However, they are less likely to develop common positions relating tospecific commercial agri-food policies and disciplines.

−� While China has certain institutional commonalities with Russia, a coalition along common“principles” is unlikely; China’s leaders recognise that such institutional characteristics are


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among the reasons China’s economy struggled for so long. Consequently, China is unlikelyto align itself with Russia unless it feels compelled to do so by counterparts’ efforts to restrictor manage trade.

−� For practical and commercial reasons, China’s interests may align more with those of theCairns Group and the United States in certain areas relating to export subsidies, domesticsupport, market access (elsewhere), and multifunctionality deliberations.

76. Overall, with China as a member, the WTO and its members would be expected to faceincreasing complexity in working towards WTO objectives. But having China as a member could also behelpful in resolving complex issues. The issues arising in relation to agriculture may be as complex as anyand will be particularly important to China where agriculture remains the lifeblood of the economy. Thereis reason to think that addressing these issues in the WTO will be more fruitful than having to face themwithout the constructive influence of the WTO as an intermediary.


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China in the WTO: Implications for International Trade and Policy Making in Agriculture

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