The Telegraph
Since 1st March, 1999
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- Today is the second anniversary of China’s accession to the WTO

Today marks the second anniversary of China’s accession to the World Trade Organization when it became the 143rd member of that world body. The negotiations for the accession took fifteen long years and were marked by many twists and turns. Finally, China agreed to the terms of entry that were very onerous, much more onerous than India would have ever accepted. For instance, on farm subsidies, China has agreed to a maximum level of 8.5 per cent of the value of production, as compared to 5 per cent for the developed countries and 10 per cent for developing countries like India. It has agreed to an average bound (that is, maximum) tariff level of 15 per cent for agricultural products, as compared to India’s 115 per cent. Even after the developed countries abolish all textile import quotas on January 1, 2005, China will not be free of restrictions till December 31, 2008. For twelve years, WTO members will have access to a safeguard mechanism to protect themselves from Chinese imports. Foreign companies will have freedom for domestic retailing over a three-year period. Market opening in services — like telecommunications, banking, insurance and law — is more comprehensive than that being offered by India. It already offers product patents in pharmaceuticals unlike India, which will do so from January 1, 2005. China has also agreed to a ten-year review of implementation of its accession protocol by the WTO.

The implementation of China’s accession protocol is watched minutely across the world but most intensively in the United States of America. The US congress, the US trade representative, the US-China business council and other trade bodies all prepare annual review reports. The report last year gave China high marks but this year’s progress report is more critical, pinpointing many areas where China is sliding back from meeting its WTO obligations in letter and spirit. The influential US-China business council gives China a score of just a little over 5 on 10 for implementation in year two and says that most of the problems arise in Beijing and not at the local level as originally feared.

This year, Sino-US trade economic ties have come under pressure, given that the bilateral trade deficit in favour of China has touched about $ 120 billion. The US has slapped extra duties on the import of certain textile imports from China, like bras and knitted fabrics, and on colour televisions. There has been clamour in the US congress for an across-the-board hike in import duties on all US imports from China on the ground that the Chinese renminbi that is pegged to the US dollar is substantially undervalued. The US government has expressed concern at the flight of US manufacturing jobs to China, no matter that American companies themselves are involved in this migration. For their part, the Chinese have postponed buying American commodities like soybean, wheat and cotton.

In general, on tariffs, China scores high in implementation. Actually, China’s tariff reforms predate entry into WTO. Even prior to WTO accession, for instance, China’s average import tariff rate had fallen to around 15 per cent in 2001, a year in which the corresponding figure for India was more than double the Chinese level. By 2005, average import duty rates in China are expected to settle at around 10 per cent, which would be around one-third the Indian average. Transparency in laws and regulations remains the most serious problem. In spite of legislation, patent infringement, copyright piracy and trademark counterfeiting are rampant particularly in software, pharmaceuticals, consumer goods. The grant of trading and distribution rights to foreign companies supposed to have been in place by December 31, 2004 is way behind schedule. Adequate tariff-rate quotas in sectors like agriculture and automobiles (which allow a certain quantity of imports at lower duties) are not in place.

Traditionally, China has been at the receiving end of anti-dumping investigations by its trading partners. But in the first half of 2003, it became the third largest user of the anti-dumping mechanism, next to the US and India. Since January 1, 1995 when the WTO came into being, India has been the largest user of anti-dumping duties. India should be in the forefront to have the WTO get rid of anti-dumping, leaving the safeguard duty as a protective mechanism. But if we are such an enthusiastic user of anti-dumping —15 per cent of all world cases during January 1995-June 2003, which is especially ludicrous given our paltry less than 1 per cent share of world imports — then we can hardly speak from a position of any legitimacy. The same principle applies for agricultural trade liberalization. India’s position is weakened considerably by her ridiculously high binding rates and by the fact that average applied agricultural tariffs (unweighted) have actually been increasing in recent years and are around 45-50 per cent.

A direct consequence of China’s accession to the WTO is its even closer integration with Taiwan which also became a WTO member soon after China. The WTO calls it “Chinese Taipei”. Hong Kong and Macau are also separate members. Taiwan is the second or third largest investor on the Chinese mainland, accounting for about a fifth of all foreign direct investment flowing into China over the past two decades. Trade links are also very close. Before WTO entry, Taiwan was China’s fifth largest trading partner after Japan, US, Hong Kong and South Korea. In 2002, it moved up to fourth place and 2003 has seen growth continue robustly with a massive trade surplus in favour of Taiwan. Taiwan is now the second most important source of imports for China after Japan. Increasingly, components and semi-finished goods are moving from Taiwan to the mainland for processing and ultimate exports, as China’s exports, to overseas markets, particularly the US. In the information technology industry especially, significant relocation is taking place from Taiwan to China across all segments including semiconductor manufacturing. This gives China’s IT hardware industry an added competitive edge which India will have to reckon with. With the growing use of embedded software, the conventional distinction between software and hardware in the IT industry is breaking down. If India were to look at embedded software as an area of global leadership, then perhaps its huge disadvantage in conventional hardware need not be crippling.

Aware that 2004 is a US presidential election year that will see competitive China-bashing, China has stepped up its economic diplomacy. Its premier, Wen Jiabao, is in America this week. Other channels are also at work. India could learn from China in this regard. One unfortunate fallout from the recent Cancun summit of the WTO is that the US thinks India was not constructive in ensuring that a deal was clinched. Indian perceptions are different but the reality is that Bob Zoellick, the US trade representative, is miffed with our stance. India was the first country he visited after taking over three years ago, and even earlier, as President Bush’s advisor, he had written in Foreign Affairs in January-February 2000 that the US must work towards a special trade pact with India. It is not in our interest to have such an influential “friend of India” frustrated with us. What is needed apart from official talks, is quiet back-channel diplomacy, also holding out the promise of procurement from the US, which the Chinese excel at, to rebuild a strained Indo-US trade relationship.

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