Eye on China: Light-fingered habits raise trade benefits

BEIJING - Last week we saw how measures such as trade- related investment measures (Trims) and trade-related intellectual property issues (Trips) put into question the efficacy of free trade as a way for poor countries to prosper.

As one delegate at the recent World Trade Organisation round of talks in Hong Kong said, developing countries are not interested in increasing trade statistics for their own sake. Trade is only attractive if it helps reduce poverty in their countries.

One unusual aspect of the bitter controversy surrounding the WTO is how low-key China has been on the subject. Yet you would think China would provide an instructive example about the benefits (or not) of joining the WTO, given it has followed a successful development path and recently became a WTO member.

China joined the WTO in 2001 and, since then, appears to have grown strongly on the basis of a series of measures promoting free trade. It's true trade has played an increasingly strong role in maintaining dynamic growth, especially when domestic consumption showed signs of flagging.

The WTO has also facilitated foreign direct investment that has, in turn, fed back into improving trade. Today 50 per cent of China's exports and 30 per cent of domestic industrial production is provided by foreign-invested enterprises. Foreign companies have brought in staggering amounts of foreign direct investment (FDI), and this has helped spread developed world-class technology and management practices.

Why staggering amounts of FDI? Most FDI goes to the most developed countries. These countries, with cheap capital, a highly educated workforce and good legal environment naturally attract the lion's share of investment.

China has confounded expectations by attracting the second largest amount of FDI in the world after the US.

Classical economists would say this accretion of benefits is perfectly predictable based on the beneficial effects of free trade. But controversially, it's possible that China's enormous theft of intellectual property has been just as important.

From the point of view of developing countries, using foreign intellectual property plays an important role in hastening the country's economic progress.

(As mentioned last week, that's why WTO rules restricting access to intellectual property such as Trips have been especially unpopular with developing countries). Conforming to IP rights is hugely expensive for developing countries and, quite frankly, impractical.

I have witnessed an explosion of entrepreneurial activity during my time in China and it is inconceivable this would have happened if every single small company had to pay thousands of dollars to be able to use basic IT software.

China's trading partners are outraged by China's light-fingered ways with other people's IP, but the truly interesting thing is how little they have been able to do about it.

China has the heft to stare these critics in the eye and not blink first. Some superficial moves to stamping out the problem are made, but piracy thrives regardless.

And uniquely among developing countries, the multinationals have to grin and bear it. That's quite a remarkable achievement and bodes well for China's growth.

Yet although China breaks WTO rules in this respect, in another respect, agriculture, it is among the world's most aggressive enforcers of WTO rules.

Unlike the powerful agriculture and cotton lobbies in Europe and the US, China's peasant masses get short shrift from the Government.

Compared with the mollycoddling French farmers get under the pretext that they are preserving French food culture and landscape, Chinese farmers get little protection. The Government's most important requirement from the farmers is that they preserve food security by ensuring 90 per cent of the country's grain is homegrown.

This is certainly not a way of helping farmers' incomes because grain prices are controlled to ensure the country's urban citizens have cheap food. (Keeping the cities happy and well fed was the most important lesson the Government learned from the Tiananmen Massacre in 1989).

For their part, farmers would prefer to produce labour-intensive, high-margin fruit and vegetables. These cash crops enable farmers to focus on China's comparative advantage of labour, rather than land, but so far access to these areas has been restricted.

So China has managed to make a success of the WTO through a combination of ignoring critics and compliance. Smaller, weaker countries can only try to curry favour through compliance, so far with uncertain results.

Foreign help

* The WTO has facilitated foreign direct investment that has, in turn, fed back into improving trade.
* Today 50 per cent of China's exports and 30 per cent of domestic industrial production is provided by foreign-invested enterprises.
* Foreign companies have brought in staggering amounts of foreign direct investment (FDI), helping to spread developed world-class technology and management practices.
* China is attracting the second largest amount of FDI in the world after the US.