Dialogue: China opens its doors slowly

China sees its entry to the World Trade Organisation as just one step on a long journey. KARYN SCHERER* reports.

This week marks China's official entry to the World Trade Organisation - an event many believe is likely to be one of the most significant of the 21st century.

A month after world trade ministers agreed to admit China and Taiwan to the 142-member club, no one is kidding themselves about the scale of the task.

Some 900 pages of China's WTO trade pledges have yet to be translated into its official language, Putonghua, and that is only the first step towards bringing the Chinese provinces' Byzantine local business laws into line.

New Zealand Trade Minister Jim Sutton estimates that China'sand Taiwan's admission will lead to about $100 million in tariff reductions for New Zealand, based on current trade levels. So members of the New Zealand Committee of the Pacific Economic Cooperation Council were particularly interested when former US Trade Representative Charlene Barshefsky and China's top trade diplomat, Long Yongtu, gave their views of what it was likely to mean at a PECC conference in Hong Kong last month.

Western media see the deal largely as an opportunity to expand into one of the world's largest and most immature markets. But Barshefsky, quoting acclaimed historian Jonathan Spence, noted that each time advisers had tried to push China in a particular direction, they had initiated events beyond their control. China's leaders "make promises not as a favour to others, but in their own interests", she noted.

For the first time since China left Gatt in the 1940s, it will be involved in shaping world and regional trading systems. Barshefsky described China as "quite pragmatic" - unlike India, which annoyed almost everyone at the WTO's meeting in Doha.

Although a third wave of domestic reform is already under way in China, its relationship with trading partners remains open to speculation. Barchefsky said its immediate focus would be on WTO commitments, but long-term relationships with other countries, including the US, were unclear.

The US is clearly relieved that the tensions of the mid 1990s appear to have dissipated, although Barchefsky acknowledged that China's WTO membership would spur new controversies. China knew that failure to comply with WTO rules, even on a provincial level, could bring serious consequences, she said. Many New Zealand firms are pinning their hopes on a pending free-trade deal between Hong Kong and New Zealand to boost access to China, but Barchefsky stressed that Hong Kong should be viewed by WTO members as a "distinct entity" from China. She also said it should not be taken for granted that economic liberalisation would lead to social and political liberalisation. While this appeared to have happened in South Korea, Taiwan and the Philippines, it could not be assumed., particularly if China did not allow open access to the internet.

Long Yongtu is Vice-Minister of Foreign Trade and Economic Co-operation in the Chinese Government. He insists that a more open economy will benefit the rest of the region, even if China does - as many fear it will - become the "factory of the world".

Although China's economy has not escaped the global economic slowdown, it is still expecting to grow its "socialist market economy" by an average of more than 6 per cent over the next five years. That is, if you believe the statistics. "All economic statistics are science fiction, and China's more than most," Princeton economist Paul Krugman told the conference.

Krugman suggested three likely scenarios: that everything would go as it should, that it would be enormously disruptive, or that China would not play ball. Asked for his view of the most likely, he said he sensed "a lot of risks ... I don't think it's likely to be the first [scenario]".

Long argued that China had had 15 years to prepare. "Accession has been a long march, and enforcement will also be a long march, but we are determined to implement our commitments," he said.

He also noted that China was as big an importer of agricultural products as it was an exporter. He conceded that agriculture was its "least open" sector, but stressed that restructuring was under way and that China would try to be "constructive and helpful" in negotiations.

China is seriously considering an approach by Hong Kong to negotiate a free-trade agreement which would include Macau and, potentially, Taiwan. Barshefsky said the possibility of a wider free-trade agreement between China and the 10-nation Asean grouping would certainly "concentrate the mind" and prompt debate in the US. But even the eloquent Long conceded China was not likely to go as far as making its currency convertible.

On the looming challenge of widespread unemployment, he said China was making "tremendous efforts" to create social security. About 100 million Chinese already had employment insurance, and a further 5 million had been retrained.

Although economic restructuring had already created problems, China had more to room to manoeuvre, he said, because of foreign direct investment.

HSBC's chief economist, George Lung, predicts WTO membership will raise foreign investment in China by 30 to 40 per cent a year. It is already the world's fifth biggest importer, buying $US225 billion ($543 billion) of foreign goods last year and $US35 billion worth of foreign services. Exports are also on the rise, increasing 20 times to $US249 billion since it opened its markets in the late 1970s.

There are still many entry requirements for foreign firms to tap into the market, and these restrictions will remain for a few years before China fully opens up.

Foreign banks, for example, will not be able to operate yuan businesses for a further five years.

But some companies are well prepared. Australia's largest insurance and fund management group, AMP, is already finalising a deal to buy as much as 25 per cent of the life unit of one of China's biggest insurers, China Pacific Insurance.

The deal, including an option to lift the stake to 50 per cent by 2005, will catapult it to the number one foreign insurer spot in China, occupied since 1992 by the American International Group. The next long march has already begun.

Tapping into China

* Duties on farm products will be cut from 22 per cent to 17 per cent.

* Future agricultural subsidies will be capped at 8.5 per cent of the value of domestic farm production.

* Foreign banks will be allowed to conduct domestic currency business with Chinese companies after two years and with Chinese individuals after five years.

* Geographic restrictions on foreign banking will be lifted after five years.

* Import tariffs on cars and trucks will be slashed from up to 100 per cent to 25 per cent by 2006.

* Restrictions on the category, type and model of vehicles produced at joint ventures will be lifted within two years.

* Foreign companies will be allowed to take 25 per cent stakes in mobile phone firms, rising to 35 per cent after one year and 49 per cent after five years.

* Tariffs on high-tech IT and other imports will be eliminated by 2005.

* Karyn Scherer travelled to Hong Kong with help from NZPECC.