The impact of the WTO on China s foreign trade activities

The impact of the WTO on China's foreign trade activities

The above categories of entities with various levels of trading rights constitute the body of China's exporting task force. Foreign-invested enterprises are becoming key contributors to China's export earnings and have held around a 50 per cent share in China's total export in recent years . Foreign trade companies, both at the national level and lower levels, are being disadvantaged by manufacturing enterprises with the trading rights for not having their own production capabilities. They are competing on the export resources from those who have not yet obtained the rights to trade.

The impact on patterns of foreign trade activities

With the situation described above, the advantages of traditional foreign trade companies are limited to light industrial products, textile products, bulk raw materials, crude oil and petrochemical products and those that fall under the category of monopolistic trading. These products are characterized either by high levels of concentration, such as crude oil and petrochemicals, or extreme fragmentation such as textiles and light industrial products.

Recent trends have shown a weakening in the role of professional foreign trade companies. At the same time, foreign-invested enterprises are gaining momentum with a share in the total trade volume of 49 per cent. The opening of trading rights to more companies will naturally lead to increased competition for the export of products from highly fragmented industries, one consequence of which would be a reduction in the profitability of professional trading companies. Higher or stable profitability can only be achieved from the export of products of monopolistic trading. Obviously, such monopolistic trading rights are not available to every foreign trade company. As a result, larger foreign trade companies will be forced to move horizontally to invest in the production of products they have been exporting and vertically engage in the manufacturing of what they perceive will have export potential. Those smaller foreign trade companies will have to shift their focus on general trading to differentiated product trading in order to survive. The role of foreign trade companies as intermediaries of trade between China and the outside world will diminish.

Impact on the distribution of imported products

Together with the elimination of the restrictions on full trading rights, China has committed to opening up distribution rights to foreign participants . Before the WTO accession , foreign companies were not permitted to distribute their products (except those produced in China), nor were they allowed to own distribution establishments, wholesale channels or even warehousing network. The imports would have to be handled by foreign trade companies and the distribution was highly dependent on the importing foreign trade companies or distributor/wholesaler under separate arrangements. This has considerably weakened the competitiveness of imported products and efficiency of distribution. China's commitments to the WTO on the opening of the distribution sector will improve the situation. Foreign exporters will no longer be 'air-locked' out of the Chinese market and import activities will be more of an inherent part of distribution and under WTO commitments foreign exporters will be able to have hands-on control. Chinese foreign trade companies will face the situation of once-high import profitability falling as a result of the lifting of restrictions on foreign participation in the distribution process. Large foreign trade companies may move down the supply chain to expand their own distribution capabilities. In the distribution sector, they will have to meet competition from international distributors and retailers.

Impact on the flow of import and export

The impact of tariff reduction on China's foreign trade as a whole is twofold. On the import side, reductions in the average tariff level will lead to increased inflow of imports. Imports will put competitive pressure on those industries that are less efficient, less economical and technologically backward. The industries suffering the greatest impact will include agriculture, automobiles, petrochemicals, equipment manufacturing, pharmaceuticals and steel . For some imports, however, the effective rates of tariff have been significantly lower than official average rate of 15 per cent at the time of accession as a result of various tariff reductions, exemptions, rebates and evasions. In 1997, for example, the total tariff revenue was RMB35.14 billion, about US$4.28 billion. The total import value in the same year was US$142.36 billion. The effective tariff rate in 1997 was only 4 per cent. Therefore, the impact of tariff reductions on certain products is expected to be minimal. On the export side, the lowering of import tariffs will greatly improve the competitiveness of those export products that use imported materials. For example, the import tariff on chemical fibre will be reduced from the current 18 per cent to around 6 per cent by 2005. China's textile exports will benefit from the tariff reduction.