CoPS/IMPACT Working Paper Number G-137

Title: Estimating the effects of China's Accession to the World Trade Organisation

Author: Yin Hua Mai, Mark Horridge and Frances Perkins


Accession to the World Trade Organization (WTO) marks a new era in China's economic reform. In this new era, state capital will lose its dominance of pillar industries such as iron and steel, automobile, petrochemicals, non-ferrous metal, insurance, telecommunication, banking, wholesale, and utilities. This study uses a computable general equilibrium model of China to estimate the economic benefits from China opening its pillar industries to private foreign and domestic capital. The study anticipates that lowering direct entry barriers to private capital will boost productivity by encouraging new competition and foreign direct investment (FDI) inflows into these industries. In this study, the productivity gains from lowering direct entry barriers to FDI and domestic private capital are empirically estimated through a historical simulation of opening the light manufacturing industries. The opening of the light manufacturing industries to private capital happened in the early 1990s following a major policy shift marked by Deng Xiaoping's southern tour. From 1992, this policy shift led to a surge in China's inward FDI flows. The productivity gains estimated from the historical simulation are then used to simulate the opening of the pillar industries following China's WTO entry in 2001. As a result of the expected productivity gains in these pillar industries, this study concludes that WTO accession will not adversely affect production and employment in the pillar manufacturing industries, such as the automobile and parts industry. This result contrasts with the findings of most general equilibrium analyses of China's WTO entry that focus on the removal of tariffs and non-tariff barriers to merchandise trade. In the long term, productivity gains related to WTO accession should place China in a position to become an important production base for capital-intensive manufactured products as well as light manufacturing.

JEL classification: O53, F15, D58

Keywords: China WTO, SOEs, investment liberalization, pillar industries

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