China and the WTO: Some Empirical Results

Warwick J McKibbinAustralian National University

& The Brookings Institution

Overview

• Background

• Current Trade Barriers in China

• The G-Cubed (Asia-Pacific) Model

• Empirical results

• Summary

Acknowledgement

• This paper draws on an early draft of Ianchovichina and Martin (2001) “Trade Liberalization in China’s Accession to the WTO” World Bank (mimeo).

China is undergoing major reforms independently of the

WTO accession

WTO Entry at a time when China has:

• Moved away from trading through centrally controlled foreign trade corporations

• Created trade policy instruments (tariffs/quotas/licenses etc ) and removed non tariff barriers

• Unified the exchange rate in 1994

• Removed many price controls

Table 1. Changes in average tariff rates in China (%)

All products Primary products Manufactures

Simple Weighted Simple Weighted Simple Weighted

1992 42.9* 40.6 36.2 22.3 44.9 46.5

1993 39.9 38.4 33.3 20.9 41.8 44.0

1994 36.3 35.5 32.1 19.6 37.6 40.6

1996 23.6 22.6 25.4 20.0 23.1 23.2

1997 17.6 18.2 17.9 20.0 17.5 17.8

1998 17.5 18.7 17.9 20.0 17.4 18.5

*Source: World Bank (1999, p340)

Focus

• What are the additional impacts of WTO accession relative to what otherwise would have happened over time

• This is hard to do precisely

• Need a global economic model

The G-Cubed (Asia Pacific) Model

Countries• United States Japan

• Australia New Zealand

• Rest of the OECD Korea

• Thailand Indonesia

• China Malaysia

• Singapore Taiwan

• Hong Kong Philippines

• India

• Oil Exporting Developing Countries

• Eastern Europe and the former Soviet Union

• Other Developing Countries

G-Cubed (Asia Pacific)

– Sectors• Energy

• Mining

• Agriculture

• Durable Manufacturing

• Non-Durable Manufacturing

• Services

Key Features• Integrates micro and macro theory into an

internally consistent framework• Full accounting of stocks and flows over

time• Full integration of the real and financial

sectors• Short run stickiness in markets• Forward looking expectations in all markets

Financial Markets• Financial markets exist for

– Money

– Government Bonds

– Equity

– Foreign Assets

– Foreign Exchange

• Each financial asset represents a claim over real resources– Money over purchasing power

– Bonds are claims over future tax collections

– Equity is a claim over the future dividend stream of a firm

– Foreign assets are claims over the future exports of the debtor country

Scenarios

• Generate a baseline of the world economy from 2000 to 2060 assuming:– Country specific population growth– Sector/country specific productivity growth– Tax rates– Fiscal rules/monetary rules– Tariffs at current levels.

Scenarios

• Introduce a phased reduction of tariffs in China commencing in 2002 and completed by 2005

• Suppose the country risk premium falls as a result of the reforms

• Might also consider the effects on additional productivity growth (not done here)

The shocksTable 3: Tariff Reductions

2002 2003 2004 2005 2006 2050Energy 0 0 0 0 0 0Mining -1 -2 -3 -3 -3 -3Agriculture 0 0 0 0 0 0Durable Manufacturing -6 -12 -18 -18 -18 -18Non-Durable Manufacturing -12 -24 -36 -36 -36 -36

Cost ReductionsServices (TFP increase) 1 2 3 4 5 5

Country Risk reduction -0.33 -0.66 -1 -1 -1 -1

Fig 1: Effect on Chinese GDP of WTO Trade Reform

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%d

evia

tio

n f

rom

bas

elin

e

tariff cuts Plus fall in country risk

Fig 2: Effect on Chinese Current Account of WTO Trade Reform

-2

-1.5

-1

-0.5

0

0.5

1

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%G

DP

dev

iati

on

fro

m b

asel

ine

tariff cuts Plus fall in country risk

Fig 3: Effect on Chinese Effective Exchange Rate of WTO Trade Reform

(down is depreciation)

-6

-4

-2

0

2

4

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%d

evia

tio

n f

rom

bas

elin

e

tariff cuts Plus fall in country risk

Fig 4: Effect on Chinese Stock market valuation of manufacturing firms of WTO Trade Reform

0

2

4

6

8

10

12

14

16

18

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%d

evia

tio

n f

rom

bas

elin

e

tariff cuts Plus fall in country risk

Fig 5: Effect on Chinese Stock market valuations of all sectors from WTO Trade Reform

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%d

evia

tio

n f

rom

bas

elin

e

energy mining Durable manufacturing Non-Durable Manufacturing Services Agriculture

Fig 6: Effect on Global Exports of WTO Trade Reform

-4

-3

-2

-1

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015% d

evia

tio

n f

rom

bas

elin

e

USA Japan Europe Indonesia China

Fig 7: Effect on Global Trade Balances of Chinese WTO Trade Reform

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%G

DP

dev

iati

on

fro

m b

asel

ine

USA Japan Europe Indonesia China

Fig 8: Effect on Global GDP of WTO Trade Reform

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% d

evia

tio

n f

rom

bas

elin

e

USA Japan Europe Indonesia

Fig 9: Effect on Global Bond Markets of Chinese WTO Trade Reform

-0.01

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

%p

oin

t d

evia

tio

n f

rom

bas

elin

e

USA Japan

Fig 10: Effect on Bilateral exchange rates of WTO Trade Reform

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% d

evia

tio

n f

rom

bas

elin

e

Yen/$US Rupiah/$US Won/$US Yuan/$US

Summary

• Both trade and capital reallocation effects from Chinese trade reform

• The impacts on individual countries depend on– The extent of trade with China

– The extent of competition in trade with China

– The impact on the return to capital in different sectors

• Beneficial for world income but production reallocation through capital markets.

Background papers are available from:

WWW.GCUBED.COM

WWW.WWWECONOMICS.COM

www.NOTWRONG.COM