URFIG-supported Document about China

The advantages and disadvantages

of China’ s accession to WTO

and the related debates

 (Prof. Han Deqian, economist at Beijing University, 27 June 2001)

Thanks to Mr. Per GAHRTON and Green/EFA Group in European Parliament for offering me the chance to present my view here.

The title of my lecture is “The advantages and disadvantages of China’ s accession to WTO and the related debates”. It might take twenty minutes or so. I would be pleased to answer questions that may arise.

First of all, I must declare that all the viewpoints stated bellow are only my own opinions and have nothing to do with my government and my university. I am among the few scholars in China who have been consistently criticizing WTO, IMF, the World Bank, Globalization and Neoliberalism. Understandably, I am very concerned about the consequences of China’s accession to WTO. Unfortunately, this is not the attitude of the mainstream media in China.

The first point is that China’s accession to WTO will bring about more disadvantages than advantages.

Chinese enterprises do not have adequate competitiveness in international markets. General Motor alone has annual revenue comparable to the total annual gross revenue of China’s first 500 enterprises, and the average gross revenue of China’s first 500 enterprises is only 2% of that of the top 500 in the world. It’s true that China ranks in the front of the world as far as the total volume of several products are concerned, such as steel, cement, coal, cotton, fertilizer, electricity, color TV, refrigerator, air conditioner, or motorcycle, but the large quantity is produced by hundreds of thousands of firms, each of them remains small in scale. This implies that China’s average industrial concentration is too low to compete with their foreign counterparts. The level of equipment is more backward, which results in more energy consumption of per unit product, lower quality and performance. Further more, China’s enterprises are seriously short of capital in general and have no ability to improve technology and market share rapidly. Besides, few China’s products are famous internationally, so high quality products are not offered high prices, which means lower profits and higher costs.

Apparently, if China’s enterprises compete with transnational corporations under such conditions, a great number of them must go bankrupt, or be taken over by the latter. In fact, industries of beverage, beer, detergent, bicycle, paper, medical, elevator, computer, aviation, and machine tools are all controlled by transnational corporations, at least the high value-added markets of these industries have been totally conquered by foreign companies. Other industries under more strict protection of government, such as automobile industry, petrochemical industry, steel industry, coal industry, even agriculture, are under the serious threat of imported products and the penetration of transnational corporations. Some domestic firms of these industries have become the production base of transnational corporations. Hence, China’s enterprises have been suffering from decreasing profit since 1996, and forced to dismiss workers, reduce wages and freeze up welfare, many of which went bankrupt. It’s necessary to note that one of the results has been that the bad debts in China’s major banks have been soaring. In my opinion, the primary reason for the rising bad debts is due to the fierce competition, especially the competition from foreign enterprises and imported goods, the second important reason is corruption.

I want to emphasize the issue of agriculture. As known to all, the rural population in China adds up to 900 million, 500 million of which have the ability to work. The average house owned land is only 0.4 hectare. To insure such tiny land produce enough food, the price of food must be maintained at a high level, which means the price of the main agriculture products such as wheat, rice, and corn of China is constantly higher than that of international market. The price of agriculture has kept decreasing since 1996. The price fell to such a level that per hectare wheat brought 120$ loss to peasants in the autumn of 2000, while an average peasant’s annual income in pure agriculture area is only 80$. In addition, almost 600 million people live in pure agriculture area. If the  “ Agriculture Cooperation Agreement between P.R.C and U.S.A” is implemented after China joins WTO, the income of peasants must go down steeply, more land must lie waste, more peasant must flush into every city and fall into poverty trap without any hope.

As a result, China’s GDP might increase temporarily, but employment, tax and wage per GDP unit will decrease continuously. More important, China will no longer have an independent industrial system, and become the production base of transnational corporations. Most rural population will lose their land and income. Financial system might collapse because of increased bad debts. Meanwhile, China will have no ability to construct a social security system with enough money because the government couldn’t impose enough tax upon foreign enterprises, which will certainly deteriorate public security.

Then, second question naturally arises: why is China so eager to join WTO?

A great many of people feel it’s hard to understand the motivation of China’s accession to WTO. However, China’s mainstream media save no enthusiasm to praise WTO. They loudly proclaim that accession to WTO will speed up the step of reform and opening up policy, motivate the energy of China’s enterprises before international competition, normalize China’s market economy, and finally make China run in the same orbit as the developed country. If some enterprises are eliminated, it’s only the necessary cost of China’s development. More media appeal to consumers implying that they will be able to buy more high quality imported goods with less money.

But no voice from businesses directly faced with international competition appears on media. Collective enterprises owned by villages and towns or private enterprises are too small to compete directly with transnational corporations, and their main rivals are domestic firms. Although these small businesses feel vaguely the threat from foreign goods, they have little information about the whole situation, no organization, and no representation in political affairs. Most big enterprises still belong to the state, leaders of which are appointed by central or local government, and don’t bear final responsibility of the enterprises. If the government is dedicated to join WTO, they will raise their hands automatically. For the sake of personal income, these leaders will have the possibility to enjoy as high salary as their foreign counterparts, which far outweighs their concern for the over all interest of the enterprises. Workers and peasants ought to show different opinions, but they are much less informed and organized, they even don’t know what the WTO is.

What kind of force could get rid of all these obstacles and push forward the process of accession to WTO? The answer lies in the logic and history of China’s reform-open policy. It is generally considered that, reform-open policy leaves Chinese economy grow rapidly, and the living standards of Chinese people improve rapidly. However, the thing is not so simple. The core of reform opening up policy is the introduction of market logic, which means to put the development in the hands of those with desire and ability to become wealthy, which at the same time means to let the law of the jungle start functioning. It’s interesting that at the first stage of reform opening up policy the law of the jungle began to function in every level except the top, which initiatively gives up a part of power and benefit, therefore the dominant factor isn’t the law of the jungle. Before 1985, the central government improved the price of agriculture product and the wage of workers while the consumer price kept frozen. Local governments and state-operated enterprises gained more self-determination power and were able to use bonus and allowance. As a result, the  largest and weakest group won more share in wealth distribution, which promoted development strongly. The reform opening up policy won support from all social groups.

It’s the honey month between stronger and weaker. Since 1985, the government had no power and benefit to give up, the officials became conscious of the power in their hand, and moral constraint began to exit from daily life, so the law of the jungle gradually dominated all kind of social and economic activities. The increasement of peasants’ income grew slowly while peasants’ burden grew rapidly. Leaders of state-owned enterprises gradually seized more profit and put them into private wallets through all kinds of ways, on the contrary, the political position and relative income of workers fell continuously. Day after day, no person cared about the integral and long term benefit, every one, from top to bottom, even workers, learned to use power for himself, and state-owned enterprises became the object shared by all kinds of forces. Furthermore, collective enterprises owned by villages and towns and private enterprises occupied the lower level market, and transnational corporations and joint ventures occupied the upper level market, so the outside circumstance of state-owned enterprise became very serious. In a word, state-owned enterprises are dying gradually under the internal erosion and external pressure.

This process produced a large wealthy group which included cadres in all levels of government who held real power, leaders in state-owned enterprises, grass roots cadres in countryside, leaders of collective enterprises owned by villages and towns, owners of private enterprises, and those working as white-collar in foreign capital enterprises.

It must be noticed that foreign capital once played a positive actor in China’s economic development. During 1980s, the scale and level of foreign capital was relatively low, constituted mainly of capital from HongKong, Macao, and Taiwan, which didn’t threaten China’s enterprises but gave an example for business operation, Meanwhile the government adopted a strict protectionism policy. Therefore domestic market had been very boom for five years or so, supply all kinds of products once fell short of demand. The internal and external problem of state-owned enterprises existed but not so serious.

But at the end of 1980s, overproduction visited every walk of life, and competition became very fierce. In other word, China ran into its first economic crisis, the most notable mark of which was “triangle debts”. To solve the crisis, it is necessary to enlarge domestic demand, reduce the gap between the wealthy and the poverty, and absorb overproduction capability, using financial, monetary and taxation tools. But this solution was excluded from the beginning, because it couldn’t gain support from the new wealthy group, against the logic of the law of the jungle. The real choice was much more application of the law of the jungle, namely opening door much larger to foreign capital, hoping foreign direct investment could draw up the growth. After 1992, the publication of famous speech of Deng, all level governments in every district competed with each other to supply more favorable treatments to attract foreign capital. Many lands were named “developing zone”, in which governments were responsible for high standard infrastructure. Not surprisingly, a great boom formed because of the building of real estates and infrastructures in developing zones, all the storage were sold out, and the idle production capability was put into use. But the boom ended as rapidly as it appeared. The day the real estate was built up, the day the building was idle. The prices of real estates fell sharply. For example, in Hainan Province and Guangxi Province, the prices dropped to 10% of their original level. A similar story is taking place in the entire China economy. All competitive industries went into a descending spiral. The prices of color TVs, refrigerators, air conditioners, motorcycles, etc. go down more than 50%. Idle capacities were much more than that of the last crisis. It may seem strange from an European’s perspective: didn’t China economy grow at 7% annually? Yes, but the growth only existed in foreign direct investment and export/import, which at the same time compressed the market space of domestic industries, and aggravated the domestic economic crisis. Indeed, foreign direct investments focused in two fields, one was high value-added industries such as automobile, medical, chemical, and micro-electricity etc., another one was labor-concentration export-intended industries such as toy, shoe, leather, and garment etc. Though export-intended industries brought about some employments, the wage were too low to compensate the lost high wage employments in high value-added industries. More uncomfortable to China’s long-term interest, China will lose independent industrial ability. To indicate how China’s economy relies on foreign capital and markets, the ratio of the sum of export and import to GDP rose to 46% in 2000.

During the process that China economy fell into the long term deflation crisis from the boom bubble burst in 1990s, the law of the jungle functioned to its’ extreme. Workers and peasants experienced a ten years’ stagnation of income, while cadres in central government and rich area governments experienced ten times of growth of income, white-collar employees and intellectuals gained even more. These three groups are the core force in current China’s politics, economics, and culture. They are all benefit from the foreign-oriented economy, even benefit from the lasting deflation. In their eyes, if domestic growth needs more tax, less imported goods, then it must be the worst solution. Hence, when China economy faced with the choice of accession or not to WTO, they automatically support joining in WTO.

This social motivation is summarized implicitly by China’s political language as: join in WTO, so reform and opening up policy won’t be reversed. It could be understood as: join in WTO, so the wallet of the richer won’t be under threat.

Here comes the third question, how could the public be persuaded?

Actually, the Chinese rich will be dependent upon transnational corporations if China’s accession to WTO does take place, thus they won’t be so enthusiastic to support WTO if they are clearly aware of the probable consequences. It does no good to other countries and most of the people in the world if China loses the ability to grow independently and become a country competing with others by its low wage level. However, such a “fail-fail” game was indeed said to be a “win-win” game by Chinese media and world media, why?

I think the reason lies in the neoliberalism which dominates the academia and public opinion, and which has been recommended strongly by transnational corporations. Almost all Chinese economists embrace Adam Smith’s “invisible hand” and its modern representative like Milton Friedman, every leader in all level of governments is trained by the Smith’s dogma. In fact, it’s Adam Smith not Karl Marx who is the real hierophant. Hence they believe in market economy and free trade unconditionally. With no exception, the media, reporters and editors are all the embracers of Smith’s dogma, them seldom know that protectionism rather than free trade is the secret prescription of development of America, German, France, Japan, even the Great Britain. In their eyes, protectionism is equivalent to “close the door”.

It’s very interesting that under the surface of rejecting the western model China learn every thing from America with the reform and opening up policy. America sparkplug neoliberalism, then neoliberalism become fashion in China; Nasdaq upswings, the second board stock market become the top topic of China’s capital market; American communication industry opens to competition, China’s communication industry become eager to be dismantled. This kind of thinking model plays an important role in persuading the public.

The fourth point I would like to point out is that things are changing.

With the explosion of Asian financial crisis, with the rapid growth of unemployed population and the deterioration of the countryside, with more state-owned enterprises went bankrupt, public emotion against market-oriented reform strengthened. In economic academia, critique to IMF and Washington consensus from several American economists such as Joseph Stiglitz and Paul Krugman brought influence evidently. The translation of “ globalization trap: attack on democracy and welfare” written by two German reporters gave a shock to intellectuals both inside and outside economics academia. It suffice to say that anti-neoliberalism forces are developing quickly.

Since the first half of 1999, I have written many papers criticizing the policy of accession to WTO and the related treaties. My book “ Collision: Globalization trap and China’s reality choice” was finished at July 15, 1999, and was published at January 2000. Though I fell under all kinds of pressures and difficulties, I do gain more support from broad bases. To my surprise, China’s central policy research institute published long summary of my book, and the journal “International Trade” belonging to Ministry of Foreign Trade and economic Cooperation published my article “thinking of anti-globalization”. In addition, dozen of magazines gave abstract of and made comments on my view. I was invited to attend different kinds of seminars or give lectures. At the beginning of every lecture, I was in the minority, and when I finished speech, I became one of the majority.

It’s evident that the Chinese economic academia has been split. Those neoliberalist scholars still command the majority, but have lost their arrogance, while anti-neoliberalist scholars are the minority but are now more confident and encouraged with the justice on their side. I think it might fit in the Chinese proverb “moral isn’t alone, it must have neighbors”, therefore I could come here and introduce my opinion. I believe deeply that democratic forces all over the world must oppose neoliberalism and make it illegal because it promotes polarization, tragedies, and disasters in every front and in every corner of the world.