China's entry into the WTO : A survey of the effects on Chinese exports and income

Abstract

Since China opened up for foreign trade in the late 1970’s it has become a major international trading partner. China is an export oriented economy with a high economic growth rate and has relied on labor intensive production to compete in the international market. While China traditionally has been known as a producer of light manufactured goods there has been a transfer towards production of technological goods.

This thesis analyzes the effects of the entry to the WTO on Chinese exports and income. I will first provide an introduction to the WTO, before I introduce the Chinese economy and explain shortly what has happened since the major turnover in the late 1970s. By using trade theory I will analyze both positive and negative effects of the entry. One of the arguments behind the WTO entry is that this will lead to credibility and will liberalize trade. The Chinese government had most likely this in mind when they finally agreed to enter. Chinese imports will be touched briefly, but the main objective of this thesis is to look at the effects on exports and income.

There are many interesting facts to analyze when it comes to China and the WTO. Why did it take so long before China became a member and what was the government’s strategy and agenda behind the entry? China was already a large trading partner and the reason for the entry was probably to gain the same benefits as other countries already had. As presented by the WTO itself, being a part of the organization makes international trade become more peaceful. Many years ago countries used armed forces to fight trade disputes, while they are solved in a well-organized forum today. For countries this is efficient and time saving. Instead of negotiating with one country after the other we now see that large economies can negotiate with each other at the same time and make agreements that apply for everybody. Smaller countries have now the opportunity to express their opinions and together make a difference as well as an impact to the rest of the world.

My findings show that Chinese exports have increased a lot during its first decade as a member of the WTO. Trade liberalization is one of underlying causes for that. Removal of tariffs and quotas has led to increased exports to the rest of the world. I have focused on the textile, electronics and steel industry and showed that exports have increased in all of the industries. The growth after 2001 is more rapid than before the entry which indicates that WTO has had an influence on the export sector of China.

China as a whole has gained from the membership, but at the individual level the effects are not so clear. Increased production of manufactured goods and reduced production of agricultural goods has led to a migration from rural to urban areas of China. Most of the Chinese export production is located on the east coast of China where industrialization has developed the most. The income inequality among those two industries has increased. This has further led to regional inequalities. The average income level is much higher in urban areas on the east coast, than in rural areas in inland China. A future challenge for China is therefore to improve the reallocation of the gains from international trade. The Chinese government needs to focus on the income inequality and implement measures to reduce the inequality.