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GTAP Resource #1077

"Greater China's Accession to the WTO: Implications for International Trade/Production and for Hong Kong "
by Francois, Joseph and Dean Spinanger

This paper offers a quantitative assessment of how Greater China's WTO accession will affect international trade in general and Hong Kong’s economy in particular. The results discussed here are based on a computable model of the global economy. The model covers all world trade and production and includes intermediate linkages between sectors. It also allows for linkages between trade and investment, yielding medium- to longer-run scenarios. In effect, we examine the impact once changes in trade barriers and other similar measures have worked their way through the various economies and sectors.
Our assessment starts with a baseline scenario in which all 142 current WTO members have implemented their Uruguay Round and (if applicable) their accession commitments on tariffs. We then apply, step-by-step, various trade policy/market access policy changes in order to determine how production and trade flows react. The initial step covers the elimination of quotas on the exportation of textile and clothing products to industrialized economies. Such non- tariff barriers have distorted trade between developing countries (DCs) and industrialized countries (ICs) for over 40 years. Our modelling of their elimination by all current WTO members shows trade flows, especially for textiles and clothing, shifting to economies like India and Bangladesh, but also to Hong Kong and Vietnam -- in other words to economies where one would assume that such industries could be quite competitive. It also reveals how countries enjoying regional trade agreements will lose market share as the margin of their preferential treatment decreases after ATC quotas are eliminated.
The next two steps incorporate Mainland China (PRC) and Chinese Taipei into this quota elimination scenario. These experiments highlight how much China will profit from its WTO membership, through securing ATC textile and clothing quota elimination. We then apply tariff cuts and services liberalization to capture full WTO membership. This scenario also includes changes in the competitive position of the textile and clothing industry (based on a survey of companies in the sector.) The total impact involves a substantial surge in China’s trade. China’s exports increase by roughly 23% overall under the full WTO membership experiment. China’s clothing exports more than double (surging over 150% in dollar terms).
The report also offers a detailed assessment of the sectoral impact of the same scenarios for Hong Kong, China (PRC) and Chinese Taipei. We explicitly focus on 7 sectors, accounting for roughly 80% of Hong Kong's exports. The results reveal how the Hong Kong SAR can profit, overall, from the accessions. However, the size of the gains is generally less than many might assume. This is because Hong Kong is not the only economy to profit. It helps to recall that the whole process modeled here reflects most favorite nation (MFN) principles. Since Hong Kong does not have a monopoly on trade and business ties to China, it must share the gains with other economies. The only sector which lost out of the 7 specifically examined was the clothing industry. Gaining the most were transport services and other commercial services. While financial services did show a slight gain, it has effectively lost some quasi-preferential treatment in the course of the accession process.

Perhaps the key message from these calculations comes from the tables covering China's (PRC) accession. China’s textiles and clothing sectors virtually explode. Exports rise by 39 percent (textiles) and 168 percent (clothing), while output rises by 45 percent (textiles) and 125 percent (clothing). In essence these two sectors drive the developments that we trace across the PRC's economy. But China also pays dearly in terms of structural adjustment, with economic rationalization hitting sectors like those producing motor vehicles, primary nonferrous metals, and primary steel.
Mainland China (PRC) therefore has a tremendous restructuring job ahead of it. This can only be accomplished if other economies do not attempt to take advantage of newly created contingent protection rules. These rules, which are part of the protocol of accession, could permit other WTO members to keep protectionist pressure up against China (PRC) for 15 years. Beginning with special anti-surge clauses for textile and clothing products for 4 years, continuing on with general anti-surge clauses for 12 years and ending with treatment in antidumping cases which allows China to be treated as a "non-market economy for 15 years, sufficient weapons exist to keep China (PRC) at bay if necessary. And this triple jeopardy is actually topped off by the fear that anti-dumping measures against China (PRC) will also be on the increase. Our results for textiles and clothing point to a high probability that further safeguards will be implemented against China.
Concerning Chinese Taipei and its interactions with the PRC, there is an important degree of uncertainty. Our results may well be underestimates if MFN relations between the two new WTO members are allowed to truly flourish. Up until now, however, there have been less than normal economic ties between the two economies; it is well known that Hong Kong in particular has profited from this constellation. While bilateral restrictions are reflected in the basic data, they are not part of the liberalization scenarios. Although there does seem to be interest in reducing such barriers, the crucial question is: To what extent will both new WTO members prefer to maintain prevailing bi-lateral restrictions? The answer inherently lies in the individual decision of each of these two economies not to take their bilateral grievances to the WTO in Geneva. The longer this stance prevails, the longer will Hong Kong continue to profit from its role as a hub for trade, transportation, investment and financial transactions between Chinese Taipei and China (PRC).
The bottom line for Hong Kong is that Greater China's accession to the WTO brings with it tremendous potential. That potential is not just for Hong Kong. It is now more easily tapped by other WTO members as well. While Hong Kong entrepreneurs may still have an easier time in establishing new activities or expanding already established ones in the region, the WTO accession process will tend to shave down this advantage over time. In the service sector, in particular, multilateral WTO-based liberalization may erode Hong Kong’s unique position in the region. New opportunities emerge from the accession. However, there are also new competitive threats, as North American, Japanese, and European firms in particular find it easier to enter China directly, and to compete with Hong Kong entrepreneurs in the region. While the fruits of Greater China's accession are on the table, it is now up to the hard working business community of Hong Kong to compete all the harder to procure them.

Resource Details (Export Citation) GTAP Keywords
Category: GTAP Application
2002 Conference Paper
Status: Published
By/In: Presented at the 5th Annual Conference on Global Economic Analysis, Taipei, Taiwan
Date: 2002
Created: Spinanger, D. (5/2/2002)
Updated: Bacou, M. (7/16/2002)
Visits: 3,510
- Asia (East)

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