Integrating China into the Global Economy.

• Author: Dorn, James A.
• Position: Book Review

Nicholas R. Lardy Washington: Brookings Institution Press, 2002, 244 pp.

China's total trade (the sum of its imports and exports) was $20 billion in 1977 but by the end of the 20th century that figure had increased to $475 billion. In his new book, Nicholas Lardy, a long-time senior fellow in the Foreigu Policy Studies program at the Brookings Institution and currently senior fellow at the Institute for International Economics, presents a detailed study of China's integration into the global economy. He examines China's pre-reform trade regime and contrasts it with the substantial liberalization that took place after 1978, especially in the decade prior to China's accession to the World Trade Organization in December 2001. His central thesis is that the Middle Kingdom was well on its way toward global economic integration before entering the WTO. Lardy explains the expected benefits and costs of accession, why Beijing agreed to join even though certain conditions are discriminatory, and the implications for U.S.-China relations.

China's rapid economic growth since its opening to the outside world, which began with the 1979 law on joint ventures and the creation of special economic zones in 1980, has proven that economic freedom and wealth creation go hand in hand. Prior to joining the WTO, China already had siguificantly reduced its tariff and nontariff barriers and increased trading rights (that is, the right to import and export). By 2000, foreignfunded enterprises accounted for 48 percent of China's exports and 52 percent of its imports. In chapter 1, Lardy argues that China's long 14-year wait for entry into the WTO "reflects as much the rising bar imposed by members of the Working Party ... as China's slowness to embrace the principles of the multilateral trading system" (p. 9).

The interesting question is, why were Chinese politicians willing to accept high short-run costs in return for distant benefits? The answer is that the Chinese Communist Party has made economic growth its primary policy goal the survival of the party depends on continued growth in the standard of living. Jiang Zemin, Zhu Rongji, and other leaders recognized the importance of trade liberalization for achieving that goal.

As Lardy notes, the party was merely acting in its self-interest. The dilemma, of course, is that, as the People's Republic of China moves closer toward a free-market system, people will demand greater political autonomy, which will undermine the CCP's monopoly on power.

Numerous problems plague China's market socialist economy, especially the inefficiency of state-owned enterprises (SOEs), the large amount of nonperforming loans held by the four big state-owned banks, high unemployment, and widespread corruption. If the leadership's goal is to achieve sustainable growth, those problems must be addressed. What is needed is institutional change that expands the role of the market and reduces the misallocation of resources endemic to the state sector.

China's leaders have come to accept the growing importance of the nonstate sector. Economic growth rates are much higher in the marketoriented coastal areas than elsewhere in China. According to Long Yongtu, vice minister of foreign trade, "China's economy must become a market economy in order to become part of the global economic system" (p. 21). Private ownership is now explicitly sanctioned in the PRC Constitution, although it is not afforded the same protection or status as state ownership. Reformers viewed accession to the WTO as an opportunity to expand the private sector and improve long-run growth.

China's WTO commitments include further reductions in tariff and nontariff barriers; extension of trading fights to foreign and domestic firms within three years of accession; greater market access for foreign telecommunications firms, banks, and insurance companies; direct distribution fights; and greater protection of intellectual property fights. China also agreed to discriminatory treatment under the so-called WTOplus provisions designed to "safeguard" (i.e., protect) foreign producers.

There is no doubt that China will incur considerable costs as it complies with its WTO commitments. But Lardy thinks those costs may be overstated because of the significant progress China had already achieved during the 1990s in liberalizing trade and moving toward a market economy. Prior to joining the WTO, China had reduced the average statutory duty on imports to 15 percent (the actual rate was even lower), removed quotas and licenses on most imports, restructured many SOEs, and abolished most price controls.

The implications of China's accession to the WTO...