By Liu Shijin, Long Guoqiang, Wang Xu, Shi Yaodong, Hou Yongzhi and Cheng Guoqiang 

I. The Necessity of Selecting and Implementing an Active Responsive Strategy

WTO accession brings both advantages and disadvantages to China. But generally speaking, advantages outweigh disadvantages. Under this basic assessment, there are two points that deserve attention. One is that the advantages and disadvantages are not evenly distributed among different sectors. Because of their different comparative advantages, trade and investment environment, market structure, degree of globalization, industrial maturity, and the potential for demand growth, some sectors may enjoy more advantages while others may suffer more shocks. The other is that the changes in advantages and disadvantages in a specific sector remain highly uncertain. A sector that would theoretically enjoy more benefits may tuna out to be in a different situation and may even be driven into a passive position. Likewise, a sector that would theoretically suffer more shocks may end up having a considerable potential to turn challenges into opportunities. This uncertainty in changes of advantages and disadvantages are mainly related to the response strategy after WTO accession, especially to the orientation of the required adjustments and reforms. A sound responsive strategy should be able to grasp the opportunities arising from WTO accession as much as possible to reduce relevant risks and costs, maximize advantages, minimize disadvantages, and emphasize adjustment, reform and system innovation. In short, it should be an active responsive strategy.

Selecting a strategy of this nature is of vital practical significance at the moment. On the issue of WTO accession, people in some regions, sectors or enterprises have overemphasized the "shocks" and "challenges". Some of them even deemed the accession as an imminent disaster and regarded the required adjustment and reform measures as "something against their will". Then we have to come back to the rudimental question: why should we join the WTO? If can bring us only or mainly shocks and difficulties, joining the WTO would be a move to ask for trouble. If so, it is not advisable to join. In fact, joining the WTO is a voluntary strategic choice of Chinese government and people. Nobody has imposed it on us. We made this selection out of profound understanding of the trend and features of the world economic and political development and out of the strategic consideration of China''s national interests.

Therefore, despite all the risks and uncertainties, the central authorities still made a far-sighted and courageous strategic decision to join the WTO. After the accession, the responsive strategy should be consistent with this basic attitude. It should be active, instead of being passive.

Emphasizing an active responsive strategy does not mean to deny the difficulties China has encountered or will encounter after its WTO accession. After WTO accession and especially in the early years of WTO membership, the pressure of adjustment will be concentrated on the areas of employment, income distribution, personnel and industrial reorganization. In some areas, the contradictions could become more acute. An active responsive strategy is precisely designed to solve these problems through adjustment, reform and development so as to minimize adjustment cost. A passive or defensive responsive strategy can hardly maintain the status quo.

Worse still, such a strategy will lead to a dilemma in which the disadvantages of the traditional system cannot be removed and the advantages of an open market cannot be reaped either.

II. Emphasize Rules Adjustment and Turn Comparative Advantages into Competitive Advantages

The active responsive strategy can be summarized as "giving full play to a major power competitive advantages under the conditions of further opening". The purpose is to expedite domestic adjustment and reform and create an effective market environment with the new opening conditions after WTO accession so that China's existing and potential comparative advantages can be turned into competitive advantages and China can maximize its own interests in the process of economic globalization.

Maximizing advantages and minimizing disadvantages after WTO accession will first of all depend on how to understand, nurture and develop China's comparative advantages. China's economic advantages, many of them in the sense of economics, are mainly manifested in the following aspects:

-- China has a population of more than 1.2 billion and is in a stage of rapid economic growth. It has the world's largest potential for demand growth in many products and services;

-- China continues to enjoy the low-cost advantage in labor and land. In recent years, capital cost also declined to a certain extent;

-- China has advantages in the manufacturing industry which focuses on assembly and processing sector and has certain technological contents;

-- China has the "delayed stamina" in the areas of technology, management and system that are acquired through learning from advanced experience;

-- The Chinese people have the traditional traits of being good at doing business, frugal and hard working.

These advantages are same or similar to those of other countries. But what we need to emphasize is China's uniqueness. For example, some industrialized countries, such as Britain, France, Germany and Italy, still have a population of less than 100 million people, which is close to the population scale of some large Chinese provinces. Although the United States and Japan have a population of more than 200 million and 100 million respectively, they cannot compare with China''s population of 1.2 billion. What we want to emphasize here is not merely the number, instead, it is the fact that such a large population has begun entering the mid-stage of industrialization and a fast-growing period of major industrial and service products. The economic phenomenon thus formed is unprecedented in human history, and quite probably some unique features unseen in other industrialized countries could appear. Even though the income gap between China's urban and rural population is relatively wide, the country already has an urban population of more than 400 million. Even if only the urban population is taken into account and even if the prevalence rate of a particular product is not very high, the total amount will be among the largest in the world. One latest evidence is that the total number of China''s mobile phones has surpassed that of the United States and become the largest in the world. The population base of the Chinese market can be turned into a huge capacity of market demand and can lead to some other unique features in production. For example, relying merely on the domestic market can fully realize the economy of scale and scope and can accommodate several large enterprises that can form a rational competitive structure within a specific industry. In addition, large population base and uneven development can ensure some industries to maintain a longer fast-growing period than in other countries.

Another example is that the comparative advantages of the Chinese economy are in a stage of dynamic change. While the low-cost advantage of human resources and other production factors is maintained, a manufacturing advantage with relatively high technological contents and added value is gradually taking shape. After passing through the development stage that emphasized light industry, textile industry, heavy industry and chemical industry, China is now entering a development stage that highlights processing, assembly and manufacturing industries that are noted for relatively high technological contents and added value. Part of the manufacturing base came from the construction projects invested by the state for a long period, some were constructed under the planned economy. But a larger part of the base has originated from the processing and manufacturing industries built with various kinds of investments since the beginning of reform and opening up. In particular, the improvement in technology and management during this period has markedly narrowed the gap between China and the developed countries in the product manufacturing. While the level of manufacturing industry is heightened, China has not seen a drastic rise in the cost of labor, land, capital and other production factors that some other countries have experienced. China's vast territory has restrained excessive hikes in land prices in developed regions. The country''s seemingly endless supply of cheap labor, especially the skilled workers, technicians and managerial personnel that are noted for relatively high qualifications and relatively low incomes compared with the international standards, has enabled China to maintain the overall low-cost advantage in human resources. With the total volume of economy gradually expanding, the traditional high saving rate has helped the country ease the problem of fund shortages. In recent years, the interest rates have been cut continuously, making China''s capital cost close to the international level. The heightening of the manufacturing advantage and the maintenance of the low-cost advantage in production factors are attracting more and more foreign manufacturing capacities to China.

It is worth emphasizing that it is not rare that different countries possess the advantages of a vast and fast-growing domestic market, low-cost production factors and a manufacturing industry with certain technological contents respectively. But it is rare that all these advantages are found simultaneously in one country. This is of course a good fortune for China. It can enable China to have a favorable position to develop large-scale and low-cost industries with relatively high technological contents and added value in the international chain of division of labor. And it is precisely the main reason China can become a manufacturing base of the world in certain areas. At the same time it also makes it possible for China to rely on domestic market to promote the upgrading of industrial structure and the entire economic structure while continuing to maintain and enhance our own competitiveness.

Economic theories and practical experience also proved another equally important thesis that comparative advantages do not mean competitive advantages. A country that enjoys comparative advantages can be defeated in competition if it has no effective market environment to turn comparative advantages into competitive advantages. Likewise, if it has a sound market environment, a country can create competitive advantages in some areas where it does not enjoy comparative advantages. After we have a good understanding of China''s comparative advantages, we have to know how to turn comparative advantages into competitive advantages. And the key issue is where exists an effective market environment. Thus we come back to the issue of how to understand the rules adjustment after WTO accession. WTO rules are based on modern market economies and have been established and gradually improved in the course of promoting trade and investment liberalization. China is establishing and improving the system of market economy which is in conformity with WTO rules and this is the basic reason for China to accept WTO rules. The rules adjustment after WTO accession is a move to create an effective market environment and a process to turn comparative advantages into competitive advantages. It can be said that rules adjustment is consistent with the deepening of reforms and the establishment and improvement of the market economy system. In this sense, rules adjustment has a greater far-reaching significance than market opening.

III. Actively Utilize the Favorable Opportunities Arising from WTO Accession as required by the Active Response Strategy

First of all, adapting to WTO rules should be regarded as an important opportunity to solve deeper system and structural contradictions and expedite system innovation. Promoting reform through opening up has been an important experience of China over the years. In some areas where competitiveness is weak, an ideal sequence is reform first and opening up second. That means to promote domestic reform first so as to introduce active and effective competition and establish a basic framework for market economy. After great progress has been made through competition in raising the competitiveness of domestic enterprises and their products, opening up should begin on the basis of WTO rules.

However, the reality we have to face is that in some areas, reform will be out of question if there is no opening up. In these areas, the restraints of various interest relations and other factors make it very difficult to further reform. In this case, one cannot but choose promoting reform through opening tip. Tile cost is that some enterprises and their products will face great shocks due to low competitiveness. Though this approach is not necessarily a best option theoretically, it is better than no opening up and no reform at all.

WTO accession has provided an opportunity to promote reform through opening tap. But unlike tile past, tile reform directly associated with rules adjustment after WTO accession has to follow a timetable and has to fulfill international obligations. hi the past, there was a great flexibility between early reform and late reform and between reform and no reform. In a new situation, however, where important progress has been made in China's economic transition and a system of socialist market economy has been preliminarily established, the reform associated with rules adjustment after WTO accession should focus on the reform of foreign-involved management system. In fact, such a reform has constituted an important component of tile overall plan for China's economic transition that is now at a critical juncture. Here involved two issues. One is that the reform associated with rules adjustment after WTO accession is not imposed from outside. Rather it is out of China's own need for self-development. In other words, such a reform is something that must be done even if China has not joined the WTO. The other is that WTO accession has provided an opportunity, but utilizing this opportunity to push forward reform should not just be limited to areas that are directly related to rules adjustment. Instead, such a reform should be carried out on a larger scale and at a deeper level in keeping with the overall requirements of China's economic transition.

Second, the "transitional period" for some areas should be deemed as an important opportunity to open the domestic market and introduce and strengthen competition so as to enhance the competitiveness of domestic industries. The documents on China's WTO accession stipulate different length of time for the "transitional period" for market opening in some sectors. Some people expect that during the "transitional period" the state can continue to provide strong protection and support, even stronger than in the past, so that at the end of the "transitional period", domestic enterprises and products can have competitiveness. This brings tls back to a basic question: was the weak competitiveness of some sectors in the past due to insufficient state protection and support? State protection is nothing new. Especially as it is a developing country, China has more reasons to give certain protection to certain areas. The "transitional period" is a result of state protection. If there had been no state protection, negotiations on WTO accession would have been much easier. In China, however, state monopoly, market closure, privileges and preferential treatments offered by the government to some ''enterprises, especially state-owned enterprises , were all fundamentally harmful to the development of industries and to the improvement of competitiveness. We have had too many lessons in this respect. A universally proven fact is that in the industries such as banking, insurance and automobile that enjoyed government protection through administrative monopoly and access restriction, the competitiveness of these enterprises was generally weak. On the contrary, in the industries such as household appliance and telecom equipment manufacturing where market was open even to foreign investors and competition was encouraged, both domestic and international competitiveness of these enterprises was generally strong. This phenomenon is by no means accidental. We call draw the following conclusions: opening the market and promoting competition are the only way to enhance the competitiveness of enterprises and their products. There is no alternative. China's vast market has provided a unique favorable condition for the enterprises to have effective competition while giving full play to the advantage of economy of scale. The administrative protection offered by the government to the domestic market was precisely one of the root causes of the weak competitiveness of the enterprises. What good results can we expect from the continued protection during the "transitional period" following WTO accession after the country has offered decades of administrative protection to the industries with weak competitiveness?

Therefore, it is imperative to distinguish the state's external protection from its internal protection. External protection is positive for a certain period of time and should be strived for. But this kind of protection cannot last long. WTO accession is designed to solve the issue of market opening between different economic entities. On the other hand, internal protection must be removed as soon as possible. The competitiveness of enterprises should be enhanced through opening market and introducing, encouraging and protecting competition. In other words, the road is "reform first and opening second". In this sense, the "transitional period" is designed to strive for a certain degree of external protection within a certain time limit for some sectors to grasp the "last minute" to make a decisive step forward in opening market and promoting competition. By so doing, they can turn the limited "transitional period" into an important opportunity to enhance industrial competitiveness through domestic market competition so as to effectively reduce the risks and costs arising from WTO accession.

Third, fulfilling the commitments on WTO accession should be utilized as an important opportunity to build internal credit worthiness relations and improve international image. Before or after China's entry into the WTO, some countries and people expressed concerns or misgivings over whether China can fulfill the commitments made on WTO accession. Undoubtedly, fulfilling these commitments is a challenge to China in another sense. The Chinese government has repeatedly stated that as a responsible major power, China will fulfill all the commitments specified in the WTO accession agreement in a strict and comprehensive manner. Within a short period after WTO accession, the Chinese government has made great and fruitful efforts to fulfill these commitments. Since the beginning of reform and opening tip, China's international prestige has been constantly increased, not only because of its economic development and social progress, but also because it has observed its commitments and emphasized credit worthiness in international relations. During the Asian financial crisis, in particular, China adopted appropriate measures, thus making world-acknowledged contributions to the economic stability and restoration in the region and the world at large. As fulfilling WTO accession commitments represents a new challenge, China has every reason to turn the challenge into another important opportunity to improve international image through responsible behaviors.

Fulfilling WTO accession commitments has also offered a rare opportunity and driving force for China to carry out domestic construction and to improve credit worthiness relations in keeping with the modem market economy. The WTO accession agreement was negotiated, signed and ratified by the central authorities, while fulfilling WTO accession commitments is an obligation that should be undertaken by the central and regional governments as a whole. For example, the recent overhauling of the rules and systems that are inconsistent with the WTO rules involved not only those of the central government but also many of the regional rules and systems. Internally, fulfilling WTO accession commitments represents a test to the credit worthiness relationship between the central and regional governments, between the regional governments and between the governments on the one hand and the enterprises and individuals on the other hand. At the same time, it is also a major adjustment, or in a sense an all-round building of credit worthiness relations on the basis of the modern market economy. In other words, fulfilling WTO accession commitments is in consistence with the rebuilding of the credit worthiness relations ill the economic life under a new system. The lax or lack of credit worthiness relations is a serious problem for China in economic transition and also a priority in revamping the economic order and strengthening the infrastructure construction of a market economy. Fulfilling WTO accession commitments involves the adjustment of many important economic relations including credit worthiness relations, at the same time, China can effectively push forward this adjustment through improving credit worthiness image in the international community.

"China After WTO Accession" Research Group

Group Leaders: Chen Qingtai and Xie Fuzhan

Coordinator: Liu Shijin

April 2002