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Prepared by the Trade and Economic Analysis Division, Ministry of Foreign Affairs and Trade, September 2001.
This study assesses the gains to New Zealand from China's accession to the World Trade Organisation (WTO). The study uses March 2001 export flows and the final negotiated tariff concession that will apply to exports from New Zealand.
In the year ending March 2001 the value of New Zealand exports to China was $971 million. This is an increase of 48 percent over the previous year. China was New Zealand's sixth largest export destination, taking 3.2 percent of total exports.
The average tariff rate on New Zealand goods is expected to halve from 13.5 percent to 6.4 percent following China's accession, once fully phased in. Agricultural tariffs will fall to 10 percent while industrial goods will face an average rate of 5 percent.
New Zealand exporters potentially gain $48.8 million following full implementation of China's WTO commitments. Of this total, $28.2 million will be in the agricultural sector and $20.6 million in the industrial sector. In addition there are nominal "early harvest gains" of $20.4 million in wool exports.
Dairy and wool industries will receive the largest reductions in tariff payments. Milk powders face a reduction in tariff rates from 25 percent to 10 percent, resulting in gains of $21.9 million for the industry.
New Zealand negotiated "early harvest" gains for wool with increased tariff quota volumes and reduced in-quota tariffs.
As a static analysis, the estimates in this report potentially underestimate New Zealand's economic gains for two key reasons. Firstly, the Chinese economy is continuing to grow strongly in contrast to the current global slow down. This real income effect should stimulate growth in China's imports from the world. The second dynamic adjustment is increased aggregate demand from Chinese consumers due to lower prices of New Zealand products.
The Chinese economy, not including Hong Kong, is the sixth largest in the world. China's GDP was 26 times New Zealand's in 2000 and is one of the few world economies to maintain a healthy growth rate in 2001. Consequently, China's ability to import from New Zealand has increased substantially with potential to increase even further in the near future.
The impact of this growth can be put into perspective: China is currently growing at the rate of "two New Zealands" a year in GDP terms. As economic liberalisation leads to enhanced growth, China itself will benefit from opening its markets, since increased trade is likely to stimulate this growth even further, improving the real income of Chinese households. In the long run, rising incomes will allow substitution into higher quality goods, where in many areas New Zealand has a comparative advantage in production.
In the year ending March 2001, the value of New Zealand exports to China was $971 million. This is an increase of 48 percent over the previous year, double the 24 percent increase in total New Zealand exports. China was New Zealand's sixth largest export destination, taking 3.2 percent of total exports in the year to March 2001. The main commodities driving this change in recent years were dairy and forestry exports. Wool exports in contrast halved over the same period (Figure 2).
FIGURE 1: New Zealand's Principal Exports to China (FOB)
FIGURE 2: New Zealand's Principal Exports to China (FOB)
New Zealand export values for the year to March 2001 were matched with the relevant tariff lines in the Chinese tariff schedule. Export values are from the New Zealand version of the World Trade Atlas database[1] at the HS8 level. Using this HS code matching method, a small number of discrepancies occurred between New Zealand and Chinese definitions. In the cases where there was no matching HS code the export values were determined using item descriptions. There are 463 tariff lines where the value of New Zealand exports to China was greater than zero.
The Chinese tariff schedule provides the base rate of duty, the tariff rate upon accession, the bound rate of duty and the implementation period. Most lines face an implementation period of 0 to 4 years. Both the gains upon accession and the final gains are reported in this study.
The gains to New Zealand in this study are based on the reduced amount of duty that would be paid on exports to China. The duty paid is first estimated using the base rate of duty and then the duty paid is estimated using the WTO final bound rates. The "gain" to New Zealand is therefore the difference between the tariff duties paid at the current base rate and the duties paid using the final bound rates.
Wool has been New Zealand's principal export to China. As part of the WTO process New Zealand negotiated "early harvest" gains for wool into the Chinese market with tariffs of 1 percent (non-carded) and 3 percent (carded) compared to a base rate of 15 percent. These gains have already been implemented and there will be no further changes to the in-quota tariffs for wool products of interest to New Zealand after accession. The gains from "early harvest" negotiations are noted in the results as they are a byproduct of the WTO accession process.
[1] The World Trade Atlas uses Statistics New Zealand data.
Based on current trade flows, New Zealand exporters stand to gain $48.8 million following full implementation of China's WTO commitments, not including the $20.4 million in nominal gains from wool (Table 1).
Table 1: Summary of Results
| Exports Value | Base | Current | ||||
| Year to March | Rate of | Duties | Bound Rate | Final Tariffs | TotalTariff | |
| Category | 2001 (NZ$M) | Duty (%) | (NZ$m) | of Duty(%) | Duties (NZ$m) | Gains (NZ$m) |
| Total (Excluding Wool) | 970.7 | 13.5 | 131.3 | 6.4 | 62.2 | 48.8 |
| Agricultural | 385.9 | 17.4 | 67.0 | 10.1 | 38.8 | 28.2 |
| Industrial | 439.2 | 9.7 | 42.5 | 5.0 | 21.9 | 20.6 |
| Wool | 145.6 | 15.0 | 21.8 | 1.0 | 1.5 | 20.4 |
The average tariff rate (pre-WTO) on New Zealand goods entering China is estimated at 13.53 percent. This rate is expected to halve to 6.4 percent when China becomes a member of the WTO. The average tariff rate on New Zealand's agricultural exports will be reduced to 10 percent, industrial products of interest to New Zealand will face an average tariff of 5 percent.
This study hypothesises that New Zealand exporters currently pay the duties. However, in many cases New Zealand exports are sold under conditions where the importer pays the import duties. It would therefore be the importer who would receive the initial benefit, but the New Zealand producer would still gain from increased trade flows and higher prices.
Dairy and wool industries will receive the largest absolute reductions in tariff payments (Table 2). Dairy exports of whole and skim milk powders both face a reduction in tariff rates resulting in gains of $21.9 million for the industry. Forestry, fish and meat industries will all gain substantial amounts from China's accession. Fruit and vegetable exports in particular will achieve a significant reduction in tariff rates that may result in increased trade flows. Upon accession the largest immediate tariff reductions are in wool and milk powders (the wool reductions already apply).
Table 2: Tariff Gains by Industry
| Exports Value | Base | Current | ||||
| Year to March | Rate of | Duties | Bound Rate | Final Tariffs | TotalTariff | |
| Industry | 2001 (NZ$M) | Duty (%) | (NZ$m) | of Duty(%) | Duties (NZ$m) | Gains (NZ$m) |
| Total (Excluding Wool) | 970.7 | 13.5 | 131.3 | 6.4 | 62.2 | 48.8 |
| Dairy | 166.6 | 23.2 | 38.7 | 10.1 | 16.8 | 21.9 |
| Forestry | 168.1 | 6.2 | 10.5 | 2.0 | 3.3 | 7.2 |
| Fish | 39.6 | 22.4 | 8.9 | 10.3 | 4.1 | 4.8 |
| Meat | 68.5 | 15.3 | 10.5 | 10.1 | 6.9 | 3.6 |
| Fruit and Vegetables | 14.1 | 30.4 | 4.3 | 16.0 | 2.3 | 2.0 |
| Hides and Skins | 81.8 | 10.2 | 8.3 | 9.9 | 8.1 | 0.2 |
| Wool | 145.6 | 15.0 | 21.8 | 1.0 | 1.5 | 20.4 |
Based on current export values, $62 million will be paid in import tariffs following full implementation of China's WTO commitments. Of this total just under $10 million will come from whole milk powder. The highest bound rate will be on "other fermented beverages". Certain fruits and manufactured items will still face tariff rates greater than 25 percent.
As mentioned earlier New Zealand exporters will also gain from the dynamic effects of trade liberalisation. When the price of a good is lowered, it follows that in the absence of quota restrictions, the quantity demanded will increase.
The potential static gains from China's accession to the WTO are almost $50 million plus gains on increased market access for wool. With the value of New Zealand exports to China increasing rapidly, these figures could potentially under-estimate the real gains significantly.
Opinion from the New Zealand Embassy In Beijing, November 2001
Following the formal endorsement by the WTO ministerial meeting in Doha, Qatar in November, subsequent ratification by the Chinese Government and formal notification to the WTO secretariat, China is finally scheduled to be admitted to the WTO on 11 December 2001.
The admission of China to the WTO is long-awaited and has generated considerable expectations all-round. Economic and political change in China can be expected to accelerate, but, that said, adjustment and compliance with WTO rules will not be possible to achieve overnight.
While the Chinese government has implemented major changes in the last few years, there is much to be done. It is likely to take a number of years for domestic arrangements to be brought into line with international commitments.
With the risks of social and political unrest as a result of reforms, the approach of the Chinese government can be expected to be aggressive in defence of national interests. Indeed some of China's more recent pragmatic flexibility may disappear.
It is now some 15 years since China applied to resume its GATT membership, in the context of economic reforms and opening up from the end of the 1970s. Reforms accelerated through the 1990s, particularly in the last 5 years under the leadership of President Jiang Zemin and Premier Zhu Rongji. China is now described by its leaders as a "socialist market economy". This description itself conveys a sense of the difficulties faced by the Chinese government in bridging the gap between its communist ideological origins and its aspirations for a future modern economy.
China still carries the burden of decades of central planning and state owned means of production. The chaos and destruction resulting from government policies during Great Leap Forward (1958-1961) and the Cultural Revolution (1966-74) still have a profound impact on China today. The consequences of the anti-intellectualism and xenophobia of those decades is reflected, for example, in the acute shortage of skilled personnel (particularly between the ages of 40 and 60) and in the weakness of higher education institutions.
China also suffers from a poorly developed legal framework and inadequate legal protection for private enterprise and private property. Legal issues have become identified as a major impediment to economic growth and are also the subject of a body of work being done with respect to WTO compliance.
President Jiang has recently pushed through provisions which are intended to allow entrepreneurs to join the communist party. Private land ownership is still unusual and uncertain, in both urban and rural areas, and to most practical intents and purposes land is still controlled and allocated by the authorities.
The services sector is also very new, and for the most part Chinese institutions are in a poor position to compete with foreign companies. Personal property insurance and life insurance are new concepts (the Chinese insurance industry essentially having been limited to operating pension funds). With the exception of the small, privately owned Minsheng Bank, Chinese banks are state owned and continue to be heavily burdened with bad debt (in some cases up to 50 percent). Most of the bad debt is from failing state owned enterprises (SOEs), which the Chinese government continues to oblige the banks to accept.
Since 1996 SOE reform has significantly improved profitability. But the Government's goals for reform of the SOE sector have been slowed primarily because of major unemployment issues. A hard rump of inefficient and obsolete industries are proving difficult to restructure. A significant level of economic activity in China continues to be dominated by the state through SOEs and devolved SOEs. According to the Asia Development Bank (ADB), there are over 100,000 medium and large scale SOEs, of which one-third are losing money. The SOEs however contribute about 25 percent of gross industrial output; 44 percent of urban employment and up to 70 percent of government revenues; and all of China's heavy industry is in SOE hands.
Tariff reforms have been progressively implemented. In the early 1990s, weighted average Most Favoured Nation (MFN) tariff was estimated at 30.6 percent. This was cut following the 1995 APEC meeting and further cuts have since reduced the average tariff to 15.3 percent (in January 2001). However a multitude of non-tariff barriers remain significant impediments to business in China.
China has actively and successfully sought to attract foreign investment, establishing special economic zones and special rules to facilitate foreign direct investment (FDI). This has worked well, particularly in the eastern and seaboard provinces. By 2000 FDI was reported to constitute 10 percent of all fixed investment and produce by value 25 percent of national industrial output.
National treatment is an issue domestically as well as for foreign trade, as provinces and cities use various means to bar trade from other parts of China. In April the State Council issued "Measures to Ban Regional Economic Blockades" in an attempt to deal with the problem. However, local authorities are accustomed by long tradition to exercise considerable autonomy, so this issue is expected to be a continuing source of difficulty for central government.
With its commitment to accession to the WTO, the Chinese leadership has nailed its colours to the mast thereby delivering an important domestic endorsement of WTO accession as the most effective means for China to take its rightful place as a global economic and political power. The slow pace of the negotiations in recent years reflects the domestic political difficulty for the Chinese government both in terms of public perceptions of loss of sovereignty and also the profound shift in the policies of the Chinese government away from the communist ideology of its past. It still faces stiff resistance (albeit slowly diminishing) in many quarters.
Social issues resulting from economic reform, notably large scale unemployment, are a sensitive political issue for the Chinese government and has slowed its approach to the key areas of SOE and rural reform. There is now in China a "floating" labour force estimated at between 100 and 150 million, which is expected to be possibly doubled as agricultural reform is implemented. (There is an estimated 100 to 150 million "surplus" rural labour force.) Reports of incidents of social unrest across China are increasing. While WTO accession is expected to generate between 2.5 and 5 million jobs per annum, this would be insufficient to soak up the expected job losses (and many of the new jobs would probably require skilled rather than unskilled labour).
The quantitative benefits to China of joining the WTO are estimated by the ADB to be a long term gain in the range of 1 to 2 percent of GDP. Many of the expected benefits of membership relate to the government's long term goal: modernisation of the Chinese economy and integration into the world system. The WTO clearly is being used domestically by the Chinese government to overcome inertia and force the pace of change. (And the WTO may become a convenient scapegoat in the public mind if reforms go badly.)
China's WTO accession is expected to impact across the board: key sectors include insurance; banking; distribution and retail; securities; the automobile industry; telecommunications; textiles; energy and oil; and agriculture.
In the insurance and banking sectors, geographical restrictions will be removed over three to five years and a greater degree of foreign control will be permitted. Foreign banks will be permitted to conduct domestic currency transactions two to five years after accession. For life insurance foreign ownership is restricted to 50 percent but "effective management control" will be permitted. Foreign owned companies will be permitted to provide non-life insurance services.
Securities: Joint venture fund management after three years will be permitted on the same terms as Chinese companies. Foreign ownership will be limited to 49 percent of each joint venture.
Distribution and retail: Current restrictions on distribution for most products will be removed within three years; as will restrictions on foreign-owned retailers. This is expected to result in a major improvement in the distribution of imported goods.
Automobiles: Tariffs are to fall from the current 70-90 percent to 25 percent by 2006. This is expected to hit the domestic and joint venture industry hard, although some Chinese analysts are painting a more optimistic scenario.
Agriculture: In the final leg of its negotiations with the US, China agreed to limit agricultural subsidies to no more than 8.5 percent by value. Tariffs will fall further by 2004. Cheaper and higher quality imports of agricultural products such as corn, soya beans and meat are expected to cause problems for domestic producers.
Telecommunications: Participation of foreign ownership in mobile phone networks, internet and paging services will be opened up over three years. Fixed line and long distance services will be opened up more slowly but competition is expected to increase significantly.
Textiles: China is expected to benefit significantly from the lifting of foreign import quotas on textiles and apparel in 2005.
Oil and energy: State control of the energy and oil sector is to be gradually liberalised.
As noted above, there is much still to be done to establish a robust legislative framework, national rules and standards and to streamline administration. To date, trade has been subject to a welter of different cross-cutting regulations and duplicated functions and responsibilities of different government departments. Different rules and standards are often applied at different ports of entry and in different provinces. The measures introduced by the Chinese Government ought to help, but actual implementation will be another matter. Tougher and more consistent implementation, when it comes, may also have a downside.
The ADB has recently announced a programme of technical assistance for foreign trade law reform in preparation for China's WTO accession. The task involves about 200 laws and regulations that need to be reviewed, revised, annulled or incorporated into new legislation or regulations. The ADB project is expected to be completed in October 2002. In all, in excess of 2000 pieces of legislation are thought to require amendment or repeal.
While the Government avoids completely any linkage between WTO commitments and human rights, it is noteworthy that much of the emphasis of public discussion is in support of making the Government administration more accountable. One official has commented that confidence in the Government's commitment to following laws and regulations is an important foundation for continuing economic growth. Others have described China's entry into the WTO as an important tool for improving the transparency of Government services. China's commitment to modernisation is unmistakable. Its impending accession to the WTO is, as we have noted, of great symbolic and practical importance domestically.
However China's commitments are, as with every other WTO member, informed by national self interest. China's leadership is making some very hard-nosed calculations. National treatment and nondiscrimination can be doubled-edged swords, and there are already some examples of this appearing.
The Ministry of Foreign Trade and Economic Cooperation (MOFTEC) has been instrumental in the WTO negotiations in Geneva. It is expected to maintain a role in advising on WTO rules and compliance and providing information to foreign investors. On 1 November three new divisions were established in MOFTEC to deal with WTO issues: the Department of WTO Affairs, China WTO Notification and Enquiry Center, and Bureau of Fair Trade for Imports and Exports. MOFTEC advises that it will not be involved in the actual administration and implementation of bilateral agreements and WTO rules. That is to be the responsibility of individual government departments.
The overall picture is a positive one for trade China, with (eventually) greater transparency and a better regulated administration. However reforms and compliance with WTO commitments will take quite some time. There will be resistance to reform in many quarters and numerous disputes can be expected. National treatment and consistency may also bring with it a loss of flexibility and an end to some of the special concessions offered to foreign businesses in recent times.
New Zealand stands to make early gains from tariff reductions on agricultural and industrial exports. Significant gains in trade can be expected as the markets and distribution networks are freed up, and with China's continuing GDP growth projected at about 7 percent per annum. Longer term, the legislative and administrative reforms should make China an easier place to do business.
