For two decades leading up to its entry into the World Trade Organisation last December, China has undertaken economic reforms in areas such as trade and industrial policies, labour market regulations, state-owned enterprises (SOEs) and social security. These efforts, particularly the reform of SOEs, have helped to prepare the economy for accession.
However, restructuring and rationalisation of SOEs is incomplete, and these enterprises are likely to face increased competitive pressures following China's accession. Accession is often seen as creating new opportunities and catalysing the reform process, but, unless properly managed, reforms can lead to greater unemployment. Although China has experienced sustained and rapid growth over the past two decades, unemployment is relatively high.
In spite of a shift in economic activity from the public to the private sector, SOEs still play an important role in the Chinese economy. These enterprises operate in a wide range of sectors and they are dominant in heavy industries such as power, steel, chemicals and armaments; in banking, telecommunications, wholesale distribution and certain transport activities, private firms are practically non-existent. However, in some light industries, such as toys, footwear, garments and retail consumer goods, private firms have a much higher share than SOEs.
Low export levels
According to the National Bureau of Statistics, at the end of the 1990s SOEs employed about 83m people – representing 12 percent of total employment and 47 percent of workers in the manufacturing sector – and they accounted for 38 percent of GDP. They also account for about 45 percent of China's imports and 50 percent of its exports. However, these exports constitute a small proportion of their overall production – about 9 percent of GDP in terms of gross value and a smaller proportion in value-added terms. Primary goods account for 15 percent of their exports, and chemicals, textiles, light manufactures, rubber products, and machinery and transport equipment for the remainder.
State-owned enterprises are characterised by excessive employment, high inventory levels, low productivity, low capacity utilisation, inefficient scales of production and outdated technology. Despite several years of reform, many of these problems persist, generally leading to losses; if profits are made, they tend to be negligible compared with their huge amounts of capital involved. Subsidies paid to SOEs have decreased in recent years, but the growing losses of industrial SOEs, as a proportion of their value added, have increasingly been financed by credits from the banking system. Some SOEs, such as those in the automotive industry (see box), also benefit from preferential treatment in obtaining loans and foreign currency contingent upon their export performance, as well as preferential tariffs subject to meeting targets for local content of finished goods.
Removal of subsidies, reduction of tariffs and non-tariff measures, and elimination of preferential treatment will exert considerable pressure on these enterprises to improve efficiency and competitiveness, which may call for restructuring and labour-shedding. Big bang liberalisation can be both socially disruptive – particularly in the hinterland where many SOEs are located – and economically counterproductive. The scale of restructuring that remains to be done is immense. JP Morgan has estimated that about 35m workers, or 17 percent of the urban workforce, are redundant. According to a recent study, China's accession to the WTO could cause unemployment to rise as high as 25m over the period 2001-06.
The experience with trade liberalisation in developing countries shows that a sudden dismantling of support to and protection of domestic industry can result in job losses and widening wage differentials. It can also lead to deindustrialisation, particularly in sectors facing competition from the mature industries of more advanced countries. Often, it is difficult to shift displaced labour to export sectors, particularly when skill-mix requirements are different and the prevailing productive capacity is inadequate. Adjustment to new sets of incentives is not instantaneous; rather, it is a time-consuming process requiring investment in physical and human capital. In addition, for a large country like China, there is the further risk of flooding the market with labour-intensive products, particularly if restrictions on market access in industrial countries persist.
The SOEs likely to be worst affected by accession operate in industries such as machinery, electrical equipment, smelting and processing of metals, textiles, chemicals and chemical fibres, transport equipment, non-metal mineral products and food processing. Together these industries account for 72.5 percent of the workforce employed by SOEs. For some manufacturing sectors imports are low compared with domestic production, in large part due to the protection and support provided to them. While some industries, notably machinery and equipment, are not heavily protected and there are large amounts of imports of such products, they may still face some pressure due to liberalisation during the period immediately following accession.
Two sectors particularly vulnerable to liberalisation and import competition are the automobile and textiles industries. In the case of textiles, exports and imports are both important. Even though the sector is highly protected, the SOEs involved incur losses. For minerals and metals, although the tariff rates are not high, the extent of tariff reductions will be significant.
The impact of China's accession to the WTO on output and employment could be positive for clothing, electrical equipment, leather products, animals and animal products, meat and miscellaneous food products; most other manufactures and agricultural products may be adversely affected. With a few exceptions, imports could rise relative to domestic production, and the increase could be particularly rapid in sectors such as beverages and tobacco products, most agricultural goods, motor vehicles, textiles and, to some extent, machinery. In textiles, the impact of accession on domestic production could be negative even if exports were to expand.
Industries likely to be the most severely affected in terms of job losses are those dominated by SOEs, identified above. The shift in employment, from import-competing sectors to export sectors, needed to offset job losses could be significant, notwithstanding the problems of market access.
This is an edited extract from Unctad's Trade and Development Report, 2002. Copies can be obtained for US$39, or at a special rate of US$19 in developing countries, from United Nations Publications: www.un.org/publications.