Liu Shijin, Feng Fei, Shi Yaodong, Yang Jianlong and Qian Pingfan

Research Report No 083, 2002

I. Background and Significance of the Study

Compared with other industries, China’s manufacturing industry is noted for rapid development and higher international competitiveness. It is also a sector that could benefit more from China’s WTO accession than other sectors.

China’s manufacturing industry has visible comparative advantages (which vary from sector to sector) and these advantages are in a process of significantly dynamic transition. They are manifested in production factors, especially the massive and abundant cheap labor. But more importantly, they are manifested in the strength of the large-scale processing and assembly sectors that are moving toward in-depth processing and in the scale and potential of the huge domestic market that is essential for industrial development. To a very large extent, these comparative advantages have become China’s unique strength in international competition. They have helped and will continue to help China strive for a more favorable position in international division of labor.

Of course, within the manufacturing industry, different sectors differ considerably from each other in industrial maturity, market opening and comparative advantages. As a result, the impact of WTO accession is uneven. It is understood that there are two main factors that determine and influence the international competitiveness of an industry. One is the comparative advantage arising from resource endowment and factor cost. 1Comparative advantages are of a long-term and basic nature and therefore can determine the long-term trend and the basic pattern of international division of labor, international trade and cross-border investment. The other factor is the competitive advantages arising from competition strategies and system conditions. They are of a marked strategic and selective nature. China is in an important period characterized by drastic changes in production factors such as economic system, industrialization process and demand-supply structure. Therefore, the factors that affect China’s industrial competitiveness, especially its dynamic comparative advantages and competitive advantages, are extremely complex and highly changeable. Against the large background of WTO accession, the factors such as the trend of industrial internationalization and globalization, the degree of marketization, the degree of market opening, the degree of industrial maturity, the potential of domestic demand and the dynamic comparative advantage will have a more direct and visible impact on the development prospect and competitive advantages of the industries.

We attempt to establish a China Industrial Prospect Assessment Method to comprehensively evaluate the near-term, medium-term and long-term impact of WTO accession on the various sectors of the manufacturing industry. The main components of this method are: (1) an industrial development prospect assessment method against the background of WTO accession that can be universally applied to different industrial sectors so as to carry out horizontal comparison of all industrial sectors under the same coordinate system; (2) a combination of the study of short-term policy options with the study of long-term trends so as to broaden the horizons of our study and to accurately chart a long-term development orientation of various sectors of the manufacturing industry after WTO accession; (3) a definition of the orientation and basic principles of government policy adjustment in the future through the assessment of industrial development prospect against the background of WTO accession.

II. Method and Indicator Selection for Assessing the Development Prospect of China’s Manufacturing Industry after WTO Accession

Our basic idea about the method of assessing the industrial development prospect after WTO accession is to make, through a comprehensive assessment of the following six indicators, an overall judgment on the short-term, medium-term and long-term impact (both positive and negative) of WTO accession on various sectors of the manufacturing industry as well as on their development prospect. Following are the six indicators:

1. The characteristics of globalization (or internationalization). The characteristics of globalization (or internationalization) are meant to determine whether a specific industry’s research and development, manufacturing, procurement, sales services, investment, trade, financing and other operations have a tendency of globalization or internationalization. Such a tendency is to a very large extent determined by the foreign direct investments by large transnational corporations. In the perspective of WTO accession, we can come to such a judgment that the more distinctive an industry’s characteristics of globalization or internationalization are, the more likely such an industry is subject to the impact of WTO accession and the degree of such an impact is determined by the degree of domestic industries’ participation in globalization. This is mainly because if an industry has more distinctive characteristics of globalization, the scope and method of resource allocation of its industrial chain will have closer links with external economic activities. As a result, such a domestic industry is likely to be more severely affected by external factors. As to those industries that have less characteristics of internationalization or have more characteristics of localization, they are likely to be less severely affected by WTO accession because their links with external economic activities are not close. For example, we can say for certain that from a global perspective, the chemical industry obviously have more characteristics of globalization than the building materials industry or the timber processing industry. As a result, WTO accession is likely to have a more severe impact on China’s chemical industry than on building materials industry or timber processing industry. The impact here refers mainly to direct impact, including tariff concession, the removal of non-tariff measures, market access, investment liberalization and facilitation, the protection of intellectual property rights and other factors that are directly related to WTO rules. As to the industries that have characteristics of globalization, we need to specifically pinpoint whether these characteristics are manifested in the area of investment, or in the area of product and service trade, or in both.

2. The degree of marketization. The degree of industrial marketization means to what extent the process and mechanism of resource allocation of a specific industry are determined by market forces instead of non-market forces such as administrative regulation. The main factors that need to be considered include: (1) market access, whether the process of production factors entering into or exiting from a certain industry is free and smooth and whether there exist administrative restrictions on the entry and exit other than the capital and technological thresholds; (2) price control, whether the prices of products and production factors are set by market or by government; (3) ownership structure, whether a specific industry is dominated by state ownership or is shared by diverse forms of ownership; (4) market integration, whether the market is nationally unified or divided by different regions or departments. In the perspective of WTO accession, we can easily make a basic judgment that an industry with a higher degree of marketization will be less severely affected by WTO accession.

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1 Comparative advantage can be in both static and dynamic forms. Static comparative advantage emphasizes that under the static conditions (which means land, natural resources, labor force, capital and other factors of production basically unchanged), a country can reap maximum benefit if it produces and exports the products that are produced with the most intensive factors of its own and imports the products that are produced with the factors most precious to itself. On the other hand, dynamic advantage emphasizes that in a dynamic sequence of time, the changes in the total quantity, quality and structure of a country’s factors can induce changes in the country’s supply structure, trade structure and consumption structure. As government policies can to a certain extent change the scope, mode and degree of the changes in the total quantity, quality and structure of factors, the theories of dynamic comparative advantages and strategic trade have become one of the basic reasons for governments to intervene in the development of a country’s own industries.