Putting the WTO Ruling Against China in Perspective

Wednesday’s World Trade Organization ruling against China’s restrictions on the distribution of media by American companies (actually the ruling will apply to all WTO nations) in China has implications for the creative industries specifically and US-China trade relations more generally. But it also has deeper implications for China’s role in the global economy, many of which are positive.

First, a little background: for the first 22 years of China’s opening to the world (1979 until 2001, the year of its accession to the WTO), the Chinese government directed foreign investment with a heavy hand. Foreign investors across industries were almost always required to set up joint ventures (JVs) with state-owned organizations if they wanted to have any chance at success in penetrating China’s markets.

That changed dramatically with China’s accession to the WTO. Today, across many industries, companies are much more likely to set up Wholly-Owned Foreign Enterprises (WOFEs) than they are to set up JVs as their position in the market. There are still a few controlled industries, those that the Chinese government sees as critical in one way or another: automobiles (because of its role as a “backbone” industry), energy/oil and gas (because of the strategic implications of this industry for national development, tobacco (a longstanding, lucrative monopoly with key economic implications for several provinces), telecommunications, and entertainment/media. The final two are actually very interesting to ponder because of their implications for democratization.

The decision is indeed good news for the creative industries. It is absolutely the case that this ruling will have an impact on how Chinese markets will eventually open up. It will not be a watershed moment, because, China will still drag its feet as any bureaucratic nation can do with approval processes and behind-the-scenes “guiding” of ventures. However, the good news, which China is often not given credit for, is that it is taking global processes seriously. The country moved steadily in the direction of a rational-legal system under Zhu Rongji and Jiang Zemin in the 1990s and it is continuing in that direction under Hu Jintao.

Some have argued that this ruling will have implications for the trade deficit. However, it is important to keep the trade deficit issue in perspective.

Despite claims that markets in China are closed to foreign producers—an allegation that is often raised in the face of the growing trade deficit with the United States and the rest of the world—there are several complexities and nuances to this claim.

First, one simple fact that is often lost in this debate is the shift in 1991 from measuring national economic growth as GNP to GDP. GNP measures the total value of goods and services produced by a given nation in a given year; GDP measures the total value of goods and services produced within a nation’s borders in a given year.

This is an important point because, of the top forty exporters from China, ten are U.S. companies. Multinational corporations like Dell, Motorola, and Wal-Mart benefit tremendously from producing in China and exporting to the rest of the world—benefits that include healthy profits, which boost stock prices and, thus, market capitalization. These exports, however, count on China’s side of the export ledger, because the goods are produced in China. Thus, although Wal-Mart is one of the largest importers to the United States from China, those imports count as Chinese exports in the balance of trade. The bottom line is that, while the trade deficit is clearly a problem for many U.S. policy makers, it is a complicated development that encapsulates many more commodity-chain relationships than the statistic itself reveals.

Second, as U.S. trade with China has grown, its trade with other East Asian economies has shrunk. This is not surprising, given that countries such as South Korea and Taiwan have moved production sites to China to take advantage of cheaper labor there. Under these circumstances, exports from China grow; however, this commodity-chain cooperation amounts to a reorganization of export flows across the region rather than a simple net growth of exports from China. In other words, in order to really think accurately about the trade imbalance with China, we need to also account for the fact that as production in Taiwan has declined, many of the Taiwanese businesses have moved their factories over the China’s eastern seaboard.

It is important to keep all of these issues in perspective, as the issues are often distorted in significant ways by the media and by anti-China (and anti-globalization) interest groups.

Finally, on the issue of democratization, if you care about democratization in the world’s largest nation, this ruling comes as a welcome sign. The flow of information (both cultural and news) is a cornerstone of democracy. China has been moving slowly (and quietly) on this front, but it HAS been moving and in significant way, and it often does not receive enough credit for how open the society has become. This ruling will not change much in the short run, but it will in the long run. As media companies have freer rein to operate in China’s markets with fewer and fewer restrictions, the information available to people in Chinese society will be greater and greater, a fact that follows the trends already in play over the course of the last 30 years.