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Assessing the Impact of China’s WTO Accession on Foreign Ownership

Author

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  • Walmsley, Terrie L.
  • Hertel, Thomas W.
  • Ianchovichina, Elena

Abstract

During the 1990s, rapid growth in China was accompanied by strong growth in foreign direct investment (FDI). FDI continued to grow until 1997 when it leveled off. Overall total investment fell as direct investment leveled off and portfolio investment fell after 1997. In terms of total foreign investment, it is clear that in 1998, under the shadow of the East Asian Crisis, China fell out of favour. Attempts by China to join the World Trade Organisation (WTO) have recently progressed to the final stages with the signing of agreements with the United States, Europe and Japan. It is hoped that China’s accession to the WTO will accelerate changes in China towards a market economy and attract foreign investment back to China. In this paper we explore the implications of WTO accession for market rates of return and hence on investment in China using the dynamic GTAP model. The dynamic GTAP model is applied to an 11-region by 13-commodity aggregation of the GTAP database, supplemented with foreign income data. The paper also takes into account duty drawbacks and examines the effect of replacing lost tariff revenue resulting from the reduction of tariffs. Data suggest that duty drawbacks apply to approximately 60% of goods imported by China. This effectively reduces the average tariff rate applied to imported commodities and hence, if not taken into account, the effects of reducing the tariff rates under the WTO agreement may be significantly overestimated. Moreover, in countries in which the tax systems are not highly developed, tariffs are an important source of government revenue. In China accession to the WTO, and the reduction in tariffs which accompanies it, will have an important affect on the Governments tax receipts. As a result this tariff revenue may have to be replaced with other alternative taxes. The affects of this on China and on investment are investigated in this paper. It is found that the effect of accession on interest rates can play an important role in enhancing China’s attractiveness as a destination for foreign investment. This increase in the attractiveness of China as a destination for foreign capital can, however, be severely curtailed if China chooses to follow a policy of replacing lost tariff revenue with additional income taxes.

Suggested Citation

  • Walmsley, Terrie L. & Hertel, Thomas W. & Ianchovichina, Elena, 2001. "Assessing the Impact of China’s WTO Accession on Foreign Ownership," Conference papers 330941, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:330941
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    References listed on IDEAS

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