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Why China Is a Paper Tiger

Author: Jagdish N. Bhagwati
February 19, 2002
Newsweek

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Alone among developing nations, China commands attention and awe. The country is feared for its military might. It also alarms the world, and Asia much more, because of its growing economic and trade clout.

True, the fabled "China market" has long been a holy grail for foreign investors and exporters. But China's exports are another matter. They inspire as much fear as Japan's did in the 1930s, when an explosion of cheap products like hurricane lanterns and $1 blouses provoked a slew of quantitative restrictions on Japanese exports and led to charges of a looming "yellow peril." China's size and rapid growth have deepened the sense that the People's Republic will inevitably draw market share and direct foreign investment away from its neighbors. According to this line of reasoning, the country's recent entry into the World Trade Organization will only fuel Chinese exports and compound the difficulties of its rivals. The thing about fear, as the Russian proverb goes, is that it has big eyes. These worries are hardly justified, however, if one only looks clearly at them. There are several reasons to be more comfortable about China's rise than the doomsayers would have us believe.

First, China's WTO entry is almost exclusively a matter of improving access to China's markets, not enhancing Chinese access to other markets. True, Beijing will be better insulated against antidumping actions and the arbitrary imposition of safeguards against its exports. But China has shown no indication that its exporting muscle has ever been inhibited by the threat of such actions. There is no reason, therefore, to believe that Chinese exports will grow by greater leaps and bounds than they would otherwise just because of WTO entry. Remember also that, unless Beijing begins to pile up foreign-exchange reserves, increased exports will imply a matching increase in imports.

But what could one possibly export to such a powerhouse, a nation that can seemingly produce everything? Trade develops in numerous ways that we cannot really predict. Take just two examples. As countries move upscale they tend, in a phenomenon that economists call "ladders of comparative advantage," to make room for others below in less sophisticated products. Thus, in the 1970s Japan's economic success prompted it to withdraw from exporting labor-intensive products, which then were taken over by the four tiger economies— Hong Kong, Singapore, Taiwan and South Korea. Chinese exports, thanks to their dramatic growth in the last two decades, are already diversifying. China will make room for countries further down in the pecking order— in Africa, the poorer parts of Asia, some of Latin America— one can be sure.

Many countries also exchange products within the same industry— small cars traded for big cars, table fans for ceiling fans. Such intra-industry trade can be expected among Asian countries and China. Often specialization also occurs vertically: booming Chinese car factories will have to import car parts and accessories. Asian economies— rarely at a loss when looking for trade opportunities— have no reason to despair when contemplating China.

At the same time, some countries could benefit from the threat posed by Beijing. Take textile exports. Those from China will likely grow significantly as the Multi-Fiber Agreement (MFA), which establishes quotas for textile imports, is dismantled by 2005. Inefficient suppliers who for years have been protected by MFA quotas— including those on the Indian subcontinent— will likely be displaced. That could provide a much-needed wake-up call to India, which has prevented the modernization of its textile industry by protecting small-scale producers.

China's WTO entry will also make it easier for countries to shield themselves from Chinese competition that violates international norms, because they won't have to take on Beijing all by themselves. Japan found out how unproductive that could be last year, when it slapped restrictions on Chinese mushrooms, leeks and rushes, only to have retaliatory tariffs put on several Japanese exports to China, including cars and cell phones. The beauty of the WTO membership is that countries can now take such action multilaterally under the rule of law, precluding unilateral retaliatory measures by China.

Indeed, Asia and the world can only benefit from China's WTO entry. The fear that China's legal system is not up to the job of implementing WTO-mandated reforms seems exaggerated, at best, to most scholars. The concern also flies in the face of the pragmatism and willingness to change that the Chinese leadership has displayed in getting this far. WTO membership should instead reinforce the broadening embrace of the rule of law in China and facilitate a steady expansion of Chinese trade. That is something to be welcomed, not feared.


Jagdish Bhagwatiis a fellow at the Council on Foreign Relations and a university professor at Columbia in New York City.

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