China and the WTO: Some Empirical Results Warwick J McKibbin Australian National University & The Brookings Institution

Overview Background Current Trade Barriers in China The G-Cubed (Asia-Pacific) Model Empirical results Summary

Acknowledgement This paper draws on an early draft of Ianchovichina and Martin (2001) “Trade Liberalization in China’s Accession to the WTO” World Bank (mimeo).

China is undergoing major reforms independently of the WTO accession

WTO Entry at a time when China has: Moved away from trading through centrally controlled foreign trade corporations Created trade policy instruments (tariffs/quotas/licenses etc ) and removed non tariff barriers Unified the exchange rate in 1994 Removed many price controls

Focus What are the additional impacts of WTO accession relative to what otherwise would have happened over time This is hard to do precisely Need a global economic model

The G-Cubed (Asia Pacific) Model

Countries United States Japan Australia New Zealand Rest of the OECD Korea Thailand Indonesia China Malaysia Singapore Taiwan Hong Kong Philippines India Oil Exporting Developing Countries Eastern Europe and the former Soviet Union Other Developing Countries

G-Cubed (Asia Pacific) Sectors Energy Mining Agriculture Durable Manufacturing Non-Durable Manufacturing Services

Key Features Integrates micro and macro theory into an internally consistent framework Full accounting of stocks and flows over time Full integration of the real and financial sectors Short run stickiness in markets Forward looking expectations in all markets

Financial Markets Financial markets exist for Money Government Bonds Equity Foreign Assets Foreign Exchange Each financial asset represents a claim over real resources Money over purchasing power Bonds are claims over future tax collections Equity is a claim over the future dividend stream of a firm Foreign assets are claims over the future exports of the debtor country

Scenarios Generate a baseline of the world economy from 2000 to 2060 assuming: Country specific population growth Sector/country specific productivity growth Tax rates Fiscal rules/monetary rules Tariffs at current levels.

Scenarios Introduce a phased reduction of tariffs in China commencing in 2002 and completed by 2005 Suppose the country risk premium falls as a result of the reforms Might also consider the effects on additional productivity growth (not done here)

The shocks

Summary Both trade and capital reallocation effects from Chinese trade reform The impacts on individual countries depend on The extent of trade with China The extent of competition in trade with China The impact on the return to capital in different sectors Beneficial for world income but production reallocation through capital markets.

Background papers are available from: WWW.GCUBED.COM WWW.WWWECONOMICS.COM www.NOTWRONG.COM