China Enters the WTO: The Death Knell to State-Owned Enterprises?

By Gang Lin
Asia Program Associate

Dorothy J. Solinger, professor of political science, University of California-Irvine, and adjunct senior research scholar, East Asian Institute, Columbia University
Lawrence Christopher Reardon, associate professor of political science, University of New Hampshire, and Woodrow Wilson Center/George Washington University Asian Policy Studies fellow
Mark A. Groombridge, special assistant to the Under Secretary of State for Arms Control and International Security

Beijing perceives China's entry into the World Trade Organization (WTO) as both a great opportunity for accelerating economic reform and growth, and a threat to China's industrial structure and financial security. Will China's WTO membership finally solve the problem of its inefficient State-Owned Enterprises (SOEs), or strike the death knell to these incurable ventures? How does Beijing evaluate the benefits and costs of its membership in the WTO? How will Beijing tackle the issue of increasing urban unemployment in the wake of its admission to the WTO?

To answer these and related questions, the Woodrow Wilson Center's Asia Program organized a panel titled "State-Owned Enterprises under Siege." This panel constituted one part of a conference "China Joins the WTO: Domestic Challenges and International Pressures" on December 12, 2001, co-hosted by three programs at the Center (the Asia Program, the Environmental Change and Security Project, and the Project on America and the Global Economy). A special report on the conference is forthcoming in the spring.

As the first speaker of the panel on China's SOEs, Dorothy Solinger of the University of California at Irvine highlighted the negative impact of China's WTO membership on the country's rampant unemployment. According to Solinger, the rosy picture of a "win-win" deal between Washington and Beijing laying the groundwork for China's entry into the WTO turns bleak when one considers the plight of the 45 to 60 million former state-employed workers who are left with few economic opportunities. Solinger challenged five optimistic assertions about China's entry into the WTO:

1) More jobs will be gained than lost.

2) The pain will be short term and the problems will all be solved in the longer term.

3) Chinese consumers will benefit from more choice and cheaper foreign goods.

4) Export-oriented sectors, such as textiles, will benefit.

5) The tertiary sector and privately-owned enterprises will provide places for the unemployed.

Solinger observed that Beijing's several efforts to help the unemployed have yet to bear much fruit. Started in 1995, the national government's Reemployment Project has targeted only a fraction of the unemployed. By the end of 1999, less than 20 percent of households where the head was employed were participating in the social security system. With entry into the WTO and heightened international competition, millions of better-placed citizens will rise to the challenges of a more open and exposed market economy. However, millions of less fortunate workers will sink into obscurity.

Wilson Fellow Lawrence Chris Reardon of the University of New Hampshire agreed with Solinger that China's WTO accession would force the closure of many SOEs, thus ruining the livelihood of millions of workers. It is precisely these dangerous "transaction costs," however, that are most valued by Chinese elites promoting a long-term modernization agenda. Stymied by conservative elites, state bureaucracies, and regional interest groups over the past several years, reformist leaders hope to use the economic crisis created by international competition to merge, privatize and close China's 75,000 inefficient SOEs. According to Reardon, China was not forced into the WTO by some unseen hand of globalization. Rather, reformist elites consciously decided to give up a degree of national sovereignty, hoping to exert global economic power and to double the country's economy to $2 trillion within ten years. Still, reformist elites face obvious dangers in using WTO accession as a catalyst to marketization. It is unclear whether the non-coastal Chinese economy will be able to absorb the onslaught of foreign competition, especially after direct and non-direct aids to the SOEs are phased out.

In his commentary, Mark Groombridge of the U.S. Department of State argued that China has no choice but to integrate itself into the world economy. According to Groombridge, both China's inefficient SOEs and the resulting unemployment problem are the legacy of the Mao era's command economy. Despite severe social disparity and dislocation, the Chinese population's living standard has improved in general, thanks to the economic reforms of the past two decades.

This panel stressed both the dangerous repercussions and the huge opportunities that the Chinese SOEs face in the wake of China's entry into the WTO. As Reardon put it, Beijing is gambling on international competition as the death knell of the command economy, and that this outside challenge will change China for the better. China's future development hinges upon whether Beijing can appropriately reconcile the tension between economic efficiency and social stability, an old theme within the new context of China's economic transition.