For China WTO membership will have the impact of a wrecking ball

The recent activity in free trade agreements and special economic relationships suggests a significant reordering of economic globalisation. Of all the global trade regimes currently in existence, the WTO is arguably the most important. And of all recent WTO memberships, China’s was the most anticipated.

For China, WTO entry established that the long struggle initiated by Deng Xiaoping in 1978, and continued by his successors, to open up the economy had to a large degree succeeded. With the "Four Modernisations" of the 1980s, the market liberalisation of the 1990s, and the recent opening up of the economy to international capital, China has established itself as a powerhouse within the region and a potential force in the global economy, rather than the international oddity it had become at the dark depths of the Cultural Revolution.

For the rest of the world, it means that the world’s largest nation, and for much of the 1990s the world’s fastest growing economy (with average annual growth rates of at least 7-9 per cent, and double that in major cities such as Beijing and Shanghai), was now locked into the rules and regulations of the emergent global trade regime, albeit with significant concessions. The World Bank has noted that, of all the countries that entered the WTO after its commencement in 1995, China probably had more bargaining power than all of the recently acceding countries put together.

But beyond the significant symbolic impact of being recognised as a player, and not a pariah, in the global economic community – reinforced by Beijing’s successful bid for the 2008 Olympics – what does WTO accession offer for China?

In a remarkably candid speech to World Bank officials (pdf, 37KB) and U.S. business executives on 22 October, 2002, China’s Vice-Minister of Finance, Jin Liqin, described the "membership card" of the WTO as having an impact akin to the physical impact of a wrecking ball. WTO accession was seen as the "destructive force" that clears the old structures of the closed economy. At the same time, it becomes the "constructive force" for innovation and institutional overhaul that drives necessary domestic structural change and integration into the global economy.

In evoking Joseph Schumpeter’s famous metaphor of creative destruction as the driving force of capitalist market economies, this speech alerts us to two major issues facing China in the 2000s that will necessitate changes to its economic growth regime, whatever other changes may arise (such as legal or political change). During the 1990s, China became the world’s largest manufacturer of manufactured goods, as foreign investment flooded into its coastal cities and regions. The impact of the "China effect" can be seen throughout the world, from the plummeting prices of electronic goods to the proliferation of designer label clothing, and shows no signs of abating.

From the Chinese perspective, the profound short-term gains arising out of economic prosperity and competitive advantage in manufacturing – most evident within a consumption-minded Chinese middle class of at least 100 million people – have generated medium-term issues which need addressing. Most obviously, China’s entry into WTO created pressures to crack down on copyright infringement and the sale of goods illegally or in "grey markets". It has been observed that the division of the US Trade Representative (USTR) is now mostly engaged in full-time "China watching" on behalf of aggrieved American corporations.

More generally, it raises the question of whether China can move from being the world’s largest producer of "other people’s stuff", to tap into the dynamics of the emergent global knowledge economy, where copyrighted ideas, trademarks, patents and designs are now the basis for sustainable wealth creation, rather than the capacity to manufacture more cheaply than one’s competitors. While China’s neighbours in the East Asian region, such as South Korea, Thailand and Singapore, have been forced to adjust to the looming dominance of China, there is also a need for China itself to break free of its economic dependency on low-cost relocation and technology transfer. This points to the fact that both sustainable growth and national sovereignty coincide around the need to develop the well-springs of local innovation and creativity, rather than relying upon footloose foreign capital to invest locally on the basis of cost advantages. The secret is to move to high-value-added products and services that compete on the basis of quality and innovation, and not simply on price.

The Korean example is particularly relevant to China. While its first wave of industrialisation in the 1970s and 1980s was largely driven by foreign investment and a low-cost labour force, it is now the home base of many of the world’s leading companies. While people may have once bought a product of Samsung, Hyundai or LG because it was cheaper, their products are now marketed on the basis of superior quality and innovative features. China similarly aspires to develop "national champions", in areas ranging from mobile phones and electronic goods to advertising and education, that will be recognised and competitive in global business and consumer markets. China currently lays claim to very few internationally competitive brands, Haier electronic white goods and Legend computers being the front runners.

The second big issue facing post-WTO China is how to foster local well-springs of innovation and creativity, and deploy these to longer-term commercial advantage. In May 2004 The Creative China Industry Alliance (CCIA), a non-profit organisation based in Beijing, described its mission as promoting a cultural shift "from made in China to created in China". The Alliance, which is a small-scale think tank, is made up of members from the State Information Centre, the Department of Information Ministry, and the Ministry of Culture. Its secretary, Mr Su Tong, pulls no punches in his advocacy of China’s desire to be a creative nation.  The CCIA is currently looking at recent developments in the creative industries precinct in Queensland and among other initiatives has proposed a China national creative industries day on May 22 each year.

In ARC-funded research that my colleagues and I at the Queensland University of Technology have been engaged in, we found that the concept of innovation was well understood in China, and referred not only to new ideas that led to commercialisable outcomes, but also to the renewal and renovation of existing institutions. For instance, innovation policy is enshrined in the national slogan "Innovation is the soul of a nation’s progress". By contrast, creativity has not been a widely used term until recently, and was seen primarily as the provenance of the creative and performing arts, and hence as a part of the cultural industries. The "cultural industries" (wenhua chanye) and "cultural institutions" (wenhua shiye) – the latter state funded organs - have, for the most part, been extensively regulated by the Chinese state, and have variously been seen as being the "tongue and throat" of the Chinese Communist Party (CCP), and as being principally engaged in the building of "socialist spiritual civilisation".

The challenges of building a creative China - one that builds globally competitive creative industries which are high-value-added and knowledge-based, and derive wealth from the ideas of the mind rather than the work of the hand - have implications at many levels. These range from education and law, to how to develop a "creative milieu" in the major cities, to the question of whether a culture of difference and dissent can ever be compatible with one-party rule by the CCP.

In education, the issue is how to promote individualisation and diversity, in a system that has historically promoted conformity, rote learning, and fealty to Mao Zedong Thought and the Chinese nation-state. We have found the Masters of Business Administration (MBA) programs to be an interesting incubator of different models of learning and teaching in this regard. Legally, the question of how to safeguard intellectual property rights and minimise illegal copyright infringement will inevitably lead to the issue of how the rights of individuals can be safeguarded from the arbitrary application of state authority, and the associated problem of official corruption, at a more general level.

The issue of whether China can accept, let alone productively harness, difference and dissent under its current political, legal and economic structures, takes us far beyond the issues raised by WTO accession. At the same time, it has always been clear to the Chinese authorities that WTO membership would force change in the local economy, and that these changes would have costs as well as benefits.

While WTO membership is largely understood in terms of adherence to a legal regime of global trade policy, in the Chinese case this is in many respects the undergirding for a wider set of cultural changes associated with developing a creative economy in China. WTO accession is therefore not simply a ‘wrecking ball’ on existing Chinse institutions and practices, but also an imperative to create anew. How these questions play themselves out in China over the rest of this decade will have implications for the rest of the world.