Going Global: An Analysis of WTO, European Union, China and the UK Relations - Term Paper Example

 Going Global: An Analysis of WTO, European Union, China and the UK relations WTO and its Implications in Trade between China and the European Union .1 Defining WTO WTO, better known as the World Trade Organization, is an organization of countries created to facilitate and liberalize the mechanics of international trading. It was actually the successor of the General Agreement on Tariffs and Trade (GATT). (Lash, 1999; WTO Online, 2007) GATT, which was signed in 1947, is a multilateral agreement regulating trade among about 150 countries whose purpose is to achieve “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis.” The most recent round/talks, called the Uruguay Round, addressed issues such as tariffs, services, and the trade related aspects of intellectual property and investment measures. The Uruguay round resulted in an agreement among 117 countries to reduce trade barriers and to create more comprehensive and enforceable world trade rules. This agreement created the World Trade Organization (WTO), which came into being on January 1, 1995. The WTO implements the agreement, provides a forum for negotiating additional reductions of trade barriers and for settling policy disputes, and enforces trade rules. Until the establishment of the WTO, GATT functioned de facto as an organization, conducting rounds of talks addressing various trade issues and resolving international trade disputes. (Lash, 1999; WTO Online, 2007) The WTO is governed by the following principles (WTO, Online 2007): Most-Favored-nation (MFN): treating other people equally The WTO is tasked to ensure that countries do not employ trading measures that would place other countries at the losing end. Countries cannot normally discriminate between their trading partners. Grant someone a special favor (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members. Some exceptions are allowed. For example, countries can set up a free trade agreement that applies only to goods traded within the group —   discriminating against goods from outside. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners — whether rich or poor, weak or strong. National treatment: Treating foreigners and locals equally       Imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copyrights and patents. Freer Trade: Gradually through Negotiation Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. From time to time other issues such as red tape and exchange rate policies have also been discussed. Opening markets can be beneficial, but it also requires adjustment. The WTO agreements allow countries to introduce changes gradually, through “progressive liberalization”. Developing countries are usually given longer to fulfill their obligations. Predictability through Binding and Transparency Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition — choice and lower prices. The multilateral trading system is an attempt by governments to make the business environment stable and predictable. Promoting Fair Competition The WTO is sometimes described as a “free trade” institution, but that is not entirely accurate. The system does allow tariffs and, in limited circumstances, other forms of protection. More accurately, it is a system of rules dedicated to open, fair and undistorted competition. The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of trade. So too are those on dumping (exporting at below cost to gain market share) and subsidies. The issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. Encouraging Development and Economic Reform The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. And the agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries. The WTO serves as a motivational instrument for the development of their member nations. .2 The Case for China and the European Union In May 2000, China and the European Union reached a trade agreement that removed the last major barrier to China's entry to the World Trade Organization. Under the European Union deal, China agreed to reduce tariffs on more than 150 major European imports and speed the opening of its markets to foreign competitors. China will also improve market access in banking, legal services, agriculture and a wide variety of other sectors. (ICSTD, 2000) According to the study of Low (1997) and Ianchovichina et al (2000), China’s concessions in joining the WTO is believe to benefit many major E.U. industries. Among those likely to gain the most are farmers, financial companies, and high-tech industries. E.U. law and accounting firms are also granted expanded access under the agreement. This is the result of the principle of freer trade and the principle of national treatment which I have discussed above. Andersen (2001) notes that China’s concessions in the financial sector are the most profound, because they benefit not only E.U. banks and insurance companies but also other E.U. exporters and investors, who will be able to do business more easily now that E.U. financial service companies can assist them and their Chinese customers. For example, this agreement will allow E.U. firms to make automobile loans to Chinese customers, thus promoting sales. E.U. firms will also be free for the first time to distribute their products throughout China without going through a Chinese intermediary. These market-opening concessions will be phased in over five years to give Chinese firms a chance to adjust to the prospect of foreign competition. In an assessment by Bridgehead International (2006), a British economic analyzer, as new sectors of the Chinese economy are opened, E.U. export opportunities will increase work for Europeans in industries such as aerospace, chemicals, entertainment, computers, waste treatment, biotechnology, telecommunications equipment, medical equipment, and other high-tech products. Those industries that are already losing jobs due to Chinese competition, such as textiles and clothing, are minimally affected by this agreement, because EU agreed to no significant new trade concessions. It is likely, however, that there will be some loss of E.U. jobs as firms relocate labor-intensive manufacturing from the U.S. to China as conditions there become more favorable to foreign investment. Consider for example the VAT redefinition employed by China which we discussed below. Value Added Tax China's pre-WTO rates of VAT rebate for exports comprise four levels, i.e., 5%, 13%, 15% and 17%. Products that are entitled to 17% rebates include clothing, machinery and equipment, electrical appliance and electronic products, transport vehicles, instruments and meters. In late 1999, more preferential treatments are extended to foreign investment in inland provinces and regions. Upon expiration of the preferential tax polices, foreign-invested enterprises can enjoy 15% reduction of corporate income tax for another three years. (Anderson, 1996) China has gradually extended "National Treatment" to all foreign enterprises during the "Ninth Five-Year Plan" period (1996-2000). While certain preferential tax treatments enjoyed by Foreign Investors will be eventually phased out, China will gradually bring into lines the fees and charges between domestic enterprises and foreign enterprises, and increase the percentage of domestic sales for foreign enterprises. It has taken positive steps to open its tertiary sectors (including wholesales/retails, information services, legal and accountancy service, consultancy, etc.) to overseas investors. (US-China Business Council, 2002) Under the revised "Guiding Directory on Industries Open to Foreign Investment" introduced in January 1998, foreign-invested projects under the categories of "Encouraged" and "Restricted (B)" will enjoy tariff-free imports of machinery and equipment for their own use. In addition, the central government has also introduced tariff-free and VAT-exemption imports of capital equipment for projects within the hi-tech and priority sectors such as energy, agriculture, transport, infrastructure, production of raw materials, and tertiary industries, as well as in the pillar industries. These moves are targeted to attract high-quality overseas investment, introduce high technologies and know-how to rationalize the country's industrial structure. (Bridgehead International, 2006) However, there have been some qualms regarding China’s application of the lowering of the trade barrier. In September of 2006, China Daily reported that the E.U., along with Canada and the United States, are launching the first ever litigation against China at the World Trade Organization (WTO) regarding an auto parts dispute. The call came after calls to lower barriers to China's US$19 billion auto parts market had not received any Chinese government engagement. Besides this, China is also being castigated by the EU over dumping issues as discussed below. The Anti-Dumping Row between China and the E.U. Joining the WTO would commit China to a path that would immerse more and more of its citizens in international commerce. Their livelihood would increasingly depend on China attracting foreign commerce and maintaining friendly relations with most of the world’s nations. The WTO’s rules-based procedures would enhance application of commercial law in governing disputes within China, supplanting bureaucratic fiat, as such disputes could be challenged through the WTO. Any reversion to militarism in China would be increasingly costly and counterproductive as its dependence on foreign commerce increases. WTO membership is not a guarantee against future problems—some within China will suffer from increased foreign competition—but it would buttress a powerful bloc of interests within China favoring outward-oriented growth and the conditions, including peace and greater rule of law, required to secure it. There are already misunderstandings between the European Union and China regarding dumping. (The World Economy, 1997; Li and Zhai, 2000) According to Vermulst (2000), dumping occurs when a country exports a product at a price well below the price of the same product produced by other countries. In China where labor is cheap as compared to their European counterparts and where business laws and measures are not costly, the product’s price is lower than that of other competing nations. An anti-dumping measure is employed when a country’s government provides further incentives such as tax breaks and subsidies to further make the local product competitive. This presents a problem with E.U. whose markets are experiencing a surge of low cost Chinese products displacing their local products. Ever since China became a member of the WTO and enjoyed the international trade benefits of being a member, it has been charge with dumping practices. The first case was over lighters in 2003 where Chinese producers were accused of receiving government incentives enabling them to produce at a very low cost. The charges were dropped after it was confirmed that allegations do not hold water. By October of 2006, the E.U. again filed an anti-dumping suit against China regarding leather products. Brussels claims that there is "compelling evidence of serious state intervention" in the footwear sector in China and Vietnam -- in the form of cheap finance, tax holidays, favorable land rental and electricity rates, and the like -- which allow them to 'dump' goods on the EU market at unfairly low prices. (ICSTD, 2006) China is at a crossroad. On the one hand, it may be increasingly tempted to use more intensively antidumping for several reasons: as a retaliatory instrument against foreign antidumping, as a progressive integration in the worldwide collusive dimension of antidumping (used as an instrument for segmenting world markets for the benefit of large firms), and of course as a back-door of old-time protection–at the risk of unraveling its scheduled trade liberalization. On the other hand, being still a small antidumping user and a key target of foreign antidumping, China has expressed the desire to impose stricter rules on WTO antidumping rules. It will be one of the main beneficiaries of such a move which, among other things, will help China to negotiate an economically-sound interpretation of the special provisions on antidumping and safeguard included in its WTO accession protocol. It remains to be seen on what other issues would arise between China and the European Union but it is clear without concessions from both sides more is expected to follow. INCOTERMS 2000: Significance In China and UK trade1 Language is one of the most complex and important tools of International Trade. As in any complex and sophisticated business, small changes in wording can have a major impact on all aspects of a business agreement. Word definitions often differ from industry to industry. This is especially true of global trade where such fundamental phrases as "delivery" can have a far different meaning in the business than in the rest of the world. For business terminology to be effective, phrases must mean the same thing throughout the industry. That is why the International Chamber of Commerce created "INCOTERMS" in 1936. Incoterms are designed to create a bridge between different members of the industry by acting as a uniform language they can use. The inherent obligations, costs and risks of international business are underscored by Incoterms 2000, the most recent update to the rules governing the interpretation of trade terms worldwide. Each incoterm refers to a type of agreement for the purchase and shipping of goods internationally. There are 13 different terms, each of which helps users deal with different situations involving the movement of goods. For example, the term FCA is often used with shipments involving Ro/Ro or container transport; DDU assists with situations found in intermodal or courier service-based shipments. Incoterms also deal with the documentation required for global trade, specifying which parties are responsible for which documents. Determining the paperwork required to move a shipment is an important job, since requirements vary so much between countries. Two items, however, are standard: the commercial invoice and the packing list. Incoterms were created primarily for people inside the world of global trade. Outsiders frequently find them difficult to understand. Seemingly common words such as "responsibility" and "delivery" have different meanings in global trade than they do in other situations. In global trade, "delivery" refers to the seller fulfilling the obligation of the terms of sale or to completing a contractual obligation. "Delivery" can occur while the merchandise is on a vessel on the high seas and the parties involved are thousands of miles from the goods. In the end, however, the terms wind up boiling down to a few basic specifics: Costs: who is responsible for the expenses involved in a shipment at a given point in the shipment's journey? Control: who owns the goods at a given point in the journey? Liability: who is responsible for paying damage to goods at a given point in a shipment's transit? These questions are especially important in export between China and the United Kingdom which are very distant to one another. As distances get large, so does the probability of meeting an accident. Incoterms can thus have a direct financial impact on a company's business. What is important is not the acronyms, but the business results. Often companies like to be in control of their freight. That being the case, sellers of goods (such as China) might choose to sell CIF (Cost, Insurance and Freight), which gives them a good grasp of shipments moving out of their country, and buyers (UK) may prefer to purchase FOB (Fee on Board), which gives them a tighter hold on goods moving into their country. The use of these terms in contracts is required in exporting to the United Kingdom. Thus is very important for China which is becoming increasingly export oriented to be aware of such terms. China is also steadily recognizing the importance of such terms. References: Andersen, Scott and Christian Lau. (2001). Hedging Hopes with Fears in China’ Accession to the World Trade Organization: The Transitional Special Product Safeguard for Chinese Exports. Mimeo. Geneva: Powell, Goldstein, Frazer and Murphy. Anderson, K. (1996). “China’s Accession to the WTO: Why, How, and When?” Chapter 14 in Strengthening the Global Trading System: From GATT to WTO, edited by K. Anderson. Adelaide: Center for International Economic Studies. Bridgehead International (2006). Business opportunities in China: The impact of the WTO. Great Britain: Bridgehead International Limited Ianchovichina, E., W. Martin, and E. Fukase. (2000). “Assessing the Implications of Merchandise Trade Liberalization in China’s Accession to WTO.” The World Bank, Washington, D.C., Economics Report No 440 Lash, William III (1999). The Limited but Important Role of the WTO. Prepared for the Cato Institute’s Center for Trade Policy Studies Conference, “Seattle and Beyond: The Future of the WTO,” November 17, 1999, Washington, D.C. Leu, Peter (2002). Incoterms 2000: The Standard for International Terms. SBA Export Express: Connecticut. p.11 Li, S., and F. Zhai. (2000). “The Impact of Accession to WTO on China’s Economy.” mimeo, Development Research Center, The State Council, People’s Republic of China, May 2000. Low, Patrick and Aaditya Mattoo (1997) Reform in Basic Telecommunications and the WTO Negotiations: The Asian Experience, Geneva: WTO Mimeo. The US-China Business Council (2002). Highlights of China’s WTO Implementation Efforts. US Congress Report: March - May 2002 The World Economy (1997). “On the Complexities of China’s WTO Accession.” The World Economy 20(6): 749-72. Vermulst, Edwin. (2000). Contingent Protection Provisions in China’s Draft Protocol on Accession to the WTO. Seminar on Antidumping and Safeguards. Department of International Trade and Economic Affairs. Beijing: Ministry of Foreign trade and Economic Cooperation Internet Sources: China Daily (2006). EU plans first WTO litigation against China Accessed April 29, 2007 www.chinadaily.com.cn/cndy/2006-09/16/content_690184.htm ICSTD (2000). EU AND CHINA REACH WTO ACCESSION AGREEMENT International Centre for Trade and Sustainable Development Publications. Accessed April 29, 2007 from www.ictsd.org/html/weekly/story3.23-05-00.htm ICSTD (2006). ICTSD EU SLAPS ANTI-DUMPING DUTIES ON SHOES FROM CHINA, VIETNAM Volume 10 Number 33 11 October 2006. Accessed April 29, 2007 from www.ictsd.org/html/weekly/story3.23-05-00.htm WTO (2007). UNDERSTANDING THE WTO: BASICS. Principles of the trading system. Accessed April 29, 2007 from www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm ICBC (2007). INCOTERMS 2000. Accessed April 29, 2007 from www.iccbook.com Read More