The World Trade Organization - Case Study Example

Introduction W The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. At the heart of the system known as the multilateral trading system are the WTO's agreements, negotiated and signed by a large majority of the world's trading nations, and ratified in their parliaments. These agreements are the legal ground-rules for international commerce. Essentially, they are contracts, guaranteeing member countries important trade rights. They also bind governments to keep their trade policies within agreed limits to everybody's benefit. FDI: Broadly speaking, foreign private capital flows come in two forms: equity and debt. The largest type of equity flow, in fact the largest of all capital flow to developing as well as transitional countries, is foreign direct investment (FDI). FDI is generally a long term investment that involves significant management control. The World Bank defines FDI as investment made to acquire a lasting management interest (usually at least 10 percent of voting stock) in an enterprise operating in a country other than that of the investor. With FDI, equity holders are concerned with their returns over a period of years rather than weeks or months. FDI is aimed at a very wide range of economic activities, making generalization difficult, but at least three broad groups can be identified. First, from a historical perspective, the largest share of FDI has been in activities related to a country's natural resource endowments, such as mining, agricultural production, and tourism. Second, some FDI in manufacturing is aimed at producing for the domestic market in the host developing country often with protection against competing imports. Third, an increasingly large share of FDI in recent decades has focused on firms engaged in labor-intensive manufacturing aimed for export on world markets. China's FDI & WTO Accession China re-emerged recently as the fastest growing economy in the world. World markets have been flooded with Chinese goods. Though China opened up itself to many Western concepts but the way different concepts have been adopted and used in China differ a lot from the West. The change was initiated but it could not be sustained at the level it was initiated. Industrial reforms increased the variety of light industrial and consumer goods available and helped in establishing key industries like automobile. The leadership demonstrated its ability to adjust the economic pressure by adopting a variety of fiscal and administrative measures. The result of these policies changes and mixtures of central direction and local initiative was the creation of the hybrid economy, which the Chinese call a socialist commodity system influenced by market mechanisms. Much of the success represented a recovery from the economically disastrous Cultural Revolution period. Many modern management concepts like decentralization of planning and decision making; the responsibility system with emphasis on individual accountability for production, the encouragement of private enterprise and increased technological development were then introduced to improve key industries. These reforms improved the status of management function in Chinese corporate or business culture. China still has greater challenges to face as it moves from a centrally planned economy to a socialist market economy on its accession to WTO. Whenever any country is about to enter into WTO, WTO provides that country with a set of rules to follow. These rules are designed to apply in the operation of market economy. These rules treat the modern economic market according to its needs. These rules have utmost significance in improving the economy and its key industries. They solve the problem of poverty and improving the condition of economy as well as boost up the growth of economy. In particular substantially liberalization of Foreign Direct Investment (FDI) into the pillar industries like automobile is one of the requirements of WTO. So far China has protected its automobile industry with the high tariff rates. Tariff rate for car import was 220%before 1986, then it go down to 150% in 1994, 100% in 1996 and 80% in 1997. The high tariff rate for car's main parts is 50%, and 56% tariff rate for 65complete vehicle project, it is higher than cigarette and alcohol of import. Trade allows a division of labor between countries. It allows resources to be used more appropriately and effectively for production. But the WTO's trading system offers more than that. It helps to increase efficiency and to cut costs even more because of important principles enshrined in the system. Imagine a situation where each country sets different rules and different customs duty rates for imports coming from different trading partners. Imagine that a company in one country wants to import raw materials or components copper for wiring or printed circuit boards for electrical goods, for example for its own production. This is the problem of discrimination. Imagine now that the government announces it will charge the same duty rates on imports from all countries, and it will use the same regulations for all products, no matter where they come from, whether imported or locally produced. Life for the company would be much simpler. Sourcing components would become more efficient and would cost less. However it was not so before WTO. For example, to protect its auto industry China imposed control on imports with a quota and license system to restrict import of the automobile products. Lowering of tariff for imports was one of the WTO conditions requiring cancellation of non-tariff barriers which include quotas and license control, and tariff rate of cars and its parts. Private foreign capital has taken on an increasingly important role in developing as well as transitional countries in recent decades. At the most basic level, private foreign capital flows are an important part of foreign saving that add to total investable funds and can help accelerate economic growth. But private capital flows play a more complex role. Depending on its form, private capital can help open new foreign markets for export sales, bring knowledge of new products and production techniques, and encourage the transfer of new technologies. In the industrial sector, foreign private investment in the form of FDI could obtain trading rights; such as export and import without Chinese native firms as the intermediate, and the lowering tariff has become a significant attraction for FDI located or to be located in china. FDI inflow in china account for 1/4 to 1/3 total inflow in developing countries. This is the reason why WTO accession resulted in better economic environment in which foreign investors could made substantial investments in all industries including automobile industry. Peugeot in China's Car Industry The decade of 80s saw joint ventures in the automobile industry like JV between Shanghai Automotive Industry Corporation & Volkswagen, between Dongfeng Motor Corporation & Citron, between Beijing Automotive Industry & DaimlerChrysler & between Tianjin Automotive Industry & Daihatsu etc. The relationship of Peugeot with China is not new. It had a JV plant in Guangzhou, capital of South China's Guangdong Province. "China's vastly different culture, language, business climate, and political environment will continue to plague foreign investors for some time to come, and the joint venture is still the best way to acquire the necessary familiarity with China's market conditions. However, it should now be viewed as a means to an end rather than as an end in itself. Because the Chinese have made great strides in adapting to the Western mindset, an environment now exists in which foreign managers can realistically envision greater control over their Chinese operations and seriously consider the creation of wholly-owned subsidiaries, a strategy not previously thought realistic"( Appell & Hebert et al 1999 p.4) However, operation in Guangdong could not succeed. The lesson from learnt from the failure was that they had to co-operate with a big Chinese automaker to produce our latest products and build perfect sales and service networks, if they wanted to be successful in China. FDIs aim to gain the rights to take the distribution activities in China, such as whole, retail, and after-sale service, repair, maintenance and transport. So, took place PSA Peugeot Citroen's joint venture (JV) with China's Dongfeng Motor Corp in Wuhan, capital of Central China's Hubei Province. The initial JV between PSA and Dongfeng aimed to sell sedans with increase in sales every year. The introduction of Peugeot cars is part of an agreement between PSA and Dongfeng to sink further euros into the JV in coming years as private investment foreseeing China's accession to WTO. The venture is currently producing Citroen's Fukang, Elysee, Xsara and Picasso, wants to increase its annual sales. The plan included introduction of at least one Peugeot and Citroen model per year from 2004 to 2009. Dealers also started offering Peugeot sedans to consumers. The company has long term plans to control more than 5 per cent of China's passenger car market. Despite the introduction of its latest models critics are not sure of the kind of success Peugeot will have in China's automobile market. Peugeot is competing in the fiercest segment in China's auto market. Availability of other multinational models like Volkswagen's Bora, the Excelle of General Motors and Toyota's Corolla can be considered a threat. Honda also entered into a Joint Venture agreement with Guangzhou Automobile Group, which now produces the Accord, Fit and Odyssey. In this scenario pricing can be a very important factor for the success of the Peugeot. However, the pricing factor got affected by WTO and its agreements related to changes in policies concerning imports and tariffs etc. After WTO the local car industry was supposed to set prices according to market rules after having enjoyed protective policies for years because after China's WTO entry cheaper imports became a possibility. The positive development of WTO came in the form of more and more investments in China with advanced technology and new models boosting China's automobile industry. China passed Germany as the third largest automobile maker as it manufactured 7.189 million motor vehicles in the year 2006. "The domestic auto industry has great potential, judging by the ongoing urbanization and global transfer of production centers towards China. China's auto and parts (including motorcycles) exports hit 4.3 billion US dollars in 2003 and the figure will hit 15 billion to 20 billion US dollars in 2005 and 70 billion to 100 billion US dollars in 2010, according to statistics from the Ministry of Commerce" ('China's auto industry boosted'). Conclusions FDI boost the economy and also help in the growth of particular sectors. China is now an attractive market for the foreign investment because of myriad reasons among which is the availability of cheap labor. Investment in China's automobile industry has brought benefits to many big names in the automobile sector world wide. It has also benefited many local manufactures as most companies established their businesses in the form of joint venture. However, this change would not have been possible if China had stuck to its policies of protection, high tariff and import restrictions. Trade liberalization together with WTO policies have paved the way for a better and successful future for the China's automobile industry as the flow of FDIs continues in this particular sector. References: Chen, Chunlai, 1997. "Foreign Direct Investment and Trade" An Empirical Investigation of the Evidence from China, working paper 97/11, Chinese Economies Research Center, The University of Adelaide, Australia. Feenstra, Robert C and Gordon Hanson, 1996. "Globalization Outsourcing, and Wage Inequality," American Economic Review Papers and Proceedings; 85:240-5 May. Krugman, Paul, 2000."Technology, Trade, and Factor Prices, Joural of International Economics, forth- coming. Markusen, James R and Anthony J, Venables, 1996. "Multinational Production, Skill Labor, and Real Wages," NBER working paper: 5483:1-29, March . Zhang, Fan and Jingping Zheng, 1998. "The impact of Multinational Enterprise on Economic Structure and Efficient in China," working paper, China Center For Economic Research, August. China's auto industry boosted after WTO entry: official.2004. Avialable at: http://english.people.com.cn/ Zhengzheng, Gong. 2004. Peugeot rolls back into China. Available at: http://english.people.com.cn/ Yoshimatsu, Hidetaka. 1999. The State, MNCs and the Car Industry in Asia. Contributors: - author. Journal Title: Journal of Contemporary Asia. Volume: 29. Issue: 4. p. 495. Goodhart, C. & Xu, C. 1996. The Rise of China as an Economic Power. Contributors: C. - author, C. - author. Journal Title: National Institute Economic Review. Issue: 155. Publication Year: 1996. Page Number: 56+. Deckers, Wolfang. 2004. China, Globalisation and the World Trade Organisation.: Journal of Contemporary Asia. Volume: 34. Issue: 1. Page Number: 102+. Appell, Allen & Hebert, Len et al. 1999. Are Joint Ventures Losing Their Appeal in China. SAM Advanced Management Journal. Volume: 64. Issue: 1.: 4+. Read More