Page 177 - DMGT545_INTERNATIONAL_BUSINESS

International Business

notes into the WTO will change its economy by opening it to foreign products and firms. China
must begin to accept a system of global trading rules—everything from lower tariffs to
anti-dump ing regulations to removal of rules restricting distribution and retailing as well
as penalties for violating trademarks, patents and copyrights.
There are benefits and costs to joining the WTO. Regarding the former, some forecast
that China could double its exports by 2005, gain an extra percentage point of economic
growth for the next decade, and double its FDI stock within the next five years. Regarding
drawbacks, WTO membership requires the Chinese government to reform many business
institutions and market practices. Some Chinese oppose such changes. For example, five
independent bombings hit the operations of Western multinationals that were patronized
by affluent Chinese, such as McDonald’s, right after China joined the WTO.

Foreign firms welcome the changes required by the WTO. Foreign-invested enterprises
make nearly half of all China’s exports and three-quarters of its manufactured goods. A
boost in exports directly benefits these firms. Operationally, WTO regulations give foreign
firms the option to set up wholesale, retail, distribution, and after-sale networks in China.
Similarly, foreign firms no longer must comply with local content requirements, deal
with the previously high tar iffs on imports, or submit investment proposals that involve
technology transfers to MOFTEC. Moreover, China has agreed that its many state-owned
enterprises will not discriminate against foreigners and that commercial considerations
must apply when purchasing goods or services. Because trade and investment among
WTO members must abide by a specified set of enforceable rules, the Chinese business
environment should become more stable.

It remains to be seen how China interprets and enforces its WTO commitments. China
joined the WTO as a developing country, thereby gaining the right to comply with WTO
regulations over several years. For example, Chinese import tariffs on automobiles, which
in 2002 were slashed to between 44 and 51 percent (depending on the engine size), fell to
25 percent by mid-2006. Moreover, the Chinese government’s system of import quotas and
licenses for automobiles did not phase out until 2006. Still, MNEs are optimistic about the
wisdom of investing in China. Some noted that China’s agreement when it joined the WTO
reduced its political, legal, and economic risks to MNEs.
WTO membership seemed to be the latest step in China’s long march towards an
open market economy. This march began in the spring of 1992, when veteran leader
Deng Xiaoping, during his “southern tour,” reiterated China’s commitment to both an
open-door policy and movement to a market economy. The 15 Communist Party
th
Congress in 1997 marked the start of a new phase of market reform with its promise to
transform the country’s economic and business structure. In 1998, the Communist Party
removed ideological barriers to private ownership by amending the state constitution
to acknowledge the private sector. In 2001, President Jiang Zemin called the Communist
Party to allow entrepreneurs and business executives to join it, thereby legitimizing the
idea of private enterprise. Noted one observer, this proposal “basically turns the Party
on its head. It means the Party will once and for all put aside all ideological reservations
towards growing a private sector in China.”
The contest between market economics and ideological legacies in China will play out over
many years. During this time, foreign investors will play an increasingly prominent role in
a country that historically has been wary of foreigners. Indeed, large segments of Chinese
society are less than enchanted by an open market economy, growing exposure to foreign
cultures and increasing interdependence with other countries. This situation creates many
challenges for managers. If history is any guide, the Chinese government’s outlook on
invest ments by foreign companies will largely influence success.

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