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Chinese accession to the WTO: Economic implications for China, other Asian and North American economies
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Journal of Policy Modeling 32 (2010) 389–398
Chinese accession to the WTO: Economic implications for China, other Asian and North American economies Madanmohan Ghosh a,∗ , Someshwar Rao b a
Economic and Fiscal Policy Branch, Finance Canada, 140 O’Connor Street, Ottawa, Canada K1A 0G5 b Productivity and Competitiveness Analysis, Industry Canada Accepted 20 October 2009 Available online 11 March 2010
Abstract This paper, using a dynamic, multi-sector and multi-country Computable General Equilibrium (CGE) model, analyses the combined economic impact of China’s accession to the World Trade Organization (WTO) and the removal of tariff and non-tariff barriers on textiles and apparel by the industrialized countries in China and North America and other major economies. The combined impacts of these two policy initiatives are studied in detail on trade flows, real output, employment and investment both at the aggregate and industry levels in China, the U.S., Canada and other countries/regions. The simulation results suggest that China’s real gross domestic product (GDP) would increase by over 2 percent, mainly due to a large increase in the output of textiles and apparel industries. India too would gain considerably in these two industries from the removal of the trade barriers. Textiles and apparel industries will face considerable adjustment challenges in North America particularly in the U.S. and Canada, implying output and employment losses ranging between 20 and 30 percent. However, the output and employment gains in other North American industries will be more than offset the losses in textiles and apparel industries. Bilateral trade between China and North American economies would increase between 15 and 20 percent, but over all economic gain would be modest. Asian economies will also experience significant increase in trade with China and the output impacts are positive but modest. © 2010 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. JEL classification: C61; C68 Keywords: Regional trade agreements; Free trade; Dynamic General Equilibrium Model
∗
Corresponding author. Tel.: +1 613 992 8614; fax: +1 613 992 5773. E-mail address: [email protected] (M. Ghosh).
0161-8938/$ – see front matter © 2010 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. doi:10.1016/j.jpolmod.2010.03.003
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1. Introduction China has over 1.3 billion people. Its economy, measured in terms of PPP exchange rate, is the second largest, after the U.S., in the world. China’s real gross domestic product (GDP) has increased by close to 10 percent per year during the last 15 years, although, its per-capita GDP, measured in PPP terms, is still less than 10 percent of Canada. Nevertheless, China is moving up the value chain quickly and the medium to longer-term economic outlook, barring unforeseen circumstances, is excellent. China has become a major player in the global economy. It has widened and deepened its global supply chains over the last 10 years, and is a dominant source manufactured products all over the world. China has a huge comparative advantage in labour intensive manufactured goods such as textiles and apparel. In addition, it is improving its competitive position very quickly and gaining ground over its Asian neighbours in medium-tech manufacturing and service industries. Chinese exports to North American economies, the U.S. and Canada for example, has increased considerably in recent years. China is the second largest trading partner of Canada, after the U.S. Almost 9 percent of Canada’s merchandise imports come from China, and increasing very fast. It accounts for almost 2 percent of Canada’s merchandise exports. China is also the second largest exporter to the U.S., and increasing rapidly its share of the U.S. market. China provides tremendous export and investment opportunities to North American economies and offers considerable scope to businesses to increase specialisation, move up the value chain and improve their competitiveness (see, e.g. Ghosh & Wang, 2006). However, China would also pose significant adjustment challenges to North American economies especially in labour-intensive manufacturing industries such as textiles and apparel. Successive trade reforms have significantly opened up the Chinese economy. Its trade orientation increased dramatically over the last 30 years. The share of exports in GDP increased from less than 5 percent in 1976 to nearly 40 percent in 2006. Similar trends have also occurred in imports. Until recently, China was not a member of the WTO. As part of the agreement to join the WTO in 2001, China offered substantial reductions in tariff and non-tariff barriers.1 This event coincided with the gradual elimination of quotas on textiles and apparel imports by industrialized countries. The Agreements on Textiles and Clothing (ATC), removes the quotas imposed by industrialized countries on developing country exports of textiles and apparel by January 2005. There are a few studies that have looked into these issues such as Wang (2003), Ianchovichina (2004), Ianchovichina and Martin (2001, 2004), Zhang (2004) and USITC (1999). This paper contributes in this literature by extending the analysis using the latest available data. The main objective of this paper is to analyse the general equilibrium economic impacts of China’s promised reductions of tariff and non-tariff protection, and the removal of quotas on textiles and apparel imports by industrialized countries on the Chinese and North American economies. Towards this goal, using a dynamic, multi-country and multi-sector CGE model, we simulate the economic impacts of these two developments on the economies of China, the U.S., Canada and other countries/regions. The simulation results suggest that China’s real GDP would increase by over 2 percent, largely due to a substantial increase in the output of textiles and apparel industries. However, the real GDP of the U.S. and Canada would increase by less than 0.1 percent, although, textiles and apparel industries in the two countries would face considerable adjustment challenges, with a loss of
1
China formally acceded to the WTO on December 11, 2001.
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output and employment between 20 and 30 percent. But, the reductions in these two industries will be more than offset by gains in other industries. 2. Trade linkages and the structure of trade protection In addition to the model structure and parameters, the industrial composition of output, the extent of outward orientation of individual regions/countries, trade linkages among countries, the level and structure of trade protection will also influence the direction and size of the simulated impacts. The industrial structure output is broadly similar in Canada, the U.S. and Europe. However, primary industries (agriculture and energy) and resource-based manufacturing industries (wood and minerals) are more important to Canada than to the U.S. and Europe. On the other hand, services play a bigger role in the U.S. and Europe than in Canada. Manufacturing plays a much bigger role in the Chinese economy than in India. On the other hand, services play a bigger role in India than in China. In 2001, textiles and apparel contributed for over 6 percent to value added in China, compared to 2.9 percent in India. Agriculture, labour-intensive and low valueadded manufacturing industries are also relatively more important to Mexico and Latin American countries. Trade orientation of China has increased dramatically in the last 30 years. In 2006, exports accounted for over one-third of China’s GDP, compared to 31 percent for imports. Canada’s trade orientation is significantly higher than China’s, but the gap is closing very fast. On the other hand, both the U.S. and India are still relatively less dependent on trade than Canada and China, but their trade orientation has been increasing fast in the last 15 years or so. In 2006, more than three quarters of Canada’s exports of goods and services were destined to the U.S., but it supplied less than 60 percent of Canada’s imports of goods and services, and the U.S. share has been declining steadily. On the other hand, China accounted for less than 2 percent of Canadian exports, but has increased steadily. The U.S. takes more than 20 percent of China’s exports, compared to about 40 percent by other Asian countries and 20 percent by Europe. But, China imports almost 60 percent from Asia, compared to only about 12 percent from the U.S. China buys parts from its Asian neighbours and assembles them, and exports the finished products to North America and Europe. The average import-weighted bilateral trade protection rates, computed from the GTAP database come from the MAcMap database, the result of a joint research effort by the International Trade Centre—ITC of the United Nations Conference on Trade and Development (UNCTAD) & the WTO and the Centre d’Études Prospective et d’Informations Internationales (CEPII, Paris).2 The data on trade protection in textiles and apparel come from the MAcMap data on tariffs. These data are modified to reflect the U.S. preference schemes in the Western Hemisphere.3 The data on trade protection do not take into account non-tariff barriers (NTBs), except for agriculture and food products. The average tariff protection is highest (21 percent) in India, followed by China (11.2 percent), which tariff protection is under 2 percent in Canada, the U.S. and Europe (see Table 1). Another important determinant of the simulation impacts is the industrial structure of tariff protection in Canada, China, the U.S. and other countries. There is a great deal of variance in tariff 2 See Antoine Bouët, Yvan Decreux, Lionel Fontagné, Sébastien Jean, and David Laborde, TARIFF DATA, GTAP 6 https://www.gtap.agecon.purdue.edu/resources/download/2229.pdf. 3 For further details see, GTAP 6 Documentation Chapter 16.F.
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Table 1 Trade weighted average tariff rates (%): 2001.
Agriculture Energy Food Textiles Apparel Leather Wood Mineral Motor vehicles and parts Transport equipments Other manufacturing Services Average
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
1.2 0.1 13.6 5.2 14.5 9.3 0.4 0.4 0.9 0.3 0.4 0.0 1.2
1.1 0.2 3.2 7.9 9.9 12.2 0.2 1.6 1.3 0.4 0.9 0.0 1.5
41.2 3.1 18.3 20.3 22.4 10.0 9.0 7.2 38.1 4.6 12.0 0.0 11.2
21.7 16.8 76.4 26.2 31.1 26.5 22.0 29.3 40.3 18.9 27.4 0.0 21.0
36.6 2.2 22.7 7.8 9.1 4.7 2.4 3.0 9.7 2.4 1.9 0.0 4.3
9.9 2.5 14.0 9.9 14.9 14.8 6.4 7.8 9.9 9.2 7.0 0.0 6.5
7.6 0.2 20.1 4.0 4.8 5.1 0.4 1.7 4.0 1.4 1.7 0.0 2.0
10.8 7.0 20.1 12.8 33.9 12.4 8.1 6.9 9.8 6.6 5.2 0.0 6.6
GTAP Database Version 6.
protection across major industries in all countries (see Table 1). The highest tariff sector in Canada is apparel, followed by food and leather, while tariff protection in Canada is the lowest in energy, followed by wood products, minerals and transportation equipment (including motor vehicles and parts). The U.S. tariff structure is very similar to Canada. On the other hand, China’s tariff protection is the highest in agriculture, followed by motor vehicles and parts, textiles, apparel and food. India too protects heavily food, motor vehicles and parts, apparel, textiles and agriculture. 3. Structure of the model We use a multi-sector, multi-country and dynamic CGE model to simulate the economic impacts. This is a standard dynamic CGE model originally developed by Lavoie, Mérette, and Souissi (2001), as used by Ghosh and Mac Leod (2006) and Ghosh and Rao (2005). Unlike the macro-econometric models, CGE models assume full employment and deal with only real variables. They are well suited to capture effectively the resource reallocation impacts across industries and countries, largely driven by changes in relative input prices. Consequently, CGE models are able to capture the impact of resource reallocation on aggregate productivity and output. For analytical convenience, we aggregate the model into eight regions/countries and twelve major industries. The model is dynamic in the sense that investment and capital stock are endogenous and it gives the time path of all the variables towards their long-run equilibrium values. The model is calibrated to the benchmark GTAP data for 2001. The size of substitution elasticities – the substitutability between domestic goods and imports – in different industries in Canada and other countries also play an important role in determining the simulation results. We obtained the data on substitution elasticities from the GTAP database.4 These differ across industries in both developed and developing regions/countries. For the developed countries, they vary between 4.3 for services to 11.2 in energy, while, in the developing 4 Elasticity value for each commodity is an average of its top (between domestic and composite imports) and bottom level (between different sources of imports) elasticity values obtained from GTAP database. For obtaining country specific numbers we multiply these by 1.5 for Canada, U.S. and Europe and by 1 for other regions.
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Table 2 Estimated tariff reductions (%age points). Canada Agriculture 0.0 Energy 0.0 Food 0.0 Textiles −5.2 Apparel −14.5 Leather 0.1 Wood 0.0 Mineral 0.0 Motor vehicles and parts 0.0 Transport equipments 0.0 Other manufacturing 0.0
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
0.0 0.0 0.0 −7.9 −9.9 0.2 0.0 0.0 0.0 0.0 0.0
−9.5 −1.1 −10.3 −10.1 −4.5 −1.6 −3.6 −2.3 −17.9 −1.9 −5.8
0.0 0.0 −0.1 0.1 0.0 0.0 0.0 0.0 0.0 −0.1 0.0
0.1 0.0 0.0 0.0 0.0 −0.1 0.0 0.0 0.0 0.1 0.0
0.0 0.0 0.0 −0.1 −0.1 0.0 0.0 0.0 −0.1 −0.1 0.0
0.0 0.0 0.0 −4.0 −4.8 0.1 0.0 0.0 0.0 0.0 0.0
0.0 0.0 0.0 0.0 0.4 0.2 0.0 0.0 0.0 0.0 0.0
Authors’ calculation based on Ianchovichina and Martin (2004).
regions they range between 2.9 and 7.4. The elasticity of substitution between labor and capital is assumed to be one in all industries and in all regions/countries. The other two key parameters of the model are the world real rate of interest, and the rate of consumer time preference. These are assumed to be same for all regions/countries at 5 percent. 4. Design of simulations We simulate the economic impact of important quantifiable aspects of China’s accession to the WTO: (China’s tariff reduction commitments); and the removal of quotas on textiles and apparel by industrialized countries on the economies of China, Canada and the U.S. As a condition to joining the WTO, China agreed to reduce tariffs on all imported goods, including high-technology and agricultural products. General tariff rates are to fall to 10 percent by 2005, from over 15 percent in 2001. Automobile tariffs are to fall to 25 percent by 2006, from 80 to 100 percent. China also committed to opening its service industries to foreign investment and participation, and government procurement, and agreed to the enforcement of intellectual property rights. In return, China will enjoy “Normal Trade Relations” with all member countries and territories of the WTO – most-favoured – nation treatment, and reciprocal rights for trade and investment in services. China will also have the right to use the WTO dispute settlement mechanism. In addition, China will benefit from the phasing-out of the quota restrictions on textiles and apparel in 2005, applicable under the Multi-Fibre Agreement (MFA). A significant portion of imports, especially intermediate inputs, into China enter duty free, because of the duty remission program in support of exports. To take into account this important feature in the design of simulation experiments, we used the following equation to estimate the effective tariff reductions by China in each industry: Tc = To × (1 − Ta) × (1 − b) where Tc is new tariff rate; To is the benchmark tariff rate; Ta is the percentage tariff cut; and b is the share of exports in gross output. The estimated tariff reductions by China in each industry are presented in Table 2. The cuts range from 1.1 percentage points in energy to almost 18 percentage points in motor vehicles and parts. For the U.S. it ranges between 8 and 10 percent.
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The tariff equivalents of the elimination of quotas on imports of textiles and apparel for industrialized countries are also given in Table 2. For Canada, the estimated tariff reductions in textiles and apparel are 5.2 and 14.5 percentage points, respectively. In short, the estimated tariff reductions in China and other countries are used as inputs in simulating the combined economic impact of China’s accession to the WTO and the removal of quotas on imports of textiles and apparel by the industrialized countries on the economies of China, the U.S. and Canada. 5. Simulation results As expected, China’s trade with the U.S., Canada and all other regions/countries increases considerably. For instance, China’s trade with the U.S. increases by 21 percent, compared to about 15 percent with Canada (see Table 3). US total exports increased by 2.6 percent but its exports of textiles and apparel decline by 7–21 percent. Canada’s total exports increase by 1 percent, but its exports of textiles and apparel decline by between 7.5 and 14 percent (see Table 4). China’s total exports increase by over 14 Table 3 Long run impacts: bilateral trade (%change over benchmark).
Canada United States China India Rest of Asia Mexico and Latin America Europe Rest of the world
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
−0.2 −0.2 23.7 22.7 1.6 −1.0 −0.2 1.5
0.2 −0.2 14.3 3.6 1.7 −0.2 −0.3 1.9
14.9 21.1 0.5 6.6 17.2 30.7 17.1 4.6
4.8 4.9 11.8 0.0 1.1 2.0 3.7 3.0
3.5 3.6 11.5 −1.2 0.1 1.9 2.4 1.6
1.5 1.8 8.3 −4.2 −2.4 0.0 0.3 0.0
2.0 2.1 22.6 6.7 −0.9 −0.5 −0.1 −1.4
1.3 1.3 7.9 −4.5 −2.3 −0.1 0.4 0.0
Note: row, exports; column, imports. Table 4 Long run impacts: exports (%change over benchmark).
Agriculture Energy Food Textiles Apparel Leather Wood Mineral Motor vehicles and parts Transport equipments Other manufacturing Services Total
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
3.3 2.1 1.5 −7.5 −14.0 −0.6 0.8 1.1 0.7 1.1 1.1 1.2
7.6 1.9 2.6 6.7 20.7 2.3 1.9 1.9 1.5 2.3 2.9 1.3
5.6 12.9 8.5 38.2 41.0 7.3 8.4 8.1 14.2 11.7 11.1 4.2
−3.5 −5.0 −2.6 19.0 37.3 −9.5 −5.3 −4.5 −4.2 −6.0 −4.9 −3.4
0.8 −0.4 0.3 41.5 59.7 −5.0 −0.3 −1.4 −2.4 −4.2 −0.3 −2.8
7.5 −0.9 0.2 23.9 7.7 −4.3 −1.4 −0.6 −0.9 −1.6 −1.6 −0.2
1.3 −0.3 1.3 14.5 17.8 −1.7 0.8 0.7 1.8 −0.2 1.6 0.3
0.4 0.1 0.8 1.4 −0.7 −1.6 −0.3 0.3 0.4 0.4 0.5 −0.1
1.0
2.6
14.4
2.1
2.7
0.1
1.4
0.2
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Table 5 Long run impacts: imports (%change over benchmark).
Agriculture Energy Food Textiles Apparel Leather Wood Mineral Motor vehicles and parts Transport equipments Other manufacturing Services Total
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
−2.0 −0.8 −0.9 13.7 86.7 −1.2 0.0 0.1 0.1 0.3 −0.3 −1.2
−1.4 −0.6 −1.6 48.8 50.9 0.4 0.1 −0.7 −1.7 −1.5 −1.4 −1.7
57.6 0.1 31.7 51.1 11.8 3.3 10.5 4.7 51.1 4.9 19.9 −2.7
4.7 1.6 2.6 9.9 8.2 4.3 3.6 2.4 2.4 4.6 4.2 2.3
4.4 2.1 3.3 21.9 10.0 4.7 4.3 3.4 3.1 3.2 5.0 2.2
1.2 0.5 0.7 4.7 6.6 3.0 1.1 0.4 0.2 −0.3 0.8 0.1
−0.5 −0.2 −0.5 23.3 31.1 0.6 0.3 0.1 −0.9 0.2 0.4 −0.4
0.0 0.7 0.0 1.7 2.8 1.7 0.2 0.2 −0.1 0.2 0.3 0.1
1.0
1.8
16.7
3.1
4.3
0.8
1.5
0.3
percent, with the exports of textiles and apparel increase by about 40 percent. India’s exports of textiles and apparel also benefit significantly from the removal of quotas. China’s exports of motor vehicles and parts, other transportation equipment and energy increase by over 14 percent. Canada’s total imports also increase by about 1.0 percent, compared to 1.8 percent for the U.S. imports (see Table 5). Canada’s imports of apparel increase by almost 90 percent. On the other hand, China’s imports of agricultural products and motor vehicles and parts increase by more than 50 percent. The impact on European imports is similar to that of Canada and the U.S. The macro-economic impacts of China’s accession to the WTO and the elimination of quotas on textiles and apparel on China, U.S. and other countries are shown in Table 6. As mentioned before, exports and imports of China increase by 14.4 and 16.7 percent, respectively. China’s terms of trade declines by 1.7 percent, because of the significant reduction in tariff barriers across all sectors. Despite the terms of trade loss, consumption and investment in China increase significantly. As a result, China’s value added increases by over 2 percent. India’s real GDP, on the other hand, increases by 0.16 percent. Because of the removal of quotas on textiles and apparel, terms of trade also decline in Canada, the U.S. and Europe.
Table 6 Long run aggregate economic impacts (%change over benchmark). Region
Exports Imports Value added
Canada 1.0 United States 2.6 China 14.4 India 2.1 Rest of Asia 2.7 Mexico and Latin America 0.7 Europe 1.4 Rest of the world 0.2
1.0 1.8 16.7 3.1 4.3 0.8 1.6 0.3
0.1 0.0 2.0 0.2 0.2 0.1 0.0 0.0
Consumption Investment Terms of trade 0.0 0.0 0.4 0.3 0.3 0.1 0.0 0.1
0.1 0.0 2.5 0.1 0.3 0.1 0.0 0.0
−0.1 −0.3 −1.7 0.9 0.9 0.2 −0.0 0.1
Price of cons.
Price of invt.
−0.5 −0.4 −1.4 0.9 0.5 −0.0 −0.2 −0.1
−0.3 −0.3 −1.9 0.7 0.4 −0.1 −0.1 −0.1
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Table 7 Long run effect of China’s accession to the WTO: value added (%change over benchmark). Canada Agriculture 1.4 Energy 1.3 Food 0.4 Textiles −20.1 Apparel −31.8 Leather −3.3 Wood 0.5 Mineral 1.0 Motor vehicles and parts 0.7 Transport equipments 1.1 Other manufacturing 0.6 Services 0.1 Total
0.06
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
1.2 0.6 0.2 −16.6 −20.9 −1.5 0.3 0.7 0.9 1.1 0.5 0.0
−1.0 3.2 0.5 11.5 23.2 5.9 2.4 1.7 −4.6 3.1 1.6 1.4
0.3 −1.0 −0.1 7.5 31.5 −5.4 −0.9 −1.7 −0.5 −1.1 −0.9 0.0
0.2 −0.6 0.1 19.3 18.3 −4.0 −0.1 −0.8 −1.0 −2.9 −0.2 0.1
1.3 −0.4 0.1 4.5 1.6 −1.3 −0.3 −0.4 −0.3 −0.3 −0.3 0.0
0.1 0.1 0.1 −5.0 −10.3 −1.2 0.1 0.2 0.6 −0.2 0.2 0.0
0.1 0.0 0.1 −0.5 −0.9 −0.9 0.0 0.1 0.2 0.1 0.1 0.0
0.02
2.05
0.16
0.21
0.08
0.01
0.03
Because of terms of trade loss, despite a 1 percent increase in trade flows, Canada’s value added increases by less than 0.1 percent (see Table 7). Real GDP (value added) increases by just 0.02 percent in the U.S., and 0.01 percent in Europe. On the other hand, terms of trade improves for India and Rest of Asia.All industries in China, except Motor vehicles and part and agriculture gain from its accession to the WTO. Moreover, the output of textiles and apparel increases between 11.5 and 23.2 percent respectively (see Table 7). The output of textiles and apparel industries in India and Rest of Asia also increase substantially. On the other hand, the output of these two industries decline by between 20 and 32 percent in Canada. The output loss in these industries is more than off set by gains in all other industries, except a small (3.3 percent) reduction in leather industry. Interestingly, a recent paper by Wyman (2006) finds that clothing production in Canada fell by 33.3 percent between 2002 and 2005. During the same period employment in Canadian clothing industry fell by about 36 percent, a little higher than that our simulation results suggest (33 percent). The industrial structure of output changes in the U.S. and Europe are broadly similar to the changes in Canada. Developing regions such as India and rest of Asia suffer small losses in terms of output in some industries due to competition with China is third markets but it is compensated by gains in other industries.The industrial structure of employment changes in all countries is similar to the changes in the output structure. Textiles and apparel industries face considerable employment reductions in Canada, the U.S. and Europe. On the other hand, employment in these industries increases considerably in China, India and the Rest of Asia. 6. Conclusions China’s economy grew at an average annual rate of almost 10 percent over the last 30 years, mainly because of its economic reforms and the increased market and outward orientation. These trends occurred despite the fact that China was not a formal member of the WTO until very recently. China formally joined the WTO in 2001. As a condition to its entry into the world trading organisation, China made a number of concrete commitments to reduce both tariff and non-tariff barriers and liberalise its service industries.
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The main objective of this paper has been to simulate the general equilibrium economic impacts of China’s accession to the WTO and the removal of quotas on textiles and apparel by industrialized countries in China, the U.S., Canada and other countries. The simulation results suggest that China’s bi-lateral trade linkages with all the countries would increase substantially. China’s real GDP would increase by more than 2 percent. All industries in China, except motor vehicles and parts and agriculture, would gain from its accession to the WTO, but textiles and apparel gain the most because of the removal of quotas on the exports of these two industries by industrialized countries. India too would gain a great deal in these two industries. On the other hand, as expected, Canada, the U.S. and Europe would see big output and employment reductions in these industries. But, the gains in all other industries would more than offset the output and employment loss in textiles and apparel, resulting in a very small net increase in real GDP in Canada and other industrialized countries. The policy implication of our simulation results is that formal integration of the China into the world economy via its induction into the WTO has been a win-win proposition for China as well as all other countries. It has allowed China to maximize its comparative advantage in labour-intensive manufacture goods. On the other hand, it has facilitated industrialized countries such as the U.S. and Canada to increase their strength in technology and knowledge-intensive and resource-based industries, and gradually move out of labour-intensive activities. However, there will be a significant employment dislocation from the industrial re-allocation of resources in China, and other industrialized countries. These adjustment challenges need to be managed effectively and smoothly. All regions of the world benefit from the accession and Chinese bilateral exports to all regions increases. This suggests that Chinese accession has benefited each and every region as China reduces its import barriers and the MFA liberalization. These results suggest that there are further scope for extending multilateralism by way of unilateral trade liberalization. Acknowledgements The authors are grateful to the referees of the journal of policy modeling and the participants at the Canadian Economic Association meetings and Statistics Canada Socio-economic conference for valuable comments. This paper reflects the views of the authors and no responsibility for them should be attributed to the Department of Finance or Industry Canada. This paper was written when the first author was with Industry Canada. References Ghosh, M., & Mac Leod, C. (2006). Effects of a free trade area of the Americas: Evaluation based on a dynamic general equilibrium model. Integration and Trade, 24, 27–61. Ghosh, M., & Rao, S. (2005). A Canada–U.S. Customs Union: Potential economic impacts in NAFTA countries. Journal of Policy Modeling, 27, 805–827. Ghosh, M., & Wang, W. (2006). Is Canada underperforming in foreign direct investment and exports to China? Horizons, 9(2), 55–58. Ianchovichina, E. (2004). Trade policy analysis in the presence of duty drawbacks. Journal of Policy Modeling, 26(3), 353–371. Ianchovichina, E., & Martin, W. (2001). Trade liberalization in China’s accession to WTO. Journal of Economic Integration, 16(4), 421–445. Ianchovichina, E., & Martin, W. (2004). Impacts of China’s accession to the World Trade Organization. World Bank Economic Review, 18(1), 3–27.
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Lavoie, C., Mérette, M., & Souissi, M. (2001). A multi-sector multi-country dynamic general equilibrium model with imperfect competition. Department of Finance Working Paper No. 2001-10. US International Trade Commission. (1999). Assessment of the economic effects on the United States of China’s accession to the WTO. Investigation No. 332-403. Publication 3228. Wang, Z. (2003). The impact of China’s WTO accession on patterns of world trade. Journal of Policy Modeling, 25(1), 1–41. Wyman, D. (2006), Trade liberalization and the Canadian clothing market. Canadian economic observer, December, Statistics Canada—Catalogue No. 11-010. Zhang, H. (2004). The impact of China’s accession to the WTO on its economy: An imperfect competitive CGE analysis. International Economic Journal, 18(1), 119–137.
Journal of Policy Modeling 32 (2010) 389–398
Chinese accession to the WTO: Economic implications for China, other Asian and North American economies Madanmohan Ghosh a,∗ , Someshwar Rao b a
Economic and Fiscal Policy Branch, Finance Canada, 140 O’Connor Street, Ottawa, Canada K1A 0G5 b Productivity and Competitiveness Analysis, Industry Canada Accepted 20 October 2009 Available online 11 March 2010
Abstract This paper, using a dynamic, multi-sector and multi-country Computable General Equilibrium (CGE) model, analyses the combined economic impact of China’s accession to the World Trade Organization (WTO) and the removal of tariff and non-tariff barriers on textiles and apparel by the industrialized countries in China and North America and other major economies. The combined impacts of these two policy initiatives are studied in detail on trade flows, real output, employment and investment both at the aggregate and industry levels in China, the U.S., Canada and other countries/regions. The simulation results suggest that China’s real gross domestic product (GDP) would increase by over 2 percent, mainly due to a large increase in the output of textiles and apparel industries. India too would gain considerably in these two industries from the removal of the trade barriers. Textiles and apparel industries will face considerable adjustment challenges in North America particularly in the U.S. and Canada, implying output and employment losses ranging between 20 and 30 percent. However, the output and employment gains in other North American industries will be more than offset the losses in textiles and apparel industries. Bilateral trade between China and North American economies would increase between 15 and 20 percent, but over all economic gain would be modest. Asian economies will also experience significant increase in trade with China and the output impacts are positive but modest. © 2010 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. JEL classification: C61; C68 Keywords: Regional trade agreements; Free trade; Dynamic General Equilibrium Model
∗
Corresponding author. Tel.: +1 613 992 8614; fax: +1 613 992 5773. E-mail address: [email protected] (M. Ghosh).
0161-8938/$ – see front matter © 2010 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved. doi:10.1016/j.jpolmod.2010.03.003
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1. Introduction China has over 1.3 billion people. Its economy, measured in terms of PPP exchange rate, is the second largest, after the U.S., in the world. China’s real gross domestic product (GDP) has increased by close to 10 percent per year during the last 15 years, although, its per-capita GDP, measured in PPP terms, is still less than 10 percent of Canada. Nevertheless, China is moving up the value chain quickly and the medium to longer-term economic outlook, barring unforeseen circumstances, is excellent. China has become a major player in the global economy. It has widened and deepened its global supply chains over the last 10 years, and is a dominant source manufactured products all over the world. China has a huge comparative advantage in labour intensive manufactured goods such as textiles and apparel. In addition, it is improving its competitive position very quickly and gaining ground over its Asian neighbours in medium-tech manufacturing and service industries. Chinese exports to North American economies, the U.S. and Canada for example, has increased considerably in recent years. China is the second largest trading partner of Canada, after the U.S. Almost 9 percent of Canada’s merchandise imports come from China, and increasing very fast. It accounts for almost 2 percent of Canada’s merchandise exports. China is also the second largest exporter to the U.S., and increasing rapidly its share of the U.S. market. China provides tremendous export and investment opportunities to North American economies and offers considerable scope to businesses to increase specialisation, move up the value chain and improve their competitiveness (see, e.g. Ghosh & Wang, 2006). However, China would also pose significant adjustment challenges to North American economies especially in labour-intensive manufacturing industries such as textiles and apparel. Successive trade reforms have significantly opened up the Chinese economy. Its trade orientation increased dramatically over the last 30 years. The share of exports in GDP increased from less than 5 percent in 1976 to nearly 40 percent in 2006. Similar trends have also occurred in imports. Until recently, China was not a member of the WTO. As part of the agreement to join the WTO in 2001, China offered substantial reductions in tariff and non-tariff barriers.1 This event coincided with the gradual elimination of quotas on textiles and apparel imports by industrialized countries. The Agreements on Textiles and Clothing (ATC), removes the quotas imposed by industrialized countries on developing country exports of textiles and apparel by January 2005. There are a few studies that have looked into these issues such as Wang (2003), Ianchovichina (2004), Ianchovichina and Martin (2001, 2004), Zhang (2004) and USITC (1999). This paper contributes in this literature by extending the analysis using the latest available data. The main objective of this paper is to analyse the general equilibrium economic impacts of China’s promised reductions of tariff and non-tariff protection, and the removal of quotas on textiles and apparel imports by industrialized countries on the Chinese and North American economies. Towards this goal, using a dynamic, multi-country and multi-sector CGE model, we simulate the economic impacts of these two developments on the economies of China, the U.S., Canada and other countries/regions. The simulation results suggest that China’s real GDP would increase by over 2 percent, largely due to a substantial increase in the output of textiles and apparel industries. However, the real GDP of the U.S. and Canada would increase by less than 0.1 percent, although, textiles and apparel industries in the two countries would face considerable adjustment challenges, with a loss of
1
China formally acceded to the WTO on December 11, 2001.
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output and employment between 20 and 30 percent. But, the reductions in these two industries will be more than offset by gains in other industries. 2. Trade linkages and the structure of trade protection In addition to the model structure and parameters, the industrial composition of output, the extent of outward orientation of individual regions/countries, trade linkages among countries, the level and structure of trade protection will also influence the direction and size of the simulated impacts. The industrial structure output is broadly similar in Canada, the U.S. and Europe. However, primary industries (agriculture and energy) and resource-based manufacturing industries (wood and minerals) are more important to Canada than to the U.S. and Europe. On the other hand, services play a bigger role in the U.S. and Europe than in Canada. Manufacturing plays a much bigger role in the Chinese economy than in India. On the other hand, services play a bigger role in India than in China. In 2001, textiles and apparel contributed for over 6 percent to value added in China, compared to 2.9 percent in India. Agriculture, labour-intensive and low valueadded manufacturing industries are also relatively more important to Mexico and Latin American countries. Trade orientation of China has increased dramatically in the last 30 years. In 2006, exports accounted for over one-third of China’s GDP, compared to 31 percent for imports. Canada’s trade orientation is significantly higher than China’s, but the gap is closing very fast. On the other hand, both the U.S. and India are still relatively less dependent on trade than Canada and China, but their trade orientation has been increasing fast in the last 15 years or so. In 2006, more than three quarters of Canada’s exports of goods and services were destined to the U.S., but it supplied less than 60 percent of Canada’s imports of goods and services, and the U.S. share has been declining steadily. On the other hand, China accounted for less than 2 percent of Canadian exports, but has increased steadily. The U.S. takes more than 20 percent of China’s exports, compared to about 40 percent by other Asian countries and 20 percent by Europe. But, China imports almost 60 percent from Asia, compared to only about 12 percent from the U.S. China buys parts from its Asian neighbours and assembles them, and exports the finished products to North America and Europe. The average import-weighted bilateral trade protection rates, computed from the GTAP database come from the MAcMap database, the result of a joint research effort by the International Trade Centre—ITC of the United Nations Conference on Trade and Development (UNCTAD) & the WTO and the Centre d’Études Prospective et d’Informations Internationales (CEPII, Paris).2 The data on trade protection in textiles and apparel come from the MAcMap data on tariffs. These data are modified to reflect the U.S. preference schemes in the Western Hemisphere.3 The data on trade protection do not take into account non-tariff barriers (NTBs), except for agriculture and food products. The average tariff protection is highest (21 percent) in India, followed by China (11.2 percent), which tariff protection is under 2 percent in Canada, the U.S. and Europe (see Table 1). Another important determinant of the simulation impacts is the industrial structure of tariff protection in Canada, China, the U.S. and other countries. There is a great deal of variance in tariff 2 See Antoine Bouët, Yvan Decreux, Lionel Fontagné, Sébastien Jean, and David Laborde, TARIFF DATA, GTAP 6 https://www.gtap.agecon.purdue.edu/resources/download/2229.pdf. 3 For further details see, GTAP 6 Documentation Chapter 16.F.
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Table 1 Trade weighted average tariff rates (%): 2001.
Agriculture Energy Food Textiles Apparel Leather Wood Mineral Motor vehicles and parts Transport equipments Other manufacturing Services Average
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
1.2 0.1 13.6 5.2 14.5 9.3 0.4 0.4 0.9 0.3 0.4 0.0 1.2
1.1 0.2 3.2 7.9 9.9 12.2 0.2 1.6 1.3 0.4 0.9 0.0 1.5
41.2 3.1 18.3 20.3 22.4 10.0 9.0 7.2 38.1 4.6 12.0 0.0 11.2
21.7 16.8 76.4 26.2 31.1 26.5 22.0 29.3 40.3 18.9 27.4 0.0 21.0
36.6 2.2 22.7 7.8 9.1 4.7 2.4 3.0 9.7 2.4 1.9 0.0 4.3
9.9 2.5 14.0 9.9 14.9 14.8 6.4 7.8 9.9 9.2 7.0 0.0 6.5
7.6 0.2 20.1 4.0 4.8 5.1 0.4 1.7 4.0 1.4 1.7 0.0 2.0
10.8 7.0 20.1 12.8 33.9 12.4 8.1 6.9 9.8 6.6 5.2 0.0 6.6
GTAP Database Version 6.
protection across major industries in all countries (see Table 1). The highest tariff sector in Canada is apparel, followed by food and leather, while tariff protection in Canada is the lowest in energy, followed by wood products, minerals and transportation equipment (including motor vehicles and parts). The U.S. tariff structure is very similar to Canada. On the other hand, China’s tariff protection is the highest in agriculture, followed by motor vehicles and parts, textiles, apparel and food. India too protects heavily food, motor vehicles and parts, apparel, textiles and agriculture. 3. Structure of the model We use a multi-sector, multi-country and dynamic CGE model to simulate the economic impacts. This is a standard dynamic CGE model originally developed by Lavoie, Mérette, and Souissi (2001), as used by Ghosh and Mac Leod (2006) and Ghosh and Rao (2005). Unlike the macro-econometric models, CGE models assume full employment and deal with only real variables. They are well suited to capture effectively the resource reallocation impacts across industries and countries, largely driven by changes in relative input prices. Consequently, CGE models are able to capture the impact of resource reallocation on aggregate productivity and output. For analytical convenience, we aggregate the model into eight regions/countries and twelve major industries. The model is dynamic in the sense that investment and capital stock are endogenous and it gives the time path of all the variables towards their long-run equilibrium values. The model is calibrated to the benchmark GTAP data for 2001. The size of substitution elasticities – the substitutability between domestic goods and imports – in different industries in Canada and other countries also play an important role in determining the simulation results. We obtained the data on substitution elasticities from the GTAP database.4 These differ across industries in both developed and developing regions/countries. For the developed countries, they vary between 4.3 for services to 11.2 in energy, while, in the developing 4 Elasticity value for each commodity is an average of its top (between domestic and composite imports) and bottom level (between different sources of imports) elasticity values obtained from GTAP database. For obtaining country specific numbers we multiply these by 1.5 for Canada, U.S. and Europe and by 1 for other regions.
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Table 2 Estimated tariff reductions (%age points). Canada Agriculture 0.0 Energy 0.0 Food 0.0 Textiles −5.2 Apparel −14.5 Leather 0.1 Wood 0.0 Mineral 0.0 Motor vehicles and parts 0.0 Transport equipments 0.0 Other manufacturing 0.0
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
0.0 0.0 0.0 −7.9 −9.9 0.2 0.0 0.0 0.0 0.0 0.0
−9.5 −1.1 −10.3 −10.1 −4.5 −1.6 −3.6 −2.3 −17.9 −1.9 −5.8
0.0 0.0 −0.1 0.1 0.0 0.0 0.0 0.0 0.0 −0.1 0.0
0.1 0.0 0.0 0.0 0.0 −0.1 0.0 0.0 0.0 0.1 0.0
0.0 0.0 0.0 −0.1 −0.1 0.0 0.0 0.0 −0.1 −0.1 0.0
0.0 0.0 0.0 −4.0 −4.8 0.1 0.0 0.0 0.0 0.0 0.0
0.0 0.0 0.0 0.0 0.4 0.2 0.0 0.0 0.0 0.0 0.0
Authors’ calculation based on Ianchovichina and Martin (2004).
regions they range between 2.9 and 7.4. The elasticity of substitution between labor and capital is assumed to be one in all industries and in all regions/countries. The other two key parameters of the model are the world real rate of interest, and the rate of consumer time preference. These are assumed to be same for all regions/countries at 5 percent. 4. Design of simulations We simulate the economic impact of important quantifiable aspects of China’s accession to the WTO: (China’s tariff reduction commitments); and the removal of quotas on textiles and apparel by industrialized countries on the economies of China, Canada and the U.S. As a condition to joining the WTO, China agreed to reduce tariffs on all imported goods, including high-technology and agricultural products. General tariff rates are to fall to 10 percent by 2005, from over 15 percent in 2001. Automobile tariffs are to fall to 25 percent by 2006, from 80 to 100 percent. China also committed to opening its service industries to foreign investment and participation, and government procurement, and agreed to the enforcement of intellectual property rights. In return, China will enjoy “Normal Trade Relations” with all member countries and territories of the WTO – most-favoured – nation treatment, and reciprocal rights for trade and investment in services. China will also have the right to use the WTO dispute settlement mechanism. In addition, China will benefit from the phasing-out of the quota restrictions on textiles and apparel in 2005, applicable under the Multi-Fibre Agreement (MFA). A significant portion of imports, especially intermediate inputs, into China enter duty free, because of the duty remission program in support of exports. To take into account this important feature in the design of simulation experiments, we used the following equation to estimate the effective tariff reductions by China in each industry: Tc = To × (1 − Ta) × (1 − b) where Tc is new tariff rate; To is the benchmark tariff rate; Ta is the percentage tariff cut; and b is the share of exports in gross output. The estimated tariff reductions by China in each industry are presented in Table 2. The cuts range from 1.1 percentage points in energy to almost 18 percentage points in motor vehicles and parts. For the U.S. it ranges between 8 and 10 percent.
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The tariff equivalents of the elimination of quotas on imports of textiles and apparel for industrialized countries are also given in Table 2. For Canada, the estimated tariff reductions in textiles and apparel are 5.2 and 14.5 percentage points, respectively. In short, the estimated tariff reductions in China and other countries are used as inputs in simulating the combined economic impact of China’s accession to the WTO and the removal of quotas on imports of textiles and apparel by the industrialized countries on the economies of China, the U.S. and Canada. 5. Simulation results As expected, China’s trade with the U.S., Canada and all other regions/countries increases considerably. For instance, China’s trade with the U.S. increases by 21 percent, compared to about 15 percent with Canada (see Table 3). US total exports increased by 2.6 percent but its exports of textiles and apparel decline by 7–21 percent. Canada’s total exports increase by 1 percent, but its exports of textiles and apparel decline by between 7.5 and 14 percent (see Table 4). China’s total exports increase by over 14 Table 3 Long run impacts: bilateral trade (%change over benchmark).
Canada United States China India Rest of Asia Mexico and Latin America Europe Rest of the world
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
−0.2 −0.2 23.7 22.7 1.6 −1.0 −0.2 1.5
0.2 −0.2 14.3 3.6 1.7 −0.2 −0.3 1.9
14.9 21.1 0.5 6.6 17.2 30.7 17.1 4.6
4.8 4.9 11.8 0.0 1.1 2.0 3.7 3.0
3.5 3.6 11.5 −1.2 0.1 1.9 2.4 1.6
1.5 1.8 8.3 −4.2 −2.4 0.0 0.3 0.0
2.0 2.1 22.6 6.7 −0.9 −0.5 −0.1 −1.4
1.3 1.3 7.9 −4.5 −2.3 −0.1 0.4 0.0
Note: row, exports; column, imports. Table 4 Long run impacts: exports (%change over benchmark).
Agriculture Energy Food Textiles Apparel Leather Wood Mineral Motor vehicles and parts Transport equipments Other manufacturing Services Total
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
3.3 2.1 1.5 −7.5 −14.0 −0.6 0.8 1.1 0.7 1.1 1.1 1.2
7.6 1.9 2.6 6.7 20.7 2.3 1.9 1.9 1.5 2.3 2.9 1.3
5.6 12.9 8.5 38.2 41.0 7.3 8.4 8.1 14.2 11.7 11.1 4.2
−3.5 −5.0 −2.6 19.0 37.3 −9.5 −5.3 −4.5 −4.2 −6.0 −4.9 −3.4
0.8 −0.4 0.3 41.5 59.7 −5.0 −0.3 −1.4 −2.4 −4.2 −0.3 −2.8
7.5 −0.9 0.2 23.9 7.7 −4.3 −1.4 −0.6 −0.9 −1.6 −1.6 −0.2
1.3 −0.3 1.3 14.5 17.8 −1.7 0.8 0.7 1.8 −0.2 1.6 0.3
0.4 0.1 0.8 1.4 −0.7 −1.6 −0.3 0.3 0.4 0.4 0.5 −0.1
1.0
2.6
14.4
2.1
2.7
0.1
1.4
0.2
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Table 5 Long run impacts: imports (%change over benchmark).
Agriculture Energy Food Textiles Apparel Leather Wood Mineral Motor vehicles and parts Transport equipments Other manufacturing Services Total
Canada
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
−2.0 −0.8 −0.9 13.7 86.7 −1.2 0.0 0.1 0.1 0.3 −0.3 −1.2
−1.4 −0.6 −1.6 48.8 50.9 0.4 0.1 −0.7 −1.7 −1.5 −1.4 −1.7
57.6 0.1 31.7 51.1 11.8 3.3 10.5 4.7 51.1 4.9 19.9 −2.7
4.7 1.6 2.6 9.9 8.2 4.3 3.6 2.4 2.4 4.6 4.2 2.3
4.4 2.1 3.3 21.9 10.0 4.7 4.3 3.4 3.1 3.2 5.0 2.2
1.2 0.5 0.7 4.7 6.6 3.0 1.1 0.4 0.2 −0.3 0.8 0.1
−0.5 −0.2 −0.5 23.3 31.1 0.6 0.3 0.1 −0.9 0.2 0.4 −0.4
0.0 0.7 0.0 1.7 2.8 1.7 0.2 0.2 −0.1 0.2 0.3 0.1
1.0
1.8
16.7
3.1
4.3
0.8
1.5
0.3
percent, with the exports of textiles and apparel increase by about 40 percent. India’s exports of textiles and apparel also benefit significantly from the removal of quotas. China’s exports of motor vehicles and parts, other transportation equipment and energy increase by over 14 percent. Canada’s total imports also increase by about 1.0 percent, compared to 1.8 percent for the U.S. imports (see Table 5). Canada’s imports of apparel increase by almost 90 percent. On the other hand, China’s imports of agricultural products and motor vehicles and parts increase by more than 50 percent. The impact on European imports is similar to that of Canada and the U.S. The macro-economic impacts of China’s accession to the WTO and the elimination of quotas on textiles and apparel on China, U.S. and other countries are shown in Table 6. As mentioned before, exports and imports of China increase by 14.4 and 16.7 percent, respectively. China’s terms of trade declines by 1.7 percent, because of the significant reduction in tariff barriers across all sectors. Despite the terms of trade loss, consumption and investment in China increase significantly. As a result, China’s value added increases by over 2 percent. India’s real GDP, on the other hand, increases by 0.16 percent. Because of the removal of quotas on textiles and apparel, terms of trade also decline in Canada, the U.S. and Europe.
Table 6 Long run aggregate economic impacts (%change over benchmark). Region
Exports Imports Value added
Canada 1.0 United States 2.6 China 14.4 India 2.1 Rest of Asia 2.7 Mexico and Latin America 0.7 Europe 1.4 Rest of the world 0.2
1.0 1.8 16.7 3.1 4.3 0.8 1.6 0.3
0.1 0.0 2.0 0.2 0.2 0.1 0.0 0.0
Consumption Investment Terms of trade 0.0 0.0 0.4 0.3 0.3 0.1 0.0 0.1
0.1 0.0 2.5 0.1 0.3 0.1 0.0 0.0
−0.1 −0.3 −1.7 0.9 0.9 0.2 −0.0 0.1
Price of cons.
Price of invt.
−0.5 −0.4 −1.4 0.9 0.5 −0.0 −0.2 −0.1
−0.3 −0.3 −1.9 0.7 0.4 −0.1 −0.1 −0.1
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Table 7 Long run effect of China’s accession to the WTO: value added (%change over benchmark). Canada Agriculture 1.4 Energy 1.3 Food 0.4 Textiles −20.1 Apparel −31.8 Leather −3.3 Wood 0.5 Mineral 1.0 Motor vehicles and parts 0.7 Transport equipments 1.1 Other manufacturing 0.6 Services 0.1 Total
0.06
United States
China
India
Rest of Asia
Mexico and Latin America
Europe
Rest of the world
1.2 0.6 0.2 −16.6 −20.9 −1.5 0.3 0.7 0.9 1.1 0.5 0.0
−1.0 3.2 0.5 11.5 23.2 5.9 2.4 1.7 −4.6 3.1 1.6 1.4
0.3 −1.0 −0.1 7.5 31.5 −5.4 −0.9 −1.7 −0.5 −1.1 −0.9 0.0
0.2 −0.6 0.1 19.3 18.3 −4.0 −0.1 −0.8 −1.0 −2.9 −0.2 0.1
1.3 −0.4 0.1 4.5 1.6 −1.3 −0.3 −0.4 −0.3 −0.3 −0.3 0.0
0.1 0.1 0.1 −5.0 −10.3 −1.2 0.1 0.2 0.6 −0.2 0.2 0.0
0.1 0.0 0.1 −0.5 −0.9 −0.9 0.0 0.1 0.2 0.1 0.1 0.0
0.02
2.05
0.16
0.21
0.08
0.01
0.03
Because of terms of trade loss, despite a 1 percent increase in trade flows, Canada’s value added increases by less than 0.1 percent (see Table 7). Real GDP (value added) increases by just 0.02 percent in the U.S., and 0.01 percent in Europe. On the other hand, terms of trade improves for India and Rest of Asia.All industries in China, except Motor vehicles and part and agriculture gain from its accession to the WTO. Moreover, the output of textiles and apparel increases between 11.5 and 23.2 percent respectively (see Table 7). The output of textiles and apparel industries in India and Rest of Asia also increase substantially. On the other hand, the output of these two industries decline by between 20 and 32 percent in Canada. The output loss in these industries is more than off set by gains in all other industries, except a small (3.3 percent) reduction in leather industry. Interestingly, a recent paper by Wyman (2006) finds that clothing production in Canada fell by 33.3 percent between 2002 and 2005. During the same period employment in Canadian clothing industry fell by about 36 percent, a little higher than that our simulation results suggest (33 percent). The industrial structure of output changes in the U.S. and Europe are broadly similar to the changes in Canada. Developing regions such as India and rest of Asia suffer small losses in terms of output in some industries due to competition with China is third markets but it is compensated by gains in other industries.The industrial structure of employment changes in all countries is similar to the changes in the output structure. Textiles and apparel industries face considerable employment reductions in Canada, the U.S. and Europe. On the other hand, employment in these industries increases considerably in China, India and the Rest of Asia. 6. Conclusions China’s economy grew at an average annual rate of almost 10 percent over the last 30 years, mainly because of its economic reforms and the increased market and outward orientation. These trends occurred despite the fact that China was not a formal member of the WTO until very recently. China formally joined the WTO in 2001. As a condition to its entry into the world trading organisation, China made a number of concrete commitments to reduce both tariff and non-tariff barriers and liberalise its service industries.
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The main objective of this paper has been to simulate the general equilibrium economic impacts of China’s accession to the WTO and the removal of quotas on textiles and apparel by industrialized countries in China, the U.S., Canada and other countries. The simulation results suggest that China’s bi-lateral trade linkages with all the countries would increase substantially. China’s real GDP would increase by more than 2 percent. All industries in China, except motor vehicles and parts and agriculture, would gain from its accession to the WTO, but textiles and apparel gain the most because of the removal of quotas on the exports of these two industries by industrialized countries. India too would gain a great deal in these two industries. On the other hand, as expected, Canada, the U.S. and Europe would see big output and employment reductions in these industries. But, the gains in all other industries would more than offset the output and employment loss in textiles and apparel, resulting in a very small net increase in real GDP in Canada and other industrialized countries. The policy implication of our simulation results is that formal integration of the China into the world economy via its induction into the WTO has been a win-win proposition for China as well as all other countries. It has allowed China to maximize its comparative advantage in labour-intensive manufacture goods. On the other hand, it has facilitated industrialized countries such as the U.S. and Canada to increase their strength in technology and knowledge-intensive and resource-based industries, and gradually move out of labour-intensive activities. However, there will be a significant employment dislocation from the industrial re-allocation of resources in China, and other industrialized countries. These adjustment challenges need to be managed effectively and smoothly. All regions of the world benefit from the accession and Chinese bilateral exports to all regions increases. This suggests that Chinese accession has benefited each and every region as China reduces its import barriers and the MFA liberalization. These results suggest that there are further scope for extending multilateralism by way of unilateral trade liberalization. Acknowledgements The authors are grateful to the referees of the journal of policy modeling and the participants at the Canadian Economic Association meetings and Statistics Canada Socio-economic conference for valuable comments. This paper reflects the views of the authors and no responsibility for them should be attributed to the Department of Finance or Industry Canada. This paper was written when the first author was with Industry Canada. References Ghosh, M., & Mac Leod, C. (2006). Effects of a free trade area of the Americas: Evaluation based on a dynamic general equilibrium model. Integration and Trade, 24, 27–61. Ghosh, M., & Rao, S. (2005). A Canada–U.S. Customs Union: Potential economic impacts in NAFTA countries. Journal of Policy Modeling, 27, 805–827. Ghosh, M., & Wang, W. (2006). Is Canada underperforming in foreign direct investment and exports to China? Horizons, 9(2), 55–58. Ianchovichina, E. (2004). Trade policy analysis in the presence of duty drawbacks. Journal of Policy Modeling, 26(3), 353–371. Ianchovichina, E., & Martin, W. (2001). Trade liberalization in China’s accession to WTO. Journal of Economic Integration, 16(4), 421–445. Ianchovichina, E., & Martin, W. (2004). Impacts of China’s accession to the World Trade Organization. World Bank Economic Review, 18(1), 3–27.
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