The WTO on Monday announced that it has concluded negotiations over China's terms of membership, a decision that will pave the way for a formal invitation to join at the organization's November meeting in Qatar.
Although the ripple effects of the event will take years to play out, the entry of both nations into the trade organization stands as a milestone. By joining the WTO, China will undertake a vast legal reform that will effectively eliminate the chaos and unpredictability for Western companies trying to expand into the Chinese market, according to several sources.
"It is going to force a much more competitive environment in China for an array of products," said John Foarde, vice president of the U.S.-China Business Council, a nonprofit trade association. "They are moving in the direction of more independence from the judiciary, freeing the local courts from the local government."
Dell Computer announced Monday that it will start making desktop PCs bound for Japan in its plant in Amoy, China. Since May, Dell has been moving some production facilities from Malaysia to China.
Just as important, WTO membership will change how high-tech products come to market. Currently, Taiwan manufactures a substantial portion of the world's monitors, notebooks, semiconductors, mice and other computer hardware.
In the future, companies will move more manufacturing to the mainland to take advantage of cheaper labor, and Taiwan will likely emerge as a logistical and design center, as well as a cultural go-between for China and the West.
Gartner analyst French Caldwell says China winning membership in the World Trade Organization may influence the IT industry more decisively than any other event in the first decade of the 21st century.
Added Foarde: "How (the China-Taiwan relationship) works out will be the most fascinating aspect. Clearly, Taiwan sees the future of its manufacturing tied up in China."
The rule of law
Admission to the WTO is important largely because of the effect it will have on China's legal and regulatory framework. To join the organization, countries must eliminate tariffs and other laws that favor companies from one country over another.
Among some of the specific commitments, China will drop dual-pricing policies that some nations have claimed permit Chinese manufacturers to "dump" goods in export markets for less than they cost to make. Approximately 1,300 national and local laws will need to be changed, according to statements from Chinese government officials.
"The WTO is all about the rule of law, setting guidelines and standards and then following them. If they do that, the WTO will make a difference," said John Callebaut, senior program officer for Asia at the Center for International Private Enterprise.
Corruption will also be another target of legal reform. For years, Western companies have complained about delays in getting permits, selective enforcement of fines, and bureaucratic conflicts of interest. Hewlett-Packard, for instance, used to import components through Hong Kong because the informal tariff was cheaper than the official rate. Intellectual property and copyright laws have been subject to sporadic enforcement.
"There continues to be a fair amount of corruption," said one high-tech executive whose company has extensive trade links with China. "There are central laws and local laws, and they are open to different interpretations."
Competition has been heating up in anticipation of WTO approval. Last summer, Dell Computer began an effort to move deeper into the Chinese market by releasing the Smart PC, a relatively low-cost consumer model specifically for China.
Chinese companies, which are all partly owned by the state, will also face increased competition. Legend Computer, China's largest PC maker, and other local PC companies will likely see more competition on price, U.S. executives have said. Legend's lucrative distribution business, which distributes PCs from Western competitors, will also see incursions.
In the end, Chinese companies will become more like some French or Italian companies that are partly state-owned but compete in an open market, said Foarde. Unemployment and currency devaluation are also likely outcomes.
At the same time, WTO entry will mean increased economic cooperation between Taiwan and China.
"There is a very strong engineering base there," said Via's Brown. Via employs around 300 engineers in development centers in Beijing and Shanghai.
Commerce across the Taiwan straits is tricky. There are no direct legal flights between the two countries, noted Brown. The Taiwanese government also limits how much local companies can invest in China. National security regulations, for instance, prevent Taiwanese companies from opening semiconductor plants in China or full-fledged notebook plants.
Taiwanese business leaders have been pushing hard for changes for the past few years on the grounds that cooperation might be easier to deal with than direct competition.
"Taiwanese companies should actively participate (in) and assist the development of the semiconductor industry in mainland China," Morris Chang, chairman of Taiwan Semiconductor Manufacturing Co.--the world's largest chip foundry--said in a speech earlier this month. "Mainland China may develop a semiconductor industry on its own or draw support form other companies. No matter whether Taiwan participates or not, mainland China won't stop."
Technically, neither China nor Taiwan will be admitted into the WTO for a while. The Working Party of the WTO, a committee staffed with negotiators from member states, this week closed its reports on the admission of China and Chinese Taiwan, Taiwan's name for the purpose of the treaty. The report summarizes the legal terms and conditions for entry.
The report and a protocol for accession from both nations will then be presented to the WTO ministers in a meeting this November in Qatar. The ministers will then agree to the accession. After that, the domestic governments of both countries need to ratify the treaty of Marrakech, which established the WTO. These events, though, are viewed as formalities.
Although China has cracked down on corruption, enforcement is still spotty and in some ways ineffective. Awhile back, for example, the mayor of Xiamen and his cohorts were given the death penalty in a corruption case. Callebaut said that China will need legal and cultural methods--such as allowing a free press--to deal with problems such as corruption before it gets to the death penalty phase.
Progress, nonetheless, is being made. China appointed Laura Cha, a regulator who came to prominence in Hong Kong, to serve as the No. 2 person in the China Securities Regulatory Commission.
"This is the first time an outsider has been appointed to a senior position," Callebaut said. "By bringing her in, someone there is very serious about creating an open and fair securities system."
China's official Taiwan policy also remains a huge problem. China remains firmly committed to its policy of considering Taiwan a renegade province and promises to take actions against parties that treat the island as a separate nation. Credit Suisse First Boston recently was ejected from participating in a deal with China Unicom after the bank helped the Taiwanese government on a promotional tour in Europe. The move qualifies as an illegal boycott, according to John Tkacik, an analyst at the Heritage Foundation.
Despite the political situation, however, the arguments for moving into China will prompt companies to swallow the risks, said most sources.