Literature Review: Analysis of Effects of WTO on China’s Foreign Direct Investment
China acceded to the World Trade Organization (WTO) in 2001, and since then, it has opened its economy and business conditions to the world. It has followed the globalization trend that the WTO has led since its inception. It has been highlighted in research by Carbaugh (2022) that it reduced trade barriers and has made the world more open for free trade and investment across countries. The relationship between the WTO’s effects on foreign direct investment is well-established (Carbaugh, 2022). Research studies have confirmed that this relationship is positive as reducing trade barriers and the process of opening increase foreign direct investment in the country. Every country that has embraced WTO guidelines has accepted opening its boundaries to the world. It has been highlighted by Pelkmans (2018) that China has kept the socialist aspect of its economy alive while moving toward a market-based economy (Pelkmans, 2018). However, China has worked and responded to WTO successfully, and it has resulted in an increase in trade and investment in a country following the WTO guidelines.
Transformation of the Chinese Economy
A country’s policy to open its economy and market makes it acceptable for world and international trade. It is a sign of trust and confidence of other countries in it that they can treat the country favorably for their business in the country. Research has distinguished between free trade economy and protectionism. Petersmann (2019) has considered a kind of protectionism as the crisis faced by its member countries. Free trade is in line with globalization and WTO guidelines. It is based on reducing trade barriers and increasing opportunities for trade and investment. Protectionism is very different as it does not believe in liberalizing the economy and market for the world. Countries sticking to protectionism believe that they have an obligation to their businesses and organizations. There are instances where member countries are hesitant to fully abide by WTO guidelines (Petersmann, 2019). Daugbjerg and Swinbank (2015) have taken this aspect in light of the impact of WTO on domestic policymaking for EU’s environmentally sustainable policy. They must take care of them, and trade policies must support them directly. Before globalization and WTO, most countries adopted measures to support their industries and businesses. After globalization and WTO, countries started realizing that taking business operations globally is more beneficial. It led them to embrace competition, and China is one of these countries. However, topics like environmental and social sustainability are concerning as countries have to take care of WTO guidelines and emerging sustainability concerns (Daugbjerg & Swinbank, 2015).
Pelkmans (2018) has taken the case of China, which is a socialist market economy. China is a socialist market economy, but it started realizing its potential if it opened it market up. It motivated China to strengthen its market system, which changed how the Chinese government regulated and interacted with the market. The Chinese government started letting the market decide on trade and investment issues and decisions. There has been an issue with China’s strategy as it has not become a true market economy (Pelkmans, 2018). Bacchus et al. (2018) have stated that China has taken steps toward liberalizing the market and becoming a market-oriented economy. If the market is given the freedom to decide, it focuses on resource allocation. Chinese government paved the way for WTO in this regard which was an effort to convince Chinese nationals about the transformation towards the market economy. China has successfully responded to complaints put against it by member countries of WTO (Bacchus, Lester, & Zhu, 2018).
Responding to complaints and WTO rules by China indicates that change in the market economy and business conditions cannot happen without a change in the legal system. Globalization and implementation of WTO rules forced countries to change their legal system fundamentally so that they could come up with WTO rules and guidelines. The most relevant change is the change in the law to support multilateral trade rules and guidelines. Tan (2021) has further taken a look into China and its legal system. It took 15 years of negotiations before China entered the WTO. China brought changes to its legal system to align with the WTO rules, and these efforts have been mixed with the global as well as Chinese elements (Tan, 2021). China engaged in reviewing and revising the laws and rules of its legal system. It affected the government at all levels in China to support multilateral trade and WTO regulations and rules. Chinese steps towards aligning with the WTO rules are in line with the literature supporting change in law and the legal system to make the business environment suitable. On the other hand, in the words of Petersmann (2019), many countries are not efficient in abiding by WTO rules as they might contradict their local laws and legislation (Petersmann, 2019).
Fulfilling WTO Commitments
WTO has some commitments regarding the trade of goods, and one of the prominent requirements is the reduction in tariffs. There is a visible link between tariff reduction and increasing trade and investment activities in a country. It makes it mandatory to reduce tariffs so that countries can have a level playing field. Orefice (2017) has noted that tariffs can be one of the main hurdles in the trade of goods and commodities being traded among countries. However, measures taken to make trading health-friendly can also act as an effective barrier to trade globally. Therefore, such measures should be studied as part of trade barriers (Orefice, 2017). However, China has fulfilled this commitment by reducing tariff rates over the years. It has considerably decreased tariff rates on manufactured and agricultural products (China-embassy, 2018). The following table highlights the reduction in tariff rates.
| Types of Goods | Tariff Rate in 2001 (Average) | Tariff Rate in 2017 (Average) |
| Manufactured | 14.8% | 8.9% |
| Agricultural | 23.2% | 15.8% |
Another measure for facilitating international trade and investment is the reduction in non-tariff measures. Timini and Conesa (2019) have considered various types of non-tariff measures like setting quotas to favor the domestic industry, treatment with import licenses, and special import tendering requirements. These non-tariff measures reduce the chances of a level playing field for international traders and businessmen. They are also against requirements under WTO because any protectionist attitude or action is not allowed under the WTO guidelines (Timini & Conesa, 2019). China has responded to these requirements favorably as it has eliminated these non-tariff measures for 424 items since 2005. Commodities enjoying the reduction in non-tariff rates included machinery, electronic products, automobiles, and natural rubber. However, it introduced quota administration regarding new tariff rates for commodities like rice, corn, wool, wheat, and chemical fertilizers (China-embassy, 2018).
Issues with Intellectual Property Rights and WTO Guidelines
Brandl et al. (2019) have noted that intellectual property rights have emerged as crucial for global and international trade. These rights make an important part of the legal and regulatory framework because government initiatives are inevitable to ensure these rights. Patents, trademarks, and all intellectual property rights are crucial sources of competitive advantage for businesses in international trade and business. Companies from advanced countries increase the importance of intellectual property rights, and laws for intellectual property get stricter (Brandl, Darendeli, & Mudambi, 2019). Research scholars have fostered the need to focus on intellectual property rights in any case. May (2015) notes that any risk to intellectual property rights can cause a serious threat to a business because it is a serious threat to its competitiveness. With the emergence of innovation and technology, the role of intellectual property rights has increased, and these rights have become crucial for the sustainability and competitiveness of a business. WTO ensures the protection of these rights while it promotes global trade and business (May 2015).
Literature has confirmed that a strong legal and legislative environment is crucial for intellectual property rights protection. For this, there must be the relevant law and judicial system to ensure the application of law and rules. Huang et al. (2017) have taken the case of intellectual property law in China, where the law for intellectual property rights makes the environment at the macro-level under which every business becomes responsible and careful about intellectual property rights. The research finds that Chinese firms are less responsive to these laws in comparison to western companies (Huang, Geng, & Wang, 2017). Furuta (2017) has studied how trade relations started between China and Japan, and it has also addressed the issue of imitation and counterfeiting. It is a good account to know how these issues evolved to bring the world to this point (Furuta, 2017).
China has amended the Patent Law and the Copyright law to fulfill these copyright protection requirements from the WTO. Law alone cannot serve the purpose if there is no law enforcement. China has restructured the State Intellectual Property Office to serve this purpose. There are considerable results and achievements in China regarding intellectual property rights. The following are some useful facts about intellectual property rights in China (China-embassy, 2018).
| Intellectual property royalties paid to foreign companies by China since 2001 | $28.6 billion |
| Intellectual property royalties paid to foreign companies by China since 2001 (Annual growth rate) | 17% |
| Invention patent applications received by China in 2017 | 1.382 million |
| Percentage of invention patent applications by foreign companies and businessmen | 10% of the total applications |
| Number of invention patent applications filed by foreign businesses and businessmen | 136,000 in 2017 (33,000 in 2001) |
| Number of patent applications filed from China in 2017 | 51,000 (In second place after the US) |
Measures on intellectual property rights also reflect transparency. Companies show trust in a country that abides by international law. Compliance with international law acts as the guarantee for international companies that they consider it transparent and a certain way of doing business. China considers this commitment and fulfills it by consistently reporting to laws and regulations and measured under the WTO requirements. In this regard, China continuously shares notifications with WTO to let it know about its progress and commitments. China attracted FDI and the interest of foreign companies because of transparency. However, Cannizzaro and Weiner (2018) have noted that state ownership can cause issues with transparency, and there are examples of state-owned enterprises in China. Therefore, multinational corporations can have a more transparent environment if they are given a more open business environment (Cannizzaro & Weiner, 2018). They responded to it with innovation and adjustment to the environment that made the Chinese automobile market more competitive and sustainable.
The Impact on Foreign Direct Investment
WTO offers the framework where trade liberalization is present at the center. It is the main purpose of WTO that free trade must not be hurt. WTO favors market-based economic decisions under which the private sector must have the freedom to trade and make decisions for investment. Shah and Ali (2016) have studied factors leading BRICS to attract foreign direct investment. It is worth comparing these factors in counties like the United States, the United Kingdom, and regions like European Union attract huge foreign investment only because they have trade liberalization. They have opened their market as any player can take the lead in trade and business. Similar factors are there in eng economies like macroeconomic stability and availability of infrastructure (Shah & Ali, 2016). China has also followed this practice and policy of trade liberalization. The following table shows how foreign and private sector companies are contributing to the international trade volume of the country.
| Private and Foreign Invested Companies’ share in foreign trade in 2001 | Private and Foreign Invested Companies share in foreign trade in 2017 |
| 57.5% | 83.7% |
Lowering restrictions in the trade and services sector is one of the most crucial requirements and conditions to attract foreign direct investment. There can be two kinds of restrictions on the way of foreign direct investment, among others. They are geographical restrictions and quantitative restrictions. Fan (2019) has taken this case with a focus on differences in income across geographical regions. A country can impose geographical restrictions on foreign companies to prevent them from doing business in a certain geographical area. It can also happen within a country, as China witnesses’ inequality across geographical regions and between skilled and unskilled citizens (Fan, 2019). A country can impose quantitative restrictions to prevent them from having an extra privilege from the rest of the companies. In this regard, WTO calls for members to set sub-sectors in the economy under which industries must enjoy the reduction in such restrictions. China has followed WTO guidelines, and the following table shows sub-sectors in the Chinese economy enjoying the freedom of ownership and operating without any restrictions.
| Number of sub-sectors with permission of wholly foreign-owned enterprises | 54 |
| Number of sub-sectors with permission of foreign majority ownership | 23 |
| Number of sub-sectors accorded national treatment to foreign capital | 80 |
WTO offers favorable policies for products and services as international trade must focus on products and services simultaneously. Lai et al. (2016) have studied China, and globalization and international trade literature have given very much importance to the services sector. Technology and the global flow of information have given rise to internationalization and globalization of the services sector. Developed countries are advanced in the services sector as they have become the hub of many services sectors (Lai, Riezman, & Wang, 2016). China has also established its unique place in this sector. Favorable policies and reductions in restrictions have brought huge foreign direct investment into China. The following table shows the distribution of foreign direct investment to China in the goods and services sector.
| FDI Share in the Services Sector in China | FDI Share in the Goods Sector in China |
| 73% | 27% |
Uddin et al. (2019) have studied determinants of FDI that a country must liberalize its economic and trade policies to be attractive to foreign businesses and companies. As a result, it becomes attractive for foreign direct investment. Various factors include cheap labor cost, the abundance of raw material or semi-finished goods, supportive infrastructure, supply chain, and other factors. A more important factor is hidden in the legal and regulatory framework as it shows a more serious approach. There must be obvious and understandable reasons behind making policies favorable for FDI (Uddin, Chowdhury, Zafar, Shafique, & Liu, 2019). Response of countries to WTO is also worth analyzing as Paul (2015) has researched India and China considering WTO. WTO provides this reason for its member countries as they shape their practices and actions through this international law and regulations. Proactive compliance with the law is more effective than being reactive. It is worth looking into China’s response to WTO and its impact on FDI. The reach has noted that India has responded well to WTO in comparison to China, where the impact is mixed (Paul, 2015).
Since the start of the 1990s, China has been the top country in attracting FDI among developing countries. The pace of FDI increased after the accession to the WTO. The following table can help to know the impact of WTO on FDI in China.
| FDI to China in 2001 (The year it acceded to the WTO) | $46.88 billion |
| FDI to China in 2017 | $136.32 billion |
| The annual growth rate in FDI | 6.9 percent |
The above table indicates how China has attracted huge sums of FDI after the WTO. WTO is the result of globalization that has transformed economies across the globe. Ullah et al. (2022) have taken a new perspective on FDI if it goes with environmental regulations. There is a positive and long-term link between the two. It suggests that China remains to be one of the top countries in attracting FDI despite a focus on environmental regulations (Ullah, Zhao, Kamal, & Zheng, 2022).
Consistent years of growth by China have created a strong middle class with increased purchase power. Other factors are favorable for China to attract FDI, as indicated by Yingxi and Hung (2018). The research has compared India and China and found two advantages of China over India. Good infrastructure and a knowledgeable workforce are factors attracting more FDI to China than to India (Yingxi & Hung, 2018). There are other favorable factors in China as well. After the seventeen years since embracing the WTO by China, the number of newly founded foreign enterprises reached 35,652 marks (China-embassy, 2018).
Research confirms that WTO offers a win-win situation for a country and foreign companies. It has taken place in China, where the government made sure it provided strategic planning to foreign companies. However, the case with WTO and its impact on developing countries are worth investigating. Narlikar (2019) has pointed toward challenges that developing countries can face resulting from WTO. However, China has successfully responded to WTO and its policies (Narlikar, 2019). Carbaugh (2022) has studied various factors in the international economic context, and the discussion has been comprehensive and detailed to know the impact of globalization and factors contributing to FDI (Carbaugh, 2022).
There is a positive link between WTO and foreign direct investment, as research confirms. Globalization has made WTO work effectively, but there are signs of increasing protectionism among countries (Daugbjerg & Swinbank, 2015). China has been a successful example of a positive relationship between variables, and it has been confirmed.WTO has offered a path towards globalization under which countries can decide how they must interact to benefit from globalization. Attaining a win-win situation between countries, companies, and business individuals must be the priority for all participants of globalization. China has grown into one of the fastest economies in the world. Mainly, it has been possible through liberalization of its economy by freeing it.
Summary
The literature review has found a positive relationship between WTO and FDI, and it has been true in the case of China. China has opened up its economy and lets foreign companies do business freely. It increased their confidence and restored their trust in China. Literature also notes that WTO has made a favorable condition for companies, countries, and various stakeholders. It has benefited the economy of each country, and FDI is an indicator of how a country successfully does business in the other country.
References
Bacchus, J., Lester, S., & Zhu, H. (2018). Disciplining China’s Trade Practices at the WTO: How WTO Complaints Can Help Make China More Market–Oriented. Retrieved from https://www.cato.org/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help-make-china-more?source=content_type:react|first_level_url:article|section:main_content|button:body_link
Brandl, K., Darendeli, I., & Mudambi, R. (2019). Foreign actors and intellectual property protection regulations in developing countries. Journal of International Business Studies, 50 (5), 826-846.
Cannizzaro, A. P., & Weiner, R. J. (2018). State ownership and transparency in foreign direct investment. Journal of International Business Studies, 49 (2), 172-195.
Carbaugh, R. (2022). International economics. Cengage Learning.
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Fan, J. (2019). Internal geography, labor mobility, and the distributional impacts of trade. American Economic Journal: Macroeconomics, 11 (3), 252-288.
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Uddin, M., Chowdhury, A., Zafar, S., Shafique, S., & Liu, J. (2019). Institutional determinants of inward FDI: Evidence from Pakistan. International Business Review, 28 (2), 344-358.
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