China’s commitment to GATS represents the most radical services reform program in the WTO. It proposes to eliminate over the next few years all forms of barriers to foreign entry and ownership and end all discrimination against foreign firms.
The fulfillment of China’s GATS commitment will lead to one of the most dramatic events of liberalisation. Over the span of six years one of the most closed economies has promised to become one of the most open.
GATS covers the following areas: cross border supply of services, consumption of services abroad, foreign direct investment or commercial presence, and movement of individuals across borders for temporary assignments.
Certain GATS obligations are general and certain are sector specific. General obligations include Transparency and Most Favored Nation principle (MFN). Transparency requires each member publish promptly all relevant measures of general application. Affecting trade in services, MFN stipulates that members should not discrimeintae against trading partners.
Overall for China, the coverage of market access commitments was 57.4 %. This is much higher than the commitments offered by any group of countries in the Uruguay round of the GATT .The share of completely liberal commitments in the maximum possible commitments was 23% for China, higher than developing countries but slightly lower than high income countries.
In the area of commercial presence the restrictive measures in China were as follows-Some restrictions on Joint venture agreements, restrictions on Geographic locations for special zones, business restrictions like scope restricted to certain subsets of consumers, and some regulatory requirements.
In the area of professionalised services, the situation will be highly liberalized from now and for the next few years. Compared to 1994, China is now committed to the cross border supply of professional services. Quantitative limitations no longer apply to accountancy firms, taxation services, urban planning and legal services. Some restrictions persist in legal and medical services.
In the area of Computer and related services, commitments have become less liberal. In the area of telecommunications, however extensive foreign entry has been allowed and is set to increase in the future. Some restrictions persist and majority foreign ownership is not allowed. Construction and engineering services benefited from opening since 1994, and joint ventures with foreign majority ownership is permitted. By 2004, full ownership came to be permitted.
In distribution services, there has been substantial liberalization but, restrictions have been in place-establishment (only joint ventures), geographic scope (retailing only in Special Economic Zones), and products sold (books, pharmaceuticals, newspapers etc.)
China has also built up a strong logistic supply chain like warehousing and storage.
In education services cross border delivery was unbound in i1994 but is now fully open.
In financial services, all restrictions will be eased. In life insurance all the restrictions will be removed like percentage of ownership. Foreign banks were fettered by a number of restrictions like fixed area of operation, deposits from only non-residents and dealing only in foreign currencies. But GATS implies removal of all these restriction and freedom for foreign currency business. The entire banking sector is to be liberalized by 2006.
Transport services benefited form liberal commitments on international maritime transport and certain support services. Multi modal transport will be given a boost though air transport is left out of the purview of the Agreement.
The commitments above imply a dramatic loss of discretion in policymaking. China has promised to give up over the next few years, the freedom it had to restrict new entry and foreign ownership, discriminate between trading patterns, and the freedom to change its mind.
Discriminations have been sought to be eliminated s they cause economic distortions, the two pillars of non-discrimination under GATS are MFN and national treatment objectives. Exemptions on both are very narrow. But China has retained the freedom to impose explicit quantitative restrictions on the number of providers in legal, medical and retailing services.
There is a necessity to reduce further barriers to entry in these sectors for maximum productivity. There must also be eliminating restrictions on foreign ownership. Also restrictions must be eased gradually across all regions so as to reduce regional disparities
To make the newly reformed Chinese economy work certain conditions must be in place-. Efficient Regulatory Authority- Markets will fail in the case of capital heavy, long term projects especially infrastructure projects. So regulatory authorities are needed to remedy market failure and deal with cases of natural monopoly.
Also provisions must be made for speedy dissemination of market information to all corners of the economy so that consumers and producers can make informed decisions. Social safety nets must be in place to deal with the shakeouts during the reform and liberalization process that will cause unemployment on a large scale.
The regulatory reform and trade and investment liberalization has to proceed in a slow and sequential manner. In the telecom sector China has followed the policy of allowing competition first and privatizing later. In the financial sector the experience of many countries is that internationalization and domestic deregulation can be mutually reinforcing. But that is not sufficient and it also needs a supporting institutional framework.
A revamping of the Banking system and further liberalization of sectors like Telecom are the pressing need of the Chinese economy as it proceeds towards super stardom.