Team Project of International Trade China’s WTO accession impacts on domestic automobile industry—a rudimental approach from the view of scale economy

Abstract: As a result of successful domestic economic reforms combined with a fast-developing international market that is willing to purchase its labor-intense products, China’s economy has grown approximately 10% per year over the past 28 years and the GDP per person has grown up to 10561RMB in 2004. This remarkable development has made China the second largest beneficiary of direct foreign investment, behind only the US. China has by far the largest developing economy—more than 30% larger than Brazil’s. China’s ranking in the world economy is expected to continue improving in the coming decades [1]. Fueled by the favorable open environment for MNCs (multinational corporations) to invest in domestic manufacturers and the increasing income for urban residents, China’s automobile industry is likewise experiencing the fastest growth in its history. The total output (including saloon cars, camions and other special types) increased from 1475 thousand in 1996 to 5700 thousand in 2005, and the automobile possession rate per person increased from 0.2364% in 1996 to 1.1364% in 2004. On November 15, 1999, US and Chinese officials reached a bilateral agreement on China’s bid for membership in the World Trade Organization (WTO) [2]. Upon its admission to the WTO in 2001, China agreed to make several major reforms (including the Tariff Reduction Schedule and the Ration Abrogation Schedule) that will bring about great impacts on China’s automobile industry. Much research has focused on the potential damage to domestic automobile producers when they have to compete with foreign magnates, some has given recommendations for China’s less developed automobile industry to meet the challenges, and others even claims that China’s inchoate automobile industry will not survive. But little has been written from the perspective of benefits, specifically the opportunities for the producers to enhance the manufactural technology and benefit from scale economy. This article attempts to fill this gap, offer evidence and data to prove that the expectation of potential competition when China is involved in WTO forces the automobile manufacturers to pursue industrial concentration, which will lead to scale economy and decrease the average cost in China’s automobile industry. This trend will ultimately narrow the price gap between domestic market and world market and the total social welfare will increase.