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The effect and strategy of the China Telecom entering the
WTO-----China's Telecommunication Industry and Its Policy
Trend after Joining WTO Proposal
During the 1990s, China came to be seen as an especially attractive
site for foreign direct investment (FDI). The vast potential
of the Chinese market, Chinese low labor costs, favorable
tax policies, and the stability of its business climate relative
to other developing countries stimulated a gigantic global
reallocation of capital and labor resources. More than US$200
billion in FDI flowed into mainland China from 1990 to 1997,
accounting for 30% of the total foreign direct investment
sent to all the world's developing economies during that period
(China State Statistical Bureau, 1998).
China is now building what will inevitably become the world's
largest telecommunications network. The Chinese leadership
has made no secret of its belief in the importance of information
and telecommunication products and services to China's economic
aspirations. To develop its infrastructure, China must invest
large amounts of capital and harness new levels of managerial
and technological know-how. Nevertheless, during the whole
of the 1990s China imposed some of the world's tightest restrictions
on foreign investment in telecommunication services. Foreign
businesses were not allowed to own, operate, or manage telecommunication
networks or services in China.
China's rejection of FDI in telecommunication services was
unusual relative to other economic sectors in China or to
other countries at a similar level of development. In telecommunications
equipment manufacturing, equity joint ventures and wholly
foreign-owned enterprises were commonplace in China, and took
in billions of US dollars early in the reform process. Other
developing nations in Latin America and Asia opened their
doors to foreign direct investment in telecommunication services
during the decade. Evidently, despite its need to invest in
a large-scale service infrastructure and the ready availability
of capital from foreign sources, China was willing to forego
what seems like a natural trade resources for market access
in order to achieve other objectives. Chinese closed door
in services played a major role in its negotiations to enter
the World Trade Organization (WTO). The United States, the
European Commission and Japan all made opening up telecommunication
services a major point of contention (Dow Jones International
News, 1999a, b).
The FDI restriction in telecommunications attracted significant
attention from businesses and investment analysts eager to
enter the China market. But almost all of the analysis has
been devoted to guessing when or how it will change; there
is surprisingly little analysis of why it was there and what
domestic political and economic bargains sustain it. In our
opinion, it is necessary to understand what created and sustained
the FDI restriction before one can understand what is changing
and why. In particular, it is impossible to assess the impact
of the WTO negotiations on China's policy without understanding
how the external pressures imposed by WTO bargaining interact
with the pre-existing domestic policy bargains.
Domestic constraints on policymakers depend not only on group
calculations of interests, but on their political influence.
Therefore, what counts [domestically] is not total national
costs and benefits, but their incidence, relative to existing
coalitions and proto-coalitions. A (Putnam, 1988, p. 451).
From this perspective, international telecommunications actors
needed to do more than explain why telecommunications reform
and liberalization in China is in Chinese and national interest
if they wanted to be elective in challenging the restrictions
that existed on foreign participation. They needed to understand
and challenge the strategic interactions between certain key
participator in China's policy environment.
In the further paper, I will investigate the domestic policy
considerations that supported the FDI restriction. A simple
theoretic model is used to analyze the interactions. The main
objective of the model is to aid in assessing whether China's
willingness to open up to foreign trade and investment in
the sector was driven primarily by its own domestic reform
process, or by the external pressures generated by its desire
to join the WTO.
I really believe that domestic policy bargains would be sufficient
to explain China's policy toward FDI in telecommunication
services, and that the WTO process would have a secondary
significance. I hope I could develop a model which can suggest
whether the external pressures associated with WTO accession
may have played a bigger role in the process of opening China's
telecommunications sector than I thought.
I will begin by verbally describing three distinct virtual
cases or bargaining arenas in which negotiations over FDI
take place. Then I will focus on what I consider to be the
most central of those arenas: the interactions between Chinese
service providers, the government, and foreign strategic investors
over participation in Chinese domestic telecommunication services
sector. I identify four distinct participators in the Chinese
environment: the State, the China Telecom interests, the domestic
rivals of Chinese Telecom, and foreign strategic investors.
Finally, we describe verbally the interests of each participator,
and translate those interests into a formal definition of
strategies and an assessment of each participator's payoffs.
The use of virtual model theory is intended to provide a more
robust understanding of the social forces underpinning the
FDI restriction. The virtual model theory sets out to address
the question: How should individual actors pursue their interests
when each realizes that the consequences of their individual
acts will depend (in part) on what other independent actors
do. How, in other words, does an actor best pursue its own
objectives, whatever they might be, in an interdependent milieu?
My theory formalizes this question by positing actors and
endowing them with moves, specifying what information is available
to each actor at each point at which they may be called upon
to move, assigning payoffs to the ways all actors' moves can
be combined to participate the experiment, and then investigating
the kinds of conduct that might plausibly arise.
A comprehensive analysis of the role of foreign investment
in Chinese telecommunication sector would have to encompass
all three of the bargaining arenas described above. The domestic
bargaining among key participators in China's telecommunications
sector and their interaction with foreign strategic investors
are more fundamental to the current FDI ban than the others.
In applying a virtual case theoretic framework to China's
WTO accession, it is necessary to simplify the complex processes
involved. My first step in this simplification is to isolate
three distinct cases or bargaining arenas that affect the
future of FDI in the telecommunications service sector. I
will describe them here in order of decreasing complexity.
The first and most complex arena is the international bargaining
between the Chinese government and other states over Chinese
accession to the WTO. This is a positive sum case in which
each member attempts to realize gains from trade while minimizing
their losses from exposure to trade-induced competition. In
this process, China must engage in a series of bilateral negotiations
with 130 member states in order to achieve a consensus on
the terms and conditions of its accession. Negotiations span
a broad variety of topics such as tariff! Reductions, non-tariff
barriers, and developing vs. developed country status (Lardy,
1996, 1999). They also must cover a sprawling array of industrial
sectors, from agriculture to entertainment, and from manufactured
commodities to insurance, financial, and telecommunication
services. Obviously, the large number of participators and
the heterogeneity of their strategies or moves create a highly
complex array of bargaining positions, coalitions and outcomes.
Time is also an important, complicating factor. The current
round of negotiations will end in the year 2000; if China
is not successful in obtaining entry it will (theoretically)
have to wait for the next round in 2005. The impact of a delay
on the bargaining strength of the key participators is difficult
to gauge.
The second bargaining arena is the set of domestic trade-offs
that define the offer Chinese government is willing to make
to other states in the WTO negotiations. This bargaining occurs
between Chinese State Council and Ministry of Foreign Trade
and Economic Cooperation (MOFTEC) on one side, and the various
line ministries that manage the industrial sectors that would
be affected by WTO concessions on the other. Presumably, Chinese
state, which is familiar with the bargaining positions of
other nations, wants to achieve WTO accession enough to extract
a bundle of concessions from its industrial ministries that
it believes is capable of winning the approval of other nations.
This case has a political dimension, in that there are factions
within Chinese state that oppose WTO accession or that may
perceive the price as too high. Industrial ministries must
also compete against each other in this case, hoping that
the really painful concessions will be made in some sector
other than its own. While nominally professing support for
Chinese accession, each ministry will argue that there are
special circumstances or problems that make it against the
national interest to apply the market opening and enforcement
regulations of the WTO to their industry. Theoretically, some
ministries could form coalitions with other ministries in
an attempt to shift the burden of making concessions elsewhere;
it is also possible that a majority of the line ministries
could coalesce into an organized, united force against joining
the WTO at all (see, for example, Lam, 1997b).
The third bargaining arena is within Chinese information and
telecommunication sector. In this arena, the industrial ministries
and state enterprises with a substantial stake in the sector
bargain with the State Council over policy, resources, and
regulation. One of the key resources subject to negotiation
in this case is access to foreign capital and technology.
In China, the important stakeholders are the domestic service
and equipment suppliers, as opposed to users, consumers, or
foreign corporations. They include the Ministry of Information
Industry (MII) bureaucracy and its associated enterprises
(especially China Telecom); the various provincial and local
branches of MII; the provincial cable television systems;
the telecommunications enterprises of the Peoples Liberation
Army; and finally, the `joint-stocks companies China Unicom
and Ji Tong. In addition, ministries or enterprises with substantial
nationwide private networks, such as the Peoples Bank of China,
the Ministry of Power, and the Railroad Ministry, are significant
participators. One must also include as minor participators
the educational institutions charged with developing China's
Internet the China Education and Research Network (CERNET)
and the Chinese Academy of Sciences (CASNet).I do not include
consumers or labor in this case because the Chinese political
system is attuned to industrial interests and does not permit
such groups to organize independently to pressure the government
or influence public opinion (Howell, 1993). Historically,
bargaining in this arena has revolved around questions such
as: which ministry has authority over which part of the information/telecommunications
sector? How much competition will be allowed, and in what
markets? How much autonomy do state enterprises and agencies
have to engage in business deals at the provincial and local
levels? What technical standards will be authorized? Who controls
essential resources such as radio frequencies? Until very
recently, WTO accession was not a significant factor in the
bargaining that went on within the sector; not until the middle
of 1998 did it begin to penetrate the process. On the other
hand, foreign direct investment and the role of foreign capital,
technology, and competition have been key negotiating points
in this game from the beginning of the reform period (Zita,
1987). Both Chinese enterprises and Chinese government officials
at various levels engage in bargaining with foreign strategic
investors seeking market access or joint venture partners
in telecommunication services markets. Bargaining among these
participators must take place within the policy constraints
dictated by the outcome of the bargaining among domestic participators.
The foreign investors, of course, are interested in gaining
a presence in the market that will allow them to capture some
share of the projected future revenue stream generated by
China's burgeoning telecommunication services market. The
Chinese side has varying interests; some participators are
interested in maximizing the input of foreign capital, others
are more interested in the transfer of strategic technologies;
others want to minimize competition. Mindful of the possibility
of losing control of sector development if Chinese entities
are allowed to bargain with foreign investors in an unsupervised
and decentralized manner, the Chinese state carefully regulates
the relationship between foreign investors and Chinese enterprises.
A comprehensive analysis of the role of foreign investment
in Chinese telecommunication sector would have to encompass
all three of the bargaining arenas described above. This paper
I will write would pay more attention to Arena 3, however.
The domestic bargaining among key participator in Chinese
telecommunications sector and their interaction with foreign
strategic investors are more fundamental to the current FDI
ban than the others.
The above is my thought way for my thesis (may be the main
content of my thesis’ Introduction), and a detailed outline
is listed following:
The title is: The effect and strategy of the China Telecom
entering the WTO-----China's Telecommunication Industry and
Its Policy Trend after Joining WTO
Abstract:
Introduction:
Bargaining arenas
l Arena 1: WTO accession negotiations
l Arena 2: China's WTO owner
l Arena 3: the telecommunication sector
Focus on Arena 3
l The history of the FDI ban
l Foreign investors and the ban
l The Z-Z-W loophole and its use by competitors
l China's 1999 WTO owner in telecom services
Defining the competitors: a large number of enterprises and
groups
l The state
l The China Telecom group
l Other participators
l Foreign strategic investors
The interests of the competitors
l Interests of the state
l Interests of the China Telecom group
l Prevent FDI
n Shelter the rate structure and revenue streams from competition
n Retain the link between government and enterprise functions
l Interests of domestic competitors
l The interests of foreign strategic investors
Analytical framework : The model and its implications
l New institutional economics
l The WTO and telecommunications services
l Competitors’ strategies
n The state
n The China Telecom group
n Domestic competitors
n Foreign strategic investors
l Diagram of the game structure
l Preference assumptions
n Foreign strategic investors
n Domestic competitors
n China Telecom
n State
n Results
l China’s institutional endowment and regulatory stance
Impacts before WTO accession
l Regulatory reform
l Restructuring the telecommunications industry
l Impact on market performance and structure
Prospective impact after WTO accession
l Regulatory barriers
n Competitive safeguards
n Interconnection
n Universal service
n Public availability of licensing criteria
n Independent regulator
n Allocation and use of scarce resources
l Outlook
Summary and conclusions
Acknowledgements
References
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