Assessing the WTO agreements on China's telecommunications regulatory reform and industrial liberalization

Telecommunications Policy 25 (2001) 461–483

Assessing the WTO agreements on China’stelecommunications regulatory reform and industrial

liberalization

Bing Zhang*

School of Public Policy and Management, The Ohio State University, 411 Bevis Hall, 1080 Carmack Road, Columbus,OH 43210-1002, USA

Received 11 April 2000; received in revised form 10 December 2000; accepted 25 April 2001

Abstract

By drawing on new institutional economics, this paper contends that the ‘‘rules-of-law’’ specified by theWorld Trade Organization (WTO), as an exogenous institution for the member states, will theoreticallyinfluence its members’ domestic telecommunications regulatory institutions, but that the actual effects willbe different and will depend on the institutional endowments of host countries and their institutionalstances. Empirically, this paper examines the impact of China’s prospective membership status in the WTOon its telecommunications regulatory reform and industrial liberalization and explores the institutionalbarriers preventing China from fully implementing the WTO Agreements in this sector.r 2001 Publishedby Elsevier Science Ltd.

Keywords: Telecommunications; Regulation; Liberalization; China; WTO

1. Introduction

On November 15, 1999, China and the United States signed ‘‘The Bilateral AgreementBetween the Government of the People’s Republic of China and the Government of the UnitedStates of America on China’s Accession to the World Trade Organization’’ in Beijing.1 The

*Tel.: +1-614-292-9668; fax: +1-614-292-7196.

E-mail address: [email protected] (B. Zhang).1Xinhua, ‘‘Press communiqu!e on the signing of Bilateral Agreement Between the Government of the People’s

Republic of China and the Government of the United States of America on China’s Accession to the World Trade

Organization’’ China Daily, November 15, 1999.

0308-5961/01/$ - see front matter r 2001 Published by Elsevier Science Ltd.

PII: S 0 3 0 8 - 5 9 6 1 ( 0 1 ) 0 0 0 2 0 - 9

agreement cleared the biggest hurdle blocking China’s entry into the World Trade Organization(WTO).2

Traditionally, the telecommunications industry in China has been closely overseen and tightlycontrolled by the national government. It has also been shielded from foreign investment in basicservices since its inception.3 With accession to the WTO, this highly protected industry will finallybe exposed to foreign competition. According to the China-US WTO Agreement, after Chinaenters the WTO, foreign firms could take 50% ownership of value-added services in two years and49% for mobile and fixed-line services in five and six years, respectively.4 In addition, China hasaccepted the principles of the WTO Reference Paper and has made commitments to implementpro-competitive regulatory policy in the telecommunications sector.5

By drawing on new institutional economics, this paper suggests that the rules-of-law specifiedby the World Trade Organization (WTO), as a supra-national institution for member states, willtheoretically to an important degree shape the members’ domestic telecommunications regulatoryinstitutions to some extent, but that the actual effects will be different and will depend on theinstitutional endowments of host countries and their institutional stances. The ‘‘institutionalstance’’ is defined as an overall regulatory attitude toward the subject in question. Empirically, thepaper examines the impact of China’s prospective membership status in the WTO on itstelecommunications regulatory reform and industrial liberalization and explores the institutionalbarriers preventing China from fully implementing the WTO Agreements in this sector.While joining the WTO may well have a powerful impact on China’s political and economic

reforms overall, strong impacts are not likely in the telecommunications sector. Rather, this paperdemonstrates that the WTO would have a limited impact on China’s regulatory reform andliberalization when subjected to its internal institutional constraints. Thus, the post-WTOtelecommunications market in China will be ‘‘open’’ but in reality, faced by considerable barriersand constraints. As a consequence, this paper forecasts that, partly because of the weak terms andconditions of the Fourth Protocol of the WTO and China’s conservative domestic regulatorystance, future telecommunications competition from overseas in China’s post-WTO era will mostlikely occur in those telecommunications services with relatively small investment and highmobility of capital, such as Internet content services and other value-added services, rather than inthe facility-based competition that was initially anticipated by the WTO.The paper proceeds as follows: Section 2 outlines an analytical framework for the remainder of

the paper. Next, the paper describes and interprets the impact of the WTO on China’stelecommunications sector in the pre-WTO era. In Section 4, it examines the institutional barriers

2 In order to access to the WTO, China must negotiate with each Member of the WTO and get bilateral agreements

on market access. The negotiation with the United States is believed to be the most difficult because of the strictrequirements from the United States. For more analyses about the process of China’s access to the WTO, see Abbott(1998), Anderson (1997), Geest (1998), and Zhao (1998).3 In 1994, limited competition in wireless sector was introduced with the entry of Unicom. See Chang (1994).4The New York Times, November 15, 1999. Also see the summary of the US-China Bilateral WTO Agreement at

http://www. Uschina.org/public/991115a.html (visited on January 4, 2000). For full text, see http://www.uschina.org/

(visited on March 19, 2000).5The New York Times, November 15, 1999. Also, see the summary of the US-China Bilateral WTO Agreement at

http://www. Uschina.org/public/991115a.html (visited on January 4, 2000). For full text, see http://www.uschina.org/

(visited on March 19, 2000).

B. Zhang / Telecommunications Policy 25 (2001) 461–483462

for China in implementing its commitments in the post-WTO era through the lens of the WTOReference Paper. Section 5 concludes the paper.

2. Analytical framework

This section, following North’s institutional economic theory (North, 1990, 1991, 1994), firstlays out an analytical framework. The institutional arrangements of the WTO, China’sinstitutional endowment, and the interaction between them are then discussed. Empiricalanalyses occupy the following sections.

2.1. New institutional economics

As distinguished from neoclassical theory, the new institutional economics emphasizes thebounded rationality and opportunism in human behavior, and transaction costs in marketexchanges (Coase, 1937, 1960; North, 1990; Williamson, 1975, 1985). Institutional theorycontributes to the understanding of organizations and their governance, generally treatedas a ‘‘black-box’’ in neoclassical theory (Williamson, 1985). In essence, the newinstitutional economics argues that ‘‘institutions matter’’ in the case of costly transactions(North, 1994, p. 360). According to North (1990, p. 3; 1991, p. 97), institutions are the rules andconstraints that structure individual interaction in political, economic, and social affairs devisedby humans. They are designed to create order and reduce uncertainty in exchange. Institutionsconsist of formal rules (e.g. constitutions, laws, regulations, property rights) and informalconstraints (e.g. sanctions, conventions, codes of conduct). Formal and informal institutionscollectively influence organizational governance. Specifically, he points out that institutionalchanges exhibit the pattern of ‘‘path dependence’’ in an incremental manner (North, 1990,pp. 92–104). Further, he highlights the role of enforcement and, insightfully for our purposes,points out that

‘‘Although the rules are the same, the enforcement mechanisms, the way enforcement occurs,the norms of behavior, and the subjective models of the actors are not. Hence, both the realincentive structures and the perceived consequences of policies will differ as well (North, 1990,p. 101).’’

In sum, the new institutional economics recognizes the importance of institutions in shapingorganizational structure and socioeconomic development. Institutional change will typically takethe form of gradual evolution, and historical origins and development matter profoundly. Inaddition, institutional consequences and performance will differ due to the differences inenforcement mechanisms and other factors along the way.Viewed through the window of institutional theory, regulation can be regarded as a kind of

crucial formal institution influencing the liberalization of the telecommunications market. In theworld trading system, services have two distinctive characteristics different from goods in theGeneral Agreement on Tariffs and Trade (GATT): most of them are monopolized and subject toclose governmental regulation (Kawamoto, 1997; Warren & Findlay, 1998; Sapir, 1999). Inreality, regulation can be used as an instrument to resist market opening and is regarded as a

B. Zhang / Telecommunications Policy 25 (2001) 461–483 463

significant barrier to market entry (Sauve, 1995; Altinger & Enders,1996).6 In other words, it iscommon practice that domestic regulation in a host country, has been manipulated for thepurpose of trade protection.The WTO serves as a forum for its members to collectively negotiate to liberalize services,

which are not covered by the GATT. In contrast to the GATT, one of the most importantcharacteristics of the WTO is that it is a rule-oriented organization. Its multilateral concepts,principles, and rules are legally enforceable and binding on its members (Sauve, 1995, p. 141). Themembers must take into account the rules-of-law of the WTO while formulating economicpolicies.7 Clearly, in the setting of the WTO, international law is inter-mingling and penetratingthe members’ domestic formal institutions and playing a much more important role in nationalpolicy-making processes than ever before. Legally binding rules of the WTO, as an exogenousformal institution, clearly influence members’ domestic institutions including their telecommu-nications regulation.However, questions arise when we assess the implementation of WTO rules and principles. For

instance, how will domestic institutions react to this new comer? Will they accommodate it, orresist it, or accept it half-heartedly? Since the rules of the WTO and schedules of commitmentspresented by the members have to be finally implemented by domestic administrations, theinstitutional stance in a host country plays a crucial role in determining how far the promisedcommitments will be implemented. The constraints imposed by institutional endowment in realityproduce an institutional equilibrium in which compromises are reached between domestic andinternational institutions (e.g. the rules of the WTO). A regulatory regime’s pro-competitiveinstitutional stance would actively embrace WTO disciplines significantly boosting the process ofliberalization in the telecommunications sector. But, domestic institutions operating through acontrary-regulatory orthodoxy would constitute a significant non-tariff barrier to market entryand effectively frustrate some of the goals of the WTO.Since there exist pervasive and significant differences in political, legislative, judicial, and

executive systems among members, it is unrealistic to believe that implementation of the WTOrules would be homogeneous. Furthermore, there exist resistant and conservative institutionalstances and also motivations for opportunistic members to be free riders, e.g. obtaining benefitsfrom other countries fully enforcing their commitments, while effectively circumventing WTOobligations. Typically, differences in institutional stance toward the WTO can account for thesignificant variances in the scope and depth of the commitments presented by the members, whichare exhibited in some empirical studies (Hoekman, 1995; Altinger & Enders, 1996; Aronson,1997). Their studies show that countries with pro-competitive institutional stances are more likelyto make greater commitments than those with contrary attitudes.In short, in the implementation of the WTO agreements, the members’ domestic institutional

stances matter. The rules-of-law specified by the WTO, as an external institution to memberstates, influences members’ domestic regulatory institutions and the liberalization of

6The political reasons behind the motivation to resist opening domestic markets are explained by Kawamoto (1997,p. 86) and Anderson (1997, p. 751).7A national sovereignty concern arises. As pointed out by Oman (1994, pp. 33–34), diminished national policy

sovereignty is one of the likely results of globalization. Also see the discussion presented by Winham (1998, p. 362).


telecommunications to some extent, but the actual impacts may diverge significantly, contingenton institutional endowments of the host countries and the regulatory stances adopted.

2.2. The WTO and telecommunications services

Much has been written in interpreting and assessing WTO agreements related totelecommunications liberalization.8 This paper sketches only a rather simplified institutionalframework for the WTO in the telecommunications sector (see Fig. 1).9

In the telecommunications sector, the WTO rules-of-law and disciplines are reflected mainly inthe terms and conditions of the ‘‘Fourth Protocol.’’ First, as with the GATT, most-favored-nationtreatment (MFN) is firmly established as a universal rule for all service sectors and should be

Fig. 1. The WTO/GATS institutional framework. Source: constructed by the author.

8For a general discussion, see Bronckers and Larouche (1997), Fredebeul-Krein and Freytag (1997), McLarty (1998),and Tarjanne (1999). For the Fourth Protocol, see Tuthill (1997) and Drake and Noam (1997). For the Annex onTelecommunications, see Tuthill (1996). For the Reference Paper, see Fredebeul-Krein and Freytag (1999).9For the sake of simplicity, we intentionally overlook many items of the GATS and only present those related to the

telecommunications sector. It is suggested to refer to the legal text of the WTO/GATS for thorough understanding. Inaddition, it is beyond the scope of this paper to discuss the rules and principles of the WTO/GATS in detail. For

classical literature, see Jackson (1969, 1995) and Hoekman and Kostecki (1995).


entered into as a commitment by all members.10 According to MFN, the members should treat allother members equally in terms of telecommunications market access.Second, the Annex on Telecommunications (AT) specifically stipulates ‘‘access to and use of

public telecommunications transport networks and services on reasonable and non-discriminatoryterms and conditions for the supply of a service included in its Schedule’’.11

Third, the General Agreement on Trade in Services (GATS) includes specific commitmentsregarding market access, national treatment, plus ‘‘additional commitments’’.12 For marketaccess, members should clearly indicate any limitations in their telecommunications services(basic and value-added) for all of four modes of supply, i.e. cross-border, consumptionabroad, commercial presence, and company domicile.13 In addition to market access, the GATSalso prohibits members from discriminating against foreign telecommunications service providersas compared with their domestic counterparts in terms of national treatment. In thetelecommunications sector, the Reference Paper was endorsed by most members as an annex.14

The Reference Paper constitutes an important regulatory commitment aimed at creating pro-competitive, independent and transparent regulatory institutions by members.15 The paper laysout six guiding principles for the members in redesigning their domestic telecommunicationsregulatory institutions: competitive safeguards, interconnection, universal service, publicavailability of licensing criteria, independent regulators, and allocation and use of scarceresources.As long as the members make commitments on telecommunications services in market access,

national treatment, and the Reference Paper, they are recorded in the national schedules that areattached to and form an integral part of the GATS along with MFN, and AT (Weiss, 1995,p. 1188). The scheduled commitments are hard to withdraw from or modify (Drake & Noam,1997, p. 800). More importantly, these commitments are legally binding on members’ domesticinstitutions.Finally, significantly different from its predecessor GATT, the WTO establishes a dispute

settlement mechanism constituting an integrated system of rules under a uniform institutionaladministration (Weiss, 1995, p. 1215). According to the Dispute Settlement Understanding(DSU),16 an affected member has a right to appeal to the Dispute Settlement Body (DSB) againstother members who fail to implement their commitments. Based on the panel investigation report,the DSB can authorize the affected member to retaliate against the offending member countries.Never before has the governance of the telecommunications services of a WTO member beenexposed to strict jurisdiction under international trade law.

10Exemptions are granted subject to meeting the conditions of the GATS Annex on Article II Exemptions.11AT paragraph 5(a).12GATS Article XVI, XVII, and XVIII.13GATS Article I.14As of December 1998, 68 members made additional commitments on the Reference Paper, accounting for 90% of

the government-made commitments on basic telecommunications services (WTO, 1998, paragraph 20).15According to Takigawa (1998, pp. 41–44), the Reference Paper represents the first success by the WTO in

intervening into the regulatory policies of member countries and can also be interpreted as a typical example, where theUS government exports its telecommunications policy to its trading partners.16See WTO (1994, Annex 2).


Although the WTO/GATS institutional framework is appealing, it is important to caution thatthere exists what might be called an ‘‘architectural weakness’’. (Sauve, 1995, p. 132).17 Forinstance, the principles of the WTO/GATS would have limited effects unless members makeactual commitments to them. The scope and depth of a country’s liberalization in thetelecommunications sector depends on the extent of that country’s commitments (Hoekman,1995; Kawamoto, 1997; Sauve, 1995). How to ensure that these commitments are faithfullyimplemented is quite another matter.

2.3. China’s institutional endowment and regulatory stance

In China, authority for regulating the telecommunications industry belongs to the Ministry ofInformation Industry (MII), a successor of the Ministry of Posts and Telecommunications (MPT)as a result of governmental restructuring in 1998.18 As shown later, China’s telecommunicationsregulation and policy are also subject to the constraints of its institutional endowment. Withrespect to formal institutions, China has no national legislation in telecommunications. As aconsequence, the overall regulatory regime lacks a solid legal foundation. In addition, thejudicial system is rather weak and not really independent (Che & Qian, 1998, p. 9). In fact,thus far judicial institutions rarely play a role in telecommunications regulation.19 Incontrast, telecommunications regulation rests heavily on governmental administration andintervention.Policy-making in China is rather complex and fragmented (Lampton, 1992; Lieberthal, 1992;

Shirk, 1992). Important players besides MII are the State Council and the State Planning andDevelopment Commission (SPDC). Regulatory policies must gain support from SPDC andapproval from the State Council. Moreover, there are many interest groups with great bargainingpower which also exert significant influence on telecommunications regulation and policy, as wasreflected during the establishment of Unicom (Lovelock, 1996; Tan, 1994).In such a setting of limited and fragmented institutions, regulation tends to be uncertain and

unpredictable.20 Due to a deficit in terms of a sound institutional environment within which to

17Sauve (1995, p. 142) points out that the value of specific commitments on market access and national treatment

lodged by GATS members will be a function of the extent to which: (1) service sectors, sub-sectors or activities appearin individual schedules; (2) all modes of supply are bound; (3) limitations and qualifications apply to market access andnational treatment undertakings; and (4) exemptions to the MFN principles are listed. Too many exemptions

dramatically weaken the effectiveness of the WTO/GATS in the liberalization of international telecommunicationsmarkets.18For related discussion about the function of MII, see Tan (1999).19As an exception, the so-called China’s ‘‘First IP Telephony Case’’ happened in a period in which MII and China

Telecom were suffering fierce criticisms from the public. On January 20, 1999, the Intermediate People’s Court inFuzhou judged that the operation of offering IP Telephony service by a private firm is not illegal, a case appealed by thelocal branch of China Telecom. The court’s judgment stimulated a debate among the MII, court, and the public. See

People’s Daily, January 30, 1999; Zhao (1999).20 In the case of Unicom’s CCF, the MII announced in September 1999 Unicom’s financing mode, i.e. China–China–

Foreign (CCF), was ‘‘irregular’’ and should be prohibited, long after the ‘‘irregular’’ behavior occurred. ‘‘CCF’’ refers

to a financing mechanism whereby a foreign partner of a venture invests funds in a joint venture which, in turn, investsin Unicom’’ (China Daily, September 15, 1999). CCF involves 45 projects with more than 20 foreign firms includingSprint, NTT, Bell Canada, and Cable &Wireless HKT, values totally US$1.4billion. See South China Morning Post,

October 1, 1999; (Xu & Pitt, 1999).


incorporate the rules-of-law of the WTO, it is doubtful whether WTO rules and the nationaltelecommunications schedule could be fully implemented without reservation. Furthermore, apartfrom the above weakness in regulatory structure, the regulatory stance toward market access intelecommunications constitutes another barrier to the implementation of the WTO Agreements.Generally speaking, there exist conflicting opinions about the costs and benefits of accession to theWTO and the opening of markets in telecommunications services, especially in basic services. Onthe one hand, strong voices calling for breaking-up the monopoly, introducing competition, andlowering prices can be heard within society; on the other hand, there exists fierce opposition frominside the industry.21 In the end, the real driving forces which place China’s telecommunicationsindustry on the liberalization track comes not from inside the telecommunications industry butfrom the political will of China’s leadership and the pressures of accession to the WTO.22

However, the institutional stance in telecommunications regulation has not fundamentallychanged to accommodate the WTO agreements.Recalling North’s path dependence theory and the importance placed on China’s institutional

stance, as discussed earlier, it is a safe assumption to expect that the WTO would have someimpact on China’s telecommunications regulatory reform and liberalization in the short term, butwould be rather limited in the long term without significant changes occurring in the institutionalregulatory endowment and domestic policy attitudes in which the telecommunications sectoroperates.

3. Impacts before WTO accession

As mentioned previously, the WTO Fourth Protocol sends a clear signal to countries wishingaccess to the WTO that they must liberalize telecommunications services and make commitmentsto regulatory reform. Interestingly, the impact of the WTO on China’s telecommunications sectorhappened even before China assumed formal membership of the WTO. However, a criticalinterpretation of this development is that it was designed to defend domestic markets by hurriedlytaking administrative measures to boost the growth of national carriers in order to meet futureforeign competition.

21See Zhou (1999) and Di and Zheng (1999). Zhou believes that the advantages will dominate over disadvantages ifChina joins the WTO, and claims that the opening of the telecommunications market not only attracts technologies andcapital, but also promotes the reform of its regulatory mechanisms. In contrast, Di and Zheng point out that China has

to give up part of political and economic authority as an exchange to join the WTO, and criticize the WTO as being adouble edged sword. Also see Johnson (1999).22 It was claimed that GBT Agreement effectively raised the bar for new entrants accessing to the WTO by requesting

basic telecommunications services commitments as part of accession to the WTO (US Congress, 1997). As pointed outby Kawamoto (1997, p. 103), ‘‘it should be noted that it can be significantly advanced when a number of sectors aredealt with simultaneously, because that makes it more difficult for special interests to resist reform given the higher

political profile and more transparent policy agenda’’. Placing telecommunications liberalization with other goods andservice sectors in one negotiation package, this arrangement significantly weakened the resistance and opposition fromthe telecommunications industry. In fact, concession in the case of telecommunications is an important bargaining chip

for China to gain favorable conditions in other sectors on the negotiation table.


3.1. Regulatory reform

The Reference Paper in the Fourth Protocol clearly stipulates that the regulatory body shouldbe separate from telecommunications carriers and impartial to all market participants.23 In thisregard, China’s government had to separate its telecommunications regulatory function fromnetwork operations and terminate the regulatory model of ‘‘twin status as both referee andplayer’’ (Xu & Pitt, 1999, p. 248), at least on the surface.As a practical step, China’s government in March 1998 reshuffled its telecommunications

regulatory institutions by replacing the former regulatory body MPT, with MII. Compared to thesituation with MPT, several important changes emerged. First, by merging with the Ministry ofElectronic Industry (MEI) and eliminating regulatory authorities scattered in other governmentaldepartments, MII has significantly expanded its regulatory authority from telecommunications tocover the broader information industry. This measure effectively overcame the problems offragmented regulation and multiple regulators by creating a single regulator, MII. Second, and incontrast to MPT, MII cannot directly involve itself in network operations. Regulatory andoperational functions were nominally split for the first time in nearly 50 years.To implement the WTO Agreements, the host country is expected to streamline its domestic

regulations and, if necessary, create new institutions to accommodate to WTO principles. As asignificant development, MII pays great attention for enacting new regulations and decrees tomeet prospective international competition. In September 1999, MII issued the ‘‘TemporaryRegulation on Telecommunications Network Interconnection.’’ This regulation consists of 10chapters and 51 articles, and covers most of the important issues concerning networkinterconnection, such as interconnection obligation, time, cost, arbitration, and so on. Inaddition, after publicly collecting opinions, MII formulated a regulation regarding telecommu-nications service quality in January 2000. This regulation clearly defines standards andrequirements concerning network and service quality such as repair time, successful connectionrate, network reliability, etc. It is expected that additional important regulations and rules willbe enacted. Although these regulations are not firmly based on telecommunications legislation,they contribute to the reduction of regulatory uncertainty and improve the transparency ofpolicies.

3.2. Restructuring the telecommunications industry

According to the commitments China made in its WTO trading agreement with the UnitedStates, full-services liberalization in the telecommunications sector would be implemented no laterthan six years after its accession to the WTO.24 How to ensure that domestic carriers, still highlyprotected by the government, prevail against forthcoming international competition is a seriouschallenge for MII.

23Reference Paper, para 5.24Although these are not the final commitments presented to the WTO there exists a possibility that unfinished trade

negotiations could push China to make more concessions, they at least act as the minimum conditions and requirements

in commitments, according to MFN.


Three striking measures for restructuring China’s telecommunications industry were takenimmediately after the creation of MII.25 The first measure was to split the postal service sectorfrom telecommunications. Before that, the telecommunications sector heavily subsidized postalservices. Separating these two sectors paved the way for the government to treat them differentlybased on their specific industrial characteristics and needs.The second step was to break up China TelecomFthe reconstituted telecommunica-

tions component of MPTFinto four independent companies responsible for fixed-lineservices (focusing on local, long-distance, and international basic voice services, data, Internetand other value-added/information services), wireless, paging, and satellite communicationsservice.The third measure was to foster the growth of Unicom, a competitor to China Telecom.

Relative to MPT, MII’s attitude toward Unicom constituted a sudden U-turn. Instead of limitingits development, MII made a priority of facilitating the rapid growth of Unicom. For instance, in1999 MII initiated and completed a merger between Unicom and GuoXin, a national radiopaging company with 39.55 million subscribers, 60% of the radio paging market, total assets ofRMB13 billion (US$1.6 billion), and a profit of RMB1.453 billion (US$177.2 million). Inaddition, MII promptly granted an operational license to Unicom for Internet Protocol (IP)telephone service in April 1999.26 Further, MII granted a license for CDMA (Code DivisionMultiple Access)27 exclusively to Unicom considering that this measure would greatly boostgrowth in the wireless market. Such seemingly radical reforms must be reviewed in relation to theimpact of WTO membership.It is a firmly established belief of China’s government that entry into the WTO serves China’s

long-run interests. It should be expected that, after entering the WTO, some domestic industrieswill benefit from the WTO deal, and others, such as automobiles, banking, insurance, andtelecommunications, will encounter serious challenges. China must act promptly to reduce theprospective risks and losses in these highly protected ‘‘infant industries’’ as a consequence ofaccession to the WTO. China Telecom faced serious disadvantages in the telecommunicationssector, in terms of productivity and production efficiency compared to its foreign counterparts.Fig. 2 shows that China Telecom only accounted for 10.7% and 51.7% of NTT’s productivity andproduction efficiency, respectively in 1997. More seriously, know-how and experience aboutcompetition are extremely limited. Viewing such significant gaps, MII must hurriedly take actionto mitigate these problems.A defensive strategy pursued by MII is the simulation of a competitive environment by

strengthening Unicom, a fledging competitor stuck in a business quagmire due to an unfriendlyregulatory environment and uncooperative treatment from China Telecom regarding

25The main reason of creating MII is that China needs to consolidate its command and control over the informationindustry, which was scattered over several departments and divisions. For more discussion, see Tan (1999) and Xu andPitt (1999).26At the same time, MII also granted IP phone service licenses to China Telecom and Gitong Company.27 In China, the digital cellular system generally takes the European standard, GSM (Global System for Mobile

Communications) based on TDMA (Time Division Multiple Access) rather than CDMA which is widely used in the

United States.


interconnection.28 Administratively, MII ordered mergers between other telecommunicationscompanies with Unicom and granted it special favors as the government had done for MPT in the1980s.29 By such means, MII hoped that China Telecom and Unicom would gain competitiveknow-how as a hedge against foreign competitors in the market place.Splitting off China Telecom is another important measure taken by MII. This action might

seem counter-intuitive, in that one would expect an integrated China Telecom to be morepowerful and effective in meeting foreign competition than a disaggregated company . However,breaking-up China Telecom was the second-best choice as a final compromise among severalfactors, including overwhelming public discontent with exorbitant prices and bad quality ofservice, and pressures from the public for terminating the monopoly.

Fig. 2. The comparisons of productivity and production efficiency between China Telecom and some foreign telecom

carriers (1997). (Productivity is defined as the ratio of revenue over the number of employee, and production efficiencyas the ratio of total subscriber lines(fixed and mobile) over the number of employee.) Source: complied by the authorbased on WTO (1998) Table A4, A6, and A7.

28MPT deliberately delayed negotiation, squeezed prices for interconnection, was not willing to allocate wireless

spectrum, and undercut the prices of wireless service, a core service of Unicom (Xu, Pitt, & Levine, 1998; Xu & Pitt,1999). By 1997, Unicom market share in mobile phone service was less than 2%, and most of its networks were isolatedfrom the public wireless and fixed-line networks controlled by China Telecom. More seriously, ‘‘China Unicom users

are sometimes not able to dial 110 and 119Ftwo fixed-line phone numbers controlled by China Telecom for police andfire brigade emergency calls.’’ China Daily, January 15, 1999.29MII can easily split off China Telecom and order mergers between Unicom and other telecommunications

companies with little resistance because all of these companies are state-owned. So MII can restructure and assembletelecommunications assets and entities with its administrative power instead of through the market as a way ofallocating resources. This situation will encounter challenges as reforms stress the independence of State-owned

Enterprises (SOEs) and more involvement of not state-owned capital into SOEs through holding shares.


If breaking-up China Telecom was inevitable, the question becomes how to split itupFvertically, horizontally, or in the form of a hybrid? In the case of the divestiture of AT&Tin 1984, it was broken-up by vertically splitting long-distance service from local service. The meritof vertical disintegration is that it can promote competition in the long-distance service segmentthrough technological progress (Brock, 1994). In the case of China Telecom, its break-up has beenneither vertical nor horizontal because each company after divestiture still monopolizes ordominates in distinct service sectors (i.e. non-horizontal) and each service sector is providedindependently without involving services from other sectors either up-stream or down-stream (i.e.non-vertical).30 MII defends its break-up plan on the ground that it maintains ‘‘national teams’’,and this is regarded as necessary to meet prospective international competition (Liu, 1999). Underthis plan, the current initiative is merely to create several national monopolistic firms in separatesub-service sectors by dismantling China Telecom’s previous domination over all telecommunica-tions services. Viewed in this way, the structure of China’s telecommunications industry did notexperience fundamental changes in terms of market integration. Fig. 3 demonstrates that theindustrial structure of China Telecom post-break-up is approximately as same as that of AT&Tpre-divestiture.Another significant change introduced was that more and more telecommunications companies

were publicly listed on foreign stock markets.31 There are at least two important benefitsassociated with the current wave of public listings. First, domestic carriers can raise capital tocompensate for recent reductions in tariffs. Second, it is a necessary and effective measure toobtain experience in modern enterprise management. For foreign investors, public listing presentsan important means for investing in China’s telecommunications service markets because, as seenbelow, the chances for foreign carriers to compete with China Telecom head-to-head in full-services immediately after China’s entry into the WTO, are extremely slim, especially in fixed-lineand other core service sectors. In fact, whether foreign ownership could reach 49% for mobileand fixed-line services in five or six years, as indicated in the China-US WTO Agreement,depends mainly on how much proportion of those domestic companies (e.g. China Telecom andUnicom) would be listed on the stock markets. However, public listing would not necessarilyresult in full privatization of the telecommunications sector. Instead it is just a means of raisingfinance to help fund network expansion and expose it to the disciplines of modern enterprisemanagement.Based on the analysis in this section, several conclusions about China’s current telecommunica-

tions reform can be drawn. First, pressure resulting from China’s entry into the WTO has played adirect and catalytic role in propelling China’s government to restructure its telecommunicationsregulatory regime and industry. In other words, without pressure from the WTO, China wouldnot have taken such drastic actions in so short a time. Second, even though the separation ofregulatory and operational functions is the most obvious sign of progress in China’s

30Theoretically, wireless services can independently provide communication without the involvement of local fixed-line network. However, in practice, the interconnection between the two networks is becoming increasinglyindispensable because customers in different networks should communicate with each other. But for the sake of simple

analysis, the paper emphasizes the feature that the two services are independent of each other.31China Telecom (HK) was listed in 1997. See (Xu & Pitt, 1999). It was also reported that 25% of Unicom asset will

be listed on the Hong Kong and New York stock exchanges scheduled for the middle of 2000, in order to raise $6 billion

for its network rollout (CommunicationsWeek International, April 3, 2000).


telecommunications reform, it is only a necessary, rather than a sufficient, condition for creating afair, transparent, pro-competitive, and independent regulatory institution in accordance with therequirements of the Reference Paper. Third, the break-up of China Telecom had little effect inpromoting actual competition, especially in fixed-line phone service. It is questionable whether thecurrent ‘‘managed competition’’ between China Telecom and Unicom would have any real effectin improving their competitive abilities and in meeting impending international competition.Finally, for domestic companies, public listing is an effective way to raise capital. But the portionof the whole company assets going to the public listing, especially for national telecommunica-tions carriers, would be rather limited and subject to strict regulatory oversight to safeguardgovernmental ownership.

3.3. Impact on market performance and structure

Empirical evidence from market changes supports the theoretical finding that the WTO doesinfluence domestic regulatory institutions and economic development. Table 1 sketches the

Fig. 3. The comparison of the break-up between AT&T and China Telecom.


changes in China’s telecommunications market between 1998 and 1999. Since most actualregulatory changes and reforms were put into force after 1998, driven by pressure from entry intothe WTO, the information in Table 1 approximately reflects the impact of the WTO on China’stelecommunications market performance and structure.As a direct result of restructuring the telecommunications industry and the price cuts of 1999,

fixed-asset investment dropped 9.7% as compared to 1998. A significant reduction in telephoneinstallation fees shrank the overall capital pool for investment.32 However, price cuts intelephone, mobile phone, and Internet service greatly spurred market demand as shown inthe table. As expected, Unicom substantially benefitted from the favorable policy frameworkgranted by MII and expanded its market share in mobile service from 5% in 1998 to 11% in1999. The following point should be stressed. Even though the overall changes shown in thetable cannot be entirely credited to the impact of the WTO, most of them are directly orindirectly related to it. For example, price cuts reflect the progress of ongoing price structureadjustments aimed at meeting the challenge of international competition prompted by entry intothe WTO.

Table 1The impact of China’s pre-WTO entry on its telecommunications industry

1998 (without the impact ofthe WTO)

1999 (with the impact ofthe WTO)

Change (%)

Fixed-asset investmenta 168.1 billion yuan (US$20.28) 151.8 billion yuan (US$18.31) �9.7Fixed-line phone installation fee (averageat national level)b

1010 yuan(US$121.8) 725 yuan (US$87.5) �28.2

Mobile network access fee (averageat national level)b

800 yuan (US$96.5) 500 yuan (US$60.3) �37.5

Leasing international line rate (2MBPS,

for Internet Service Providers (ISPs))c431,600 yuan (US$52,063) 320,000 yuan (US$38,600) �25.9

Fixed-line customers (million)c 87.35 108.8 24.6Mobile phone customers (million)c 25 43.2 72.8Telephone penetration (per 100

population)c10.53 13 23.5

Internet consumers (million)d 2 8.9 345Market share of Unicome 5% 11% 120

Market share of China Telecom (mobile)e 95% 89% �6.3

aMII (1998a, 1999).bPeople’s Daily, 08/13/99. (Installation of the second telephone lines at same home address is free.)cChina Daily, 03/01/99.dChina Computerworld, 03/03/00.eSouth China Morning Post, 01/17/00.

32Generally installation fees accounted for 30–50% of capital for local network investment. It was charged by localPTTs to customers as a form of ‘‘tax’’. It is this price policy that explains why the explosive network development did

not face serious capital shortages, a problem that most developing countries encounter.


4. Prospective impact after WTO accession

Unlike trade in goods, barriers to entry for foreign firms in the case of services may not take theform of high tariffs or quotas but rather the form and functioning of domestic regulation in a hostcountry (Warren & Findlay, 1998, p. 445). As pointed out by Sapir (1999, p. 53), ‘‘althoughregulation of service activities may be imposed for purely domestic purposes, it almost alwayscreates a powerful trade barrier’’. In other words, the regulatory institutional stance towardmarket access from foreign firms could well be conservative, resistant, and hostile. Recognizingregulation as a barrier to entry, the WTO Basic Telecommunications Agreement specifically laidout a legally binding foundation, i.e. the Reference Paper, to require members to removeregulatory barriers.The prospective impact of the WTO on China’s telecommunications sector, therefore,

will mainly depend on the overall national institutional environment and the specifictelecommunications regulatory stance of MII. Although as discussed earlier, the initial impactof the pre-WTO accession is impressive, the motivation behind it was to defend against foreigncompetition rather than to facilitate it. There is no convincing evidence that there is a plan tocreate a pro-competitive regulatory environment for foreign competitors.33 Through the lens ofthe Reference Paper, this section first examines the regulatory barriers in China’s telecommunica-tions sector; then the outlook for China’s telecommunications industry after its entry into theWTO is discussed.

4.1. Regulatory barriers

Since China’s current telecommunications regulatory institutions are at best in an initialtransitional period from central-planning mechanisms towards a pro-competitive marketorientation, it is not surprising that there exists a large gap between present reality and theprinciples of the WTO Reference Paper discussed below.

4.1.1. Competitive safeguardsIn accordance with the competitive safeguards specified in the Reference Paper, MII should

effectively prevent China’s telecommunications carriers armed with market power from engagingin anti-competitive behavior such as cross-subsidization and concealing technical information andnetwork specifications etc.34 As mentioned previously, the break-up of China Telecom does notnecessarily connote competition in any real sense. Even in the case of mobile service whichexhibits the most noticeable competition, it is questionable how far current competition can go, inview of the fact that both China Telecom and Unicom are state-owned firms with similarinterestsFgenerating income for the government35 and are under the command-and-control ofMII. In fact, that competition appeared to be particularly fragile when MII jointly intervened inthe ‘‘price war’’ between China Telecom and Unicom in November 1999, a fight ‘‘spawned by the

33That many new regulations would be enacted does not necessarily mean that the overall institutional stance would

become pro-competitive. The new regulations could be anti-competitive to some extent under the conservative stancewith a protective approach.34Reference Paper, para 1.35They are different from private firms pursuing maximum profits for private shareholders.


country’s expected accession to the WTO’’.36 Further, there has been no well-established andcoherent telecommunications competition policy to safeguard competition with the result thatcross-subsidy, distorted tariffs, and highly integrated markets are significant barriers to entry forpotential competitors. Not surprisingly, some regulations are clearly out-of-date and contrary toWTO principles and China’s commitments, such as the prohibition of foreign investment in basictelecommunications services.

4.1.2. InterconnectionInterconnection issues are highlighted in the Reference Paper. It requires interconnection with

an incumbent carrier to be available to competitors at any technically feasible point in thenetwork upon request. Furthermore, the terms and conditions of interconnection should betimely, cost-based, transparent, and non-discriminatory.37

Interconnection is widely regarded as a necessary condition for telecommunicationscompetition. In the United States, the fundamental spirit of the 1996 Act is to promotecompetition in all telecommunications sectors, especially in local phone markets, which aremonopolized by Regional Bell Operating Companies (RBOCs). The FCC issued its ‘‘First Reportand Order’’ (FCC96-325) in 1996 to further strengthen and clarify interconnection rulesconsisting of the obligation to interconnect, fair pricing, and compulsory arbitration.Experiences in the United States and other countries suggest that a sound interconnection orderplays a crucial role in safeguarding competition and promoting market entry in local phonemarkets.Recently, MII issued an order concerning telecommunications network interconnection,

entitled ‘‘Temporary Regulation on Telecommunications Network Interconnection.’’ However, itis much looser in its provisions than the requirements of the Reference Paper envision. Forinstance, the ‘‘sufficient unbundling’’ requirement in the Reference Paper is not addressed. Due tothis, telecommunications competition is unlikely to happen or impossible at facility level.Interconnection related to other forms of competition such as resale is not mentioned either. Also,MII’s interconnection regulation does not mandate number portability from China Telecom.Several studies elsewhere have shown that most consumers would be reluctant to change theirtelecommunications service carriers if they cannot keep their phone numbers (Petrazzini, 1996, p.64).38 Without such telephone number portability, competitors would be put at a disadvantage.By the same token, the absence of an obligation on China Telecom for an operation supportsystem (OSS) also raises barriers to entry for competitors in ordering, billing, marketing, etc. Inaddition, without dialing parity, it is not surprising that Unicom customers have to dial an extraaccess code (i.e. ‘‘193’’) in order to gain access to long distance services.39 In contrast, ChinaTelecom customers do not encounter such a burden. In sum, even though the interconnection

36 It is reported that a local branch of China Telecom in Chengdu responded Unicom’s price cuts in mobile service by

cutting its mobile network access charges from RMB800 yuan (US$96) to RMB10 yuan (US$1.2). China Daily,November 28, 1999.37Reference Paper, para 2.38Citing from a research report, Petrazzini (1996. p. 64) points out that ‘‘almost 70% of subscribers who would

consider switching to a new operator if they could retain their telephone number would not switch if forced to change toa new number’’.39See China Computerworld, April 5, 2000.


regulation has been promulgated, its real effect remains to be seen because it seems to ignore somecritical interconnection terms and conditions stipulated in the Reference Paper.

4.1.3. Universal serviceThe Reference Paper recognizes that the universal service obligation of members should not be

used as an anti-competitive instrument, and should be administered in a transparent, non-discriminatory and competitively neutral manner.40

Traditionally, China Telecom was responsible for the rollout and operation of the nationaltelecommunications network across the country. In 1998, it was reported that 32.9% of ruralvillages had no phone facility and could not access phone services (MII, 1998b). Operational costsin the western areas of the country are exceptionally high because of harsh natural conditions andsparse population. These factors produce high costs and low revenue in the absence of subsidies.Cross subsidies from eastern to western areas, from wireless and long-distance services to localphone service were the chief methods of sustaining network integration and realizing positiveexternalities. However, this mechanism is facing a serious challenge because of the recentbreak-up of China Telecom, and imminent competition in basic phone services in the post-WTOera. How to prevent cream-skimming and achieve a fair allocation of the universal serviceobligation among the targeted telecommunications service providers is an emerging issue for MII.Since the terms and conditions in the Reference Paper are rather broad and weak and lackcredible criteria and norms, it is an open question whether the Reference Paper can adequatelysafeguard the universal service obligation from being manipulated for anti-competitivepurposes.

4.1.4. Public availability of licensing criteriaAs for the licensing issue, the requirements of the Reference Paper are also rather weak. They

merely stress that the licensing criteria should be publicly available but leave the members todecide what the criteria should be.41 There is nothing in the Reference Paper about specificationsand criteria for granting licenses (Fredebeul-Krein & Freytag, 1999, p. 630). For basictelecommunications services, currently there is no transparent licensing criterion in China.Whether an applicant can obtain a license is a political decision subject to fierce bargaining. Infact, MII has limited authority to approve or refuse a license application, except for competitiveservices. Approval from the State Council and SPDC is crucial in obtaining a license, especiallyfor a national carrier. Without detailed criteria and clear procedures, license regulation isuncertain and lacks transparency.

4.1.5. Independent regulatorCreating an independent regulator is called for in the Reference Paper. There are two

specifications in the guidelines. The regulator should be separate from, and not accountable to,any supplier of basic telecommunications services and be impartial and non-discriminatory indealing with all market participants.42 As mentioned, China has split-off regulatory functions

40Reference Paper, para 3.41Reference Paper, para 4.42Reference Paper, para 5.


from network operations, but this institutional restructuring is only the first step toward creatinga truly independent regulator. The really challenging task is to design a regulatory institution thatwill ensure that MII would in fact perform reasonably independently.Regulatory ‘‘autonomy’’ or independence is contrasted to regulatory capture in public utility

regulation (Phillips, 1988). With regulatory capture, ‘‘the regulator either lost, or never had, theindependence to make professional decisions on their merits because of undue influence eitherfrom politicians, politically driven Ministries, or the regulated monopolies’’ (Melody, 1997, p.195). On the contrary, independence from government regimes means that the ‘‘regulators are freeto carry out their functions in the way they think best satisfies their stated objectives, and theirperformance should be judged solely on this basis’’ (Stern & Holder, 1999, p. 43). In addition, tobe independent from the regulated industry, the regulators should not unduly favor the regulatedfirms at the expense of consumers (McNamara, 1991, Chapter 7).In the case of China’s current political institutions, to expect regulatory independence from

politicians, government, and the regulated industry at the present time is asking a great deal. Theparty is responsible for making fundamental socio-economic policy and controls the political andeconomic reform process. All governmental agencies and social organizations are obliged not todeviate from the basic policies and political line set by the party. In addition, the party holds thepower of appointing and removing cadres and officials, including the Minister of MII. This is abasic institutional precept in China. Therefore, theoretically, it would be totally unacceptable forMII to openly pursue absolute ‘‘independence’’. Furthermore, as in most other countries, theregulator remains as a part of the government. Following the administrative line, MII shouldimplement policy, decisions, and tasks as directed by the State Council. It is highly questionablewhether MII can claim ‘‘independence’’ from the State Council and be ‘‘free’’ to carry out itsfunctions in the way it thinks best satisfies its stated mission.For historical reasons, MII has a deep-rooted and complex relationship with China Telecom

and other regulated carriers, and MII still has a strong influence over the local postal, telephoneand telegraph branches (PTTs). At least for now, MII still holds the power to appoint, promote,and dismiss key officials of PTTs, including China Telecom, China Telecom (HKT), China MobileCommunication Groups, Unicom, and provincial Posts and Telecommunications Administra-tions (PTAs). In addition, most of the current officials in MII come from the PTTs and the PTAs.In this kind of complex personnel administration system, the line demarcating MII and domesticregulated firms is hazy at best. Also, the influence of the regulated industry on MII is implicit ifnot explicit. MII and PTTs share common values in ideology, ownership, and ultimategoals. For instance, both MII and the PTTs are ‘‘state-owned’’; both are accountable to the partyand government; and they both explicitly share the same nominal target of committing to theprogress of China’s telecommunications industry. In this context, the idea of the independence ofMII from telecommunications firms appears illusory and even far-fetched. In short, the uniquepolitical and institutional endowment of China gives rise to specific and major challengesto the creation of an independent regulator for telecommunications as intended in the ReferencePaper.

4.1.6. Allocation and use of scarce resourcesFinally, the allocation of scarce resources, including frequencies, numbers and rights-of-way

should be carried out in an objective, timely, transparent and non-discriminatory manner,


according to the Reference Paper.43 In China, however, these scarce resources are presentlyallocated in an administrative manner with limited transparency and competition. Thisadministration-based mechanism for allocating scarce resources will not meet competitivedemands of the post-WTO era. For instance, with more foreign competitors entering China’stelecommunications markets, requests for frequencies will sky-rocket. There is thus a need forChina to reform and replace the current administration-oriented allocation system with atransparent, fair, timely, and pro-competitive one.

4.2. Outlook

Based on the above analysis viewed through the lens of the Reference Paper, the disparitiesbetween China’s current telecommunications regulatory institutions and the specifications of theReference Paper can be seen as truly significant. The regulatory barriers identified above, allied toa conservative regulatory stance, cast doubts on whether the rule-oriented WTO will have adramatic impact on the liberalization of China’s telecommunications markets after its entry intothe WTO.In the new regulatory regime, more regulations are expected to be enacted to fill the policy

vacuum. But it is likely that these regulations will mainly be aimed at establishing the rules ofmarket competition such as the universal service funding mechanism, radio frequency allocations,and price structure adjustments, and not toward fundamental restructuring of the regulatoryframework to include workable independence and transparency as it is contemplated in theReference Paper. As for market structure, the core sectors such as fixed-line and mobileservices will still be under monopoly control or highly integrated; peripheral services such aspaging, Internet, and other value-added services will be open to robust competition. The pricestructure can be expected to change gradually streamlining the relationship between local andlong distance services. As a result, economic rents will decrease dramatically. A side effectmay be the deterrence of market entry by foreign firms. An expected effect would be thedeterrence of market entry by foreign firms since the profit margins in some lucrativetelecommunications service sectors would have been eliminated by the time of market openingfor foreign competition.An overwhelming increase in foreign investment in all service sectors is not likely to

happen immediately following China’s accession to the WTO. As indicated, the scopeand depth of competition will be rather limited. Due to the significant sunk in costs requiredand the high risks associated with an uncertain regulatory environment, foreign investorsmay not have great interest in China’s long-term basic telecommunications services withoutcredible commitments from regulators (Levy & Spiller, 1994). Instead, they will most likelytarget services with lower capital requirements and high capital mobility, such as callback,Internet access, content services, etc. As for business strategy, a joint venture could be expectedto be the most common form of business operation because it reduces investment risks. One canalso expect the targeting of customers and market niches to be cautiously rather than rashlyselected.

43Reference Paper, para 6.


5. Conclusion

By drawing on new institutional economics, this paper argues that the WTO principles anddisciplines do have positive effects in promoting telecommunications liberalization among itsmembers, but that actual progress toward WTO goals will vary greatly and depend mainly onspecific institutional endowments and regulatory stances of the members. Specifically, this paperhas theoretically and empirically explored the impact of China’s entry into the WTO in relation toits telecommunications, regulatory reform, and industrial liberalization. As North (1990) pointsout, institutions matter, especially in the case of telecommunications reform. From the point ofview of the WTO/GATS, the first-best way to implement the WTO Fourth Protocol would be toengage the members’ regulators and assist them in realizing a transition toward pro-competitiveinstitutions. Specifically, ensuring that the regulatory institutions and stances of the countrieswhich actively incorporate rather than passively resist the WTO disciplines is central todetermining the transitional pace and its effects. Even with this, it is argued here that the overalldomestic institutional endowment and regulatory stance would be finally decisive. Commitmentsmade by the members would make sense only if the implementation of the WTO Fourth Protocolbecomes a self-enforcing action driven by the members themselves in the context of a cooperativeregulatory stance toward the exogenous institution of the WTO.In China’s telecommunications sector, the conservative regulatory stance may persist into the

post-WTO era, and, if true, this means that the telecommunications market would be open inname but still exerts constraints.If accurately appraised, the implications of this paper are profound. For Chinese regulators, it

calls for ongoing regulatory restructuring and specifies the existing regulatory barriers impedingits implementation of commitments on market access and regulatory reform. For the WTO/GATS, this paper presents an analysis of the interaction between the members’ domesticinstitutions and the exogenous rules and disciplines emanating from the WTO. It demonstratesthat the national institutional environment and regulatory stance matter in the implementation ofthe WTO Agreements, and offers a case study of China to exemplify these arguments. Thefindings buttress the argument made in the studies elsewhere that the architectural weakness of theGATS needs significant improvement. Furthermore, it assesses China’s regulatory environmentand industrial structure in the post-WTO era with regard to foreign investors and multinationalenterprises interested in its telecommunications market. The implications of China’s accessioninto the WTO for foreign investors’ entry strategies are also discussed. Finally, this paper presentsan analytical framework built on the foundation of new institutional economics. The findings ofthis paper support the general principles of the new institutional economics. The analyticalmethodology exhibited in this paper is not limited to the setting of the WTO/GATS, but is usefulin evaluating more general interaction mechanisms between institutions and socio-economicdevelopment, especially for transitional economies.In conclusion, WTO norms have influenced China’s telecommunications regulatory reform and

its industrial liberalization. Interestingly, the changes happened even before China’s membershipof the WTO. The driving forces placing it on track toward liberalization come directly frompressures surrounding China’s entry into the WTO, a rule-of-law-based institution. However, howfar and how fast China will go along the current regulatory and industrial restructuring route inthe future will largely depend on the institutional stances taken by China’s government, which is


affected by domestic policy constraints and counter-competitive forces in the short run, anddetermined by political and economic reform in the long run.

Acknowledgements

The author would like to thank Jaison Abel, Bob Graniere, Douglas N. Jones, Mike W. Peng,Rohan Samarajiva, Eric Ulm, and two anonymous referees for helpful comments and suggestionson earlier drafts of this paper. All remaining errors are the responsibility of the author.

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Assessing the WTO agreements on China's telecommunications regulatory reform and industrial liberalization