The Magazine

TRADE WITH CHINA -- SOME SIMPLE RULES

Mar 8, 1999, Vol. 4, No. 24 • By GREG MASTEL
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Zhu Rongji, premier of China, will visit Washington in April. As preparations go forward in both countries, some officials are expressing the hope that the visit will complete the more than decade-long negotiations over China's accession to the world trading system. China's membership in the World Trade Organization (WTO) holds out some promise for both sides, but there are real risks to going forward with a quick, politically driven deal that fails to solve the problems that have kept the Chinese out for so long.


Zhu and his followers seem to have a true commitment to market reform. For them, China's entry into the trade group would amount to recognition of how far their country has come on the path of economic reform; it would also give China new international prestige and some protection from trade retaliation by the United States and other countries. In addition, membership would help Zhu resist anti-market pressures at home. With a new round of trade negotiations and a U.S. presidential campaign about to begin, Zhu probably calculates that if China does not join soon, events will keep it out for several more years.


American advocates of China's membership also have strong arguments: If the Chinese could be made to live under WTO rules, they would be more reliable trade and investment partners. Locking China onto the path of true market reform not only would strengthen the foundations of U.S.-China relations but would give the Clinton administration a tremendous diplomatic victory.


It is important, however, to temper the enthusiasm for China's entry into the WTO. Membership for China has not materialized because the United States has rightly sought to ensure that it take place only under commercially viable terms, which China has been unwilling to meet. To break the deadlock, some in the administration seem prepared to substantially soften the U.S. position and allow China to join now and phase-in WTO discipline over a long period, perhaps even one without a fixed endpoint. Such a political compromise would substantially undermine U.S. commercial interests, essentially lock in the existing billion-dollar-a-week trade deficit with China, and threaten the world trading system.


To understand why a quick political deal to bring China into the organization is not in the best interest of the United States or the world, it is first important to understand the WTO. Although China apparently perceives it as such, the World Trade Organization is not a simple trading club or a United Nations for trade. It is a complex agreement that sets detailed requirements regarding tariffs, intellectual property, investment, and subsidies -- essentially a set of rules for running a market economy.


The fundamental problem is that China is neither a rules-based country nor a market economy. In recent years, Chinese leaders have spoken frequently about the need for a stronger rule of law. The former head of the National People's Congress, Qiao Shi, was fond of saying, "China is a country of strong leaders, not strong laws." Nevertheless, the primary result seems to be a series of anti-corruption campaigns targeted at officials without political connections.


China's weak rule of law is widely seen as a barrier to political reform, notably to dissidents' injecting their views into Chinese society. But it also raises questions about China's ability to meet the requirements of the WTO, an organization premised on its members' ability and willingness to change their behavior in accordance with its rules.


Thus, in bilateral agreements, Beijing's record of compliance has been mixed at best. In 1992, China and the United States struck an accord under which China adopted a legal standard of protection for intellectual property matching that of most Western countries. Unfortunately, little changed on the ground. In fact, piracy of computer programs, movies, music, and other products dramatically increased, and China became a major exporter of pirated products. Seven years later, the United States has twice been on the verge of imposing trade sanctions on China for not enforcing its own laws. Despite a few high profile crackdowns, no credible observer would deny that piracy still runs rampant there.


And problems have not been limited to intellectual property. Again in 1992, the United States and China concluded a sweeping agreement liberalizing trade on a wide array of products and eliminating a number of Chinese trade barriers such as import licenses. Six years later, the results of the agreement are still debatable. In its annual listing of trade barriers, the Clinton administration includes a number of violations of the agreement: China's pledge to eliminate requirements substituting domestic products for imports is openly ignored in the auto and pharmaceutical industries. Similar import substitutions have been imposed by bureaucrats in sectors ranging from electronics to fiber-optic cable. China has not met its promises to make its procurement process transparent. Import licenses on many products have been replaced with suspiciously similar import registration requirements. And many Western firms have had difficulty enforcing contracts and commitments from China's central and provincial governments.


If simple bilateral commitments to phase out import substitution cannot be relied on, what hope is there of enforcing complex agreements in areas like telecommunications and financial services? Since China's bureaucracies do not operate through transparent processes, how could the trade group's other members hope to press their case in front of WTO dispute settlement panels without documentation and in the face of likely Chinese denials? And given its record of using retaliatory threats to get its way on issues from human rights to sea lanes, what assurance is there that it would obey the organization's rulings?


A similar problem arises on China's adherence to the trade group's basic commitment to market economics. About 30 percent of China's economy is tied directly to state-owned enterprises, and beyond that there is a large gray area, including state-private joint ventures, ventures of local and regional governments, and ventures owned by government officials. Further, China's planners are still busily turning out industrial plans that violate both the WTO and other existing arrangements.


Although China has undertaken important market reforms (and perhaps WTO membership would stimulate greater reform), the political future of Zhu's reformer faction is far from certain. It is possible that rivals within the central or provincial governments could take China in a new direction or that Zhu's commitment to reform may wobble, particularly in the face of a recession. Thus, it is likely China would use membership to shield itself from sanctions by its trading partners -- it would continue to adopt market reform only in certain sectors, relying on the institutional weaknesses in WTO enforcement. It is also possible that membership would allow the anti-market opposition to drag its feet, free from the threat of meaningful trade sanctions.


If China were able to join the WTO and largely ignore its terms, the credibility of the organization would be undermined. Worse, a terrible precedent would be set for the accession of a number of other major countries, notably Russia -- soon to follow China into the trade organization. The final result of such an ill-advised move may be a rise in global protectionism or even destruction of the global trading system.


It is still conceivable that an admission process in the interest of the United States, China, and the rest of the world can be established. But any reasonable agreement must include commercially viable terms, including a Chinese commitment to accept all WTO disciplines over a fixed staging schedule to be completed by an agreed upon date. Beyond that, three innovative elements could be woven together to forge a meaningful, enforceable accession agreement.


Experience has demonstrated that lowering formal trade barriers, like tariffs and import licenses, is not enough to guarantee meaningful market access. On the other hand, this type of access is not possible without lowering those barriers. There is speculation that China may be willing to make some concessions, from telecommunications to agriculture, that are of value to the United States. Although this is still speculative, it is worthwhile to get as much as possible in commitments in these areas from China. If Zhu's visit to the United States provides an opportunity to do that, it should be seized. At the very least, an enforceable commitment from China not to raise new barriers should be demanded as the price of continuing negotiations.


Meaningful market access, however, will require more than a series of tariff concessions. In the past, market access targets -- agreed upon purchases of imports -- have been used to ensure that concessions result in real increases in imports. Such targets were put into WTO accession agreements for two non-market economies, Poland and Romania.


Import targets are a tried and true method of ensuring that countries actually implement the trade promises they make upon WTO entry. Particularly in sectors closed to imports, such as agriculture, electronics, and telecommunications, market share or import targets are an effective approach to ensuring that China actually fulfills its commitments.


Another concept discussed in past accession agreements with non-market economies is the "general safeguard." This measure would allow the United States or other WTO members to impose sanctions if they felt China was not living up to the promises it made in its accession agreement. As the United States has learned, trade sanctions are never easy to impose and always have political and economic costs. The existence of the general safeguard would keep the threat of bilateral trade sanctions against China viable -- at least during a transition period. U.S. negotiators should ensure that the general safeguard, included in early drafts, remains in the final agreement.


Given past problems with enforcing agreements, special emphasis should be given to this topic in an accession agreement with China. A WTO review of that country's adherence to the terms of its accession agreement should be completed during the phase-in period of WTO discipline. At home, the United States should complete an annual review of China's participation. If China is found to be violating any of the conditions, the general safeguard should be employed to withdraw appropriate benefits.


China will no doubt vigorously oppose the inclusion of the safeguard and market access targets in its WTO accession agreement. Naturally, it would prefer the kind of standard accession arrangement negotiated with market economies, but China simply lacks the legal structure and market orientation that would make such an agreement meaningful. The only way to marry China to the WTO in a manner consistent with long-term American interests is to adopt some of the innovative devices discussed here. Otherwise, as the United States learned from previous bilateral agreements, a series of tariff concessions from China are unlikely to be worth even the paper they are written on.


A quick, diplomatic deal on China's induction might make for a successful visit by Zhu, but it would certainly undermine U.S. commercial interests, weaken the WTO, and sow the seeds for serious problems in the long term. Congress and other interested parties should insist that the right kind of agreement be concluded or that no agreement be concluded at all. The potential opportunity afforded by China's entry into the World Trade Organization is too significant to be sacrificed for short-term political gain.




Greg Mastel is vice president and director of studies at the Economic Strategy Institute.