The Magazine

TRADE WITH CHINA -- SOME SIMPLE RULES

Mar 8, 1999, Vol. 4, No. 24 • By GREG MASTEL
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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.