The Magazine

A Feel-Good Agreement?

The deal for China to enter the WTO won't be worth much without enforcement

Nov 29, 1999, Vol. 5, No. 11 • By GREG MASTEL
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WITH CONSIDERABLE fanfare, the Clinton administration last week struck an agreement with China that should clear the way for its membership in the World Trade Organization (WTO). On paper, the deal has many positive features. But U.S.-China trade relations are a saga of great press releases and poor results. A verdict on the present agreement must be withheld until it has been tested in practice. As Congress considers the package next year, members will want to make sure that as much energy goes into its enforcement as went into its negotiation.

In principle, China has agreed to lower its tariffs from an average of over 22 percent to an average of about 17 percent. Some tariffs will remain high, including the 25 percent tariff on automobiles. Indeed, Chinese tariffs overall will remain much higher than those of most major trading countries, such as the United States, which have tariffs in the low single digits.

China has also agreed to liberalize some of its service sectors, such as banking and telecommunications. Nevertheless, Western firms will have far less than free access to these markets. In the telecommunications sector, they will be allowed only minority shares in ventures. This represents backsliding from the offer of majority ownership made in April.

America's farmers -- promised new access to the Chinese marketplace -- may well experience the biggest short-term gains. Most of the barriers to be phased down in this sector are easily verifiable measures, like tariffs, which makes it difficult to cheat. U.S. exports of wheat, feed grains, and other farm products to China are likely to expand.

For the most part, the Clinton administration was able to convince China to agree to the package Washington had offered, then withdrawn in April. The new agreement, however, is merely the beginning of a long process aimed at integrating China into the world economy. Only after other countries, including the European Union, complete their bilateral talks with China will a final multilateral accession protocol be inked. The agreement between the United States and China was the major hurdle, however, and China's WTO membership now seems likely this year.

Whether China's accession is ultimately in the best interest of the United States will depend on whether China can be made to live by the rules of the WTO. If it can, China will become a much more reliable trade and investment partner. Further, the WTO's mandates to reduce subsidies and limit government interference in the economy, if they are followed, could boost reformers' efforts to make China a market economy. Unfortunately, those are very big ifs.

Every trade agreement the United States has struck with China has run into serious enforcement problems. China's compliance with the 1992 agreement on intellectual property was so poor that the United States has threatened trade sanctions on several occasions. The administration officially acknowledges more than half a dozen Chinese violations of the 1992 bilateral memorandum of understanding on market access -- an agreement analogous in substance and scope to a WTO accession agreement.

The main problem appears to be that China lacks the legal infrastructure to force its diverse ministries, provincial authorities, and state-owned enterprises to abide by commitments. Within China there is a range of opinions on the wisdom and appropriate pace of economic reform. The group led by Zhu Rongji is interested in Western-style economic reform, but it is only one faction in a contentious political landscape.

Without the rule of law, there is no counterweight to the traditional incentives to cheat on trade agreements and so minimize the economic and political pain of losing noncompetitive industries. Nor is there any means of enforcing orderly resolution of disputes. Compliance problems become barriers to progress sufficient to raise questions about the wisdom of concluding trade agreements in the first place. In short, this is more than a minor irritation.

Many point to the highly unusual public criticism of Zhu's trade concessions inside China as evidence that the new agreement is a good deal for the United States. But it also suggests just how difficult obtaining compliance is likely to be. Zhu apparently did not have wide domestic support for the reforms he offered. Instead of quietly folding their hand, the critics are likely to employ the same bureaucratic tactics used to frustrate past agreements. The welling up of opposition may be evidence that China's concessions will ultimately prove significant, but it may also portend their going unfulfilled.