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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Some naively argue that the WTO will force the Chinese to deliver. This view both exaggerates the capabilities of the WTO and misapprehends the nature of the Chinese system. Keep in mind, the WTO has proven largely ineffective at convincing even Europe, which maintains a transparent and largely open trading regime, to amend its policies on banana and meat imports.

China is a far tougher case. Its economy not only is not based on the rule of law, it also is almost entirely opaque. The WTO relies on transparency in order to evaluate policies and reach enforcement decisions. It may well prove impossible even to establish the existence of protectionist Chinese trade policies before a WTO panel, much less secure rulings against them.

And there is another cause for skepticism: Once China is a member of the WTO, the United States would be expected to forgo unilateral trade sanctions, the only tool that has so far demonstrated the ability to curb Chinese mercantilism. It may be possible to fashion, say, a WTO-based multilateral oversight committee to monitor Chinese implementation without waiting for disputes to arise. And innovative enforcement provisions from past accession arrangements with other countries might allow U.S. authorities to take certain actions if China is not fulfilling its promises.

This may also be an area where a special role could be created for Congress, which historically has been more inclined to enforce trade agreements than the executive branch. Administrations of both parties have seemed more interested in negotiating new agreements than enforcing old ones. Congress has also been willing to confront China, while the executive branch seems forever concerned with poorly defined geopolitical objectives and uninterested in the particulars of trade. Perhaps a formal benchmarking process could be created by which Congress would review Chinese compliance and launch any necessary enforcement actions under U.S. trade law. This could be accomplished without violating the WTO.

It is important to emphasize, again: All of the potential commercial and long-term economic benefits of China's WTO accession depend on the agreement's being enforced. A strong and consistent enforcement process could provide an important boost to reformers in China as well as a boon to U.S. exporters. A meaningful enforcement regime would make the difference between another "press release agreement" and a significant accord.

The merits of any given deal are easily lost sight of amid the customary overselling of trade agreements. Both proponents and opponents of NAFTA grossly exaggerated its impact, and the China package is getting similar treatment. The reality is that China buys a mere 2 percent of U.S. exports -- less than Taiwan, Belgium, or Holland. If all goes well, that figure will expand modestly, to perhaps as much as 2.5 percent. At the same time, increased Chinese access to the U.S. textile market will probably expand the U.S. trade deficit with China. There still may be good reason to go forward with the WTO package, but we should do so with realistic expectations.

Beyond that, there looms the issue of China's currency. In order to boost its trade account and combat deflation, Beijing seems to be on the verge of a sharp devaluation. In the short term, devaluation would completely eclipse the benefits to American exporters from a WTO pact. If China joins the WTO but devalues its currency in 2000, the result will likely be increased imports from China, decreased exports to China, and a widening trade deficit.

One unequivocally positive possibility that could be opened by this agreement, meanwhile, is Taiwanese membership in the WTO. China has been the major barrier to Taiwan's accession, but administration officials claim that China will now refrain from objecting. This could be as important for U.S. commercial and foreign policy interests as China's membership, given that Taiwan already imports $ 3 billion more annually from the United States than China. The case for China's WTO accession is mixed, but Taiwan plainly deserves membership. It is now up to the Clinton administration and the Congress to make sure that the "other China" is not forgotten in the WTO endgame.

At the end of the day, it is difficult to know what effect China's WTO membership would have. It is possible that U.S. and Chinese leaders would lose interest in the process, and the agreement would end up having very little impact. Equally, the WTO might be unable to police China's closed economy. Under the worst case, China would prove too much for the WTO, and the organization would lose its fragile credibility as a result of this failure.