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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most part, the Clinton administration was able to convince China to agree to the package Washington had offered, then withdrawn in April.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.


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.


Perhaps the WTO, the U.S. administration, and the U.S. Congress can work together to create effective enforcement mechanisms that would make China's WTO accession a positive event -- at best, an event that would help bring the rule of law to China and integrate the world's most populous country into the global economy. But this will require a more hard-headed view of China than the Clinton administration has shown.




Greg Mastel is director of the Global Economic Policy Project at the New America Foundation.