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The China Trade

Membership in the World Trade Organization won't liberalize Beijing unless America insists on compliance with the rules

Mar 6, 2000, Vol. 5, No. 24 • By GREG MASTEL
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The fight over the permanent extension of most-favored-nation trading status to China is likely to be one of the hardest- fought congressional battles of 2000. Last week, the administration launched a high-profile campaign in favor of MFN for China; labor is vigorously countering. But for all the lofty rhetoric, at its core, the issue is the prosaic one of the merits of the agreement negotiated between Washington and Beijing last November, setting out the terms for China's accession to the World Trade Organization.

If this agreement is sound and enforceable, it is likely to encourage reform in China and vindicate a policy of engagement. If it is faulty or simply unenforceable, it is unlikely to spur positive change. Thus, before election-year bombast swamps the discussion, it is important to reach a sober evaluation of the proposed agreement and of China's record of compliance with recent trade deals.

P The WTO Accession Agreement. Trade agreements are by nature compromises, and this one is no exception. Unquestionably, some provisions could be improved. Chinese tariffs could be lowered beyond the 17 percent Beijing has agreed to. Foreign telecommunications firms and banks could be granted more leeway to operate in China. Subsequent negotiations between China and other WTO members may improve the terms on these and other issues.

On paper, however, the November deal has quite a lot to recommend it. China does agree to significant tariff cuts. It promises substantial new market access for agricultural products. And it assures U.S. banks and insurance firms considerably increased access to Chinese consumers.

Already, however, Chinese press reports indicate that Beijing may not plan to fulfill the agricultural provisions of the agreement. It is a familiar song. An examination of the four recent major trade deals the United States has struck with China shows that compliance is a chronic problem.

P Intellectual Property, 1992. One of the best-known agreements between the United States and China aims to protect patented, copyrighted, and trademarked material. The United States has sought improvement in this area from China for many years. After threatening sanctions, the Bush administration convinced China to undertake a sweeping update of its laws, which brought China's intellectual property protection regime largely into conformity with Western norms.

But these legal changes had little discernible effect. Chinese piracy of music recordings, computer programs, and films grew at an alarming rate at least through the mid-1990s. Movies and computer programs made by Chinese pirates turned up as far away as Canada and Eastern Europe.

After trying to address matters through quiet consultations, the Clinton administration threatened to impose trade sanctions in 1995. As the deadline approached, China agreed to step up enforcement. A year later, however, little had improved. Once again, the Clinton administration threatened sanctions. After much complaint, the Chinese agreed to a far more specific enforcement regime.

Under consistent pressure from the United States, China has regularly produced records of pirate operations it has shut down and invited the press to watch steamrollers crush pirated CDs. Although these actions show some effort to attack piracy, they also prove that it continues. Despite the limited success of American efforts, the affected U.S. industries estimate that their losses to piracy today are greater than they were when the subject of enforcement was raised in 1995.

Two points relating to enforcement warrant further attention.

It is perfectly clear that the families of leading Chinese officials, provincial leaders, and even the Chinese military have been involved in the piracy of intellectual property. Pirates reportedly set up facilities to make illegal CDs, for example, on People's Liberation Army bases, as a means of evading internal security police charged with shutting down pirate operations. The theft of intellectual property, in other words, has not been solely the province of street level criminals. Elements of the Chinese government have participated.

Second, according to firsthand reports, government ministries routinely illegally copy computer software for their use. Chinese officials promised to address this matter in 1995, 1996, and March 1999. The persistence of illegal copying by government ministries calls into question the sincerity of China's commitment to protect intellectual property.

Both the private sector and the Clinton administration have made enforcement of this agreement a priority for the better part of a decade. Yet glaring violations remain. Were it not for the high-level American enforcement effort, there is no reason to believe that China would have made much effort to keep the promises it made in 1992.

P Market Access, 1992. Unfortunately, other trade agreements have not benefited from the same high-level commitment to enforcement. The sweeping agreement on market access struck with China in 1992 is a case in point.

Through the early 1990s, China followed an unabashedly protectionist policy, excluding many foreign products with trade barriers. Threatening sanctions similar to those used later on intellectual property, the Bush administration successfully negotiated improved market access for U.S. exports.

In its latest reports on the subject, the Clinton administration states that China has "generally" fulfilled its commitments. On some of the easily verifiable points, like elimination of formal barriers and lowering of tariffs, China does seem to have implemented the agreement. In other areas, however, there have been obvious problems. Only three will be discussed here.

First, China agreed in 1992 to eliminate import-substitution policies. In the past, economic planners had developed strategies for replacing particular imports used in the manufacture of automobiles, pharmaceuticals, power-generating equipment, electronics, and so forth, with domestic products. Time and time again, the Chinese government has ignored this commitment.

China also agreed to phase out import licenses and not to raise new barriers. Shortly after phasing out import licenses, however, China announced new import registration requirements for many of the products previously covered by licenses. And a number of other new barriers on products ranging from electricity-generating equipment to pharmaceuticals have sprung up.

Finally, China agreed to make public all its laws and regulations relevant to foreign trade -- a major change. As a result, many trade directives are now publicly available. Yet, this elementary provision has not been implemented in a number of areas, including government procurement regulations.

These are unambiguous violations of the 1992 market-access agreement. It is difficult to estimate their economic importance. Washington has officially noted them over a number of years, and Beijing has offered neither denial nor explanation.

One obstacle to pursuing these matters, Clinton administration trade officials argue, is that other U.S. government agencies have other priorities, and many private companies oppose trade sanctions that could compromise their business in China. If, however, agency indifference and private sector grumbling are sufficient to halt enforcement, it is doubtful that any trade agreement, particularly with a country willing to intimidate U.S. companies, will ever be enforced.

P Textile Transshipment. For decades, trade in textiles and apparel has been governed by the Multi-Fiber Agreement. Under the MFA, importers and exporters of textiles negotiate what amount to quotas on textile imports on a bilateral basis. As the world's largest textile exporter and the world's largest textile importer, respectively, China and the United States concluded a number of bilateral MFA agreements.

For some years, there have been reports of "transshipment" of textiles and apparel by Chinese entities: Chinese companies label textiles made in China as having originated elsewhere, usually Hong Kong or Macao, to avoid MFA limits. Because transshipment is illegal, accurate figures are not available, but a past U.S. Customs commissioner estimated that transshipment from China into the U.S. market amounted to about $ 2 billion annually. A more recent U.S. Customs study noted that Chinese textile exports worth as much as $ 10 billion were not officially accounted for, and much of this undoubtedly found its way into the U.S. market.

The Customs Service has undertaken a number of enforcement efforts, including reducing China's official MFA quotas as a penalty for transshipment. In 1997, China and the United States reached a four-year textile trade agreement that, among other things, strengthened penalties and reduced quotas in 14 apparel and fabric categories where there had been repeated instances of transshipment. Nevertheless, in May 1998, the U.S. trade representative and U.S. Customs brought an action against China under the agreement, imposing $ 5 million in charges on textiles illegally transshipped.

Each year, a list of companies involved in transshipment is released. On the most recent list, 23 of the 26 companies assessed penalties for illegal transshipment were from China, Hong Kong, or Macao. Despite such enforcement efforts, China continues to ignore the MFA.

P Prison Labor. China has an extensive system of prison work camps that produce products ranging from apparel to tools and machinery. Often, prison work forces are leased to private firms to assemble or manufacture various products. Under a 1930s U.S. law, it is illegal to import into the United States anything made with prison or forced labor.

Over the years, it has been alleged that a number of imports from China violated this law. In 1992, the Bush administration concluded a bilateral agreement to halt the export of goods made with forced labor and to hold periodic consultations between customs officials from both countries.

Despite the agreement, advocacy groups have produced evidence that various Chinese companies exporting to the United States are involved in prison labor commerce, products made with prison labor have been imported into the United States, and Chinese companies are prepared to export such products to the United States.

Because it is hard to distinguish goods made by prison labor from others, it is impossible to credibly estimate the size of the problem. However, the State Department's most recent "Report on Human Rights for China" found that Chinese cooperation under the 1992 agreement had been "inadequate" and that when complaints were brought by the United States, "the Ministry of Justice refused the request, ignored it, or simply denied the allegations made without further elaboration." The report also notes that Chinese officials have attempted unilaterally to define Chinese work camps as not covered by the 1992 agreement -- an interpretation that renders the agreement virtually meaningless.

This review of the evidence shows that there have been serious enforcement problems with every recent trade agreement with China. In some cases, the agreements produced improvements in Chinese trade practices, but Beijing's implementation still fell far short of the letter and spirit of these pacts. Without the extensive U.S. enforcement effort on intellectual property, little of the progress that has been made would have come about.

China's defenders often claim that its record is no worse than that of other countries. Certainly, a number of U.S. trading partners appear to have cheated on trade agreements over the years. Japan is most often cited.

It is difficult, however, to find another trading partner whose compliance with every significant trade agreement has been so deficient. Furthermore, difficulties go beyond China's mere ignoring of provisions offensive to important domestic constituencies. As Chinese leaders themselves concede, China lacks the rule of law. In the trade arena, this means that it is difficult or impossible for Beijing to direct policy changes that actually bind China's diverse ministries, state-owned enterprises, and provincial governments.

Unfortunately, the World Trade Organization is no magical solution. Indeed, the WTO itself is a law-based institution. It is unclear that it will be able to police a country that operates without a stable, reliable legal system. Trade policies in China are often made in secret, leaving no paper trail. It may be impossible even to document the existence of objectionable Chinese trade practices, much less win WTO rulings against them.

To some, enforcement may seem a side issue. But none of the benefits ascribed to China's accession to the WTO will be achieved without it. If China simply ignores the terms of the WTO, as it has other agreements, not only will the benefits vanish, but lasting damage will be done to the credibility of the WTO.

Furthermore, no one knows how long China will be governed by relatively reform-minded leaders. Given the uncertainties of Chinese politics, a regime led by the military or hardline elements could easily emerge. Such a regime would pose enormous challenges for WTO enforcement, as well as on many other fronts.

In fact, China's membership in the WTO will help reformers like Zhu Rongji only if it entails compliance. Thus, an energetic effort to enforce the WTO in China is the best contribution the United States could make to the cause of reform. But American performance in this area inspires no confidence.

In light of Washington's weak and unpredictable pattern of enforcement and China's poor record of compliance, Congress should construct a vigorous enforcement procedure. This could take the form of annual reviews with a direct role for Congress, backed up by the promise of trade sanctions. Such a mechanism should be made a quid pro quo for permanent most-favored-nation trading status for China. Without it, there are good grounds to doubt that enforcement of the WTO will be a priority for the United States.

In the coming months, this issue will be discussed in a highly politicized atmosphere. But our relationship with China will last beyond next fall's election. Even if, as seems likely, China joins the WTO this year, bringing it into compliance with the WTO's provisions will take decades. Success will require the vigilance of Congresses and administrations for many years to come. If this Congress and this administration can build a sturdy framework for attending to these important issues, they will perform a great service to future Congresses, future presidents, the cause of reform in China, and America as a whole.

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