Normal Trading Relations with China: Round Two

John Gershman

0104china-ntr.pdf

Almost certainly the U.S. Congress will have to vote again this summer on granting China Permanent Normal Trade Relations (PNTR) status. Last year's vote granting China NTR status expires on June 3, unless China formally completes accession to the World Trade Organization (WTO) before that date--which now seems unlikely.

The last round of WTO accession negotiations ended in January in a stalemate over agricultural subsidies and over the degree to which China will open its services sector (including the insurance industry) to foreign competition. In mid-March, China's Foreign Trade Minister Shi Guangsheng said that China does not expect to complete its accession to the WTO until October or November at the earliest, a view echoed early this week by Supachai Panitchpakdi, who will replace Michael Moore as the WTO's director-general in September 2002. Other observers say there are also still large holes in China's proposed membership terms. WTO accession deals normally cover every aspect of the trade regimes of new members, but China has not yet made commitments regarding two-thirds of the state trading arrangements that govern the Chinese market.

The lack of progress is due to the unrealistic demands by some of China's trading partners, principally the U.S. and the European Union as well as to the increased domestic concern within China about the major economic restructuring that will accompany WTO entry. For example, state-owned enterprises have laid off at least 14 million workers over the past two years and will eliminate another 5 million jobs in 2001. Urban unemployment in China soared to at least 10 percent last year. Concerns about growing unemployment have been heightened by signs of a global--and domestic--economic slowdown this year. Domestic opposition has also obstructed the approval of legislation necessary to bring China's laws into compliance with WTO norms. For example, sharp differences between ministries over the issue of convergence between television, the Internet, and voice communication (such convergence is now forbidden in China except in Shanghai) has become a stumbling block to the drafting of a new telecommunications law.

For the China, the urgency of speedy accession to the WTO has been somewhat diminished given the recent success of investors in raising capital in domestic and foreign markets. Even prior to the anticipated changes in investment rules that will result from WTO membership, domestic companies are having increasing success in raising capital, climbing the technology ladder, and boosting efficiency to international levels. China has also had success in maintaining high levels of inflows of direct foreign investment. Contractual foreign investment totaled $9.2 billion in the first two months of 2001--up 47% over the same period last year. Actual investment inflows were $4.6 billion--up nearly 25% over last year.

The Food Fight

The controversy over agricultural rules has been the most immediate stumbling block to WTO accession. WTO membership will raise import quotas and lower tariffs on a host of key staples, including wheat, corn, and soybeans. With a rural population in China of more than 500 million, the country's leaders fear the possibility that millions of rural workers will be forced into the cities in search of jobs that don't exist. One mechanism to shelter Chinese farmers from the effects of integration could be the increase of agricultural subsidies. Current Chinese domestic support measures amount to about 2% of production, which is far below that of the U.S. and Europe.

WTO's agreement on Agriculture (AoA) caps the trade-distorting support (subsidies that depress prices or boost production) at 10% of the value of agricultural production in developing countries. Developed countries can not exceed a 5% cap. Although China has agreed to be bound by standards for developed countries in terms of trade in manufactured goods, it wants to be treated as a developing country in terms of agricultural subsidies. (The question of agricultural subsidies was not addressed in the November 1999 U.S.-China bilateral trade/investment agreement.)

The higher ceiling of 10% would provide China with a larger cushion to respond to the inevitable economic dislocation and political backlash that will likely accompany the reductions of tariff and nontariff barriers to agricultural imports once China enters the WTO.

Until recently, the official U.S. position, backed by U.S. agribusiness groups including the American Farm Bureau Federation, the National Association of Wheat Growers, the National Cattlemen's Beef Association, Archer Daniels Midland, Cargill, and ConAgra was to hold China to the lower 5% threshold with a five-year phase-down. This would give China five years to reduce its support to the 5% ceiling.

In an attempt to overcome this obstacle to China's accession, a new U.S. proposal sets a percentage limit on domestic agriculture support that is higher than the ceiling set for developed countries but below the level allowed for developing nations. The compromise plan would allow China to continue to assert developing country status, which it has claimed as a matter of principle, while being subject to tighter rules. According to some news reports, China originally proposed the idea of a compromise limit in between the 5% and 10% limits. It is unclear whether the new proposal will include a phase-down transition period.

The EU has been more flexible than the U.S. At the last round of accession talks in January, the EU floated a package compromise that allowed China to provide agricultural domestic support up to the higher ceiling allowed developing countries. The U.S. refused to support that proposal.

The fracas over the U.S. holding China to higher standards for agricultural subsidies is a bit ironic given that Washington has come under criticism for failing to comply with the reporting requirements for agricultural subsidies under the WTO's Agreement on Agriculture. Since 1997 Washington has failed to report to the WTO the total amount of subsidies the U.S. government delivers to American farmers. Under the WTO agriculture agreement, the U.S. is obliged to cut its farm subsidies 20% during the 1995-2000 period. Under WTO rules, any subsidies above those levels are supposed to be forbidden.

During the missing three years, the U.S. allocated billions of dollars in subsidies for U.S. farmers in the form of "emergency aid." This spring, the Congress is debating proposals for another $10 billion in emergency subsidies for farmers for the coming year. The failure to notify WTO of subsidy levels puts other countries at a major disadvantage. They have no way of knowing whether the U.S. is living up to the cuts in subsidies.

The U.S. is failing to meet its reporting requirements under the AoA because it is violating its commitments under that agreement. China is not asking to be excused from WTO rules, just to be held to ones appropriate to its level of development. Meanwhile, the U.S. cavalierly flouts the reporting requirements of the agreement, in addition to allocating emergency subsidies. This smacks of rank hypocrisy at a time when U.S. trade negotiators routinely bemoan the lack of transparency in China, and denounce China's unwillingness to adhere to international standards.

Furthermore, Washington's policy in the area of agricultural export credits has also come under attack. A recent OECD report (An Analysis of Officially Supported Export Credits in Agriculture available at http://www.oecd.org/agr/Documents/wp0091fe.pdf) estimates that U.S. export credits are almost twice as distorting on a per unit basis as those of any other country and, given Washington's relatively large program, account for the majority of the distortions in world markets caused by officially supported export credits.

A Dangerous Opportunity

The U.S. should follow the EU's lead on agriculture, and work to negotiate an accession agreement that recognizes that China is a developing country, and should therefore be granted the room to maneuver that such countries are granted under WTO rules. This is not special treatment, but simply treating China fairly and equitably. A plausible argument can be made that because of the size of China's economy, its competitiveness with major manufacturing sectors found in OECD countries, and the expanding scope of operations by Chinese transnational corporations, it should be treated as a developed country with respect to trade in manufactured goods. In terms of agriculture, however, China fits the profile of a developing country, where the major concerns are productivity and food security.

The ongoing negotiations over China's WTO accession provide the Bush administration with a major opportunity to strengthen U.S.-China relations--something even more urgent now in the aftermath of the spy plane crisis. The first step should be to take a more compromising negotiating position on subsidies. This is essential if the U.S. is going to be a credible advocate for adhering to international law and standards as a cornerstone for U.S.-China relations.

The spy plane crisis, no matter its resolution, will be fodder for bipartisan "China-bashing" during the PNTR debate. The Chinese character for crisis means "dangerous opportunity." The Bush administration should seize the opportunity posed by this crisis to begin preparing Congress and the American public now for the need to approve PNTR again for China. Although the Bush administration clearly supports PNTR and WTO accession for China, it needs to head off a repeat of last year's fight on Capitol Hill that will only serve to aggravate the already tense state of U.S.-China relations.

John Gershman <john@irc-online.org> is FPIF's Asia-Pacific editor and the codirector of the Global Affairs Program at the Interhemispheric Resource Center.