The Progressive ResponseVolume 3, Number 44
Editor: Tom Barry (IRC)
Table of ContentsI. Updates and Out-TakesTHE U.S., CHINA, AND THE WTO CHINA IN THE WTO: THE DEBATE
II. Letters from ReadersSUSTAINABLE DEVELOPMENT FPIF--NOT PROGRESIVE, NOT SUSTAINABLE
I. Updates and Out-TakesTHE U.S., CHINA, AND THE WTO
The November 15, 1999 trade deal signed by the U.S. Trade Representative (USTR) and Chinese officials re-ignited a long-simmering debate over China’s prospective accession to the WTO and the granting of Normal Trading Relations (NTR) status to China. The deal paves the way for China to enter the WTO. With Canada also having recently completed a bilateral agreement with China, the only remaining obstacle is an agreement with the European Union. The U.S. agreement has stirred heated discussion in the United States, which will take political form when the U.S. Congress votes on whether to approve permanent NTR status (or treatment) for China early next year. Outside of Congress, the opposition will likely come from labor, environmental, anti-free trade, and some human rights groups on the progressive side, and from social conservative and anticommunist groups on the right. Citizen and political groups that promote protectionism and U.S. national sovereignty, such as Public Citizen and the Reform Party, can be counted in the opposition. Some oppose WTO accession and NTR for China outright, while others want to attach social and environmental conditions to U.S. approval of WTO entry and NTR. Scholars specializing in Asia, business organizations, and foreign policy think tanks generally favor the Clinton administration’s position of "constructive engagement," WTO membership, and permanent NTR status. China’s membership in the WTO also counts, for the most part, on the support of most of the world’s nations and multilateral institutions, including such entities as UNCTAD and the G-7 group of developing nations. In the U.S. Congress, opposition will come from the Republican right (concerned about religious rights, the spread of communism, the military threat of China, and China’s potential economic threat to the U.S. as a world power) and the Democratic left (concerned about human rights and environmental and labor standards). Below are some of the terms and concepts that arise in this debate. Accession by Other Nations: In 1999 the U.S. made deals that facilitated the WTO accession of Kyrgyztan, Estonia, and Lativa. Discussions involved the accession of thirty other nations, including nations not characterized by their commitment to democracy and human rights such as Saudi Arabia, Jordan, Ukraine, Sudan, Nepal, Croatia, Cambodia, and Russia. China’s Accession to WTO: The process of Accession to the WTO occurs on two fronts: 1) Multilateral negotiations between China and a WTO Working Group on Accession (open to all WTO members) that first establishes the differences between the petitioning country’s trade regime and WTO rules and then sets out the general terms of accession. Once bilateral negotiations are complete, the general terms and the specific terms of the bilateral accords are incorporated into a protocol of accession. In the multilateral negotiations, China has agreed to apply WTO rules throughout its territory, to make its trading regime transparent, and to maintain independent tribunals for the review of administrative trade actions. 2) Bilateral negotiations between the petitioning country and WTO members that establish the specific market access conditions for goods and services. These bilateral accords are then multilateralized (extended to all WTO members) in the protocol of accession. Under the WTO’s most-favored-nation (MFN) principle, any agreement between two members applies to all members. Absence of Permanent Normal Trade Relations (PNTR) status for China would not preclude the U.S. from voting in favor of China’s accession, but it would be required to invoke the Nonapplication clause. Approval of China’s accession protocol requires either consensus or a favorable vote by two-thirds of the WTO members. (See Accession in What’s This Organization, Part One.) China as World Trading Nation: Total Chinese trade rose from $21 billion in 1978 to $324 billion in 1998, raising China from the 27th largest trading economy to the 10th. The World Bank projects that China will become the second largest trading economy by 2020. According to the IMF, it is already the world’s third largest economy after the U.S. and Japan. In 1998 China had a $44 billion trade surplus. In 1998-99 the amount of China’s trade surplus has declined, resulting in stagnant foreign reserves. China’s Reasons for Joining WTO: Among the political and economic reasons why China is eager to join the WTO are the following: 1) China wants to be acknowledged as one of the world’s great powers and sees its exclusion from the WTO as an obstacle to this goal; 2) WTO membership would further the "strategic cooperative partnership" that both the U.S. and China are interested in building because, among other factors, it would remove China from the annual review of its NTR status; 3) China wants to be admitted to the WTO ahead of Taiwan, which is also seeking membership; 4) The internationalist sector of the Chinese economy has expanded considerably as China’s economy has grown and market forces expanded, giving rise to increased domestic pressure for lower tariffs on foreign inputs and improved access to foreign markets; 5) China wants to become a WTO member while rules are still being formulated on such issues as agricultural liberalization, government procurement, investment, and labor standards, and it wants to have a role in formulating those rules. Congress and China’s Accession: Since 1991 the U.S. Congress has repeatedly attempted to block or condition the executive branch’s granting of NTR status to China and to require prior congressional approval before the U.S. could support China’s accession to the WTO. In the 106th Congress (1999), Representative Dick Gephardt introduced a resolution requiring prior congressional approval of any U.S. vote favoring China’s accession and providing for the withdrawal of the U.S. from the WTO if China gained admittance without U.S. support. Contracting Party to GATT: In 1986 China petitioned to be considered as a contracting party to GATT. China was one of the original contracting parties of GATT in 1948, but has not actively participated in GATT since 1950. In 1992 the Chinese government intensified its efforts to accede to GATT. Countries Denied MFN/NTR Status: Afghanistan, Cuba, Laos, North Korea, and Yugoslavia (Serbia and Montenegro). China has temporary MFN/NTR status. MFN status can be restored to Afghanistan and Yugoslavia (countries not subject to the Jackson-Vanik amendment) by executive action under conditions specified in the legislation suspending the status. Permanent extension of MFN status to Laos is under consideration. Bills have been introduced in the 106th Congress to withdraw the MFN status of Lebanon and Syria. Exports from China: In 1998 the U.S. exported $14.3 billion in goods to China, accounting for 2.1% of total U.S. exports and making China the 13th largest destination for U.S. exports. According to one estimation, when U.S. goods sold to Hong Kong and re-exported to China are included, China was the sixth largest export market of U.S. firms in 1998. The top five categories of U.S. exports (accounting for one-half of total U.S. exports to China) are: 1) transportation equipment (mainly aircraft related), 2) fertilizers, 3) electrical equipment, 4) office machines and computers, and 5) general industrial machinery and equipment. Many U.S. manufacturers hope to increase the export of consumer goods to China, but most of the immediate potential for increased U.S. exports lies in supplying capital inputs and infrastructure needs, not consumer goods. Even if the consumer market expands significantly, it is likely that this will be supplied mainly from low-wage production facilities located outside the United States. Impact on China: It is widely accepted that upon entering the WTO, China would experience severe economic dislocations. Nicholas Lardy of the Brookings Institution estimated that a WTO agreement would lead to about a one-third decline in the output from several economic sectors, the main one being agriculture, particularly in wheat production. Rural unemployment will rise dramatically because of wheat imports. It is likely, however, that employment would increase in light manufacturing, particularly textiles and clothing, once China joins the WTO and the Multi-Fiber Agreement (which allows countries to set high tariffs and quotas on imports) is phased out according to the schedule specified in the Uruguay Round. For more information on the impact on China, see Jim Nolt, "China in the WTO: The Debate," Foreign Policy In Focus, December 1999. Imports from China: In 1998 imports from China accounted for 7.8% of total U.S. imports, making China the fourth largest supplier of U.S. imports. Between 1994 and 1998, the level of U.S. imports from China nearly doubled. The top five categories of imports (accounting for two-thirds of total U.S. imports from China) are: 1) miscellaneous manufactured articles (toys, games, etc), 2) footwear, 3) clothing and other apparel, 4) telecommunications equipment and consumer electronics, and 5) office machines. The fundamental reason for the rising level of Chinese exports is the liberalization of the economy, which has opened the country to foreign investment. However, the rise in exports and the U.S. trade deficit with China can also be explained by shifting trading relations. As China has liberalized, companies based in Hong Kong and Taiwan have shifted production (or in many cases simply changed the name of the exporting nation) to China--which means that exports that were previously listed as coming from Taiwan and Hong Kong are now coming from China. Intellectual Property Rights Disputes: On the economic front, the main issue of contention in the 1990s in U.S.-China relations has been the enforcement of intellectual property rights. The U.S. has repeatedly designated China as a Special 301 "priority foreign country," which mandates that the USTR initiate negotiations with priority nations to address declared violations of U.S. IPRs, including patents, copyrights, trademarks, and trade secrets, and then impose trade sanctions if these negotiations are unsuccessful. On at least three occasions, trade sanctions have been averted by a new IPR agreement with China. Following a new Chinese government directive against using pirated software, the USTR said the move was a "milestone in China’s efforts to increase intellectual property protection." The November 16, 1999 business deal did not specifically address IPR issues. By joining the WTO, China will be required to abide by the rules of the Trade-Related Intellectual Property Rights (TRIPS) agreement. The November deal did increase access to U.S.-made films from the currently permitted ten films to fifty films in three years. The U.S. also gained the right of the U.S. entertainment industry to distribute videos and sound recordings in China. Jackson-Vanik Amendment: This amendment to the Trade Act of 1974 conditions U.S. extension of MFN status to a country's emigration policy. The authors of this amendment were concerned about the Soviet Union’s restrictive emigration policy for Jews, but the amendment was written broadly enough to refer to all restrictions on freedom of emigrations by nonmarket economies. The renewal process of the Jackson-Vanik waiver with respect to China is prescribed by law. The president must make a recommendation by June 3 of every year and the extension is automatic upon the president’s recommendation unless it is disapproved by a joint resolution of Congress. Such a resolution must be approved by August 31, and any presidential veto must be overridden by August 31 or within 15 days after Congress has received the veto message. There has been deep opposition in Congress to extending China’s NTR status, but this opposition is not related to the statutory freedom-of-emigration considerations. Rather congressional opponents have raised a wide range of human rights, military, religious, labor, intellectual property rights, and competition issues. Mongolia Precedent: Like China, Mongolia's MFN/NTR status was governed by Title IV of the Trade Act of 1974, which established conditions that nonmarket economies had to meet before receiving permanent, unconditional MFN treatment. In 1991 the U.S. granted temporary MFN status to Mongolia after concluding a bilateral trade agreement with that country. This status was renewed annually until January 1999, when Congress granted Mongolia permanent MFN treatment. In January 1997 Mongolia joined the WTO. Because conditional MFN status is inconsistent with the obligation under WTO rules to give all WTO member countries unconditional MFN treatment, the U.S. government invoked the Nonapplication clause (Article XIII) of the WTO charter. As a result, WTO trade rules were not applicable to U.S.-Mongolia trade relations as long as Mongolia remained subject to annual MFN review by the U.S. government. It is possible that China would join the WTO without receiving permanent, unconditional MFN status. In that case, the U.S. would be required to invoke the Nonapplication clause until such time as the U.S. agreed to grant normal trading relations treatment to China. It is highly unlikely, however, that U.S.-China relations around WTO membership will follow the same path as U.S.-Mongolia relations for two reasons: 1) U.S.-China trade is $66 billion, while U.S.-Mongolia trade is $35 million, and the U.S. policy and business communities will be unwilling to jeopardize this economic relationship; and 2) China will be unwilling to include its business deal with the U.S. within the WTO framework unless it is guaranteed access to the U.S. market and capital. MFN/NTR and U.S.-China Trade Agreement: Either party of the bilateral trade agreement can terminate the agreement if the party notifies the other of its intent at least 30 days before the end of the three-year term. The agreement also provides that either contracting party can suspend application of the agreement (or portions of it) if the other party does not have domestic legal authority to carry out its obligations. If Congress enacted new legislation conditioning NTRs or revoked NTR treatment, China could decide that it would no longer be subject to the agreement. Either contracting party could decide to take action with respect to the agreement or MFN relations if it determined that its security interests were threatened. MFN Tariff Rates/Full Tariff Rates: If China were denied MFN/NTR treatment, tariffs on 95% of China’s exports to the U.S. would be affected. Instead of the NTR rate, China tariffs face the full tariff rates, which vary according to the product. The average MFN duty rate on all 1998 imports from China (dutiable as well as nondutiable) was 4.5%. Without MFN/NTR treatment, this rate would have been ten times higher--about 45%. Toys that now enter without duties would have tariffs of 70%; leather apparel tariffs would rise from 6% to 35%; footwear would double from 10% to 20%; and Christmas tree light sets would rise from 8% to 50%. According to a Congressional Research Service report, U.S. importers’ overall cost of Chinese products would increase by more than one-third, mostly in the range between 25% and 65%. Nonapplication of GATT/WTO Rules: Although the WTO (and GATT previously) generally require unconditional MFN treatment of member nations, there is a provision that allows nonapplication of WTO agreements to countries that are not original members. In the case of original WTO members, the nonapplication provision could be invoked in relations with a GATT founding member only if the GATT’s nonapplication clause had been invoked earlier and such nonapplication was effective between the two parties when the WTO was founded. In the event that the U.S. decides not to grant permanent NTR treatment to China, the U.S. would be obligated to invoke the nonapplication clause. This would allow China to withhold WTO benefits to U.S. exporters, service providers, and investors, and the U.S. would lose the right to enforce China’s commitments to the U.S. under the WTO’s dispute settlement process. Non-Market Economies (NMEs): NME is a designation used by the U.S. to refer to China and Soviet bloc countries. After the end of the cold war, the more common term is "transition economies." However, NME remains a functional category in U.S. trade relations. In antidumping deliberations by the U.S. Trade Representative (USTR), for example, China has been treated as a NME. This means that in measuring the costs of production, the USTR does not attempt to measure costs in China but uses figures for similar production in a third country. If China is selling below the costs of production in that third country, the U.S. can apply antidumping measures. As the costs of production are generally lower in China, this NME categorization disadvantages China and allows the USTR to apply high dumping margins. The EU no longer categorizes China as a NME because it believes that costs of production in China can be determined. The November 15, 1999 business deal continues to treat China as a NME for antidumping purposes for ___ years after it joins the WTO. The November 15, 1999 business deal continues to treat China as a NME for antidumping purposes for 15 years after it joins the WTO. This will allow the U.S. to apply countervailing duties against Chinese goods when it determines that these goods are being dumped in the U.S. market. Normal Trade Relations (NTR): In 1998 the U.S. renamed Most Favored Nation (MFN) status to Normal Trade Relations (NTR) to signal that this trade treatment was not preferential as MFN implied. One China Principle: This formula of international policy holds that the People's Republic of China (PRC) is the sole legal government of China. It is a principle repeatedly affirmed by U.S. administrations. Permanent Normal Trading Relations (PNTR): The U.S. government has annually approved temporary NTR treatment for China. In keeping with the MFN principle of the WTO and the conditions of the November 1999 U.S.-China business deal, the Clinton administration will seek PNTR for China, thus removing the annual presidential and congressional review of its NTR status. A joint resolution of Congress is needed to give PNTR status to China. Prison Labor: The U.S. and China signed a memorandum-of-understanding (MOU) in August 1992 prohibiting Chinese prison labor exports to the United States. At the same time, the two countries agreed to begin regular formal talks, at the Assistant Secretary (State/Foreign Affairs) level, to discuss human rights issues. A new MOU was signed in 1994 that included provisions enhancing U.S. access to Chinese production facilities suspected of exporting prison labor products. Human rights groups continue to express concern about the use of prison labor in China and charge that the government has circumvented the MOU provisions. Restoring MFN Status and the Trade Act of 1974: Among other measures, this trade act conditions the U.S. MFN policy first enacted in 1934 as part of a new U.S. initiative to liberalize international trading relations. Under the 1934 act, the U.S. specifically granted to all foreign countries any concessions on tariffs or import restrictions agreed to in reciprocal negotiations with any other U.S. trading partner. The policy of general application of MFN status to all foreign countries was modified in 1951 by the Trade Agreements Extension Act that suspended the MFN status of Sino-Soviet bloc countries. Article IV of the Trade Act of 1974 sets out the conditions and the procedure for MFN restoration to nonmarket economies (NMEs). Under Title IV, the two key requirements for the restoration of MFN status to a NME are: 1) Conclusion of a bilateral trade agreement containing a reciprocal grant of MFN status and additional provisions required by law, approved by Congressional enactment of a joint resolution; and 2) Compliance with the Jackson-Vanik amendment on the freedom-of-emigration requirement. The freedom-of-emigration requirement can be fulfilled either by a presidential determination that the country in question places no obstacles to free emigration of its citizens or by a presidential waiver of full compliance. The first trade agreement with China was submitted to Congress and signed by the president in 1979, and revised treaties have since been extended six times, every three years as the Trade Act of 1974 requires. The last trade agreement was extended by President Clinton for three years in January 1998. While the initial trade treaty requires congressional approval, its triennial extension is subject only to a presidential determination that "the actual and foreseeable reductions in U.S. tariff and nontariff barriers resulting from multilateral negotiations [meaning negotiations by the U.S. with other countries that reduce its trade barriers, which because of MFN rules also benefit China] are satisfactorily reciprocated by China." Unlike the triennial approval of trade agreements, the Jackson-Vanik amendment is revisited annually. The Jackson-Vanik waiver and China’s NTR status were renewed in June 1999. For China to obtain permanent, unconditional MFN/NTR status, a joint resolution of Congress is required. Safeguard Provision: If the U.S. determines that a surge of imports from China, it has the right, under the November 15 trade deal, to apply unilaterally based restraints on these products for 12 years. The WTO has safeguard provisions, but this product-specific safeguard mechanism addresses imports solely from China rather than from the entire world. Initially, China had resisted the U.S. efforts to include the safeguard provision and the NME antidumping provision. With regard to textiles, the U.S. agreed to end import quotas after five years while maintaining anti-surge safeguards for another four years until 2008, in keeping with the phase-out schedule of the WTO Agreement on Textiles and Clothing. In addition, some special anti-surge safeguards would be put into place for yet another four years. State-Owned Enterprises (SOEs): A major concern of WTO members has been the large state-owned industrial sector in China. Multilateral negotiations by the WTO Working Group on China’s Accession and bilateral negotiations with the U.S. and other countries have laid out the economic reforms China must undertake with respect to SOEs if it accedes to the WTO. According to the National Bureau of Asian Research (NBR), "The Chinese leadership regards international influence as useful in pressuring State Owned Enterprises (SOEs) to make the reforms necessary to break up monopolies, to become more competitive, or to go out of business--any of which would make the Chinese economy more efficient and reduce the heavy burden of subsidies on the Chinese government." As Premier Zhu put it, "Competition from such a situation will promote the more rapid and healthy development of China’s national economy." The November 15 U.S.-China trade agreement contains Chinese commitments to open sales and purchases of SOEs to foreign companies. Taiwan Accession: Since 1992 a GATT/WTO Working Group has considered the application from Taiwan to become a member of the WTO. The Chinese government has insisted that China must be admitted first, and that Taiwan could then be admitted as an autonomous customs territory of China. WTO membership and PNTR for China will clear the way for Taiwan to join the WTO. China and Taiwan are the only two major U.S. trading partners that are not WTO members. Having both China and Taiwan as members of the WTO and subject to the same rules and dispute-resolution procedures will, according to Asia specialists, reduce the chances that tensions between the two neighbors will erupt into military conflict. Tiananmen Square Sanctions: Following the violent suppression of dissidents at Tiananmen Square on June 4, 1989, the U.S. government imposed a set of sanctions on China. The Bush administration prohibited weapons exports, nuclear energy cooperation ceased, export licenses for crime-control equipment were withheld, and Overseas Private Investment Corporation (OPIC) and Trade Development Agency (TDA) business assistance programs were legislatively suspended. Many academic and cultural exchange programs were also canceled. These sanctions were later terminated. After its 1994 delinkage of human rights issues from China’s MFN status, the Clinton administration announced new efforts to promote human rights in China, including new support for NGOs working in China, the formulation of a voluntary corporate code of conduct for companies doing business in China, and increased Radio Free Asia broadcasts to China. Tibet and MFN: In 1952, after the People’s Liberation Army assumed control of the autonomous province of Tibet, the U.S. suspended MFN treatment of Tibet, which the U.S. then considered an independent nation. Tibet is now covered by China’s NTR status. Two MFNs: WTO’s MFN and US’s NTR: As the world’s leading trading nation, the U.S. has long been the leader in advancing the principle of Most-Favored Nation treatment in international trading relations. This principle of granting the same trading privileges granted to one nation to all nations was incorporated in GATT and remains a core principle of the WTO. In the case of the WTO, MFN treatment extends to all WTO agreements and rules. In the U.S., MFN treatment has been statutory policy since 1934, although Sino-Soviet bloc countries were excluded in 1951 legislation. Unlike the concept of MFN operative in the WTO, MFN or NTR status in the U.S. is applicable only to tariff levels--non-MFN countries being subjected to substantially higher tariff schedules. U.S.-China Bilateral WTO Agreement: The agreement covers all agricultural products, all industrial goods, and all service areas. Industrial tariffs are scheduled to fall from an overall average of 24% to 9% by 2005, and information technology tariffs from a 13% average to 0% by 2005. On priority agriculture products, tariffs will be reduced from a 31% average to 14% by 2004. A key new part of the agreement for U.S. negotiators is that China agrees to permit the right to export without Chinese intermediaries and will allow full rights of distribution by U.S. firms, including aftersale service, repair, and maintenance. China also agreed to U.S. demands for tough antidumping standards and product surges safeguards. According to the terms of the agreement, State-Owned Enterprises and State-Invested Enterprises will make sales and purchases solely on commercial considerations, providing U.S. firms with an increased opportunity to compete for business. In other words, purchases of goods and services by SOEs do not constitute "government procurement" and are thus subject to WTO rules. (Government procurement is not yet subject to WTO rules, although the EU is advocating that government purchases by open to foreign firms.) U.S.-China Trade: Total trade rose from $4.8 billion in 1980 to $85.5 billion in 1998, and an estimated $95 billion in 1999. As total trade has risen, so has the U.S. trade deficit with China, increasing from $6.2 billion in 1989 to $57 billion in 1998, and an estimated $66 billion in 1999. The U.S. ranks second among China’s trade partners, and China is the fourth-ranked trade partner for the United States. U.S. Investment in China: The U.S.-Business Council estimates that direct U.S. investment in China is more than $21 billion. Since 1993 China has been the world’s second largest recipient of foreign investment (the U.S. ranking first). Because much of the foreign investment is export-oriented, the share of China’s exports manufactured in foreign-owned plants increased from 1% in 1985 to 45% in 1998. U.S, MFN, and China: The U.S. has applied MFN treatment in trade as a matter of statutory policy since 1934 to nearly all its trading partners. At the outset of the cold war, the U.S. Congress modified this universal application of MFN by approving the Trade Agreements Extension Act of 1951, which required the president to suspend MFN status to the Soviet Union and all countries of the then-Sino-Soviet bloc. President Truman, acting on this legislation, suspended China's MFN status in 1951. MFN tariff was restored to China in 1980 conditionally under Title IV of the Trade Act of 1974, which specifies that NMEs denied MFN status must sign a bilateral trade agreement with the U.S. and be certified by the president as complying with the Jackson-Vanik freedom-of-emigration amendment. President Bush successfully vetoed two congressional attempts to revoke or condition China’s MFN status. In 1994 President Clinton reversed the administration’s 1993 position that the annual renewal of China’s MFN status depended on continuing improvements in China’s respect for human rights. Arguing that revoking China’s MFN treatment would seriously undermine U.S.-China economic, diplomatic, and military relations, Clinton announced that human rights conditions (other than the original emigration freedom specified in the Jackson-Vanik amendment) would no longer be linked to China’s continued MFN status, adding that the U.S. would pressure China on human rights by other means. The latest renewal of China’s NTR status occurred on June 3, 1999. If the U.S. does not grant China permanent MFN/NTR status, the U.S. would be prevented from fully applying WTO agreements to China.
Sources for More InformationJoseph Fewsmith, "China and the WTO: The Politics Behind the Agreement," The National Bureau of Asian Research, November 1999 at http://www.nbr.org/publications/report.html Nicholas R. Lardy, "China's WTO Membership," Policy Brief #47, Brookings Institution, April 1999, posted at http://www.brook.edu/comm/policybriefs/pb047/pb47.htm U.S. Trade Commission, "Assessment of the Economic Effects on the United States of China's Accession to the WTO," Publication 3228, August 1999 Bruce Stokes, Senior Fellow at Council on Foreign Relations, "The China WTO Dilemma," posted at http://socrates.berkeley.edu/~briewww/forum/berkeley2/stokes.html Robert E. Scott, "China Can Wait: WTO accession deal must include enforceable labor rights, real commercial benefits," Economic Policy Institute Briefing Paper, posted at http://epinet.org/ Jim Nolt, "China in the WTO: The Debate," Foreign Policy In Focus, Vol. 4, No. 38, posted at http://www.fpif.org/briefs/vol4/v4n38china.html Wayne Morrison, "China-U.S. Trade Issues," CRS Issue Brief for Congress, October 25, 1999, posted at http://www.cnie.org/nle/econ-35.html Vladimir N. Pregelj, "Most-Favored Nation (Normal-Trade Relations) Policy for the United States," CRS Issue Brief for Congress, September 17, 1999, posted at http://www.cnie.org/nle/econ-49.html
CHINA IN THE WTO: THE DEBATE
The November 15th U.S.-China agreement on the terms for China to join the World Trade Organization (WTO) is the most significant deal between the two countries since diplomatic relations were established more than two decades ago. The Clinton administration hopes this paves the way for Congress to now vote permanent Normal Trade Relations (NTR) (also known as Most Favored Nation), thereby giving China the same trading privileges now enjoyed without annual review by almost every other U.S. trading partner. The only other nations denied NTR status by the U.S. are: Afghanistan, Cambodia, Cuba, Laos, North Korea, and Yugoslavia. China has enjoyed NTR since 1980, but only by an annual vote of Congress. Only if the U.S. Congress approves permanent NTR for China can the November agreement be implemented. WTO membership for China and permanent NTR status will clear the way for Taiwan to join the WTO. China and Taiwan are the only two major U.S. trading partners that are not members. When these two join, all significant U.S. trading partners will be governed by the same rules and dispute-resolution procedures. Joining the WTO will not give China any trading advantage with the U.S. that it does not already enjoy, but China anticipates that securing permanent NTR will remove the political embarrassment of Congress’ annual scrutiny of its human rights, labor, and environmental record. More importantly for the U.S., the agreement grants unprecedented access to the Chinese market for both U.S. exports and investments--including in politically sensitive sectors like banking, insurance, and telecommunications--and it will improve the chances for relations to develop peacefully on the basis of mutual interest. In seeking WTO membership for China, the U.S. government has rejected arguments by many labor, human rights, and environmental groups that this should be tied to commitments by China to improve human rights and environmental standards. The November 15th U.S.-China agreement is a major step toward Chinese membership in the 135-member WTO. To gain approval from the existing members, China, which has been seeking GATT/WTO membership since 1986, must reach bilateral understandings with its important trading partners. Before securing Washington’s approval, China had previously made agreements on the terms for its entry into WTO with a dozen countries, including Japan and Australia. Negotiations continue for settlements with other major Chinese trading partners, most notably the European Union, but no major problems are anticipated in reaching consensus with the other WTO members. Therefore, China’s admission to the WTO sometime next year is now likely. The November 15th agreement imposes much more substantial concessions on China than on the U.S., which merely grants permanently what it has long granted annually anyway. China’s concessions are the price of U.S. support for Chinese WTO membership. Both these concessions and the WTO rules themselves should have a profound impact on China, substantially opening its economy to foreign competition. WTO membership would compel China to change its current commercial laws and practices to conform to WTO rules. Trade disputes would be resolved through the WTO adjudication procedures rather than through bilateral bargaining. China has seemed to prefer bilateral trade bargaining in the past because, as a large country, it is often able to gain more concessions that way. Once it is a WTO member, China would need to negotiate trading terms on a multilateral basis with all members at once. As the U.S. is already a WTO member and already grants China NTR, China’s entry imposes few adjustments on the U.S. compared to the profound changes required of China. To assuage U.S. firms that do face Chinese competition, China has conceded 12-15 years of special protection against any rapid surge in Chinese imports on the presumption that such a surge might result from dumping (selling products below production cost), which is illegal under WTO rules. A U.S. firm can also gain temporary protection against alleged dumping while its legal challenge is in process. As new sectors of the Chinese economy are opened, U.S. export opportunities will increase work for Americans in industries such as aerospace, chemicals, entertainment, computers, waste treatment, biotechnology, telecommunications equipment, medical equipment, and other high-tech products. Those industries that are already losing jobs due to Chinese competition, such as textiles and clothing, are little affected by this agreement, because Washington agreed to no significant new trade concessions. It is likely, however, that there will be some loss of U.S. jobs as firms relocate labor-intensive manufacturing from the U.S. to China as conditions there become more favorable to foreign investment. Joining the WTO would commit China to a path that would immerse more and more of its citizens in international commerce. Their livelihood would increasingly depend on China attracting foreign commerce and maintaining friendly relations with most of the world’s nations. The WTO’s rules-based procedures would enhance application of commercial law in governing disputes within China, supplanting bureaucratic fiat, as such disputes could be challenged through the WTO. Any reversion to militarism in China would be increasingly costly and counterproductive as its dependence on foreign commerce increases. WTO membership is not a guarantee against future problems--some within China will suffer from increased foreign competition--but it would buttress a powerful bloc of interests within China favoring outward-oriented growth and the conditions, including peace and greater rule of law, required to secure it. The AFL-CIO, several other labor unions, and numerous human rights, fair trade, and environmental NGOs quickly came out against the U.S.-China agreement. If implemented, China’s entry into the WTO will impose little adjustment on the U.S., but it will require further substantial liberalization of the Chinese economy. These changes may shuffle wealth and power in China in ways that are potentially explosive. The greatest danger is not that the agreement requires too little of China but that it may require too much too fast. To the extent that this agreement threatens powerful interests and job losses in parts of China, there is a real danger of a xenophobic backlash that could derail further progress in economic liberalization and jeopardize relations with Washington. Thus, although most Americans should welcome the entry of China into the WTO, we should be patient and understanding of the difficulties this transition creates in China. It is important not to rush the pace of change faster than Chinese society can bear. There are three major economic forces in China today. Internationalists are the first force and the one most obvious to foreigners. They comprise businesses that are internationally competitive, plus their political allies. They are China’s exporters, and they include most of the firms that receive foreign investment. Internationalists also employ most of the foreign-educated Chinese , and they are mostly prominent in light industries such as textiles, clothing, toys, food processing, and other simple consumer products. Internationalists are the main economic force that will benefit directly from the WTO agreement, but they constitute only a small fraction of the total economy. Nationalists are the second major economic force in China. They control businesses (including farms) that are not efficient enough to compete successfully in international trade but that dominate the domestic market. These nationalists are prominent in many heavy industries and in some farm sectors in which China is not a competitive producer, and they include wheat farmers and most of China’s leading chemical, petroleum, high-tech electrical machinery, aircraft, and automobile producers. Occasionally, some of these large firms woo a foreign partner to inject capital and upgrade their technology to make them more competitive, but the political complexities of such investments often discourage foreigners. Thus most nationalists will not benefit from Chinese WTO membership. Instead, they will suffer in two ways: directly from increased foreign competition and indirectly as increased competition in the financial sector attracts capital away from their losing ventures toward more competitive internationalist firms. Localists are China’s third major economic force. These are producers who are not only less competitive than the world market standard, but also less competitive than the leading national producers within China. They are mostly small-scale producers for local markets. Despite their relative inefficiency, they have helped provide political and economic stability through employment and subsidies. In the past two decades, they have flourished because China’s economic liberalization has been accompanied by substantial political decentralization. Local officials at every level of government have many means to subsidize and protect local industries. China’s agricultural reforms have provided many farmers with increasing income with which to purchase products. The underdevelopment of China’s transportation network has insured that, in most parts of China, people buy mostly from local businesses funded by local branches of government banks. This has resulted in hundreds of small-scale producers of items such as fertilizers, steel, cement, motorcycles, and farm machinery. However, the recent rapid construction of highways provides an alternative to state-run railroads, bringing in new competition. Some localists might find ways to redeploy their capital to more efficient pursuits, but many will eventually succumb as outside competition increases. Because China’s tariff cuts will increase the competition they face, they will view WTO membership more as a threat than as an opportunity. Chinese reforms since 1978 have represented an implicit alliance between internationalists and localists. Both have benefited from the transfer to local government of most business oversight as well as tax and regulatory power. This allows internationalists to gain strong support from outward-looking local governments in a few areas, while in most of China local governments try to isolate their local industries from outside competition. Nationalists, on the other hand, have been weakened by political decentralization and by substantial cuts in military procurement. There is some possibility that a political realignment in China could unite nationalists and localists against the economic liberalization policies of the internationalists, including WTO membership. Such a backlash might be reinforced by protests from labor against job losses resulting from increased foreign competition, especially if liberalization proceeds too rapidly. The growth of jobs in the internationalist sector may not be rapid enough in the short run to counteract the fall of employment in the less competitive sectors as more and more businesses succumb to competition. On the other hand, WTO membership might strengthen internationalists enough to allow them to resist any policy reversal and maintain prosperity based on trade-oriented growth. Although U.S. policy favors both democratization and economic liberalization of China, these goals may prove to be contradictory in the short run. Openness to foreign trade and investment favors democratization in the long run, because more Chinese will be educated abroad, work with foreigners, and gain greater access to sources of information and ideas beyond Chinese government control. This does not mean that the U.S.-China NTR agreement necessarily harms China’s prospects for democratization or increases its chances of severe social conflict. Without any agreement, the chances for conflict in the near term might be even greater, as internal competition is increasing anyway. Even if foreigners were closed out of the Chinese economy, a wide gulf would still exist in most industries between the most competitive firms (many of which are now exporting) and the least competitive firms. The current rapid development of the highway system—eclipsing the current state-run, politically controlled railroads—will result in intensified competition, whether or not foreigners are participating. Depoliticizing commerce reinforces nations’ mutual interest in peaceful global commerce rather than battling for exclusive spheres of influence, as occurred when imperialist politics provoked two world wars in this century. Giving China a greater stake in the international system through membership in organizations like the WTO and through broader participation in international commerce will likely influence China to cooperate more fully in international peace and security issues. Many U.S. consumer, human rights, and labor organizations wish to use trade discrimination as leverage to enforce desirable social policies, such as human rights or environmental standards. Under current WTO rules, the U.S. cannot use human rights as a litmus test for granting trade privileges. If WTO members--some of whom are worse human rights abusers than China--are not subjected to the same litmus test as China, then it is obvious (especially to the Chinese people) that holding Chinese commerce hostage to a human rights test is hypocritical and discriminatory. Numerous U.S. advocacy groups recommend incorporating social standards--such as environmental regulation and human rights (including labor rights)--into multilateral organizations such as the WTO. This is a desirable goal if agreement can be reached among the member governments, but until such agreement is reached, China’s participation in the WTO should not be blocked on the basis of a higher standard than is applied to any existing member. Prominent American labor leaders have been most vociferous in opposing any WTO agreement with China. Their arguments against it are based both on China’s repression of labor organizers and on the supposed loss of American jobs that would result. Certainly worker rights in China today are far inferior to those of most of the other top U.S. trading partners. Independent unions and collective bargaining rights are suppressed. Yet many other developing countries that inflict similar repression on workers are already WTO members, so singling out China for exclusion is obviously discriminatory. Furthermore, WTO membership is likely to improve workers’ rights in China over the long term. Foreign employers in China today typically pay wages many times higher than those paid by domestic firms. Opening the way for more U.S. investment in China will improve wages and spread information among Chinese workers about the superior rights of workers abroad. Isolating China from the world community is not an effective way to encourage either democratization or human rights. Approving China’s entry into the WTO will bring the world’s most populous nation into an important multilateral forum with 135 other nations. Joining the WTO will not resolve the many deep social, political, and economic problems of China. However, expanded foreign commercial relations have already contributed to a significant increase in the standard of living and life alternatives of most Chinese. WTO membership will help ensure that this expansion of the realm of freedom and possibilities continues.
Sources for More InformationAccessAsia Connections Asia Pacific Center for Justice and Peace Asia Pacific Foundation of Canada Asia Pacific Media Network Australian APEC Study Center Human Rights Watch, Asia National Bureau of Asian Research Pacific Forum of the Center for Strategic and International Studies U.S. Department of State, Bureau of East Asian and Pacific Affairs U.S. Office of the Trade Representative World Trade Organization
II. Letters from ReadersSUSTAINABLE DEVELOPMENT
FPIF--
Trillions of dollars, NAFTA, TRAFTA, etc. Local economies are better because they use less fuel in transportation and require using local environments sustainably. Support your friends and neighbors, buy local products. Produce for your area. Connect with the world electronically to support this simple and very old idea. From Dave Moore, Seattle
Your service is greatly appreciated. But surely it's inappropriate to put Dernbach's reformist piece on the WTO out as "progressive"--the very day that the global left is so incredibly inspired by the struggle to shut down the WTO? From Patrick Bond, Johannesburg
This is not a "win/win" game. This is not a negotiation. The U.S. delegation, headed by the cannot-make-decision Trade Representative while her boss, the U.S. President Clinton, was far away from his White House office, came to Beijing only for the final signature. There was no place to negotiate for their conditions, and they had prepared to leave for the U.S. on the third day. This reminds us the U.S. diplomacy during the Rambouilet "negotiation" this year before bombing Yugoslavia. There was no negotiation, as the former U.S. Ambassador to the UN told the then-UN Secretary-general: "Rome needs no diplomacy." Their Chinese counterpart was not the delegation headed by Shi Guangsheng, the Foreign Economy & Trade Department Minister seating face-to-face with the USTR, but the whole regime directly headed by the PRC "President" Jiang Zeming and Prime Minister Zhu Rongji. Jiang showed up on the last day. The Chinese side resisted, as widely expected. The USTR simply requested to meet Zhu Rongji because she knew that Shi Guangsheng is not her counterpart; otherwise, she would leave for the U.S. next morning. Zhu appeared, twice, during the "negotiation" process. This time, the Chinese side's resistance lasted for as long as three days, not "another thirteen years" as Zhu once claimed, and finally accepted the U.S. conditions. This surprised most Chinese people including many other ministers within Zhu's administrative government. The regime in Beijing simply cannot afford waiting for another thirteen years to sustain its legitimacy to stay at power. The USTR's message is clear enough: "...the strategic significance of this agreement. The key for China is whether it will be a constructive force in the global community as well as in the Asia region or whether it will be a destructive force. Anything that moves China toward western norms, toward internationally accepted norms of behavior, starting here on the commercial side, but ultimately hopefully spill over effects in other areas of Chinese activity is an absolutely positive, correct, sensible thing to be doing." No one who speaks English misunderstands her message. Their general response is: "The agreement on China's entry into the WTO will rank with President Nixon's 1972 visit to Beijing and President Carter's extension of diplomatic recognition to China as a major step in bringing China into the world. It will help stabilize China's relations with the major powers, most particularly the United States, and burnish Jiang Zemin's (and perhaps Zhu Rongji's) leadership credentials. Most importantly, it will reinforce domestic reform and lead China to play an increasingly constructive role in world affairs."(*3) For them, the concern of China's future's uncertainty has been clarified, no matter that destination be a Russia, an India, or a Mexico, an Indonesia. What the U.S. is concerned is: "But given China's poor record in honoring agreements, it will take a strong administration to hold them to their word." Toward Chinese people, the Chinese Chief Negotiator Long Yongtu, who is also the Vice Minister of Foreign Economy & Trade Department, claims this accession to WTO (he uses the word "entering") to be as great as China's entering the UN. Twenty-eight years ago, PRC did enter the UN headquarters and began to influence the world affairs as one permanent member in the Security Council. Had Long read The Economist November 20-26, 1999 issue of the death-knell of Socialism, he could claim this deal is greater than PRC's foundation fifty years ago. Long could claim so not because he did not know this is a sky lie, but because he did know that in China, all public dissent against the party and government, including recently one kind of spiritual health practice movement, has been effectively silenced. Labeled sometimes as "butchers" (which they deserve), sometimes as "strategic partners" (which apply to them) by the same counterpart in Washington, the Beijing regime simply does not have an equal shape, nor the right to represent the Chinese people to negotiate such important issues as this WTO deal. The U.S. should not utilize Chinese people's difficult period to achieve such a deal exploiting the Chinese people. From Jing Zhao
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