What's This Organization (WTO):
An Annotated Glossary of Terms and Concepts
About the World Trade Organization
By Tom Barry, Codirector Foreign Policy In Focus
with research assistance by Julie Schneider, IRC
V. China and the WTO
(Editor’s Note: Many of the terms and concepts in Part Three, "The U.S., China, and the WTO," are referenced in Parts One and Two. We welcome comments, critiques, and suggestions.)
The November 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 paved the way for China to enter the WTO. Reaching an agreement with the European Union remains the major remaining obstacle to China’s accession to the WTO.
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 (PNTR) for China in late May 1999. Outside of Congress, the opposition comprises labor, environmental, anti-free trade, and some human rights groups on the progressive side, and from social conservative and anticommunist groups on the right. Most unconditionally oppose WTO accession and NTR for China, 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 normal trading relations. 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. Opposition comes 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 loss of U.S. jobs and about human rights, environmental, and labor standards). The debate over China’s trade status highlights the clash over economic globalization, as the leading pro-PNTR voices label the opposition as the "backlash camp," while the leading anti-PNTR label the PNTR advocates as "free-traders."
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 Latvia. The WTO is considering 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. With the
exception of two nations (Cuba and Yugoslavia), all WTO member nations have PNTR status
with the United States.
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 the U.S. would
likely invoke the Nonapplication clause prior to China’s accession.
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 1998-99 China’s trade surplus has declined, resulting in stagnant
foreign reserves. China has enjoyed a total trade surplus since 1994. In 1999,
China’s total trade surplus was $21 billion.
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, WTO membership would likely force the
U.S. to grant permanent NTR status, thereby avoiding 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;
6) economic reformers among Chinese leadership believe that further integration into the
international market and the WTO’s system of global economic governance will help
China avoid economic stagnation by increasing productivity and improving internal
allocation of economic resources.
Congress and China’s WTO 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:
China along with other communist countries was denied permanent MFN/NTR treatment
by the Trade Act of 1974, while the Jackson-Vanik amendment to that act permitted 1-year
waivers if they complied with certain emigration objectives. Since 1980 China has been
provided temporary MFN/NTR treatment. There are a handful of countries for which the U.S.
does not provide NTR treatment: Afghanistan, Cuba, North Korea, and Yugoslavia (Serbia and
Montenegro). NTR 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, while NTR treatment for Cuba and North Korea will
require congressional approval. Permanent extension of NTR status to Laos is under
consideration. Bills were introduced in the 106th Congress to withdraw the NTR
status of Lebanon and Syria because of their alleged support of terrorist groups.
Exports to China:
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 in China expands significantly, it is likely that this will be supplied
mainly from low-wage production facilities located outside the United States. U.S. exports
of goods and services to China increased from $9.5 billion in 1992 to $19.3 billion in
1999. The U.S. International Trade Commission projects that U.S. exports will increase by
$5.4 billion, compared with a $4.7 billions increase of imports from China.
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. Facing a downturn in foreign investment flows, falling foreign exchange
reserves, deflationary trends, declining exports, and high inventories of nonmarketable
products, China hopes that the bilateral agreement with the United States and the terms of
its accession to the WTO will help put in place what Lardy calls a "new growth
paradigm" that will help the economy allocated production resources more efficiently.
Competition-led growth will be used to complement the traditional Chinese model of
fostering growth by promoting exports, domestic consumption, and investment. Clearly,
China hopes that the costs of adjustment to the new market rules will be short-lived and
will be offset by long-term economic gains. The U.S. International Trade Commission
estimates that China’s overall external trade will increase by $56 billion as the
result of its accession to the WTO: $26 billion in increased exports, and $30 billion in
increased imports.
Impact on U.S. if PNTR Denied:
The U.S. will likely request "non-application" of WTO rules for its
trade with China before that country’s entry to the WTO, and China may do the same
for its U.S. trade. PNTR opponents claim that U.S. access to China’s market would be
unaffected by the denial of PNTR since the U.S. and China have a bilateral agreement
dating back to 1979 that gives the U.S. most favored nation treatment (ensuring that
tariffs for goods imported from the U.S. are no higher than those granted other nations).
Public Citizen also argues that annual U.S. reviews of China’s NTR treatment do not
conflict with the WTO’s most-favored nation rule as along as the threat of higher
tariffs is not invoked. These arguments are countered by others that hold that the NTR
review undermines WTO benefits by creating uncertainty about China’s access to the
U.S. market. PNTR supporters in government and business say that while the U.S. may be
able to benefit from the lower import tariffs on goods that China negotiates as part of
its accession agreement, U.S. firms would probably not be able to benefit from the new
liberalizing measures included in the 1999 accord, including service and government
procurement agreements. Furthermore, if the U.S. decides not to provide China with normal
trade agreement, China could retaliate by breaking the bilateral trade agreement with the
United States, thus placing U.S.-China economic relations in serious jeopardy. U.S. firms
fear that other non-U.S. corporations will move into the holes in the market. Aside from
the legal arguments, the Institute for International Economics argues that it is foolish
to assume that China will give the U.S. the same preference to other nations if PNTR is
denied: "It is fantasy to suppose that the United States can conduct an annual
Jackson-Vanik review and enjoy the full benefits of China’s WTO obligations."
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 1992 and 1999, U.S. imports of goods
from China increased from $18.7 billion to $64.1 billion. 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.
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/NTR
status to a favorable certification that a country does not deny its citizens the right to
emigrate. 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. Law requires
the president to grant an annual waiver if these nonmarket economies are to receive NTR
treatment. 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 two-thirds vote of the House and Senate. This congressional response must occur 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. The 1979 U.S.-China Trade Agreement paved the way for the first
Jackson-Vanik waiver for China in 1980. To maintain the right for the annual NTR review,
the U.S. will have to invoke the "nonapplication" clause of the WTO, which
exempts its relation with China from the WTO’s MFN treatment requirement.
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/NTR 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
PNTR. 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 U.S.-China bilateral trade agreement, which was signed in
1979 and renewed every three years since then, 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. Additionally, 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 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.
Some groups like Public Citizen who are opposed to granting China as a normal trading
relations (temporary or permanent) still use the old terminology of "most favored
nation, temporary or permanent normal," so that for them the PNTR debate is the PMFN
debate. If PNTR is denied, Congress will again be forced to vote on whether China should
be granted an annual waiver from the Jackson-Vanik stipulation. The denial of NTR
treatment (which China has received since 1980)would strain U.S.-China economic relations
as U.S. tariffs on imports from China would rise dramatically.
One China Principle:
This formula of international policy holds that the mainland and Taiwan are part
of the same country, namely China. It is a position held by the government of the
People’s Republic of China (PRC) and by the Nationalist Party in Taiwan. It is a
principle repeatedly affirmed by U.S. administrations, although the political evolution of
Taiwan toward a democratic, pluralistic system has raised new questions about the
applicability of this diplomatic principle.
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 after China’s accession to the WTO. 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. Taiwan favors PNTR
treatment for China and its accession to the WTO.
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, which the U.S. government officially accepts
as being part of China, 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/NTR 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 25% 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 after-sale 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.) According to the U.S. General Accounting Office,
"The result of the agreed-upon actions would be a Chinese market more open to foreign
goods, services, and investment; enhanced protection against import surges of Chinese
products; and a Chinese commitment to comply with many WTO Requirements."
U.S. Job Losses:
Many opponents of PNTR and NTR treatment of China contend that the November trade
and investment agreement with China threatens U.S. jobs. An oft-cited report by the
Economic Policy Institute that takes a stand against PNTR and China’s entry into the
WTO states that a rising trade deficit with China could result in a loss of 817,000 jobs
in the United States over the next decade, "and these losses would come on top of the
880,000 jobs the U.S. has already lost due to its current trade deficit with that
country." EPI’s analysis of job losses is based on a highly disputed assumption
that increased imports automatically cause job losses in the importing country. Supporters
of PNTR respond that it was China not the United States that made concessions in the trade
deal and that the agreement does not pose a job threat to Americans. The Business Council
for U.S.-China Trade contends that the low U.S. employment rate is evidence that free
trade is good for the U.S. economy and job creation, and the Institute for International
Economics notes that "most of the growth in the U.S.-China trade balance does not
result from production moving from Toledo to Shanghai, but rather from China’s
success in capturing U.S. markets previously held by other East Asian economies." In
a letter to Congress, the UAW said that the agreement "does not contain any effective
mechanisms to stop surges of imports from China that could threaten thousands of American
jobs in the automotive, aerospace, steel, textile, and other industries." The Clinton
administration, business associations, and think tanks like Brookings Institution and
Institute for International Economics respond that the safeguard and antidumping
provisions of the bilateral accord provide for adequate protection and are stronger than
normal WTO safeguards and the U.S. section 201 trade law. Another argument advanced by
PNTR opponents is that increased trade liberalization in China will force the government
to devalue its currency, which will dramatically increase the U.S. trade deficit by
lowering the cost of imports from China and increasing the cost of U.S.
exports—thereby threatening hundreds of thousands of U.S. jobs.
U.S.-China Trade:
Total trade rose from $4.8 billion in 1980 to $30.9 billion in 1992, and $92.4
billion in 1999. As total trade has risen, so has the U.S. trade deficit with China,
increasing from $8.7 billion in 1992 to $43.2 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:
U.S. direct 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
nearly half in 1999. Foreign invested firms also account for a large share of
imports—more than 50% in 1999.
U.S, MFN, and China:
The U.S. has applied MFN/NTR 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. Congress is now considering permanent NTR status for China, which would obviate the
need for annual NTR reviews. If Congress denies China PNTR, it will be faced with another
vote this summer on whether to override a likely presidential waiver that grants China
temporary NTR for another year. A two-thirds vote is necessary to overturn a presidential
waiver.
Sources for More Information
Joseph 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
Contents | part I | part II | part III | part IV | part V | Appendix
