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Dilemmas of Reform in Jiang Zemin’s China, by Andrew J. Nathan, Zhaohui Hong, and Steven R. Smith (eds.)
6. The WTO: What Next for China?
It has been a long march for China in its quest for World Trade Organization (WTO) membership. China first formally indicated its interest in resuming its original contracting party status with the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, in July 1986. A GATT Working Party was appointed in June 1987, and the first meeting of the Working Party took place in February 1988. Since that time, China has met more than two dozen times with the WTO Working Party and has conducted extensive bilateral negotiations on the WTO entry with its main trading partners. The process for China’s accession to the GATT/WTO is already the most extensive on record.
GATT/WTO is based on a premise of free trade between member nations. Each member nation should have a free-market economy in which the private sector plays a dominant role. China faces a major challenge in transforming its planned economy to a free-market economy to meet this premise. The quest for WTO membership has been a painful process, but not a process without many gains. In fact, under pressure to comply with the WTO rules and standards, China has achieved remarkable progress in privatization, trade liberalization, and economic integration with the rest of the world. The quest to become a WTO member has been an impetus for China to speed up its ongoing privatization of state-owned enterprises and the establishment of a free-market economy.
Despite the progress China has made in complying with the WTO requirements, at the time of this writing, considerable obstacles remained in the way of the industrialized nations (led by the United States) issuing China an entry ticket to the WTO. It was speculated that a political solution on Beijing’s entry to the WTO might be reached in the summit meetings between the presidents of the United States and China. This did not happen during President Jiang Zemin’s visit to Washington in October 1997, or during President Bill Clinton’s visit to China in June 1998. At the Asian-Pacific Economic Community (APEC) annual summit meeting in November 1998, Vice President Al Gore agreed with President Jiang to make an effort to bring China’s WTO negotiation to a closure early the next year. In fact, nobody knows when and under what conditions China will be accepted into the WTO.
At this point, China finds itself in a dilemma. It neither wants to accept the preconditions set by the Western economic powers for instant membership, nor wants to withdraw its application for membership. The WTO bid remains a strategic choice for China. After thirteen years of seeking membership, Chinese policymakers have to reconsider five crucial questions: (1) What are the gaps remaining and what is required for China to close those gaps? (2) What is the likelihood that the United States will say “yes” to China’s WTO quest? (3) What are the costs and benefits of membership, and will the benefits it may gain offset the price it has to pay? and (4) What are the strategic options available and what is the best strategy for China? To address these issues, this chapter is organized as follows. The first section assesses the progress China has made in its quest for WTO, followed, in the second section, by an analysis of the gaps remaining. It then discusses the U.S. stance in the third section and the costs/benefits of the WTO membership in the fourth section. Three strategic options are identified in the fifth section, followed by conclusions and recommendations to both China and the Western economic powers.
The Progress China Has Made
During the past thirteen years, along with its open-door policy and economic reforms, China has made sincere efforts to meet the requirements for WTO entry. Its progress can be observed in the following six areas.
Transition to a Private Market Economy
The WTO is premised on the function of a private-market mechanism in the domestic economies of its member countries. The basic idea for WTO is to establish an international economy that is disciplined by the operation of comparative advantage and the “invisible hand” (price), and is governed by the principles of nondiscrimination and reciprocity. Any interference that may distort such free-trade mechanisms should be limited. In other words, it is unlikely that the WTO regulations could impose any effective discipline on the trading sectors of a centrally planned economy such as China’s. 1
China nonetheless has been systematically moving away from its centrally planned economy toward a market-oriented economy. In 1986, the year China applied for WTO entry, state-owned enterprises contributed 62 percent to China’s total industrial outputs, whereas nonstate enterprises (including collectively owned, individually owned, and foreign-owned business entities) contributed 38 percent. By 1996, the state-owned enterprises accounted for merely 30 percent of total industrial outputs whereas the nonstate enterprises accounted for 70 percent. 2 The private sector has replaced the public sector as the major driving force in the vitalization of Chinese economy. More and more state-owned enterprises are being privatized through stock sharing, joint ventures, merger and acquisition, and bankruptcy. It is expected that within the next five to ten years, the number of state-owned enterprises will be further reduced from the current more than twelve thousand to about one thousand or less, and the private sector will contribute even more to the total industrial outputs. By then, China can comfortably claim that it has fulfilled its transition from a planned economy to a market economy. 3
Trade Liberalization
To reduce trade barriers, WTO requires that, among its members, tariff levels be restricted, roughly, to an average of 5 percent for developed countries and 15 percent for developing countries. China has achieved major progress in trade liberalization. In compliance with WTO rules and to give greater access to its market for foreign competition, China has progressively lowered its tariffs. Tariffs were reduced from 36 percent on average in 1993 to 23 percent in 1996, and to 17 percent by October 1997. China is also committed to further cut tariffs to an average rate of 15 percent by the year 2000 and to 10 percent by 2005, the tariff level maintained by most developing countries, as President Jiang promised at the APEC meetings in November 1996 and in November 1997. 4 Furthermore, to encourage foreign investment and international trade, China has developed a scheme of duty exemption for exports and duty concessions for imports. For example, equipment and raw materials imported by foreign-owned enterprises and foreign joint ventures, which constituted about 48 percent of total imports in 1995, were given 50 percent duty concessions. Overall, about 70 percent of total imports enjoyed some kind of tariff exemption or reduction in 1995. 5
Nontariff Barrier Dismantlement
In addition to tariff reductions to promote free trade, WTO requires its members to dismantle nontariff barriers and make rules, regulations, judicial decisions, and administrative rulings in their domestic trade systems transparent (i.e., open and accessible to the public). China’s international trade was originally centrally controlled through a handful of state-owned foreign trade companies. This centrally planned import-export system has been decentralized and put into the hands of local and regional international trading companies. More than eight thousand domestic enterprises and hundreds of enterprises with foreign investment have been authorized to engage in international trade directly. By the end of 1995, 176 nontariff measures, 30 percent of the total import quotas and licensing, had been phased out. 6 Recently, after cutting and scaling down export subsidies for industrial goods, China promised not to provide export subsidies for agricultural products. It has also agreed to phase out import quotas for cars and minibuses in eight years instead of the fifteen years that the Chinese negotiators first offered. 7 The automobile industry is one of the most sensitive industries for which China has insisted on having a relatively longer phase-out period because of the substantial economic costs and political risk for adjusting these industries to international competition.
National Treatment Rule
The “national treatment” rule is the WTO’s second manifestation of the nondiscrimination principle. In contrast to the most-favored-nation (MFN) rule, which requires nondiscrimination at a country’s border, the national treatment rule requires a country to treat foreign products equally with its domestic products once they are inside the country. China has begun to make major improvements in complying with the national treatment rule.
However, since most of the goods manufactured by enterprises with foreign investment were intended for export, special permission was needed for them to sell their goods in China’s domestic market. In addition, foreigners traveling in China were treated differently: they were charged more than Chinese residents for the services they received. For example, airfare was about 50 percent higher for foreigners than for Chinese residents. The tardiness of China in complying with the national treatment rule has drawn many complaints from foreigners traveling or doing business in China. Recently, China has gradually relaxed the restrictions of market entry for enterprises with foreign capital investment. More and more foreign enterprises have been permitted to sell their goods and services in the domestic market. Four foreign banks were recently allowed to enter the financial market and five foreign insurance firms were granted licenses to sell insurance policies to local residents. Many of the discriminatory pricing policies against foreigners have been removed. For example, the double standard in the pricing system for transportation was eliminated in July 1997. 8
Intellectual Property Rights Protection
Another important aspect of China’s bid to join WTO that has resulted in positive policy change is intellectual property rights (IPR) protection. Many multilateral and bilateral negotiations with major trade partners on IPR protection over the last few years have been difficult. 9 International pressure to protect foreign intellectual property rights has helped China establish its IPR legal systems and set up rules for a market economy. Yet, the record of IPR protection has been quite disappointing. Violations of IPR have been common regardless of whether foreigners or local people owned such rights. Both enterprises and consumers have found themselves the victims of intellectual property piracy, and they are the supposed beneficiaries of the IPR legal system and its tough enforcement. After the serious efforts of the government in the last decade or so, the IPR legal system and IPR protection have significantly improved.
Currency Convertibility
The Chinese currency exchange market was fully under the control of the central government through the control of exchange rates and the control of the availability of foreign currencies. The absence of a freely convertible currency served as the final complicating factor in the quest for WTO membership. To obtain WTO membership, China has committed itself to move faster toward total convertibility of its currency. Starting in 1985, foreign exchange adjustment centers (FEACs) were established on an experimental basis in Shenzhen, Xiamen, and Shanghai in an attempt to set the exchange rate based on market supply and demand. The number and volume of FEACs grew rapidly; they were expanded into all major cities and the volume has reached the multibillion U.S. dollar level annually. In addition to opening its service to institution clients, the foreign exchange market has also been opened for individual clients since 1988. FEACs currently serve as the managed marketplaces for currencies. To further meet WTO requirements, China’s central bank, since 1997, has allowed the currency (RMB) to become convertible in current accounts, one step closer to a fully convertible currency. This change has reduced government control over the financial market and international trade, giving more room for the “invisible hand” to function.
Overall, the quest for WTO membership over the past thirteen years has presented a historical opportunity for China to privatize its economy and to liberalize its trading regime. Although it has not yet been accepted as a full member of WTO, China has made extraordinary progress and has benefited from this painful process. The performance of the freer market has been remarkable. With real GNP growing by an average of 9 percent annually, the size of the Chinese economy has quadrupled. International trade has increased from $69 billion in 1986 to $325 billion in 1997. 10 Real income and living standards have been substantially improved. Meanwhile, an animated nonstate sector has emerged as the leading sector. The market distortions of the centrally planned economic system have been reduced and many tariff and nontariff trade barriers have been removed. The economy has also become more open and integrated with the world economy through a growing private sector and increasing foreign trade and investment.
The Gaps Remaining
Recognizing that China is undergoing complex economic reform, Western economic powers still want to arrange a protocol package that will secure solid commitments to provide market access for their goods and services. There are gaps remaining between China’s current offers on reducing trade barriers and the preconditions set by the major trading powers from the developed economies. According to a report entitled Foreign Trade Barriers, issued in early 1997 by the Office of the United States Trade Representative (USTR), the major barriers remaining in China’s foreign trade practice include the following five. 11
Tariffs and Their Management
Compared with the tariff levels for developed economies and advanced developing economies, China’s tariffs are still high, and act in combination with other import restrictions and foreign exchange control to protect domestic industries and restrict imports. Western countries are pushing China to a commitment of lower tariff rates and shorter phase-in periods. The continued poor performance of the state-owned enterprises has been the major concern for tariff protection. The government worries that, with low tariffs, foreign goods would flood in and replace Chinese goods and services in the market. It would threaten the survival of many state-owned enterprises because those enterprises do not have a significant competitive advantage in the international market. In addition to the high average tariff rate, the United States and other Western countries continue to express their concerns about high tariff rates for selected sectors, such as chemicals, in which China is seeking to build its international competitiveness.
In addition to import tariffs, U.S. and other foreign businesses have complained about the lack of uniformity in tariff rate application and in custom valuation practices. Tariffs may vary for the same product, depending on whether the product is eligible for an exemption from the published MFN tariff. This creates difficulties for foreign companies trying to export to the Chinese market. Different ports of entry may charge significantly different duty rates on the same products. Because there is flexibility at the local level in deciding whether to charge the official rate, actual customs duties are often the result of negotiation between businesspeople and customs officers. Allegations of corruption often result. Many foreign businesspeople are frustrated by the lack of market discipline in China in terms of the rights, obligations, and ethics in business conduct.
Nontariff Barriers and Transparency
Nontariff barriers include import licenses, import quotas, and other import controls. Many products are subject to both quota restrictions and import licensing requirements. Central government agencies determine the level of import quotas through evaluation of the particular products needed for an individual project or quantitative restrictions for certain products. Once “demand” is determined, these agencies then allocate quotas that are eventually distributed nationwide to end-users and administrated by local branches of the central government agencies concerned. Western industries complain that China provides little transparency regarding the quantity or value of products to be imported under a quota, although the WTO requires such information. 12 China still maintains strong controls on imports and exports through a nationwide licensing system that is administrated by the Ministry of Foreign Trade and Economic Corporation (MOFTEC). The licensing policy requires enterprises to receive government approval for each of their imports; this may nullify the value of any tariff concession by denying import licenses. China offered in December 1995 to phase out the licensing policy within five years. The United States has pushed for a shorter phase-out and insists that China not discriminate against foreign enterprises in granting trading licenses during the phase-out period.
Import Substitution and Export Subsidies
The United States and other industrial nations are still concerned about the intervention of the government in international trade practices other than tariff and nontariff barriers. Import substitution has been a long-standing trade policy. Despite having agreed in its 1992 Memorandum of Understanding with the United States to eliminate all import substitution regulations, guidance, and policies, China in 1994 announced an automotive-industry policy that includes import substitution requirements. This policy calls for production of domestic automobiles and automobile parts as substitutes for imports. The United States and other industrial nations want to make sure that these policies will be eliminated and any future policies do not contain such provisions in the context of China’s WTO accession negotiation.
Although the government claims that direct financial subsidies on all exports ended on January 1, 1991, China continues to use a variety of measures to support and promote exports such as preferential loans and tax policies and preferential energy and raw material supply policies. It remains to be seen that uniformity in the types and amounts of taxes and duties imposed on enterprises can be achieved, particularly with respect to income and other direct taxes imposed on exporters.
Services Barriers
China has promised to liberalize its services markets upon accession to the WTO, but the market for services remains severely restricted. Most of the foreign services, such as banking, financing, insurance, electronic communication, accounting, and legal services, are only allowed to operate on a selective “experimental” basis and are restricted to specific geographic areas or market segments. For example, as early as 1997, eight foreign banks had obtained permission to conduct renminbi transactions on a restricted trial basis in Pudong. With regard to insurance services, while China has approved 144 representative offices opened by eighty-five different foreign insurance companies, only six foreign insurance companies have been granted licenses to operate in restricted areas. In other areas, such as retailing, information, and telecommunications services, foreign companies are only permitted to team up with local companies to provide services in restricted areas. 13
Investment Barriers
Although official policy welcomes foreign investment as critical to China’s economic development, the government continues to maintain barriers and controls on foreign investment, channeling it toward certain areas that support government development policies, such as energy production, communications, and transportation. It still prohibits foreign investment for projects with objectives not in line with the national economic development plan. For example, investment in the management and operations of telecommunications as well as in the news media, broadcast, and TV sectors is banned, and investment in insurance, shipping, advertising, education, and travel services is severely restricted. The major reason for the restriction in service industries is to protect these markets and industries from domination by foreign firms.
After thirteen years of negotiation and major concessions, major problems remain, especially restructuring the state-owned industries and dismantling trade barriers to meet WTO standards for developed economies, and opening up the market fully to international competition. The economic costs and political risks for these changes could be very high.
When Will the United States Say “Yes” to China?
China has conducted bilateral negotiations with 35 of WTO’s 132 member countries. By the end of 1997, agreements had been reached with seven countries including Japan, New Zealand, Pakistan, South Korea, and three European countries. China expects to reach agreements in the near future with the rest of the member countries except the United States. 14 The United States remains the major barrier to China’s membership. However, the United States is also China’s most important trade partner.
Trade policy with the United States is the core of China’s international trade policy. The U.S. government plays a central role in keeping China out of the WTO. The United States wants to make sure that China pays its dues before its entry. Although the trade between the two countries has grown rapidly, the trade relationship has hardly been smooth. 15 Even though it has announced repeatedly that it is committed to supporting China’s accession, the U.S. government continues to delay China’s WTO entry. 16 After China’s successful bilateral negotiations with the European Union and Japan, 17 the U.S. government is now the only industrialized nation saying “no” to China’s WTO quest.
The U.S. position is consistent with its overall trade policy, which has revolved around the concept of “free trade” for the past fifty years. That policy can be characterized as “using threats of trade sanctions and tariffs to force other countries to allow U.S. companies to access their markets (a tactic that has come to be known as ‘fair trade’).” 18 Reviewing the annual report of Foreign Trade Barriers, prepared by the USTR, one finds that its major trade partners have challenged America’s dominant position in international trade. The United States had trade deficits with Japan, Canada, the European Union, Mexico, and China, with a total trade deficit of $184 billion in 1995 and $194 billion in 1996. 19 The United States blames these deficits on the market entry barriers of its trade partners. While trade conflicts remain between the United States and its trade partners, the U.S. is taking unilateral actions to force its trade partners to open their markets for U.S. goods and services. Currently, the remaining disagreements between the United States and China are centered on the openness of China’s capital market and the market entry for American agricultural goods. Using support for China’s WTO accession as a bargaining chip to gain market entry is part of the U.S. “free trade” policy.
In addition, the U.S. stance on this issue reflects the influence of the American politicians opposed to China’s entry to WTO. These people insist that China will not get in unless it accepts the terms offered by the United States and other industrialized nations. On the one hand, they recognize that “the WTO can’t afford to exclude China,” but on the other hand, they insist that China has to be “contained” by demanding that it should reform its economic system and open its market to a far-reaching level as preconditions. 20 Some politicians even want to insert human rights and other political issues into the negotiation agenda. They take China’s WTO bid as the last opportunity to discipline China’s possible “disruptive behavior” and force it to accept their economic and political terms. Overall, they perceive China’s growth and its involvement with the world economic community as a threat. 21
Nevertheless, the number of American politicians supporting China’s accession to WTO is growing. These people view the rise of China in world affairs and its growing power not as a threat, but as an opportunity to establish stable working relations with one-quarter of humanity and to integrate China peacefully and constructively into the norms and institutions of the global community. They believe that a prosperous and stable China is profoundly in America’s interests. As Nicholas Lardy argued in a congressional hearing, “China’s membership in the WTO will serve the U.S. interests by providing a mechanism for dealing with inevitable trade frictions on multilateral rather than a purely bilateral basis. It would also allow the United States to concentrate in the bilateral diplomatic channel on critical strategic issues.” He suggested that “the United States should moderate its demands for reform as a precondition for China’s membership in the WTO. In exchange, the United States should expect China to agree to a schedule that would gradually bring the country into compliance with WTO standards.” 22
When the United States will say “yes” to China’s WTO membership depends on whether the pro-China policy or the “constructive engagement” policy prevails. It also depends on the growth of U.S. economic interests in China. The rapid growth of U.S. trade and investment will provide more incentives for the United States to say “yes.” Jiang’s visit to the United States and Clinton’s visit to China and the declaration to establish a “constructive strategic partnership” between these two countries as well will give impetus to China’s entry into the WTO. It remains to be seen if it will give enough impetus for the United States to say “yes.” 23
The WTO: The Costs and the Benefits to China
Before formulating a strategy for WTO entry negotiation, it is necessary to estimate what kinds of benefits China may receive after its entry into the WTO and what price China will have to pay. This will help determine the leverage that the negotiation provides to China and the industrialized nations as well. It seems that WTO membership will bring great benefits. However, some scholars have pointed out that the benefits of membership are relatively modest. 24 The most important economic benefit associated with membership is the permanent MFN trading status in the market of member countries. 25 All major trading partners except the United States had bestowed this MFN status on China before the WTO was conceived. The United States has provided MFN status for China for the last sixteen years on an annual review basis. 26 It seems unlikely that the United States will revoke China’s MFN status in the future given the mutually beneficial nature of the U.S.–China trade relationship.
Another major benefit that WTO offers only to its developing-country members is the General System of Preferences (GSP), which grants the developing country members privileges of a waiver of reciprocity in the negotiation of trade concessions from developed countries. This allows a developing country to obtain tariff concessions from a developed country on a nonreciprocal basis. The purpose of the GSP is to make the developing countries more competitive in the world market and less dependent on the production of raw and primary goods. Currently, China is one of the largest exporters in the world. Manufactured goods have become the major part of its exports, instead of raw and primary goods. It has become clear that China will not be qualified for GSP, according to the officials who participated in the U.S.–China bilateral trade negotiations. Realistically, the best that China can hope for will be a status in between developing and developed nations.
Third, WTO membership may entitle China to benefit from the elimination of Multi-Fiber Arrangement (MFA) quotas. One of the major achievements of developing countries from the Uruguay Round agreement is that the developed countries agreed to eliminate restrictions under the MFA and to return textile and apparel to normal GATT disciplines. According to the Uruguay Round agreement, elimination of the bilateral MFA quotas is designed to take place gradually. It involves increasing the growth rates of MFA quotas under the Agreement on Textiles and Clothing during a ten-year period, and the progressive reintegration of certain export categories under WTO disciplines, followed by the termination of all remaining quotas by the year 2005. Several studies have shown that eliminating MFA quotas accounts for a major part of what China would gain from joining the WTO. Currently, it could not benefit from the elimination of MFA quotas. 27
The final benefit of WTO membership is to be able to participate in the process of “setting rules for the game” instead of merely being a rule follower. In this situation, one may draw a parallel to China’s entry into the United Nations. As a permanent member of the UN Security Council, China is actively involved in setting the rules for international affairs and is able to protect its own interests. However, there is no such Security Council type structure in WTO and China will have no veto power in international trade affairs even if it is accepted as a member. On the other hand, at this point, although China has not been accepted as a WTO member, it has participated in most of the international economic organizations. Also, its interest in international trade can be addressed through bilateral negotiations and regional trade organizations. Furthermore, given the nature of economic competition in the current post–Cold War period, conflicts among WTO members are growing, calling for more unilateral and bilateral actions. The WTO, as a multilateral trade organization, has not yet been very powerful in resolving international trade conflicts.
One price that China is being asked to pay is the dismantling of its remaining tariff and nontariff trade barriers. These barriers are set primarily to protect China’s state-owned industries. Because these industries still employ almost two-thirds of urban workers, it would be risky for Chinese political leaders to incur the high level of unemployment that could result if the trade barriers are removed too rapidly. In addition, the wide-open market for foreign goods and a rapid restructuring of the economic and trade regimes may uproot some national industries and weaken the country’s ability to export. Consequently, this will lead to trade deficits simply because most Chinese companies have not yet grown to the point where they are competitive in the international market. Trade deficits and the subsequent decline in foreign exchange reserves will have a negative impact on China’s ability to repay foreign loans. That, in turn, would make it difficult to attract additional foreign investment. Further, China will not be able to make the currency (renminbi) fully convertible before the restructuring of its financial system. This restructuring is a complicated and risky business. The current unfolding financial crisis in several Asian countries will reinforce a more cautious attitude toward opening up its financial market. China is not ready to risk its financial-market stability for quick WTO accession. Finally, China has little experience in opening service industries to foreign competition and it must open that market cautiously.
While WTO membership is strategically important in the long run, the short-term costs of conforming immediately to the preconditions set by the industrialized nations for openness to trade are too high to justify the relatively modest gains from its entry into the international trade club. Especially when the major benefits are already in hand, it is less justifiable for China to open itself to economic and political risks in exchange for WTO membership.
Strategic Options for China
Although China has made significant progress in the last twelve years and Western economic powers have indicated their serious interests in accepting China as a member of the WTO, there is an apparent standoff in the negotiations over membership. After years of negotiation, the true unresolved issue is not whether China should follow WTO rules or should be accepted on “commercially viable terms,” but rather concerns the phase-out period of China’s remaining trade barriers, that is, the length of time given to meet the terms. The United States insists that dismantling most of the trade barriers is a precondition for China’s membership. Under this situation, China has three strategic options:
This situation is like buying a house. In the negotiations, the buyer wants to buy the house at a bargain price and with a low down payment. The rest will be covered by a mortgage from the seller. However, the seller has no interest in either lowering the price or lowering the down payment. If China is the buyer and the WTO is the seller, China can choose to buy the house on the seller’s terms, or choose not to buy the house at all. The third choice is to renegotiate the terms by asking the seller either to lower the price to the level the buyer can afford (i.e., granting China GSP status or other concessionary terms) or to accept a longer-term mortgage (i.e., allowing longer phase-out periods for dismantling the trade barriers).
The option “not to buy” is not a good one because China needs to buy the house, that is, China wants to become a member of the international trade organization for its long-term strategic interests. Accepting the seller’s terms is not a good option either, because China cannot afford the price and the full payment in the short run. The only remaining choice is to continue the negotiations for granting China developing-country status and/or granting China a sufficient phase-out period. A longer phase-out period would allow China to stretch out the very substantial costs of adjusting its industries to international competition and to reduce the political risk due to radical change in its economic and trade systems. As long as the economic benefits of being a WTO member cannot at least offset the very real costs that would be associated with compliance with WTO standards, China should not accept the preconditions for entry, unless some other important factors come into the bargain.
First, it should be reemphasized that China’s membership would serve not only its own long-term interests but also the institutional interest of the WTO. With China excluded, the WTO can hardly claim to be global. The potential disruptive threat of the Chinese economy, the world’s third-largest economy behind the United States and Japan, is greater outside the WTO than within it, as many leading economists have pointed out. Second, the size of the Chinese market and the accelerating speed of market access into China by the major trading powers should not be overlooked. For example, trade between the United States and China has grown from $4.8 billion in 1980 to $63.5 billion in 1996. U.S. exports to China, including those sold through Hong Kong companies, have risen from $6 billion in 1990 to about $17 billion in 1996, outpacing the growth of the U.S. exports to any other major foreign market. Many American products, such as Motorola’s cellular phone, Microsoft’s software, and Coca-Cola and Pepsi-Cola, already reach millions of Chinese families. Third, the timing of lowering tariff and nontariff barriers has been entirely at China’s discretion, not at the discretion of the industrialized nations. Fourth, WTO entry will create a new avenue for China to solve its trade frictions through multilateral negotiation, but will not once and for all solve its trade frictions and disputes with other countries. Conflicts between the United States and China will not disappear after China’s entry to the WTO.
Conclusions
The above analysis indicates that WTO entry remains a major trade-off for China. It is clear that China has to take significant costs in the shorter term to gain a long-term strategic benefit as a WTO club member. The costs include further privatization and trade liberalization to the WTO standards. China should realize that privatization is at the core of its economic reform and that trade liberalization is the central piece of its opening policy. The quest for WTO membership can best serve the promotion of its own strategic interests. The right choice for China might be to continue economic privatization and trade liberalization, and to gradually integrate its domestic economy into the world economy based on its own needs and at its own pace. The quest for WTO membership can be and should be used as a vehicle for promoting privatization and free market operations, but the quest by itself is not a substitute for internal reform.
Currently, Western nations have been very firm on the preconditions they have set. It is very unlikely that China will win the WTO bid without making major concessions, especially when political and other nontrade issues increasingly complicate the case. At this point, China should be prepared for major concessions. However, any concessions beyond what its economy can bear in exchange for instant membership might be counterproductive. An important lesson China may have learned from the Asian financial crisis is that an economy may run out of control or even collapse overnight if it rushes into an open-market operation without sufficient infrastructure preparation in place. It may take a long time for China to be sufficiently prepared for the global free-market competition that drives its WTO quest. China has waited for thirteen years. There are no good reasons for China to set a deadline for its accession to the international trade club.
Although many features of China’s trade regime are not fully compatible with the WTO system and it is generally agreed that China should make further reforms, membership should not be used as leverage to force far-reaching changes in China’s economic system and trade regime. It is good strategy for Western economic powers to tie China’s economy into the WTO’s regulation structure for the promotion of trade liberalization in China. However, China’s intention to join the WTO and its willingness to comply with the WTO’s regulations should not be misinterpreted. One should realize that the most important benefit associated with WTO membership is the permanent MFN trading status in the markets of member countries. All WTO member countries except the United States have bestowed China MFN status, and the United States has done it annually for the past sixteen years. With the most important benefit of WTO membership already granted to China, the leverage of the major trading powers is limited. Insisting that China dismantle most of its trade barriers as a precondition for membership may prove counterproductive. The possibility that China may choose to stay outside the club for as long as it figures that the gains would not offset the costs should not be ruled out.
Endnotes
Note 1: Paul D. McKenzie, “China’s Application to the GATT: State Trading and the Problem of Market Access,” World Trade Journal 24 (October 1990): 133–158. Back.
Note 2: China National Statistics Bureau, Zhongguo tongji nianjian, 1997 [China Statistical Yearbook, 1997] (Beijing: Zhongguo tongji ju, 1997). Back.
Note 3: Shuanglin Lin, “Resource Distribution Between State-Owned and Nonstate-Owned Enterprises in China’s Economic Growth” (Working paper, 1997). Back.
Note 4: “Zhongguo jueding jinyibu jiangdi guanshui” [“China Decided to Further Reduce Its Tariff”], Shijie ribao (World Journal), November 26, 1997. Back.
Note 5: Zhang Erzheng, “Qianxi woguo guanshui xiatiao de jingji yingxiang” [“The Economic Impact of the Reduction of Tariff Rates”], Guoji maoyi wenti (International Trade Issues) 6 (1996): 25–31. Back.
Note 6: Zhang Jialin, “An Assessment of Chinese Thinking on Trade Liberalization,” paper presented at the American Chamber of Commerce Executives International Trade Conference, 1996. Back.
Note 7: New York Times, August 4, 1997, A7. Back.
Note 8: David E. Sanger, “U.S. Officials Say China Not Ready for Trade Club,” New York Times, August 4, 1997, A7; “Zhongguo zai shijie maoyi zuzhi wenti shang zuochu gengduo rangbu” [“More Concessions Made by China to WTO Entry”], Shije ribao (World Journal), November 12, 1997. Back.
Note 9: Jason Zunsheng Yin, Jishu guanli: kaifa he maoyi [Technology Management: R&D and Trade] (Shanghai: Shanghai renmin chubanshe, 1995), pp. 41–46, 256–271. Back.
Note 10: Renmin ribao (People’s Daily, Overseas Edition), January 10, 1998. Back.
Note 11: The United States Trade Representative (USTR), National Trade Estimate on Foreign Trade Barriers: People’s Republic of China (1997). See http://www. ustr.gov/reports/nte/1997/china.pdf. Back.
Note 12: Matt Forney and Nigel Holloway, “In Two Minds,” Far Eastern Economic Review (June 19, 1997): 66–71. Back.
Note 13: Shijie ribao (World Journal), November 12, 1997. Back.
Note 14: Chen Weibin and Li Jingchen “The Developing Country Members Have Collectively Declared Their Support for China’s WTO Membership,” Renmin ribao (People’s Daily), December 8, 1997. Back.
Note 15: State Council of PRC, “Guanyu Zhong Mei maoyi pingheng wenti” [“On the China–U.S. Trade Balance”], Renmin ribao (People’s Daily), March 22, 1997; USTR, Foreign Trade Barriers: People’s Republic of China (1997). See http://www.ustr.gov/reports/net/1997/china.pdf. Back.
Note 16: Sanger, “U.S. Officials Say China Not Ready.” Back.
Note 17: Renmin ribao (People’s Daily), October 15, 1997, and November 12, 1997. Back.
Note 18: Ed Brown, “It’s Put Up or Shut Up for U.S. Trade Policy,” Fortune (October 27, 1997): 34. Back.
Note 19: USTR, “Appendix: U.S. Data for Given Trade Partners in Rank Order of U.S. Export,” Foreign Trade Barriers, 1997. Back.
Note 20: Robert P. O’Quinn, “How to Bring China and Taiwan to the World Trade Organization,” The Heritage Foundation Asian Studies Backgrounder no. 140 (March 22, 1996); Sanger, “U.S. Officials Say China Not Ready.” Back.
Note 21: Editorial, “How America Sees China: Friend or Foe?” Economist (November 1, 1997): 3. Back.
Note 22: Nicholas R. Lardy, China and the WTO, Brookings Policy Brief no. 10, 1997, Washington, DC: The Brookings Institution. Back.
Note 23: Barnathan J. Harbrecht, “Will China Agree to Pay Its Dues?” Business Week (December 26, 1994): 34–36. Back.
Note 24: Lardy, China and the WTO. Back.
Note 25:
The most-favored-nation (MFN) rule requires that each contracting party apply its tariff rules equally to all other parties without discrimination. Article 1, paragraph 1, provides that “any advantage, favor, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the product originating in or destined for the territories of all other parties” (Ray August, International Business Law: Text, Cases, and Readings [Englewood Cliffs, NJ: Prentice Hall, 1993], pp. 315–317).
The MFN rule has been central to the development of international trade in the last half century. However, the MFN rule of nondiscrimination is not without exceptions. The exceptions include the General System of Preferences (GSP), South-South Preferences, and Multi-Fiber Arrangements (MFA). Back.
Note 26: The U.S. government conducts its unilateral review of the trading practices of its trading partners, and the U.S. Congress reserves its right to overwrite the GATT/WTO’s rulings. Back.
Note 27: Zhi Wang, “China and Taiwan Access to the World Trade Organization: Implications for the U.S. Agriculture and Trade,” Agricultural Economics 17 (1997): 239–264; Y. Z. Yang, “China’s WTO Membership: What’s at Stake?” World Economy 19 (1996): 661–682. Back.
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