CIAO DATE: 2/00

Two Sides to China’s Entry into the WTO

Claude E. Barfield and Mark A. Groombridge

On The Issues
January 2000

The American Enterprise Institute for Public Policy Research

 

The November breakthrough in trade negotiations between Washington and Beijing set the terms for China’s proposed entry into the World Trade Organization. The deal is to be applauded for lowering China’s tariffs and increasing foreign access to its markets. But the provisions that would allow WTO members to manage trade with China constitute a setback.

As we learn the details of a deal struck between the United States and China on the terms of accession for Chinese membership into the World Trade Organization, there is cause for rejoicing and cause for worry.

Certainly, the market access provisions seem close to the liberal package China agreed to in April, and therefore heartening. But on key issues such as administered protection through the use of selective safeguards, antidumping actions, and transparency (relating to commercial law and legal due process), the deal appears wanting and potentially retrograde.

Finally, it appears that U.S. negotiators have also missed an important opportunity to use the accession process to force the Chinese to introduce greater transparency in their commercial laws and administrative procedures as they affect foreign businesses and investors.

 

The Good News

First, the good news on market access and tariff reduction: Despite adamant opposition from strategic industrial sectors and their allies in Beijing, President Jiang Zemin pushed through a market-opening package that certainly will gladden the hearts (and, they hope, the pocketbooks) of Western businessmen. Thus, industrial tariffs will be cut to 17 percent from an average of 21 percent, and agricultural duties to 14.5–15 percent. China will also end export subsidies of agricultural commodities.

In a separate automobile package, China promised to phase down tariffs to 25 percent from over 80 percent by 2006 and grant foreign car manufacturers the authority to provide financing for car purchases. In addition, foreign auto companies are given full distribution rights—indeed, henceforth all foreign industrial manufacturers will be able to import and export without Chinese middlemen and provide after-sales repair and maintenance.

The most difficult issues arose in the trade-in- services area, particularly with regard to telecommunications and financial services. And here, too, the new agreement comes close to the liberal concessions of April. Telecommunications companies, now restricted to equipment sales, will be able to control 49 percent of telecommunications service companies upon accession and 50 percent two years later.

Finally, in the financial services—banking, insurance, securities—foreign banks will be able to conduct business with local enterprises in local currency upon Chinese accession; and after five years, those banks will be able to provide services directly to individual Chinese consumers. On securities, accession brings a ceiling of 33 percent foreign ownership for fund managers, with the figure rising to 49 percent after three years.

 

The Bad News

The downside of the new agreement stems from the very long periods carved out for the United States and other industrial nations to “manage” trade with China. This will be done using “safeguards,” actions that permit supposed temporary protection against a sudden influx of imports that threatens sudden injury to a domestic industry.

Under current WTO rules, nations can institute safeguards for a four-year period, renewable once. They can’t single out individual nations for special action, and they must gradually phase out the protection. Under the new agreement, however, the United States forced the Chinese to accept this highly protectionist action for twelve years, or, in the crucial textile sector, for nine years.

Similarly, the United States demanded long-term manipulation of trade flows through the application of special antidumping methodology. Dumping in trade terms is defined as selling below costs at an “unfair” price. Even for market economies, economists with virtual unanimity condemn antidumping actions as a protectionist front for uncompetitive domestic industries.

The Clinton administration, however, proposes to worsen the situation by continuing to define China as a “nonmarket economy” for fifteen years, thereby perpetuating an even more arbitrary methodology to determine whether Chinese exports are “unfairly” traded. Using nonmarket criteria allows the complainant to ignore local Chinese prices and use surrogate or constructed prices, a practice that allows large-scale manipulation of data, as the U.S. Commerce Department has ably demonstrated over the years.

Cynically, U.S. Trade Representative Charlene Barshefsky stated that U.S. laws do “provide for the graduation of sectors or an economy as a whole from [nonmarket] rules,” knowing full well that U.S. government agencies in recent years have cravenly succumbed to interest-group pressure against such graduation. China will be in antidumping limbo for the full fifteen years.

 

Exactly the Wrong Message

There is a twofold danger in this result. On the one hand, protectionist interests within WTO countries will become accustomed to the protection afforded by “managing” trade and will move heaven and earth to perpetuate the system in the future. On the Chinese side, it sends just the wrong message to government bureaucrats who will preside over the export quotas on Chinese companies that will surely result from the safeguards and antidumping actions. The old-style Communist “command and control” attitude thus will be all the more difficult to eradicate.

Finally, this accord’s apparent silence with regard to transparency will create problems. Given the primitive state of Chinese law and administrative procedures, foreign businesses face years of daunting obstacles when commercial disputes arise. The protocol of accession should have spelled out in some detail minimum standards of due process, including such things as notice of hearings, standards of evidence, and publication of the rationale behind agency decisions.

Transparency and contingency protection measures do not have the sex appeal of market-access negotiations so dear to the hearts of Western businessmen. But mistakes made in those areas are likely to haunt the WTO for years to come.

 

Claude E. Barfield, the director of trade policy studies at AEI, and Mark A. Groombridge, a resident fellow at the Center for Trade Policy Studies at the Cato Institute, are the authors of Tiger by the Tail: China and the World Trade Organization (AEI Press, 1999; to order call 800.937.5557). A version of this article appeared in the weekly edition of the Asian Wall Street Journal, November 22-28, 1999.