Reading Table: China & The WTO

CHINA & THE WTO
by UICIFD STAFF

August 2000 INTRODUCTION:

The World Trade Organization (WTO) is currently considering 31 countries' bids for membership; China is one of those countries. In this edition of the Reading Table we present background information and different view points on this issue. Let us hear your opinion in our currentPoll. ABSTRACTS:

WILL CHINA FOLLOW WTO RULES?
BEIJING'S TRACK RECORD ISN'T PRETTY
by Paul Magnusson and Howard Gleckman in Buniness Week, Jun. 5, 2000, pp. 42-46.

On May 24, 2000, the House of Representatives voted 237 to 197 to grant China Permanent Normal Trade Relations status. Although the Senate must yet vote, the May 24th decision will certainly help China become a member of the WTO. China's entry into the WTO would seem to normalize relations with the U.S., however, China's compliance with the WTO's rules and regulations will be questionable. For the last ten years U.S. exports to China have only been 2% of Chinese imports. These authors maintain that Chinese entry into the WTO is not likely to change that figure in the near future. In a totalitarian nation such as China domestic products to be used in manufacturing are preferred over imports. Therefore many foreign companies will, to their disadvantage, find themselves having to offer contracts containing provisions requiring them to use Chinese products in their manufacturing. This may cause foreign companies to pay more for materials than they may have desired had they been able to get manufacturing materials elsewhere. Lastly, although the U.S. and the other 135 members of the WTO will be able to take China before the WTO dispute settlement panels, it can take years to settle such disputes and governments often chose not to follow the rules. The author notes that currently China often ignores human rights rules and regulations showing that they may do the same with WTO rules and regulations.

NEW HURDLES: FOREIGN BANKS IN CHINA
by F.T. McCarthy in The Economist, Apr. 8, 2000.

With China's likely entry into the WTO, foreign bankers in the future may be able to do business there more easily than at the present time. However, foreign banks will still not be able to do any real business in China unless China's interest rates are deregulated along with proper bank market development. The WTO has no mechanism to address this type of issue. Exacerbating the problem is the fact that the Central Bank of China can continue to apply local currency regulation as long as it maintains that it is applying the same standards to every bank. Hence foreign banking firms are left with no protections.

CONGRESSIONAL TESTIMONY:
CHINA'S ACCESSION TO THE WTO AND HUMAN RIGHTST
by Mike Jendrzejczyk, WA Director, Asia Director of Human Rights Watch (May 5, 2000)

China's possible entry into the WTO may be important to improving the human rights situation in China. Economic reforms such as economic and general transparency may lead to a legal and court system that would be separate from the Communist Party and the State. But WTO membership will not guarantee a rule of law, workers rights, or meaningful political reform. Presently China breaks international rules of human rights. Mary Robinson, the U.N. High Commissioner on Human Rights, visited China recently and found crackdowns by the government on freedom of expression, freedom of religion, and freedom of association on criminals as well as suspected dissidents. For example many Chinese academics at credible Chinese Universities have been purged. The Human Rights Watch recommends that the U.S. demand human rights conditions before granting PNTR. Further, the Human Rights Watch recommends that the U.S. develop a code of conduct for U.S. businesses practicing in China.

THE WTO DILEMMA
by: Bruce Stokes , Senior Fellow Council on Foreign Relations

This author is concerned with the numerous problems that could arise if China becomes a member of the WTO. First, he doubts whether China will be able to keep the commitments it makes in becoming a member of the WTO. He believes that there is a lack of Chinese understanding of the implications of becoming a member of the WTO. Because Beijing will not have to follow WTO mandates, he is concerned that ultimately China could withdraw from the WTO causing it to lose its international credibility. Another problem he thinks may develop is that China may not be willing to complete a Millennium Round because of the agenda that it includes. The upcoming agenda includes liberalizing farm trade, opening up the service industry to international competition, and opening up commerce. To ensure a smooth transition and relationship in the WTO Stokes recommends that the US, Europe, and Japan offer funds and expertise to provide a comprehensive educational and training program for the Chinese officials involved.

WTO AND THE REFORM OF CHINA'S STATE BANKS
by Pieter Bottelier, China Economic Outlook, CSIS Press (Jun. 14, 2000)

The article stresses the fact that China’s accession to the WTO will have long-term beneficial effects on the Chinese economy. China’s commitment, as a WTO member, to open its financial markets to foreign competition will have far-reaching consequences on its banking system and the economy as a whole. The reform of China’s commercial state-owned banks will have to intensify to enable the banks to compete with their foreign counterparts under WTO terms. The reform of the banking sector will accelerate the reform and privatization or liquidation of bankrupt state-owned enterprises. China’s commercial banks, acting primarily as agents of the state, used to provide preferential loans to ailing state-owned enterprises. The prospect of WTO membership will give Chinese commercial banks a compelling reason to eliminate the large nonperforming loan portfolio. During the last 20 years of reforms China’s markets have become more open for imports, but they are still closed for financial services. After accession, foreign banks will be able to conduct local currency business with Chinese corporate customers and will enjoy "national treatment." The modern social security system will be under pressure to develop. The conversion of the old social security system based on individual work units in the state sector into a two-pillar system (with a third voluntary pillar based on private insurance) is a complex task financially, administratively and politically. WTO membership will help the central authorities of China in pushing through critical reform decisions and put at China’s disposal fresh international resources (financial, managerial, system development experience, software).

THE MOST IMPORTANT VOTE CONGRESS WILL PASS THIS YEAR
by Laura D’Andrea Tyson, in Business Week (May 1, 2000)

The author unequivocally supports China’s admission to the WTO. She states that the deal China struck with the Unites States to secure U.S. support for its admission to the WTO is in the economic interest of the U.S. The United States will not have to open its markets any further, so there will not be an uncontrolled increase in imports from China. But China agreed to open its markets significantly thereby allowing for a major expansion of U.S. exports to China. Upon admitting China, the WTO will enforce China’s concessions and trading obligations. Another benefit the author sees in China’s accession to WTO is that the strengthening of the commercial relations between the United States and China will expand the flow of information, ideas and business practices to China’s newly formed middle class. Additionally, it will hasten the pace of China’s economic and political reform.

COMING TO TERMS WITH THE "WTO EFFECT" ON US-CHINA TRADE AND CHINA'S ECONOMIC GROWTH
by Mark W. Frazier , NBR Briefing, The National Bureau of Asian Research (Sept. 1999)

The author stresses the fact that the continued expansion of US exports to China depends on the continued growth of Chinese economy. Moreover, there is a linear relationship between the annual rate of China’s economic growth and the rate of growth in China’s exports of American and other foreign goods (the author demonstrates this point with a chart). For the most part, U.S. exporters have already benefited from cuts in tariffs, which on average have declined over the past 20 years. The real significance of the WTO accession lies not in the short-term benefits that might accrue to corporations in specific sectors but in the restructuring of China’s economy as a whole over the next decade. It is in the long-term interests on the US and China’s other trading partners to encourage the growth of the Chinese economy. The article reviews some of the estimates that various organizations and scholars have made of the likely "WTO effect" on U.S. - China trade and on China’s overall growth in imports and compares them with a "status quo" scenario in which China remains out of the WTO. The author then gives his own estimate and a demonstration of a close relationship between the rates of China’s economic development and growth rates of the
foreign trade.

TIGER BY THE TALE: CHINA AND THE WTO
by Mark A. Groombridge, Claude E. Barfield, American Enterprise Institute for Public Policy Research (1999)

Tiger by the Tail explores the issues surrounding China’s accession to the WTO. The book focuses on how the WTO can best resolve conflicts with China after China’s inevitable admission to the organization. The authors argue that the only way to avoid conflict within the WTO is to persuade the Chinese to accept, as conditions of WTO membership, at least minimal provisions for administrative and legal due process, as well as the creation of specialized courts capable of dealing with complex issues of commercial and trade law. For all the difficulties and dangers that full membership for China entails for the multilateral trading system, China must be accommodated and integrated if the WTO aspires to retain its status as a global economic and legal force. Accession to the WTO will help China along the difficult path of reforming its economy into one governed increasingly by market forces and the rule of law.

OUR CHINA ILLUSIONS
by James Mann , The AM Prospect, p.22 (5 Jun. 2000)

The author begins the article by noting the current frenzy about China's entry into the WTO. He observed the fact that both the Clinton administration and the business community are anticipating congressional approval of China's trading rights in the United States. Beijing began to pursue membership in the WTO in 1986 and reached a deal with the European Union in 2000 following the landmark trade agreement with U.S. in 1999. Considering the enormous attraction of the Chinese market to the business community, the author predicts that Congress will grant China Permanent Normal Trade Rights (PNTR) no later than the spring of 2001. He then reviews the past relationship between the United States and China to show various wrong assumptions the United States has made. He notes how George Bush attempted to form a strategic partnership with China against the Soviet Union but ended up finding China unhelpful and mistrustful. After the Tiananmen massacre in the early 1990s, Bill Clinton attempted to force China to improve its human rights policies by imposing economic sanctions. During this period, however, China began to open up its market to other Asian nations and aimed to achieve rapid economic growth. Soon western leaders began rushing to enter into business relationships with China and Clinton ceased pressuring China for changes in human rights policies. The author questions whether trade with China is trade with entrepreneurs or state enterprises, and whether the Chinese market is indeed an outlet for American products. He points out that China's economic growth rate and foreign investment have continued to decline since the mid-1990s. The author worries that China's economy will not be able to sustain the burdens that come with WTO membership and China may not fully comply with the rules. He concludes that while it is possible that China’s entry into the WTO will lead to a political liberalization, it will not happen in ways the Americans expect it to.

CHINA IN A HOMESTRETCH
by Alejandro Reyes, in AsiaWeek , p. 50 (2 Jun. 2000)

The author begins the article by noting China’s mixed feeling about WTO membership: the expectation for rapid economic growth and fear for the collapse of domestic enterprises. Once China becomes a member of the WTO, it will have to follow the trade rules to open its market and reduce tariffs on imports. The author predicts that by following the WTO rules, China may potentially develop a more efficient economy, more reliable judiciary, and a more prosperous society. But on the other hand, as the author notes, Chinese businessmen are concerned that they might not be able to compete with foreign enterprises in the open market. The author then describes the positive reaction of foreign enterprises toward China’s WTO membership, and in particular, how major American enterprises have lobbied intensively for granting PNTR to China. He reasons that China’s trade deal with the European Union and Beijing’s mild response to Taiwan President Chen’s inauguration speech relieved some of the tensions that may have held the Congress back from granting PNTR. The author believes that WTO membership will lead China to the next level of development, both economically and politically. The author concludes by predicting that China will be struggling with growing problems in the next 10 to 20 years, and at the forefront of these problems is the high unemployment rate that has haunted the nation for decades.

THE SQUANDERED PRESIDENCY: DEMANDING MORE FROM THE COMMANDER-IN-CHIEF
by Richard N. Haass in Foriegn Affairs, p. 139 (Jun. 2000)

The author begins the article by commenting on U.S. foreign policy in the Clinton era. He pointed out that the Clinton administration did not achieve much in terms of establishing foreign relations and achieving new economic growth. He notes in particular that U.S. foreign policy suffered from a lack of attention under the Clinton administration. The author reasons that the rise in trade volume was largely contributed to the NAFTA and WTO agreements that were negotiated by Clinton's predecessor. He acknowledges Clinton's efforts in developing international coalitions in the Mexican and Asian financial crisis, resolving the tensions over nuclear weapons between Russia and her neighboring countries, and engaging in humanitarian interventions. However, the author stresses that the Clinton administration has failed to expand the coverage of NAFTA and delayed bringing China into the WTO. The author points out that Russia, on the other hand, benefited from the administration's more consistent approach. He also notes the administration's failure to implement forceful measures to bring Iraq into compliance with the U.N. Security Council requirements. The author then describes instances where the U.S. applied resources that were disproportionate to the interests at stake. He believes the Clinton administration has failed to set up a framework under which resources are allocated and upon which more coordinated decisions are based. The author feels Clinton's approach to foreign affairs is largely influenced by domestic politics. The author further comments that international affairs are simply not one of Clinton's major concerns since "no single force threatened America's existence." He concludes by urging the president to implement a foreign policy that represent what the people really need and not just want they want.

UNRESTRICTED WAR: THE LEVELLER
by Ehsan Ahrari in Jane's Intelligence Review, Vol. 12, No. 2 (01 Feb. 2000)

The article focuses on the growing attention Beijing has given to the development of China’s military subsequent to the collapse of the Soviet Union. He observes that China sees the United States as a superpower that will potentially threaten China's existence and therefore Chinese strategists urge Beijing to study the U.S. approach to war. The author comments that China will not benefit much by modeling the U.S. approach. He points out the significant differences between China and the U.S., for example, the fact that the U.S. becomes involved in military conflicts mostly to preserve human lives and to respond to terrorism. The author reasons that the U.S. aims to minimize casualties and therefore focuses on the research and development of qualitatively superior technology. He then examines the war strategy presented in the book "Unrestricted War" written by two senior Chinese colonels. The book received much media attention from the West because it was read by President Jiang Zemin and other Chinese officials. The author describes the major points of the book and notes that it focuses on how a developing nation with a relatively weak economy can face the high-tech warfare. The author notes that the message behind the book "Unrestricted War" is that an underdeveloped nation like China is not bound by the war rules made by developed nations, and therefore it may go to the extremes to win in a military conflict. The author concludes that the U.S. should stand by its security commitments to Taiwan, Japan and Korea even though the U.S. plans to form strategic partnership with China.

CHINA AND THE WTO:
TENSIONS BETWEEN GLOBALIZED LIBERALISM AND LOCAL CULTURE
by Pittman B. Potter in the Canadian Business Law Journal, p. 440 (December 1999)

Potter argues that efforts to unify international commercial law by integrating international economic norms with domestic institutions ignore the conflict between "liberal law norms" and the norms of local communities and cultures. In particular, this article discusses China’s WTO accession in the context of tensions between the "liberal regulatory norms" of the GATT/WTO and China’s legal norms governing government regulation, dispute resolution and intellectual property protection. First, the author argues that GATT places significant emphasis on state responsibility for compliance while China, for various reasons, has difficulty controlling its provinces. Second, it is suggested that while the WTO "Understanding" requires that national judicial systems act in compliance with international treaty obligations and norms in an expanded range of trade relations, Chinese legal culture would remain an obstacle to compliance with international norms due to structural deficiencies of the Chinese court system combined with a weak record of enforcement in foreign arbitration awards. Last, it is suggested that the WTO TRIPS Agreement emphasizes the intertwining of substantive standards with enforcement procedures, and while the Chinese IPR system has adopted multiple intellectual property rights substantive standards, it has failed in the area of enforcement due to Chinese legal culture and an emphasis on political tutelage. The author suggests that China’s accession to the WTO will require not only that China accept the WTO provisions, but also that it actually work internally on implementing those provisions.

THE IMPACT OF WTO/PNTR ON CHINESE POLITICS
by Joseph Fewsmith in NBR Analysis (July 2000)

The author notes that the debate in Congress over whether to grant China permanent normal trade status (PNTR) has focused in large part on whether PNTR will promote economic and political reform in China. Opposition to PNTR has focused on fears that the U.S. will lose leverage for dealing with China, and thus reform in China will slow. The author examines the politics of U.S.-China relations and reform on three levels: elite policy makers, intellectual "opinion makers," and broader public opinion. The author’s survey indicates that passage of PNTR would have positive effects on all three levels for U.S.-China relations and the prospects of reform.

THE TAIWAN FACTOR IN THE VOTE ON PNTR FOR CHINA AND ITS WTO ACCESSION by Nancy Bernkopf Tucker, NBR Analysis (July 2000)

The author focuses on China’s accession to the World Trade Organization (WTO) and its acquisition of permanent normal trade relations (PNTR) with the U.S. in the context of its impact on Taiwan. While accession to the WTO and acquisition of PNTR are vital to China’s 1.3 billion people, it is also vital to Taiwan’s 22 million people for two reasons. First, Taiwan wishes to join the WTO, but most members of the WTO have accepted the idea that Taiwan will not gain entry until China is admitted. Second, Taiwan has moved such a great deal of its manufacturing to the mainland of China that any failure to grant PNTR to China could potentially harm Taiwan’s economy severely. As a result, Taiwan has become one of the biggest proponents of China being admitted to the WTO and acquiring PNTR from the United States. The article also focuses on possible obstacles Taiwan may face in trying to enter the WTO from China if China gains entry to the WTO first, as well as what interaction and integration could result between China and Taiwan should they both be granted admittance to the WTO.

FORIEGN AFFAIRS, DEFENSE, & TRADE DIVISION IB91121
by Wayne M. Morrison in China-U.S. Trade Issues , (Jun. 19, 2000)

The author wrote an issue brief for the Foreign Affairs, Defense, and Trade Division concerning China-U.S. trade issues in light of permanent normal trade relations (PNTR) and China’s impending accession to the World Trade Organization (WTO). While Congress does not play a direct role in the process of China becoming a WTO member, the U.S. will not be able to apply the WTO agreements to China if no agreement is made on PNTR. The author analyzes the arguments of opposition to granting PNTR, which include a fear that Congress will lose an effective tool to influence U.S. policy towards China on both trade issues and non-trade issues such as human rights. The author also analyzes the arguments from proponents of granting PNTR status to China, who argue that the agreement is needed to ensure that U.S. firms receive the full benefits of China’s WTO accession, such as trade concessions and the ability to use the WTO dispute resolution process. In addition to a background and analysis of China-U.S. Trade Issues, the brief includes a summary of the most recent events in China-U.S. trade relations, including references to important legislation passed by the U.S. concerning the granting of PNTR to China.