Commentary

Admit China To The WTO, But Don’t Bend The Rules

By Daniel Griswold
November 9, 1997

Speaking in London last week, the World Trade Organization’s director-general, Renato Ruggiero, urged the speedy admission of China to the WTO. But China’s bid for membership will require more than the offer it made in Geneva in December to eliminate tariffs on furniture, toys and beer. Before China gains the prestige and market access membership confers, its rulers need to show more commitment to the principles of liberal trade and the rule of law.

The issue should not be whether to admit China to the 132-member club, but when and under what conditions. After two decades of domestic reform and falling trade barriers, China has become the world’s 11th largest trade economy. Barring a retreat on liberalization, its 1.2 billion people guarantee that its weight in the world economy will only grow larger in the next decade.

Although still saddled with state controls and protection, China has moved rapidly to join the global economy. Since 1980, the share of industrial production controlled by the state has plunged from 80 percent to under 40 percent. The share of foreign trade controlled by the state has fallen from a virtual monopoly to 50 percent. Average tariff levels have dropped from 35 percent to 23 percent, with a commitment to cut the rate to 15 percent by the year 2000.

China’s mix of markets and state control would not be unique among WTO members. According to the study Economic Freedom of the World 1997, by James Gwartney and Robert Lawson, a number of WTO members are less free economically than China, among them Brazil, Bangladesh, Nigeria, and Venezuela. Even Cuba has managed to gain WTO membership.

More importantly, in the category of international transactions, China’s index of economic freedom ranks it squarely in the middle of the pack of WTO members. At the Asia Pacific Economic Cooperation summit in Vancouver in November, China’s President Jiang Zemin committed China to negotiate toward free trade in the sensitive information technology sector.

Despite its progress, China today is not ready for admission. Members of the WTO must commit to abide by its basic principles. Those include applying the same tariff rates to all member countries (the “most-favored nation” clause), applying internal laws equally to domestic and imported products, and administering trade rules in a transparent manner through price-based tariffs rather than more easily disguised quota restrictions.

Contrary to WTO principles, sections of China’s trading regime remain opaque, such as its unpublished import quotas and arbitrary import and export licensing system.

Another hitch is China’s request to enter the WTO under the relaxed standards applied to “developing” countries. That status would allow China to make smaller cuts in export subsidies than required of advanced economies and to phase in the cuts over a longer period. It would also allow China to impose quantitative restrictions to protect “infant industries” or its balance of payments position.

Lowering standards of liberalization for developing countries has been a mistake. Those double standards allow poorer countries to indulge in failed policies of protection, stunting their own development and arousing resentment in developed countries. Admitting a country that will soon be one of world’s top 10 traders under what will be perceived as preferential rules will erode the credibility of the WTO at a critical moment in the organization’s development. It will invite charges that China has been dealt with too leniently, instead of impartially according to the established rules applied to its major trading partners.

China’s rulers are eager to gain the economic benefits and the political prestige of WTO membership. The big four trading powers—the United States, Canada, Japan and the European Union—should channel that zeal by insisting that China liberalize further and faster, rather than less and later.

As the price of admission to the WTO, China should agree to abide by the full range of obligations that the charter requires. That includes further liberalization, transparent trade rules, national treatment of imported goods and investment, and the abolition of subsidies, quotas and import licensing.

In return, the advanced countries should agree to treat China as a grown up in the WTO by forgoing any extraordinary powers to block Chinese imports through enhanced “safeguard” provisions and abuse of anti-dumping laws.

A liberalized China operating within the WTO’s legal framework would boost global trade and production. As a byproduct, encouraging transparency and the rule of law in Chinese trade policy (not to mention free trade in information technology) can only be good for advancing human rights in China. This provides all the more incentive to extract the maximum liberalization from China’s mercantilist leadership.

In his meeting with President Clinton in December, the recently exiled Chinese dissident Wei Jingsheng urged caution in dealing with a regime unrestrained by voters or the rule of law. He warned the president, “Do not pay before the goods are delivered.” The same principle should apply to negotiating China’s accession to the WTO.

Daniel Griswold is associate director of the Cato Institute’s Center for Trade Policy Studies