Commentary

China and the WTO

It has been said that when the United States sneezes, the world catches a cold. While this metaphor still prevails, the world is now heavily vested in China’s well being as well.

A decade of near double-digit annual economic growth, tens of billions of dollars of annual investment inflows, an industrial complex that churns out an ever-increasing share of the world’s consumption, and the implications these developments have had on everything from raw materials prices to shipping rates have thrust China into the spotlight in 2004.

But success and the capacity to influence events bring responsibility. Thus, how China manages its economic policies, including its trade relations with the United States, Europe, and its Asian neighbors, will impact profoundly the direction of the world economy and institutions linked to it, such as the World Trade Organization.

China is the pretty girl with whom everyone wants to dance. The countries of ASEAN, New Zealand, and Australia have been tripping over themselves to get a date — for a free trade agreement. Argentina, Brazil, and Chile are giddy about commitments from the Chinese premiere for direct investment and big ticket purchases. American, European, and Asian companies continue unabated the process of setting up manufacturing operations in China. And, the reality of a growing consumer class — the prospects of which are made all the more alluring by new infrastructure projects in the country’s interior — has producers throughout the world dreaming of the possibilities.

In large measure, China owes the rapid pace of its economic progress to its World Trade Organization accession. Joining the WTO leveled the playing field for Chinese exporters, who until then often faced steeper trade barriers than those applied to standing WTO members. Facing equivalent trade barriers, Chinese exporters have been able to capitalize on their wage and other logistical advantages to capture growing shares of foreign markets.

Perhaps more importantly, WTO membership forced China to engage in a process of liberalizing its own rules on investment, foreign ownership, tariffs, and other barriers to trade. While much remains to be accomplished in these areas, WTO membership and the initial steps taken by China to honor its commitments have provided confidence to foreign investors, business partners, and importers that China would not be subject to whimsical and unpredictable changes in the business climate. Thus, the investment and purchase orders have poured in.

Going forward, it is important that China continue to recognize and honor this linkage. It may be tempting for China to be smitten by the acclaim and succumb to the fallacy that bilateral or regional trade agreements are viable alternatives to the WTO. But ASEAN’s countries are seeking to link their fortunes to China’s because under the WTO the latter has become an investment magnet — largely at the expense of the former.

China is seeking copper and iron ore and other raw materials in South America because it wants to continue large infrastructure projects and it needs to feed its industrial machine. These developments are attributable to the willingness of Americans and others to buy Chinese-made products, again outcomes inspired by the WTO.

But Americans can continue to consume Chinese products only if the reserves are recycled. If China intends to diversify its portfolio by foregoing American bonds and securities in favor of purchasing hard assets in other countries — a perfectly legitimate choice — it will have to purchase more American services, technology, bio-technology, entertainment, and pharmaceutical products. This will require further liberalization of rules that disadvantage foreign providers, and substantially better enforcement of intellectual property protections.

The Bush administration has been a fairly decent steward of trade relations with China. It has overruled imposing sanctions under the China safeguard law on each of four occasions that the U.S. International Trade Commission recommended that prescription. It declined to initiate an investigation into what U.S. unions were calling unfair labor practices in China, and it dismissed a similar investigation into currency undervaluation.

On matters of antidumping and textile safeguards, the Bush administration has acted less commendably. But its actions on these fronts reflect a prominent anti-trade — indeed, anti-China — strain in certain U.S. business and policy circles that will only grow worse if China does not, at a minimum, show greater progress on intellectual property rights enforcement.

Multilateral trade rules embodied in the WTO have been the infrastructure used by China — and indeed most of the world — to create wealth and opportunity over the past decade. Should China lose sight of its importance, the world may catch more than a cold.

Dan Ikenson is a trade policy analyst with the Cato Institute.