Commentary

China’s Coming Battle with Congress

This article appeared in the Journal of Commerce on November 24, 1999, and the Korea Economic Weekly on November 29, 1999.
Now that the United States and the People’s Republic of China have reached an agreement concerning the latter’s accession to the World Trade Organization, the battle for congressional support is about to begin.

Although China can enter the WTO without a vote of Congress, provided two-thirds of the 134 member nations support accession, Congress must grant China permanent normal trade relations (NTR). If it does not, the stunning market-access benefits contained in the recent accord will flow to other nations, not to the US.

The choice would seem clear: repeal the Jackson-Vanik Amendment to the 1974 Trade Act, which requires annual renewal of most-favored-nation (now NTR) trading status for non-market economies (communist countries), and enjoy the rewards of trade liberalization with China, or retain a relic of the Cold War and deny US consumers and businesses a basic human right—the right to voluntary exchange.

Does anyone seriously believe that China’s trade status with the US should be based on a liberal emigration policy, as called for in Jackson-Vanik? China would be glad to send millions of immigrants to the US in return for permanent NTR.

The Soviet Union is gone, central planning is dead, and China has pursued market-oriented reforms for more than 20 years. Today, most prices in the PRC are determined by demand and supply, not by government decree, and more than 70 percent of industrial output value is produced by the non-state sector. That is why the European Union and Australia recently discontinued using the non-market-economy (NME) classification for China.

Communism, however, remains—and that is the issue Congress must confront. Can China be a market economy and a communist polity? No one will deny that the Chinese Communist Party holds a monopoly on power and violates human rights, but neither can anyone deny that most economic decisions are made by the market, not the “plan.”

What must be understood is that, although China does not yet have a free market, it has been moving step by step toward a market-liberal system since 1978. If NME means a

Soviet-style centrally planned economy, then the NME label is clearly inappropriate for the new (post-Maoist) China.

Even the China Daily—the voice of the CCP—concedes, “You cannot snap a finger and insist that China is still a non-market economy. Private, foreign and State-owned enterprises are running on an equal footing.”

Recent reports in the China Economic Quarterly suggest the private sector may account for as much as 53 percent of the mainland economy. The PRC constitution now recognizes the importance of the non-state sector, including private businesses, and non-state firms are increasingly seeking equal protection under the law.

By repealing Jackson-Vanik, Congress would clear the way for increased US-Chinese trade (and more peaceful relations), lock in market liberalization for China and promote long-run political reform by subjecting the PRC to international norms and the rule of law.

This does not mean we should condone the CCP’s human rights’ violations or trade away our military secrets and technology for profit. It simply means we should face reality and recognize that political change will come slowly to the mainland and that overall liberalization is more apt to occur in an atmosphere of trust developed through trade relations than in one of threats and protectionism.

Indeed, it is ironic—and contrary to the spirit of the WTO’s nondiscrimination principle—that the US should insist, under the current accord, that China’s NME status be retained for a period of 15 years after the PRC accedes to the WTO. Thus, even if Congress repeals Jackson-Vanik, the NME stigma will stay with China for the foreseeable future. For that reason, the US-Chinese WTO accord was a victory for US protectionism and for Chinese liberalism—and points to a serious flaw in the WTO protocol.

Allowing the US to treat China as a NME makes it easier for antidumping penalties to be imposed on the mainland’s exports—and for the US to protect its heavily unionized steel industry. Moreover, China has “agreed” to allow the US to extend (by up to 12 years) selective safeguards against import “surges” in order to protect US textile and other industries.

Those safeguards will follow the standard set by the obscure section 406 of the Trade Act of 1974 in determining whether US industry has been damaged by an import surge from China. That section applies to NMEs, and instead of having to prove “serious injury” (as in section 201), all the US must demonstrate is “market disruption,” a vague and weak standard for justifying higher tariffs or other protectionist measures. Meanwhile, textile-specific safeguards are available for four years after import quotas expire in 2005.

Forcing China to accept an extension of the NME methodology and extending safeguards beyond normal WTO practices are a clear indication that the WTO protocol is flawed. These measures are instances of managed trade or “trade socialism,” not trade liberalism—and they are being driven, not by communists, but by “capitalists.”

Congress should repeal Jackson-Vanik, join the EU and Australia in ending considering China an NME, and make sure the WTO protocol is consistent with free-trade principles. Until the schizophrenic treatment of China ends, the symbolic role of the US as the world’s champion of freedom must be questioned.

James Dorn is a China specialist at the Cato Institute and editor of China in the New Millennium.