Commentary

Normalize Trade with China

This article appeared in the Journal of Commerce on April 7, 1999.

China’s recent concessions in its attempt to gain admittance to the World Trade Organization indicate a willingness to normalize trade relations. It is in China’s interest to create a more favorable environment for direct foreign investment and to open more fully to the outside world in order to gain the expertise and information needed in today’s highly competitive global economy.

To narrow the gap in negotiations between itself and the West, China proposes to relax restrictions on foreign investment in telecom companies, abolish tariffs on telecom equipment, allow up to 50 percent foreign investment in retail banking operations and in insurance companies, and expand the number of cities from which insurance could be sold - all by 2005.

In addition, China would partially lift the ban on foreign distribution and on U.S. citrus products, and increase quotas and lower tariffs on other farm products.

Although these are only “”proposals,” they are a significant change from the deadlock that characterized negotiations just a short time ago. Moreover, the West should recognize that China has made steady progress since 1978 in moving toward a market economy and is beginning to create a legal infrastructure.

Indeed, last month the National People’s Congress approved a constitutional amendment that will give greater protection to private businesses.

The time appears ripe to seriously consider normalizing trade relations with China by admitting it to the WTO.

Moreover, it is time for Congress to reduce uncertainty in U.S.-China relations by granting the People’s Republic permanent “”normal trade relations,” and thereby ending the annual trade certification spectacle. Both Hong Kong and Taiwan support such a move and would benefit from it.

The current hysteria over China should not be allowed to blind Congress to the importance of normalizing trade relations. The strategy should be to use trade liberalization as a lever to reduce the role of the Chinese Communist Party in economic life. The more the party and the state get out of business, the more freedom and dignity the Chinese people will have.

China needs to abide by formal rules when entering into the liberal trading community represented by the WTO. At the same time, China should be treated fairly and be bound by the same principles that bind existing members of the WTO.

That means the nondiscrimination principle should apply, and China should be admitted as a developing, rather than a developed, country. China’s size and power require special attention, but China is still a poor country, as measured by per-capita income, and should not be discriminated against by richer nations that fear competition.

Likewise, the WTO, as the guardian of a liberal trading order, should reject the stringent requirement - supported by the European Union - that China accept special “”safeguard” provisions for imposing tariffs or quotas on its exports in order to qualify for WTO membership. The WTO should apply the rule of law to its own members and protect free trade, or go out of business.

China has liberalized its foreign trade regime by expanding the number of foreign trade corporations, which now number in the thousands; by allowing large state-owned enterprises - and a number of foreign-affiliated firms - to have direct trading rights; and by reducing tariff and nontariff barriers to trade.

According to the World Bank, China’s trade-weighted average tariff declined from 31.2 percent in 1992 to 19.8 percent in 1996, and is scheduled to drop to 16.2 percent by 2005. Furthermore, China has promised to eliminate most of its non-tariff barriers upon accession to the WTO.

However, China continues to offer its state-owned enterprises a high level of effective protection for fear of social disruption.

China’s domestic problems, including the need to restructure and recapitalize banks, may slow China’s progress toward meeting the criteria for accession to the WTO. Yet, in the long run, it is in China’s interest to be a member of the WTO.

It is also in the interest of existing members, especially Hong Kong, to have China join the WTO and abide by international norms and rules.

The U.S. policy of engagement has been successful and should be continued and deepened. Congress should not let the bilateral trade deficit with China interfere with that strategy. Any movement away from freer trade and toward protectionism would only delay China’s progress toward freedom and prosperity and harm the global economy.

The United States should help move China in the direction of greater economic and personal freedom by adopting a consistent, long-run policy that normalizes trade relations, integrates China into the global trading order, and promotes exchange on a broad front.

James Dorn is the vice president for academic affairs at the Cato Institute and editor of China in the New Millennium: Market Reforms and Social Development.