Commentary

Risky… or Worthy WTO Bid?

This article appeared in the Washington Times on July 18, 1999.
The insistence of U.S. Commerce Secretary William M. Daley that China continue to be treated as a “nonmarket economy” (NME), even though most prices are now market-determined, is a direct attack on China’s efforts to join the World Trade Organization. Denying the world’s 10th-largest trading nation WTO membership will only serve to slow the growth of China’s dynamic nonstate sector, which now accounts for 70 percent of industrial output value, and strengthen the power of hardliners.

When China’s Premier Zhu Rongji met with President Clinton in April, he offered major concessions that would provide the U.S. with greater market access in telecommunications, insurance, banking, agriculture, and other areas. Tariffs would be completely removed in several years on information-technology products, and the average tariff level on U.S. priority products would fall to 7 percent, which is in line with our other major trading partners.

But the United States scuttled that deal by insisting on a “super deal” - one that would protect U.S. special interests and require the People’s Republic to agree to be treated in a discriminatory fashion.

Backed by the Commerce Department, the United States insists China remain a NME for purposes of determining antidumping margins. Antidumping cases involving China would be resolved not on the basis of market-determined prices in the PRC but on production costs in “comparable market economies” in the Third World. Such treatment, notes Nicholas Lardy of the Brookings Institution, “is highly disadvantageous to China.”

Using the NME methodology, the Commerce Department has brought numerous antidumping cases against the PRC. In one recent case, involving the alleged dumping of frozen crawfish tail meat in the U.S., Commerce used India as a comparable market economy to determine production costs in the PRC - even though India has no crawfish industry. To protect the crawfish industry in Louisiana against cheap imports, the U.S. eventually levied a stiff tariff of more than 200 percent on imports of Chinese crawfish. Free trade and American consumers lost, protectionists won.

In discussing that case, and the forcefulness with which U.S. steel companies have lobbied for keeping China’s NME status intact, trade journalist Greg Rushford commented that the practice of using the NME methodology in antidumping cases “has long been one of the most abuse-prone of the American antidumping regime.”

Under pressure from the United States, China has agreed to maintain its NME status for five years after it accedes to the WTO. But the U.S., in its quest to get a super deal - to protect jobs in the heavily unionized steel industry and other import competing industries - is demanding that the PRC accept the NME label for a total of 10 years after joining the WTO.

Such blatant protectionism on the part of the United States undermines the very essence of the nondiscrimination principle that lies at the heart of the WTO. If the liberal trading order is to expand and prosper in the 21st century, China must be part of that order. And it must be admitted on the basis of the same principles that apply to other WTO members. An important first step would be to end discrimination against China and treat it as a market economy. Australia and the European Union have already done so.

The PRC has made significant progress in moving from a planned to a market economy. Today only about 5 percent of industrial product prices are determined by the government, compared with nearly 70 percent in 1979. More than 90 percent of retail prices and more than 80 percent of agricultural and raw material prices are market-determined. Australia’s East Asian Analytical Unit notes, “China’s market is increasingly competitive across a range of industries.”

That competitiveness has come about because the central government has allowed the growth of the nonstate sector, including private and foreign-funded enterprises. Since most of China’s export growth is due to the growth of the nonstate sector, denying China greater opportunities for free trade invariably harms its emerging market economy and strengthens state-owned enterprises.

Although China has to develop its legal system and afford better protection of property and contractual rights, in order to move from a “socialist market economy” to a private market economy, treating China as a NME, in order to protect inefficient U.S. producers, is harmful not only to the Chinese people, who seek greater economic freedom, but to U.S. consumers and businesses, who are deprived of the benefits of free trade.

James A. Dorn is a China specialist at the Cato Institute and editor of China in the New Millennium: Market Reforms and Social Development.