Two Sides to China’s WTO Membership

November 17, 1999

As we learn the details of a deal struck between the United States and China on the terms of accession for Chinese membership into the World Trade Organization, there is cause for rejoicing and cause for worry.

Certainly, the market access provisions seem close to the liberalpackage China agreed to in April and therefore heartening. But on keyissues such as administered protection through the use of selectivesafeguards, antidumping actions and transparency (relating to commerciallaw and legal due process), the deal appears wanting and potentiallyretrograde. Finally, it appears that U.S. negotiators have also missedan important opportunity to use the accession process to force theChinese to introduce greater transparency in their commercial laws andadministrative procedures as they affect foreign businesses andinvestors.

First the good news on market access and tariff reduction. Despiteadamant opposition from strategic industrial sectors and their allies inBeijing, President Jiang Zemin pushed through a market‐​opening packagethat will certainly gladden the hearts (and, they hope, the pocketbooks)of Western businessmen. Thus, industrial tariffs will be cut to 17% froman average of 21%, and agricultural duties to 14.5% — 15%. China willalso end export subsidies of agricultural commodities.

In a separate automobile package, China promised to phase down tariffsto 25% from over 80% by 2006 and grant foreign car manufacturers theauthority to provide financing for car purchases. In addition, foreignauto companies are given full distribution rights — indeed, henceforthall foreign industrial manufacturers will be able to import and exportwithout Chinese middlemen and provide after‐​sales repair andmaintenance.

The most difficult issues arose in the trade in services area,particularly with regard to telecommunications and financial services.And here, too, the new agreement comes close to the liberal concessionsof April. Telecommunications companies, now restricted to equipmentsales, will be able to control 49% of telecommunications servicecompanies upon accession and 50% two years later. Despite statements asrecent as last week from China’s Minister of Information Industries, WuJichuan, that foreigners will not be able to invest in China’s internetoperations, the current agreement does allow for such investment.

Finally, in the financial services — banking, insurance, securities –foreign banks will be able to conduct business with local enterprises inlocal currency upon Chinese accession; and after five years, these bankswill be able to provide services directly to individual Chineseconsumers. On securities, accession brings a ceiling of 33% foreignownership for fund managers, with this figure rising to 49% after threeyears.

The downside of the new agreement stems from the very long periodscarved out for the United States and other industrial nations to“manage” trade with China. This will be done using “safeguards,” actionsthat permit supposed temporary protection against a sudden influx ofimports that threatens sudden injury to a domestic industry.

Under current WTO rules, nations can institute safeguards for afour‐​year period, renewable once. They cannot single out individualnations for special action, and they must gradually phase out theprotection. Under the new agreement, however, the United States forcedthe Chinese to accept this highly protectionist action for 12 years, orin the crucial textile sector for nine years.

Similarly, the U.S. demanded long‐​term manipulation of trade flowsthrough the application of special antidumping methodology. Dumping intrade terms is defined as selling below costs at an “unfair” price. Evenfor market economies, economists with virtual unanimity condemnantidumping actions as a protectionist front for uncompetitive domesticindustries.

The Clinton administration, however, proposes to worsen the situation bycontinuing to define China as a “nonmarket economy” for 15 years,thereby perpetuating an even more arbitrary methodology to determinewhether Chinese exports are “unfairly” traded. Using non‐​market criteriaallows the complainant to ignore local Chinese prices and use surrogateor constructed prices, a practice which allows large‐​scale manipulationof data, as the U.S. Commerce Department has ably demonstrated over theyears.

Cynically, U.S. Trade Representative Charlene Barshefsky stated thatU.S. laws do “provide for the graduation of sectors or an economy as awhole from [non‐​market] rules,” knowing full well that U.S. governmentagencies in recent years have cravenly succumbed to interest‐​grouppressure against such graduation. China will be in anti‐​dumping limbofor the full 15 years.

There is a two‐​fold danger in this result. On the one hand,protectionist interests within WTO countries will become accustomed tothe protection afforded by “managing” trade and will move heaven andearth to perpetuate the system in the future. On the Chinese side, itsends just the wrong message to government bureaucrats who will presideover the export quotas on Chinese companies which will surely resultfrom the safeguards and antidumping actions. The old‐​style Communist“command and control” attitude thus will be all the more difficult toeradicate.

Finally, this accord’s apparent silence with regard to transparency willcreate problems. Given the primitive state of Chinese law andadministrative procedures, foreign businesses face years of dauntingobstacles when commercial disputes arise.

Transparency and contingency protection measures do not have the sexappeal of market access negotiations so dear to the hearts of Westernbusinessmen. But mistakes made in these areas are likely to haunt theWTO for years to come.