Officials optimistic concerning China’s entry into WTO

Sascha Matuszak

The Chinese Prime Minister Zhu Rongji handed the Clinton Administration a gift in April 1999.
President Clinton, to the dismay of China and the U.S. business community, rejected the gift.
The gift came in the form of a list of concessions presented by Zhu, substantially lowering the trade barriers between China and the United States. Zhu made the five-day U.S. tour in order to garner support for China’s entry into the World Trade Organization, an organization that regulates international trade.
“President Clinton did not recognize that this was a critical moment,” said Scott Kennedy, a research fellow at the Brooking’s Institution in Washington, D.C. “China was making a huge concession.”
China agreed to give U.S. companies greater access to previously protected areas such as telecommunications, banking and insurance.

Stalled trade talks
The two countries have been deadlocked over the terms of China’s entry into the WTO since negotiations resumed in earnest during President Clinton’s trip to China in June 1998.
How much China will open its markets and whether or not they will enforce WTO-mandated regulations, such as the protection of intellectual-property rights, are the main concerns among American officials.
Tim Kehoe, a University professor of economics, said there is virtually no protection of intellectual-property rights. For instance, pirating computer software is widespread.
However, Chinese state-owned industries argue that rapid liberalization will destroy them by forcing head-on competition with more efficient foreign companies.
Although China faces dangers by eliminating trade barriers and exposing its weak banking system and shoddy state-run enterprises, remaining outside the World Trade Organization would guarantee economic stagnation.
“(WTO membership) is much more important for the Chinese domestic economy than for our domestic situation,” Kennedy said.

Domestic politics trump trade policy
China primarily wants to join the a World Trade Organization in order to establish a permanent normal trade relation status with all other WTO members. Currently, China’s status is debated each year on the floor of the U.S. Congress, where domestic politics invariably cloud the economic issues.
“There is a lot of political capital to be made in long discussions about whether or not China should enter our markets,” said Robert Kudrle, associate professor at the Hubert H. Humphrey Institute for Public Affairs.
April talks stalled in part because of demands from politicians from states such as North Carolina, whose textile industry would suffer if forced to compete equally with the Chinese textile industry. Bowing to this pressure, President Clinton pushed for quotas on Chinese textiles and short-term barriers if China floods the market with cheap raw materials, such as copper.
“The decision to reject (China’s) offer was based more on political logic, not necessarily on objective economic arguments,” Kennedy said.
The business community and negotiation observers accused President Clinton of failing to prepare for China’s offer.
“The Clinton administration may have been caught by surprise and could not say yes because of domestic politics,” said Yi-Jiang Wang, a University associate professor of industrial relations.
Clinton was too busy with the Monica Lewinsky scandal and did not do his homework to prepare for Zhu’s visit, Wang said.
After the rejection of the offer, U.S. trade representative Charlene Barshevsky publicized the concessions offered by Zhu, which were kept secret from Chinese industries. This, along with last May’s embassy bombing and allegations of Chinese espionage, put the talks on ice.

Membership imminent
A meeting last month between presidents Clinton and Jiang Zemin broke that ice, and officials are optimistic that China will soon gain entry into the World Trade Organization.
“The question of whether or not China will enter the WTO is not a question of if, but of when,” said Mahmood Zaidi, director of the International Programs development in the Carlson School of Management. “Barring something unusual, it seems the differences are narrowed quite a bit.”
China needs a decision to come soon, however. China’s economy is slowing down after almost two decades of dramatic growth.
“China is not an economic giant as some foreign businessmen preach,” Kennedy said. “Their banking system, it could be argued, is more fragile than Russia’s.”
The majority of Chinese industries consist of state-owned enterprises, often dependent on loans from Chinese banks.
“The banks keep supporting inefficient state enterprises, which helps keep the growth rate high, but has lead to an accumulation of problems,” Wang said.
WTO membership will translate to liberalization and privatization of China’s industries. Some Chinese businesses will subsequently falter.
“There is no question that many inefficient enterprises will have a hard time,” Wang said.
“China has big imbalances — some regions are going really fast, other don’t,” Kehoe agreed. “This closed economy that is not based on a free market is going to have to change, and that involves uncertainty.”
Chinese banks, funded primarily by private households, lend money to state-owned enterprises that will face strong foreign competition if the country joins the WTO. If industries default on loans, the banks will face a liquidity crisis — possibly prompting private households to withdraw their savings. Similar scenarios rocked Asian economies in 1997 and 1998.
“There are dangers,” Kennedy said.
However, if liberalization is controlled, China might not experience as hard of a transition.
“Liberalization is not likely to create problems for China, especially if it is spread out over a period of years,” said G. Edward Schuh, Orville and Jane Freeman professor of international trade and investment policy.
One of the concessions Zhu offered in April included expanding U.S. access to Chinese banks over the next five years. The United States risks asking too much of China too quickly, economists argue, with possible disastrous results.
“The U.S. says China should have a higher level of openness,” Wang said. “At a more profound level, Chinese believe that the U.S. doesn’t really want China to become strong.”
For China, the political and economic consequences of eliminating trade barriers and forcing state-owned industries to reform or die remains to be seen.
“Down the road, China is going to go through some crises.” Kennedy said. “That’s inevitable. But China is very clear on what the costs and risks are of liberalization and entry into the WTO.”

Sascha Matuszak covers international affairs and welcomes comments at [email protected]