| Benjamin Hammer December 1, 1999
The United States, China, and the World Trade Organization
This observation from Jeffery Schott of the Institute for International Economics captures the essence of the China-World Trade Organization debate in America and the world today. China’s unprecedented economic growth has put it at the forefront of the US trade agenda. America’s is the biggest economy and China’s is the most populous nation, in terms of sheer number of people. To conjoin these two great international forces in a more complete way than the previous, bilateral agreements have would be of immeasurable value to both countries. Just in the past two weeks, China and the United States concluded their much-anticipated bilateral trade agreement, which paves the way for China’s accession intro the WTO. Concurrently, the United States has some domestic issues to resolve regarding its trade relationship with China before China can become a universally accepted member. The organ that embodies this global trading order is of course the World Trade Organization, or WTO. As we will see in greater depth later in this paper, the United States has a crucial, one could say pivotal, role in allowing China to be totally accepted into the world economy. Underlying all these discussions of politics and legalities, there remains the premise that both the United States and China are eager for China to become an equal, active participant in the world trading system. Both are pointing themselves in the direction of Liberalism and multilateralism, and it is on this point that the 18th Century economist Adam Smith is relevant. (To see full text of his The Wealth of Nations, click here.) His stance on this issue, were he alive today, can be expressed through a simple syllogism. Adam Smith supports open trade and opposes mercantilism as a state’s national economic policy. (More about Adam Smith) China acceding to the WTO would force it to open its market and diminish if not eliminate most of its protective policies. Therefore, Adam Smith would encourage the United States to push for China’s accession to the WTO.
The United States has much to gain from an easily accessible, transparent Chinese economy of 1.2 billion consumers. America, though, is determined to obtain certain market-opening concessions and promises from China before its formal accession, and is equally determined to define China’s status as a developed nation rather than developing going into the WTO. A nation’s status upon admittance, developed or developing, carries very significant implications for the applicant. The status of China will determine the timetable for its obligations and liberalizations. This, too, will be touched on in greater detail again, but the basic argument is as follows: China wants to accede as a developing country, as this would give China much more time in adjusting to the WTO demands and in dismantling its protective barriers. The United States, however, because it wants quicker access to China’s markets and faster reforms on China’s part, is pushing for them to be admitted as a developed nation. In the WTO, this label, that of developed nation, carries with it shorter grace periods for adjusting one’s economy to WTO standards. But many would say that the United States is actually standing in its own way by making so many pre-accession demands and, perhaps more important, by its own laws interfering with China’s accession. The Jackson-Vanik Amendment of the 1974 Trade Act puts China on a list which requires that the president annually review the administration’s position on China. He then must decide whether to extend the NTR (normal trade relations, formerly called most-favored nation) status for another year, or reject it and deprive China of the benefits of NTR. This has been the subject of much debate in Congress and the administration, especially after the Tian An Men Square massacre in 1989. The debate is whether or not to graduate China from the Jackson-Vanik list and grant it permanent NTR status. If we do not grant them such treatment, and yet China accedes to the WTO, then our domestic law would be inconsistent with the WTO regulation requiring equal and unconditional MFN status given to all members. So as not to allow U.S. law to be over-ridden or remain inconsistent with WTO law, the United States would invoke WTO Article 13, also known as the non-application clause, which gives the United States (or any nation already a WTO member) the right to decline extending MFN privileges to a joining member. If the United States does invoke this clause upon China’s entry, then China would not have the benefit of being able to deal with the United States on a multilateral level. It is the argument of this paper that, through Smith’s analysis of open-market economics, we see China would benefit by joining the global marketplace, and the United States could more quickly and effectively reap the benefits of China’s open market by pushing for their early admittance.
China today is basing its economic reforms on a system we call mercantilism. China is shaping its policies to be protective in nature. The principles of mercantilism are laid out here by Adam Smith in The Wealth of Nations: "That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value" (Smith, 1776:429). What he is pointing out here is that mercantilists accrue reserves first, because money itself is a measure of power, wealth, success, etc., and second, for what it can purchase. By imposing import barriers, such as tariffs or even out-right prohibitions, they want to minimize imports so as to assist and protect the domestic, import-competing companies, and to keep money in the country. At the same time, they are advancing their own low-priced, highly competitive exports abroad to bring more money into their country. Both of these policies are based on the mercantilist premise that money is power. The three most important things a country should work to gain are gold, gold, and gold. In The Wealth of Nations, Adam Smith skillfully encapsulates the motives of a mercantilist country in his statement, "A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it" (Smith, 1776: 429). It is with the dual purpose of accumulating wealth to purchase goods and to be able to carry on wars that a country, in this case China, would adopt such protectionist policies. We can look to Adam Smith, however, to see that such an approach is economically unsound. As just mentioned, China has in mind the protection of its own domestic industries and companies when it discourages imports via tariffs or prohibitions. To some, it would seem reasonable that it is in a country’s interest to look out for the well-being of its own businesses at the expense of foreign ones, but Adam Smith provides two arguments to the contrary. The first is that the common man is allowed to enjoy the most affordable product if there are no restrictive import barriers. "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage" (Smith, 1776: 457). This in itself is actually a two-fold argument. If foreigners can supply us with a good for less money than domestic producers, then there is no reason why we should not be able to buy it. At the same time, if we see that a foreigner can make it cheaper than can be made here, that shows us that they are simply more efficient at making this product. To express it in modern economic parlance, they have a comparative advantage in that product. We should direct our capital, manpower, and overall effort towards something in which we have an advantage. His second line of reasoning questions the assumption that foreign companies successfully selling their products in our home market is necessarily hurtful to our economy. Mercantilist countries, such as China today, believe that jobs and opportunities are being lost if/when foreign firms do well in their market. What we should realize, according to Smith, is that capital and people will be employed to the appropriate extent when the market is allowed to operate naturally. If additional industry is artificially forced into the domestic market, say, by discouraging imports and encouraging domestic production, then these new companies and industries growing in the home market will be drawing upon labor and capital that is not even available.
Let us look at the ubiquitous high-tech, Information Technology industry to illustrate these points. On the first point, if China were to place duties on imports on Intel’s logic chips, the government would not only be deriving its citizens a cheaper product, because of Intel’s economy of scale, but a higher quality product as well. On the second point, let us recall that at the end of August, Premier Zhu Rong Ji placed an all-out ban on foreign investment in China’s Internet industry (WSJ November 16, 1999). This is only shooting themselves in the foot economically, because China’s Internet system could progress much more quickly and efficiently if the money and expertise came from other countries and companies that are advanced in that area. By eliminating such a ban, as would be the case after they acceded to the WTO, China would be letting foreigners spend their millions of dollars on China’s Internet industry. And while the foreigners are building up China’s Internet, Chinese money and energy could be diverted towards something it has a comparative advantage in, such as a labor-intensive good.
To illustrate the final point, not allowing foreigners to bring in their computer chips or Internet funding and expertise for fear of displacing Chinese jobs and threatening certain industries assumes that there are or will be Chinese workers engaged in these industries. But is this the case? I think not. They don’t produce chips, and China’s Internet industry is nascent. So does China have a valid reason to put up these walls to protect its economy? No. The sooner China joins the WTO, the sooner their economy will be receiving the benefits of an open, multilateral trading system as expounded by Adam Smith.
China would benefit from granting trading rights to its partners abroad. From Nicholas Lardy’s article, "China and the WTO," of The Brookings Institution, the term trading rights means that "foreign firms could purchase Chinese products for resale abroad and also sell in China goods produced abroad." We can then look to Adam Smith to see how this would be helpful to the Chinese economy. Smith directly addresses the mercantilists’ hesitation to let gold out of the country via loosening trade restrictions and allowing a greater number of imports. They fear that such transactions would necessarily diminish the quantity of money and wealth in a nation by letting it flow abroad. Smith counters,
China could therefore benefit from the increased international trade involving itself and its own goods, which would also be a mandatory part of acceding to the WTO.
China has made tremendous progress in market growth and development in the past two decades, and on top of that has made specific market concessions to the United States in recent years as well. However, within these reforms lies a problem that puts the United States ill at ease. Under the status quo, none of their market-opening measures are binding. China has complete discretion to renege on its reforms and promises, revert to protectionist policies, and they are under no obligation to promise any further reforms. It is clearly to the benefit of the United States to have guarantees on current and future market reforms. These obviously could be achieved through China’s admittance into the WTO. In their report The United States and China: A New Framework, Richard Haass and Nicholas Lardy describe the change in the nature of China’s concessions and promises as a result of joining the WTO.
Another area in which the United States stands to gain from China’s inclusion into the WTO concerns the way in which we deal with China. As it is now, "the burden of opening up China’s market … [rests] almost entirely on the United States" (Lardy, 1997). By taking this onus off the shoulders of the United States and placing it in a multilateral forum, namely the WTO, America will be able to put more emphasis on its bilateral diplomatic relations with China, "providing some relief" to the already "overloaded bilateral relationship" between the two countries (Haass, Lardy, 1997).
There are also benefits the United States could reap by taking unilateral action towards normalizing trade relations, as opposed to imposing standards on China. US business would benefit greatly from the repeal of existing US sanctions in China that resulted from the Tian An Men massacre. Because of the global availability of the goods and services upon which the United States has imposed export restraints, US companies are losing vis-à-vis their international counterparts, with no apparent detriment to China. To use an example from Haass and Lardy,
While the United States could decide to change such a law on its own, China’s membership in the WTO would allow it to file a formal case against this US law and demand its legal repeal in front of the DSM. Simply the ability/right to carry out such a suit is precisely what China would have to gain from acceding the WTO, and the result of the suit, assuming the ruling is in favor of China, is also to the direct material benefit of US businesses. In this respect, China’s accession would force the United States to liberalize most of its few remaining protectionist policies towards China that have lingered on from past events, thereby boosting American business opportunities. Looking at such policies, we see that they are not effective, but rather only serve to make American firms less internationally competitive in China.
One concession from the Chinese that will appease many Americans concerns dumping practices. From the Wall Street Journal, under this recent agreement, "China agreed that for 15 years, it would abide by provisions that make it much easier for U.S. companies to prove imports are being sold in the U.S. at below market prices" (WSJ November 16, 1999). This is one of the few provisions in the November agreement that is procedural in nature. Most of the agreement covered goods and services.
Under this new agreement, tariffs on industrial goods, cars, and agricultural products are all being reduced sharply. Auto tariffs, for example, which now are as high as 100%, will fall to 25% in 2006 (WSJ November 16, 1999). The new deal also greatly liberalizes China’s telecommunication, banking, and securities sectors (WSJ November 16, 1999).
What needs to be realized as an over-arching characteristic of all of these benefits is that they are not time- or condition-specific. What I mean by this is that none of the advantages change or grow or will only become available if the US attaches excessive conditions to China’s membership. This then leads us to the area of what the US stance should be regarding the terms of China’s accession, i.e., policy approach. Before this, however, we must understand some of the intricacies of the accession process. After that, we can better understand what the points of contention are between the United States and China, and better understand why America should do as it should.
China is in a precarious stage of the admittance track right now because the terms of its accession are still up in the air. There are two procedural questions that are major issues for China. The first is under what status would China join the WTO. China wants to accede as a developing nation so that it will have a longer grace period for phasing out its protectionist policies, i.e., tariff and non-tariff trade barriers, and for implementing market-liberalizing policies. The United States, however, because it wants quicker access to an unprotected market of 1.2 billion people, are pushing for China’s status as a developed nation, which would shorten the timetable for its reforms. This brings us to the next procedural issue of China’s accession, which will also answer the question, Why does it matter what the US thinks?
GATT Article XXXV, which has become WTO Article 13, is what’s called the non-application clause. This is based on the premise outlined in the original GATT that no country can be forced to extend GATT privileges to another member if it does not want to do so. The only condition for the abstaining country is that they can only invoke the non-application clause when the target country is applying for admission. Every country has this right under GATT, so theoretically any country could refuse to extend its GATT privileges to China. In practice, however, practically all GATT members have already granted MFN status to China, except for the United States. If China joins the WTO and the United States does not file for a non-application clause, it is obligated to extend permanent MFN status, now NTR in American parlance, to China. The catch is, there is already a US law dating back to 1974 which prevents giving permanent MFN status to China without a special vote from Congress. As is, the Jackson-Vanik Amendment to the 1974 Trade Act forces the US Administration to review its trade position with China on an annual basis, with the option of rejecting normal trade relations for the next year. So the problem for China is, if the United States keeps China on the Jackson-Vanik list of countries to be reviewed annually, and then invokes the WTO Article 13, China will be denied all the rights and privileges of a WTO member in its dealings with the United States, such as the right to take cases against the United States to the DSM or TPRM (trade policy review mechanism). For that reason, China is in negotiations with the US to make certain concessions that would convince the United States to allow China permanent NTR status.
The main stipulation that the United States should stick to in its otherwise ardent push for China’s early accession is China’s status as a semi-developed nation (Lardy, 1997; Haass, Lardy, 1997; Grow, Levin, Porte, White, 1998). As mentioned earlier, the status of a nation upon entering determines the timetable for its obligations and liberalizations. China wants the longest allowed phase out time for its current policies so as to be able to protect its industries as long as possible. But of course the world wants China to be open and fair as soon as possible. Consequently, the US/WTO policy on this matter should be to assign an intermediate status to China as it joins, neither fully developed nor developing. More specifically, the US should extend time allowances to China in opening up its more sensitive industries. This means lengthy implementation periods for dismantling the barriers protecting many of China’s state-run, and thus poorly run and not globally competitive, firms. For China’s already efficient and not vulnerable sectors, quick elimination of barriers is reasonable and recommended.
As it turned out, the United States-China trade deal that was struck on November 15 had no mention of a phase-out period, most likely because this was a bilateral trade agreement, not the agreement to let China into the WTO.
When China’s terms of accession are being negotiated, we can and should push them to enact laws regarding trading rights and the transparency of its actions. We already discussed how trading rights would benefit China, but it is just as obvious that all other countries would gain from this type of standardization of trading practices. This would be a significant step in ‘internationalizing’ China’s markets. Secondly, the US should push for China making its trade system transparent to the public and outside world. This is specifically to be aimed at getting China to publish all government rules and regulations on trade, as well as its annual foreign trade plan. (Lardy 1997) The purpose of this effort is to help foreign firms better understand the business environment in China and the pertinent laws, and to expose all the existing trade barriers which could be addressed in future negotiations. (Croome 1995) Personally, I believe that both of these measures, granting trade rights and making procedures and rules transparent, would greatly increase the credibility of China in the business world and thereby spur trade. China would benefit from the increased investment and trade activity, and at the same time it would provide a much more stable environment for foreign companies doing business in China. The United States ought to push strongly for these two terms in its negotiations with China.
One of the clearest obstacles to China’s universal acceptance into the global economic order is its place on the Jackson-Vanik list of countries for mandatory annual review. As long as China remains subject to this amendment, the United States is likely to invoke the non-application clause so that it can preserve the ability to regularly reconsider China’s MFN/NTR status, which would otherwise of course be granted permanently once China accedes. Therefore it is further recommended that the United States grant China permanent NTR status to ease its transition into the WTO. Another recommendation is set forth in Grow, Levin, Porte, and White’s article United States-China Relations in the Twenty-First Century. China trade, while advantageous to the average American consumer because of the access to cheap imports, does cause social and economic harm. Even though the unemployment and domestic industry injury comes from fair competition from a country with a comparative advantage in labor-intensive goods, many of those adversely affected still argue that it is in fact from dumping practices, and even if they concede it is not dumping, there still needs to be a certain level of protection from their markets. Such demands, if met by the US lawmakers, would simply put more barriers to trade between our two countries and drive unnecessary wedges into our negotiations. Grow, Levin, Porte, and White suggest three concrete steps aimed at mitigating the dislocation and material harm caused by cheap Chinese imports. First, they advocate the vigorous enforcement of existing anti-dumping and other unfair trade practices. Second, "publicly financed and privately managed retraining" of those who lost their jobs and financial support of communities hurt by damaged industries. Last, they propose an augmentation of the quality of education in American schools, particularly for those in the labor force.
One of the biggest obstacles in this process has already been surmounted with the signing of the new trade deal in Beijing. With the United States and China now agreeing on the major trade issues, China has America’s endorsement in its bid for the WTO. Especially with agreements in services and financial sectors, this agreement will lead to much more economic integration between these two countries. This will be furthered upon China’s formal entry to the WTO, but the United States still needs to insist on certain concessions and guidelines for China’s admittance. The United States needs to ensure trading rights and transparency, and needs to not let China join as an underdeveloped nation.
At the same time, the United States needs to realize that being lax in our criteria for China’s accession to the WTO is not sacrificing those concessions we are trying so hard to obtain right now prior to its admission. Rather, a quick entry equals quicker elimination of these barriers, quicker adherence on China’s part to international norms, faster normalization of trade relations between the two countries. This does not mean the United States or anyone should allow China to be a free rider in the world economic community. Rather, the United States, by enforcing the bare-minimum yet critical conditions as delineated above, will expedite a more positive relationship among China, the United States, and the world, to start out the next century.
Bibliography
Croome, John. 1995. Reshaping the World Trading System, A History of the Uruguay Round. Geneva: World Trade Organization
Grow, Roy and Burton Levin and Al Porte and Robert White. 1998. "United States-China Relations in the Twenty-First Century" The American Assembly at Columbia University
Haass, Richard and Nicholas Lardy. 1997. "The United States and China" A New Framework." Brookings Institute
Lardy, Nicholas. 1997. "China and the WTO" Brooking Institute
Robertson, Jack. 1999. "China is on slow boat to the WTO." Electronic Buyers’ News Issue 1184, page PG4
Schott, Jeffrey. 1996. WTO 2000:Setting the Course for World Trade. Washington, DC: The Institute for International Economics
Smith, Adam. 1981 [1776] .An Inquiry into The Nature and Causes of the Wealth of Nations. Indianapolis, IN: Liberty Fund
The Wall Street Journal, November 16, 1999. The Dow Jones Company |