Remarks on China's WTO Accession
Statement on China and the World Trade Organization
A conference hosted by the Institute for International Economics
The accession of China to the world trading community is potentially the largest trading bridge between China and the West since Marco Polo's voyages in the 13th century. That is why this issue deserves, in fact requires, a more thoughtful debate than the usual polarized slugfest labeled "free trade" vs. "protectionism."
China's accession to the WTO must be done and it must be done right. The focus of the debate is not whether we should be expanding trade with China, but how expanded trade with China should be structured. And that is the central point that I want to address today—my thoughts on how we structure China's entry into the WTO.
To date, our negotiators have focused on obtaining commitments from China that will enable U.S. workers, businesses and farmers to tap in to the enormous potential in China's market. In that regard, considerable progress was made in the negotiations leading up to Premier Zhu Rongji's April visit, including obtaining commitments from China on:
- Significant tariff reductions. Reduction of agriculture tariffs from levels ranging from 30% to 65%, to an average of 17%, and industrial tariffs from an average of 24.6% to an average of 9.4%, with tariffs as low as 7.1% in certain priority areas.
- Elimination of restrictions on investment: China reportedly committed to eliminate investment restrictions such as technology transfer and domestic content requirements.
- Elimination of quantitative restrictions: China reportedly agreed to lift import quotas in a number of sectors.
- Access to distribution networks: China reportedly agreed to eliminate restrictions on the right of U.S. companies to distribute their goods within the Chinese market.
Of course, the agreement is not yet final, and there are a number of sector-specific market access issues that remain to be resolved.
In addition to resolution of these outstanding sector-specific issues, there are three overarching issues that U.S. negotiators must resolve if this agreement is to be of long term economic benefit to the American people. First, we need to ensure that the market access commitments China makes on paper will be meaningful in China's non-yet market oriented, not-yet rules based economy. Second, we must ensure that the agreement enables us to deal with China not only as a consumer of U.S. products and services, but also as a competitor. Third, the agreement must promote a "leveling up" for all people.
Before I turn to the main point of my remarks, I would like to say a few words about the overall context in which the debate over China's accession will take place. The revelations about Chinese espionage contained in the Cox-Dicks Commission's report, China's reprehensible sanctioning of anti-U.S. demonstrations following the tragic but accidental bombing of the Belgrade embassy, and the continued lack of improvement in China's human rights record have raised important questions that must be answered. As a result, some of my colleagues will vote against permanent NTR, regardless of the terms of the final accession agreement. While I strongly believe that we need a forum to discuss and encourage China to improve its human rights record, I continue to believe that for me, and a majority of Congress, the issue that will determine how we cast our vote will be whether the agreement benefits the people of the United States. In turn, the answer to that question rests on resolution of the three outstanding, cross-cutting issues I mentioned earlier, and on which I will focus the remainder of my remarks.
The first task: Integrating a non-rules-based society into the WTO.
The first task in bridging structural differences to integrate China's non-rules-based society into an organization premised on adherence to rules is to create:
- mechanisms that enable businesses and the U.S. government to detect whether China is living up to its commitments, and
- mechanisms that allow effective enforcement when violations occur.
Light must be shed on China's closed--and often cozy and informal—system of administering laws and regulations. China frequently does not publish basic laws and regulations essential for allowing businesses to understand the rules of the road in China. This failure to publish is notwithstanding an obligation to do so under a 1992 Memorandum of Understanding (MOU) with the United States—and despite repeated requests and complaints by the U.S. Government. Even worse is China's track record at publishing administrative and judicial decisions that are often essential to understand what laws and regulations mean. On those occasions when government or quasi-government actions or decisions are made available, they are frequently not explained, and, therefore, are of limited use.
As the U.S. Trade Representative stated in the 1999 National Trade Estimates Report: "[M]any gaps exist. Even where laws and regulations have been published, they are often unclear and leave too much room for discretionCeither through honest misunderstanding or corrupt implementationCor for being ignored outright."
To correct for these problems, the accession agreement must provide mechanisms that will allow for the detection of violations and for the enforcement of obligations.
With respect to the detection of violations, the agreements reportedly reached to date do not provide the tools to enable the U.S. government to detect whether a government ministry is living up to China's commitments. For example, in the import substitution area, several sectors—including pharmaceuticals, automobiles and electronics—are subject to formal government five-year plans that are inconsistent with China's MOU commitments. Other sectors, such as telecommunications and fiber optics, are subject only to an "official ministry policy," not a formal five-year plan. These points may seem esoteric; unfortunately, they are not. In order to prevail under the WTO dispute settlement system, the complaining country bears the burden to show that a law or comparable measure by a government has violated a WTO rule. Given the nature of China's non-rules based system, the United States will have a hard time showing the nature and extent of government action in areas ranging from the WTO Agreement on the Application of Sanitary and Phytosanitary Measures (which is critical to U.S. agricultural and pharmaceutical exports), to the Agreement on Technical Barriers to Trade (industry standards), to rules concerning the operation of State-owned and State-invested Enterprises in particular sectors.
In short, as the negotiations on terms of accession stand, it will be extremely difficult for U.S. businesses to demonstrate that the lack of market access opportunities is the fault of China's government. That is because China stopped publishing its five-year plans after 1994 and does not make ministry "policies" available either. This lack of transparency means that U.S. businesses will be unable to detect WTO-inconsistent actions, or at a minimum will have to spend years pushing up against glass walls or ceilings—all the while losing substantial commercial opportunities—before they realize that their problem is a government action, rather than market obstacles such as the inability to meet purchaser preferences.
With respect to enforcement, China's non-rules-based system will also make it very difficult for the United States to challenge WTO-inconsistent actions effectively once they have been discovered. Article X of the GATT, and Articles III and VI of the General Agreement on Trade in Services (GATS), require publication and transparency. However, WTO decisions construing these provisions, such as the panel decision in the Japan-Film case decided last year, provide little reason for confidence that the United States will be able to use the dispute settlement system to force China to adopt a substantially more transparent system of promulgating and applying laws and regulations. In the Japan-Film case, for example, the panel decided that unpublished decisions of the Government of Japan, which Japan had refused to provide to the United States despite repeated requests, could not be found to be inconsistent with Article X, because the United States had not been able to show the panel the content of the decisions.
We must not underestimate the significance to U.S. interests of these more obscure barriers to trade. These barriers are not as blatant as, for example, high tariffs. However, the indirect protection created when U.S. businesses are prevented from understanding exactly how a foreign government is intervening in a market can impose real and substantial costs. Those costs may limit substantially benefits to the United States from the apparent concessions China has made on market access.
Dispute settlement in the WTO is not yet designed to deal with blocked access to information as a barrier to trade. We must recognize and accept that China is still developing the institutions of a rules-based society, and we must equip the WTO to deal with that reality.
The Second Task: Applying rules that deal with China as non-market economy competitor
The second aspect of the challenge is China's non-market economy. Businesses in China, a majority of which are state-owned or heavily invested in by the state, do not operate on the same principles as businesses in the economies of current WTO member countries. Many Chinese businesses are driven by five-year plans rather than the bottom line. Looking ahead, this will have important consequences for the United States and other WTO members.
Heavy state ownership and investment can easily act as subsidies, shaping, and potentially distorting, the terms on which companies compete with market-driven enterprises. State-owned and state-invested enterprises do not necessarily make buying and selling decisions based on profit maximization. Rather, their primary objective, more often than not, is maintaining employment and generating hard currency. The lack of market discipline has led to tremendous inefficiencies and overcapacity in a number of sectors. What this could mean for enterprises in the United States that must play by market principles or perish was painfully illustrated this past winter, when imports of steel from China surged into the U.S. market. In the first two months of 1999, China exported almost 98,000 tons of hot-rolled steel to the United States, close to as much as it exported to the United States for all of 1998.
As the case of Chinese steel illustrates, integrating an immense non-market economy into a system made up of market economies poses significant challenges. One lesson we should learn from the steel episode is the importance of anticipating and preparing for changes that may occur in the flow of trade. Our negotiators' efforts to reach agreement with China on rules for applying trade remedy laws in the future must be successful to prepare the U.S. economy for such changes.
Currently, our trade remedy laws take account of the special circumstances posed by imports from non-market economies. Recognizing that prices in such economies are not set by market principles, the laws authorize our Department of Commerce to apply a special methodology to determine whether goods from China and other non-market economies have been dumped in the United States. These laws also authorize the International Trade Commission to apply a special standard in determining whether sudden increased imports from non-market economies have caused injury sufficient to warrant application of a "safeguards" remedy.
The special rules that apply to non-market economies reflect the realities of price setting in those economies, and should continue to apply as long as China remains a non-market economy. Any fixed termination date, as reportedly has been requested by China's negotiators, would be artificial.
The Link Between Trade and Labor Market Issues
Beyond the two structural challenges relating to China's accession, China's entry into the WTO raises a more general issue, the nexus between labor market standards and trade. This issue is already implicated in areas of China's WTO accession, such as the application of U.S. non-market economy rules for antidumping and safeguards actions against Chinese products. However, China's accession cannot bear the full weight of resolving this issue. Rather, it is incumbent on the United States and the WTO to begin here the process of developing standards to deal with the interaction between labor market distortions and trade, and to carry that process forward during the next round.
There are two reasons why we should address this issue in the context of China-WTO and beyond. First, China's accession to the WTO elevates the link between trade and labor markets to new prominence. Upon China's entry into the WTO, a labor force numbering in the hundreds of millions will be further joined with the world trading community. However, the people in this labor force are not likely to realize the full benefits that China's new relationship with the world will bring because they are subject to controlled wages, benefits, and working conditions and are denied the right to form unions and engage in collective bargaining. These practices distort China's labor markets vis-a-vis those in our and other nations, allowing inefficient companies to continue to operate, and inhibiting the development of a middle class.
Second, addressing these types of labor market distortions in the trade context is ultimately consistent with both the wealth-generating objective of trade and the means by which that objective is achieved—i.e., promoting an efficient allocation of resources. Over the last fifty years, first in the GATT and now in the WTO, we have been developing and perfecting international trading rules and obligations to ensure an efficient allocation of resources. Initially, our efforts focused on the most obvious sources of inefficiency—tariffs, quotas, and other traditional border measures. Over time, those efforts adapted as subtler barriers to trade proliferated. Labor market distortions are among the next generation of trade barriers to which our efforts in the WTO should be channeled.
Acknowledging these points does not mean rejecting basic principles of comparative advantage. Benefits of trade flow from operation of those principles. Rather, it is an effort to correct a set of conditions that distort comparative advantage, creating an artificial regulatory-based advantage.
Without knowing the details, Americans sense that China's integration into the WTO is a big deal. They want it to be a good deal. The single most important factor that will affect whether Americans consider China's accession a good deal is the impact on their standards of living. As I have said, China's accession to the WTO must be done, and must be done right.