The Real China Question

Links between Chinese officials and U.S. political campaigns—coupled
with renewed concern about human rights abuses by the Chinese
government—have put China policy center stage. But while public
officials and many commentators here have focused their attention
mostly on the contentious issue of whether to renew China's most-favored-nation
trading status, the more important question is whether China should
be admitted into the World Trade Organization (WTO)—and whether
formerly communist states such as Russia should be next.

Created in 1994 as a more potent successor to the General Agreement
on Tariffs and Trade (GATT), the WTO is the Geneva-based organization
that sets and enforces the rules for world trade among developed
nations. By agreeing to abide by WTO rulings, countries forfeit
some control of their trade policy to gain access to foreign markets.

Although controversial at its founding—in part because American
critics alleged it would compromise U.S. sovereignty and environmental
laws—so far the organization has performed respectably, if not
admirably. The organization's settlements of disputes between
members have been well received, and recently it concluded two
new agreements on information technology and telecommunications
services and equipment.

Yet with several formerly communist (and some still communist)
nations applying for WTO membership, the organization is at a
difficult crossroads. The growing economic power of these nations
makes them difficult to ignore. But their repeated refusal to
play by many WTO rules suggests that they would exploit the economic
benefits of membership without abiding by the rules that are the
very premise for the WTO's existence.

China, which is pushing hard for WTO admission, is by far the
most important and dangerous of these candidates. In the months
to come, the WTO will make a decision on whether to admit China—based
in large part on the disposition of the United States—and that
decision will set the standard for future applications from nations
like Russia and Vietnam. Some argue the United States should block
Chinese membership altogether; others, including the Clinton administration,
argue that such a move would be either futile or disastrous. China's
disdain for civil liberties on the mainland, and perhaps now in
Hong Kong, and the fact that conservative Republicans along with
many liberal Democrats are skeptical, combine to widen the odds
against China's WTO membership this year. However, supporters
of China's accession to the WTO argue, with some logic, that the
world community will have more leverage on China's domestic behavior
with China in the WTO rather than out.

Both arguments have some merit. The best policy, as I will argue,
may be a middle course: allowing the Chinese to join gradually.
This could mean creating more than one tier of membership, and
forcing them—as we did for other formerly communist nations entering
GATT many years ago—to meet hard numerical targets for trade balances
in order to gain admission.

It was perhaps inevitable that the status of communist
and formerly communist nations would pose such a challenge for
the global trading system. The WTO's predecessor, the General
Agreement on Tariffs and Trade, was a postwar invention designed
to unite free market nations and, in part, to thwart communism.
Initially GATT included only the world's major trading powers,
but it grew in the intervening years to its current membership
of well more than 100. Nations with nonmarket economies were not
a problem, because they were outside the GATT system.



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Unfortunately, this also meant that GATT was ill equipped to manage
the post-Cold War world—an era in which foreign threats were often
of an economic, not a military, nature, and in which potential
adversaries included vibrant democracies as well as totalitarian
states. Beginning in the 1970s, Japan and several other GATT nations
used their positions to create one-sided trade relationships with
wealthy consumer nations such as the United States. Although these
countries had market-based economies, they built globally dominant
industries by subsidizing these operations, selling their wares
abroad, and then closing off their domestic markets to outsiders.
GATT, burdened with an extraordinarily ineffective dispute settlement
system and rules that were perennially one step behind the latest
generation of trade barriers, simply could not curb the mercantilist
ambitions of Japan and like-minded emerging powers.

Conceived as a solution to this challenge, the WTO has a stronger
dispute settlement system and better rules to enforce. It has
taken additional steps to ensure that those countries that benefited
from free trade also opened their markets. A key early test will
be whether the WTO proves itself an effective policeman of Japanese
protectionism in the current dispute over imported photographic
film.

But it remains to be seen whether the WTO can deal with
the next challenge: incorporating communist and formerly communist
states into the global economy. About two dozen such countries,
including China and Russia, want to join WTO, and the potential
admission of these nonmarket economies into the ultimate market-oriented,
rule-based organization, raises serious questions.

The unstated assumption in the West is that former communists
have abandoned nonmarket economics, but the demise of communism
as an economic philosophy has been exaggerated. China, in addition
to maintaining highly protectionist policies, maintains numerous
features of the communist system, such as government economic
planning, government ownership of industries, and widespread subsidies.
Russia seems to have come further in implementing political reforms,
but a surprising amount of the communist economic machinery remains
in place and the Russian government is still deeply involved in
owning and managing the economy. Worse yet, Russia shows strong
signs of becoming increasingly protectionist and suspicious of
foreign companies.

The lack of a reliable rule of law in former nonmarket economies
may pose an even more serious problem for the WTO. In Russia,
corruption and crime seem the rule, not the exception [for more
on the chaos in Russia, see Stephen Holmes, "What Russia
Teaches Us Now
," page 30]. Many Western businesses that have
attempted to operate in Russia complain of contracts being ignored
by the government, which is now renationalizing industry in concert
with adoption of more protectionist policies.

China is no better. As the head of China's National People's Congress,
Qiao Shi, has argued, China is a society ruled by strong men,
not by laws. Laws and contracts can be swept aside if China's
rulers wish to do so. China's lack of respect for rules is also
a problem at the international level. In recent years, the United
States has concluded a number of important trade agreements with
China on such topics as protection of intellectual property and
market access. Unfortunately, these agreements have had only a
limited impact on China's behavior.

For four years the Chinese essentially ignored an intellectual
property agreement designed to outlaw the widespread pirating
of U.S.-produced software and entertainment, which was costing
U.S.-based firms billions of dollars. Even when the United States
threatened trade sanctions, China only grudgingly made an effort
to enforce the agreement. The Clinton administration now believes
that China is doing a better job enforcing the intellectual property
agreement, but U.S. industries still complain of enormous enforcement
lapses. There is also good reason to believe China has violated
trade agreements with the United States on textile shipments,
prison labor, and market access.

The case against admitting these nations into the WTO—beginning
with China—might thus seem compelling. But thanks in part to heavy
lobbying by both the Chinese government and multinational firms
with interests there, China's bid has received an enthusiastic
response from the Clinton administration as well as from Japan
and Europe.

In fairness, the issue is a complicated one. On the one hand,
if China and Russia are on the outside, can the WTO truly be a
world trade organization? Chinese officials are fond of
arguing that they may soon be able to write the world trading
rules themselves. These statements are of course exaggerated,
but in fact the reforming nonmarket world now has a $5 trillion
economy, larger than that of Japan. Especially as China moves
toward becoming the world's largest economy and one of the most
successful trading countries in the world, if the WTO does not
cover China and other major former nonmarket economies, the WTO
could lose credibility.

On the other hand, throwing the doors open to former nonmarket
economies could also compromise the WTO's credibility. The WTO
could, for instance, admit China, Russia, and other nonmarket
economies by granting them broad waivers and long phase-ins to
key provisions such as rules on subsidies, investment, and protection
of intellectual property. Yet this would effectively make these
countries free riders on the trading system; they would enjoy
the full benefits of WTO membership without shouldering the responsibilities.
No doubt other WTO members would ask for similar arrangements—why
should China get special treatment?—and that could cripple the
organization, or maybe bring it down altogether.

True, other WTO nations might sit still for special allowances
if the time frame for compliance were short enough, but it's not
clear that China and the other countries would even meet such
requirements. Some WTO provisions, such as the restrictions on
subsidies to state enterprises, would require a wholesale restructuring
of the economies of China, Russia, and similar countries—changes
these countries would be unlikely to make even if they agreed
to them in principle. As the experience with the intellectual
property agreement with China demonstrated, having an agreement
on paper is no guarantee that Chinese behavior will change. The
same can be said for other reforming nonmarket economies.

China, Russia, and other past nonmarket economies often do not
govern through publicly available rules and regulations; informal
actions by ministries to exclude foreign products and to make
life difficult for foreign companies are more common. These informal
actions leave no paper trail and may be next to impossible to
prove before a WTO dispute settlement panel. This makes it unlikely
that even a strong agreement could or would be vigorously enforced.

Meanwhile, by admitting nonmarket nations into the WTO,
the U.S. and other member nations would greatly limit their ability
to impose unilateral sanctions—the one method that has produced
any results. So long as China is outside the WTO, the United States
has some leverage; the modest progress that was made on intellectual
property and market access was made only under the threat of U.S.
trade sanctions. (These sanctions have proved ineffective in moving
China to improve treatment of dissidents, but that is because
the Chinese leadership fears that concessions on this issue would
threaten their hold on power. That is not true, however, for sanction
threats over trade matters.) Like most other countries, the Chinese
leadership treats economic sanctions as bottom-line business negotiations;
thus it has sought accommodation instead of conflict. As noted,
the agreements reached have not been terribly effective, but that
is at least partially the result of inconsistent U.S. attention
to these issues.

If China were a WTO member, the U.S. could not make such threats—at
least not in a timely way. As the United States found in the dispute
with Japan over access to the Japanese auto market, trade sanctions
against WTO members only work after a WTO dispute settlement
panel has ruled in favor of the United States. If the United States
were to impose trade sanctions without WTO approval, it would
almost certainly face an adverse WTO ruling for raising new trade
barriers and probable sanctions. Thus, there is a real cost in
terms of lost negotiating leverage to letting China or other former
nonmarket economies into the WTO.

Would sanctions against China work? But even if the WTO supported
the United States in disputes with China, there would still be
serious enforcement problems. If a dispute settlement panel obligated
China to fully implement the subsidy and investment provisions
of the WTO, there are good reasons to think the current generation
of leaders would not be willing to risk the potential political
disruption of forcing state-owned enterprises to operate without
subsidies because that would require enormous layoffs. The United
States and like-minded countries could continue to threaten China
with trade sanctions, but it is unclear that trade sanctions alone
would be enough to move China on matters of great political gravity,
particularly because, at least in serious disputes, China would
likely respond with counter sanctions.

Since China has demonstrated little respect for the rule of law,
this scenario is all too realistic. Further, it is entirely possible
that if China lost a series of disputes it would charge that the
WTO was rigged against it and threaten to pull out. Given the
strange logic of diplomacy, such a threat would surely give the
U.S., the WTO, and others pause. In a strange turn of events,
many would likely argue against forcing China to heed the WTO
for fear that China would withdraw from the organization, creating
tensions on other fronts. Here again, the credibility of the WTO
as a trade policeman and support for the system, at least in the
United States, would decline, dealing a potentially serious blow
to the world trading system.

The choice thus appears to be between risking the survival
of the trading system by leaving these countries outside the system
or risking the survival of the system by trying to bring them
in. But perhaps there is a third way. It may be possible to bring
nonmarket economies into the trading system without treating them
just like market economies. In the late 1960s and 1970s, the United
States spearheaded an effort to bring some nonmarket economies,
notably Poland and Romania, into the GATT system. At the time,
many countries objected, arguing—rightly—that former communist
economies were not compatible with the market-based trading system.

The final compromise incorporated the formerly communist countries
into the trading system by making unique entry requirements that
included numerical targets for growth in imports from GATT members
and special trade restrictions (such as quotas on specific commodities)
that could be imposed if exports from these nonmarket countries
undermined Western markets. Today's trade negotiators could essentially
adopt the same strategy by admitting China and the other applicants
with four special caveats:


  • To ensure that other WTO members gained trade benefits and
    were not restricted by government planning or other distortions,
    former, nonmarket members would be required to increase imports
    from WTO members by a fixed percentage. Since state planning machinery
    continues to operate in most of these countries, such a task should
    be achievable.


  • Given the widespread presence of subsidies and government-inspired
    predatory pricing, other WTO members should be able to restrict
    onetime nonmarket country exports if they undermined Western markets.


  • To assist in enforcing the pact, current WTO members should
    be able to withdraw from the pact with reforming nonmarket economies
    if they felt nonmarket economies were not obeying its terms.


  • If the former nonmarket economies could prove that they had
    become market economies and were obeying WTO rules, they should
    be graduated to normal WTO member status.

This approach would likely require hard negotiation. And because
it involves numerical targets for exports—that is, "managed
trade"—it will offend many economists who believe tinkering
with the free market is inherently counterproductive. Some nonmarket
economies may also criticize this approach to making them second-class
citizens in the world trading system.

This approach, however, has already proved workable in connection
with Poland and Romania; it has the unique advantage of turning
the state planning machinery now impeding trade liberalization
into a tool that opens markets and encourages trade liberalization.
It also makes it politically possible to extend these mixed economies
more time to make the difficult economic transition to the free
market by creating a balance between reduced responsibilities
and reduced benefits. This balance could allow a longer transition
without undermining the political consensus that holds the WTO
together.

If American foreign policy has a consistent weakness, it
is that America seems to view the world as a giant house of mirrors.
Everywhere it looks, America sees reflections of itself. They
may be a little taller or a little shorter, a little fatter or
a little thinner, but fundamentally other countries are just like
us. Just below the surface, every country is a budding Jeffersonian
democracy with a free market economy.

Unfortunately, the world is not so simple. Owing to its distinctive
history, culture, political structure, and economic institutions,
America is largely unique. More shatteringly, most other countries
do not desire to be reflections of the United States; they have
their own political and economic philosophies and institutions.

The struggle to bring nonmarket economies into the WTO is but
the latest example of this American failing. We are attempting
to make the former communist world fit into the market trading
system. Pounding hard enough to make them fit risks damaging both
American interests and the WTO that the United States worked so
long to create.



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