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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