China in the WTO: The Debate.

(Editors' Note: Foreign Policy In Focus has on several previous occasions produced policy briefs or reports supporting granting China permanent normal trading status and WTO membership. Neither of FPIF's sponsoring institutions, IRC and IPS, have taken public positions on these issues, and other projects at IPS have raised questions about the terms of China) entry into WTO. As a project, FPIF does not require that our experts adopt preordained policy positions, only that they articulate policy recommendations that are based on broad concern for global peace, sustainable development, and human rights. We recognize the controversial character of this policy brief, particularly for labor and "fair trade" advocates in the U.S., and we are including an accompanying page that briefly presents some dissenting voices. We solicit comments and critiques, which will be posted on our website.)

The November 15th U.S.-China agreement on the terms for China to join the World Trade Organization (WTO) is the most significant deal between the two countries since diplomatic relations were established more than two decades ago. The Clinton administration hopes this paves the way for Congress to now vote permanent Normal Trade Relations (NTR) (also known as Most Favored Nation), thereby giving China the same trading privileges now enjoyed without annual review by almost every other U.S. trading partner. The only other nations denied NTR status by the U.S. are: Afghanistan, Cuba, Laos, North Korea, and Yugoslavia. China has enjoyed NTR since 1980, but only by an annual vote of Congress. Only if the U.S. Congress approves permanent NTR for China can the November agreement be implemented. WTO membership for China and permanent NTR status will clear the way for Taiwan to join the WTO. China and Taiwan are the only two major U.S. trading partners that are not members. When these two join, all significant U.S. trading partners will be governed by the same rules and dispute-resolution procedures.

Joining the WTO will not give China any trading advantage with the U.S. that it does not already enjoy, but China anticipates that securing permanent NTR will remove the political embarrassment of Congress' annual scrutiny of its human rights, labor, and environmental record. More importantly for the U.S., the agreement grants unprecedented access to the Chinese market for both U.S. exports and investments--including in politically sensitive sectors like banking, insurance, and telecommunications--and it will improve the chances for relations to develop peacefully on the basis of mutual interest. In seeking WTO membership for China, the U.S. government has rejected arguments by many labor, human rights, and environmental groups that this should be tied to commitments by China to improve human rights and environmental standards.

The November 15th U.S.-China agreement is a major step toward Chinese membership in the 135-member WTO. To gain approval from the existing members, China, which has been seeking GATT/WTO membership since 1986, must reach bilateral understandings with its important trading partners. Before securing Washington's approval, China had previously made agreements on the terms for its entry into WTO with a dozen countries, including Japan and Australia. Negotiations continue for settlements with other major Chinese trading partners, most notably the European Union, but no major problems are anticipated in reaching consensus with the other WTO members. Therefore, Chinas admission to the WTO sometime next year is now likely.

The November 15th agreement imposes much more substantial concessions on China than on the U.S., which merely grants permanently what it has long granted annually anyway. Chinas concessions are the price of U.S. support for Chinese WTO membership. Both these concessions and the WTO rules themselves should have a profound impact on China, substantially opening its economy to foreign competition. WTO membership would compel China to change its current commercial laws and practices to conform to WTO rules. Trade disputes would be resolved through the WTO adjudication procedures rather than through bilateral bargaining. China has seemed to prefer bilateral trade bargaining in the past because, as a large country, it is often able to gain more concessions that way. Once it is a WTO member, China would need to negotiate trading terms on a multilateral basis with all members at once.

Chinas concessions will benefit many major U.S. industries. Among those likely to gain the most are farmers, financial companies, and high-tech industries. U.S. law and accounting firms are also granted expanded access under the agreement. Chinas concessions in the financial sector are the most profound, because they benefit not only U.S. banks and insurance companies but also other U.S. exporters and investors, who will be able to do business more easily now that U.S. financial service companies can assist them and their Chinese customers. For example, this agreement will allow U.S. firms to make automobile loans to Chinese customers, thus promoting sales. U.S. firms will also be free for the first time to distribute their products throughout China without going through a Chinese intermediary. These market-opening concessions will be phased in over five years to give Chinese firms a chance to adjust to the prospect of foreign competition.

As the U.S. is already a WTO member and already grants China NTR, Chinas entry imposes few adjustments on the U.S. compared to the profound changes required of China. To assuage U.S. firms that do face Chinese competition, China has conceded 12-15 years of special protection against any rapid surge in Chinese imports on the presumption that such a surge might result from dumping (selling products below production cost), which is illegal under WTO rules. A U.S. firm can also gain temporary protection against alleged dumping while its legal challenge is in process.

As new sectors of the Chinese economy are opened, U.S. export opportunities will increase work for Americans in industries such as aerospace, chemicals, entertainment, computers, waste treatment, biotechnology, telecommunications equipment, medical equipment, and other high-tech products. Those industries that are already losing jobs due to Chinese competition, such as textiles and clothing, are little affected by this agreement, because Washington agreed to no significant new trade concessions. It is likely, however, that there will be some loss of U.S. jobs as firms relocate labor-intensive manufacturing from the U.S. to China as conditions there become more favorable to foreign investment.

Joining the WTO would commit China to a path that would immerse more and more of its citizens in international commerce. Their livelihood would increasingly depend on China attracting foreign commerce and maintaining friendly relations with most of the world's nations. The WTO's rules-based procedures would enhance application of commercial law in governing disputes within China, supplanting bureaucratic fiat, as such disputes could be challenged through the WTO. Any reversion to militarism in China would be increasingly costly and counterproductive as its dependence on foreign commerce increases. WTO membership is not a guarantee against future problems--some within China will suffer from increased foreign competition--but it would buttress a powerful bloc of interests within China favoring outward-oriented growth and the conditions, including peace and greater rule of law, required to secure it.

Key Points

* WTO membership for China is the most significant advance in relations with the U.S. since diplomatic ties were established two decades ago.

* Creating winners and losers on both sides, the November 15th agreement will benefit both economies, but China has conceded much more than has the United States.

* WTO membership would likely incline China more toward peace and the rule of law, though progress will take time.

James H. Nolt, World Policy Institute