Dimensions: 6'' x 9'' 120 pages AEI Press  (Washington) Publication Date: August 1999 Hardcover ISBN: 0844741078 Price: $ 29.95 Add to Cart   Examination Copies

Tiger by the Tail explores the issues surrounding China's accession to the World Trade Organization. Although the book acknowledges that the specific market-access commitments that China makes are important, the focus is on how the WTO can best resolve conflicts with China after the PRC’s inevitable admission to the organization. The authors argue that the only way to avoid years of corrosive conflict within the WTO is to persuade the Chinese to accept, as conditions of WTO membership, at least minimal provisions for administrative and legal due process, as well as the creation of specialized courts capable of dealing with complex issues of commercial and trade law. How the WTO integrates China into the world trading community will have important implications not only for current WTO members, but also for other nonmarket economies vying for entry into the organization, such as Russia and Vietnam.

Mark A. Groombridge is a research fellow in the Center for Trade Policy Studies at the Cato Institute. Claude E. Barfield is a resident scholar and director of trade policy studies at AEI.

China's quest to join the World Trade Organization, the multilateral institution governing international trade, is one of the longest running dramas in modern trade history. In 1986, China applied formally to join the WTO, but both economic and political reasons have prolonged the accession process. WTO-member nations have been dissatisfied with China's reluctance both to open up its burgeoning economy to foreign competition and to lower trade barriers. And while the WTO is technically not a political institution, it is clear that a number of events outside the economic realm have shaped the negotiations. Examples include the Tiananmen Square crackdown in 1989 and U.S. concerns over the trade deficit in the 1990s, spurred by China's large increase in exports in industries such as textiles and shoe manufacturing.

In 1999, relations between the United States and the People's Republic of China reached their lowest ebb in several decades. A number of crises in the relationship developed, including campaign finance and nuclear espionage scandals, the accidental bombing of the Chinese embassy in Yugoslavia by NATO forces, and concerns over the U.S. bilateral trade deficit with China. It should come as little surprise that those events cast a pall over the negotiations on China's accession to the WTO. After a four-month "cooling-off" period, President Clinton and Chinese President Jiang Zemin agreed to resume stalled negotiations in September 1999 over the terms by which China will be admitted to the organization.

Despite the recent strains in U.S.-China relations, a consensus on the importance of getting China into the WTO has been growing. Most commentators agree that WTO membership for China is beneficial not just for China but for the world trading community at large. For China, WTO membership will help bolster the position of Premier Zhu Rongji, who faces the difficult task of keeping China on the reform path. For other countries, it will help integrate China more peacefully into the international community and will open up China's market to increased foreign competition.

In light of those benefits, President Bill Clinton's rebuff of China's pro-reform premier, Zhu Rongji, when Zhu came to the United States in April 1999, was a disappointment. Premier Zhu came to Washington with a market-access package that made key concessions on important sectors such as agriculture and services--concessions that went far beyond many of those undertaken by other countries as the price of admission to the multilateral trading system.

The Need to Focus on Transparency

Getting China into the WTO quickly is also important in light of the looming commencement of the organization’s Millennium Round of trade negotiations. If China does not accede before that round, the price of admission is likely to be higher as the country would probably have to commit to even deeper liberalizing measures.

While it is heartening that negotiations have resumed, it appears that U.S. trade negotiators may be unduly concerned with two peripheral issues. First, U.S. trade negotiators need to abandon irrational and unfounded fears of the bilateral trade deficit with China. That deficit has increased largely because operations from other Southeast Asian nations have relocated to China.

The second and more important concern is that U.S. trade negotiators are placing excessive importance on winning narrow market-access deadlines, such as whether the People's Republic of China will open its telecommunications or financial services markets in three years as opposed to six or even eight. The overarching goal should be to keep China on a steady, ever-widening reform path. That goal seems particularly appropriate when one recalls that Premier Zhu already put forward a very good market-access package last April but was rebuffed by a U.S. president too weak to stand up to business (especially steel and textile) and labor interests at home.

Although details on the market-access commitments and deadlines need to be finalized, it is much more important for U.S. trade negotiators and the WTO at large to get in writing how China intends to live up to whatever commitments are finally agreed to in the accession protocol. The key word for the WTO should be transparency. In other words, the most important thing is to ensure that foreign commercial interests will be able to understand and navigate their way through myriad, sometimes conflicting, administrative laws in China and that WTO member governments will be able to determine when Chinese laws and administrative rules violate international trade rules.

Specifically, that will mean that the protocol of accession for the PRC should spell out at least minimum standards of due process for administrative and legal actions involving foreign traders and investors. Those standards ought to include, for example, provisions for notice of hearings, right to appear with counsel, publication of the rationale behind new commercial and investment regulations, and the introduction and publication of standards of evidence. Further, building on steps already taken by Chinese officials, the accession document should provide for specialized courts for handling international economic disputes. In turn, the United States and other WTO members owe it to China to provide clear methods for evaluating its graduation to a full-fledged market economy and timetables for ending antidumping actions and arbitrary safeguards against import surges. Groombridge and Barfield present specific proposals for dealing with the safeguards and antidumping issues in ways that both protect WTO members in the near term and provide inducement for China to move steadily toward achieving the status of a market economy.

Stronger, more detailed transparency provisions are important for two political reasons, one internal to China and one stemming from protectionist forces among WTO members. First, regarding the Chinese situation, Zhu faces enormous resistance from certain industrial ministries and local officials who have designed laws and regulations to serve their own narrow interests. Moreover, in some cases, China has overlapping jurisdictions for economic affairs, leading to what the Chinese refer to as "too many mothers-in-law." That onerous bureaucracy is a powerful force for keeping foreigners at bay and markets closed, but strong transparency provisions will help to overcome it.

Second, a commitment from China to beef up transparency and administrative reform will be crucial in resisting pressure to "manage" China’s trade after accession. Some private interests and public policy analysts, for example, are advocating mandatory import targets for the PRC in key industries. Trade hawks, particularly in the United States, are also calling for an indefinite period in which China would be subject to special safeguards and antidumping provisions. Such special provisions would relegate China to second-class status within the WTO for the foreseeable future--something PRC officials are right to resist at all costs.

The best way for China to avoid that trap is to convince the West that the process by which trade is conducted in China is transparent and that outcomes are equitable. That is the reason administrative reform in China is so crucial; it is the only way that the WTO will be able to evaluate disputes and render competent judgments when they arise. Without a commitment to transparency, the WTO is likely to face enervating disruptions for years to come, because it will be much easier for Western countries to win frivolous dispute settlements and to impose unilateral protectionist measures. Such an outcome is in the interest of neither China nor the WTO.

In the end, for all the difficulties and dangers that full membership for China entails for the multilateral trading system, China--and Russia and other nonmarket economies--must be accommodated and integrated if the WTO aspires to retain its status as a global economic and legal force. China will set an important precedent for the way the WTO deals with the numerous other countries that remain outside the system. The processes by which trade in China is conducted--and not actual volumes of trade--are the issue with which U.S. trade negotiators and other WTO members should concern themselves.

While no panacea to China's economic problems or other difficult issues in the U.S.-China relationship, economic institutions such as the WTO help promote dialogue between nations in stable and predictable ways, something the bilateral U.S.-China relationship has often failed to do. We have already seen how the WTO-led liberalization of economies has enhanced welfare in both developed and developing countries. Accession to the WTO will help China along the difficult path of reforming its economy into one governed increasingly by market forces and the rule of law--something that is in the interest of the entire world community.