China, the WTO, and Globalization: What Happens Next
by Ellen L. Frost, Peterson Institute for International Economics
Article written for the ChinaOnline Web site
July 19, 2001
Reprinted with permission from ChinaOnline.
After fifteen years of effort, China appears poised to join the World Trade Organization this year. This hard-won triumph is a milestone in the march of globalization. But globalization brings dangers as well as opportunities. How the United States and its major allies handle the pressures associated with China's ongoing lurch toward globalization will influence not only the effectiveness of the WTO and the health of the Chinese economy, but also, more broadly, the future of U.S.-China relations, the evolution of China's political system, and the fate of Asia.
The terms and conditions of WTO membership partially reflect the demands of globalization and thus offer a preview of possible risks. What follows is a brief summary of China's WTO obligations, followed by a deliberately pessimistic sketch of what could go wrong—and a plea for careful management to ensure that it doesn't.
Rights and obligations of WTO membership
Like its predecessor organization, the General Agreement on Tariffs and Trade (GATT), the WTO is founded on two core principles: non-discrimination and national treatment. The non-discrimination principle dictates that China cannot impose one level of barriers (e.g., tariffs) against one member country and another level for others. (China's current trade dispute with Japan touches on this principle.)
National treatment requires China to treat foreign firms the same as domestic firms are treated in the Chinese market. These are the basic requirements of a global market.
Besides these core principles, China has assumed a long list of specific obligations. The Uruguay Round of multilateral negotiations (1986-93), which established the WTO, mandated that members of the new body cannot subscribe to GATT rules a la carte but must adhere to all of the provisions of the various agreements, with a few minor exceptions.
These agreements provide for both increased market access and substantive rules. They vary in content but generally require "transparency": open publication or dissemination of measures affecting trade and investment, including not only tariffs and quotas but also subsidies, licensing requirements, and other measures.
In China's case, barriers and distortions are numerous and interconnected. Although privatization is proceeding, quantifying the residual thicket of subsidies, price controls, local protectionism, and other forms of state interference will be extremely difficult.
New ground on dispute settlement
Equally important, China will participate in the WTO's dispute settlement system, a big step toward the rule of law. Participation is mandatory and if one WTO member is accused of violating the rights of another—and if negotiations fail—it must submit to a dispute settlement process.
The findings of a dispute settlement panel do not have the force of law, but they are generally complied with because governments see it in their interest to maintain the system.
Dispute settlement is based on strict equality among all nations. One of the WTO's first disputes, for example, centered on a complaint brought by Costa Rica against the United States. The panel found in favor of Costa Rica, and the United States complied.
By its very nature, the dispute settlement system runs counter to China's insistence on "non-interference" in domestic affairs. However, in the age of globalization, what governments do in the management of their domestic economy may matter far more to foreign competitors than what they do at the border.
Whereas the rights of WTO members accrue to nation-states exercising sovereign power, their obligations increasingly affect local authorities and private actors. Ironically, as China pursues its cherished national rights in the WTO, it will necessarily "interfere" in the domestic affairs of its trading partners, just as those partners will "interfere" in China’s own domestic affairs.
To be or not to be developed
A major sticking point at certain stages of the WTO entry negotiations was Beijing's insistence that China should be treated as a developing country. Prior to the Uruguay Round, trade rules permitted "special and differential treatment" for developing countries, meaning that poor countries did not have to undertake the same obligations as rich countries.
The collapse of the socialist model discredited these alternative options. The Uruguay Round reduced most differential treatment to the timing of implementation of obligations. The required review of a country's trade record, a useful device for managing trade relationships, still takes place annually for industrialized countries but less frequently for developing countries.
In the context of accession to the WTO, the Chinese were forced to agree to shorter phase-in periods and lower caps on certain subsidized exports than those granted to many low-income countries, a compromise that has symbolic as well as substantive implications for Chinese leadership ambitions.
It’s not just about money
Globalization implies long-term movement toward a global market guided by a harmonized legal and regulatory framework, a sense of political community and shared purpose, a stable security system, and common standards of governance and justice. In a world of this nature, the United States and China have nothing to fear from each other.
But globalization is also a disruptive catalyst, exposing latent tensions, weaknesses, and rigidities in the body politic and inflicting intense competitive pressures. It can foster disintegration, instability, crime, large-scale corruption, pockets of severe unemployment, localized environmental damage, and yawning income gaps even as it raises per capita GDP.
China, with its vast and impoverished interior, wide discrepancies in wealth, and pervasive corruption, is already at risk.
The primary political challenge of globalization stems from China's failure to modernize its rigid and archaic system of governance. Successful adaptation to globalization requires a flexible and adaptive political system.
The record to date suggests that globalization offers the most widespread benefits to states that have put in place not only the rudiments of a market-oriented economy, but also competent and accountable governance, some degree of political pluralism, a free or partly free press, a rules-based system of justice that inspires a reasonable degree of trust, and openness to global engagement, all backed by a stable security system.
China's record has vastly improved, but it is still mixed at best.
The economic and industrial challenges facing China stem primarily from the legacy of socialism. WTO membership brings crucial external reinforcement to China's reform agenda, and hence to its long-term ability to adapt successfully to the surging global economy.
In the short term, however, Chinese enterprises may prove even less competitive than expected. Widespread factory closings would worsen already high levels of unemployment and underemployment, sparking an anti-reformist backlash.
Meanwhile, the Chinese banking and financial system, already weakened by dangerously high levels of bad loans, could slide into a full-fledged financial crisis, throwing millions more out of work. Although the WTO would not be the cause of these problems, it could become the scapegoat.
The global trading system faces danger as well. First, the WTO's fledgling dispute settlement system could be swamped as other countries react to a perceived export juggernaut. China could be accused of violations ranging from the use of prison labor to failures in implementing commitments to open up the distribution system.
Anticipating this risk, negotiators have hammered out a series of compromises with China, but preventing a flood of dispute settlement cases will still require common sense and good will.
Second, WTO member governments can already impose "safeguards" against China—temporary import restraints in response to import surges. The working group on WTO accession reached a compromise with China establishing somewhat lower than normal permissible criteria for safeguards over the next 15 years. Textiles and apparel, a politically sensitive industry in developed and developing countries, will be covered.
Third, China's pervasive price controls are expected to stir up a number of anti-dumping cases. In determining "comparability" of price, a key step in anti-dumping proceedings, WTO members agreed to publish methods of calculation in advance.
But anti-dumping remains subject to protectionist abuse. In turn, China has vowed to increase its own use of this tool. The United States has refused to put anti-dumping on the WTO negotiating agenda and may be forced by domestic interest groups to use this weapon against China, thus souring U.S.-China relations.
Finally, Taiwan has long since met the conditions for WTO membership, but China has not formally signaled its acquiescence. A belligerent attitude could stir up more anti-China sentiment in the U.S. Congress, giving trade opponents another excuse to block or cripple badly needed trade promotion authority.
Given good will, common sense, and a strategic perspective, all of these risks are manageable. A new Cold War with China, or even worse, armed conflict, would represent a massive failure of policy on both sides. The dangers ahead must be consciously managed and not left solely to "the market"—which is still emerging and/or distorted—or to domestic politics.
To ease China's entry into the WTO, the United States should set an example by resisting protectionism and encouraging others to do likewise. Many problems can be contained if negotiators tackle them early. Washington should also throw its full weight behind a new trade round and commit itself to eliminating barriers facing emerging and developing economies, including China's.
But more is at stake than trade and investment. The Chinese government has undertaken a heroic effort to adapt to globalization by wrenching China's distorted economy into greater conformity with a market-oriented, rules-based world order. In a deliberate gamble, China's leaders are resisting the demand for corresponding political change at the national level.
How long this contradiction can continue is anyone's guess, but at this crucial juncture the United States should not make China's adjustment to globalization more difficult than it already is by withholding the benefits of trade or pursuing a foreign policy that dismisses China's legitimate concerns.
Washington could do a better job adapting to globalization itself. Devising a successful globalization strategy will require, at a minimum, much closer coordination among economic, security, environmental, and law enforcement policy-makers than now exists. Dealing constructively with China calls all of these perspectives into play. From the clutter of daily deadlines in separate bureaucracies, leaders need to extract and shape a holistic approach to China founded on a sense of history and informed by strategy.
Globalization is a common challenge. It should be channeled or managed cooperatively. As a new member of the WTO and the global trade leadership community, China has the chance to shape globalization, not merely to be shaped by it. The stakes are so high that American policy-makers should muster extraordinary patience, humility, public restraint, and political self-control as this unprecedented opportunity unfolds.