Commentary Type

Spies, Bombs, and the WTO

Gary Clyde Hufbauer (PIIE) and Daniel H. Rosen (China Strategic Advisory)

Article originaly appeared in the South China Morning Post


What do spies, bombs and the World Trade Organization (WTO) have in common? As most children could answer, China. During 13 long years of GATT/WTO accession talks, nearly every U.S.-China bilateral issue has been linked to the WTO talks: the four T's (Tiananmen Square, Tibet, Taiwan, territorial claims in the South China Sea), along with missile technology and human rights. Spies in Los Alamos and bombs in Belgrade are only the most recent links.

Global competition between the two powers ensures that political and security disputes will erupt for years to come. Yet leaders in both countries are tiring of the persistent linkage between political-security questions and economic issues.

In bygone days of U.S.-U.S.S.R. rivalry, the two superpowers disagreed about politics, security and economics. By contrast, the United States and China agree on many commercial and financial issues. Hence there are solid grounds for separating the WTO question from other issues. The case for delinkage was boosted by the excellent WTO offer tabled by Prime Minister Zhu when he visited Washington. Yet it seems unlikely that the Clinton Administration will propose, or the U.S. Congress will approve, permanent "normal trade relations" for China prior to the December 1999 Seattle Ministerial meeting of the WTO. Instead the next U.S. President will have to grab the ball that Clinton fumbled.

Zhu's Offer

Zhu's offer was nothing short of revolutionary. WTO accession on Zhu's terms means that old Chinese bureaucracies will be destroyed, monopolies cut loose, and lifetime guarantees to workers renegotiated wholesale. At the same time, creative chaos will bring lower prices to consumers along with better quality and greater selection. Entrepreneurs will find new resources at their disposal. And foreign investors will find China a better place to do business. This is important. Top Chinese leaders know that investment is lagging and see continued reform as the best way to move forward.

Besides shaking up customary ways in China, WTO accession will improve the long-term prospects for Chinese exports. As long as China is kept outside the WTO, its exports will remain subject to textile and clothing quotas, even after quotas expire for other WTO members in 2005. Inside the WTO club, however, China will be allowed to compete freely for world markets. According to Zhi Wang, China's share of world textile and clothing trade, as a WTO member, is likely to increase by 5 percentage points, or by at least $20 billion, by 2007. Higher Chinese exports of other labor-intensive goods could add another $10 billion to the "WTO dividend". Without WTO membership, China's merchandise exports in 2007 will probably reach $300 billion; with membership they could reach $330 billion.

What are the economic implications for the United States? The heart of the U.S. economic debate about China's accession concerns new export opportunities and new import competition. New exports are on many American minds because the bilateral trade balance is one statistic that captures the public imagination—and the attention of Congress. In 1999, U.S. exports of goods and services to China (including exports via Hong Kong and other intermediaries) may reach $25 billion; U.S. imports will be about $85 billion, and the trade deficit could exceed $60 billion.

The goal of trade negotiations is not to eliminate bilateral trade deficits, but rather to create new export opportunities for all players. The key to U.S. export success in China lies less with border barriers than with operating conditions inside the Chinese marketplace. Border barriers, however, are the obstacle Beijing can best address. And here Zhu's offer looks great. Tariffs and non-tariff barriers on industrial goods and merchandise are to be lowered from a simple average of 25 percent in 1997 to under 10 percent by 2005, with two thirds of the cuts implemented by 2003. For agricultural goods the ceiling will be 17 percent, and substantially all cuts will be made by 2004. Special accommodation will be given to U.S. priority products (for example meat, citrus, wheat, auto parts and chemicals). All these commitments would be "bound" in the WTO sense, meaning that China would have to compensate the United States (and other WTO members) if it later raises its barriers. Our calculations suggest that, over a period of years, the offer tabled by Zhu could boost U.S. exports to China by $3 to $5 billion annually.

In terms of imports, the United States already extends low MFN tariffs to China—on a year-by-year basis, subject to Congressional disapproval. However, so long as China is outside the WTO, the United States has unlimited discretion to restrict imports from China; once China becomes a member, this discretion will be curtailed, but not eliminated.

The WTO provides a menu of potential safeguards the United States can utilize when imports from China threaten the economic survival of U.S. firms and workers. Under the WTO, until 2005, textile and clothing imports from China will be strictly limited by quotas. After that, the United States can invoke the "escape clause" to restrain textile and clothing (or other) imports that cause serious injury. Meanwhile subsidized and dumped imports of any product from China be penalized. What all this means is that the United States, like other WTO members, will retain defenses against serious economic dislocation, but it will have to follow normal administrative procedures.

Economically Sweet, But Politically Sour?

Most Congressmen acknowledge that Zhu put a very good offer on the table. Based on the economic fundamentals on both sides of the Pacific, there are strong reasons for Congress to normalize China's trade status as a step toward WTO accession. Indeed, when it comes, the permanent NTR vote will find both Republicans and Democrats in favor. They see the virtue of separating trade from the broader and more durable political-security differences.

To be sure, organized labor and some human rights groups are dead-set against bringing China into the WTO. But business is in favor. In ordinary times these forces would offset each other.

These are not ordinary times. Since the days of Julius Caesar and the Han Dynasty, world powers have spied on one another. But there are always new twists. The Cox Report shows how good the Chinese are at this ancient profession, and how careless was America's defense. These revelations have excited China critics in Washington. Meanwhile, America critics in Beijing have turned the accidental Embassy bombing into a grand conspiracy. To compound the difficulty, "China bashing" has become a ritual of U.S. presidential politics. If Clinton signed a WTO deal with China, Democratic Senator Bill Bradley might hang a "soft-on-China" banner around Vice-President Al Gore's neck in the Democratic primary campaign. And the Republican presidential candidate—George Bush or Elizabeth Dole—would be sure to play the China card against the Democratic nominee in the general election in fall 2000.

In other words, economics says "yes" but politics says "no". As usual, politics trumps in the short run, but economics will ultimately prevail.


1. MFN—or "most favored nation"—status remains a term of art in WTO parlance. It means treatment as favorable as that extended to any other WTO nation. In U.S. law, the acronym has been changed to NTR for "normal trade relations". The Jackson-Varik amendment, dating from a different era and a different problem (Jewish emigration from the USSR) requires an annual congressional vote on continued MFN/NTR treatment for imports from China.

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