"..From the Jus' so's ya know Department.."
INFORMATION BRIEFS
China's WTO Accession Bid
Published June 26, 1998
China's bid to join the World Trade Organization (WTO) is now twelve years old, making it the longest accession process in WTO/GATT history. There is good reason for this delay. While other nonmarket economies have been admitted to the multilateral trading regime, none participates in global trade to the extent of China, which has nearly $350 billion worth of imports and exports. The WTO system has never confronted the complex mix of market and command features which characterizes China's economic transition. Moreover, the Chinese economy is characterized by wide disparities in the level of development between coastal areas and the vast interior, where seven out of ten Chinese live. The terms of China's entry matter profoundly to its major trading partners, and to the integrity of the WTO system itself. The status of China's WTO bid will be an important topic during President Clinton's trip to China.
Background
China was one of the twenty three original contracting parties in the 1948 predecessor to the WTO, the General Agreement on Tariffs and Trade (GATT). After the 1949 Chinese revolution, the Nationalist government served notice of withdrawal from the institution. China s accession will be a Îresumption of membership, but one governed by the rules and procedures for new entrants. Under this process, China's entry package must contain market opening trade concessions sufficient to induce other WTO member states not to exercise their right to "opt out" of WTO obligations toward a new entrant ( WTO rules permit new and existing members to withhold application of WTO commitments on a selective basis when a new member enters the system..)
When China and the United States began the effort to accelerate China's WTO bid in the mid-1990's, China's leadership described WTO participation as one of the highest goals of Chinese foreign policy. Some in China viewed WTO membership as a right due the country by virtue of its economic importance and progress, rather than a set of economic obligations that necessitated fundamental changes, involving increased transparency and predictability of access in China's economy. As detailed discussions of China's bid occurred in a special working group at WTO headquarters in Geneva, Chinese participants came to appreciate that WTO undertakings challenged important features of China's domestic economic policy. The WTO is not just another multilateral club in which membership is accorded to the most important global actors. Under the "single undertaking" -- introduced in 1995 -- the WTO's new structure pulls together the GATT regimes on subsidies, government procurement, and other disciplines, and reaches "new" areas, such as agriculture and service trade. These advances represent major improvements to the system, but further complicate China's participation.
Moving on a separate -- but not unrelated -- track is Taiwan's application for WTO membership. Taiwan's negotiations are nearing completion, intensifying pressure for closure on Beijing's application. Technically, Taiwan can join as a customs area of China, whether or not the People's Republic completes the process. However, political complications suggest that the WTO is likely to hold off completing Taiwan's protocol of accession until China's status is certain.
What are the Issues?
China's WTO accession talks have moved in tandem with bilateral market access negotiations with the United States. To date, there has been significant progress on the core issues dealing with the application of WTO rules and process. There is substantial agreement on increasing transparency of China's import and export rules, judicial review of administrative features of WTO implementation, and on the right of companies to imports and export their products ("trading rights"). China's 1996 decision to allow convertibility of its currency for the trade account permits repatriation of profits, trade in goods and services, and repayments of debt. These moves are important in liberalizing the foreign exchange regime. There has been additional movement on reducing the role of China's state trading companies, and improving intellectual property protections -- a high priority for U.S. companies.
Much remains to be done in such core protocol areas as "national treatment" (a basic WTO commitment to nondiscrimination in treatment of imports, once inside the borders), reviews of China's compliance once inside the WTO, and the fundamental treatment of China's system of subsidies and government purchasing. Moreover, the United States and European Union wish to include "safeguard" provisions which permit limits on fairly-traded Chinese exports that threaten to disrupt domestic markets.
Negotiations in the past year have shifted away from these process-oriented issues and focused on the specific market opening commitments that China is prepared to make. Among the most important are:
Tariffs - While China has made a series of unilateral tariff reductions, it has yet to achieve cuts that reduce most levels below the 15% that China's trade minister established as the goal. Among the most important reductions are those for information technology products. China's tariff offers include long phase-out periods, especially for high technology products and autos/parts, that have met stiff resistance from trading partners.
Service Trade - Important areas of the Chinese economy, including banking and insurance, are largely closed to foreign companies. Some progress has been made in liberalizing foreign participation in the areas of accounting, engineering, and legal services. But other service products -- such as retailing/distribution and insurance -- remain contentious. Since the service sectors are among the fastest growing areas of both the Chinese and world economy, greater market access is a high priority for foreign firms.
Agriculture - Tariff and nontariff barriers to value-added food products have restricted foreign competition. American, European, and Asian companies expect significant growth in China sales, if these impediments can be phased out. But, as in the West, strong domestic interests in China assure that agriculture market liberalization will be politically difficult.
The current phase of China's WTO negotiations occurs against the back drop of an Asian economic contraction so severe that the World Bank is now describing it as a regional depression. Moreover, China would be shouldering its WTO commitments in the midst of an ambitious reform of the entire state sector, which employs nearly one third of the country's urban work force. With growth slipping below projections of eight percent and exports contracting as the result of the Asian downturn, China is likely to experience record unemployment as it seeks to implement WTO promises. The broad architecture of WTO reforms complement the bold directions of China's own rationalization of the state sector. But WTO commitments are likely to be complicated by China's rising unemployment and the contraction of the state sector.
The United States has given China's WTO bid an important boost at critical stages of the process, as well as pressure to conform to the commercial needs of American business -- crucial to Congressional support. Business community support is necessary -- though not sufficient -- to achieve a Congressional consensus to provide permanent "most favored nation" tariff status for China. Without that change, the United States would be required to continue to condition China's MFN status on the outcome of the annual review process.
President Clinton's discussions on WTO are certain to give China's membership added momentum. The challenge for China and its trading partners will be to maintain that energy in the months ahead and achieve a commercially acceptable result that assures mutual advantages. For China's leaders, WTO commitments must somehow balance adjustment and unemployment pressures with the challenge of sustaining a high level of development. It is politically necessary that the Chinese leadership sees WTO undertakings as part of the solution, rather than part of their problems.
China's WTO participation will not be a cure-all for Sino-American trade tensions. It will help to move China toward adherence to rule-based international norms. This should yield greater predictability and openness for foreign exporters and investors, while assisting the country in developing a world-class economy.
Principal Author
Kevin Nealer is a Senior Fellow at the Forum for International Policy. A former Fulbright Professor of trade law and policy in the People's Republic of China, he is a Lecturer at Georgetown University's School of Business Executive Programs.
Wendy Lazarus is an associate with The Forum for International Policy.
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