CHINA TRADE DEBATE

May 2000
		Free Trade: Cato Institute Trade Analyst Mark Groombridge answers questions on why normalized trade should be supported. Also available: Human Rights and Labor

Free Trade Advocates: The Cato Institute Human Rights Activists: Human Rights Watch Labor Unions: The Teamsters     Online NewsHour Special Report: The China Trade Debate Q&A: PNTR Debate: * Free Trade * Human Rights * Labor Dec. 1, 1999: A discussion on China, trade and democracy Nov. 18, 1999: An interview with U.S. Trade Representative Charlene Barshefsky Nov. 15, 1999: A discussion on the U.S.-China Trade deal. July 30, 1999: Beijing cracks down on the meditation group Falun Gong. Feb. 26, 1999: The U.S. State Dept. releases its yearly human rights report. Dec. 30, 1998: A report on muzzling dissent in China. June 29, 1998: President Clinton challenges China on human rights. Online NewsHour Special Reports: The WTO and Global Trade The World Bank & IMF Complete NewsHour coverage of Asia   AFL-CIO Cato Institute Human Rights Watch International Brotherhood of Teamsters United States-China Business Council

1. Why should the United States approve PNTR and increase trade with China? The U.S. Congress is in the historic position of being able to assist pro-reform leaders in China move their country in a market-oriented direction. A vote to extend Permanent Normal Trade Relations (PNTR) to China will bolster the position of those leaders in Beijing who are attempting to broaden the depth and scope of China's two decade experiment with economic reform. Granting PNTR and China's subsequent accession to the World Trade Organization (WTO), will give political cover to leaders in China as they implement what will undoubtedly be difficult and painful economic restructuring policies. This benefits, not only the United States and the world trading community, but most directly the citizens of China, millions of whom are still mired in abject poverty due to tragic policy errors made by China's leadership in the past. Granting PNTR to China will also enable U.S. companies to take full advantage of the market access provisions that China has agreed to adopt in order to comply with WTO rules and obligations. If Congress does not extend PNTR to China, China can still enter the WTO and extend those benefits to competitors in Europe and Japan while denying those benefits to U.S. companies. Import-using businesses and consumers here in the United States will also have better guarantees that low tariff rates will continue to apply. While non-trade issues will and should remain an important part of the U.S.-China relationship, the present annual debate on whether to extend NTR is neither an effective nor appropriate tool to influence China's long-term behavior on these matters. China is also more likely to abide by multilateral WTO agreements that enjoy broad international legitimacy than bilateral agreements which inherently are much more politicized. As a member of the WTO, China will be subject to a multilateral dispute settlement process that is likely to be far more effective than sanctions imposed unilaterally by the United States. Ultimately, Congress should ask a straightforward question: is it in the U.S. national interest to encourage China to liberalize and reform its economy in a more market-oriented direction? The answer is a resounding "yes". A vote in favor of extending PNTR to China is a vote for the most moderate leaders in China who want to reform their economy. It is also a vote for U.S. business and citizens who will reap the benefits of expanded U.S.-China trade.   2. If passed, PNTR will open the doors to China's entry into the WTO. How would this change the dynamics of the relationship between China and the U.S.? It would create a more harmonious atmosphere to discuss issues in which we share common interests such as security on the North Korean peninsula. Too often, people look to China only as a source of instability in the Asian region. While this remains a possibility in the future, at this time, China plays a crucial role in reducing the likelihood of conflict in the region's most volatile area--the Korean peninsula. China remains the one country that can help bring North Korea to the negotiating table and mollify its militaristic behavior. Maintaining good relations between the United States and China is thus helpful in resolving conflict in Korea. Passage of PNTR would also enable the United States to more credibly engage China on a variety of non-trade related issues such as missile proliferation, human rights, and nuclear espionage. Currently, when trade disputes between the United States and China remain purely bilateral, anti-reform elements in China often claim that the U.S. position stems from either the desire to protect failing U.S. industries or a fear of China's emergence as a regional hegemon. China's accession to the WTO would blunt such arguments. In so doing, it would also allow U.S. policymakers to more effectively address other, non-trade related aspects of the Sino-U.S. relationship. By de-linking the two, the United States can show that it is serious about maintaining a dialogue on these issues. These discussions are not hollow either. China expends a great deal of energy every year lobbying countries to vote against censures on human rights issues in a variety of international institutions in both Geneva and, specifically, the United Nations. More important, the status quo of conditional NTR is an "empty cannon." Indeed, the annual threats to remove NTR have actually weakened U.S. credibility since it is clear it will not be revoked. With Sino-U.S. relations at a particularly low ebb in 1999, it is reasonable to ask what was the point of the annual debate on the floor of the House when Senator Trent Lott, the majority leader in the Senate, announced that the Senate would not even take up the issue. Moreover, the House of Representatives garnered only 170 votes in favor of revoking NTR status with China last year, even in the face of the Cox Committee's espionage charges and the furor over illegal campaign contributions. Finally, actually carrying through on the threat to revoke China's NTR status would fail for the same reason that unilateral trade sanctions fail generally. It is true that the United States is the sole superpower in the world today, but this does not mean that we live in a unipolar world where the United States can impose its will on other countries. If the United States were to revoke NTR for China and raise tariffs accordingly, other countries would "free ride" on U.S. actions and continue to trade with China. Those against China's entry in the WTO for fear of high-tech exports going to China would also find their efforts stymied. Other countries are quite explicit about the fact that they will continue to give China their most advanced technology.   3. Labor union leaders say increased trade with China will hurt the American worker, as businesses move to China where workers' rights do not exist. What is your response to that argument? Old-fashioned protectionists oppose PNTR for China for the simple reason that they opposed expanded trade with China. They point to the $71.2 billion in annual imports from China, and the bilateral trade deficit with China of $56.9 billion. These figures, they claim, mean a loss of U.S. jobs. In particular, lobbyists for the textile industry fear the competitive challenge of Chinese imports once quotas are eliminated under WTO agreements. First of all, the fact is that PNTR by itself does not expand China's access to the U.S. market. All it does is to make permanent the status quo that has prevailed every year for the past 20 years. Accordingly, U.S. industries that face import competition from China will not be exposed to any additional competition simply as a result of changing China's NTR status from annually renewable to permanent. It is true, though, that PNTR facilitates China's entry into the WTO, and that WTO membership for China will require the United States to eventually remove some of the trade barriers it currently maintains against China - in particular, its restrictive textile quotas. Trade in textiles and clothing is subject to the WTO Agreement on Textiles and Clothing (ATC). Under the ATC, all countries are required to eliminate quotas in this industry by the year 2005. The United States, however, negotiated in the bilateral agreement with China a provision which would enable the United States to invoke additional protection against import surges through the use of a textile safeguard provision that expires at the end of 2008. Despite this additional protection, the ITC is likely correct that: "Although much of this increase in China's exports of textiles and apparel comes at the expense of other suppliers to the U.S. market, the U.S. textile and apparel industries could also be affected, with U.S. apparel producers and workers experiencing the more adverse effects." So WTO membership for China will adversely affect some U.S. interests through increased imports. Those increased imports, however, will also benefit other U.S. interests: the businesses that can reduce costs with Chinese inputs and equipment, and the consumers who enjoy the low prices and variety offered by Chinese clothing, toys, and other products. As to the overall effect on the U.S. economy, economists since Adam Smith have known that increased openness to foreign competition is a net benefit for the countries that make that wise policy choice. Meanwhile, on the other side of the ledger, WTO membership for China will open up enormous new opportunities for U.S. exports and investment. One study by the Institute for International Economics estimates that "the induced increase in world exports of goods and services to China can be estimated at U.S. $21.3 billion. The immediate increase in U.S. exports of goods and services to China can be estimated at U.S. $3.1 billion." Others estimate even higher benefits, taking into account the potential dynamic gains of increased competition. Fred Hu of Goldman Sachs, for example, estimates that China's accession to the WTO would lead to an additional $13 billion in U.S. exports by 2005. The protectionist argument against PNTR thus comes down to the assertion that the commercial interests of textile producers and a few other import-competing industries are more important than the interests of import-using businesses and consumers; more important than the interests of U.S. exporters with a huge stake in improved access to the Chinese market; and more important even than the U.S. national interest in encouraging market-oriented reform in the world's most populous country. This kind of naked special pleading must be rejected.   4. Some say that PNTR proponents are siding with "big business" on the issue due to politics or greed. Others even say we're giving China a "blank check" with PNTR. What is your response? It is certainly true that corporate America will benefit from the extension of PNTR and China's subsequent accession to the WTO. Are large corporations greedy? Of course they are. I see little wrong with that. China will enter the WTO regardless of whether or not Congress passes PNTR. If we do not pass PNTR, though, China will extend its market access benefits to our competitors in Japan and Europe. A vote not to extend PNTR is thus a vote against American businesses. As for giving China a "blank check"-- the answer is yes! But this is good because it is a blank check for the people of China--not the government. Passing PNTR will help China reform its economy in a more market-oriented direction. This will help get wealth and resources out of the hands of the state and into the hands of the people. This will help break the state monopoly of wealth and power which enables Beijing to control its citizenry. Moreover, we will be better able to monitor China's economic reforms. A number of serious critics of China's entry into the WTO point out that the promised benefits of WTO membership will occur only if China abides by its commitments. Moreover, they point out the possibility of severe disruptions to the WTO process should China become a member and not play by the rules. Even if China's leaders are intent on implementing the agreement, it is not lost upon the world trading community that some local bureaucrats will be resistant to change. Moreover, there is a lack of transparency in the rule-making process in China, a problem which hinders foreign access to China's market. To be sure, these are legitimate concerns. Two mitigating factors, however, should be raised. First, the current Chinese leadership is at least aware of this problem. Top trade and foreign investment officials forthrightly acknowledge that laws that were made during the 1970s or 1980s did not take into consideration international regulations. There are even conflicts between them and some recently-made laws, such as the Contract Law and the Corporate Law. Trade officials have also been more forceful in pushing through laws and regulations to conform to the requirement of WTO rules and acknowledging that the government's project-review and decision-making processes should be more transparent. The second factor mitigating concerns that China will not abide by the WTO agreement is the strength of the WTO dispute settlement process. Should China not open up its market, the United States and others would have a better forum in which to air their grievances than if China remained outside the WTO. China would be forced to blame the entire world trading community and the WTO should it lose a case--something China would find difficult to do if it is intent on becoming a respected global leader in its own right. Already, there is evidence that China makes a concerted effort to play by the rules with international economic institutions such as the World Bank and the International Monetary Fund.   5. Will increased trade/engagement with the West (and entry into the WTO) have any effect on the social and political climate in China? How? How should the United States approach trade with China now and in the future? The relationship between economic and political freedom is a hotly contested subject. It is a subject that has featured prominently in the annual debates in Congress over extending NTR to China, and doubtless it will be just as prominent in the PNTR debate. One way to help resolve this debate is to pose the right question. The wrong question is: does wealth and economic growth lead to democracy? The right question is: does a market economy foster the growth of autonomous groups outside the state? A rallying cry of the American Revolution was, "No taxation without representation." The converse is true as well…"No representation without taxation." People sometimes ask why wealthy states in the Middle East are not democratic? Well, in oil-rich Middle Eastern states, most of the money flows directly into the state hands that control the state-owned oil enterprises. These states then distribute this wealth to their citizenry in the form of government handouts. At issue here is the power of the purse. A society may have middle classes and growing affluence, but if it is the state that is responsible for channeling resources to the citizenry, then there is little reason for the citizenry to articulate demands that would oppose or run counter to state interests. Accordingly, in evaluating the effect of WTO membership on China's political situation, what really matters is the degree to which trade with China helps generate wealth outside of state control. In China today, this process is already well underway. The non-state sector is clearly the most vibrant economically. State-owned enterprises accounted for 80% of gross-value industrial output in 1978, and now account for well under one-third. Similarly, roughly one-third of the urban industrial workforce is employed in the non-state sector. In rural areas the number is even higher, where close to 50% of the rural industrial workers (non-farmers) are employed in the non-state sector. The State Statistical Bureau of China reported that non-salary income from savings interest, revenue from securities investments or inheritance as well as certain illegal activities accounted for 32.8 percent of urban citizens' total income in 1997, compared to 12.7 percent in 1981. The growth of wealth outside of state control, a trend that WTO membership will only accelerate, challenges the power of the Beijing leadership at its root. For the first time since it was founded, the Maoist state must support itself by taxing resources it does not own. This shift of control of resources away from central state coffers has allowed the growth of a number of different types of groups in China to organize. To be sure, it is still too soon to say that there is a vibrant or strong civil society in China; moreover, all groups are supposed to register with the state. Still, a nascent civil society is developing, certainly one far stronger than in 1978. These groups are finding it increasingly possible to criticize the state because they are now independently financed and receive no funds from the government. The recent crackdown on Falun Gong, while it highlights how repressive the Beijing regime remains, also shows how dramatically things have changed since Mao's death. That a group with millions of adherents could form and organize outside the state, and that such a group could continue to survive even in the face of determined and brutal state opposition, would have been unthinkable 20 years ago. To be sure, the growth of civil society does not automatically translate into expanding political liberties. After all, China's growing civil society exists alongside a still repressive and unaccountable regime. But the emergence of social power centers that rival the state does increase the likelihood over time that the state will be forced to concede political rights to those new power centers. Accordingly, civil society is a precursor of democracy. East Asia offers numerous examples of this dynamic in action. In South Korea, Taiwan, the Philippines, and Thailand, economic development laid the foundations for eventual political liberalization.