DATE=12/2/1999
TYPE=ON THE LINE
TITLE=ON THE LINE: CHINA AND THE WORLD TRADE ORGANIZATION
NUMBER=1-00801
EDITOR=OFFICE OF POLICY - 619-0037
CONTENT=
THEME: UP, HOLD UNDER AND FADE
Anncr: On the Line - a discussion of United
States policy and contemporary issues. This week,
"China and The World Trade Organization." Here is
your host, Robert Reilly.
Host: Hello and welcome to On the Line. The
World Trade Organization meeting in Seattle this
past week was greeted with demonstrations by
various labor and environmental groups. Some of
the protests turned violent. A curfew was declared
by the city and the police used tear gas to break
up the demonstrations. This is not what the
leaders of the World Trade Organization expected.
They were looking forward to dealing with major
policy issues, including those flowing from the
agreement on trade reached by the United States
and China last month. That accord cleared the way
for China's accession to the World Trade
Organization.
Joining me today to discuss the World Trade
Organization and China are three experts. James
Lilley is a resident fellow at the American
Enterprise Institute and a former U.S. ambassador
to China. Nick Lardy is a senior fellow at the
Brookings Institution and author of the book,
China's Unfinished Economic Revolution. Shengde
Lian is executive director of the Free China
Movement, a coaltion of thirty Chinese pro-
democracy organizations around the world. Welcome
to the program.
Host: As we begin here, let me invite your
comments on what did take place in Seattle in
terms of the demonstrations and the turbulence.
And of course, it was not just Seattle. There were
violent demonstrations in London. Charlene
Barshefsky, the U.S. Trade Representative, who
successfully negotiated with China, made the
remark before the meeting that "the biggest threat
to open markets is the lack of public support for
it." Do any of you see the way these
demonstrations took place as a problem for the W-
T-O or for the agreement that was negotiated in
November between the U.S. and China as part of
their accession?
Lilley: I think primarily it's a problem for W-T-
O, not the Chinese accession. But I think it gives
you a very strong flavor of the resistance that
exists in China to W-T-O. It's not the same kind
of resistance. But the Chinese faced a lot of
opposition when they tried to get the deal. When
Premier Zhu Rongji went back to China in April, he
faced a real problem: protectionist elements,
party people, military people, state-owned
enterprise people, banking people. So I think it
gives a graphic demonstration in some ways about
the resistance to this. But I thought it was
interesting both Mike Moore [W-T-O General
Director] and President Clinton said that they're
going try to bring the demonstrators in to talk to
them. They are going try it, at least, to listen
to their argument.
Host: Mike Moore?
Lilley: The head of the W-T-O.
Host: Any thoughts, Nick Lardy?
Lardy: I think it really is a problem for the W-
T-O, particularly in the United States. The
administration really has not been out in front
selling freer trade as a substantial advantage to
our economy, our workers, and our consumers. And
until there is more leadership on this from the
top, you will have groups attacking it from the
side and underneath, saying that there are
disadvantages to opening our markets further.
Host: So in other words, you might see this
actually as prelude to opposition to it in the
U.S. Congress, since Congress is required to
approve this agreement.
Lardy: I don't think there will be opposition in
the Congress to China accession. I think the
question is how much support will there be in
Congress for the next round of talks, which this
meeting in Seattle was supposed to have launched,
the so-called "millennium round." Ultimately, they
will have to give the president negotiating
authority and, quite frankly, they have not been
willing to. They have not really been persuaded
that further liberalization of the trading system
is in our long-term interest.
Host: Shengde Lian, any thoughts?
Lian: I think it might be good for the W-T-O in
the future, since it looks like many people want
to have a voice on the W-T-O and its rules. But I
wanted to do a comparison between the protest in
Seattle, which was violent recently, whereas ten
years ago, in Tiananmen Square, where thousands of
students, including myself, were protesting
peacefully. The protesters in Seattle received
tear gas and rubber bullets and we received tanks
and the killing of hundreds of students and
citizens. My question is: how has the world
prepared to welcome the current Communist
government to enter into the W-T-O? How will the
rules of W-T-O be abided by, rather than being
changed by such a powerful economy and entity?
Host: Let's get to that question a little later.
I want to ask Jim Lilley, in your vast experience
in China, having served as an ambassador, and
having observed the country for a long period of
time, what is it stake for China in making this
agreement that they have? Some observers say that
this is a landmark turning point, so profound will
be the internal changes effected in China by their
meeting their requirements of WTO. Is that
overstating the case?
Lilley: A little bit. I think it could be a major
move in the direction of a more open trading
system in China, more liberal terms for foreign
investment. But you have got to understand that
China has been doing this for about twenty-five
years. Their tariffs came down dramatically in the
1990s. Our exports went up sixteen to eighteen
percent a year. So they were opening up anyway.
What this does is, I think, gives it an added
push. I think, particularly in areas like
agriculture, it's really important for China's
future. China's agricultural production, if I am
correct, went down slightly last year. This wasn't
considered a tragedy in China at all. They are
thinking in terms of the economics of comparative
advantage. It doesn't make sense for them to
produce all of this grain. They can import it,
turn over land to industrial production or cash
crops. And they are really thinking in much more,
I think, liberal terms than the Japanese or the
Koreans, for instance, who protect their
agriculture. The Chinese are more open on this. I
think this is a real turning point, or could be.
But don't underestimate the resistance to it.
Host: Let's get to the substance of the agreement
between the United States and China. Zhu Rongji
brought an agreement here that President Clinton
turned down. Then there are all the difficult
negotiations after the accidental bombing of the
Chinese Embassy in Belgrade, and finally an
agreement. Is this agreement substantively the
same as the one that Zhu Rongji brought to
Washington those months ago? What are the main
features of it, Nick Lardy?
Lardy: Its broad outlines are very similar to the
April agreement. Indeed, many of the details are
identical. There were some changes in some areas
of market access where we got a little bit less.
But the U.S. negotiators got a little bit more on
some of what are referred to as the protocol
issues. We have more weapons at our disposal, if
you want to call them that, to resist big surges
of imports that might come from China at some
point in the future. This is called a safeguard
agreement. And we got some other very important
things in terms of how we deal with China in anti-
dumping cases. So the broad parameters are the
same. There are a few differences in some of the
details, but the broad structure is very similar.
It is very dramatic. It will bring down tariffs
but, as Jim said, they already have come down
quite a bit. So the real action, if you will, is
in the area of services, where China has agreed to
open up things like telecommunications, financial
services, professional services, in ways they have
never done before. So it's not so dramatic in
terms of plain bread-and-butter manufactured goods
where the tariffs are already pretty low. But in
terms of opening up their economy, these service
openings will be quite dramatic, particularly
telecommunications.
Host: Shengde Lian, how do you assess the
significance of this for the future of China?
Lian: I'm very glad to see that certain areas,
like you mentioned, financial services and
communication industries opened this time to a
certain degree to the international society. But
my concern is that, in China since 1949 until
today, especially after the 1989 crackdown in
Tiananmen Square, there haven't been any
significant political reforms. And in one word, in
essence, there is no rule of law. So I'm worried
about that, even if there is a great agreement of
the W-T-O. But how can those rules be followed by
the Chinese government? What's the implementation
of that agreement? So my question is that I don't
know how the W-T-O and other organizations could
figure out a way that this agreement would be
abided by both sides of the trading partners, thus
to have this trade be really free and fair. And
that is in the best interest of both trading
partners on both sides, government and the people.
Host: So you would say you are for this agreement
if it's observed.
Lian: If it's been observed, and it's been really
implemented.
Host: Okay. He raises an interesting question,
Jim Lilley, because, over a year ago, China signed
the International Covenant on Civil and Political
Rights. One of the ironies is, just as they have
agreed to more open trade, they have clamped down
on civil and political rights with their roundup
of over thirty-five thousand Falun Gong members,
with increased religious suppression. They are not
observing the Covenant on Civil and Political
Rights. Will they observe this? Are there
sufficient enforcement mechanisms in the W-T-O to
make China toe the line?
Lilley: Well, at the risk of making some enemies,
I would say trade is not human rights. Trade is
hard give-and-take on things that China
desperately wants from us, and things we need from
them. It's give-and-take. It's compromise. It's
not values being laid on the line. Human rights,
the covenant that you are talking about, is a
principled position on political freedom. Of
course, the Chinese see the world very
differently. They signed it, sure, but it's
different from the World Trade Organization. Let
me just make one point. Two of my colleagues wrote
a book on China and the W-T-O, Tiger by the Tail,
it's called. They make two points that the two
issues really in China that are essential on this
-- one is the transparency of their system and the
other one is the process of law. And they say a
lot of it hangs on this. Are the Chinese really
going to let you get in and look at their system?
Their banking, their credit, the way they handle
things. And are they going to carry out a process
of law that is outside of the party?
Host: And the answer to that is?
Lilley: The answer is a great big question mark.
Host: All right. We have a number of guests
asking questions rather than answering them, so
let's see if you will answer this one, Nick Lardy.
Jim Lilley has referred to the debates within the
Chinese elite against this agreement. Because so
much of the Chinese economy still is state-
controlled, can the Chinese economy withstand the
kinds of pressure that are going to be brought to
bear upon it by opening up? And what will the
effect of that be, both economically and
politically?
Lardy: Well, I think we'll have to wait and see.
I think it's uncertain. There will be enormous
pressures in many sectors. Employment is going to
shrink. Output is going to decline. There will be
increased political pressure on the regime because
of the consequences of that. Some of this will be
concentrated in areas as in the northeast, where
there really is very little other economic
activity that is likely to spring up immediately
to provide new jobs. In south China, where there
is very little state industry, they are much more
efficient. There is going to be a further boom
from more opening. They are going to do very well.
So there are a lot of regional tensions involved.
And whether or not the whole system can withstand
all these stresses, I think we will have to wait
and see. Obviously, the leadership thinks they
will be able to. They signed on to this
voluntarily. They are going to use it as a wedge
to accelerate their own domestic economic reforms.
But I don't think it's certainly a risk-free
strategy from their point of view.
Host: Some speculated that Zhu Rongji, in his
attempt to deal with the state-owned enterprises,
was not having a great deal of success, and
decided that only the external pressures brought
upon these entities could be great enough so as to
effect some reform. Does that make sense to you
from your knowledge of Chinese politics?
Lian: Zhu Rongji was trying to bring the state
firms out of recession in three years, when he
first took the responsibility as the prime
minister a couple of years ago. And he has
relinquished his stated goal. The problem in
China, as Mr. Lilley has just mentioned, is that
the Chinese government right now is desperately
wanting to get into the W-T-O as soon as possible.
Host: Why?
Lian: The reason is that, as you may know, the
state firms have gone bankrupt in 1997, according
to some reports. And the banking system in China
has been virtually bankrupt since 1998. Their
debts are twenty-five times more than their
assets.
Host: Let me check with the economist in the
room. Does that comport with what you know?
Lardy: Broadly speaking, yes. Their financial
system is very fragile and the largest banks, or
at least several of the largest banks, are
certainly insolvent. They've just thrown a lot of
money at enterprises to keep them going and the
money has not been effectively used. The resources
have been wasted, basically.
Lian: So that's why two-thirds of the state firms
have not been able to recover from their losses
for years. So right now, as you may know, many
Chinese people are, because of the free flow of
information from international society and
universal rights, like civil rights -- those kinds
of terms hurt the Communists with more and more
Chinese people. That's why last year, several
thousand of people tried to organize the China
Democracy Party. And recently the crackdown on
Falun Gong told the world that many people are not
satisfied with the current political system and
society, the widespread corruption, the tensions
between different regions of China, and the
disparity of the distribution of the wealth --
because the primary group of the people who are
benefiting from the so-called reform, since 20
years ago, were those who were government
officials or their followers. And the primary
factor which is supporting economic growth right
now is foreign investment and trade from the
international society.
Host: As one commentator put it, there is a deal
inside China. The party says to the people, "we
will allow you to get rich," and the people
respond, "as long as you allow us that, we will
leave you with your exclusive operation of power."
And therefore, the party now is left in a
position, without an ideology really, of having to
continue to open, because if there are severe
economic reverses, it will threaten that exercise
of power. Does that make sense?
Lilley: Yes, I think it does. The Chinese face
some serious dilemmas, as Nick has pointed out.
They need foreign investment. They have to attract
foreign investment. Foreign investment has, in
fact, gone down. They need this to have growth.
They need, let's say, seven or eight percent
growth. We need that growth for our exports. If
their growth goes down, our exports don't grow.
It's in our interest to have them grow. On the
other hand, we know that, in the short term, W-T-O
is going to effect them. If it effects them too
seriously, then you have an increase in
unemployment; you have a drop in exports; you have
all sorts of problems develop. And then you face a
possible backlash against it.
Host: But aren't they facing this problem anyway,
because these state enterprises are simply sapping
their capital and wasting it? And this is going to
get worse, not better, unless there is reform.
Right, Nick Lardy?
Lardy: Well, exactly. I think, as Mr. Lian said,
when Zhu Rongji came to power, he recognized this
explicitly and he vowed that he would solve these
problems in state-owned companies within three
years, because I think he understands that the
continual drain of resources that is represented
by the increased bank lending that goes into those
companies to keep them afloat is ultimately
creating a big hole on the balance sheet of the
whole economic system. They are spending the
lifetime savings of many Chinese citizens who put
the money in the bank in order to prop up these
inefficient companies. So in the long run, it
can't be sustained. He's determined to reduce it,
and I certainly think the W-T-O is part of the
strategy. But as I said, it's risky. It's a
gamble, because there will be increased political
problems at least in the short run. There is
nothing in this agreement that is going to provide
China with greater market access in the West, at
least in the short term. They already have that.
So import prices are going to come down in China,
at least at the margin. That means imports are
likely to go up. That's going to put more pressure
on their balance of payments. It's not going to
help them with sustaining the growth rate that Jim
Lilley mentioned is their long-term goal. So they,
in the short-run, face some very severe
challenges.
Host: Will not that help them, though, with what
Mr. Lilley mentioned in terms of attracting
investment?
Lardy: I'm a little bit of a skeptic. Many people
have said this agreement will allow them to
attract a great deal more investment. I think it's
a mixed picture. I think there will be primarily a
change in the composition of investment.
Manufacturing firms will be less likely to invest
in China because it will be easier to sell
directly from production sites elsewhere in the
world when tariffs are coming way down. You don't
need to invest in China to put up a factory inside
the tariff wall. There will be more investment in
telecoms and in other service sectors. So I think
we'll see more in some areas, probably less in
others. Where it is going to come out in the
aggregate, I think we'll have to wait and see.
Host: And your overall odds on their chance of
succeeding in this transformation?
Lilley: Well, you know, it depends on how you
define success. They're not going to become a
competitive, perfectly free market economy over
night, as Mr. Lian mentioned. There will be
problems of enforcement. There will be slippage,
but if you look at the record of the last twenty
years, you have to be relatively optimistic. They
have made substantial progress against great odds,
and the leadership is pretty committed to this. I
wouldn't bet against them at this point.
Host: I'm afraid that's all the time we have
this week. I'd like to thank our guests - James
Lilley from the American Enterprise Institute;
Nick Lardy from the Brookings Institution; and
Shengde Lian from the Free China Movement - for
joining me to discuss China's entry into the World
Trade Organization. This is Robert Reilly for On
the Line.
Anncr: You've been listening to "On the Line" - a
discussion of United States policies and
contemporary issues. This is --------.
02-Dec-1999 14:52 PM EDT (02-Dec-1999 1952 UTC)
NNNN
Source: Voice of America
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