Editor's note: This is Part 1 of a two-part article. Look for a link at the bottom to continue on to Part 2.
After more than a decade of negotiations, last fall the U.S. and China finally reached agreement on China's accession to the World Trade Organization, or WTO. The Chinese agreed to open their markets to U.S. exports in a wide variety of sectors, from agriculture to financial services. In exchange, the U.S. agreed to support China's admittance to the WTO, bringing China, the world's most populous country with what is forecast to be the world's largest economy in the next few decades, into the global trading system. It's an historic agreement. And it has pissed a lot of people off. The biggest controversy surrounds the requirement that Congress grant Permanent Normal Trading Relations, or PNTR, to China -- the status granted to all nations in the WTO. The fact that Congress will no longer face an annual vote on China's trade status, critics charge, eliminates a vital weapon Congress can use to sanction China. Congress is expected to vote on the issue in May. Of course, the controversy over China PNTR is just one of the many bitter trade battles of the last couple of years, from the denial of fast-track trading authority for the president to the Seattle protests last December and the World Bank protests this April. At the center of the storm is U.S. Trade Representative Charlene Barshefsky. She was sworn in as USTR in March 1997 after serving as Acting USTR from April of the previous year. She was Deputy USTR from May 1993 to April 1996. Prior to joining the Clinton administration, Barshefsky was a trade lawyer with the Washington firm of Steptoe & Johnson for 18 years. Barshefsky spoke on these issues on the phone from her office in Washington, D.C., to several TSC staffers, including Managing Editor Geoff Lewis, International Editor Andrew Morse, Associate Editor Justin Lahart and Senior Writer David Kurapka, who, it should be noted, is a former USTR staff member.
: We're going to start off on a pretty broad question, which is just why is China's entry to the World Trade Organization good for U.S. companies and which sectors stand the most to benefit from it?
: Let me give you three broad reasons why China's entry into the WTO and
Permanent Normal Trading Relations, or PNTR are in the U.S. interests, and then I'll go back to the sector issue.
First off, direct economic benefits to the United States, China makes, in our WTO accession agreement, broad-ranging concessions ¿
and we do not reciprocate. We do not alter our market access policies, we don't change our tariffs, we don't change any requirement that currently exists on market access.
We don't change our trade laws, we don't change our ability to restrict the export of sensitive technology, we don't do anything. These are all one-way concessions by China.
And the concessions, as I'm sure you've read, are very, very dramatic, with the slashing of tariff/nontariff barriers, elimination of quotas, various restrictive and discriminatory licensing requirements -- including discriminatory taxation -- the granting of saving rights, distribution, opening of the full range of services sectors. Everything from soup to nuts whether in banking, in insurance, in telecom, or construction, engineering or accounting law, so on and so forth. And then of course, market access on the full range of key agricultural products, both commodity products and specialty products.
In addition to that, the agreement secures for the U.S. much stronger rights against unfair trade by China into our markets. Even though our trade regime doesn't change at all, we nonetheless felt because of the great imbalance in the trade relationship, we should have at our disposal certain devices to help protect our beleaguered U.S. industries. So we have special dumping methodology to avoid unfair dumping, and a special anti-import surge remedy that we can apply to imports in any sector from China that is disrupting the U.S. market.
And we have a variety of enforcement mechanisms built into the agreement, far many more than we've ever had before. So, point one, pure economic benefit to the United States, this is an economic no-brainer for the United States.
Two other broad reasons to support the agreement:
First off, we have an absolute interest in supporting economic reform, and greater economic freedoms in China. This agreement strengthens significantly the hand of the reformer, it diminishes the ability of the hardliners in China to restrict access to information, to prevent Chinese from interacting more fully and freely with Westerners. This is very, very significant.
The entity in China that most objects to China's entry into the WTO is the PLA, the Chinese army, because of its view that this kind of market opening will expose China to substantially increased Western influence. That, it seems to me, is reason enough to support the agreement.
And the third broad reason has to do with our more fundamental national security. I think 50 years of postwar trade policy has demonstrated that by opening markets, countries becoming economically more interdependent, which reduces the risk of conflict, reduces the risk of war, gives countries a greater stake in peace and stability beyond their own borders. And this is surely true with respect to China. We want to integrate China into the Pacific region on a more firm footing and integrate China into the global economy as a more constructive player on the global scene, not a destructive force. This brings China into the rules-based system and PNTR will help do that.
So those are three broad reasons to support this. The point on PNTR is simply that, without it, under WTO rules, we have no legal rights to the benefits we negotiated. But we will have opened China to the rest of the world. And every other country in the world already gives China permanent NTR. So for us to have a legal right to our own agreement, and the benefits of China's accessions, Congress must grant unconditional NTR. This is a permanent NTR.
In terms of sectors that would gain, this is an across-the-board proposition because the breadth and the scope of the market-opening opportunity that's presented is so large, it's covered everything from sophisticated financial services to the proverbial widget, and agricultural products and so on.
And because we've negotiated for trading rights -- that is the right to export and import freely to and from China, which is a series of rights that have not existed since the 1940s -- we would expect to see increases in U.S. exports across a broad range of products.
And indeed, the Congressional Research Service has estimated that on the basis of the agreement, we should see U.S. exports to China almost doubled within five years, across a broad
range of goods and services, as well as agriculture.
I don't think we can give you a list of winners because I think this very much depends on the companies and the industries involved and on their desire to avail themselves of the opportunities presented.
: One of the things that you always hear from companies who are going into China is just the frustration of dealing with the Chinese system. Do you have any expectation that that's going to change with this agreement?
: I think it will change very much so, because really, the agreement covers the full aspects of any given import transaction. For example, right to trade, distribution rights, rights to advertise, rights to service the product, rights to provide after-sale service to the product, rights to distribute the product throughout the country.
We really took products from the ports in the U.S. all the way to the end user in China, and we handled each barrier along the way but in a broad enough manner that it would be very hard for China to substitute other, adverse policy mechanisms for the ones they're removing.
So we were quite careful to do this. We have, I think, a very good knowledge of the way in which market access has been impeded in China over the years. And the way we structured the agreement was to respond to this highly integrated web of barriers that are presented. And then of course we'd have full dispute settlement and other enforcement rights.
I do think that one of the problems in dealing with China generally, is the fact that it has a very underdeveloped rule of law. Corruption poses a significant problem. As to the rule-of-law question, entering the WTO on the basis of very detailed rules, literally, hundreds and hundreds and hundreds of rules, quite apart from the market access agreement, will help China over time -- you know, nothing happens tomorrow, but over time -- to develop a more commercially friendly series of rules.
As to the corruption element, of course the Chinese government
is onto the problem of official corruption, particularly in commercial transactions, and certainly have mounted some significant efforts to try and get the problem under control.
: Including executing and shooting people?
: I don't comment on the system of punishment.
: Let's turn to a specific sector, which is of interest to a lot of readers of
, which is financial services. What does it mean for the U.S. financial services firms trying to break into the Chinese market? Do you think that the experience of Japan and Europe, where American financial services firms have been extremely successful, provide a blueprint for what's going to happen in China?
: I think they may provide a blueprint for what will happen in China, although I don't want to sort of make off-the-cuff claims.
Let me give you, though, a sense of the magnitude of the change that the agreements would insure. Take, for example, insurance. Today, we have two U.S. insurers that operate in China. China today reserves the right to deny licenses on entirely arbitrary grounds. It restricts operations to certain cities and China today has the right to terminate, without question, existing rights of insurance services providers whenever China chooses to do so.
Under the agreement, No. 1, all existing rights are grandfathered, regardless whether those rights were approved by the central government or provincial government. Second, China is going to have to award licenses solely on the basis of published credential criteria, no economic-needs test, no quantitative limits on the number of licenses that can be issued, the eventual elimination entirely of all geographic restrictions on the provision of insurance services throughout the country and, permitting internal branching as the restrictions lift.
Foreign insurance, for the first time, would be able to offer group and health and pension lines of insurance. On the nonlife side, equity at 51%, you can be a majority equity holder or a branch.
On the life side, joint ventures are permitted at a 50-50 split. This is a very, very substantial change in the market from the way it has been the last 40-plus years. So that's one example.
I can give you another example on the banking side of the equation. There again, under the current situation in China, the banking situation is very restrictive. Foreign banks cannot now conduct local-currency business with Chinese clients. And only a few banks can engage in local-currency business even with foreign businesses, or foreign individuals.
There are severe geographic limitations on the provision of banking services just as in insurance. Here, within five years, China commits essentially to full-market access on the banking side, internal branching, national treatment -- meaning U.S. and Chinese banks will be treated the same way. A bank will be able to deal in local currency with Chinese enterprises within the first two years, and then, within five years, local currency for Chinese individuals. This is a radical change in China.
And then for the first time, as an add-on -- and this isn't a bank issue so much as a nonbank issue -- we wanted to be sure, particularly in the case of autos, which are a very expensive consumer product, that we could effectively export cars from the U.S. to China. Right now it's essentially banned.
We made a huge array of changes on the auto side. Slashed tariffs, trading rights distribution, right to set up dealerships, the whole nine yards. But when we got to the end of all these concessions we thought, you know, these cars are expensive. It'd be great to have a GMAC. That is, to have nonbank financial institutions be able to provide auto financing. This system has never existed in China.
But we will have that system on the financial services side for automobile purchases from foreign entities. So here again, I don't want to say that necessarily banking and insurance reform will follow the European or Japanese pattern, but the range and depth of concessions is such that one could see a similar pattern emerge in China.
: And the bottom line is that in a few years after this is phased in, a Chinese citizen can borrow money from a U.S. bank, buy a car or buy a house, get xuan out of an ATM in Chiaun, or someplace other than on the coastal areas, is that correct?
: Yes. It would be more than a few years, it would be five. But in the span of history and WTO negotiations, that ain't very long.
For Part 2, click here.