China's WTO Entry Isn't a Matter of Merits

In fact, election-year politics could alter the dynamics of this already divisive issue.
Author:
Publish date:

The battle -- and political maneuvering -- have begun.

Last week, President

Clinton

announced an "all-out effort" to secure congressional approval of last fall's deal on China's admittance to the

World Trade Organization

. He appointed

Commerce

Secretary William Daley and Deputy Chief of Staff Steve Richetti to lead the effort and urged

Congress

to vote "at the earliest possible time." He also directed all of his international economic Cabinet members and other senior officials to join the effort.

Despite the president's sense of urgency, don't expect a vote any time soon, however. In fact, there is now a serious possibility that a vote won't happen at all this year. A delay of the vote, either until after the election or next year when a new president and Congress take office, would impact the stocks of Chinese companies, many of which have rallied strongly since the WTO deal was concluded last November. Those companies that might benefit from a little extra time to prepare for foreign competition could get a pop. Those that would benefit immediately from international commerce may slide. Unfortunately for investors, a delay will likely cause more distress than benefits. Investors should watch this debate closely.

Neither the president nor the Republican leadership in Congress is predicting or considering a delay of the vote. Both are pledging bipartisan cooperation, and a vote this year is still quite possible. But the specter of election-year politics alters the dynamics of what is already a divisive issue.

Obviously, the president wants to get this passed badly. That's why he has pulled out the big guns. Daley led the effort to pass the

North American Free Trade Agreement

. As Commerce secretary, he has connections to the business community and as a Chicago lawyer/politician he also has close ties to the labor movement. Richetti is a well-known political insider with a lot of connections on the Hill. They have their work cut out for them.

Opponents to the deal range from religious conservatives on the right to labor unions on the left, the same groups, of course, that are most active in both parties during an election year. Democrats in particular are hesitant about upsetting unions during an election year. The Democrats can expect to feel extra heat during the vote since the veterans of the Seattle protests against the WTO have promised a repeat for China.

In short, this vote will make NAFTA look about as controversial as one of those

Senate

resolutions honoring the latest sports hero. Timing of the vote, therefore, is vital to its passage. Hold the vote too close to the election and members will be unlikely to upset the unions or the religious right.

However, an early vote is unlikely as well. Congressional staffers say that they can't hold a vote until China concludes all of its negotiations with other WTO members, because Congress needs to see the full details of China's membership in the WTO before it can vote. If the president pushes for an early vote, Congress will feel it is being rushed, and the vote will fail.

Thus, there is a very short window when a vote might take place, from sometime in the late spring to early summer. That's not a lot of time.

Delay of the vote until next year when a new president and Congress take office may disappoint the president, for whom China's entry into the WTO would be a considerable addition to his foreign-policy legacy, but it would have other consequences as well. It would give another victory to the anti-WTO crowd and make other parts of the trade agenda even more difficult. In China, it would strengthen the antieconomic-reform crowd, who use it as proof that China should not link its economic prospects to the politics of the West.

And it would certainly have an impact on Chinese stocks that have gone wild since the November deal.

China Telecom

(CHL) - Get Report

, the dominant provider of cellular telecommunications services in China's Guangdong and Zhejiang provinces, for example, has gone up nearly 50% since then. It may actually benefit from a delay on the vote, which will give it more time to prepare for the foreign competition.

Others, however, would certainly take a big hit. Internet portal

China.com

,

(CHINA)

, which has more than doubled since November, could lose some air as foreign investors worry the Web economy's arrival in China might be delayed. Then there are companies that will lose without WTO's expected economic boost. Companies like

China Prosperity International Holdings

(CPIH)

, a construction company that rose as high as 32 1/16 from a dollar, and

China Resources Development

(CHRB)

, a rubber distributor that rose to 25 from 6, won't look as attractive if growth isn't as obvious. Obviously, all of these stocks are extremely volatile, and that will undoubtedly increase if doubts rise about a vote on the WTO deal.

If judged by its merits, the China WTO deal would pass easily. But in a political year, merits don't matter much.

David Kurapka's Trade Winds column appears Wednesdays and Fridays on TSC. In keeping with TSC's editorial policy, he does not own shares in any companies or mutual funds mentioned in this column. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

dkurapka@thestreet.com.