Originally published in THE BOSTON GLOBE

Tuesday, February 1, 2000

China gambles on WTO entry

By Martin and Kathleen Feldstein

"US consumers, business would benefit from equal status"

A major goal for President Clinton in his last year in office will be gaining congressional approval of his trade deal with China. Last fall, after long and difficult negotiations, the United States and China reached agreement on the conditions for US support of China's entry into the World Trade Organization (WTO). Those conditions require China to open its markets to a wide range of US products and services and to permit increased investment in China by US firms. Since that agreement will need ratification by Congress, the stage has been set for a major congressional debate this spring, one that is likely to spill over into the presidential campaign.

China's membership in the WTO is important and positive for both countries. For China, admission to the trade organization will guarantee equal trading status with the more than 100 other countries that are already WTO members. That equal trading status is what trade specialists call "most favored nation" status. It means the United States and all other WTO members will be required to treat Chinese products in the same way they treat products from every other country. Thus once China joins the WTO, the tariffs on Chinese goods cannot be higher than the tariffs on the same goods imported from other countries.

The United States already imports a great deal from China and in fact has been granting China most favored nation status one year at a time. So membership in the WTO simply will make permanent the treatment that China has been enjoying already. It's important, however, because it provides a predictability about China's future trading status. As a WTO member, China no longer can be held hostage to annual congressional debates in which advocates of Chinese political and human rights reforms threaten to block Chinese exports to the United States.

Removing the uncertainty about future trade relations will encourage US and Chinese companies to develop long-term relations that will lead to further trade and to increased direct investment in China by American companies. This will be good for US consumers, who by now have become accustomed to buying high-quality products that are stamped "Made in China." The broader market access that we will gain for US products, services and investment opportunities will provide obvious and important opportunities for US businesses and their employees.

Those who oppose increased imports from China with the argument that those imports displace American jobs ignore the basic fact that if imports from China were interrupted, US consumers would find similar products from other countries in Asia, but with slightly higher price tags.

China is taking a huge economic and political gamble by seeking membership in the WTO. The increased imports from the United States and other countries and the production in China by foreign firms will provide devastating competition to many state-owned industries. Many such Chinese firms will be forced to close. Others will have to shed the excessive labor that keeps costs too high. The resulting rise in unemployment can be politically destabilizing and economically costly.

But Chinese reformers, led by Premier Zhu Rongji, have sought WTO membership not only to gain greater and more reliable access to foreign markets for Chinese products, but to force the domestic economic changes inside China that otherwise would be blocked by Chinese industrial bureaucrats and politicians who like business as usual. The reformers are willing to take that short-term political risk in order to modernize and strengthen the Chinese economy. They also may understand the long-term political consequences of breaking down the old system of state enterprises and replacing them with the growing number of private firms.

There are political risks in the United States, as well. Organized labor and environmental groups, supported by many congressional Democrats, continue to oppose Chinese membership in the WTO. They see this as an opportunity to construct a political bargain in which they eventually support Chinese membership in exchange for introducing environmental conditions and labor rights into the WTO rules. Such a change in rules eventually would allow the United States to block imports from a country that does not meet environmental and labor standards.

The president will have to work hard to gain formal congressional approval. His own position has become compromised by his recent support at the Seattle trade meeting for linking labor standards to trade agreements. Any attempt to add labor rights to the general WTO process as a condition for admitting China would end the whole process of Chinese WTO admission.

Newly emerging market economies, many of which are already members of the WTO, strongly oppose any attempt to introduce labor rights into the international trade rules. They rightly view any such linkage as simply disguised protectionism, an excuse for blocking imports from low-wage countries that cannot afford the kinds of labor benefits and conditions that have evolved in the West.

All of the leading presidential candidates are on the record as being supporters of free trade. They will be challenged to demonstrate that support when the trade debate opens in Congress this spring. Al Gore has avidly sought the support of organized labor and environmental groups for his campaign. Will he have the courage and the leadership to step up for free trade when it counts most?

Martin Feldstein, the former chairman of the Council of Economic Advisers, and his wife, Kathleen, also an economist, write frequently together on economics.