- The Washington Times - Thursday, April 6, 2000

There is a good economic case against admitting China to the WTO this year. It is seldom made. Most arguments against China's accession to the WTO involve human rights. These are similar to those made against granting China Most Favored Nation status every year (now called NTR, for "Normal Trade Relations"). I never found those arguments persuasive, and they should not prevail now. Human rights improvements have followed free-market developments in Taiwan, Singapore, South Korea and Chile. And freer trade helps free markets develop.

Those defending Chinese membership in WTO, however, fail to understand that WTO membership is very different from NTR status. In those differences lie the reasons for rejecting WTO membership, at least for now. All NTR means is that punishing tariffs are not applied to China's goods. In return, they don't put punishing tariffs on ours. WTO membership, however, is far more complex.

The WTO is the successor to the General Agreement on Tariffs and Trade, GATT, adopted right after World War II. The GATT had two purposes. The first was to prevent trade disputes, principally over subsidizing exports and dumping product in a foreign country, from becoming trade wars. (The second was to reduce trade barriers around the world). To accomplish the former, GATT was formed by countries with economies sufficiently free-market and transparent that would permit the measurement of the effect of subsidized exports and dumping. Socialist economies were not welcome in GATT, because subsidies were so pervasive it was impossible to sort out how much of an export's lower price was due to the government's subsidy.

Dumping (the practice of selling in a foreign country below the price in one's own country) was also harder to measure for socialist economies. Domestic prices were set by the government, and hence could be made to mask true market prices. Eventually, GATT dealt with dumping by socialist economies by using reference to a third country to determine domestic price; an imperfect compromise which almost always led to a finding of dumping when it was alleged. That is what China has offered in its trade agreement with the United States.

But the problem of subsidies remains. Among free-market economies, an occasional subsidy could be identified, and the country into which subsidized exports were sent could apply an offsetting tariff. It was clear, however, from the start of GATT, that the rule against subsidies would not work if subsidies were pervasive. Only narrow subsidies could be identified, measured and offset. That's why many countries were not invited into GATT.

China subsidizes massively. Its domestic commercial banking system is not open to foreign competition. Rather, China uses its state-directed banking system to subsidize entire industries that would otherwise fail. China does this as an employment policy. The products of those subsidized industries, including much high technology, enter world markets where they compete against American products. But no one can measure what the price of an import from China would be without the subsidy. Subsidies passed through the banking system, in the way China does it, are not offset under WTO rules.

Could China offer to do so? Yes. It's possible a scheme could be worked out, similar to what China offered regarding dumping. The 15 members of the European Union are still working out their WTO accession agreement with China. At the very least, we should wait to see what they obtain.

Under WTO rules, America would get the benefit of whatever Europe obtains from China; if the Europeans can solve the subsidy problem, so much the better. But if they can't (and we couldn't, or wouldn't, in our negotiations), then we're giving up our right to insist that goods traded among WTO countries not have an unfair subsidy from any of the WTO governments. On the economic merits, that's a lot to sacrifice. Assuming the subsidy issue is handled, one problem would still remain.

Despite its written rules, WTO works by consensus. In deciding what items go on the list for discussion at each trade round, any one country can thus effectively exercise a veto. In the early days of GATT, this didn't matter much. Discussions were on eliminating non-tariff barriers, and on lowering the overall level of tariffs. All GATT countries were interested, or they wouldn't have joined the GATT. The more recent trade rounds, however, have focused on intellectual property protection, and access for American agriculture. Here, the fight has been fierce. We have to compromise to get either subject on the agenda.

With China joining WTO, it now would have a veto over these and any other subjects proposed for trade discussions. The fact remains that China is not a developed economy. It has less interest in intellectual property protection, in the near term, than in allowing royalty-free access to software, copyright and patent. And it has a developing economy's natural inclination to protect domestic agriculture, memories of famine being only a generation old.

The answer is to proceed in stages. For now, let's proceed with Normal Trade Relations for another year. Let China suggest a way of solving the subsidy measurement problem. Engage China as a "member in waiting," without the right to veto WTO trade agendas, but with every right to participate in those discussions. Agreements don't have to be universal; some GATT codes were adopted only by some GATT members. It's the possibility of China's being able to block trade discussions from taking place in the first place on any given topic that poses the problem of China's membership.

Rep. Tom Campbell, California Republican, represents Silicon Valley.



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