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Number 00-1 January 2000

International Economics Policy Briefs

    The Next Trade
    Policy Battle

    by C. Fred Bergsten


    C. Fred Bergsten is Director of the Institute for International Economics. A slightly edited version of this policy brief orginally appeared in the January/February 2000 issue of The New Democrat.

    The global trading system underwent two major developments as the 20th century drew to a close. The first was the agreement between the United States and China in mid-November that will enable the Chinese to join the World Trade Organization in the near future. The second was the WTO's failure during its ministerial meeting in Seattle in early December to launch a new round of negotiations to further reduce trade barriers and write new international economic rules.

    If the Seattle talks had succeeded, the next major trade item on Congress's agenda might have been a revival of the 1997 and 1998 debates over restoration of presidential authority to negotiate trade agreements that Congress would then address on a "fast track." But the collapse of those talks almost certainly means that Congress instead will first take up the matter of U.S. trade relations with China--a scenario once considered quite unlikely, especially after President Clinton made the huge error of initially rejecting Chinese Premier Zhu Rongji's trade proposals last April.

    The congressional trade agenda has thus been reversed. China will be the priority issue for the near future, presumably in 2000 if the Chinese complete the WTO entry process early this year as scheduled.

    The Issue for Decision

    It is important to understand the precise issue that Congress will consider. Contrary to popular belief, Congress will not vote on whether China can join the WTO. The president makes that decision for the United States. President Clinton presumably will approve, having agreed on the terms of China's accession. All of the major presidential candidates have indicated that they would support China's entry into the WTO as well. The rest of the WTO appears ready to agree, so China's membership seems assured barring some cataclysmic political development (for instance, a war with Taiwan.)

    China has clearly stated that it would not reduce its barriers to U.S. imports unless it received unconditional permanent normal trade relations status from the United States.

    Congress will, however, vote on whether to extend permanent "normal trade relations" status to China, meaning the same tariffs faced by our other trading partners. President Clinton promised China's leaders that he would strive to win congressional support for such status for China. Indeed, permanent assured access to the U.S. market is the largest tangible benefit China would gain from joining the WTO. It is virtually inconceivable that China would have agreed to open its markets so dramatically without a firm expectation of receiving permanent normal trade relations status from the United States in exchange.

    Congress has been approving presidential extensions of equal treatment for China on an annual basis for 20 years (through yearly waivers of the requirements of the Jackson-Vanik Amendment to the Trade Act of 1974, which denies permanent normal trade relations status to any non-market economy that impedes the emigration of its citizens). Approval of permanent normal trade relations status is necessary to eliminate the uncertainties that now surround U.S.-China trade, however, because a failure to renew the waiver could at any time push U.S. tariffs on Chinese products back to the stratospheric levels of the 1930s.

    . . . our failure to act promptly would result in an immediate loss of high-paying export jobs for American workers . . .

    The United States is not legally bound to extend permanent normal trade relations status to China even after it joins the WTO. The global trade body cannot force the United States to change its laws on this or any other issue.

    However, the WTO rules bar member countries from discriminating against other members. If Congress fails to approve permanent normal trade relations status, the United States will have to "opt out" of its WTO obligations to China. China would then be relieved of any reciprocal obligation to extend its newly liberalized trade regime to the United States. In conformity with the WTO rules, China has clearly stated that it would not reduce its barriers to U.S. imports unless it received unconditional permanent normal trade relations status from the United States.

    Some opponents of permanent normal trade relations status for China argue that continued annual renewal would meet the WTO requirement, provided that such renewals were no longer linked to a specific condition such as freedom of emigration. But the requirement of annual approval would itself be a condition, and the United States could still raise trade barriers against China at almost any time. This would maintain the uncertainties inherent in the current annual-renewal practice and perhaps even increase them because nonrenewal would not then be linked to any specific criteria.

    A U.S. failure to grant permanent normal trade relations status would . . . plunge our overall relationship with China into its deepest crisis since normalization in the 1970s.

    The Economic Stakes

    After China joins the WTO, any U.S. trade discrimination against that country would thus trigger Chinese discrimination against the United States. Because no other WTO member intends to discriminate against China, the ironic result would be that the United States--and only the United States--would fail to benefit from the dramatically increased access to the Chinese market that American negotiators painstakingly achieved over the course of 13 years. Japan, Europe, and Asian developing countries would rapidly take Chinese market share away from the United States, in sectors ranging from autos to computer software, in the world's sixth largest and most rapidly growing major market. Australian, Canadian, and Latin American grain exporters would have a substantial advantage over American farmers. American firms that managed to hang on to their Chinese customers would have to service them from subsidiaries in third countries, just as American firms have been forced to do in the past by other U.S. export sanctions.

    Even a delay in congressional approval of permanent normal trade relations following China's accession to the WTO would likely trigger such results, at least temporarily. Although House Minority Leader Dick Gephardt (in his desire to become House speaker) and Vice President Al Gore (in his desire to become president) undoubtedly would prefer to avoid raising divisive trade issues within the Democratic Party during a crucial election year, the potential costs of not acting are extremely high. Both Democrats and Republicans should work to avoid delay at all cost.

    American rejection of permanent normal trade relations status for China . . . would clearly signal that antiglobalization forces will dominate American foreign economic policy for the foreseeable future.

Compounding the irony, our failure to act promptly would result in an immediate loss of high-paying export jobs for American workers--whose union leaders vigorously oppose permanent normal trade relations status for China. Those unionists presumably fear that the deal will eliminate U.S. jobs by increasing imports. But objective research shows that the great bulk of our purchases from China displace purchases from other developing countries rather than domestic production here. In other words, they shift the geographic composition of our imports rather than increase their total. This will also be true for clothing imports when WTO entry enables China to benefit from the elimination of our current quotas; the losers will be exporters in countries such as Bangladesh, South Korea, and Thailand. In any event, China has agreed to our insistence on special safeguards that will allow us to block any rapid surge in imports of textiles or anything else.

    The Global Political Implications

    Even more important than these economic effects, failure by the United States to grant China permanent normal trade relations status would severely undermine China's reformers and thus the country's movement toward market principles, a new legal system, and greater personal freedoms and human rights. During a recent meeting in Beijing, President Jiang Zemin contrasted China's WTO entry directly to his country's "deep sleep during our feudal period while the West was developing rapidly after the Renaissance." China's leadership realizes that it must avoid its predecessors' mistake of opting out of the world, which condemned China to almost two centuries of poverty and international humiliation (and thus susceptibility to totalitarian politics). By denying China the most important immediate fruits of its trade liberalization commitments, the United States would jeopardize those leaders' ability to integrate China more deeply into the global economic community.

    It is virtually inconceivable that China would have agreed to open its markets so dramatically without a firm expectation of receiving permanent normal trade relations status from the United States in exchange.

    A U.S. failure to grant permanent normal trade relations status would in fact plunge our overall relationship with China into its deepest crisis since normalization in the 1970s. It would be read by the Chinese leadership and public alike as confirmation of their suspicion that the dominant power of the 20th century seeks to contain the rise of the most likely emerging power of the 21st century. They would surely see it as an effort "to keep China poor."

    American rejection of permanent normal trade relations status for China would also have immediate global consequences for the United States. Coming on the heels of the failure at Seattle, it would clearly signal that antiglobalization forces will dominate American foreign economic policy for the foreseeable future. This would in turn confirm not only America's abdication of global economic leadership, but even its inability to participate constructively in cooperative international ventures of paramount importance to the rest of the world.

    If Seattle's "victors" are permitted to carry the day on China, the global liberalization program of the past half century will be at serious risk. Under that U.S.-led strategy, the world has enjoyed peace and prosperity as never before. But we know from history that the trading system tends to slide backward into protectionism and conflict whenever the forward momentum toward liberalization falters. Congressional rejection of permanent normal trade relations status with China, coming on the heels of the disaster at Seattle and the repeated failures to provide new negotiating authority for the president, could easily push the system into reverse.

    President Clinton should promptly propose permanent normal trade relations status for China. Congress should pass the measure in time to take effect as soon as China completes its accession to the WTO. Our economy and national security will suffer enormously if they fail to do so.

    The views expressed in this publication are those of the author. This publication is part of the overall program of the Institute, as endorsed by its Board of Directors, but does not necessarily reflect the views of individual members of the Board or the Advisory Committee.

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