Hold the Champagne: China May Deform the W.T.O., Rather than Be Reformed by It, Likely Negating Benefits to U.S.

(Washington, D.C.): What the Wall Street Journal in today’s editions calls
“morning- after
realism” cannot set in too fast in light of the giddy response with which yesterday’s U.S.-Chinese
trade agreement is being greeted. In fact, the promises being made about this agreement — for
widespread opening of the PRC’s markets and extraordinary new business opportunities for
American companies — are almost certain not to be fully realized.

This point is lucidly made in a “reality check” that appeared in this morning’s Journal
in the
form of an op.ed. article by former Carter Administration Under Secretary of Commerce
Robert
Herzstein. It should be required reading for every Member of Congress who will be
asked to
approve China’s accession to the WTO — and each of their constituents, who share a huge stake
in whether the Communist Chinese government secures a new, and undeserved, lease-on-life
from this deal and, in the process, is able to corrupt the effort to make global trade genuinely
free trade.

Is China Ready for the W.T.O.’s Rigors?

By Robert Herzstein

Yesterday’s trade agreement between Washington and Beijing means that China’s long quest
to
enter the World Trade Organization is on the verge of success. This is a milestone for China and
the global economy. But neither China nor the rest of us will reap the benefits unless a
further challenge is met — equipping China to comply with the WTO’s rules.

These rules open the world’s marketplace by requiring governments to stand back and allow
businesses to decide whether they buy foreign goods and services or those made at home. But
China does not have the habits, culture or legal institutions needed to restrain its own officials
from improperly controlling or influencing business deals. Some of China’s leaders may resist
the reforms implicit in the WTO rules, because those reforms would reduce the discretionary
power of officials and bring them under the rule of law.

The WTO calls on its member countries to recognize a bright line between business and
government. Businesses respond to market forces and engage in transactions on the basis of
commercial considerations; governments make rules for businesses to protect the public interest,
but normally are not authorized to interfere in individual transactions.

China’s economy has been built on a different assumption: that commerce is a state
responsibility. For half a century, trading decisions have been based on central-planning
requirements. Key commercial decisions have been determined not by market forces but by
government officials implementing a plan. Despite economic reforms, China’s leaders still call
their system a “socialist market economy,” acknowledging the absence of the bright line that
prevails in the West.

Suppose you are an executive of an American company eager to enter the Chinese market.
You
have been successful in other foreign markets, so when you learn that China has promised to
eliminate the tariff on your product you aggressively look for customers and distributors there.
You find that, despite the zero tariff, you can’t make headway in competition with established
Chinese producers, for one or more of these reasons:

o Some of your prospective customers are state enterprises, run by
managers attuned to goals
other than company profits and shareholder value. They deal with your Chinese competitors
because this helps achieve planning goals, or because of custom, reciprocal business
arrangements, personal friendships or other relationships.

o Other prospective customers, though owned by private entrepreneurs, are responding to
suggestions or mandates they have received from government officials at the
local or
provincial level, or in ministries with little interest in China’s WTO obligations. These officials
may have personal or political reasons for steering business to your competitors.

o Your Chinese competitor is enjoying a hidden subsidy from a
government entity, in the form
of cheap raw materials, transportation, electricity or other resources, which gives it an unfair
advantage.

o You have been adversely affected by an action of government regulators
that made your
products more expensive or less attractive for customers. You didn’t even know the regulatory
action took place, much less have an opportunity to oppose it.

o Government authorities at some level have given their blessing to a quiet cartel
arrangement
that ties your potential customers to your competitors.

o Authorities have advised your customer to buy your product only if you agree to
license your
technology to a Chinese company that will compete with you.

It appears that upon entering the WTO, China will agree to administer its laws and policies
affecting trade in a uniform and impartial manner, to make its rules and policies publicly
available and to provide a forum for legal review of administrative actions affecting trade. But
it
is not likely that the globally oriented and well-intentioned trade officials in Beijing who
negotiated these commitments will be able to control the protectionist behavior of countless
officials and Communist Party leaders with their own agendas.

Legal tribunals for impartial, effective and speedy resolution of disputes with the
Chinese
authorities are not in place. And the dispute-resolution resources of the WTO will not
be
capable of handling the workload of hundreds, or thousands, of complaints that would be
forthcoming if that becomes the primary forum for enforcing China’s compliance with the rules.

China’s admission to the WTO should be accompanied by unambiguous and enforceable
commitments to regulate its bureaucrats and party officials through a modern and effective
system of administrative law, including judicial review. Its progress in making the necessary
reforms should be assisted by WTO members and monitored by a WTO working party. And it
should be clear that China’s failure to operate the new mechanisms effectively will be a cause for
proceedings in the WTO’s Dispute Body, with sanctions for noncompliance.

Until businesspeople on the ground feel confident that they can sell goods and
services on
their competitive merits, free of politics, cronyism and other noncommercial influences, the
benefits of China’s membership will be asymmetrical, giving it opportunities in cleaner
markets than it offers its trading partners. And China will not enjoy the investor
confidence
that comes from a legal system that protects against arbitrary or unpredictable government
actions.

Have Chinese officials faced up to this reality? Probably some have and some haven’t. Have
trade negotiators from the U.S. and other Western countries faced up to it? There are few signs
that they are willing to look closely now at the uncomfortable question of whether China has the
capacity to live up to its WTO commitments.

It would be a mistake for both sides, as they celebrate China’s WTO membership, to gloss
over
this crucial question. WTO membership should include all measures needed to achieve a
law-governed marketplace in a country which will have an important influence on the economic
future of the world.

Robert Herzstein is a Washington lawyer. As U.S. undersecretary of commerce for
international
trade in 1980, he negotiated for American businesses’ access to China’s market.