Will China’s Rigged Capitalism’ Undo the W.T.O.?

(Washington, D.C.): As the People’s Republic of China moves inexorably closer to becoming a member of the World Trade Organization, the ominous prospect looms that the PRC will do more to corrupt the WTO than the WTO will do to transform China’s economy into a genuine and open free market one.

A sobering analysis of the magnitude of the problem posed by the PRC’s phony “capitalism” was published last week in the Washington Times by Canadian journalist Peter Hadekel. Unfortunately, Mr. Hadekel sets up something of a straw-man by contending that “Engaging China through trade and investment remains a better bet than isolating it,” since no one is realistically suggesting that China can be isolated completely. Still, his assessment of the folly of integrating fully a largely unreformed China into the World Trade Organization should give pause to those who continue to believe that profitable trade and investment opportunities — and, a desirable political transformation — will necessarily follow.

Everywhere you go in China, you get a lecture, particularly if you are a Western journalist. When our group of U.S. and Canadian editorial writers visited the country recently, we received a daily dressing-down over the collision involving the U.S. EP-3 surveillance plane. One afternoon we met officials from the city of Shanghai, whose role is to get the local government ready for Chinas accession to the World Trade Organization (WTO). When a member of our group asked a question about the weight of the Peoples Liberation Army in the Chinese economy, our Chinese host went ballistic. What about the American spy plane, he sputtered angrily. Why does America believe it always needs to spy on China? The harangue went on for minutes, while we squirmed uncomfortably in our chairs. It couldnt have been scripted any better by the foreign ministry.

The encounter left me troubled. If Chinas trade bureaucrats are going to behave like this, what will happen when the country actually joins the WTO and when the first of many complaints inevitably are filed against it? Will the propaganda machine kick into overdrive every time? Will it all be seen as a U.S. plot to undermine China and keep it weak?

The shocking thing about China today is to see not how far it has come, but how far it still must go to resemble a modern, competitive economy. Yes, Shanghai today is a gleaming jumble of skyscrapers that looks for all the world like a Western business center. But appearances can be deceiving. The truth is that despite its rapid transformation and its impressive rate of growth, China is not ready economically or politically to join the WTO.

Communism may be dead, but capitalism here is a rigged game. Why else would U.S. multinationals such as General Motors or McDonalds be forced to accept joint ventures with the state as the price of admission to this country? At the gleaming General Motors plant on the citys outskirts, everything looks state-of-the-art except the ownership structure. GMs joint-venture partner turns out to be the city of Shanghai through a company called Shanghai Automotive Industry Corp. Your partner today is the government official tomorrow who could deny you a key permit or force some unexpected government edict on your operation. Worse, your business partner may ask for a helpful cash contribution to make your life a little easier.

The problem, from the WTO perspective, is the murkiness of it all. The states presence is everywhere, through direct ownership or indirect subsidy. Does anyone believe, for example, that China has an independent banking system? The state-owned banks are weighed down with so many bad loans to money-losing state-owned enterprises that the government will be forced to bail them out. This is subsidized credit by anyones definition, and will surely be tested at the WTO.

The face of capitalism in China looks like this. At the Shanghai Stock Exchange, restricted shares open only to Chinese investors have, in general, soared over the last decade while those stocks open only to foreign investors have sunk by 40 percent. Corruption is hardly unique to China (or to members of the WTO, for that matter). By all accounts its getting worse here under a system that favors well-connected officials and their princelings. Two recent estimates put the aggregate cost of corruption to the Chinese economy at between 4 percent and 8 percent of GDP, according to Minxin Pei, a scholar at the Carnegie Endowment.

Whats troubling is not so much the extent of corruption as the lack of effective means to contain it. China is in the midst of a “strike hard” campaign with the preferred punishment being execution. (The China Daily is careful to report each time someone is shot for, say, submitting fraudulent tax receipts.) But the campaign doesnt seem to be working, and its easy to see why. Change doesnt come from the barrel of a gun. Cutting out the roots of corruption requires a free press, a strong and independent judiciary and a system of political accountability.

Without these, problems could get worse after China joins the WTO. Free trade brings with it both winners and losers. If the expanded opportunities fall only to those with connections, resentment at Chinas widening economic inequality is likely to grow. Also lacking is a system of governance to deal with the social unrest that surely will arise from WTO membership. As state-owned enterprises and uncompetitive farms are cut adrift by government, grievances against the state will mount and losers will demand help. With the collapse of Chinas social safety net, there wont be much help forthcoming. Another risk is that Chinas leaders will try to use trade disputes to beat the drums of nationalism. U.S.-China relations could be unsettled as a result.

Chinas leaders face a difficult choice. If they faithfully implement the WTO agreement, and respect trade rulings that may go against them, China runs the risk of even greater social upheaval. On the other hand, if they fail to comply with WTO decisions, Chinas international standing will suffer, along with its attractiveness to foreign investors. Engaging China through trade and investment remains a better bet than isolating it. But lets be aware of the risks that come along with it.

Peter Hadekel is editorial page editor of The Gazette in Montreal.