DATE=12/2/1999 TYPE=ON THE LINE TITLE=ON THE LINE: CHINA AND THE WORLD TRADE ORGANIZATION NUMBER=1-00801 EDITOR=OFFICE OF POLICY - 619-0037 CONTENT= THEME: UP, HOLD UNDER AND FADE Anncr: On the Line - a discussion of United States policy and contemporary issues. This week, "China and The World Trade Organization." Here is your host, Robert Reilly. Host: Hello and welcome to On the Line. The World Trade Organization meeting in Seattle this past week was greeted with demonstrations by various labor and environmental groups. Some of the protests turned violent. A curfew was declared by the city and the police used tear gas to break up the demonstrations. This is not what the leaders of the World Trade Organization expected. They were looking forward to dealing with major policy issues, including those flowing from the agreement on trade reached by the United States and China last month. That accord cleared the way for China's accession to the World Trade Organization. Joining me today to discuss the World Trade Organization and China are three experts. James Lilley is a resident fellow at the American Enterprise Institute and a former U.S. ambassador to China. Nick Lardy is a senior fellow at the Brookings Institution and author of the book, China's Unfinished Economic Revolution. Shengde Lian is executive director of the Free China Movement, a coaltion of thirty Chinese pro- democracy organizations around the world. Welcome to the program. Host: As we begin here, let me invite your comments on what did take place in Seattle in terms of the demonstrations and the turbulence. And of course, it was not just Seattle. There were violent demonstrations in London. Charlene Barshefsky, the U.S. Trade Representative, who successfully negotiated with China, made the remark before the meeting that "the biggest threat to open markets is the lack of public support for it." Do any of you see the way these demonstrations took place as a problem for the W- T-O or for the agreement that was negotiated in November between the U.S. and China as part of their accession? Lilley: I think primarily it's a problem for W-T- O, not the Chinese accession. But I think it gives you a very strong flavor of the resistance that exists in China to W-T-O. It's not the same kind of resistance. But the Chinese faced a lot of opposition when they tried to get the deal. When Premier Zhu Rongji went back to China in April, he faced a real problem: protectionist elements, party people, military people, state-owned enterprise people, banking people. So I think it gives a graphic demonstration in some ways about the resistance to this. But I thought it was interesting both Mike Moore [W-T-O General Director] and President Clinton said that they're going try to bring the demonstrators in to talk to them. They are going try it, at least, to listen to their argument. Host: Mike Moore? Lilley: The head of the W-T-O. Host: Any thoughts, Nick Lardy? Lardy: I think it really is a problem for the W- T-O, particularly in the United States. The administration really has not been out in front selling freer trade as a substantial advantage to our economy, our workers, and our consumers. And until there is more leadership on this from the top, you will have groups attacking it from the side and underneath, saying that there are disadvantages to opening our markets further. Host: So in other words, you might see this actually as prelude to opposition to it in the U.S. Congress, since Congress is required to approve this agreement. Lardy: I don't think there will be opposition in the Congress to China accession. I think the question is how much support will there be in Congress for the next round of talks, which this meeting in Seattle was supposed to have launched, the so-called "millennium round." Ultimately, they will have to give the president negotiating authority and, quite frankly, they have not been willing to. They have not really been persuaded that further liberalization of the trading system is in our long-term interest. Host: Shengde Lian, any thoughts? Lian: I think it might be good for the W-T-O in the future, since it looks like many people want to have a voice on the W-T-O and its rules. But I wanted to do a comparison between the protest in Seattle, which was violent recently, whereas ten years ago, in Tiananmen Square, where thousands of students, including myself, were protesting peacefully. The protesters in Seattle received tear gas and rubber bullets and we received tanks and the killing of hundreds of students and citizens. My question is: how has the world prepared to welcome the current Communist government to enter into the W-T-O? How will the rules of W-T-O be abided by, rather than being changed by such a powerful economy and entity? Host: Let's get to that question a little later. I want to ask Jim Lilley, in your vast experience in China, having served as an ambassador, and having observed the country for a long period of time, what is it stake for China in making this agreement that they have? Some observers say that this is a landmark turning point, so profound will be the internal changes effected in China by their meeting their requirements of WTO. Is that overstating the case? Lilley: A little bit. I think it could be a major move in the direction of a more open trading system in China, more liberal terms for foreign investment. But you have got to understand that China has been doing this for about twenty-five years. Their tariffs came down dramatically in the 1990s. Our exports went up sixteen to eighteen percent a year. So they were opening up anyway. What this does is, I think, gives it an added push. I think, particularly in areas like agriculture, it's really important for China's future. China's agricultural production, if I am correct, went down slightly last year. This wasn't considered a tragedy in China at all. They are thinking in terms of the economics of comparative advantage. It doesn't make sense for them to produce all of this grain. They can import it, turn over land to industrial production or cash crops. And they are really thinking in much more, I think, liberal terms than the Japanese or the Koreans, for instance, who protect their agriculture. The Chinese are more open on this. I think this is a real turning point, or could be. But don't underestimate the resistance to it. Host: Let's get to the substance of the agreement between the United States and China. Zhu Rongji brought an agreement here that President Clinton turned down. Then there are all the difficult negotiations after the accidental bombing of the Chinese Embassy in Belgrade, and finally an agreement. Is this agreement substantively the same as the one that Zhu Rongji brought to Washington those months ago? What are the main features of it, Nick Lardy? Lardy: Its broad outlines are very similar to the April agreement. Indeed, many of the details are identical. There were some changes in some areas of market access where we got a little bit less. But the U.S. negotiators got a little bit more on some of what are referred to as the protocol issues. We have more weapons at our disposal, if you want to call them that, to resist big surges of imports that might come from China at some point in the future. This is called a safeguard agreement. And we got some other very important things in terms of how we deal with China in anti- dumping cases. So the broad parameters are the same. There are a few differences in some of the details, but the broad structure is very similar. It is very dramatic. It will bring down tariffs but, as Jim said, they already have come down quite a bit. So the real action, if you will, is in the area of services, where China has agreed to open up things like telecommunications, financial services, professional services, in ways they have never done before. So it's not so dramatic in terms of plain bread-and-butter manufactured goods where the tariffs are already pretty low. But in terms of opening up their economy, these service openings will be quite dramatic, particularly telecommunications. Host: Shengde Lian, how do you assess the significance of this for the future of China? Lian: I'm very glad to see that certain areas, like you mentioned, financial services and communication industries opened this time to a certain degree to the international society. But my concern is that, in China since 1949 until today, especially after the 1989 crackdown in Tiananmen Square, there haven't been any significant political reforms. And in one word, in essence, there is no rule of law. So I'm worried about that, even if there is a great agreement of the W-T-O. But how can those rules be followed by the Chinese government? What's the implementation of that agreement? So my question is that I don't know how the W-T-O and other organizations could figure out a way that this agreement would be abided by both sides of the trading partners, thus to have this trade be really free and fair. And that is in the best interest of both trading partners on both sides, government and the people. Host: So you would say you are for this agreement if it's observed. Lian: If it's been observed, and it's been really implemented. Host: Okay. He raises an interesting question, Jim Lilley, because, over a year ago, China signed the International Covenant on Civil and Political Rights. One of the ironies is, just as they have agreed to more open trade, they have clamped down on civil and political rights with their roundup of over thirty-five thousand Falun Gong members, with increased religious suppression. They are not observing the Covenant on Civil and Political Rights. Will they observe this? Are there sufficient enforcement mechanisms in the W-T-O to make China toe the line? Lilley: Well, at the risk of making some enemies, I would say trade is not human rights. Trade is hard give-and-take on things that China desperately wants from us, and things we need from them. It's give-and-take. It's compromise. It's not values being laid on the line. Human rights, the covenant that you are talking about, is a principled position on political freedom. Of course, the Chinese see the world very differently. They signed it, sure, but it's different from the World Trade Organization. Let me just make one point. Two of my colleagues wrote a book on China and the W-T-O, Tiger by the Tail, it's called. They make two points that the two issues really in China that are essential on this -- one is the transparency of their system and the other one is the process of law. And they say a lot of it hangs on this. Are the Chinese really going to let you get in and look at their system? Their banking, their credit, the way they handle things. And are they going to carry out a process of law that is outside of the party? Host: And the answer to that is? Lilley: The answer is a great big question mark. Host: All right. We have a number of guests asking questions rather than answering them, so let's see if you will answer this one, Nick Lardy. Jim Lilley has referred to the debates within the Chinese elite against this agreement. Because so much of the Chinese economy still is state- controlled, can the Chinese economy withstand the kinds of pressure that are going to be brought to bear upon it by opening up? And what will the effect of that be, both economically and politically? Lardy: Well, I think we'll have to wait and see. I think it's uncertain. There will be enormous pressures in many sectors. Employment is going to shrink. Output is going to decline. There will be increased political pressure on the regime because of the consequences of that. Some of this will be concentrated in areas as in the northeast, where there really is very little other economic activity that is likely to spring up immediately to provide new jobs. In south China, where there is very little state industry, they are much more efficient. There is going to be a further boom from more opening. They are going to do very well. So there are a lot of regional tensions involved. And whether or not the whole system can withstand all these stresses, I think we will have to wait and see. Obviously, the leadership thinks they will be able to. They signed on to this voluntarily. They are going to use it as a wedge to accelerate their own domestic economic reforms. But I don't think it's certainly a risk-free strategy from their point of view. Host: Some speculated that Zhu Rongji, in his attempt to deal with the state-owned enterprises, was not having a great deal of success, and decided that only the external pressures brought upon these entities could be great enough so as to effect some reform. Does that make sense to you from your knowledge of Chinese politics? Lian: Zhu Rongji was trying to bring the state firms out of recession in three years, when he first took the responsibility as the prime minister a couple of years ago. And he has relinquished his stated goal. The problem in China, as Mr. Lilley has just mentioned, is that the Chinese government right now is desperately wanting to get into the W-T-O as soon as possible. Host: Why? Lian: The reason is that, as you may know, the state firms have gone bankrupt in 1997, according to some reports. And the banking system in China has been virtually bankrupt since 1998. Their debts are twenty-five times more than their assets. Host: Let me check with the economist in the room. Does that comport with what you know? Lardy: Broadly speaking, yes. Their financial system is very fragile and the largest banks, or at least several of the largest banks, are certainly insolvent. They've just thrown a lot of money at enterprises to keep them going and the money has not been effectively used. The resources have been wasted, basically. Lian: So that's why two-thirds of the state firms have not been able to recover from their losses for years. So right now, as you may know, many Chinese people are, because of the free flow of information from international society and universal rights, like civil rights -- those kinds of terms hurt the Communists with more and more Chinese people. That's why last year, several thousand of people tried to organize the China Democracy Party. And recently the crackdown on Falun Gong told the world that many people are not satisfied with the current political system and society, the widespread corruption, the tensions between different regions of China, and the disparity of the distribution of the wealth -- because the primary group of the people who are benefiting from the so-called reform, since 20 years ago, were those who were government officials or their followers. And the primary factor which is supporting economic growth right now is foreign investment and trade from the international society. Host: As one commentator put it, there is a deal inside China. The party says to the people, "we will allow you to get rich," and the people respond, "as long as you allow us that, we will leave you with your exclusive operation of power." And therefore, the party now is left in a position, without an ideology really, of having to continue to open, because if there are severe economic reverses, it will threaten that exercise of power. Does that make sense? Lilley: Yes, I think it does. The Chinese face some serious dilemmas, as Nick has pointed out. They need foreign investment. They have to attract foreign investment. Foreign investment has, in fact, gone down. They need this to have growth. They need, let's say, seven or eight percent growth. We need that growth for our exports. If their growth goes down, our exports don't grow. It's in our interest to have them grow. On the other hand, we know that, in the short term, W-T-O is going to effect them. If it effects them too seriously, then you have an increase in unemployment; you have a drop in exports; you have all sorts of problems develop. And then you face a possible backlash against it. Host: But aren't they facing this problem anyway, because these state enterprises are simply sapping their capital and wasting it? And this is going to get worse, not better, unless there is reform. Right, Nick Lardy? Lardy: Well, exactly. I think, as Mr. Lian said, when Zhu Rongji came to power, he recognized this explicitly and he vowed that he would solve these problems in state-owned companies within three years, because I think he understands that the continual drain of resources that is represented by the increased bank lending that goes into those companies to keep them afloat is ultimately creating a big hole on the balance sheet of the whole economic system. They are spending the lifetime savings of many Chinese citizens who put the money in the bank in order to prop up these inefficient companies. So in the long run, it can't be sustained. He's determined to reduce it, and I certainly think the W-T-O is part of the strategy. But as I said, it's risky. It's a gamble, because there will be increased political problems at least in the short run. There is nothing in this agreement that is going to provide China with greater market access in the West, at least in the short term. They already have that. So import prices are going to come down in China, at least at the margin. That means imports are likely to go up. That's going to put more pressure on their balance of payments. It's not going to help them with sustaining the growth rate that Jim Lilley mentioned is their long-term goal. So they, in the short-run, face some very severe challenges. Host: Will not that help them, though, with what Mr. Lilley mentioned in terms of attracting investment? Lardy: I'm a little bit of a skeptic. Many people have said this agreement will allow them to attract a great deal more investment. I think it's a mixed picture. I think there will be primarily a change in the composition of investment. Manufacturing firms will be less likely to invest in China because it will be easier to sell directly from production sites elsewhere in the world when tariffs are coming way down. You don't need to invest in China to put up a factory inside the tariff wall. There will be more investment in telecoms and in other service sectors. So I think we'll see more in some areas, probably less in others. Where it is going to come out in the aggregate, I think we'll have to wait and see. Host: And your overall odds on their chance of succeeding in this transformation? Lilley: Well, you know, it depends on how you define success. They're not going to become a competitive, perfectly free market economy over night, as Mr. Lian mentioned. There will be problems of enforcement. There will be slippage, but if you look at the record of the last twenty years, you have to be relatively optimistic. They have made substantial progress against great odds, and the leadership is pretty committed to this. I wouldn't bet against them at this point. Host: I'm afraid that's all the time we have this week. I'd like to thank our guests - James Lilley from the American Enterprise Institute; Nick Lardy from the Brookings Institution; and Shengde Lian from the Free China Movement - for joining me to discuss China's entry into the World Trade Organization. This is Robert Reilly for On the Line. Anncr: You've been listening to "On the Line" - a discussion of United States policies and contemporary issues. This is --------. 02-Dec-1999 14:52 PM EDT (02-Dec-1999 1952 UTC) NNNN Source: Voice of America .