China and the WTO Jude Wanniski and Michael Churchill March 8, 2000

When President Clinton sends legislation to Capitol Hill today to grant China Permanent Normal Trade Relations (PNTR) status with the U.S., it will kick off a nasty debate about our trade relationship with China. The administration hopes to bang it through prior to the April recess and we now think its chances of passage are very good. As longtime advocates of permanent status for China on Most-Favored-Nation treatment, it would be nice to see this development, which, if coupled with favorable election results in Taiwan on March 18, would open up another positive chapter in our roller-coaster relationship with Beijing. Even if the opponents of PNTR succeed in getting the votes to block it in the House, there is little doubt Congress would return after the April recess and pass another one-year extension for MFN. What is at stake in the approaching vote, though, involves the possibility the European Community can steal a march on the United States in getting access to the China market for telecomm and other high-tech investment.

Congress actually does not vote on whether to admit China to the World Trade Organization (WTO). The administration has already made an agreement with Beijing that automatically places China in the WTO if the EC members come to their own terms of agreement with Beijing. In this high-stakes poker game, if Congress postpones PNTR into 2001 and the Europeans complete negotiations with Beijing that they temporarily have suspended -- obviously to see what happens in the U.S. Congress -- China will have its membership in the WTO and the United States will be in technical violation of its WTO treaty obligations. China then could suspend the terms of its completed agreement with the United States, and the European Community would have the immediate benefits of liberalized tariff and trade openings to China's vast and growing economy. A new Congress and President would come in next January, but even a nine-month lead time for Europe's telecomm industry would be bad news for the U.S. domestic industry -- and why the lobbying effort will be intense to pass PNTR.

There are, of course, arguments that China does not deserve PNTR because of threats against Taiwan or "human rights" abuses. It is hard for anyone to make the case that China's record is worse now than it was five, ten, or twenty years ago, when the improvements along all lines have been palpable. The real core of the anti-PNTR argument is that the U.S./China trade balance is wildly unfair and that China is not sufficiently opening its markets to U.S. exports. The data would appear to lend an air of credence to this view. In 1999, U.S. figures show that Chinese goods and services exports to the U.S. were $81.8 billion, while Chinese imports from the U.S. were $13.2 billion. "What kind of trade relationship is this?" asks Pat Buchanan, the likely Reform Party candidate, who already is staking out the hard-line anti-PNTR position. "We are selling them 1.5% of our exports, at most, and we are taking 40% of their exports."

In reality, there are gigantic discrepancies between Chinese and American figures for U.S.-China bilateral trade. The U.S. statistics for 1999 that show imports of $81.8 billion from China make no sense when set against Chinese stats showing exports to all of North America of only $40.3 billion. Some of the discrepancy is caused by the U.S. practice of counting exports that flow from Asia in general through Hong Kong. By anecdotal accounts, Chinese imports from the U.S. are higher than the $13.2 billion reported here, because much of our exports of high-value-added software and other "intellectual product" so easily can bypass customs agents in China. The fact that Chinese hard-currency reserves remain close to $155 billion is a good indicator that its net trade surplus with the rest of the world is close to zero, if not beginning to show the deficit we expect of a rapidly growing emerging market. For 1999, for example, China's total exports to the world grew by only 6.1% while its imports from the world grew by 18%. This is why Buchanan's trade arguments have much less resonance than they did in previous years.

Even if U.S. trade data were correct and China were running a huge trade surplus with the U.S., there still are two critical reasons to maintain MFN -- and preferably to approve PNTR. One, bringing China into the WTO is the best way to force Beijing to further open markets, as it must to meet WTO guidelines; and second, if the U.S. raises tariffs on China, the negative effects will extend outward in Smoot-Hawleyesque waves to the rest of the world, landing squarely back in the U.S. As the table below shows, China's economy is fully integrated within the Asian and global economy. Its total multilateral trade is more than three times the size of its U.S.-only trade. If the U.S. raised tariff barriers substantially on China, Beijing would be forced to contract its trading relationships with the rest of the world. 

China: Inextricably Linked to Asia's Economic Health

                                                             China Exports                   China Imports                         Balance
                                                                  in US$ bn                            in US$ bn                           in US$ bn

North America *                                        40.3                                       19.6                                       20.7
Europe *                                                     31.7                                        29.6                                        2.1
Asia *                                                           91.6                                        90.7                                        1.0

Total:                                                         194.6                                      165.4                                     29.2
* Data for 11 months only
Source: China Customs Office, CSC Ltd.

In other words, China's integration into the Asian and U.S. economies has become so pronounced in recent years that it would be cataclysmic to suddenly withdraw MFN. When two countries are not trading with each other, you can put up a formal tariff wall of infinite height without causing damage to financial markets in either. When literally millions of businesses here, large and small, are buying or selling to myriad businesses in China, an increase in the tariff wall, as Buchanan insists he would order if he were President, would result in dominoes falling in every business corner of America -- including all those having no contact with China. Suspension of MFN could easily cut the DJIA by 3000 points, and make nobody happy except perhaps Alan Greenspan, who could then cut interest rates (to no avail). These issues will ripen just in time for the presidential campaigns this fall, even if PNTR passes later this month. It will be some weeks before we can get a true bead on how Vice President Al Gore and Governor George Bush may play their China cards. We already know about Buchanan's.