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Wednesday, 11 October, 2000, 00:44 GMT 01:44 UK
Why US-China trade matters

US President Bill Clinton has signed into law an historic bill normalising trade relations with China. BBC News Online's Steve Schifferes explains why that decision matters to the rest of the world.

What are permanent normal trading relations (PNTR)?

During the Cold War the US decided that it would only grant trading privileges to Communist countries after reviewing their record on human rights and emigration each year.

This provision still applied to China, although Congress had never actually voted to block trade.

China wants to join the World Trade Organisation and has agreed to open its markets to Western investment. In return, the US Government promised to end the annual vote on normal trade relations.

Why does it matter?

So long as the US continued with the annual trade review, it was not entitled to gain the benefits of any trade liberalisation that China undertakes.

Although China would still have been able to join the World Trade Organisation, the uncertainty over its trade relations with its largest trading partner would have undermined the significance of the move.

Many supporters believe that integrating China - the world's fourth largest economy - in the world trading system is crucial to persuading China to liberalise its political and economic system.

If the US had turned in a protectionist direction, it would have made trade negotiations with other countries, including the EU, more difficult.

What happens next?

To gain membership of the World Trade Organisation, China has to reach deals with all members of the WTO on measures to open its markets to foreign competition.

It reached such a deal with the US in November 1999, but only finalised agreement with the European Union in May.

It could well be the end of the year before the WTO's technical panel approves Chinese membership - and some years after that before all of China's market-opening measures are completed.

Why had the issue become so politically charged in the US?

The decision to grant PNTR to China was only passed by the House of Representatives in May after much heated debate.

The vote had a huge symbolic significance in the US, where it was the centrepiece of a battle between free traders and protectionists.

Those Americans worried that free trade and globalisation had gone too far, including many unions, mobilised against the deal. They had support from many in the Democratic Party who were sensitive to the concerns of its heartland voters in an election year.

President Clinton, a Democrat who cannot run for re-election, wanted to make his mark in history by agreeing to the landmark trade deal with China, thus securing good relations with Beijing.

Why is it so important for China?

China's opening to the West since the l970s has led to a dramatic transformation of its economy which has quadrupled in size.

Joining the World Trade Organisation would ensure that China continued on its path towards economic modernisation.

China's economic reformers know that opening up the Chinese economy to Western competition could cause massive disruption and job losses.

They believe that it is a necessary price to pay to strengthen China's power and prestige internationally.

The annual vote on PNTR was seen as a humiliation for China as a great power.

That is why China remains bitterly opposed to any human rights commission which the US Congress proposes setting up.

How will it affect the rest of the world?

The opening up of China will have a major effect on the whole world economy.

China's market of 1.3 billion people will, over time, become a more attractive place to sell goods and services from the industrialised countries of Europe, Japan and North America.

In so far as the deal stimulates China to grow faster, investment opportunities will be even greater.

In the short term, Western industries could face more competition from Chinese imports in sectors like textiles, clothing and steel.

And if China becomes an economic powerhouse it may become more assertive about playing a bigger role in Asia, challenging Japan and the US.

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See also:

24 May 00 | Business
Showdown on US China vote
23 May 00 | Business
China's US trade critics
23 May 00 | Business
China trade vote hots up
19 May 00 | Business
EU-China agree trade deal
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