China hopes to join trade club dashed

Shanghai traders would benefit from WTO membership

President Clinton has expressed regret that his China trip had failed to bring agreement on lowering trade barriers, market liberalisation and other economic reforms. These conditions must be met before China gains entry to the World Trade Organisation.

Speaking in Hong Kong at the end of his visit, the President said although no agreement was reached, he now understood better why China was reluctant to open its markets before it had completed its economic reform which involved dismantling much of its state-run industry.

China had been hoping to enlist US support for its bid to join the WTO, which regulates the world trading system.

Negotiations on the issue will resume in Geneva during the week of July 20.

All members of the WTO receive the same tariff reductions and access to markets. In return, they pledge to operate an open trading system and abide by an arbitration system run by the WTO. Formerly operating as GATT, the General Agreement on Tariffs and Trade, it has led to major reductions in trade barriers across the world.

China's trade growing

China's merchandise trade balance is growing fast .
source: WTO

In the Chinese view, membership would take trade outside of the political agenda. China would no longer be subject to an annual vote in Congress to ensure it has the benefit of free trade with the United States. That is currently dependent on the yearly renewal of China's Most Favoured Nation status with its largest trading partner. It would also confirm China as a full-fledged member of the international economic system, as the world's fastest growing exporter.

The United States, however, says that China would have to do more to open its closed economy, allowing more foreign competition, and reducing its subsidies to state industries.

The two sides met for preliminary talks just before Mr Clinton's trip, when US Trade Representative Charlene Barshefsky travelled to Beijing to meet with Foreign Trade Minister Shi Guangsheng.

China reportedly put forward a new proposal for increased access to the tightly controlled financial, telecoms and legal services sectors. But the two sides still seem to be far apart.

The economic problems in China, with growth slowing and unemployment rising, have made it more difficult for the Chinese to offer major concessions.

More investment wanted

Foreign direct investment in China is up sharply.
Source: UNCTAD

But the Asian crisis has also shown how vulnerable the US economy is to economic disruption in the Far East. China's economic credibility has increased as it has stood aside from the round of devaluation sweeping other Asian nations. The mere threat of a Chinese currency move was crucial in pushing the United States into intervention against the yen. China feels it should be rewarded for this show of international restraint.

The Chinese vice minister for foreign trade, Sun Zhenyu, said that keeping China out of the WTO would not be conducive to world economic stability.

But the United States has domestic problems of its own. While big US companies are anxious to invest more in China, protectionist pressures have mounted as Chinese exports have soared. The Clinton Administration's efforts to widen its regional trade deal NAFTA to Latin America and Asia have stalled.

Any future deal with China would have to show significant gains for US companies and agricultural producers to get through Congress.

President Clinton will now have to face his congressional opponents, who have opposed his strategy of constructive engagement, without any concrete trade gains. After the diplomatic niceties, the politics of the trade gap will be back to haunt US-China relations, just as they dominated US-Japanese relations for years.