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An Update by Washington State China Relations Council
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CHINA
AND THE U.S. REACH AGREEMENT ON WTO
After six days of tense negotiations in Beijing, the U.S.
and China finally reached a bilateral trade agreement this past weekend that
should open the way for China's accession to the WTO, possibly before the end of
this year. Although the full text of the agreement has not been released as
of this writing, the details provided by U.S. Trade Representative Charlene
Barshefsky at a press conference in Beijing on November 15 and a summary
provided by the White House on the same date indicate that the agreement
"captures" virtually all of the offer Premier Zhu Rongji made in
April, plus some additions in finance, media, textiles and anti-dumping
protection. According to press reports, Zhu personally intervened to break
an eleventh-hour deadlock. There follows a summary of the major elements of the
agreement.
Industrial Tariffs
China's industrial tariffs will fall from an overall
average of 24.6 percent in 1997 to an overall average of 9.4 percent in 2005.
On U.S. priority industrial products, tariffs will fall to
an average of 7.1 percent, most of those reductions occurring by 2003.
Among priority products are: wood, paper, chemicals, and capital and
medical equipment.
For information technology, tariffs on products such as
computers, semiconductors and all internet-related equipment will fall from an
average of 13.3 percent to zero by 2005.
Agricultur
The overall average of agricultural tariffs will fall from
the current 31.5 percent to 14.5 percent by January 2004 at the latest.
(Note: a recent New York Times story, apparently picked up by local papers,
erroneously stated that the agricultural tariffs would fall only from 15.5
percent to 14.5 percent. In fact, that is the target range for such
tariffs by 2004; the current average, as stated above, is 31.5 percent.)
China has pledged to expand foreign access to its markets
for bulk agricultural commodities, including corn, cotton, wheat, rice, barley,
and soybean oil.
China will also implement fully the offer made during
Premier Zhu's visit in April to drop phytosanitary barriers to the importation
of western U.S. wheat, meat products and certain tree fruit.
China will eliminate export subsidies. This is
especially important for U.S. cotton and rice producers, and may also impact on
China's export of apple juice concentrate.
China for the first time ever will permit agricultural
trade between private parties - i.e. it will not be necessary to trade through
state agricultural import-export corporations.
Services
On industrial goods, China will for the first time permit
foreign traders to deal directly with buyers and suppliers, bypassing state
trading corporations. Foreign sellers will have full distribution rights,
including wholesaling and retailing, and aftersale service, repair, maintenance
and transport.
Telecommunications, internet service and content providers,
insurance, banking securities, audio-visual, legal, accounting and other
professional services will all have expanded market access.
Of Particular Interest to the
State of Washington
--China has committed to open up distribution auxiliary
services, including: rental and leasing, air courier, freight forwarding,
storage and warehousing, advertising, technical testing and analysis, and
packaging services. All current restrictions will be phased out in three
to four years, at which time U.S. service suppliers will be able to establish
100 percent wholly owned subsidiaries, if they wish.
--China's commitments mark its first agreement to open its
telecommunications sector, both in the scope of service and in direct foreign
investment in telecommunications businesses. Specifically, China has
agreed to the principles in the Basic Telecommunications Agreement, including
cost-based pricing, interconnection rights, and independent regulatory
authority; the agreement also stipulates that foreign suppliers can use any
technology they choose to provide telecommunications services.
--For the scope of telecommunications services, China will
phase out all geographic restrictions for paging in three years; for value-added
and close-user groups in three years; for mobile/cellular in five years; and
domestic wireline services in six years. China's key telecommunications
corridor - Beijing-Shanghai-Guangzhou - which handles about 75 percent of all
domestic traffic, will open to all telecommunications services immediately upon
accession.
--China will allow 49 percent foreign ownership in all
telecommunications services immediately upon accession, and move to 50 percent
foreign ownership for value added in two years, and for paging services in three
years. The 50 percent foreign ownership provision is an important
benchmark, as it allows foreign investors to hold key positions on a joint
venture board of directors. That is probably the best China could do for
the moment, given not only the economic, but also security, sensitivities
attendant on its telecom sector.
--For insurance, China will permit foreign property and
casualty firms to insure large-scale risks nationwide immediately upon
accession, and will eliminate all geographic limitations for future licenses
over five years. Foreign insurers will also be able to offer group,
health, and pension lines of insurance over the next five years.
China also agreed to employ international standards for prudential criteria,
phase out branching restrictions, allow foreign insurers to choose their own
joint venture partners and permit wholly owned subsidiaries two years after
accession.
--In banking, China agreed to allow foreign banks to begin
local currency transactions with Chinese enterprises two years after accession,
and with private citizens five years after accession. All geographic
restrictions on branching will be eliminated five years from accession.
--In tourism, China, upon accession, will allow foreign
hotel chains to assume majority ownership of their hotels in China, and acquire
100 percent ownership three years from accession. Foreign travel service
operators will be able to provide the full range of travel agency services,
including access to government resorts.
Grandfathering
China will grandfather all existing market access and
service activities agreements. This will protect existing American
distribution services, financial services, professional services and other
service providers in China from restrictions as China's commitments phase in.
Protocol Provisions
Apart from market access provisions, the U.S. and China
also had to negotiate China's WTO protocol, which stipulates rights and
obligations enforceable through WTO dispute settlement procedures. Keys to
the U.S. for this part of the agreement were antidumping and subsidies,
protection against import surges, technology transfer requirements and offsets,
and state owned enterprises.
--China agreed that, upon accession, it will not condition investment approvals, import licenses, or any other import approval upon performance requirements, including local content requirements, offsets, transfer to technology, or requirements to conduct research and technology in China.
--China agreed to abide by U.S. anti-dumping laws for 15
years beyond accession, permitting the U.S. to continue to apply non-market
economy rules to China when it finds that China is selling subsidized, or
below-cost products in the U.S. market. This was one of the provisions -
absent in Zhu Rongji's April offer - that caused Clinton to reject the offer
then.
--China also agreed to ensure that state owned and state
invested enterprises will make purchases and sales solely on commercial
considerations, and provide U.S. firms with the opportunity to compete for sales
and purchases on non-discriminatory terms and conditions. All state owned
and state invested enterprises will be subject to WTO rules.
--On another point of contention in the April proposal -
textiles - the U.S. wrested from China a commitment to abide by the bilateral
textile agreement beyond the WTO-imposed textile quota end-date, 2005.
U.S. quotas on China textile exports will remain in effect until December 31,
2008.
THE ROAD AHEAD
The agreement with the U.S. clears a major hurdle for
China's accession to the WTO, and marks an important victory for China's
economic reformers headed by Premier Zhu. Nevertheless, there still remain
several steps China must complete and under existing WTO rules it would appear
impossible for China to accede in time for the Seattle ministerial.
China must still complete bilateral market access
negotiations with its other major trading partners, the EU being chief among
those with whom negotiations have not been concluded. However, the EU has
signaled before that it expects to follow the model established by the U.S., as
most probably will other trading partners of China. Thus, it is certainly
possible that China could wrap up all remaining bilateral agreements before the
end of November. China must also negotiate its protocol of accession with
the WTO, and the entire 135-member body must then vote on admitting China.
Finally, China must ratify the protocol and notify the WTO of its acceptance.
China would become a full member 30 days after tendering its acceptance
notification.
Although China technically cannot reach full membership in time for the ministerial, it should be well on the way to accession by the time the conference opens in Seattle late this month. Thus, it seems very likely that China will seek a higher profile at the ministerial than would normally be the case for an "observer" delegation. Though China will have no vote at the ministerial, its impending accession will give added weight to the views its delegations expresses since (as now seems very likely) China will join the negotiations as a WTO member before the Seattle Round progresses very far.
Originally, China had planned to send 15-20 observers
headed by Foreign Trade Minister Shi Guangsheng. About half of the
delegation would be from Beijing; the remainder would come from Geneva, the
Embassy in Washington, and the Consulate General in San Francisco. That
"core" group will still come, but it is likely to be augmented
considerably, and possibly be headed by State Councilor (and former Foreign
Trade Minister) Wu Yi. There is some speculation that either Premier Zhu
or President Jiang Zemin may lead thedelegation, but the probability is low.
There is still one final "loop" to close in the
U.S.-China market accession agreement: conferring permanent Normal Trade
Relations status (formerly known as MFN) on China. Since the Jackson-Vanik
Amendment was passed in the early '70s, China - as a putative non-market economy
- has been subjected to an annual review by the president and congress of its
eligibility for the same low tariff rates that we accord to virtually all of our
trading partners. Recall if you please that Jackson-Vanik was added to the
1974 Foreign Trade Act to pressure the former Soviet Union into allowing
unrestricted emigration. As far as China was concerned, that issue was
first settled when Deng Xiaoping famously stated to President Carter in 1979
that China was prepared to send one million, or even ten million immigrants to
the U.S. Deng's rhetoric aside, China in 1994 finally did allow a passport
to virtually anyone who applied for one. One could also seriously question
whether China still falls into the non-market economy category, since nearly 70
percent of its GDP is now accounted for by the non-state owned sector. In
fact, China's agreement with the U.S. will propel its economy even more quickly
toward full marketization.
In other words, exempting China from the provisions of Jackson-Vanik should be a "no-brainer," except for the fact that the annual review of China's MFN-NTR status in the past twenty years has moved far afield of the original intent and language of Jackson-Vanik. The annual May-August exercise has instead become a congressional clearing-house in which to take China to task for every possible grievance, real or imagined.
That such a review of China and U.S.-China relations should be conducted by congress has obvious merit, given the importance that China has assumed for the U.S. That this review should continue to be tied to our trade relationship - in light of our bilateral market access agreement and China's imminent accession to the WTO - no longer makes any sense, and here's the reason why.
China's accession to the WTO is now a virtual certainty, and it is likely to happen within the next two to three months. This will happen whether or not congress passes legislation conferring permanent NTR on China. However, if congress fails to approve such legislation, under WTO rules China can (and almost certainly will) demand an exception for the U.S. to its market-opening agreements and accession protocol. What that means is that every WTO member except the U.S. will enjoy liberalized access to China's market. If China is wise in this matter, it will not invoke the exception rule before the next annual review of China's NTR status in late May, to give congress time to pass the necessary legislation. As this legislation comes up for consideration before congress, you should make clear to your representatives and senators that failure to convey permanent NTR will not punish China, but U.S. businesses, workers and farmers.
ONE FINAL THOUGHT
We should temper our euphoria over the over this long-sought trade agreement - and China's imminent accession to the WTO - with the reality that China is not going to change overnight, however much its reformist leaders might wish that to be so. Conventional wisdom in China holds that it takes 100 years to effect significant change. A despondent Mao Zedong allegedly told Richard Nixon that the Cultural Revolution - one of the most convulsive periods in China's modern history - had changed only Beijing, and a few suburban counties.
Economic opportunities for U.S. businesses will undoubtedly increase over the next several years, perhaps substantially so. But, even assuming that China's government makes a good-faith effort to implement fully the terms of its bilateral agreements and accession protocol within the stipulated phase-in period, that will have little immediate bearing on the business practices of thousands of communities, and hundreds of thousands of enterprises, in this continent-sized economy and population. As with Japan, overcoming cultural inertia will be a long term project.
That said, the terms under which China will enter the WTO constitute the most breathtaking opening of China's trade policy in its recorded history. With this agreement, China has cast its lot with the global economic and trading community, and signaled its desire to stabilize relations with the U.S. Not a bad way to start the new millennium.
(This update was posted with approval from Joseph J. Borich, Executive Director of Washington State China Relations Council.)
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