China & the WTO


Robin Hahnel

After
declining to sign a "better deal" last April, the Clinton
administration signed off on conditions for permitting China to enter
the World Trade Organization (WTO) in November. Even though China’s
premier was in Washington last April begging for Clinton’s signature
to lock in a victory for his faction of economic liberalizers over their
internal opponents, April was politically inconvenient for the
Administration. Anti-China sentiment in the U.S. had crested over
alleged thefts of U.S. nuclear secrets, alleged covert funding of the
Democratic Party, alleged Chinese saber rattling at Taiwan, and
confirmed repression of political dissent inside China. But in November
the Clinton Administration needed a "big win" to save the WTO
meetings in Seattle where the Administration program of accelerating
liberalization appeared to be in more trouble with every passing day.

The China Deal

In
1985 the U.S. exported $5 billion to China and imported almost exactly
the same amount. By 1998 the U.S. exported $14.4 billion to China and
imported $71.2 billion, and in August 1999 the U.S. had a larger trade
deficit with China than with Japan. U.S. direct foreign investment in
China never topped $200 million a year between 1985 and 1992. By 1998
U.S. direct foreign investment in China had reached $1.5 billion a year.
Like NAFTA before it, while ballyhooed as a deal to free trade, the deal
clearing Chinese entry into the WTO is more about liberalizing foreign
investment and ownership than liberalizing trade. Steven Mufson admitted
as much in the Washington Post on November 16: "The biggest
benefits of the deal will be for American companies investing in China,
not for American exporters."

Most
importantly the deal will greatly increase U.S. corporate investment in
China, opening whole new areas previously off limits like
telecommunications and finance. The deal will also expand U.S.
agricultural exports to China significantly. The deal will gradually
increase U.S. imports of Chinese labor intensive products like textiles
and toys, putting more downward pressure on wages in general, and the
wages of unskilled U.S. workers in particular.

  • Finance:
    U.S. banks can offer services in local currency to Chinese
    enterprises two years after China joins the WTO, and to individual
    Chinese after five years. Foreign insurance companies can offer
    property and casualty nationwide

  • Telecommunications:
    Foreign phone companies, now restricted to equipment sales, will be
    able to own up to 49 percent of all telecommunications service
    ventures upon China’s entry into the WTO and up to 50 percent two
    years later

  • Agriculture:
    Foreign companies can sell China large amounts of wheat, corn, rice,
    cotton, and other commodities. For example, China now imports
    roughly 2 million tons of wheat a year; the agreement immediately
    permits 7 million tons with almost no tariff. Moreover, a
    substantial share of these goods can be imported by private
    companies rather than Chinese State enterprises

  • Cars:
    Foreign auto companies will have full distribution and trading
    rights. By 2006 China will reduce tariffs on cars to 25 percent from
    the current 80 to 100 percent. China will also permit foreign
    financing of car purchases

  • U.S. Heavy
    Industry Exports to China:
    Chinese tariffs on imports of
    industrial goods will drop from an average of 24.6 percent in 1997
    to 9.4 percent in 2005. Foreign companies will have the right to
    sell, distribute, and market industrial goods, including steel and
    chemicals, without going through a Chinese middleperson as is now
    necessary

  • Chinese Light
    Industry Imports into the U.S.:
    U.S. import quotas on Chinese
    goods such as textiles, toys, shoes, bicycles, portable stereos and
    computer parts will disappear in 2005. But China agreed to 4 years
    of protection after the quotas are lifted for the U.S. textile
    industry and 15 years of special protections for the U.S. against
    "dumping" of Chinese goods in the U.S. market

  • Internet:
    Foreign firms will be allowed to invest in Internet content
    providers such as Sohu, the Chinese equivalent of Yahoo. Companies
    will be allowed to buy 49 percent of Chinese Internet firms upon
    China’s entry into the WTO and up to 50 percent 2 years later

  • Movies:
    China will import 40 foreign films a year, double the current number
    and 50 by the third year of the agreement, and foreign film and
    music companies can share in distribution revenues for 20 of the
    films

Who
are the Winners?

Listen
to some who reacted with joy at news of the signing as quoted by John
Burgess in the Washington Post on November 16 and by Steven
Mufson and Robert Kaiser on November 25. Sy Sternberg, chair of New York
Life Insurance Company: "This is probably the most important economic
development in China in the last 50 years. My company is working for a
license to enter China." Scott Shearer, director of national relations
for Farmland Industries: "What we’re hearing is that this will be
the largest market-access agreement in U.S. agricultural history."
America Online Inc., who already has an online service in Hong Kong and
investment in an Internet company serving Hong Kong, China, and Taiwan:
"We welcome the agreement." Christopher Hansen, executive vice
president and Washington representative of Boeing Company: "The vote
in Congress that would enable China to join the WTO is really for all
the marbles." Harry Kamen, MetLife’s chair emeritus: "When the
actuaries think about 1.2 billion lives, their mouths water. It’s not
only the number of people that are there, but there’s very little life
insurance being purchased relative to the rest of the world. The Chinese
savings rate—40 percent of earnings—also makes an impression on
insurance salesmen."

Listen to
what the winners have been doing to promote their interests. In the
November 14 issue of the Washington Post Robert Kaiser and Steven
Mufson report: "Many farm groups around the country have joined
executives of large businesses in a coalition to press Congress for
favorable action. This coalition has grown from modest origins just five
years ago into a broad, well-organized alliance. Washington
representatives of the interests involved meet at two different weekly
sessions to discuss policy options and politics. Both the Business
Roundtable and the U.S. Chamber of Commerce have organized national
efforts targeting about 60 members of the House through their home
districts. For this year’s vote on China’s trade status, two to four
big corporations were assigned to each of several dozen House members
whose votes were in doubt." On November 25 the same two reporters told
us: "Sandra Kristoff, New York Life’s Washington-based executive
vice president who formerly worked as senior director for Asian affairs
at the National Security Council, has seen nearly 100 members of
Congress since April and has been plying her views in congressional
testimony and op-ed particles in major newspapers." Mufson and Kaiser
also lay to rest any lingering doubts about who the Clinton
administration is humping for in its China negotiations: "The dean of
the American insurance community in China—and the executive most
effective at wielding influence on both sides of the Pacific—is
Maurice "Hank" Greenberg, the AIG chair and former head of the
U.S.-China Business Council. As the WTO deal was wrapped up last week,
the 73-year-old executive was waiting in his office in lower Manhattan
for U.S. Trade Representative Charlene Barshefsky to call from Hong Kong
with the details."

Who
are the Losers?

Not
all in the U.S. reacted with joy at the prospect of Chinese entry into
the WTO. John Sweeney, President of the AFL-CIO immediately warned:
"This is a grave mistake. China is a rogue nation that decorates
itself with human rights abuses as if they were medals of honor." (Washington
Post
, November 16). Sweeney reiterated his anger in a speech at the
National Press Club calling it "disgustingly hypocritical for the
White House to posture for workers’ rights in the global economy at
the same time it prostrates itself for a deal with China that treats
human rights as a disposable nuisance" (Washington Post,
November 21). While Sweeney’s professed concern for human rights
abroad is not as hypocritical as Clinton’s, this is hardly the basis
for Sweeney’s opposition to Chinese entry into the WTO. He and the
AFL-CIO correctly estimate that their membership is the constituency
within the U.S. most likely to suffer negative consequences from the
deal.

Will
there be jobs lost or gained as a result of the deal? Former Secretary
of Labor in the Clinton administration, Robert Reich, offered a
revealing comment on this in the "Outlook" section of the Washington
Post
on Sunday, November 21: "The deal won’t affect the number
of American jobs one way or the other. Trade-opening agreements don’t
add to the nation’s stock of new jobs, as the White House has been
arguing since the NAFTA battle. Nor do they cause jobs to succumb to
giant sucking sounds elsewhere. We will continue to have as many jobs
here as Alan Greenspan and company allows. It may be hard for partisans
to extol the advantages of trade or to conjure up its horrors without
resorting to hype about job gains or losses, but this kind of talk
clouds what’s really at stake."

There is
an important truth to be found in the words of our former Labor
Secretary returned academic: "If those in charge of monetary and
fiscal policy deploy them in a way that maintains the demand for goods
and services at the level of production that would fully employ the
nation’s labor force and productive capacity, any shifting around in
what we produce and consume, or what we export and import need have no
affect on the rates of employment and unemployment." We should pause
to savor the implication of this remarkable confession: "The head of
the Federal Reserve Bank, who is responsible for monetary policy, and/or
Congress and the White House, who are responsible for fiscal policy,
deserve to be held accountable for any unemployment we suffer because
they have the power to prevent it." This confession comes as no
surprise to radical economists or even liberal post- Keynesians. But
there are few in government who do not hide behind the fig leaf of
"global competitiveness" whenever jobs are lost or real wages fall
in the U.S. Unfortunately, a growing number of their constituents have
come to accept the lie that lost jobs and falling wages are the
inevitable consequences of globalization as well.

Reich is
dead wrong that trade-opening agreements don’t affect the number of
American jobs one way or the other. This is mainstream economics dogma
and text book economics at its worst. While economists such as Reich
love to forget it, there is a constant battle being waged over fiscal
and monetary stimulus with employers and wealth holders usually pressing
for less stimulus. Less stimulus means higher rates of unemployment,
lower worker bargaining power, and therefore less pay for more effort.
Less stimulus means lower demand for goods and services and lower
inflation rates, which usually works to the advantage of wealthy
creditors.

On the
other hand, those of us who work for a living and pay interest rather
than receive interest payments are usually better served by more
monetary and fiscal stimulus rather than less. Trade and capital
liberalization tilts the battle field farther in the direction of
deflationary policies than it already is. Capital liberalization
increases the risk that lowering domestic interest rates will lead to
capital flight and/or downward pressure on the value of the dollar.
Trade liberalization makes it more difficult to keep labor markets
"tight" than it already is in economies where labor is the
relatively scarce, not abundant resource. When governments are forced to
compete with one another under less favorable circumstances to retain
and attract investment, they predictably tilt farther in the direction
of deflationary policies that are demanded by employers and investors.

To bury
one’s head in the sand that fills most ivory academic towers these
days and deny these important real world forces is convenient if one is
searching for an excuse to support free trade, but it will certainly
lead to inaccurate predictions. In the end Reich simply assumes his
conclusion: "Assuming monetary and fiscal authorities maintain full
employment in any and all eventualities, trade deals will not affect
levels of employment." Thank you, Professor Reich.

In
reality there will surely be more jobs lost in light manufacturing
industries in the U.S. than gained in heavy manufacturing industries.
Despite the fact that the deal is lopsided and permits U.S. industries
to retain greater protections for longer than it permits Chinese
industries, the fact remains that China’s comparative advantage is in
labor intensive production, while the U.S. comparative advantage is in
high-tech, capital intensive manufacturing and agriculture. This means
that more jobs will be lost in the U.S. than gained even if the deal
generated an extra dollar of exports to China for every dollar of
imports from China. But this is highly unlikely if one looks at the
large and growing trade deficit we have with China at present, and if
one considers that the U.S. capital account deficit with China will
surely increase as a result of the deal, making it all the more easy to
finance a growing trade deficit. But the real job losses will result not
from liberalized trade, but from the export of jobs to China as U.S.
companies expand their investment and production there instead of inside
the U.S. Other low wage economies will suffer as well as international
companies flock to China, moving jobs out of countries like Indonesia,
Thailand, Vietnam, Brazil, and Mexico further aggravating recessionary
dynamics in those troubled, no-longer "emerging" markets. But
unleashing the Chinese Dragon will finish off a process that began
decades ago with the rise of the smaller Asian Tigers sounding the final
death knell for labor intensive manufacturing jobs in the U.S. That is
what will happen if things go well and according to "plan." If
unemployment and social unrest in China lead a desperate Chinese
government to devalue the yuan all bets are off since, according to the
treaty, the U.S. government will no longer be able to protect U.S.
workers and industries from even cheaper Chinese imports with new quotas
and higher tariffs. Of course that assumes the U.S. government would
honor the agreement we just signed if and when it proves inconvenient.

The deal
is also a disaster for Democrats in Congress and their hopes of mounting
a unified campaign to win back the House in the 2000 elections.
Representative Nancy Pelosi (D-CA), who opposes China’s entry into the
WTO, predicted: "This is going to be very damaging to the unity of the
Democratic Party," and went on "to blame President Clinton for
putting his own legacy ahead of party interests" (Washington Post,
November 21). The problem for House Democrats is that if the AFL-CIO
decides to go to the wall on this, those who most need support from
organized labor for re-election will have to vote against granting
permanent normal trade relations (NTR) status to China. But the deck is
now stacked in a way that a yes vote is sure to win and Democrats who
vote against will face the wrath of business and farm backers. As Robert
Kaiser explained on November 21 in the Washington Post: "The
U.S. administration, like all governments that belong to the WTO, can
admit China without congressional approval. Congress will only vote on
granting permanent NTR status. Under WTO rules, the U.S. must give China
permanent NTR status to receive the market-opening concessions China has
made to get into the world body. This pleases lobbyists promoting
Chinese membership, who look forward to arguing that a negative vote in
the House would only have the effect of denying the benefits of
China’s entry into the WTO to U.S. farmers and businesses while other
WTO members cash in." Moreover, the argument that retaining the option
of annual votes on temporary NTR status for China in any way serves to
curb Chinese human rights abuses is difficult to make since the House
has voted China temporary NTR status six years in a row. So House
Democrats are reduced to praying that organized labor will only be a
mouse that roared on this on

The final
tally in the U.S.—Wall Street wins, main street loses; high-tech and
finance win, light industry loses. The highly skilled win, the low
skilled lose. If you are lucky enough to keep your job and avoid a drop
in your real wages, you will be able to buy more (Chinese made) toys to
put under your Christmas tree. If you lose your job or, like most
Americans, if you continue to fail to get wage increases commensurate
with inflation, Christmas will be all the more bleak for you and yours
when China enters the WTO.

What
Does It Mean For China?

On
the one hand, Chinese elites—both the old Party elite and the young
educated elite—should get much richer, and finally have their chance
to take what I am sure they consider to be their "rightful" place
among the international economic elite. On the other hand, it means that
hundreds of millions of Chinese peasants will lose their jobs to
international food imports, joining the 100 million of unemployed
already sleeping in cardboard boxes in China’s cities where the
construction boom has slowed and almost every industry already has
excess capacity. It also means that hundreds of millions of Chinese
workers in state owned enterprises will lose their jobs as
"downsizing" Chinese-style makes the last ten years of downsizing in
the U.S. look like a proletarian picnic. Since only a fraction of these
newest additions to the ranks of the world’s most dispossessed will
find employment in new, foreign-owned, labor-intensive manufacturing
enterprises, and since the Chinese version of a "social safety
net"—subsistence wages in State enterprises regardless of
productivity—will have been dismantled, it means that either the
Chinese political repressive apparatus will set new standards for
brutality and effectiveness at the beginning of the new century, or,
hopefully, the feast of the Chinese and international corporate elites
at the expense of hundreds of millions of Chinese peasants and
proletarians will prove mercifully short lived.

 

Why
Did China Do It?

Why
has the leadership of China’s Communist Party signed such a lopsided
deal so likely to upset the Chinese apple cart? That is more difficult
to understand.

Surely
they must realize that reducing tariffs and dramatically increasing
quotas on imports of basic grains from the U.S., Canada, Australia, and
Argentina will put hundreds of millions of Chinese peasant farmers out
of work, further flooding urban labor markets? Surely they must realize
that putting Chinese savings into the hands of western financial
enterprises will siphon investment away from state and small Chinese
enterprises into foreign or jointly owned enterprises destroying many
more jobs than are created, further swelling the ranks of the
unemployed? Surely the Chinese leadership must realize that the only
"social safety net" China has ever had is the "social contract"
of employment for all in State enterprises at subsistence wages
irrespective of productivity levels, and irrespective of whether or not
there is demand for all goods the State enterprises produce? Not only
income support, but housing, health care, child care, and old age care
the entire spectrum of "social services" provided through various
government ministries and paid for by taxes in Western capitalist
economies—have all been provided in China through employment in state
enterprises. Of course they run losses. They have been providing all the
services provided for by non-military government spending in Western
economies—off budget. If officials at the World Bank are so worried
they are warning China to get busy building a Western-style "social
safety net," surely Chinese leaders realize there is little chance to
replace more than a tiny fraction of the net they are dismantling with
one of an entirely new kind before it will be needed?

If my
predictions are correct, the WTO deal will prove to be a catastrophe for
the Chinese economy. Not only is it a lopsided deal in which China has
agreed to dismantle far more of its economic defenses than its trading
partners have agreed to do in exchange, it could well lead to massive
social unrest with highly unpredictable consequences.

Moreover,
because China had not opened up its financial sector as other Asian
economies did, only because China had not permitted foreign investment
on the scale other Asian economies did, only because China had resisted
demands that it make the yuan a convertible currency was China spared
from the ravages of the currency speculators and hedge funds and the
contagion effects of massive capital flight that brought other Asian
economies to their knees in 1997 and 1998.  Why would China, the
Communist giant whose GDP more than doubled during the 1990s, adopt the
international economic policies of Russia, the fallen Communist giant
whose GDP fell by more than half during the same decade?

Greed,
Arrogance, and Ignorance

As
is often the case when ruling elites miscalculate, this decision on the
part of China’s rulers probably results from getting too greedy, being
too arrogant about their powers to suppress dissent, and not
understanding the full consequences of the forces they will unleash.

Greed:
The old political elite believe they, as well as the young educated
elite, can profit handsomely from the deal, not only in the short run,
but also from the changes it will lock the Chinese economy into in the
long run. Up to now the Party elite have been like gate-keepers
collecting bribes from foreign firms seeking entry into China, and they
have been appropriating assets from State enterprises for new small
private businesses of their own. They are quite adept at both
activities, but these are still only penny ante games. Bigger money can
be made by becoming stockholders in fabulously profitable enterprises
owned and operated jointly with foreign multinational companies. Bigger
money still can be made by lending other people’s money to these
highly profitable enterprises at highly profitable rates of interest.
Unless I miss my mark provisions have already been made to take the big
Chinese fish aboard the 49 percent and 50 percent foreign-owned banks
and insurance companies that will be tapping into 40 percent of the
income of 1.2 billion Chinese. Who will staff the skilled jobs in these
new foreign owned and mixed enterprises? No less an authority than
Robert Reich, former U.S. Secretary of Labor informs us (Washington
Post
November 21): "The real deal isn’t about who will be
selling what to China. It’s about who will be hiring Chinese to make
things or do things there. Not only will American auto companies be
assembling cars there, but every major American service business able to
enter China will be hiring Chinese to provide the services to other
Chinese. Under the terms of the deal, U.S. life-insurance companies will
have the right to market their products in China, but don’t expect
hordes of American agents to descend on Beijing. The sales will be made
by Chinese. Even the insurance products are likely to be designed by
Chinese because they will have a better idea of what will sell. Global
banks will have the right to open branches in China, but don’t expect
bank tellers or branch managers flying in from San Francisco. They’ll
be Chinese too."

How
wonderful. Young graduates from the top Chinese universities will
finally have a chance to get something close to their marginal revenue
product. Those who are even more ambitious and/or well connected, and
able to obtain degrees abroad, will do even better because they will get
in on the ground floor with foreign companies from the countries where
they studied. Forget about reuniting Taiwan with the mainland. This is a
deal that can finally unite the interests of the incredibly large and
well-heeled foreign Chinese community that has been filling commercial
cracks around the globe for centuries with the domestic elite that never
left home. This is a deal so sweet it will disprove the adage "You
can’t go home again."

Arrogance:
The Chinese Communist Party must believe it is more proficient at
stifling political dissent and repressing social unrest than either
Stalin or Hitle —neither of whom had to deal with the sheer number of
hopelessly abandoned victims China’s leaders will have to cajole in
the decade ahead.

They
certainly know the deal will create social unrest. Razeen Sally, a
lecturer at the London School of Economics, calls this approach by
national leaders the Nike Strategy—Just Do It! John Burgess explained
in the Washington Post on November 29: "They make a calculated
decision that they would benefit from opening, even if there’s pain up
front as local industries and farms get knocked around. China’s
leaders seem to have accepted this risk as they move to join the WTO."
The question is what workers will do when they are laid off and what the
Chinese government will do when they do it.

The
bigger question is what displaced Chinese peasants will do—because
there are eight times more of them than there are urban workers. Erik
Eckholm warns: "Even more daunting than the problem of urban workers,
and receiving far less official attention, is the task of creating new
jobs and lives for millions of inefficient farmers who are expected to
lose out to global trade and may join the country’s vast floating
population of migrants who compete for bottom-rung jobs in the
cities." Eckholm would be closer to the mark if he said "hundreds of
millions" instead of "millions." If he wanted to provide a little
historical perspective, he could have reminded readers that China once
before had a "vast floating population of migrants who competed for
bottom-rung jobs." For decades leading up to the 1949 Revolution,
China was a living hell for hundreds of millions of dispossessed.

Ignorance:
Despite all the evidence available to them from the last decade—that
dismantled Communist economies who embrace capitalism are far more
likely to join the ugly capitalist periphery instead of the alluring
capitalist center—Chinese reformers are apparently far more
knowledgeable about the devil they know, command planning, than the
devil who was banished from China 50 years ago and seems to have been
forgotten, capitalist imperialism. They know the frustrations of a
system where "workers pretend to work and the government pretends to
pay them" all too well. But they have yet to meet a 21st century
global hedge fund. And apparently until they do, they are putty in the
hands of the sirens of neoliberalism and the mainstream economics text
books their universities have switched over to.



Who
Are the Winners in China?

The
nimble among the Party elite will get far richer than they have ever
been before, and have an easier time passing their wealth and power onto
their children than under Communism. The better educated and the well
established in mega cities like Shanghai will do well. As long as they
are careful not to challenge the political monopoly of the Communist
Party, Chinese ex-patriots will be welcomed home to an economy starved
for their skills and capital. Managers of the enterprises that soar will
also do well.

But
managers of the enterprises that sink will not do well. More
importantly, displaced peasants and workers—those who foreswore
freedom and accepted grinding poverty in exchange for the "iron rice
bowl"—will suffer. Others who find work for the profitable
enterprises that survive the great shakedown are unlikely to enjoy
rising real wages to go along with their rising productivity. High
levels of unemployment, a ban on independent unions, and a highly
repressive government apparatus devoted to achieving high levels of
investment so China can fulfill its destiny to become an economic super
power will conspire to keep the wages of the fortunate who find work
from rising for decades if all goes according to plan.

I shudder
to offer a final tally of winners and losers. Instead I prefer to hope
that all will not go according to plan. Sometimes "Just Do It!"
proves to be a poor plan. Hopefully, in this case, the Chinese Communist
Party leadership has greatly underestimated the powers of perception and
resourcefulness of the Chinese people. I know they have grossly
underestimated the maelstrom of "creative destruction" capitalism is
about to wreak on China.