Joseph J. Borich
Washington State China Relations Council
April 30, 1999.

Although Chinese Premier Zhu Rongji's trip to the U.S. in mid-April will most likely be remembered for the breath-taking offer he put on the table to join the WTO, his visit had a broader and even more important goal: to reverse the recent slide in Sino-U.S. relations. Having borne nearly eight months of U.S. carping on human rights, Tibet, Taiwan, theft of nuclear weapons designs, donations to the Democratic National Committee and a burgeoning trade deficit, China sent its ablest statesman to deliver a straightforward message:

--The fate of China is inextricably linked to the fate of the U.S., and China's highest foreign policy priority is a strong, mutually beneficial relationship with the U.S.

--In the past 20-odd years, China has changed more than it has ever changed in over 5,000 years of recorded history. Its work is not complete, but its goal is, and will remain, becoming a partner among the world's developed nations - economically, politically and socially. Stop attacking, and start acknowledging what we have already accomplished; and give us help with what still remains to be done.

--We are not your enemy, and will not choose to become one. We have 20-30 deliverable nuclear warheads to your 6,000, and what resources we have must be put at the disposal of developing our economy for the next century and more, and not toward developing a world-challenging, strategic nuclear arsenal.

--Our trade is indeed unbalanced, though the degree to which this is so is a matter for debate. So is the significance of this imbalance. Your own experts estimate that the withdrawal of Normal Trade Relations for China would amount to a $300 per year "tax" on every household in the U.S. in the form of higher consumer prices.

--The answer to the trade problem is not to restrict Chinese exports to the U.S. (which would hurt American consumers), but rather to open China's market to American exporters and investors. This we are prepared to do, through accession to the WTO.

--By offering this WTO package, we acknowledge we must open China's economy fully to the rest of the world, and we believe that despite the current slump in our own economy and Asia's generally, we have advanced enough to bear the pain. We also acknowledge that we will face short-term increases in unemployment and a higher risk of social and political instability.

--The impact of WTO accession will be to open China's markets; it will not boost our access to the U.S. market, which is already quite open to us.

Longer-term, we believe that opening China's market is vital to China's development over the next century. Zhu took his message across the U.S., telling listeners in Los Angeles, DC, Denver, Chicago, New York and Boston what they had hoped to hear about China's long-term intentions, and, to underscore the point, tabled a package of WTO pledges that go way beyond lowering tariffs. Stripped to its essentials, Zhu's WTO offering posits an economy, legal structure and government practices that would, with few exceptions, seamlessly fit the WTO definition of "developed economy" by 2005. In other words, China would by 2005 be playing essentially by the same rules as the world's leading economies. Zhu's WTO package represents another strategic shift in China's economic and political institutions at least as sweeping as Deng Xiaoping's "reform and opening" policy announced in 1978.


In general, China has offered the following concessions to the U.S. in exchange for accession to the WTO:

--Full market access to U.S. firms to distribute their products throughout China;

--Tariff reductions immediately upon accession, with further phase-ins over five years to levels below most U.S. trading partners;

--China would be "bound" to all tariff reductions - tariffs could be further lowered, but not subsequently raised;

--Elimination of quotas;

--Participation in the three multilateral agreements reached since the Uruguay Round: the Information Technology Agreement; the Agreement on Basic Telecommunications; and the Financial Services Agreement; and

--Commitments to open up service sectors, including distribution, value-added telecommunications, insurance, computer and business services, environmental services, legal and accounting services, and others.

In specific terms, China's concessions would drastically change our economic relationship in three broad areas:


Taken as a whole, China's offer would remove virtually all non-tariff barriers to agricultural trade and reduce tariffs to levels below those of most U.S. trading partners. Overall, China would reduce its average tariff for agricultural products to 17 percent, with an even lower average rate - 14.5 percent - for U.S. priority products. All tariff cuts would be implemented by 2004 and would be bound. Some examples of interest to Washingtonians: apples would be reduced from the present 30 percent to 10 percent in 2004; citrus, from 40 percent to 12 percent; grapes, from 40 percent to 13 percent; wine, from 65 percent to 20 percent; cheese, from 50 percent to 12 percent; and poultry, from 20 percent to 10 percent.

China also offered to adopt a tariff rate quota system (TRQ) for particularly sensitive bulk agricultural commodities. Under this system, China would impose minimum tariffs - one to three percent - on imports up to the quota level, and charge a much higher tariff on imports above that level. The TRQs would be substantially higher on accession than current quota levels, and provide for future growth. Private traders would be guaranteed a portion of the annual quota, and any unused portion allocated to state owned corporations would be re-allocated to the private sector. For wheat, the TRQ on accession would be 7.3 million metric tons, rising to 9.3 mmt (China's present quota is around 2 mmt).

China also announced a decision - not tied to WTO accession - that it would accept prevailing scientific standards to settle sanitary and phytosanitary disputes. What this means is that the ban on Northwest wheat that was imposed over concerns about TCK wheat smut is lifted. It also means that China will accept USDA certification for safety on U.S. meat exports and open its markets to U.S. citrus fruit.


On tariffs, China has offered to reduce average rates for industrial products from 24.6 percent (1997), to 9.4 percent. For U.S. priority products, the rate would fall even lower - to 7.1 percent. Two-thirds of these tariff reductions would be implemented by 2003; the balance, with a few exceptions, would be reached by 2005. Of particular interest to Washington State:

--China would implement the Information Technology Agreement and reduce tariffs from the current average of 13.3 percent to zero for semiconductors, computers, computer equipment, telecommunications equipment, and other telecommunications technology products. Most of these tariff eliminations would be reached by 2003; the balance, by 2005.

--In the auto sector, China would reduce tariffs from the current 80-100 percent to 25 percent in 2005, with cuts phased equally in each intervening year. Auto parts tariffs would fall to an average of 10 percent.

--China offered to implement APEC sectoral liberalizations when the WTO accepts these sectors for implementation. This would eliminate tariffs on forest products, environmental goods and services, energy and energy equipment, fish, medical equipment and scientific equipment, among others.

--Until sectoral liberalizations are implemented, China would reduce tariffs for wood and paper products from current levels of 12-18 percent for wood, and 15-25 percent for paper, down to 5-7.5 percent generally.

--China also offered that it would reduce from over 20 percent to 10 percent the tariff on fish products important to the U.S.

As trade restricting as high tariffs are, quotas are worse. If/when China accedes to the WTO, China promised it would completely eliminate existing quotas for top U.S. priority industrial products upon accession and phase out most remaining quotas by 2002. All industrial product quotas would be eliminated by 2005. Auto quotas will be phased out by 2005; in the interim, the base level would be set at $6 billion, with an annual growth rate of 15 percent until elimination in 2005.


Although USTR insists that further work must be done in banking, securities and audio-visual, China's offers to date on services are compatible to those of most WTO parties. China will "grandfather" all existing market access and marketing agreements in all service sectors. This will protect existing American distribution services, financial services, legal services and other service providers in China.

Beyond those agreements already reached, China would agree to allow American firms to import and export products without Chinese middlemen, and to market, wholesale, retail, repair and transport their products whether produced in China or imported. All current restrictions on foreign distribution in China would be eliminated in three years.

China's offer on internal distribution and auxiliary services encompasses: express delivery services; rental and leasing; air courier; freight forwarding; storage and warehousing; advertising; technical testing and analysis; and packing services. All restrictions will be phased out in 3-4 years, at which time U.S. suppliers of the above-named services would be able to set up wholly owned subsidiaries.

In telecommunications, China has promised it would join the WTO's Basic Telecommunications Agreement. This would:

--Bind China to implement the pro-competitive regulatory principles embodied in the Agreement, including: cost-based pricing, interconnection rights, independent regulatory authority, technology-neutral scheduling; and, the phase-out of geographic restrictions for paging, value added and closed user groups (4 years); mobile and cellular phone service (5 years); and domestic wireless services (6 years).

--Open immediately on accession in all telecommunications services to China's key telecommunications corridor, Beijing-Shanghai-Guangzhou.In insurance, China has offered to allow foreign insurance companies to operate in each part of China and without artificial limitations on their activities or number of companies. Specifically, China has agreed in principle to:

--Embrace "prudential criteria" - to award licenses with no economic needs test or quantitative limits on the number of licenses issued;

--Permit foreign property and casualty firms to insure large-scale risks nationwide immediately upon accession, and would eliminate all geographic limitations for future licenses over five years, allowing access to the key cities of priority U.S. interest within 2-3 years.

--Expand the scope of activities for foreign insurers, including group, health and pension lines of insurance (which represent about 85 percent of total premiums) phased in over 5 years; and

--Allow majority ownership, remove onerous joint venture requirements on foreign life insurers, and phase out internal branching restrictions. Life insurers may choose their joint venture partners, can acquire 50 percent of ownership upon accession, and can move to 51 percent ownership after one year. For non-life and reinsurance, China would allow 51 percent ownership upon accession, and wholly owned subsidiaries within two years of accession.

In other services, China is offering broad concessions for legal, accountancy, taxation, management consultancy, architecture, urban planning, medical and dental, and computer related services. In all of these fields it will permit foreign majority control, except for practicing Chinese law. China would agree to apply national treatment in issuing CPA licenses and follow transparent procedures. Although distribution of sound recordings, movies, videos, books and magazines, as well as foreign construction, ownership and operation of cinemas remain under discussion, China has already agreed upon accession to allow:

--49 percent foreign participation for the distribution of video and sound recordings; and

--Foreign majority ownership in three years for the construction, renovation, ownership and operation of cinemas. China would also permit unrestricted access to the Chinese market for hotel operators, including the ability to set up 100 percent foreign ownership within 3 years, and with majority ownership permitted upon accession. For foreign travel operators, China would allow the full range of travel agency services, including access to government resorts as well as Beijing, Shanghai, Xian and Guangzhou.


In addition to a bilateral agreement, China must also conclude a Protocol and Working Party Report which would establish rights and obligations enforceable through WTO dispute settlement procedures. There already exists an agreement in principle on key provisions relating to antidumping and subsidies, protection against import surges, technology transfer requirements and offsets, as well as practices of state owned, and state invested enterprises. Still to be negotiated, according to the White House, is the duration of some of these provisions and import protection for textiles and steel. However, China has already agreed in principle, upon accession, to:

--Eliminate trade and foreign exchange balancing requirements;--Eliminate local content requirements;

--Refuse to enforce existing contracts requiring the above;

--Only impose and enforce laws and regulations relating to the transfer of technology or intellectual property if they are in accordance with WTO agreements on protection of intellectual property rights and trade-related investment measures. China has also agreed upon accession that it will not condition investment approvals, import licenses, or any other import approval process on performance requirements of any kind;

--Maintain current antidumping methodology (i.e., treating China as a non-market economy) in future antidumping cases. The duration of this provision remains under negotiation and may, in any case, violate WTO principles;

--State owned enterprises would: henceforth make purchases and sale based solely on commercial (market) considerations; provide U.S. firms with the opportunity to compete for sales and purchases on non-discriminatory terms; not classify purchases of goods and services as government procurement, and thus would be subject to WTO rules; and be subject to American trade laws under the WTO Agreement on Subsidies and Countervailing Measures.


With all of the above on the table, why did the President hesitate to conclude an agreement while Premier Zhu was visiting the U.S. in April? For one thing, although most of the points contained in Zhu's package had been under negotiation for some time, the final offer Zhu brought with him apparently was hastily drawn up and probably contained translation errors and points that generated disagreement about actual meaning. For another, there are still some areas - auto financing, audio-visual, and protection for U.S. textiles and steel among them - where the U.S. government feels that China has not offered enough.

But the most likely reason Clinton did not jump at Zhu's offer was that he wasn't prepared for it. Little work had been done to build constituencies among business, labor and agricultural groups, or within Congress, to support such an agreement and for the crucial granting of permanent Normal Trade Relations status for China. With the congressional mood running strongly "anti-China," the concern was that an agreement in April would be viewed as just another example of Clinton caving in to China, and that efforts to get permanent NTR through Congress would be doomed from the start. As word of the draft agreement's contents spread, however, American business let both the White House and Congress know that it wanted an agreement and it wanted China in the WTO. Before Zhu's return to Beijing, Clinton clarified his position, announcing he strongly supported China's entry to the WTO before the end of this year. Secretary of Commerce Daley, perhaps somewhat optimistically, said subsequently that an agreement would be reached before the end of June. In any event, USTR's top WTO negotiator, Robert Cassidy, was back in Beijing the day after Zhu's return to seek closure on the remaining differences. He was still there as of April 27, but had offered no comments on the progress or lack of it, of negotiations. Chinese negotiators would say only that the two sides were awaiting "further arrangements" and that both sides were making "pragmatic and earnest efforts."

Cassidy may find himself not only trying to close the remaining gap, but also keeping some of what China has already offered on the table. The expanse of Zhu's offer undoubtedly will generate stiff resistance among economic constituencies that will be most directly threatened by further opening of China's economy. The Clinton administration's decision to go public with China's offer - though tactically helpful in building support for it in the U.S. - has drawn an angry response from Beijing. A Foreign Ministry spokesman warned that "the things the U.S. side has (made public) haven't yet received Chinese agreement." Additional pressure to retreat from the generous offer made to the U.S. may come from the EU - which opened its own WTO negotiations with China in late April - and other WTO parties. The EU had warned earlier it would not accept a "sweetheart" deal for the U.S.

Finally, there is still the congressional hurdle to clear. Any agreement reached between China and the U.S. administration would be meaningless if it failed to provide permanent Normal Trade Relations status for China. That would require both houses of Congress to pass legislation modifying the Jackson-Vanik Amendment and releasing China from the annual extension of Normal Trade Relations status. Passage of such legislation will be problematic, especially in the House. Opposition will come from members of both parties who view permanent NTR as an undeserved "reward" for China, rather than the key for American businesses to the door of China's market. The task for NTR supporters will be to turn the debate away from rewarding or punishing China, and to what it is that America's economy stands to gain from the passage of permanent NTR legislation or lose if it fails to pass. Other opposition is likely to come from organized labor, which may try to sway Democrats to vote against permanent NTR (and by extension, China's accession to the WTO) as it did against NAFTA and "fast-track" trade legislation. It will require a powerful, concerted effort by the administration - and by President Clinton personally - to counter House opponents of China, and of free trade.

On the Senate side, the odds look better. While Majority Leader Trent Lott has stated he opposes permanent NTR, other senior Republican Senators - including Finance Committee Chairman William Roth - have come out strongly favoring permanent NTR and China's accession to the WTO. Both of Washington's Senators -Patty Murray and Slade Gorton - have expressed their support as well. Ultimately, though, it will be the strength of constituent support for the bilateral agreement and China's accession to the WTO that will likely determine the fate of permanent NTR. It would be an ironic twist - and one not likely to be missed by many constituents in next year's elections - if the last barrier to relatively unfettered access to China's market turned out to be not China's government, but our own.

This paper is posted  with the approval of the Washington State China Relations Council and for possible benefits of the readers. Please respect its copyright by the council and note that no endorsement is provided here. Any questions about this paper should be sent to the council.

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