June 15, 2010    Volume 17, No. 10

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China's Entry Into The WTO 10 Years Later Is Not What President Clinton Promised

By Richard A. McCormack richard@manufacturingnews.com

It has been 10 years since the U.S. Congress and President Bill Clinton paved the way for China to enter the World Trade Organization (WTO). Most all of the predictions from those pushing the deal at the time have proven to be wrong, according to an analysis done by Robert Lighthizer, former deputy United States Trade Representative during the Reagan administration and head of the international trade department of the Washington firm of Skadden, Arps, Slate, Meagher & From LLP.

Bill Clinton, the country's most ardent booster of opening trade with China, looks especially imprudent 10 years later. During a press conference on March 29, 2000, Clinton said that granting China permanent normal trade relations (PNTR), which allowed China to gain entry into the WTO, would be a great deal for America. "We do nothing," Clinton said. "They have to lower tariffs. They open up telecommunications for investment. They allow us to sell cars made in America in China at much lower tariffs. They allow us to put our own distributorships there. They allow us to put our own parts there. We don't have to transfer technology or do joint manufacturing in China any more. This a hundred-to-nothing deal for America when it comes to the economic consequences."

It didn't quite work out that way. Since 2000, the trade deficit with China has surged by 173 percent, from $83 billion in 2000 to $227 billion in 2009. The United States has lost more than one-third of all its manufacturing jobs -- 5.6 million; U.S. wages have declined; the country has suffered a financial meltdown; it has spent $14 trillion on economic stimulus, only to experience the highest unemployment rates in generations and annual federal budget deficits of more than $1 trillion. These trends are not "likely to end," says Lighthizer.

Granting PNTR to China would "increase U.S. jobs and reduce our trade deficit," Clinton promised. There are fewer private sector jobs in May 2010 (107.6 million) than in May 2000 (110.7 million). The U.S. trade deficit in goods skyrocketed to more than $800 billion in 2008, and is presently increasing at a rate that is considered to be unsustainable.

Clinton said the deal with China would "greatly increase the opportunities to open professional services such as law firms, management consulting, accountants and environmental services." Few such opportunities exist for those types of companies. Presidential candidate George W. Bush agreed, saying that PNTR would "narrow our trade deficit with China."

Others were even more adamant in their arguments about the necessity for Congress to pass PNTR with China, Lighthizer told the U.S.-China Economic and Security Review Commission on June 9. Robert Kapp, president of the U.S.-China Business Council, said the agreement would open the Chinese market to U.S. exports and would be "the biggest single step we can take to reduce America's growing trade deficit with China. With American tariffs near zero and non-tariff barriers few and far between, we're not talking about a 'gift' for China in PNTR, we're talking about bringing home the bacon."

Another pro-China business group, the Business Coalition for U.S.-China Trade, said that in return for making concessions to joining the WTO, "China's 'reward' from the U.S. is....ZERO, ZIP, NOTHING, NADA. That's right. China gets no increased access to U.S. markets, no cuts in U.S. tariffs, no special removal of U.S. import restrictions. That's because our market is already open to Chinese imports."

The Cato Institute was equally as strident in support, stating: "It is primarily U.S. exporters who will benefit." Doug Bandow of the Cato Institute added that the "silliest argument against PNTR is that Chinese imports would overwhelm U.S. industry. In fact, American workers are far more productive than their Chinese counterparts. Moreover, Beijing's manufacturing exports to the United States remain small, about half the level of those from Mexico. PNTR would create far more export opportunities for American than Chinese concerns."

Clinton, Lighthizer noted, assured the American public that there were strong measures in the agreement "to strengthen guarantees of fair trade and to address practices that distort trade and investment." That might have been the case, but few of those measures have been pursued by the federal government.

Clinton's U.S. Trade Representative Charlene Barshefsky chimed in. She said that if the United States "turned down a set of one-way concessions made by China, we will make a very dark statement about our ability to develop a stable and mutually beneficial relationship with the world's largest country....China's accession to the WTO is a clear win. China's trade concessions are one-way and enforceable."

Other Clinton administration officials were involved in the sales campaign. Clinton's National Security Advisor Sandy Berger said that China's accession to the WTO would assure that it would "play by the rules of the international system."

Kenneth Lieberthal, now at the Brookings Institute and formerly a staff member of Clinton's National Security Council, told the PBS Newshour in 2000 that the U.S. trade deficit with China "will not grow as much as it would have grown without this agreement and, over time, clearly it will shrink with this agreement."

USCC Commissioner Pat Mulloy noted at the June 9 hearing that one person had correctly analyzed the deal: Joseph Quinlan, an economist with Morgan Stanley. Quoted in the Wall Street Journal, Quinlan said: "While the debate in Washington focused mainly on the probable lift for U.S. exports to China, many U.S. multinationals have something different in mind. The deal is about investment, not exports."

While the American people may have been oversold by Clinton and his appointees, the Chinese knew what was going on. The day that China entered the WTO on December 11, 2001, an article in the People's Daily said the deal would "actively spur foreign capital to flow into high and new technological industries and encourage transnational corporations to come to China to set up R&D centers and regional headquarters."

The United States made the mistake of treating China as if it was another democracy, says Lighthizer. The world trading system created by the General Agreement on Tariffs and Trade in 1947 excluded countries like China for good reason, Lighthizer notes. Members of GATT "agreed on basic principles of democracy and capitalism," and they excluded communist countries "because they thought such countries would sabotage GATT's effectiveness. Indeed, the experience of the Cold War, in which international relations became polarized between democratic and capitalistic nations on the one hand, and authoritarian and communist nations, on the other -- solidified GATT as a 'pillar of the free world.' The United States and its allies generally extended GATT membership to countries that they were intent on anchoring to the alliance of democratic and capitalistic nations."

China still does not fit that description. "It is clear that allowing a huge non-market economy like China -- a country that practices neither democracy nor true market capitalism -- to enter the WTO had profound consequences for that organization."

U.S. proponents of PNTR for China "misjudged China," says Lighthizer. "They assumed that acceding to the WTO would cause China to become more and more Western in its behavior."

Nothing of the sort happened. China continues to believe that the WTO "is a vehicle to do what they want to do and get access to other people's markets. They don't intend to change the essence" of their engagement.

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