CHINA'S WTO MEMBERSHIP IN THE SECOND YEAR

TESTIMONY OF

ROBERT A. KAPP

PRESIDENT

THE US-CHINA BUSINESS COUNCIL

TO THE TRADE POLICY STAFF COMMITTEE

OCTOBER 3, 2003

Members of the TPSC, ladies and gentlemen:

Thank you for convening this meeting to discuss China's progress in implementation of its WTO accession commitments during the second year of its membership in the organization.

I will keep my remarks very brief, referring members of the Committee to a longer written document, prepared by the exceptionally capable staff of the US-China Business Council led by Director of Business Advisory Services Karen M. Sutter. The written submission draws on results of a poll of the Council's members. While the total number of respondents to our questionnaire was not enormous, we feel that a very substantial portion of the corporate membership most directly affected by specific WTO accession issues did respond, and that the conclusions we have drawn from their comments merit serious consideration.

Last year, as we approached the end of the first year of China's WTO membership, I noted that the "glass was half full," rather than "half empty," primarily because China had made massive efforts to adjust its laws to make them compatible with WTO requirements and to train large numbers of relevant government officials in the concepts and practices implied by WTO membership, and because China had acted effectively to reduce its tariffs as required by its WTO accession commitments. I also noted that a number of "Year One" commitments had not been fully implemented, and commented that for this and other reasons, "Year Two" would prove to be a critical point in the multi-year process of full implementation laid out by those WTO accession agreements.

Before turning briefly to report on what the Council perceives as Year Two winds down, let me offer a couple of contextual comments.

First, it is important to note that overall US-China business has grown extremely rapidly in 2003, and that China, whose economy has been advancing (in spite of the SARS crisis) at a torrid pace, is both importing from and exporting to the world in massively increased volumes. Chinese government statistics show Chinese exports in the first quarter of 2003 up by 33 percent over the same period in the preceding year, and Chinese global imports up by a remarkable 52%. The same statistical source shows that China's global trade balance the first quarter of 2003 was negative by a billion dollars, as compared with a positive balance of over seven billion dollars a year ago; full-year 2002 balance was positive by $30 billion, and it will be interesting to see how full-year 2003 shapes up.

Chinese figures show the United States ranked second (to Japan) among China's trade partners, with first quarter 2003 total trade up 35.8 percent over the preceding year. American official figures, which are generally understood to understate US export totals to China (while Chinese figures are regarded as overstating similar categories) nonetheless show US exports in the first quarter of 2003 up 38% over the same period in 2002, and US imports from China (generally regarded as overstated in US statistics) rising by more than 31%. Such export categories as iron and steel (up 81.4% year-on-year), oil seeds (up 181% YOY), organic chemicals (up 132%), and medical equipment (up nearly 45%) are indicators of a very strong American export performance with China.

In short, in a period of sluggish economic performance throughout much of the world and certainly in the United States, US trade with China has expanded very robustly over the past year. The driver of this expansion has been the high rate of Chinese economic growth. More vigorous US economic expansion would stimulate further growth in bilateral trade, as it would US bilateral trade with many partners, though much of that growth could be expected to show up on the import side. Analysts of China's economy, both within and outside the PRC, have begun to express concerns about economic overheating in China, characterized by a huge burst of bank lending and the resumption of nearly uncontrolled expansion in the real estate and construction sector -- and accompanied by a massive inflow from abroad of money, presumably in expectation either of RMB revaluation or other forms of higher return than are perceived to be available overseas. Whether this amounts to a serious threat to the continuation of China's rapid growth, whose perpetuation at some level is still considered a critical prerequisite to the management of China's massive problems of economic restructuring and both agricultural and urban unemployment, remains to be seen, but a significant drop in growth rates would very likely have negative effects on US exports to the PRC.

Against this background of rapidly expanding bilateral trade, the Council's evaluation of China's WTO record in Year Two is nonetheless, and regrettably, very qualified.

I would say that there are signs that China and the US -- indeed, China and many of its fellow WTO members -- may be falling into a pattern of engagement over WTO that football fans would call a "yard by yard ground game," in which progress toward decisive implementation of critically important WTO principles and specific sectoral commitments pulses unevenly up and down the field, perhaps in a generally favorable direction, but laboriously, with setbacks, diversions, "Time Out" periods, "fumbles," and only very rarely a "long ball" play that scores quick, major gains in the move toward the clearly defined goal lines.

The most worrisome aspect of this apparent loss of clear momentum in regard to fulfillment of China's WTO obligations is that, in both countries, the possibility of being "nibbled to death" by reciprocally destructive actions aimed at protecting one or another economic interest or sector could take on a momentum of its own that gradually undermined each country's confidence in the good will of the other and thus became a self-fulfilling negative trend. Certainly, as we know so well, a minor forest fire of specific and generalized complaints about China's economic and trade demeanor as it affects the United States continues to flare in this country. While the US-China Business Council believes that the Administration has generally handled this sensitivity in a judicious and constructive manner, we remain concerned that failure to progress decisively on key WTO commitments in China could itself become the product of tit-for-tat frictions between the United States and China in a period of high political sensitivity, and that a clear sense of "first cause" will be replaced by a downward spiral of reciprocal irritation and blame.

The Council's written submission, however, focuses on the subject at hand, China's overall record on WTO implementation in Year Two. It finds that on tariff reduction, China has acted effectively. To treat this quickly is not to diminish its significance; WTO-defined tariff reductions are unquestionably a factor in the vigorous expansion of US exports to China. but we need not spend a long time discussing it.

On other key areas, the record is less laudable. From our corporate respondents, we learn that transparency -- the ability of affected foreign economic actors to view and understand the processes by which laws and regulations affecting them are developed and enacted -- remains a very serious problem, albeit of uneven gravity across the spectrum of Chinese government ministries and other agencies. The perception that structural problems within the Chinese government, and in particular the difficulty in determining which agencies have decisive influence over which other agencies in advancing the WTO-mandated agenda of policy and regulatory liberalization, continue to hobble China's WTO progress has become, if anything, more entrenched among US corporate actors in the PRC over the past year. (A charitable view of this, perhaps not held by many of our respondents, would be that the installation of a new national government administration in the spring, at exactly the moment when the SARS epidemic struck with crippling effect in Beijing, might have contributed to this apparent weakening of government resolve on key WTO implementation issues, but there is simply no way of measuring this, and in the end the terms of the WTO commitments are clear).

In a broad sense, perhaps the greatest concern we see is that regulatory measures adopted in apparent response to WTO requirements create new and daunting obstacles to the actual expansion of international business opportunities in the PRC. Our respondents consider this to be a clear indication of out-and-out protectionism on the part of government bureaucracies defending their bureaucratic prerogatives and the economic interests of their domestic constituencies -- a phenomenon hardly unknown elsewhere in the world, but one which takes on a particularly odiferous quality when absolutely crucial WTO commitments seem thus to be derailed or delayed. It is this regrettably recurrent phenomenon of regulatory diversion that constitutes, overall, the most irritating and worrisome aspect of China's WTO progress in Year Two. The inability to resolve, cleanly and decisively, a series of issues that have festered for too long, now, is contributing to a sense of cynicism among those firms, in those sectors, directly affected. Our written submission goes into some detail on this, and we welcome discussion with our respected counterparts in the US Government.

Members of the TPSC, to the surprise of many observers, US-China relations overall have, in the past two years, turned in a very favorable direction. The United States and China are apparently working well together, publicly and privately, on a variety of issues of the greatest sensitivity and the greatest significance for the security of the United States and the world. The range of bilateral cooperation efforts at the government to government level has increased. Contacts and reciprocal visits at the highest levels of our two governments have become almost routine, in ways that can only benefit the profoundly important cause of mutual understanding on complex and difficult issues in world affairs. The US-China relationship over the past two years has truly become "normal," after years of acute and highly volatile friction and conflict. Against that backdrop, the continued expansion of our bilateral trade and economic relationship is both to be expected and a logical contributor to a "virtuous circle" of continually improving relations.

The positive contribution of expanding trade and economic relations to a more stable and mutually beneficial overall relationship between the US and China, however, is not automatic. The rapid emergence of China on the global economic scene as a trading power and a manufacturing center is, in fact, a historically important development that poses dilemmas both for the world's economies unaccustomed to the new Chinese position and, indeed, for China itself. Complex and difficult social and economic adjustments are in train, not least in China, whose commitment to integration in the global economic mainstream has its own potentially dire domestic consequences.

We are, in other words, in a period of considerable delicacy and sensitivity. The US-China Business Council believes that the value of the World Trade Organization lies primordially in its ability to mediate and stabilize relations among widely disparate economies and societies, by defining commonly agreed-to standards of economic and commercial behavior for all members' governments to follow and by defining impartial, multilateral formats for the resolution of otherwise unresolvable disputes.

For this system -- which is in everyone's interest -- to work effectively, it must be embraced decisively. We don't pretend, like Voltaire's Candide, that "Everything is for the best in this best of all possible worlds;" nations have their interests to defend both bilaterally and in multilateral fora. But the US-China Business Council, in its very qualified assessment of China's progress toward full implementation of its WTO commitments during the second year of its membership, is concerned that the defense of national, local and sectoral economic interests, should it continue to erode China's ability to realize its WTO obligations in a manner that its trading partners clearly acknowledge, will at the very least prevent China and the world from grasping the full benefits of China's entry into the WTO. It is absolutely critical that China's WTO track record not become the starting point for a progressive degeneration of economic and commercial relations between the US and China, to say nothing of a more widespread erosion of trust and cooperation. While there is plenty of room for mutual recrimination in such a darkening scenario, the Council believes that the content of China's WTO accession agreements is, in fact, generally very clear and very specific, and that China's progress toward fulfillment of those agreements is China's responsibility -- both to accomplish, and to show clearly to the world trade community. We thank our counterparts in the Office of the US Trade Representative, the Department of Commerce, and other agencies of our government for their extensive efforts to ensure amicable and full compliance on the part of the People's Republic of China, while resisting inevitable pressures to protect highly particularistic interests within our own country. We predict, however, that your work is far from finished. Thank you again for the opportunity to introduce our Council's written findings today.