JULY 2002 - REPORT TO CONGRESS OF THE U.S. - CHINA SECURITY REVIEW COMMISSION - THE NATIONAL SECURITY IMPLICATIONS OF THE ECONOMIC RELATIONSHIP BETWEEN THE UNITED STATES AND CHINA
Chapter 3 - China and the World Trade Organization
Key Findings
>
Introduction
Both Republican and Democratic Administrations strongly supported China’s accession to the WTO, arguing that integrating China into the world trading system would economically enrich both countries and, over the long-term, would stimulate development of the "rule of law" and democracy in China and temper regional hostilities in Asia. The writings and public statements of officials in China suggest that the Chinese leadership had significantly different long-term objectives for joining the WTO. China’s leaders sought WTO accession as a means to foster continued economic growth, with the goal of both enhancing China’s economic wealth and, by so doing, maintaining the Chinese Communist Party’s legitimacy and monopoly on power.
The long-term consequences of China’s accession to the WTO will not be known for several decades, but clearly the United States has much at stake in the outcome. Accordingly, it is essential that U.S. policymakers carefully assess post-accession developments in China as they unfold, and adequately prepare for the full range of potential scenarios. The U.S. Government must make it a priority to provide bilateral or multilateral support to encourage WTO compliance and broader economic and political liberalization in China, while at the same time preparing for situations where China’s actions may be inimical to U.S. interests.
The U.S. and Chinese Leadership’s Goals for China’s WTO Accession
U.S. Goals
The final stages of China’s accession to the WTO were negotiated under the Clinton and present Bush Administrations, both of which strongly supported bringing China into the world trading system. During the run-up to Congress’ consideration of legislation in 2000 to grant China Permanent Normal Trade Relations (PNTR), a necessary precursor of U.S. support for China’s WTO accession, President Clinton highlighted both PNTR’s trade benefits and its importance to U.S. national security. He noted, "even though for me the economic choice is clear . . . far, far more important to me are the moral and national security arguments."1 President Clinton explained his arguments as follows (bullets added):
President Clinton’s National Security Advisor, Samuel Berger, reinforced the national security argument for supporting China’s WTO accession:
[T]his debate should not be defined as economic rights versus human rights — or economic security versus national security. That is a trap, a false choice. This agreement is just as vital "if not more vital" to our national security as it is to our economic security. It is far more likely to move China in the right direction — not the wrong direction — on all of our other concerns. We can’t duck these issues by saying we’re only interested in talking about economics. If we are going to win this debate, we must be persuasive that it promotes both growth and jobs in America and progress toward change in China.3
The policy has been consistent under the current Bush Administration. Following the WTO’s decision to admit China at its meeting last November, President Bush echoed his predecessor in lauding the non-economic benefits of China’s accession:
I am confident that China’s entry into the WTO will bring other benefits to China beyond the expected economic benefits. WTO membership, for example, will require China to strengthen the rule of law and introduce certain civil reforms, such as the publication of rules. In the long run, an open, rules-based Chinese economy will be an important underpinning for Chinese democratic reform.4
As these public statements demonstrate, the U.S. Government’s support for China’s accession to the WTO was premised not only on achieving immediate commercial benefits for the United States but also on achieving long-term economic and political change in China. As articulated in these statements, not only would China’s WTO accession reap economic benefits for U.S. exporters in terms of market access, but also, equally important, it would lead to fundamental civil and political reforms inside China.
The key U.S. goals for supporting China’s accession can be summarized as follows:
Market Access - The most concrete economic goal U.S. policymakers touted in support of China’s accession to the WTO is the market access benefits that would accrue to U.S. firms. Despite the enormous and growing volume of Chinese goods flowing into the U.S. market, U.S. exports have largely been restricted from China’s market through a variety of tariff and non-tariff measures. Pursuant to its terms of accession, China has agreed to significantly lower tariffs and other barriers to trade, raising the prospects of greatly enhanced U.S. exports to this market.
Economic Reform - China has made remarkable progress in modernizing its economy in the past two decades; but still has a long road ahead to develop a mature market economy. China’s accession to the WTO is viewed by many U.S. policymakers as providing the best opportunity for China to move forward in reforming its economy, by forcing it to open up to foreign competition and investment and by subjecting it to the strictures of the WTO. Supporters of China’s accession feared that China’s economic development would stall in the absence of these outside influences.
Political and Civil Reform - A belief that political liberalization and development of the "rule of law" will follow China’s economic liberalization as a result of joining the WTO underpinned U.S. support for China’s membership. The hope is that WTO membership will force China to open up its economy to foreign business and develop new legal institutions and regimes to enforce its WTO commitments, and that these developments will foster broader political and civil reforms.
Regional Stability - With both China and Taiwan joining the WTO, there is optimism that this development will improve cross-strait relations by increasing economic linkages between the two and providing a forum for dialogue between Chinese and Taiwan officials. There is also the hope that it will promote peaceful relations between China and its Asian neighbors as these nations become more economically integrated and thereby vested in avoiding hostilities.
China’s WTO accession was not uniformly supported within the U.S. Government.5 Nonetheless, the statements of President Clinton, President Bush and other Administration officials represent the prevailing rationales and goals that were provided at the highest levels of the U.S. Government for supporting China’s WTO accession.
These goals — political and civil reform, market access, economic reform, and regional stability — are key issues discussed in more detailed in other sections of this Report. These goals will serve as important benchmarks that the Commission will use to assess progress in the U.S.-China relationship.
Chinese Leadership’s Goals
The Chinese leadership made economic reform and WTO accession a top national priority and persisted in its negotiations to join the trade organization for more than 15 years. Underpinning the Chinese leaders’ effort has been a belief that greater economic integration and the reforms it would necessitate are essential to China’s continued growth and prosperity. Despite apprehensions of U.S. motives and of opening the doors to foreign competition, China’s leaders appear to have supported accession to the WTO because of their belief that China’s ability to assume the status of a preeminent world power depends on further integration into the global economic system.
Long Yongtu, China’s chief trade negotiator for its WTO agreement, cited the following advantages of WTO membership in a presentation to CCP officials in January 1999:
On December 11, 2001, the day China formally entered the WTO, The People’s Daily, the Party’s official news outlet, discussed China’s goals as a WTO member (bullets added):
In sum, the Chinese leadership views WTO membership as a means to continue economic growth and enhance China’s wealth and international standing through the following:
Economic Reform - Despite a growing private sector, China’s economy is still dominated by state-owned enterprises (SOEs), many of which have been financially unviable for years. China’s leaders embraced WTO accession as a means for imposing outside pressure on the SOEs, through increased foreign competition, to undertake necessary reforms.
Attraction of Foreign Investment, Capital, and Technology - Chinese leaders see WTO membership as a means for attracting the foreign investment, capital and advanced technology necessary for continued economic progress. China’s economic growth over the past two decades has been fueled by foreign direct investment (FDI) and such investment will be critical to its future growth as well. The Chinese leadership in particular is seeking FDI in the high-tech sector, since investment in that sector often is accompanied by transfers of technology and know-how. WTO accession is expected to result in a large influx of FDI into China, with some investment banks predicting that FDI could rise from current annual levels of $40-45 billion to $100 billion in the near term. Although China has an exceptionally high rate of savings, and a domestic stock market that has grown dramatically in terms of capitalization over the past decade, it likely will need to tap foreign capital in order to meet its growing capital needs.
Expanding/Maintaining Export Markets - Chinese officials view WTO membership as a means to expand, or at least maintain, their vital export markets. While China’s trading partners have focused on China’s market opening concessions, China too is looking at its trading partners to lower barriers, or to not raise new barriers, to its products. Given the burgeoning size of China’s trade surplus with the United States, it is likely that Chinese officials sought WTO membership as a means to prevent the U.S. Government from reacting to the growing trade deficit with new bilateral restrictions on its products, preferring instead to have disputes handled in the more neutral WTO dispute resolution process. As Long Yongtu’s statement indicates, China views its entry into WTO as an opportunity to counter U.S. unilateral trade actions against China, by subjecting U.S.-China trade to the multilateral rules and processes of the WTO.
Influencing the "Rules of the Road" - WTO membership confers on China the opportunity to help develop and shape the rules governing the international trading system. With China now the world’s seventh largest trading nation, it has a significant stake in the outcome of these rules, and now will be able to play an active role in their development.
Prestige/Legitimacy - Becoming a member of the WTO is another key component in China’s efforts to gain international prestige and legitimacy. China’s absence from the most important multilateral organization governing international trade was likely viewed as a loss of face for one of the world’s most important trading nations. Just as awarding the Olympics to Beijing for 2008 has elevated its international standing, so too does its WTO membership.
China’s Economy as it Enters the WTO
The future direction of the Chinese economy following its entry into the WTO — whether it is marked by continued growth, stagnation or collapse — will have a direct impact on U.S. national security. Consequently, understanding and analyzing the Chinese economy has been, and will continue to be, an important component of the Commission’s efforts.
Despite the impressive performance of the Chinese economy over the past two decades, serious structural and fiscal challenges remain. Beijing must overcome these challenges to continue its rapid economic progress. As noted above, China’s entry into the WTO was motivated in part by a belief that outside pressures are needed to achieve economic reform and continued economic growth.
The Commission received testimony and briefings from economists and other experts on the Chinese economy about China’s economic prospects over the medium or long-term. There were strong differences of opinion among these observers.
Experts who foresee China’s continued economic ascendency emphasize the many successful reforms that have been implemented to date, such as:
These observers tend to believe that China’s WTO membership will positively influence its economy. They argue that the strictures of the WTO will force China to undertake continued market-oriented reforms and to further open up its economy to trade and investment. Dr. William Overholt, Senior Fellow at the Harvard University Asia Center, told the Commission that China has been more aggressive than its Asian neighbors in opening up its economy and tackling some of its most significant structural problems:
China, although it has not been commented on much in the press, has gone far beyond most of its capitalist neighbors in opening its economy. Its trade to GDP ratio is now three times that of Japan. It is more welcoming of foreign investment than anybody else in the Third World — I’m talking in terms of institutional structures and rules — than anybody except Hong Kong, Taiwan, and Singapore.8
Others in this camp predict that China will continue its rapid economic expansion following WTO accession and may in the foreseeable future become the world’s second largest trading economy. Nicholas Lardy of the Brookings Institution testified:
[W]ithin five years or so, they [China] could easily surpass countries like Canada, France, and the UK and became the fourth-largest trading country within the world; within a decade, they might surpass Germany and Japan and be the second-largest trading economy in the world. It is within the realm of possibility given the very large role that foreign firms in China are already playing in generating exports and the additional liberalization that is coming with their WTO obligations.9
Those who believe that China’s impressive growth over the past two decades rests on an unstable foundation and that the economy is heading for stagnation or collapse emphasize problems such as:
This group believes WTO membership will exacerbate many of China’s underlying economic and social problems as domestic firms are subject to increased foreign competition and the norms of the international trading regime.
The Commission heard dramatic testimony on the precarious state of the Chinese economy from Gordon Chang, an American attorney who practiced law in China for more than twenty years and wrote The Coming Collapse of China:
In the WTO era, the state-owned enterprises, which are the pride of Chinese socialism, will just not be prepared for the enhanced competition that accession will bring. Beijing has essentially deferred structural reform of the SOEs. There has been some window dressing. The SOEs look more profitable, but they are not more competitive. Some analysts say that in the years following accession, only a few of the approximately 1,100 Chinese companies that are listed on Chinese stock exchanges will survive. I don’t know if the shake-out will be that horrendous, but certainly, there will be a change. With state-owned banks, the story is similar. They have gone through two major recapitalizations, one in 1998 and the other in 1999 and 2000. Yet even after the recapitalizations, they still are insolvent and they’re not prepared for accession.10
China’s Real Economic Growth
One overarching problem facing all observers of the Chinese economy, and a problem that constrains the ability of U.S. policymakers to accurately assess the situation, is the general unreliability of official Chinese economic statistics. Perhaps the most significant example is China’s pronouncements of its official economic growth rates. While official statistics indicate annual GDP growth averaging over 9 percent since 1978, there is a general consensus among economists that have studied China that the actual rates are likely several percentage points less than the announced rates, with some economists concluding that China may in fact have experienced negative growth in recent years.
In particular, the Commission notes the work of Professor Thomas Rawski, an expert on the Chinese economy from the University of Pittsburgh, who briefed the Commission on his assessment of China’s real growth rate for the period 1997-2001. Professor Rawski argues that China’s actual growth rate during this period is likely in the range of 2 to 4 percent annually at best (with corresponding low-end estimates ranging from —2 to 3 percent) given the country’s negative growth in energy consumption, modest employment growth, and falling consumer prices.11
A similar sentiment was expressed by the brokerage house Credit Lyonnais in a January 2002 report that concluded that "the data that show China as the fastest growing economy in the world are not worth the paper they are written on" and therefore Credit Lyonnais "lack[s] the basic statistical information to be able to construct even a rudimentary model" to forecast China’s future GDP growth.12
These assessments demonstrate the difficulty in gaining a clear picture of the current state of the Chinese economy. If the more pessimistic estimates of China’s recent growth rates are correct, this analysis would indicate an economy growing modestly if at all.
Economic Challenges
Reform of State Sector
Among the key constraints on China’s continued economic growth are the significant structural impediments present in its economic system, most notably the weakness of its SOEs and state-owned banking system.
The problems of the SOEs and state-owned banks are interrelated, and arise from the continued intervention by the state in investment decisions and allocation of capital. Widespread bankruptcy of the state sector has in part been avoided thus far because the state has propped up many SOEs with so-called "policy loans" from the state-owned banking system, which holds the assets of millions of Chinese who have no other investment alternatives. Instead of confronting the problem of unviable state enterprises, Beijing’s policies created insolvent state-owned banks saddled with the bad loans they made to the SOEs. China’s leaders have shown little resolve or ability to curtail policies of state-directed lending to SOEs, or to free the domestic capital markets and financial service industry from state dominance.
Financial Challenges
The Chinese Government has pumped billions of dollars into the economy in the past few years, in infrastructure and other projects, to stimulate economic growth. This "pump-priming" spending has contributed to record budget deficit levels, which according to official accounts have risen from $11.1 billion in 1998 to an estimated $37.4 billion in 2002.13 Both economists and Chinese officials have underscored the importance of this fiscal spending to China’s economy.
Finance Minister Xiang Huaicheng recently estimated that fiscal spending contributed 1.5 to 2 percent to GDP growth in the past four years.14 This represents approximately one-quarter of the official growth rate during that period, and is equivalent or exceeds some economists’ estimates of the real GDP growth for those years, as discussed above. In a dramatic assessment of the key role of fiscal spending to the Chinese economy, Premier Zhu Rongji admitted, "if we hadn’t adopted a proactive fiscal policy and a prudent monetary policy, the country would have collapsed."15
In addition to stimulating the economy, Beijing faces other formidable financial challenges in the next decade. The SOEs must be restructured so that financially unviable enterprises are shut down and profitable enterprises given the ability to develop. This task has become more urgent given the increased competition China’s SOEs will face in the post-WTO accession period. Another major challenge is the need to recapitalize the state-owned banking system. Some estimates put the percentage of nonperforming loans in this sector above 50 percent, well above the officially reported level of 27 percent.16 China must also address the fiscal costs of its substantially underfunded pension and other social security obligations and invest heavily in infrastructure improvements and energy resources in the coming decade, including its buildup for the Olympics in 2008. Lastly, as discussed in Chapter 9, China’s ongoing military modernization program is drawing a growing share of the government’s budget resources.
Cost estimates for such capital needs vary. In testimony before the Commission, Stephen Harner, a financial services consultant based in Shanghai, suggested China will invest some $2.5 trillion ($487 billion a year) in fixed assets and major infrastructure projects during its next Five Year Plan period (2001-2005), an amount in line with investment of $1.7 trillion in such assets during its past Five Year Plan period.17 Harner estimated that China will need $466 billion, equivalent to 43 percent of GDP in 2000, to recapitalize its banking sector.18 A report on China’s capital needs prepared for the Commission estimates the cost of bank recapitalization to be $510 billion and the cost to finance pension and other social security obligations to be nearly $1 trillion.19 In an attempt to quantify China’s total capital needs over the next five years, and China’s ability to meet them through revenue generation, the report concludes that China’s budget deficit will soar to over $150 billion by 2005.20
Projecting the scope of China’s financial needs over the next decade involves some guesswork at this point in time. Nonetheless, there appears to be a general consensus that these needs are enormous and that China faces a monumental challenge in meeting them. How China addresses these fiscal challenges and its ability to tap domestic and international capital to assist in this effort will be critical to its long-term economic success.
Corruption
China’s endemic corruption poses a formidable obstacle to its future economic growth. Although Beijing has undertaken public anti-corruption campaigns and periodic high-profile trials (and even executions) of corrupt Party officials, large-scale corruption in both the central and regional government and in the commercial sector in general continues unabated. Analysts who represent commercial interests in China regularly identify corruption as one of the contributing factors to the possible social backlash against economic reforms. A detailed discussion of the scope and nature of corruption in China is presented in Chapter 4.
Instability/Social Unrest
The Commission heard repeated testimony on the social strains that would likely result from China’s WTO accession, most notably mass unemployment and an accompanying widening income gap between rich and poor. Many observers predict that unemployment in the rural regions of the country, already at high levels, could escalate markedly as the agriculture sector would be particularly hard-hit by foreign competition. In addition, if WTO accession forces the restructuring or closure of inefficient SOEs, these enterprises will be laying off significant numbers of workers. The Development Research Center of the State Council, a Chinese governmental research institute, estimates high employment losses due to WTO accession in the agricultural and automotive sectors: in rice, wheat and cotton production, it forecasts an aggregate loss of nearly 13 million jobs; in "road vehicle" production, it forecasts a loss of nearly 500,000.21 Given the official nature of these estimates, they may understate the potential employment impacts.
The expected increase in unemployment following WTO accession will be countered to some extent by new employment opportunities in certain export-oriented industries, including new foreign-invested enterprises. The Development Research Center forecasts significant employment increases in textiles, apparel and other sectors to offset the losses in agriculture and the automotive industry.22 Even if this assessment proves accurate, China’s WTO accession likely will result in large-scale unemployment is certain sectors, particularly in rural areas.
The potential for social instability and unrest and the concerns this raises for U.S. national security, was recognized by Director of Central Intelligence George Tenet in his most recent annual threat briefing before the Senate Select Committee on Intelligence:
China’s entry into the WTO underscores the trepidation the succession contenders will have about maintaining internal stability. WTO membership is a major challenge to Chinese stability because the economic requirements of accession will upset already disaffected sectors of the population and increase unemployment. If China’s leaders stumble in WTO implementation — and even if they succeed — they will face rising socioeconomic tensions at a time when the stakes in the succession contest are pushing them toward a cautious approach to problems. In the case of social unrest, that response is more likely to be harsh than accommodative toward the population at large.23
If high levels of unemployment materialize in the wake of WTO accession, the possibility exists for a marked escalation of mass protests against government institutions by unemployed workers, which are already occurring on a frequent basis. In some instances, local governments that have a vested interest in the economic status quo may join in the protests. The leadership’s response will be a marker for accessing China’s progress toward the rule of law and political reform. If the response is characterized by enhanced repression, as Director Tenet predicts, this will signal backward movement on these important U.S. goals for China’s WTO accession. Similarly, if the leadership responds by protecting its SOEs against competitive market forces, thereby minimizing employment losses, economic reform (and the hoped-for U.S. commercial benefits) will be undermined as well. At the same time, unchecked social unrest could lead to a breakdown in the current political system and an accompanying period of instability, with uncertain implications for China, Asia and U.S.-China relations.
Market Access and Compliance
China’s WTO accession could yield substantial economic benefits for the U.S. economy. But for this to occur, China must comply with its WTO obligations, a massive undertaking that will require fundamental changes to its economic system. The Commission held hearings on the potential impact of China’s WTO membership on certain key U.S. industry sectors and on China’s prospects for compliance. Set forth below is an overview of these topics, as well as a discussion of the mechanisms and tools available to the U.S. Government to monitor and enforce China’s implementation of its WTO obligations.
China’s WTO Commitments
China’s accession documents are unprecedented within the WTO or its predecessor, the General Agreement on Tariffs and Trade (GATT), in terms of their complexity, range of specific commitments, and number of deviations permitted at the time of accession. As Peter Davidson, General Counsel of USTR, explained to the Commission, the major market access concessions under the agreement are (bullets added):
In addition, China has agreed to considerable non-tariff concessions, to join WTO agreements regarding areas such as law reform, import licensing, and subsidies for SOEs, and to assume the obligations of more than twenty existing multilateral WTO agreements, such as the GATT, General Agreement on Trade in Services (GATS), Technical Barriers to Trade (TBT), Trade-related Investment Measures (TRIMs), and Trade-related htmects of Intellectual Property Rights (TRIPs). China has also committed to reforming its state trading enterprises and SOEs and the elimination of price controls.
Market Access
U.S. officials touted the market access benefits that would accrue to U.S. firms as a result of China’s accession to the WTO, and this became an important factor motivating U.S. support for China’s WTO membership. The Commission heard testimony during its first year from representatives of several key industry sectors of U.S.-China trade — aerospace, agriculture, automotive, electronics and information technology products, entertainment and communications, financial services, and steel. There certainly are other important sectors in U.S.-China trade, and the Commission intends to hear from them in future years.
The industry representatives that came before the Commission during the past year discussed both the potential market access benefits they foresee as well as the challenges they face in achieving these benefits.25
The industry representatives acknowledged the considerable challenges they face in realizing the potential market access benefits discussed above. They identified the following cross-cutting areas of concern:
Legal Reform - One of the most crucial issues facing foreign companies in China is the country’s lack of a functioning legal system. Transparency of laws, uniform application of the law, and impartial review are the three most glaring deficiencies. The WTO addresses these three areas, and the Commission will closely monitor them. The Commission is highly skeptical that China can comply with this obligation, particularly given the country’s lack of a truly independent adjudicative body. We discuss this issue in Chapter 4.
Trade-Related Investment Measures (TRIMs) - Under the TRIMs agreement China will not be able to condition the award of contracts on requirements such as technology transfers or offsets. While the TRIMs agreement is clear in this regard, the Commission is concerned that it will prove ineffective in practice, as companies are pressured into technology transfer or offset contracts in order to remain competitive. We discuss this issue further in Chapter 2.
Trade-Related htmects of Intellectual Property Rights (TRIPs) - In evaluating China’s compliance with the TRIPs agreement, the Commission heard testimony from representatives of the Motion Picture Association of America, the International Intellectual Property Alliance, the International Anti-Counterfeiting Coalition and that of an independent film producer. The consensus was that China’s record on IPR enforcement has improved, but that violations still continue on a wide scale. In part as result of U.S. pressure, the Chinese Government has shut down many production facilities for pirated audio-visual products, which has halted the problem of China being a major exporter of such products. But with the production base of pirated goods shifted to Southeast Asia, China’s domestic market for U.S. audio-visual products remains closed. The Commission heard from independent film producer Larry Spiegel that despite these improvements "China, it appears, is condoning robbery on a grand scale…The loss in real dollars is staggering."33 The International Intellectual Property Alliance estimates that U.S. firms lost $1.5 billion in 2001 due to the piracy of audio-visual products and software, and that piracy levels for such products were around 90 percent that year.34
China’s record for trademark protection has been even worse. With techniques such as "salting," in which the top layer of goods in a container are authentic while the products below are counterfeits, China remains a major exporter of pirated trademarked goods, with its products reaching markets throughout Asia and Europe. China’s own Development and Research Center has issued a report indicating that counterfeiting in China is a $16 billion industry.35
A major obstacle to effective enforcement of IPR is the lack of criminal penalties that would make IPR violations a serious matter, as opposed to a pre-calculated cost of business. As a member of the WTO TRIPs Agreement, China is now required to impose criminal penalties for such violations. To date, China’s laws treat IPR violations as a criminal offense but rarely do authorities enforce them as such. In its 2002 Special 301 decision on China, the USTR noted "administrative penalties have failed to deter further infringements. Criminal investigations and sanctions are rare (i.e. administrative fines imposed are nominal), and very few cases are referred to criminal prosecution."36
The recognition by Chinese business interests and the Chinese Government that China itself has potentially lucrative intellectual property worth protecting has been the most significant impetus in fostering improvements in IPR. The United States should encourage this domestic drive by Chinese entrepreneurs and business people to protect their burgeoning market for intellectual property by providing education and legal assistance programs in this area. Such programs are discussed in greater detail below.
State Owned or Invested Enterprises - Foreign businesses are concerned that China will not comply with its WTO obligation to force SOEs or state-invested enterprises (SIEs) to operate on a commercial basis, thus allowing an uncompetitive situation to continue. Discrimination between foreign and domestic suppliers to these enterprises is also a concern. Because of the complex cost structures and accounting systems used, a major obstacle to assessing China’s compliance is the difficulty of evaluating whether SOEs and SIEs are profitable or subsidized.
Areas Outside the WTO - Outside of the Trade-related Investment Measures (TRIMs) Agreement, which deals with investment tied to trade flows, the WTO generally does not address investment restrictions. With the exception of dumping and subsidization, anticompetitive practices (e.g., price-fixing and cartels) are also not restricted by the WTO. These two issues are part of the Doha Development Agenda of the WTO. China is currently an "observer" of the WTO’s Government Procurement Agreement (GPA) and has pledged to join the agreement. China’s participation in the GPA is necessary to allow U.S. companies to compete fairly when selling to China’s large stated-owned sectors.
Only time will tell whether the hoped-for market access gains for U.S. firms in China will materialize. This will depend on whether China has both the will and institutional capacity to adhere to its broad commitments under the WTO. Surely some U.S. industry sectors will enjoy expanded market access, but how broadly beneficial China’s accession will be to the U.S. economy as a whole remains to be seen. Moreover, China’s accession may open the door more to U.S. investment than to U.S. goods and services, which could have a deleterious impact on U.S. employment if such investment flows into export production that displaces U.S.-based production. These issues are discussed in more detail in Chapter 2.
China’s Prospects for Compliance
China’s record of compliance with past U.S.-China bilateral agreements has been inconsistent and raises questions about its prospects for complying with its broad WTO commitments. The following is a description of China’s adherence to its most significant bilateral trade agreements with the United States over the past decade.37
1992 Memorandum of Understanding (MOU) on Market Access — In 1991, the USTR carried out its most sweeping market access investigation involving China. The investigation cited product-specific prohibitions, restrictive import licenses, technical barriers to trade, and a lack of transparency of laws. After negotiations broke down, USTR threatened $3.9 billion in sanctions. Under mutual challenges of sanctions, the United States and China reached an agreement in 1992. By signing the 1992 MOU on Market Access, China agreed to specific measures in return for U.S. support for China’s bid to enter the GATT. Despite tense negotiations in 1993, due to China’s poor implementation of the agreement, and again in 1994, due to China’s anger at the United States for blocking entry to the WTO, the USTR reported in 1994 that China was "substantially in compliance" with the 1992 MOU.
During Congressional testimony in 1996, former USTR Charlene Barshefsky described the nature of China’s compliance and the remaining frustrations for USTR:
To its credit, China has done much to implement the agreement…While China has removed a substantial number of non-tariff barriers, we are concerned with China’s tendency to give with one hand and take away with the other. In some instances, China had substituted new barriers in the place of those removed… China must live up to its agreements and eliminate those impediments to free trade…If I could pick one area under it where we are dissatisfied, seriously dissatisfied, I would say it is in the agricultural sector.38
In its 1998 Foreign Trade Barriers report, USTR listed non-tariff barriers, transparency, import substitution laws, and sanitary and phytosanitary issues as the key areas in which China’s compliance was lacking.
1992 and 1995 MOUs on Intellectual Property Rights (IPR) — The 1979 Agreement on mutual nondiscriminatory treatment required both countries to provide copyright, patent, and trademark protection equal to that offered in the corresponding country. Despite talks in 1985 and 1987, China made no progress in protecting IPR. After placing China on the "priority watch list" in 1989 and 1990, the USTR listed China as a "priority foreign country" in 1991. After carrying out a Section 301 investigation, the USTR threatened $1.5 billion in sanctions, which China avoided by signing an MOU on IPR on January 16, 1992 in which it promised to strengthen patent, copyright, and trade secret laws and increase protection of U.S. intellectual property.
Although China’s leadership was successful in ratifying the new laws, they failed to enforce them. In 1994, USTR placed China back on the "priority foreign country" list and threatened import tariffs of 100 percent on $1.1 billion worth of Chinese imports. China again avoided such sanctions by signing another MOU on IPR on March 11, 1995. In the 1995 MOU, China pledged to step up enforcement as well as eliminate hidden barriers, which kept U.S. audio-visual products out of the China market and therefore encouraged piracy. But the cycle of failed compliance continued and, in April 1996, USTR again put China on the "priority foreign country" list and threatened $2 billion in sanctions. China again avoided them by signing an accord on June 17, 1996. The accord laid out an action plan towards proper enforcement of IPR law, which has meet with success. In its 2002 National Trade Estimate Report, USTR explained, "China has made substantial progress in some htmects of intellectual property rights protections since it signed agreements in 1992, 1995, and 1996…however, significant problems remain, particularly in the area of enforcement."39
1997 U.S.-China Textile Agreement - The United States and China have established quotas under a series of bilateral agreements, the most current of which is the February 1997 MOU that restricts Chinese textile and apparel exports to the U.S. market.40 By transshipping products through Hong Kong and Macau, among other countries, China has at times bypassed U.S. textile quotas. Estimating that transshipment violations amounted to $2 billion of product annually, the USTR negotiated enforcement provisions into the U.S.-China textile agreements. The provisions allow U.S. officials to inspect factories and impose penalties in the forms of reducing future textile quotas or even fining the Chinese an amount equal to triple the value of the transshipped products. The United States has acted on these provisions on a number of occasions. The 1997 U.S.-China textile agreement contained market access provisions for U.S. textile products. Despite China’s compliance with this agreement, there has been no discernable benefit to U.S. textiles.
China has a mixed record of compliance with its bilateral trade agreements. One consistency has been the repeated need for the USTR to renegotiate agreements to incorporate more specific implementation requirements and to resort to sanctions, or threat of sanctions, to push China to comply.
Protectionist policies, under-resourced enforcement agencies, corruption, local protectionism, and lack of an effective legal system have contributed to China’s problems with compliance. As well, differences between U.S. and Chinese officials over what qualifies as compliance has been a constant point of friction. As a result, USTR has learned to avoid loose agreements with China. Detailing how the WTO accession agreement differs from past bilateral agreements, former USTR Charlene Barshefsky explained:
China's compliance with tariff changes has always been absolute because that's a known obligation, it is a knowable obligation and compliance can be judged. When we negotiated the WTO accession agreement, it was with that example in mind leading to an agreement, which as you know, doesn't read like an agreement. It reads more like about 150 pages of grid work. So that China in every year at every point knows exactly what the obligation is and we know exactly what our rights are.41
However, while the agreement does involve explicit "grid-work" obligations on tariff rates, it also includes numerous commitments designed to reduce trade-distorting practices. A number of witnesses testified that China will simply replace WTO-identified barriers with new ones.
China’s accession to the WTO is part of a larger economic reform effort that has been taking place for the past two decades, and the success of WTO implementation largely rests on the success of the reform effort as a whole. There was strong domestic opposition in China to joining the WTO, with many officials outside the central leadership expressing concern about the increased foreign competition it would bring and arguing that China had given in to conditions that benefited the Americans more than the Chinese.42 This opposition is likely to intensify as China begins the difficult process of implementing its WTO commitments. U.S. and international support for China’s economic reforms, and pressure on China to comply with its WTO commitments, may be essential to the reform effort. To this end, some witnesses suggested that the Chinese leadership is counting on U.S. pressure to help further the reform process in domestically painful areas such as the restructuring of SOEs and state-owned banks.43
Localism and provincialism may be stronger forces than centralism for the Chinese economy and economic decision-making process. While the central leadership has signed onto the WTO, it remains to be seen whether the provincial and municipal governments will comply. David Bleyle, Consul General of the American Consulate in Chengdu, told the Commission that compliance in the provinces is on "a line of sight from Beijing" basis in which the central leadership exerts paltry influence over provinces’ protectionist policies. WTO compliance will therefore largely be a matter of the central leadership’s ability to put in place and enforce a strong legal system that will hold up in the face of localism and provincialism. The prospects for legal reform in China are discussed in Chapter 4.
WTO implementation will be a tremendous challenge to China in the social dislocation of expected layoffs and company failures. Chinese companies in the manufacturing and service sectors are still in their formative stages and have little exposure to the competitive market forces that WTO-entry will unleash. Massive layoffs could bring protests and even violent uprisings, and the provincial governments can be expected to make every effort to protect their home industries.
Initial Areas of Noncompliance
China’s membership in the WTO is only several months old and many of its most far-reaching obligations will not be phased in until later years. Nonetheless, many significant commitments were required to take effect upon accession. To date, there have been a number of areas where China has failed to meet its commitments, including several that have become sources of bilateral trade tensions.44
The Information Technology Agreement (ITA) - Despite its commitment to participate in the ITA agreement upon accession to the WTO, China has denied ITA tariff rates to 15 tariff items unless those products are imported for domestic production. USTR Robert Zoellick stated that the "benefits [China] has accrued from the zero tariffs" of the ITA "will evaporate if it attempts to distort the basic intent of the agreement…We will make this point as often as necessary- and it will have to be made often- to the Chinese."45 Because of this dispute, the United States blocked China’s application to join the ITA at the February 15, 2002 meeting of the ITA working group in Geneva.
Tariff-rate Quotas (TRQs) - One of China’s early commitments under the WTO is to increase market access for certain agricultural products by granting TRQs to end-users in China. The agricultural products subject to such TRQs are wheat, corn, rice, soybean oil, palm oil, rapeseed oil, sugar, grain rice, wool, and cotton. Although in September of 2001 China promised that it would allocate agricultural TRQs by the end of 2001 or the date of accession, it has delayed issuing TRQ regulations and those they have released have been deemed inadequate by the USTR. Problems with TRQ allocation have also arisen for automobiles and fertilizer. The agricultural product TRQ delays are most likely due to interagency disputes in China between the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the Ministry of Agriculture, and the State Development Planning Commission.
Genetically Modified Organisms (GMOs) - In January 2002, China released GMO regulations scheduled to take effect on March 20, 2002. The regulations required a lengthy process of inspections, safety assessments, and labeling that could take 9 months to complete. With the regulations threatening all U.S. soybean exports to China (America’s largest agricultural export to China) and with the possibility that the regulations were not WTO-compliant because they were not "science-based", the U.S. trade officials came close to taking the case to the WTO. By March, China offered an interim proposal to accept U.S. safety certificates as long as U.S. exporters had begun the approval process in China. Despite a temporary hurdle that required interim licenses for U.S. exporters, China began granting these licenses in April. While the dispute has been diffused, USTR has openly stated that it is on the lookout for new hurdles to exporting soybeans to China.
Insurance Services - In November and December of 2001 China issued new insurance regulations covering foreign-invested insurance companies that have caused concern among the U.S. insurance industry. The regulations’ deficiencies lay primarily in the areas of branching, transparency, and capital requirements. As well, insurance companies continue to face unnecessary obstacles when pursuing insurance licenses. Chinese officials say that the matter is complex and should be addressed via the WTO’s annual transitional review mechanism.
Courier Services - China generally agreed that conditions on ownership, operation, and scope for existing foreign courier service providers will not be made more restrictive. Following accession it issued new regulations on courier services which imposed new licensing requirements, anticompetitive pricing restrictions, and weight restrictions on what companies could deliver. All of these regulations restrict market access and therefore are directly in violation of China’s WTO commitments. The regulations appear to be protective measures by China as the country attempts to protect the State Postal Bureau (China Post), which is facing severe competition in the profitable express delivery market. Similar to the dispute over insurance regulations, Chinese officials have refused to discuss the problems at the WTO Services Council meeting and insists that the proper forum is the WTO’s annual transitional review mechanism.
Export Subsidies - China agreed to stop all export subsidies on industrial and agricultural goods upon accession, but U.S. industry and agriculture representatives’ state that China has continued subsidizing exports. These subsidies can be difficult to identify and quantify because of their myriad forms in a socialist economy. Subsidies can take the form of shifted assets, credit allocations, low-interest loans, or guaranteed provisions of energy and raw materials. The USTR’s 2002 National Trade Estimate Report on Foreign Trade Barriers identifies soda ash, wood products, fiberglass, auto glass, steel, flat glass, cotton, and corn as areas of particular concern.
Monitoring and Enforcement Mechanisms
Monitoring
The U.S. Government has established an interagency group, coordinated by USTR and overseen by the Bush Administration’s Trade Policy Staff Committee (TPSC), to monitor China’s progress in implementing its WTO commitments. This China-specific group has a three-tiered system, in which staff and sub-committees comprise the first level, a deputy-level Trade Policy Review Group forms the second level, and the cabinet-level National Economic Council Deputies Committee or the NEC make the third level. The Committee will rely on information gathered and assessed by the Departments of Commerce, State, Agriculture, Treasury, Labor, and the U.S. Patent and Trademark office.
In addition to their involvement on the TPSC, the Commerce and State Departments are also taking the lead in organizing on-the-ground efforts in China. Shaun Donnelly, Acting Assistant Secretary of State, Bureau of Economic Business Affairs, testified:
Ambassador Randt has made China WTO implementation one of his top priorities for his mission. In Beijing, the Embassy has established a WTO Implementation Coordination Committee chaired by the Embassy Economic Minister to coordinate the efforts of the Departments of State and Commerce and other agencies, Agriculture and Customs attaches. They are responsible for tracking and analyzing the changes in these laws, obviously requiring Chinese language capability and so on. The Embassy has also formed a special IPR working group to monitor China's WTO intellectual property legislation and enforcement. Our consulates in Shanghai, Guangzhou, Chengdu, Shenyang, and Hong Kong, are also key players in WTO compliance efforts.46
The Commerce Department will take the lead, in coordination with the USTR, in investigating market access and compliance problems as they arise. William Lash, Assistant Secretary of Commerce for Market Access and Compliance, outlined the Department’s five-point "Compliance Plan", the components of which are to (1) concentrate enforcement efforts; (2) help China reform; (3) promptly address market access problems; (4) give U.S. companies a head start; and (5) aggressively monitor trade flows.47 As part of this process, the Commerce Department intends to seek input from a variety of sources, such as the U.S. Chamber of Commerce, the U.S.-China Business Council, and organized labor, and to meet with U.S. small and medium size enterprises to assess whether they are gaining proper market access to China.48
Separate from the review and monitoring efforts of the U.S. Government, the WTO will conduct an annual review of China’s compliance record as part of the Transitional Review Mechanism (TRM) provided for under Article 18 of China’s Protocol of Accession. China is the only country in the WTO subject to an annual review, and the TRM process will continue for eight years, after which there will be a final review in the tenth year. Pursuant to the TRM process, the subsidiary bodies of the WTO that have mandates covering China’s commitments — e.g., Council for Trade in Goods, Committee on Subsidies and Countervailing Measures, Committee on Antidumping Measures — are to review China’s compliance, with China providing relevant information "in advance" of these reviews. The results of these reviews will be reported to the WTO General Council, which will conduct the final review. Annex 1A of China’s accession Protocol sets forth a detailed list of specific information China must provide, including economic data in ten fields ranging from foreign exchange to pricing policies, as well as copies of laws and regulations on issues ranging from import licensing to government procurement.
U.S. trade officials recently attempted to have a discussion on TRM procedures placed on the agenda of several WTO committee meetings. China blocked these efforts on the grounds that discussions of this nature go beyond its Article 18 requirements. There now appears to be a process in place to have all the appropriate WTO subsidiary bodies take up TRM matters in October. It remains unclear how far in advance of these discussions China will provide members with documentation, how substantive such documentation will be, and whether China will formally respond to members’ questions regarding the information provided.
During meetings in Geneva with WTO officials, U.S. trade officials, and representatives of various member country delegations, the Commission was told that WTO members are concerned that the TRM process, at least for the first year, may not yield a thorough review of China’s compliance if the process is truncated to a limited review period at the end of the year. Some noted that the TRM process, which was an important component of U.S. and other member country support for China’s accession package, will only be valuable if it is robust enough to function as an early warning system of potential trade disputes and thereby encourage China’s compliance to avoid such disputes.
As the U.S. Government and the WTO monitor China’s compliance with its WTO commitments, it will be important for both to assess China’s broader economic practices, as some may effectively circumvent its WTO obligations. For example, the Commission is concerned about reports that China has adopted a policy of granting subsidies to its steel companies that use domestic rather than imported inputs.49
Enforcement
The U.S. Government has a variety of means to address Chinese noncompliance with its WTO commitments, including the WTO dispute settlement process, the WTO China-specific safeguards, and U.S. trade law provisions:
WTO Dispute Settlement Understanding - By joining the WTO, China has agreed to submit to binding external adjudication of trade disputes, therefore giving the WTO dispute settlement process precedence over its own domestic courts in trade-related matters. The Dispute Settlement Understanding (DSU) requires an initial 60-day consultation period followed by the additional time requirements of establishing a panel and selecting panelists. Although the briefing and hearing phases can be quick, the panel customarily takes several months to make a decision. If the decision is appealed, which is quite common, and the appellate decision can take three or four months. In its entirety, the DSU process generally takes 18 months, and therefore is viewed as a time consuming mechanism for resolving trade disputes.50 In meetings with representatives of various WTO member country delegations, the Commission was told that many countries likely will initially pursue disputes with China through bilateral discussions (or plurilateral discussions as appropriate), then through the TRM process, and lastly through the WTO’s formal dispute settlement processes.
Non-market Economy Antidumping Methodology — Although application of non-market economy (NME) antidumping has long been a part of U.S. trade law, it has never been a part of WTO law. China’s accession agreement includes a provision allowing the U.S. (and any other WTO-member country) to use the NME methodology for assessing China’s cost of production in antidumping cases for the 15 years following China’s accession.
The ability of WTO members to use NME evaluations of China when prosecuting antidumping cases could be extremely important to the protection of American industries, if strongly enforced by the Commerce Department. Currently the Department has the discretion of determining whether China is a non-market economy.
Product Specific Safeguard — The inclusion of Product Specific Safeguards into the Chinese accession agreement will allow WTO members to defend against import surges from China for the next 12 years. These safeguards extend well beyond normal WTO laws because they allow more lenient standards that call for finding of "market disruption" rather than "serious injury", and because they allow WTO members to single out China-specific products as opposed to addressing all imports of a product, regardless of origin. U.S. law already contained such a remedy against imports from China prior to accession under Section 406 of the Trade Act of 1974, however, it was used sparingly. The new Product Specific Safeguard tracks Section 406 and was agreed to by China in recognition of the numerous areas where immediate compliance was unlikely. The Commission believes that Congressional action under this safeguard is completely appropriate.
Textile Safeguard — Under China’s accession agreement, WTO members can impose restrictions on Chinese textile imports using a "market disruption" rather than a "serious injury" standard. This safeguard is available through 2008.
GATT Article XXI Security Exception — Article XXI of the GATT, to which all WTO members are subject, provides for national security-related exceptions to a member country’s WTO obligations. The language of Article XXI seeks to define what constitutes a legitimate national security concern and to discourage commercially inspired abuse. The United States has taken the view that Article XXI is self-judging, whereby if a country invokes Article XXI, its actions are not subject to adjudication by a third-party dispute settlement mechanism such as that of the WTO. Either branch of government- the Congress by statute, or the President by executive order - can declare the exemptions.
Article XXI(b) defines what qualifies as a national security interest as follows:
Because of its broadness, Article XXI has been the subject of much debate among international trade law specialists. However, the WTO has not yet seen a case where the Article XXI exemption is cited before its dispute resolution body. The propriety of its use was raised in 1997 by the European Union with regard to U.S. legislative efforts (the Cuban Liberty and Democratic Solidarity Act and the Iran and Libya Sanctions Act), but the issue was resolved between the United States and EU before proceeding to the WTO.51
U.S.-China Bilateral Communications — Although currently there are many U.S.-China bilateral cooperative programs in place, many initiated by the Carter Administration in 1979, there is no centralized mechanism for coordinating, reporting on, or funding these meetings.52
Following his summit with President Jiang Zemin this past February, President Bush announced that the United States and China had agreed to increase cooperation and exchanges in areas including trade, energy, science and technology, and law enforcement. They also agreed to continue the annual meetings of the Joint Commission on Commerce and Trade (JCCT), the Joint Economic Committee (JEC), and the Joint Commission on Science and Technology (JCS&T). Following the April 2002 meeting of the JCCT in Beijing, Undersecretary of Commerce Grant Aldonas announced that he will visit China every six months to consult with the Chinese Ministry of Foreign Trade and Economic Cooperation (MOFTEC) Assistant Minister Ma Xiuhong on China’s WTO implementation efforts.
While these meetings are beneficial and productive, the Commission notes that meetings with higher-level Chinese officials would likely be more helpful. In the JCCT the Commerce Secretary meets with Minister of MOFTEC; in the JEC the Treasury Secretary meets with the Minister of Finance. While these annual meetings are commendable and should continue, ministers are not always the functional equivalents of U.S. cabinet secretaries, and U.S. cabinet-level officials could more effectively meet with State Council members, who would have the power to respond to U.S. concerns.
In addition to more frequent meetings between central government officials, the United States would benefit from encouraging the use of existing bilateral mechanisms at the state and municipal levels to promote and monitor WTO compliance. These take place in the form of state government-to-provincial government and city-to-city meetings.
Technical Assistance
The Commission heard from numerous witnesses that one of the most effective measures the U.S. Government could employ to promote China’s compliance with its WTO obligations is the funding of technical assistance and legal education programs in China. China’s development of a functioning commercial legal system is vital to the country’s ability to comply with its WTO obligations. Developing such a system is a massive undertaking for which the Chinese Government has asked for international help.
The Commerce Department funds a variety of technical assistance programs in China, in coordination with the U.S. embassy and consulates.53 The funding levels of these programs have been modest and represent only a fraction of the amounts provided for similar programs in Central and Eastern Europe and the former Soviet republics. Moreover, the U.S. Government’s assistance programs for China are not coordinated with other countries’ efforts and are almost exclusively done using a top-down approach of educating government officials (as opposed to the arguably more effective bottom-up approach of educating Chinese students and attorneys). The U.S. Agency for International Development (USAID) is restricted under U.S. law from providing assistance to China.
The EU, the UK, Australia and Japan have also developed capacity-building programs for China. The WTO has been administering some modest programs of technical assistance and capacity building in China to facilitate compliance with its accession commitments and has been participating in similar programs sponsored by member countries. The WTO has begun a long-term project to build a comprehensive database of technical assistance/capacity building programs for developing countries that would encompass international organization, individual government, and private-sector initiatives. The hope is that this database will help better coordinate such programs and avoid overlap and duplication.
Most technical assistance programs supplement existing and internally supported PRC-government and think tank programs such as the Shanghai WTO Affairs Consulting Center, which is one of China’s leading WTO research centers. Numerous nongovernmental institutions such as the Ford Foundation, Asia Foundation, Temple University and Harvard University and international financial institutions such as the World Bank and Asian Development Bank also support capacity building.
National Security Implications
China’s accession to the WTO carries high stakes for both the United States and China. While they have some complementary goals for supporting China’s WTO accession — e.g., promoting market-oriented economic growth and reform — they have very different long-term objectives: the United States seeks a democratic and more open China, while the Chinese leadership seeks an economically strengthened nation that continues to be governed by one-party communist rule. The national security implications for the United States of a more economically prosperous China governed by an authoritarian regime are very serious. An economically powerful, non-democratic China may use its wealth and regional influence to enhance its military power projection, bolster its alliances with rogue states, and otherwise undermine U.S. regional, if not global, interests. If China’s WTO membership leads to economic growth and reforms that are accompanied by the development of political and personal freedoms, worker rights, and broadly shared prosperity, China may become a strategic partner for the United States that shares similar long-term objectives. There is no guarantee, however, that a more economically prosperous China will necessarily be a more democratic China.
At the same time, China enters the WTO with a rapidly growing, yet potentially unstable economy burdened with significant fiscal and structural problems. If, as some observers predict, China’s economy stagnates or even collapses under the weight of its WTO commitments, the United States would face a new spectrum of security risks. Consequently, an understanding of the Chinese economy and how the Chinese leadership is handling its important economic challenges should be central to U.S. strategic planning. The U.S. Government needs to prepare for negative contingencies regarding the Chinese economy as a result of WTO accession and have appropriate policy options in place before a crisis occurs. The Commission remains concerned by the limited preparedness of our government for various scenarios.
China’s WTO agreement is unprecedented in terms of its complexity and scope. There is considerable uncertainty at the present time as to whether China has the capacity, or the Chinese leadership has the will, to comply with its broad obligations. China’s success in adhering to its WTO commitments will determine not only whether U.S. firms enjoy enhanced access to the Chinese market for their goods and services, but may also determine whether China is on track to move in a positive direction toward greater economic, and hopefully political, liberalization. Consequently, the U.S. Government should be prepared to provide technical assistance to China where appropriate to facilitate its WTO compliance efforts and to aggressively employ its WTO and U.S. trade law tools to enforce compliance when necessary.
The Commission plans to monitor, through continued hearings, briefings, and research, China’s progress in implementing its WTO commitments, and the health of the Chinese economy. The Commission also plans to use the stated U.S. objectives for supporting China’s accession as benchmarks for assessing the success or failure of U.S.-China policy with respect to China’s economic integration.
Recommendations
ENDNOTES:
1. William
J. Clinton, "Remarks by the President at Democratic Leadership Council
retreat," 21 May 2000, <http://clinton6.nara.gov/2000/05/2000-05-21-remarks-by-president-at-democratic-leadership-council-retreat.html>
(17 June 2002).
2. Ibid.
3. Samuel R. Berger, "Remarks to The Business Roundtable." 8 February
2000. <http://www.fas.org/news/china/2000/000208-prc-usia1.htm> (17 June
2002).
4. "President Welcomes China, Taiwan into WTO, Statement by the President:
Ministerial Decision to Admit the People's Republic of China and Taiwan Into
the World Trade Organization," White House Press Release, 11 November 2001,
<http://www.whitehouse.gov/news/releases/2001/11/20011111-1.html> (17
June 2002).
5. For example, see Regular Media Availability with House Minority Leader Richard
Gephardt, 18 May 2000.
6. "PRC Media Reiterate Standard Line on WTO Entry, Hint at Internal Beijing
Tensions on Market Opening," 11 January 1999, translated in FBIS.
7. "Opening Wider to Outside World with WTO Entry as Opportunity: Commentary,"
People’s Daily Online, 11 December 2001, <http://english.peopledaily.com.cn/200112/11/eng20011211_86382.shtml>
(17 June 2002)
8. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Oral Testimony of William H. Overholt, 18 January 2002, 234-35.
9. U.S.-China Security Review Commission, Hearing on China’s Capital Requirements
and U.S. Capital Markets, Oral Testimony of Nicholas R. Lardy, 6 December 2001,
117.
10. U.S.-China Security Review Commission, Hearing on Bilateral Trade Policies
and Issues Between the U.S. and China, Oral Testimony of Gordon Chang, 2 August
2001, 67-68.
11. Thomas G. Rawski, "What is happening to China’s GDP statistics?"
China Economic Review, 2001, 349.
12. "The Janus Face," Credit Lyonnais Securities Asia Emerging Markets,
Hong Kong, January 2002, 3-5.
13. China Statistical Yearbook 2001 and People’s Daily Online, cited in
Gordon Chang, China’s Capital Needs, Report prepared for the US-China Security
Review Commission, 8 May 2002, 4 [hereafter referred to as the Chang Report].
14. James Kynge, "China’s Growth Leaps as Fiscal Move Hits Coffers,"
Financial Times, 17 April 2002.
15. Owen Brown, "Chinese Premier Zhu Defends Deficit Spending, Criticizes
U.S.," Wall Street Journal, 15 March 2002.
16. Clay Chandler, "Trying to Make Good On Bad-Debt Reform," Washington
Post, 15 January 2002, E1. This article references an Ernst & Young study
that put the amount of unprofitable loans at $480 billion, or 44 percent of
total bank lending.
17. U.S.-China Security Review Commission, Hearing on China’s Capital Requirements
and U.S. Capital Markets, Written Testimony of Stephen M. Harner, 6 December
2001, 5.
18. Ibid.
19. Chang Report, Chap. 1, p. 7; App. 3, p. 3.
20. Ibid., Chap. 4, p. 1.
21. Development Research Center of the State Council, PRC, The Global and Domestic
Impact of China Joining the World Trade Organization, (Washington: Center for
China Studies, 1998), 38.
22. Ibid.
23. Senate Select Committee on Intelligence, Hearing on Current and Projected
National Security Threats to the United States, Written Testimony of George
J. Tenet, 107th Congress, 2nd Session, 6 February 2002 <http://www.cia.gov/cia/public_affairs/speeches/dci_speech_02062002.html>
(17 June 2002)
24. U.S.-China Security Review Commission, Hearing On Bilateral Trade Policies
and Issues Between the United States and China, Written Testimony of Peter Davidson,
2 August 2001, 1.
25. Unless otherwise indicated, the references in this section to China’s
specific WTO commitments are drawn from "China in the WTO: What it means
for U.S. business," U.S. Commercial Service, U.S. Department of Commerce,
October 2001, and U.S. Department of Commerce industry fact sheets for "Civil
Aircraft" and "Steel," China Gateway, U.S. Department of Commerce,
December 2001. <http://www.mac.doc.gov/China/Docs/industryfactsheets/>
(20 June 2002).
26. U.S.-China Security Review Commission, Hearing On Bilateral Trade Policies
and Issues Between the United States and China, Written Testimony of John W.
Douglas, 2 August 2001, 1-2.
27. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Oral Testimony of Patricia Sheikh, 18 January 2002, 36.
28. U.S.-China Security Review Commission, Hearing On Bilateral Trade Policies
and Issues Between the United States and China, Written Testimony of Dave McCurdy,
2 August 2001, 2.
29. U.S.-China Security Review Commission, Hearing On WTO Compliance and Sectoral
Issues, Written Testimony of Bonnie Richardson, 18 January 2002, 1.
30. Ibid.,4.
31. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Written Testimony of David Hale, 18 January 2002, 6.
32. U.S.-China Security Review Commission, Hearing On Bilateral Trade Policies
and Issues Between the United States and China, Written Testimony of Thomas
Usher, 2 August 2001, 6.
33. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Written Testimony of Larry Spiegel, 18 January 2002, 1-2.
34. International Intellectual Property Alliance, "2002 Special 301 Report,
People’s Republic of China," 2002, 2.
35. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Written Testimony of David Quamm, 18 January 2002, 3.
36. Terence P. Stewart, "Accession of the People’s Republic of China
to the World Trade Organization: Baseline of Commitments, Initial Implementation
and Implications for U.S.- PRC Trade Relations and U.S. Security Interests,"
Report prepared for U.S. China Economic and Security Review Commission, 30 April 2002, 50.
37. Unless otherwise indicated, the following discussion on China’s compliance
with past bilateral agreements is drawn from Wayne M. Morrison, "China-U.S.
Trade Agreements: Compliance Issues," Congressional Research Service Report,
1 September 2000.
38. Ibid., 7.
39. United States Trade Representative, "2002 National Trade Estimate Report
on Foreign Trade Barriers, People’s Republic of China," 14.
40. The U.S. will be forced to abandon this quota system under the WTO in the
year 2005.
41. U.S.-China Security Review Commission, Hearing on U.S-China Current Trade
and Investment Policies and Their Impact on the U.S Economy, Oral Testimony
of Charlene Barshefsky, 14 June 2001, 169.
42. Seth Faison, "China Seeks to Win over Dissenters on Joining Trade Group,"
New York Times, 8 June 1999, Section C, p. 4.
43. Overholt, Written Testimony, 12.
44. The following discussion on initial areas of noncompliance is drawn from
Terence P. Stewart, "Accession of the People’s Republic of China to
the World Trade Organization: Baseline of Commitments, Initial Implementation
and Implications for U.S.- PRC Trade Relations and U.S. Security Interests,"
Report prepared for U.S. China Economic and Security Review Commission, 30 April 2002, 112.
45. "Zoellick Outline Concerns Raised by Lags in China’s WTO Compliance,"
BNA’s Daily Report for Executives, 1 February 2002, A-27.
46. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Written Testimony of Shaun Donnelly, 18 January 2002, 4-5.
47. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Written Testimony of William Lash, 18 January 2002, 2-3.
48. U.S.-China Security Review Commission, Hearing on WTO Compliance and Sectoral
Issues, Oral Testimony of Jeffery Bader, 18 January 2002, 47.
49. "U.S. Official Warns China Against Taking WTO Action Against U.S. Steel
Safeguard," Inside U.S.-China Trade, 27 March 2002.
50. Bader, Oral Testimony, 17.
51. Jeanne J. Grimmett, "GATT Article XXI Security Exceptions," Congressional
Research Service Memorandum, 8 June 2001. (This memorandum was requested on
behalf of the U.S.-China Security Review Commission by Senator Robert C. Byrd).
52. Kerry Dumbaugh, "The early infrastructure of U.S. relations with the
People’s Republic of China (PRC) during the Carter Administration,"
Congressional Research Service Memorandum, 23 April 2002. (This memorandum was
requested on behalf of the U.S.-China Security Review Commission by Senator
Robert C. Byrd).
53. Lash, Oral Testimony, 24.