Testimony of Margaret M. Pearson
Associate Professor of Government and Politics
Department of Government and Politics
University of Maryland, College Park

Before the U.S.-CHINA COMMISSSION

JANUARY 18, 2002

Ladies and Gentlemen:

Thank you for offering me this opportunity to speak to you today on prospects for China’s compliance with the terms and requirements of the WTO. This panel has a broad agenda; I’ll focus my comments on understanding the compliance problem, and suggestions for how the U.S. government might facilitate China’s compliance. The question of compliance is in significant ways one of politics, and as a political scientist who has been observing the question of China’s entry to the WTO for a number of years, I hope I may be able to offer some useful thoughts and recommendations.¹

Let me start with a few broad observations about the context in which we are seeking compliance from China. Observers of China’s accession process can only be struck by how much China has agreed to do, in terms of market opening, dismantling of tariff and non-tariff barriers, leveling the playing field between domestic and foreign firms operating in China, and making its market system more robust and transparent. The reform leadership of China agreed to this deal; the Chinese leadership was not coerced into it. Among the leaders who steered the agreement through, there has indeed been a profound paradigm shift in thinking over, especially, the past four or five years. There is, in my view, no pre-existing plan to thwart or undermine compliance.

Obstacles to Compliance

However, it is clear that there are numerous obstacles to achieving compliance on the schedule laid out in the agreement. Broadly speaking, the obstacles fall into two categories: administrative and judicial capacity of the Chinese government; and political leadership.

First, on administrative capacity. This is a daunting problem, as I’m sure you are aware. China’s leadership faces an administrative challenge that is equal to or perhaps even greater than European integration, and yet has a much shorter time frame and much less developed administrative structure to do so. There are a substantial numbers of laws to be rewritten (estimates range from 177 to well over two thousand). In the PRC policy-making process there often is a significant time gap between the approval of a law and the issuance of final (rather than interim) implementing regulations. Even in the absence of a tradition of partisan wrangling over legislation, writing laws and regulations in China takes time. The good news is that the Chinese government has anticipated this need, and this process is well underway, and has been for some time. At present, the rulemaking process has picked up a great head of steam, and nary a week goes by without some sort of announcement of new – or newly revised – laws and regulations.² Still, there is much, much more to do.

More difficult still is the need to build administrative and judicial capacity to implement the WTO requirements at multiple levels of government, and across a vast region where local officials are being called on (by their own government) to initiate a sea change in the way they operate the economy. This is to say nothing of the need of Chinese business people to understand the environment in which they now must operate. China has one million village jurisdictions, and WTO requirements affect the vast majority of these. Many of China’s counties are the size (and level of development) of small countries such as El Salvador. Some provinces are the size of European countries such as France. The passage of laws and regulations is crucial, but so is the development of the agencies up and down the administrative hierarchy and the infiltration of the rule of law to localities, such that the laws will be obeyed.

The second category of challenges concerning China’s WTO compliance is political support. Here, the potential problems are also perhaps obvious, but warrant a brief reminder. One issue concerns the new leadership to which China is in the process of transitioning. If we focus on the likely inheritors of the presidency (Hu Jintao) and premiership (Wen Jiabao or Li Changchun), we have less information than we would like, but we also have reason to be optimistic. These leaders have not shown extensive opposition to the economic reforms jor to WTO, and they both have strong political skills. Still, as they come on board this coming fall and next year, they are likely to suffer the brunt of the transition problems.

What we must worry about these leaders bearing the brunt of is, of course, social unrest should China’s economy fail to pull out of the doldrums, and should problems such as unemployment and dissatisfaction with local officials be made worse, in the public perception, by WTO accession. It is common in this country to think of China’s leaders as unaffected by public opinion, and Chinese public opinion as undeveloped. But neither are true. Public awareness of the costs and benefits of WTO entry has grown in the past few years, and there is now what can only be called full-blown "WTO frenzy" sweeping China. Much of this is government propaganda and is supportive, but Chinese citizens, especially in the urban areas, are aware that some sectors will face great difficulty from the pressures of foreign competition. China’s leaders will need to respond to public perceptions that the country is suffering at the hands of foreigners.

How the U.S. Can Support Chinese Compliance

Enough diagnosis of the context of the compliance challenge. What are the positive steps that might be taken by the U.S. government and private and non-profit sectors to foster China’s compliance. Obviously the lion’s share of the burden for compliance is on the Chinese government, but there are positive contributions we can make at the margins. Let me focus on three suggestions: technical support, "early harvest" options, and management of Sino-US trade friction.

1. Technical Support. First, we can expand on and support considerable efforts already underway in China for administrative and judicial capacity building. This will reinforce key constituencies favorable to WTO. Consistent with the aforementioned "WTO frenzy", there are a slew of efforts underway within China to educate and train central and local officials about WTO requirements and China’s new laws. Business people often gain access to these training venues, furthering the education process. We must take all this as a good sign, and recognize that, already, these efforts are much more than most developing countries have made upon joining WTO.

• How can the U.S. government help? Many other countries are systematically providing China with technical assistance programs.³ Comparatively speaking, the U.S. government has been slow to the mark. Nonetheless, U.S. efforts have begun to pick up steam in recent months. Indeed, the U.S. government – and this commission – would be foolish not to capitalize on a moment when, now that the negotiations are over, Chinese leaders of relevant agencies are considerably more open to foreign assistance and advisement on WTO issues. Moreover, the Chinese media is paying much attention to such efforts—giving a further educational outlet. Ongoing efforts by the US government are being carried out by the Department of Commerce, by our embassy and consulates in China, and others. Just as important, non-profits, universities, and international governmental organizations, are playing key roles (e.g., Georgetown University Law Center, Harvard’s Kennedy School of Government, the U.S.-China Business Council⁴ , the Asia Foundation ⁵, the Ford Foundation, the World Bank, and others). A timely review of such efforts has just been published this month by The China Business Review⁶, and I recommend it to you.
  
• At a minimum, the U.S. government should provide active encouragement for the excellent work currently being carried out both by government agencies and in the private and non-profit sectors. Further, the U.S. government would be well advised to support the rule of law program that has been authorized and currently is housed in the State Department, but that has not been funded.

2. "Early Harvest." The Council Task Force Report calls for what it terms "early harvest" accomplishments. This means that, working closely with Chinese officials, we should attempt to produce positive early pay-offs on a small number of items. In other words, the effort would be to produce momentum within China as well as the US in favor of ongoing WTO compliance. Within China, this would help address some of the political challenges to compliance I discussed previously.⁷ The ability to show early benefits could help build a reservoir of good will and cooperation as China faces more difficult challenges.

What specific issues might be ripe for such an "early harvest" strategy?

• In agriculture, one possibility would be to develop a program to link significant agricultural grain purchases by China with a joint venture or technical assistance arrangement enabling the movement of Chinese farmers out of what is currently inefficient grain production toward less land-intensive cash crops.
  
  
• More generally, we can support the dissemination of information in China as to the benefits to Chinese consumers of lower cost imports (such as grains) and increased exports (such as textiles and automobiles).

3. Management of Sino-US Trade Friction. My second suggestion for how the U.S. government can foster Chinese compliance concerns the management of Sino-US trade friction. Such management involves, first and foremost, political forbearance and management of expectations about disputes. There is bound to be friction with China, and it will only rise, rather than subside, now that we have concrete standards to which to hold China. It is useful to keep in mind that trade disputes are primarily an indicator of trade, not necessarily hostility. Indeed, my understanding is that the greatest number of bilateral trade disputes the US has is with Canada. Similarly, the most disputes the EU brings to the WTO are against the US, and vice versa. It would be wise in the case of China for the US government to be circumspect about when it engages in divisive rhetoric which assumes that the source of the inevitable increase in disputes is Chinese hostility and intransigence, rather than an increase in trade. The point is to anticipate and manage expectations about disputes.

• The point is not to ignore problems or simply give in to China on disputes, however. Therefore, a related suggestion, also noted in the Council report, is to expand the options for dispute resolution, so as not to overwhelm an already stressed WTO dispute process. Thus, for example:
  
  
• It may be useful to energize existing bilateral dispute mechanisms, such as through the Foreign Commercial Service, or create new ones, perhaps a standing bilateral working group focused broadly on the cooperative resolution of categories of problems.
  
  
• Another possibility is private sector or joint public-private sector technical (legal) support for dispute resolution within China or the US.
  
  
• Finally, it will be wise to build an international coalition to continue to oversee compliance. Here I am not talking about the WTO’s Transition Review Mechanism, which others today have spoken to; I am referring to more informal coalitional mechanisms within the WTO, involving the EU, Cairns Group, and other partners, to continue to urge China toward full compliance. Such coalition-building could perhaps be coordinated through the USTR, which already has extensive contacts on China’s WTO membership.
  
  
• Let me close by suggesting that the USCC’s annual report can play a very useful role in supporting and monitoring many of the efforts I have set forth here, particularly the management of expectations, support of alternative dispute resolution venues, and coordination of technical assistance.
  
  Thank you for your attention.
  

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ENDNOTES

1. Some of these comments reflect my participation in the Council on Foreign Relations Task Force Report, "Beginning the Journey: China, the U.S. and the WTO" (Council on Foreign Relations, 2001). While I do not agree with every bit of minutae in the report, I do support broadly the recommendations that were made about how the US might support Chinese and multilateral efforts to foster PRC compliance. Of related interest is Gerrit W. Gong, Pieter Bottelier, Nicholas R. Lardy, Margaret M. Pearson, and Minxin Pei, China Economic Brief: Issues for the New Administration and Congress (Washington, Center for International and Strategic Studies: March 2001).

2. In addition, MOFTEC has reorganized parts of its administrative structure to be able better to accommodate needs of WTO accession; to this end, MOFTEC has set up three new departments to deal specifically with WTO post-accession affairs.

3. Additional programs from third countries include: programs to train officials from MOFTEC, the General Administration of Customs, and other organizations; the EU-China Legal and Judicial Cooperation Program; and similar training programs by the World Bank, IMF, Asian Development Bank, and United Nations Development Program. Nicholas R. Lardy, Integrating China Into the World Economy (Brookings Press, 2002), p. 167.

4. The US-China Business Council (USCBC) has overseen the creation of the US-China Legal Cooperation Fund. The goal is to make targeted grants to a series of "rule of law" related programs, designed jointly by US and Chinese partners. arious US groups have been in, for example, distance learning courses and providing assistance to the Chinese write an administrative procedure law, which would cover many issues core to WTO compliance. USCBC also has coordinated a series of video confrences for the peurposes of training professionals in core WTO competency, helping support such efforts on behalf of the Shanghai WTO Affairs Consultation Center.

5. The Asia Foundation is organizing a program to send specialists to China to lecture on WTO issues to officials from the central and local Legislative Affairs Office (of the State Council), and to bring them to the US for several weeks’ instruction on US administrative law. The Ford Foundation is providing funding for some such programs.

6. Brian L. Goldstein and Stephen J. Anderson, "Foreign Contributions to China’s WTO Capacity Building," The China Business Review (January-February, 2002).

7. In significant measure this effort to produce early and highly publicized benefits has been the paradigmatic strategy behind the success of many of China’s gradual foreign investment and domestic reform policies. See, for example, Barry Naughton, Growing Out of the Plan: Chinese Economic Reform, 1978-1993 (Cambridge, England, Cambridge University Press, 1995), and Susan Shirk, The Political Logic of Economic Reform in China (Berkeley: University of California Press, 1993).