China's Decade of Free Trade

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The Obama administration's trade agenda has Beijing upset. What will happen to unfinished Chinese reforms in a post-WTO world?

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A truck drives into a shipping container area at Qingdao port in Qingdao / Reuters

A decade since China joined the World Trade Organization, trade negotiation in the Doha Round looks to be going nowhere. Meanwhile, in a move that has unnerved Beijing, the Obama administration is pushing its biggest trade agenda to date with the Trans-Pacific Partnership agreement, which would not include China.

What have China's leaders thought about global trade? That's the subject of part three in my series translating excerpts from speeches and statements by former Premiere Zhu Rongji, which were recently published. Here's part one, on China's growth, and part two, in which he appears to have warned the U.S. about its coming financial crisis. In this speech, given at an important State Council research session on the WTO in February 2002, he makes a spirited defense of China's WTO entry.

It is easy to forget how contentious this issue was in China at the time. Zhu had to spend considerable political capital to complete the historic deal, likely making a few enemies in the process. What struck me in particular was Zhu's persistent argument that the WTO is a vehicle by which to proceed with necessary development and reform objectives in China. I highlight this because a rising concern in certain quarters, which is putting it mildly, is what will happen to unfinished Chinese reforms in a post-WTO world? Indeed, a growing chorus of dimmer views on China's WTO record seems to be emerging. 

On justifying Beijing's decision to enter the WTO

Over the last few days, a number of cadres have expressed their concern on how we will protect ourselves in the WTO. And because some of you wanted to emphasize the gravity of the issue, there seems to be some exaggeration as well. Of course, taking the issue seriously is necessary. On the other hand, there has been far less concrete discussion on how WTO entry will benefit us. In other words, the discussion has primarily revolved around "defense", with little attention paid to "offense"--much more talk on how to adapt to the challenge rather than how to leverage it as an opportunity. This is why you are likely to conclude that with so much unanticipated trouble, was it worth it to join the WTO? If that was indeed the case, then we wouldn't have negotiated over this for 15 years.

We began in 1986, when we restored our status as party to GATT...In 1993, President Jiang Zemin launched official direct talks with President Clinton in Seattle, based on three principles. Last year (2001), we finally acceded to the WTO. This move is directly linked to our reform and opening up process and the growing strength of our economy. During the 1980s, our economy was still relatively weak and lacked a solid regulatory framework. Under those conditions, we would have incurred losses if we joined GATT...Over the next 15 years, we increasingly recognized the importance and necessity of entering the WTO. This is because opening up to foreign investment and trade and cooperation are more and more important to our economic development. Right now, export performance has a huge impact on the national economy. If exporters were to decline by 10% in a year, it would lead to a reduction in GDP growth of 2 percentage points. Moreover, if we don't join the WTO, we would have no recourse against other countries' trade sanctions or discrimination. After we've joined, China must be given "most favored nation" status. Once we have MFN status, it gives us equal treatment as other countries. At the same time, we can use WTO mechanisms to resolve trade disputes and sue other countries. We may not win every time, but at least we have a place to bring cases.

Something that left a deep impression on me was last year's trade battles over agricultural exports to Japan. At the time, we weren't in the WTO yet. Japan first dramatically raised import tariffs on Chinese onion and mushroom exports. That made it impossible for our exporters, and Shandong farmers were watching their onions rot in their fields. We felt the Japanese action violated WTO rules, and so we reciprocated by slapping tariffs on imports of Japanese cars, mobile phones, and air conditioners. Our onions weren't worth a lot of money, but their cars were much more valuable. We negotiated over this issue 19 times, and we would not back down. Ultimately, Japan finally abolished their tariffs. Once they cancelled, we slashed ours too. If they didn't, we wouldn't have removed ours either. And so, after entering the WTO, we're no longer easy to bully around. Not only have we always been tough to manipulate on the political front, now no one can bully us on the economic front...So what we should be saying is that WTO entry has put us in a position of proactive "offense" rather than the usual reactive "defense" posture...If it's merely all sorts of trouble after WTO entry, then why bother with it in the first place? Why not just seal ourselves off just like before, to protect us. This way we can certainly protect ourselves, but it also means we cannot develop. If much of our system does not undergo appropriate reforms, then we cannot adapt to the globalization wave; our industry will forever be "iron rice bowls" that are protected by the state and cannot compete globally...

On bilateral maneuvering with Russia under WTO

...We have to take advantage of the WTO opportunity to advance our "go out" strategy and expand our exports. I saw a recent report from the Ministry of Foreign Trade that argued that because Russia's economy was drastically weakened by the Asian Financial Crisis, it had a negative attitude on acceding to the WTO. And thirty-two countries have already proposed to engage in bilateral discussion with the Russians on WTO accession. Russia is a large potential market for us, so the relevant agencies must be prepared to begin bilateral talks with Moscow to secure provisions in our interests. We have to research the Russian market and market entry strategies. When I visited Moscow, I spoke at the embassy and used the slogan "March toward Russia". Because Russia's market is not liberalized, our exports are very attractive to them. Normal China-Russian trade is about $10 billion, not insubstantial. But outside of "normal" trade, there is a lot of border trade and nebulous trade activities that are probably worth another $10 billion, totaling $20 billion. This kind of profiteering trade along borders can be beneficial for those Russian residents who live along the border. But a number of products are shoddy, ruining our reputation...

...Trade with Russia is very much in our interest, and there should be no worry that it can't pay for the exports. Although it doesn't have large volumes of forex reserves--perhaps about $38 billion--Russia has oil, timber, all the commodities we lack. Our West-East pipeline has a distance issue, our northeast oil resources will gradually be depleted, and importing Middle East oil requires a long and arduous sea journey. We need to consider our long-term oil reserves and supplies, perhaps from Russia and Kazakhstan. Our policy to conserve domestic forestry is predicated on  receiving reliable supplies from Russia and Southeast Asia. Or else how can we possibly meet domestic timber demand?...

On spreading the risks of an export model

From a long-term perspective, we must not put all our eggs in one basket, tying our fate to the US and EU markets. Right now the US, EU, and Japan represent a disproportionate amount of our exports, a serious problem down the line. Last year our bilateral deficit with the US was $83 billion according to the Americans, but only $28 billion according to our own calculations. If you include processing trade, the figure may rise to $50 billion. With Japan, we only have a $2 billion deficit and a $5-$8 billion deficit with the EU. We have a trade surplus of $22 billion with Taiwan and another several billions in surplus with Southeast Asia. Last year we had $11 billion trade surplus with South Korea, as we imported large volumes of their cars, steel products, machinery, and chemical products. We also have deficits with Latin America and Africa, since they don't sell much to us. If we do not open new markets, and only rely on the US and EU, it will prove to be very dangerous...

On tapping the Indian market and protectionism

I visited India this year as well and sent another message of "marching toward the Indian market". India is clearly a huge market with 1 billion people, but really is quite poor. They don't seem to understand China and were under the impression that we are as poor as them. During an enterprise conference in Mumbai, one of the businessman said "I find it very strange that when I visited China just a few years ago, your mobile phone and fixed line phone subscribers didn't even hit 100 million. I can't believe you are developing so rapidly right now." I replied that China already has 350 million subscribers, surpassing the United States! Our consumer white goods and textiles should find much appeal in the Indian market. 

However, there's a strong sense of protectionism in India. For instance, the vehicle that picked me up at the airport was an Indian-made "Beatle", which was incredibly cramped for two people. I didn't think India was that poor! That's just the way they are, only use domestically made cars in India, high degree of protectionism...On the latest trip to India, I had my colleagues conduct an informal market survey. They found that consumer appliances like TVs, air conditioners, and refrigerators are about 3-5 times more expensive than our exports of the same products. So we certainly have a cost advantage. They can protect themselves, but we can also find a way to break into their market. Bangalore is known as the "Indian Silicon Valley," so when I went there I told the official, we will provide you with all the necessary parts for consumer appliances and you just need to assemble it in a factory here. We will set up a 50-50 JV, and the products you assemble with our parts will sell for 50%-66% cheaper. That way, Indian consumers can afford to buy the products, it will improve their lives and increase job creation. The Indian official replied that it was a great solution. 

On systemic reforms to take advantage of new markets

To enter markets like Russia, India, and others, we must usher in systemic and regulatory change and encourage private sector participation. A number of private enterprises are extremely nimble and risk tolerant. Huawei is one of those companies. It has advance technologies, decent scale, and already has operations in both India and Russia. A group of risk takers is exactly what we need to dive deeply into those markets. Recently, our ambassador in Afghanistan reported that he's receiving numerous calls and inquiries about whether it's possible to do business in the country. Whether the country is stable and safe. The relevant agencies should be facilitating this "go out" process to encourage these companies. Last year, we decided to build a trade center in Moscow to showcase China. In the trade center, there are distributors, retailers, product displays, and all sorts of consulting services, making Chinese businesses operate more efficiently in Russia. In terms of India, we need to strive for a solution to break down their protectionism and sell in that market. 

A perplexing problem now is that many of our companies lack strategic foresight. They are myopic and are content with making a quick buck, which only taints China's reputation. The relevant departments should not only continue to ensure the quality of products, but also persuade these entrepreneurs to settle on a long-term vision. Without a brand and after-sale services, it is impossible to become dominant in a market. So after joining the WTO, we should use our position to compete in the global market and expand market share, this is the fundamental purpose of acceding to the WTO...

...I hope after this session is over, everyone should not merely examine how to protect ourselves, but more importantly, should research how to "go out", quickly familiarize with the "rules of the game", study other countries' laws, and take various actions to "go out". The "go out" strategy should first and foremost rely on product quality and cannot depend solely on cost...The thing that worries me the most isn't our ability to compete or volatility in our economy but rather our product quality. Many of our companies have not made "quality" their lifeline, but continue to rely on price and volume to compete. If this mentality is perpetuated, then our country has no future.


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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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