June 16, 1999

Business Coalition for US-China Trade

QUESTIONS AND ANSWERS:  U.S.-CHINA WTO NEGOTIATIONS

1.         Benefits of China WTO Agreement for the United States

QUESTION:       How would the United States benefit if China becomes a Member of the World Trade Organization (WTO)?

A.         To join the WTO, China must agree to play by global trade rules.  As part of its accession package, China has agreed to reduce its average tariff from 35% to 10%, provide market access opportunities for imported agricultural products, improve transparency, eliminate discriminatory taxes and regulations, abolish trade-distorting export subsidies, phase out protectionist quotas and WTO-inconsistent import substitution requirements, eliminate unscientific food safety barriers, and adopt judicial review procedures for administrative decisions.  These commitments would represent fully enforceable WTO undertakings.  Any failure to implement these commitments would subject China to trade sanctions under the WTO’s dispute settlement procedures. 

QUESTION:       How do the China WTO negotiations differ from NAFTA and the Uruguay Round?

A.         The WTO is a one-sided negotiation, where China makes the concessions, and the United States gets the benefits.  To join the WTO, China must unilaterally open its markets and agree to play by the same WTO rules as other WTO Members.  Unlike NAFTA and the Uruguay Round, the United States doesn’t have to make concessions as part of China’s WTO entry -- our markets are already open.  In contrast, in NAFTA and the Uruguay Round, the United States had to make major concessions to satisfy our trading partners’ demands for increased access to the U.S. market.

QUESTION:       What does the United States give up if China gets into the WTO?

A.         Very little.  The U.S. market is already open to Chinese products.  While the U.S. must extend Permanent NTR to China in order to get the full benefits of China’s WTO commitments, the reality is that U.S. duties on Chinese products would remain exactly the same, because we have given China MFN/NTR on an annual basis since 1980. 

2.         Process for Finishing China WTO Negotiations

QUESTION:       What is the process for completing China’s WTO accession terms?

A.         The terms for Chinese Membership are being negotiated by a WTO Working Party consisting of about 50 countries.  Under WTO practice, China’s commitments will be spelled out in three documents:  (1) Schedules of Concessions and Commitments (“Schedules”), (2) Protocol of Accession (“Protocol”), and (3) Working Party Report.

            The Schedules will list China’s market access commitments.  The Goods Schedule will set out a specific duty rate for each imported product.  These tariff commitments are known as “bindings,” because WTO’s rules prohibit raising a tariff above its “bound” rate in the Schedule.  The Services Schedule will list specific services sectors (e.g. financial services, insurance, and distribution) that are subject to Chinese market access and non-discrimination commitments.  Finally, for some important agricultural products, such as wheat, cotton, and corn, the Schedule commits China to replace existing import monopolies with tariff rate quotas (TRQs).  These TRQs will provide minimum market access opportunities which will allow the entry of specific quantities of imported agricultural products at low duty rates. 

            The Protocol is a separate document which contains specific legal undertakings required to bring China’s current trade regime into compliance with WTO rules, e.g. improving transparency, eliminating trade-distorting subsidies, providing national treatment, eliminating quotas and import substitution requirements, eliminating protectionist food safety requirements, and establishing judicial review procedures It will also set out transition terms (i.e. the timetable and staging of Chinese implementation) and understandings regarding the application of safeguard, antidumping, and trade law remedies.  The Report will contain additional commitments and explain how the WTO Working Party dealt with specific issues. 

QUESTION:       What still needs to be done to wrap up a WTO Agreement?

A.         The agreements announced by USTR on April 8 during Premier Zhu’s visit indicate that the U.S. and China are very close to finishing a bilateral market access package.  The bilateral negotiations will address some Protocol issues, e.g. safeguards, and non-market economy antidumping.  China must complete similar bilateral negotiations with other WTO Members, such as the European Union, Canada, Switzerland, and Japan.  It is anticipated that these bilateral negotiations will close fairly rapidly once the U.S. and China conclude their market access deal.  China must then integrate the various bilateral tariff and market access commitments into a single, comprehensive Market Access Schedule that reflects its best offer to any WTO Member.

            In addition, the Working Party must resolve the remaining Protocol issues.  The Working Party had finished about 75% of China’s Protocol by December 1997, when the Protocol negotiations were put on hold.  The Working Party then shifted to market access negotiations, which have been led by the United States. 

            Under WTO procedures, the WTO General Council must agree to China’s Protocol, Schedules, and Working Party Report.  The General Council normally decides by consensus, although the WTO Agreement states that a minimum of 2/3 of WTO Members must approve the accession terms.  The goal is to finish this process in time for China to participate in the WTO’s Seattle Ministerial Meeting, which is scheduled for November 30 to December 3, 1999. 

3.         Making China Play by WTO Rules

QUESTION:       What does China get out of WTO Membership?

A.         In the short-term, WTO Membership would require China to make painful economic adjustments.  Most state-owned Chinese enterprises must be fundamentally restructured to become internationally competitive.  Many Chinese enterprises will fail or go bankrupt.  The survivors must take drastic steps to cut costs, improve efficiency, and eliminate excess employment.  Accordingly, China’s state-owned enterprises and hardline political conservatives oppose a WTO Agreement. 

            The benefits of WTO Membership for China are mostly intangible or long-term.  China wants the prestige of WTO Membership, which would represent an international vote of confidence in its economic reform program.  Joining the WTO would send a positive signal to foreign investors, who have backed away during the Asian economic crisis.  Over time, open trade policies, increased access to foreign investment, and exposure to global competition would strengthen China’s economy and accelerate the restructuring of state-owned enterprises.  The breakthroughs announced on April 8 suggest that the Chinese leadership now understands that open trade and investment must be part of any viable economic restructuring program. 

QUESTION:       Why have the WTO negotiations taken so long?

A.         For years, China sought a political, not commercial, WTO deal.  China first applied to join GATT -- the WTO’s predecessor -- in 1986.  The negotiations have lasted over a 13 years because of the complexity of bringing China’s economy under GATT/WTO rules and China’s reluctance to undertake the comprehensive commitments required for WTO Membership.  The United States has taken the lead in insisting on strong commercial accession terms.  We have gotten support from the European Union, Canada, Switzerland, Australia, Cairns Group of agricultural-exporting nations, and other key WTO Members. 

4.         Importance of Locking in April 8 Market Access Package

QUESTION:       Why is it important for the United States to lock in the April 8 package?

A.         During Prime Minister Zhu’s visit, U.S. trade negotiators announced spectacular breakthroughs on industrial tariffs, financial services, insurance, distribution, sanitary and phyto-sanitary (food safety) barriers, and increased market-access for key U.S. farm products, e.g. wheat, soybeans, meat, and citrus.  The Chinese commitments achieved U.S. goals in many key sectors. 

            As a result, American business and agriculture are convinced that the time to lock in a WTO deal is now.  Recent events have underscored the risks of delay.  Chinese hardliners used the accidental bombing of the Chinese Embassy in Belgrade to attack a WTO deal and challenge Chinese economic reformers.  Reports that China may be considering backing away from certain provisions of the April 8 document show the importance of locking in Chinese commitments to prevent backsliding. 

            Given the short Congressional timetable, we are concerned that, unless a deal is wrapped up quickly, there could be insufficient time to pass crucial Permanent NTR legislation that will bring home the benefits of U.S. negotiating success for U.S. farmers, workers, companies, exporters, and consumers.  If the United States doesn’t apply the WTO to China by granting PNTR, we lose the benefits of the April 8 package and more. 

QUESTION:       Why are the stakes so high?

A.         The IMF estimates that China may already be the world’s third-largest economy, after the United States and Japan.  It is by far the largest market which is outside the WTO’s rules.  China is already America’s 5th-largest trading partner and 6th largest agricultural export market.  The American Farm Bureau has called China the “most important growth market for American agriculture into the 21st century.”  Accordingly, it is essential that China enter the WTO on “commercially-acceptable” terms that reflect a genuine commitment to opening its markets and playing by global trade rules. 

5.         Enforcing China’s WTO Commitments

QUESTION:       How can the United States ensure that China lives up to its commitments?

A.         The WTO’s dispute settlement procedures provide a mechanism for enforcing China’s commitments.  In the WTO, disputes over compliance are submitted to Panels of experts, who issue legal rulings and recommendations.  If the losing Member fails to comply with a ruling within a reasonable period of time, the WTO must authorize trade sanctions.  Thus far, the U.S. has won, or successfully resolved through negotiations, 17 of the 18 dispute settlement complaints it has initiated in the WTO. 

            The WTO fixed a major problem with GATT, which allowed the losing party to block an adverse ruling indefinitely.  When the EU tried similar stalling tactics in Bananas, it was only able to delay WTO-authorized retaliation by only 45 days.  In contrast, some GATT disputes dragged on for years.  There is enormous international pressure to comply with GATT and WTO rulings.  Consequently, the WTO and GATT have a track record of producing results, even on difficult and intractable trade barriers, e.g. Japanese Agricultural Quotas, Canadian Magazines, EC Oilseeds, EC Citrus, Korean Beef, and Canada Foreign Investment Review Act. 

6.         No Benefits for U.S. Without Permanent NTR

QUESTION:       Why doesn’t the United States get the full benefits of a WTO deal unless Congress approves Permanent NTR legislation?

A.         If the United States doesn’t apply the WTO to China by withholding Permanent NTR, we don’t get the benefits of China’s WTO commitments. 

            One of the cornerstones of the WTO is the “unconditional most-favored nation” or “MFN” principle.  MFN is not a special privilege or “favor.”  It is the normal trade relationship between WTO Members, which is set out in GATT Article I and GATS Article II.  MFN means that any trade concession must be granted “immediately and unconditionally” to all 135 WTO Members.  By requiring each WTO Member to grant exactly the same, non-discriminatory market access to all 135 WTO Members without further negotiations, concessions, or demands, unconditional MFN guarantees a level playing field worldwide. 

            To comply with the WTO, the United States must grant China unconditional MFN.  If we refuse to recognize China as a full WTO Member, it would have a right to withhold the benefits of key WTO commitments from American goods, services, and farm products.  In this situation, the U.S. and China would probably invoke the so-called “non-application” clause of WTO Article XIII, even though China would become a WTO Member and grant WTO rights and benefits to its other trading partners.  As a result, Congress must approve Permanent NTR if the United States is to realize the benefits of China’s WTO commitments.  Otherwise, the principal beneficiaries of a China WTO deal will be our competitors, e.g. Europe and Japan, who will reap the gains from America’s leadership in negotiating strong commercial WTO accession terms.

QUESTION:       Doesn’t the United States already provide MFN to China?

A.         While the United States provides China with “MFN” (recently renamed “normal trade relations” or “NTR” under U.S. trade law), we do so on a limited and conditional basis.  Under the Jackson-Vanik Amendment to the Trade Act of 1974, China’s MFN status is conditioned on annual Presidential findings regarding “freedom of emigration,” which can be overridden by Congress through a joint resolution of disapproval.  The annual renewals and constant threat of Congressional revocation greatly diminish the value of China’s MFN/NTR rights.  This uncertainty goes both ways.  For obvious reasons, China also grants MFN to U.S. products on a limited and temporary basis, which also could be withdrawn at any time. 

            To comply with the WTO, the United States must make MFN permanent and unconditional by enacting legislation to exempt China from the Jackson-Vanik and end the divisive annual renewal process.  Congress has enacted similar legislation for former Soviet Bloc countries (e.g. Hungary, the Czech Republic, and most recently Mongolia) which allows a full WTO relationship with these countries. 

QUESTION:       Wouldn’t the United States get some benefits of the WTO Agreement under our Bilateral Trade Agreement with China?

A.         The United States would get some benefits under the bilateral agreement, but we would lose our rights to most of the WTO market access breakthroughs that were announced by USTR on April 8 and more. 

            In the 1979 Agreement, the United States and China agreed to provide each other with limited annual MFN rights with respect to customs duties, customs procedures, and import and export taxes.  Accordingly, U.S. goods would probably get the benefits of Chinese tariff cuts under the MFN clause of the 1979 Agreement.  These tariff cuts, however, could still be withdrawn at any time. 

            Moreover, because of the limited scope of the 1979 Agreement, the United States would not have WTO rights to key Chinese market access and protocol commitments, including financial services, insurance, trading rights, distribution, telecommunications services, TRIMS, IPR, and technology transfers.  Services, SPS, and TRIMS are outside the scope of the 1979 bilateral, while the 1992 IPR Agreement does not contain an MFN clause.  While some issues are covered by bilateral agreements, senior USTR officials have expressed concern that if Congress revokes or denies NTR/PNTR, China could refuse to apply its IPR and SPS commitments.

            Finally, the United States would not have any right to initiate WTO enforcement actions.  As a result, we would not be in a position to enforce China’s commitments under the WTO’s dispute settlement mechanism. 

QUESTION:       Can’t the United States force China to eliminate trade barriers under Section 301?

A.         Section 301 is an important, but limited, tool.  It is most effective when used to attack sector-specific trade barriers, e.g. barriers to U.S. semiconductors.  In contrast, a WTO deal is comprehensive.  It would impose strict rules and disciplines on every aspect of China’s trade, to the benefit of every U.S. industry or sector that exports to China.

            Section 301 requires the United States to take sole responsibility for challenging foreign barriers without multilateral authorization or support.  In other words, it gives the EU, Japan, and Canada a free-ride.  In contrast, because 134 countries are WTO Members, China would be under multilateral pressure to open its markets and live up to its commitments. 

            Finally, Section 301 is highly confrontational and invites tit-for-tat retaliation.  In contrast, it is difficult for any country, including China, to refuse to comply with a WTO ruling, since by doing so, it would threaten the interests of all WTO Members in an open, rules-based global trading system. 

7.         Benefits of WTO for Human Rights in China

QUESTION:       How will China’s WTO Membership affect human rights?

A.         While the WTO does not directly address human rights, it will accelerate the opening of China’s economy and the liberalization of Chinese society.  For two decades, China’s free market reforms and opening to foreign trade and investment have driven progress on economic and political freedom and the rule of law.  Opening China’s markets will put enormous competitive pressures on beleaguered state-owned industries, which are bastions of economic and political conservatism.  In contrast, a WTO Agreement will unleash China’s entrepreneurial sector, which supports increased economic and political freedom.  It will expand access to outside ideas and information by liberalizing China’s information-technology, telecommunications, and entertainment sectors.  Finally, by requiring procedures for judicial review, a WTO Agreement would intensify pressures to strengthen the rule of law in China. 

8.         Delaying a Permanent NTR vote -- Disastrous for U.S. exports

QUESTION:       Why can’t Congress delay a vote on Permanent NTR until after the 2000 Presidential and Congressional elections?

A.         Such a delay would have devastating costs for American companies, workers, and especially farmers, while benefiting our fiercest global competitors.  In addition, any delay that is seen as an effort to avoid political accountability on WTO seems unlikely to enhance public respect for Congress, the Administration, or U.S. leadership.

            A two-year delay in establishing U.S.-China WTO relations would mean that China gets into the WTO, but American products are frozen out of China’s WTO commitments during the critical period when Chinese industrial and agricultural markets are being opened.  During this period, China would turn to our competitors, e.g. EU, Canada, Japan, and Australia, for its purchases of wheat, aircraft, telecommunications equipment, and financial services, establishing long-term relationships and trading patterns that are highly disadvantageous to U.S. suppliers.