BUSINESSWEEK ONLINE : JUNE 5, 2000 ISSUE
NEWS: ANALYSIS & COMMENTARY

Will China Follow WTO Rules?
Beijing's track record isn't pretty

It surely doesn't feel like it now. But someday, Washington's 13-year negotiation with Beijing over the terms of China's entry into the World Trade Organization will be remembered as the easy bit. And President Clinton's six-month battle to secure permanent normal trade relations for China from a reluctant House of Representatives? A cakewalk, really.

The difficult part lies ahead. It begins later this year, when China enters the WTO and must start to lower its formidable barriers to imported goods, as Beijing has promised. ''We act as if we assume enforcement of the agreement is actually going to just happen,'' says Gregory Mastel, an expert on China at the New American Foundation, a Washington think tank. But in past agreements, ''we've found it next to impossible to get them to comply,'' says Mastel, who supports permanent normal trade relations.

Certainly, the recent record of compliance is not good. Foreigners seeking patent, trademark, and copyright protection get second-class treatment from Chinese bureaucrats. And piracy and counterfeiting of foreign goods are rampant, despite years of promises to reform (page 44).

''WE WILL BE GLAD.'' On top of all this, some market-opening concessions in the deal reached last November with Beijing are just a replay of forgotten promises stretching back to 1979. The result: U.S. shipments to China make up just 2% of American exports, and the figure hasn't changed for 10 years. Today, the U.S. exports less to the People's Republic than it does to Brazil or Singapore.

But such gloomy thoughts were lost in the Clinton Administration's euphoria over its come-from-behind victory on May 24, as the House of Representatives voted 237 to 197 to give China permanent normal trade relations. ''In 10 years we will look back on this day,'' President Clinton declared, ''and we will be glad we did this.''

Next stop for the legislation: a rendezvous with the Senate, and with Olin D. Clayton, a Decatur (Ill.) United Steelworkers Union member who has been in Washington for a month lobbying House members against the bill. Clayton, clad in a blue suit and baseball cap, stood outside the House chambers on May 24 and vowed, ''I ain't given up yet.'' But despite his dedication--which is shared by environmentalists, veterans groups, and small farmers--the Senate is considered almost certain to pass the bill.

The White House acknowledges that foot-dragging by Beijing on opening its markets could make things difficult. So the Administration is planning a wide-ranging effort to force compliance. Once China becomes a WTO member, the U.S. and 135 other members can haul it before the WTO's dispute settlement panels. But that process can take years, and governments can ignore adverse rulings. Europe, for example, continues to block U.S. exports of beef and bananas in defiance of the WTO.

To avoid similar impasses in China, the U.S. is recruiting a small army of U.S. bureaucrats and hand-holders to look after the interests of American exporters and investors there. The White House is seeking from Congress $22 million to hire trade experts who will monitor compliance with the agreement, provide China with technical assistance in rewriting its laws and civil procedures, and help steer U.S. businesses through the thicket of Chinese regulations--many of which aren't even written down. It will be an enormous job, and carries some of its own risks. ''I don't want a legal factory to just manufacture WTO cases,'' says Robert S. LaRussa, Under Secretary of Commerce for International Trade. ''I want a team to find practical solutions.''

But such solutions are hard to come by in a totalitarian nation whose long-standing economic goals include substituting domestic products for imports. Take just one example, government procurement. Beijing has long demanded certain promises from foreign companies that bid on projects there--commitments to buy Chinese parts and services, transfer technology, and conduct a portion of their research and development in China. Last November, Beijing agreed to stop insisting on such promises. But that concession will prove unenforceable, predicts Nicholas R. Lardy, a Brookings Institution expert on China's economy. ''Contracts will continue to go to the foreign companies that offer such inducements, and the Chinese will say that no one was required to give them,'' he says. Moreover, Beijing is writing new regulations on procurement, but foreigners will still have to seek special permission from the Ministry of Finance just to bid.

Perhaps the biggest challenge for U.S. exporters and investors will lie in reviving the Chinese legal system. It was dismantled after the 1949 Communist revolution, when attorneys and law professors were banished to farm collectives. Today, private business contracts are often enforced by bureaucrats relying on government directives rather than on a history of written case law and regulations. E-commerce sales and contracts are not legally binding and regulatory standards are unpublished, according to the Administration.

''We didn't come all this way to get an agreement and then not enforce it,'' says U.S. Trade Representative Charlene Barshefsky, a former trade lawyer herself who shuttled back and forth between Washington and Beijing for months. But, she acknowledges, ''The rule of law in China is rudimentary at best.'' China has only about 150,000 lawyers in a nation of 1.2 billion. The U.S., with less than a quarter of China's population, has eight times as many lawyers. The lack of legal infrastructure is one reason Chinese counterfeiters can knock off U.S. manufactured goods with impunity.

OVERWHELMED. Few in Washington doubt the sincerity of Chinese Premier Zhu Rongji and President Jiang Zemin, both eager to give China's creaky economy some free-market, free-trade shock therapy. But will Chinese farmers and factory workers welcome the painful treatment? China's WTO deal requires the country to reduce tariffs on farm imports from 31% to 14%. Many of China's 600 million farmers, who currently produce enough food to export some of their production, will likely be overwhelmed by competition from America's highly mechanized farms. State-owned factories and services, including those owned directly by the People's Liberation Army, not only provide 100 million jobs--nearly the size of the U.S. workforce--but also fund nearby schools, hospitals, and day-care centers. How long will Chinese workers go without social services to pursue capitalism's promised rewards? And will Army generals forgo the weapons purchases that those profits now guarantee?

There was a time when reaching trade agreements with other countries was considered an end in itself. But that was when such deals were reached between industrialized European nations with long histories of trading relations and established rules of law. No longer. The U.S. has learned from its experience with Japan that a promise to open markets to U.S. exports can be just the beginning of a long effort at ensuring compliance. If the deal between the U.S. and China is to have any meaning, the toughest work is yet to be done.

By Paul Magnusson with Howard Gleckman in Washington

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