approval from the WTO. Among the issues that Congress will address is the impact of the WTO on U.S. trade relations with Japan and China. This will be the second most important trade vote to be taken by Congress in the year 2000. The more contested debate is likely to be over the granting of permanent normal trade relations (PNTR) to China. PNTR must receive the approval of Congress if the United States and China, under their mutual understanding, are to apply WTO obligations to each other.

($ billion)

The issues affecting trade relations with China and Japan will be the focus of Congressional action during this calendar year. The decision as to whether the World Trade Organization is operating well and whether China should become a WTO member will be made primarily in the Congress. Although forgotten from time to time in this period of Executive Branch ascendancy, by foreign observers who have Parliamentary systems, and by Americans as well because of the prominence of the U.S. President and his negotiators, it is the Legislative Branch of the U.S. government that possesses the Commerce Power under the United States Constitution. While the President can negotiate with foreign countries, there is very little in the trade arena that he or she can in fact implement without authority being delegated by Congress.

This, the second session of the 106th Congress, is likely to be highly unusual in having two major trade votes. One will be on the question of Permanent Normal Trade Relations (PNTR) with China, based primarily (for most of those voting) on an evaluation of the substance of China’s WTO Accession Agreement. Separately, there will be a vote on the question of the operation of the WTO itself. In the debate accompanying the vote on this broader question, the effects of the operation of the WTO on America’s trade relations with Japan will be given especial scrutiny.

The success of the multilateral framework will be judged by two major factors – achieving real market access and preserving the ability to act against unfairly traded imports through the application of antidumping and anti-subsidy duties. In these respects, the multilateral trading system will be judged in part by comparison with the bilateral trade regimes that preceded it.

America’s affection and support for a multilateral approach to international trade relations was born during the Second World War and was shaped by the Great Depression. While competitive national tariff escalations did not cause the economic depression, they certainly broadened, deepened and lengthened it. The dream of the leaders of the immediate post-war period was to avoid repeating the mistakes of the 1930s. Economic reconstruction and development, through finance and expanded trade, were to be the primary tools in shaping a better world. If the Marshall Plan was the "most unsordid act in the history of mankind" in the words of Winston Churchill, the founding of the International Monetary Fund, the World Bank, and the proposed creation of the International Trade Organization were designed to be no less positive.

While the U.S. Executive Branch pressed forward with multilateralism in trade, the Congress was wary of the approach. It did not approve of the International Trade Organization, and that institution never came into being to take its place alongside the Fund and the Bank. Instead, a multilateral trade contract, the General Agreement on Tariffs and Trade (the GATT), was entered into. This was not submitted to the Congress for ratification, and for years was suspect in Congress for not having legitimate parentage. In the Trade Act of 1974, for example, while the Congress called on the Executive Branch to negotiate a number of improvements in the GATT’s provisions, and grudgingly authorized appropriations for U.S. participation, it stated --

This authorization does not imply approval or disapproval by the Congress of all articles of the General Agreement on Tariffs and Trade.

This statement, although ambivalent, was a hard-won acknowledgement of the GATT’s existence (sought by the author of this paper, who was the Administration’s chief draftsman of the bill).

By 1988, the Congress did accept the GATT in the Omnibus Trade and Competitiveness Act, providing that

The principal negotiating objectives of the United States regarding the improvement of the GATT and multilateral trade negotiation agreements are –

to enhance the status of the GATT;

to … extend the coverage of the GATT, and

to expand country participation in particular [GATT] agreements … .

Where did this change of heart come from?

It is a tenet of absolute faith for the current generation of U.S. policy makers that the largely unfettered operation of market forces will provide the greatest economic gain for the world and for the United States. America’s message for her trading partners is that the maximization of economic efficiency will give rise to a general increase in the standard of living for the peoples of all countries participating in an open global trading system.

American confidence in this vision is born from a conflated view of the national experience – from the 19^th century, the optimism stemming from expansion across a vast country, the welcoming of wave after wave of immigration, and the celebration of the industrial revolution and boundless technological invention. In retrospect, the 20^th century presents a similar picture of a natural order of limitless progress, with pauses in the 1930s for the depression and in the 1970s for the two oil crises.

The current perspective on the American experience is ebullient. It is shaped by rapid U.S. growth in the immediate post war years of the 1950s and 1960s, that reached its full flowering in the last two decades – marked by steady and impressive growth in U.S. productivity and the U.S. economy, the lowest unemployment rate in three decades, and in the emergence of America’s role in global e-commerce. America’s positive conclusions about its own experience with the free market have been reinforced by the recent failures of alternative models – state planning and state developmental capitalism. The collapse of the Soviet Union, the Asian financial crisis and the long stagnation of the Japanese economy are each seen as confirmations of the essential validity of the American model. In particular, there is a feeling that Japan has allowed its state developmental capitalism to linger well after its usefulness was exhausted.

Part of America’s free market prescription is to match deregulation at home with a program of opening all markets to international trade. The most efficient way to open many markets simultaneously – given that there are 135 WTO members – is to deal with them all at once. Market opening on a multilateral basis can be achieved more efficiently, in theory and often in practice, by assembling in one place all countries and signing them onto as many trade liberalizing agreements as can be produced at the one time. This is part of the theory behind the creation of great multilateral trade negotiating rounds. There is also a political dynamic whereby it is difficult for any one country to walk away from the table. This was what was being attempted at the would-have-been launch at Seattle.

Seattle

One can only wonder what conclusions China’s observers drew at the WTO Ministerial Conference last month in Seattle -- witnessing the vigorous activities of the protesters in the streets in stark contrast with the complete absence of progress among the delegates within the Convention Center. Was Seattle to be a momentary interruption in the general movement toward greater trade liberalization, or was it an inflection point, where a noticeable change in the direction of the world trading system would be later discerned? I believe that the correct answer will prove to be "both." But before assessing where the future of the WTO may lie, it is worth examining the conduct at Seattle of the two participants whose countries are represented at this meeting – the United States and Japan.

It is easy to direct criticism at America – it was the host, it has been the primary driving force for the multilateral system, it had a large share in the preparations for Seattle, and, it was the chair, and could not avoid the primary responsibility, even if it had wanted to, for the successful conclusion of the Conference. But the U.S. purpose was clear – to make a grand effort to obtain a new round of negotiations to bring about maximum trade liberalization as part of a rules-based system. The U.S. invested significant human capital in Seattle. Its team was led by the President and included most of the members of his Cabinet who had responsibilities for some aspect of trade -- the Secretaries of State, Commerce, Labor, Transportation and Agriculture, the U.S. Trade Representative, the Deputy Secretary of the Treasury, and the President’s Chief Domestic Economic Advisor. Despite President Clinton’s pleas for cooperation to foreign leaders, including most notably a lengthy mid-week telephone conversation with Prime Minister Obuchi of Japan, the effort collapsed.

There was no consensus reached on any agenda, and certainly not on the agenda advanced by the United States. There was not even a sufficient sense of common purpose among the WTO members for them to cobble together even an agreed declaration filled with generalities.

What of Japan’s part? From an American perspective, Japan, in the past, has mostly sought to avoid notice at multilateral trade negotiations. Japan was more closed than other industrialized participants were, and it felt vulnerable leading. It preferred a defensive, very low profile. In Seattle, this changed dramatically. Japan played a major, and wholly negative, role.

As noted, America’s principal objectives are to obtain open market access and to preserve its ability to defend itself with trade measures against unfairly traded (primarily dumped) goods that injure domestic industries. On both of these points, the Japanese negotiators launched major offensives. Tactically, the Japanese negotiators succeeded.

Japan’s overt protection involves primarily agriculture. At this meeting, Japan advanced a new, more sophisticated and dangerous rationale for blocking further trade negotiations. The approach was called "multi-functionality." This concept was designed to clothe the desire for protection of inefficient agriculture from more efficiently produced food from abroad in notionally respectable garb. Henceforth, Japanese protectionist policy for agriculture, instead of being served by tactics of delay and stubborn, low-key resistance, was to be strutted out by the Japanese Government. Protectionism was to be given an intellectual basis. The banner of multi-functionality was unfurled in the name of preserving a way of life, the environment, the small community, the forests, and the land.

The other high profile activity of the Japanese delegation was to press (unsuccessfully) for a re-opening of the Antidumping Code in order to curb America’s use of antidumping measures that MITI Minister Takashi Fukaya claimed the United States was abusing. His aim was to approach developing countries in particular and "establish an encircling net" around the United States.1

In describing Japan’s position at Seattle a few days later, Japanese officials used rhetoric reminiscent of some of that which, in very different circumstances, was employed in the 1930s. Japan, which is a chronic underperformer as in importer of manufactured products from developing countries, portrayed itself as a champion of less-developed nations against the United States –

On December 3, when negotiations were at their peak, one senior MITI official who made a comment on the negotiations with the U.S. over the antidumping measures, asserted: "This is going to be a contest of strength. Certainly we will not make concessions this time." [He said],"If we draw back now, developing countries will never trust us."

According to government sources, in response to a call from U.S. President Clinton on the morning of December 3 (early morning of the 4th in Japan), Prime Minister Keizo Obuchi turned down [the President’s] pressure, saying, "This time the discussion is multilateral, not limited to Japan." The U.S. made a miscalculation regarding the Japanese [stance]: Japan, supported by developing countries which have also been closed out of [the U.S. market] by U.S. antidumping measures, has stressed a "multilateral framework" rather than [making] concessions [to the United States]. The Japanese government planned to carry through a confrontational stance, "expecting that it might trigger a breakdown" (according to a MITI source).2

No breakdown occurred over antidumping, although it might have had the talks been able to move beyond disagreements over starting talks on opening markets to agriculture.

Indeed, there was a tactical success for Japan, even if not due to its efforts. The Conference did fail. But was this in Japan’s strategic interests? Perhaps no nation benefits from the world trading system more than Japan, judged by the generally mercantilist standard of state developmental capitalism. But like many a national figure in any of our countries who risks everything by engaging in promiscuous behavior, with so much of Japan’s national interest at stake, MITI’s conduct was just plain reckless. It was working at undermining American support for an open international trading system, on which its future prosperity is dependent.

What could Japan have done differently? What if Prime Minister Obuchi had responded to President Clinton’s call, by interpreting it as a call for Japanese leadership on the world stage? What if his apparent response had not been to claim domestic credit for yet again facing down American gaiatsu, but to say in response that he would call upon all the major leaders of Asia to come to a positive conclusion in Seattle? It is just possible that the outcome could have been different. But the two countries appeared trapped in their history. The phone call was just another kendo match, it was not two partners working together to create a post-Bretton Woods international economic architecture.

Nor has MITI yet recognized its error. Shortly after Seattle, the MITI Minister told Japanese steel executives at a December 20 meeting that the Japanese government would continue working with other countries to incorporate revisions to the antidumping agreement in the next WTO round. In particular, for his planned meeting with the European Union in January 2000, he reportedly gave assurances that the Japanese government would work upon its European counterparts to side with Japan:

In response to these [steel industry] requests, MITI Minister Fukaya made it clear that the government would make a frontal attack against the injustice of U.S. antidumping [measures], saying . . . We got overwhelming support at the Seattle meeting for strengthening AD rules. If the talks had not broken down, I'm confident that it would have been incorporated [in the next round of negotiations]. I would like to start the next round of talks as soon as possible and respond to the steel industry's requests. There will be a regular consultation with the EU in early January. We will work upon them to build a post-Seattle structure." ³

MITI is responsible for much of Japan’s economic miracle that extended through the 1980s. It has many of the top graduates from Japan’s most prestigious educational institutions. But like other figures in tragedy who engage in reckless behavior, the only reasonable question to ask is "what were they thinking?"

This newly confrontational stance of Japan has not been confined to setting the agenda for a new round of multilateral trade negotiations. It has been in the making for some time.

U.S.-Japan Bilateral Trade Relations

There is not space, time, or energy to catalogue here in any detail the stormy history of U.S.-Japan bilateral trade relations. The most common word to describe the seemingly endless series of disputes between the United States and Japan -- from the late 1960s (primarily in textiles), through the 1970s and 1980s (beef, citrus, apples, cherries, leather, wood products, paper, glass, autos, auto parts, computers, semiconductors, telecommunications procurement, etc.), and the 1990s (insurance, telecommunications services, automobiles, glass, film, retailing and distribution, civil aviation, ports, competition policy, investment, legal services, satellites, supercomputers, and others matters too numerous to mention) -- is trade friction. In fact, of the 424 page current volume of detailed foreign trade barriers published annually by the U.S. Trade Representative, listing market access problems with scores of countries from the Arab League to Zimbabwe, Japan takes first prize with market access problems filling 58 pages.4

Any number of approaches has been tried to resolve problems of Japan market access. These have included talks on individual trade items, various liberalization packages, various processes (MOSS, SII, framework discussions – what these stood for no longer matters), deregulatory talks, and the like. Generally these have been unsatisfactory from the U.S. point of view, although there have been areas in which solutions were found. (There are no complaints today about market access for soda ash or semiconductors, for example.) The era of bilateral disputes perhaps peaked in a high-profile confrontation over automobiles, with the threat of massive U.S. trade retaliation (none occurred) and a mock kendo match between the U.S. Trade Representative and the MITI Minister – which made all the newspapers but did not result in additional sales of foreign autos in Japan.
After that came the Uruguay Round.

Perhaps Japan’s central objective in the last major round of GATT negotiations -- other than to maintain protection for agriculture -- was to blunt the threatened use by the United States of trade leverage (under section 301 of the Trade Act of 1974). In the views of its trading partners, the threat of section 301 was being continuously applied by the United States against what it regarded as the recalcitrance of its trading partners, often Japan -- in order to extract bilateral commitments for further market access. Resentment was strong in Tokyo and in a number of foreign capitals.

These opponents of American "unilateralism" largely succeeded in achieving their objective judged by the record of the past five years. This was accomplished through the adoption of binding dispute settlement, an American (bless them) idea. How was it that America’s leverage was seemingly undone? Some illustrations are in order.

America as a defendant, when it transgresses, has a remarkably transparent law-based system of trade regulation. For dispute settlement purposes, when the U.S. crosses the line of its WTO obligations, it is as if it had a large bulls-eye painted on its chest. The foreign country plaintiff can go to the WTO, get a judgment against the practice, insist on the practice being lifted, and is able to retaliate if it does not get satisfaction, and international right is on its side. Well, that might be all right. The U.S. ought not to transgress.

When the U.S. is a complainant, it will often be seeking to challenge a far less transparent system of protection employed by the defendant country. How will it show that the Japanese economy is rigged in a variety of hidden ways – for example through prefectural limits on operation of discount stores, or the stifling of competition through the Premiums Law administered by the Japan Fair Trade Commission? The WTO has no ability to investigate. It has been shown, in the Japan photographic film and paper market access case, to be unable to make any useful findings whatsoever with respect to these more complex forms of protection. This was a loss for both sides: America was not vindicated in its complaint; Japan was under much less international pressure to reform its archaic distribution system, which is a great burden on the Japanese economy.

There were also longer lasting effects on trade relations. The feeling spread quickly within the Japanese bureaucracy that the United States could not retaliate against Japanese market barriers because to do so, without having won a WTO case against Japan, the United States would have to act contrary to its WTO obligations. The automobile confrontation was read in Japan as meaning that the U.S. would not do this. The Government of Japan, in answer to continuing American complaints of denial of market access, adopted a policy of what one astute observer termed monzenbarai (not answering the knock at the gate) – spurning attempts at any substantive discussions of market access problems. In the WTO world, with America’s section 301 and unilateralism apparently hung up on the wall like Wyatt Earp’s peace-keeping device, Japan succeeded in resisting all attempts at a civil dialogue, not to mention negotiations, over its very special trade barriers.

So, what of the 58 pages listing Japanese market barriers? Are relations between the two countries strained? Does any of this matter very much in Washington today? The answer, with only the very occasional possibility of a shot being fired (e.g., the Federal Maritime Commission’s threatened retaliation against Japanese port charges), is, not to the point of opening hostilities. While there are still problems, they rank low in importance on America’s national agenda.

There are a variety of reasons why trade with Japan has ceased to be a U.S. priority. To list a few, there is the gloom about the recovery of the Japanese economy. Japan has not been a very attractive growth market in many sectors for years. Moreover, there are some offsetting bright areas in the relationship. One positive note in U.S.-Japan trade relations, where there was contentiousness in the past, is in the field of semiconductors. Here there is harmony and cooperation, at both the inter-industry and inter-governmental level. At the suggestion of the Japanese government and industry, the U.S. agreed to a Japanese proposal to form a multilateral partnership in this sector to consider positive policies to enhance the opening of world markets and growth in demand worldwide. The focus under the current semiconductor agreement is on multilateral cooperation in this sector, without any focus on Japan market access.

In addition there have been many more opportunities to invest in Japan. With the long trough of despond of the Japanese economy, U.S. financial services firms have been encouraged to invest where there is a need for capital in Japan. Inward investment, remarkably small for over a century after the Meiji Restoration, has been welcomed in a large number of instances.

There is also, despite the enormous bilateral trade imbalance, Japan fatigue in Washington – a weariness that takes the edge out of moral outrage. There is not even any longer a debate between the Japan boosters (once known largely behind their backs as the "Chrysanthemum Club") and the hard liners (once oddly called the "revisionists"). It is now assumed that most of what the hard-liners said about Japan in the past was true (the stories of crony capitalism, protectionism, and exclusionary keiretsu relationships), but that all of this no longer matters except to the Japanese. In this time of American triumphalism, there is a feeling that Japan’s self-defeating policies are (like virtue) their own reward.

Lastly, there is another factor that deprives the U.S.-Japan relationship of friction, or even attention. When it comes to the East Asia, China accounts for 95 percent or more of American trade policy interest, absorbing the energy that was for years devoted to Japan. This does not mean, however, that the U.S.-Japan relationship will necessarily stay peaceful for long.

The next confrontation between Japan and the United States may well be in the area of antidumping, where Japan, having failed in Seattle to get agreement to a renegotiation of the Antidumping Code, has announced plans to attack all antidumping cases brought against Japanese steel, piecemeal.

The facts regarding the problem of the dumping of Japanese steel exports to the United States are very clear. The Japanese market for steel has been cartelized for decades. Relative shares of production among the Japanese producers were eerily stable, shipments to most third country markets were regulated by inter-mill agreements, imports were actively discouraged, at times being smuggled at night by barge into Japanese ports to avoid retaliation by domestic mills. Industrial policies and anticompetitive practices created, as might be expected, vast overcapacity. When the Asian financial crisis hit, rather than adjusting fully to the collapse of Asian demand through rationalization of production, the Japanese mills dumped massive quantities of steel in the U.S. market in a remarkably short period of time.

The President sought the cooperation of the Government of Japan, but given the WTO system the United States champions, he refrained from soliciting formal export restraint – the historical remedy. He singled out the Japan steel problem in his 1999 State of the Union Message to both Houses of Congress, as far as I know the first time this principal national address has been used by any President to cite another nation for causing a trade problem.

Before the U.S. trade remedies could be mobilized (they require a showing of injury), Japanese steel producers had increased exports to the U.S. market of hot rolled carbon steel twelve-fold (from 218,000 tons in 1996, to 2.6 million tons in 1998), had nearly doubled exports of cold-rolled steel (from 255,000 to 439,000 tons), and had increased exports of steel plate by nearly seventeen-fold (from 7,800 to 133,000 tons). Not surprisingly, given the closed nature of the Japanese market, the U.S. Commerce Department found that the Japanese producers had dumped their steel into the U.S. market, and applied dumping margins ranging from 25 to 68 percent for hot-rolled products, 11 to 59 percent for plate, and 39 ton 53 percent for cold rolled steel.

While each of these cases was far short of the enormous margins found in the dumping of semiconductors in the mid-1980s, the margins were very large by any standard. The International Trade Commission has unanimously found current injury to the domestic steel industry.

Having created the conditions for the most egregious instance of dumping in the 1990s, forcing highly efficient American firms into a loss position in a period of record U.S. demand, the Japanese Ministry for International Trade and Industry labeled America’s antidumping actions abusive, and has launched an all-out campaign of "countermeasures." This is bound to lead to a major confrontation with the United States.

In U.S.-Japan trade relations, the WTO has become a means to attack U.S. defensive trade measures while America’s cases against Japan have fared poorly. On the other hand, while the United States cares much less about the remaining problems of Japan market access, the WTO, which should care institutionally, is neither engaged nor held accountable, to its discredit.

There are thus two kinds of imbalance in the U.S.-Japan trade relationship. One is the inability for the two countries to solve problems of Japan market access peacefully. The other imbalance is a concomitant of the first, and it runs in the opposite direction. This is Japan’s immense surplus. Both imbalances have the capacity to put great stress into the bilateral relationship. If Japan would only import more from developing countries; this would ease the problem.

Will the condition of general ennui regarding the opening of the Japanese market persist? Perhaps, but not forever. Were there to be less robust economic conditions in the United States, and the mammoth bilateral trade imbalance continued, and/or the degree of openness to U.S. services providers and investment decreased markedly, the failure to have any answers to this Japan problem would be seen by the Congress as a profoundly disturbing deficiency in the WTO, as well as a major problem in U.S.-Japan relations. In the midst of this potentially combustible area of trade relations, there is little statesmanship from MITI officials, many of whom appear to be mired in the history of past disputes. Through recklessness, through a promiscuous use of WTO dispute settlement and blocking a new round of multilateral trade negotiations, they can achieve a renewal of trade friction with the United States that might otherwise not occur. What are they thinking?

U.S.-China Trade

As seen from Washington, there are vast differences in the trade relationship between the United States and China, as compared with that of the United States and Japan. The U.S.-China trading relationship is not remembered for having been begun with anything like Admiral Perry’s black ships forcing entry (despite some historical parallels later on), but is characterized instead by a romanticism about the China Trade, and stories of the youth of Salem, Massachusetts, who were said by the historian Samuel Eliot Morison to be more at home on the streets of Canton, than on the streets of Boston. China has always seemed open and beckoning, although America denied herself access to the Chinese market for three decades after the Chinese Communists came to power in Beijing.

Perhaps because of this long period of frozen trade relations, perhaps because imports of Chinese goods entered the United States later and seemed to compete more with imports from other sources -- replacing those imports more often than American production, perhaps because China has been relatively open to American investment, perhaps because of the seemingly very large potential market (as opposed to one that is very "difficult" and stagnant in Japan), the attitude in American business towards China trade is very positive. There is not a long troubled history of animosity over specific trade issues. Barriers in China are seen often as not of the making of the state, but areas in which the central government is interested in taking action -- for example, where there is local corruption or violation of intellectual property rights.

In Japan, American negotiators feel frustrated with the remaining major challenges of overcoming bureaucratic resistance and anticompetitive behavior. The problems with China, to the extent they occur (and there will be some), appear to lie in implementation of far-reaching new commitments. If there is major nonperformance, it is seen to be in the future.

In fact, there may be enormous problems just around the corner. It is fashionable to be excessively optimistic about the future of trade relations with China. Implementation of commitments is likely to prove difficult, in part because of China’s size, and in part due to the diffusion of power the further economic activity takes place away from Beijing. China may be even more difficult as a participant in the WTO than Japan, but we do not know that.

There is one key issue in U.S.-China economic relations today, and it does not concern arguments over trade barriers. The issue is whether the United States and China, having negotiated a mutually beneficial WTO Accession Protocol for Chinese entry into the WTO, can see it to fruition, applying the WTO to each other’s trade, and replacing their 1980 Bilateral Trade Agreement. Indeed, while China may have problems adjusting to the effects of implementing the commitments it has made, the first major hurdle in the U.S.-China WTO relationship is not China’s but America’s. This hurdle is domestic, within the United States, and does not depend upon China’s granting additional concessions (except insofar as other trading partners, most particularly, the European Union, is concerned, negotiations with which still lie between China and WTO accession).

The next step in the U.S.-China trade relationship is up to the U.S. Congress, which will be voting on Permanent Normal Trade Relations (PNTR).

The Vote in Congress on China WTO Accession (or, more accurately, PNTR)

This is an odd debate in many ways. Objectively there should be no reason why the trade relations of one-quarter of the earth’s population should be conducted outside of the instrument that already governs the trade of 135 nations. In American idiom, the question of whether China should be subject to the obligations and benefit from the rights of the WTO membership should be a "no-brainer."

Ostensibly, the debate in Congress should be about whether the China WTO Accession Agreement is sufficient substantively. This is a serious issue because China is considered to still be, in many respects, a "non-market economy" country. The Protocol of Accession therefore must deal not only with bringing China up to an acceptable level of tariff concessions, but must be looked to for supplementing the normal WTO substantive code provisions to assure that trade concessions from China have a value equivalent to those of a market economy country.

China made a number of difficult and laudable decisions to reach the current agreement with the United States with respect to its WTO accession. Presumably, these commitments would not have been made if China did not view them to be strongly its own interest. What is most important about China WTO accession is perhaps the accompanying domestic reform of the Chinese economy. Without this, the concessions would not be at all as valuable to China or to its trading partners. While the part of this paper dealing with China is focussed on WTO accession, it is critical to view this as an integral part of domestic reform in China, both in terms of economic organization – allowing the market to determine competitive outcomes, as well as moving to allow the rule of law to govern an increasing part of China’s economic life.

In turning briefly to a review of some of the substantive provisions of the U.S.-China WTO accession package, a reasonably strong caveat is in order. The text of the U.S.-China bilateral agreement regarding Chinese accession to the WTO has not been made public, and has not been seen by any but cleared advisors. Judgments made in this paper are based on USTR’s and other government briefings, and not upon the actual text of the Agreement. Therefore, please read all of the following as the public understanding of what is in the U.S.-China text rather than a reading of the document itself. A second caveat is that there is further negotiation that will take place between China and other trading nations, most notably the European Union, and then there will be a multilateral process in a WTO working party. However, our major trading partners share U.S. objectives for China’s WTO accession, and it is highly unlikely that the commitments given to the United States on November 15, 1999, in the U.S.-China negotiation on China’s accession to the WTO will be weakened. If anything, additional commitments and disciplines will likely be undertaken by China.

With this as context, a few examples help to illustrate what the U.S-China agreement provides:

Information Technology Agreement. It was only in the spring of 1997 that the European Union agreed to eliminate its tariffs on information technology products. This is how recently key trading countries came to the realization that tariff free trade in information technology products served the vital interests of the importing country. Very soon afterward, President Jiang Zemin pledged in October 1997 that China would join the Information Technology Agreement (ITA) "as soon as possible." This makes good sense for China if it is to accelerate its own development -- foregoing tariffs on the inputs necessary to participate in the information technology revolution.

Purchasing by State-Invested Enterprises (SIEs). State-invested enterprises in key sectors control a significant share of the trade in goods into and out of China. As a result of this active government role, there was a significant risk as competitive Chinese production increased both in volume and quality, state-invested enterprises would have been encouraged by Chinese officials to purchase from domestic suppliers. Such discrimination could have significantly burdened or restricted foreign sales in China in the future. Given the potential significance of state-invested enterprises in China for the foreseeable future, China's Protocol of Accession needed to include an affirmative obligation on the part of the Chinese Government to ensure that its state-invested enterprises make purchases on the basis of commercial considerations. To this was added a commitment that the Government of China would not issue administrative guidance to SIEs to buy domestic goods.

Elimination of Investment Restrictions. Chinese foreign investment restrictions, including restrictions on 100 percent foreign ownership, export targets and local content requirements can be imposed as a quid-pro-quo for decisions by government officials at both the national and sub-national level. For high-tech industries, these measures can be used as levers to obtain transfer of technology from foreign firms. China's Protocol of Accession reportedly includes an explicit provision requiring China to refrain from taking any measure which requires a foreign enterprise to invest, to enter into any form of joint venture arrangement with a Chinese entity, or to transfer any technology or intellectual property to a domestic entity, except in accordance with WTO rules.

Trading and Distribution Rights. Chinese restrictions on "trading rights" (the ability to import and export from China) are significant impediments to foreign firms' ability to access the Chinese market, and, if not eliminated, may undermine the benefit of other trade liberalization measures agreed to by China. Equally important as the right to import is the right to distribute goods within China and provide after-sales services for those goods. The current system forces U.S. producers to sell through Chinese distributors and provide after-sales services through a domestic Chinese entity. The inability to deal directly with end-users is a particular problem in industries where design and development require extensive contact between producers and the ultimate end-users of the products. Reportedly, a rapid phase out of the restrictions on trading and distribution rights has been agreed to in the U.S.-China negotiations.

Protection of Intellectual Property Rights. China has enacted patent, copyright, and trademark laws, but their credibility requires strong enforcement. While there has been no piracy of the most advanced intellectual property to date, it is also likely that China's level of technological development has not yet permitted its industries to manufacture the most advanced products in large commercial quantities. However, China's capabilities are rapidly advancing. Therefore, it is important that the Protocol of Accession apparently commits China to abide by the obligations of the WTO Agreement on Trade-Related Intellectual Property Rights, without any transition period before the obligations are enforceable.

Non-Market Economy Antidumping (NME) Rules. In a non-market economy, prices and costs are not reliable for application of the WTO’s antidumping provisions. It has been announced that a provision will be included in China's WTO Protocol of Accession to permit, for a period of fifteen years, other countries to continue to apply the NME provisions of their antidumping laws to imports from China. In essence, the practical effect for the United States is that data from a market economy at a similar level of development is used as a proxy for Chinese costs. In this way, arbitrary results can be avoided.

These are some of the reported elements that were included in the agreement reached between the United States and China regarding China’s Protocol of Accession to the WTO. There is also a clause governing safeguards, as well as various additional specific market-access concessions. There will be additional terms derived from other bilateral negotiations and from the final Protocol which emerges at the conclusion of the Working Party on China’s accession.

The bottom line is that this is a positive agreement for both China and its trading partners, including the United States. This is the judgment that will be formed once the text is made available and the Congress takes testimony. The United States is already open to imports from China. This is visible in the $69 billion5 trade deficit that America has with China. China has the benefit of a global rules-based regime on products that it exports to the United States and to Europe. The commercial question for American business, workers, and the Congress is whether it is possible to put into place the same rules and give them similar effect in China. USTR and the Clinton Administration have on paper an excellent agreement, as they have outlined it to the public. On the basis of the substance of the agreement, the question of Congressional approval should not even be a close call.

The debate in the Congress will, of course, go beyond the merits of the provisions included in the draft Protocol. The annual vote on extension of what was once called most-favored-nation treatment, and has been named "normal trade relations," involves questions of human rights, labor rights, and religious freedom in China, U.S. national security issues, relations between Beijing and Taipei, and domestic industries' concerns about potential injury due to imports.

Of these, the provisions of the Protocol itself answer the last point. The ability of the Administration to defend against dumped or otherwise injurious imports remains unimpaired. For many products, import competition from China is, as noted above, often more directly felt by other suppliers to the U.S. market than by American companies. For some products, such as cold-rolled steel, there has been a recent import problem causing injury to a domestic industry, and it is being dealt with under existing legal remedies. This will not be altered by China’s accession. There are a number of product sectors that will no doubt be of serious competitive concern later. Again the trade remedies will stay in place. It is true that determinations will be subject to WTO review, but this is already true for cases involving 134 other countries. If there are defects in the WTO’s procedures, these ought to be addressed in the context of changes in the WTO agreements themselves. These issues are not China-specific.

As for the non-Protocol, political questions surrounding WTO membership for China, a few comments are in order. First, if there is a concern about individual freedom, expanded economic exchanges can only work for this cause. The modern world economy requires extensive communication. The fax has been replaced by e-mail, and to cut off e-mail would be to stunt development. (We hope that China refrains from doing so.) This week's reports are of particular concern.) Second, if there is a concern about another of the freedoms, freedom from want, it has to be counted as a major positive contribution to human rights to lift as many people as possible above the poverty level. Trade is not perhaps going to affect the case of any individual in prison, but it can affect the standard of living of a multitude of individuals, taking them above a level of severe poverty. It is interesting that many of those Chinese citizens who worry most about individual freedom call for China WTO accession.

WTO Membership is unlikely to affect directly issues of religious freedom or national security. There may be indirect effects that allow for an increase in the pace of reform in China. With China’s history of periods of instability and weak central authority, maintaining a steady pace of economic growth is likely to contribute more positively to U.S. objectives, than would economic stagnation.

What is lost if the Congress fails to act, or votes down Permanent Normal Trade Relations (PNTR)? If China and the WTO Working Party on China’s accession conclude all aspects of its WTO accession package this year (including all bilateral market access negotiations, the Protocol of Accession and the related Working Party report), but the U.S. Congress does not pass legislation granting China PNTR, it is expected that the Administration would invoke its right of "nonapplication" under Article XIII of the WTO Agreement at the time China formally accedes to the WTO. The nonapplication provision of the WTO Agreement permits any WTO member to declare at the time of the accession of a new member that the existing WTO member will not apply the WTO agreements to the newly acceding member. The United States has taken this action with respect to a number of countries subject to the Jackson-Vanik amendment.

For the United States, invoking nonapplication would mean that, even though China would become a WTO member, the United States would not treat it as such. Moreover, China would not be required to treat the United States as a WTO member. This would mean that the terms of the U.S.-China bilateral accession agreement concluded in November, and all other terms of China’s WTO accession package, would not apply to U.S trade with, and investment in, China, except to the extent that existing bilateral agreements between the United States and China made the WTO agreements’ terms binding between the two countries.

The most important bilateral trade agreement between the United States and China in this regard is the 1980 agreement by which the two countries agreed to provide each other with most favored nation (MFN, now called "normal trade relations" or "NTR" in the United States) treatment. This agreement is the legal basis for the current MFN treatment provided by the United States under Jackson-Vanik. Under this agreement, if China lowers its tariffs for goods to other countries upon acceding to the WTO, it would be required to grant the lower tariff treatment to the United States, even though China was not treating the United States as a WTO member. The United States has done the same for China, for example, by extending to China the tariff reductions agreed to in the Uruguay Round, even though China was not a GATT member at the time and did not participate in those multilateral trade negotiations.

The 1980 U.S.-China bilateral agreement, however, covers principally market access for goods, and therefore many of the other provisions of the China WTO accession agreement would not clearly be covered. The following are issues that would continue to be governed solely by the 1980 bilateral agreement if the United States did not apply the WTO agreements to China:

Distribution Rights: With the exception of some limited language regarding banking services, the 1980 bilateral agreement does not cover services.

Trading Rights: Trading rights do relate to goods and the bilateral agreement does cover "rules, formalities and procedures concerning customs clearance, transit, warehousing and transshipment of imported and exported products." In addition, the bilateral agreement commits both China and the United States to "accord firms . . . and trading organizations of the other [country] treatment that is no less favorable than is afforded to any third country. The applicability of these provisions to trading rights was not addressed in 1980, to my knowledge.

State-Invested Enterprises: There is no explicit provision in the 1980 bilateral agreement which requires the Chinese government to ensure that its state-invested enterprises make their purchases solely on commercial terms.

Investment Restrictions: The 1980 bilateral agreement includes no provisions prohibiting restrictions on investment or technology transfer requirements.6

Intellectual Property Rights: The 1980 bilateral agreement and a subsequent 1995 U.S.-China memorandum of understanding on intellectual property rights (IPR) both include provisions on enforcement of IPR in China. If the United States does not apply the WTO agreements to China, it will not have access to the WTO dispute settlement system to enforce IPR in China.

Antidumping: The 1980 U.S.-China bilateral agreement does not address antidumping methodology. If the United States does not apply the WTO agreements to China, the Department of Commerce may continue to treat China as a Non-Market Economy (NME) indefinitely. Under the November 1999 U.S.-China WTO accession agreement, the United States would be permitted to treat sectors of the Chinese economy under the NME methodology for a period of 15 years from the date of China’s accession to the WTO.

Internet/telecom Services: As noted above, the 1980 bilateral agreement does not cover services, and therefore does not address foreign firms' right to participate in this growing part of China's economy.

One other issue worth noting generally is whether or not the WTO dispute settlement process is available as a means to enforce U.S. rights with respect to China. As discussed above with respect to enforcement of intellectual property rights, if the United States does not apply the WTO agreements to China, it will not have access to WTO dispute settlement. In the absence of a WTO relationship, the United States retains the ability to take unilateral action under U.S. trade remedy laws to address its interests (although China also retains the ability to counter-retaliate). There are conflicting views on the relative value of WTO dispute settlement versus the theoretical right to unilateral action (which may not always be a practical option).

Overall, U.S. export interests in obtaining China’s accession commitments clearly support granting PNTR to China.

The U.S. Government’s Five-Year Review of the WTO

By March 1, the President will transmit a report to the Congress which by law must include "an analysis of the effects of the WTO Agreements on the interests of the United States, the costs and benefits to the United States of its participation in the WTO, and the value of the continued participation of the United States in the WTO." Within a few months of the receipt of the President’s report, whatever its content, it is certain that either one or both houses of Congress will consider the resolution of disapproval that states "That the Congress withdraws its approval . . . of the WTO Agreement . . . ."

The number of votes against the WTO is, at this moment, uncertain. It is not anticipated that this resolution, which requires the signature of the President, or would otherwise require two-thirds of both the House and the Senate voting in its favor, will become law. But it is clear that a large number of anti-WTO votes would be a distinct negative from the viewpoint of American commitment to the WTO.

The judgment of the Congress should be made in light of an explicit recognition of the national interest – that is, U.S. objectives should be spelled out in making the required evaluation. Clearly, the principal objective of U.S. trade policy is to build upon the degree of openness that currently exists worldwide to trade and investment, and expand it further. However, this can never, as a political matter, be a replacement for making sure that equity will be served.

Providing equity will continue to be an essential element of U.S. trade policy. World trade can adversely affect industries, firms and workers – whether in terms of access denied to foreign markets or competing with dumped, subsidized, or otherwise injurious, imports. Trade policy cannot be conducted without the support (or lack of active opposition) from those affected by trade. The political impact of those adversely affected may be tempered by those who gain, such as general consumers, but this will not suffice to maintain American policy on its present course unless the equities are respected.

In this regard, Japan’s concerted attack on the U.S. antidumping law should be placed in perspective by Japanese policy makers. In 1999, Japan had an estimated trade surplus with the United States of $73 billion. This accounts for just over two-thirds of Japan’s global trade surplus. The United States, by contrast, had a global trade deficit of an estimated $346 million in 1999, up from $264 billion in 1998. Where there is dumping and injury is caused, and there has been egregious dumping by Japanese producers of steel, is it really in Japan’s interest to seek to undermine the use by the United States of WTO-sanctioned trade remedies? Japan has relied on inter-mill restraint agreements to govern its steel trade. Presumably due to these arrangements, Japan has not markedly increased its shipments during the financial crisis in Asia to markets other than the United States. What is the U.S. Congress to make of the Japanese attack on the antidumping remedy? What consequences are there for U.S. support of the WTO? What consequences are there for America’s bilateral relations with Japan? U.S.-Japan trade relations in the context of the WTO are one of a broader series of issues to be addressed by the Congress in evaluating how well the current WTO serves America’s traditional and emerging trade interests.

In general, this assessment by Congress should focus on the following:

Market access for industrial goods vis-à-vis overt barriers – tariffs, quotas and other nontariff measures. Very seldom do WTO members breach explicit, clear contractual commitments. There is great value in existing tariff bindings and commitments not to impose quotas. This part of the rules-based trading system seems to be working, judging by the absence of current controversy. There is a question of whether there is the leverage to move further toward elimination of traditional barriers, as in further tariff reductions on the part of developing countries, but the WTO cannot said to have exhausted its utility in this regard, yet.

Market access for agricultural products. Agriculture is a greater problem. Progress, such as it is, is largely made in the context of large, multi-subject, multi-participant trade negotiating rounds. In these great periodic gatherings, it is possible to assemble a package of agreements and commitments that is too large and multidimensional for any country or trading entity to walk away from. Gaining dramatically greater market access for agriculture will be difficult. The attempt to do so caused the launch failure at Seattle. And then there is the question of GMOs. The current WTO rules are inadequate. Concerns about consumer safety, whether valid or not, have become a major barrier to the development of new agricultural products and their acceptance in international trade. The WTO should not be graded adversely for this emerging problem which is currently beyond its capabilities. The WTO coverage should be expanded.

WTO Dispute Settlement. This is a very troubled area of the WTO. The recent U.S. experience has been a great disappointment. Winning does not yield results (Bananas, Beef Hormones), access is not provided in complicated cases (Japan Film), existing settlements are undone (the Foreign Sales Corporation case), and U.S. obligations are created where none were negotiated (UK Bar).

Antidumping. Part of the basic political bargain made with industry and workers at home, and with our trading partners abroad, at the founding of the GATT and the WTO, was that if unfair trade took place, most notably dumping, the dumping would be offset. Japan, with its very poor record of providing market access for the goods of others, is engaging in a campaign to re-open the antidumping code recently revised in the last round of negotiations. If it succeeds, it will finally undermine whatever consensus exists in the United States for maintaining participation in the current WTO. As one American academic who is a critic of the antidumping remedy has said, "this is the third rail of new trade negotiations", meaning that to touch it is to be electrocuted, dooming the entire enterprise.

New (for the WTO) issues: labor and the environment, GMOs, e-commerce, and competition policy. The nontraditional "trade" issues are the hardest variables to gauge in making judgments about whether the WTO can succeed in the future. There are clear risks to denying that there are issues here that must be dealt with:

The United States put forward a particularly mild proposal that the relationship of labor rights and trade ought to be examined in the WTO. This proposal met with enormous resistance from many of America’s trading partners.

Nor can the environmental issues be swept aside. To say that the environmental community is troubled by the prospect of the inability by the United States to have the right to protect dolphins and sea turtles from fishing techniques that threaten these animals’ existence, is a gross understatement.

A large part of world trade in agriculture will potentially be affected by the treatment of GMOs. The means must be found to satisfy legitimate concerns, without allowing protectionism to stifle advances in food necessary, especially for the developing countries.

An ever-larger part of global commerce will flow over the Internet. The WTO and the GATT and GATS were not written with an appreciation of the needs of a world undergoing an information revolution. There needs to be serious preparatory work to make sure that the full benefits of this area of human progress can be fully realized. An e-round of multilateral trade negotiations must be considered.

Competition policy in its broadest terms would most likely be an enemy rather than a friend of expanding international trade. But there are problems that require eventual coverage in the WTO rules and that should receive broad support among WTO members and within the Untied States. The WTO’s focus must be solely on trade. Where private restraints of trade prevent market access, this is a traditional concern of the GATT, the GATS and the WTO and is a legitimate topic for negotiation in this forum.

These issues have little in common substantively. What they do share is that they are new, they are politically very serious, if not explosive and it is probably not possible to conclude a successful new round of multilateral negotiations without addressing them.

 

Conclusion

The key trade topic for consideration in Washington this year is U.S. trade relations with China. The sensible judgment, which will ultimately prevail, is to bring China into the WTO and to have relations between the two countries governed by the WTO rules.

Japan is simply not a significant issue in U.S. trade policy, although it can become so. The current quiet is not due to any satisfaction in the United States with Japanese performance on specific trade issues. For the most part, it is considered that Japan is at present the chief victim of its failure to reform its economy. There is a misery index in U.S.-Japanese relations, however, and it may be low now, but it can rise quickly. This formula is dependent not only on the trade imbalance, which is extremely high, but also on the U.S. unemployment rate, which is very low. Japan can worsen relations with the United States if it seeks to, however. It can use commercial diplomacy to undermine America’s interests in a more liberal, rules-based trading system. It can refuse to talk about problems of access to the Japanese market. Trade friction can be created.

All trade relations will be affected by the judgment of how well the WTO is functioning. Overall, participation in the WTO is very beneficial to its members, including the United States. Nevertheless, any objective assessment of U.S. membership in the WTO must address elements that are clearly troubling. One answer is to supplement the WTO’s remedies where they fall short. Congress can and should consider creating trade remedies for problems to which the WTO has not yet found an answer. One proposal was introduced in the House recently to focus on private restraints of trade that have the effect of closing a foreign market to U.S. goods. This would be a useful addition to America’s tools for dealing with trade problems. At the same time, the Congress should judge that the WTO, with improvements, and with China included as a member, can serve America’s interests, and the world trading system well.