What's So Important About the WTO?

0020 GMT, 990707

Summary

China continues to campaign for admission into the World Trade Organization, despite the fact that the open market that membership would demand would likely generate short term instability, in turn scaring off the investment and trade that WTO membership is supposed to attract. So why is Zhu Rongji so committed to WTO membership? Because the process of seeking membership allows him to retain control of China's economic agenda and, with every preliminary bilateral trade agreement, to incrementally reform the Chinese economy. This explains the desire of some in China to present China's WTO difficulties as merely a matter of political persecution by Western economies, as well as the rumors that Zhu may be sacked over the failure of China to win membership. If hard liners can either torpedo the WTO bid or gain China membership in the organization without submitting to necessary market reforms, they will have retaken control of China's economic agenda.

Analysis

China and Japan launched into a second day of detailed trade talks on July 7, covering trade in services, having already reportedly finalized agreements on trade of material goods. Once comprehensive agreements are reached, which reportedly should happen soon, Japan will become the first of the Group of Seven nations to formalize bilateral trade treaties with China in preparations for China's World Trade Organization (WTO) accession bid. This comes as no surprise, as Japan has been quite vocal in its support for Chinese entry into the WTO and the concomitant freer access to Chinese markets. Japan's motives for supporting China's WTO bid are clear. What is less obvious are the motives underlying China's bid.

The apparent prima fascia reason for joining is, of course, economic benefit. WTO membership would free China from annually seeking normal trade relations with the U.S. It would theoretically make China's economy more attractive to foreign investment, and make bilateral trade easier. But it would also throw a great deal of China's economy out of Beijing's control, opening China to unbuffered market pressures that would likely intensify social stresses while eliminating tools with which the government could combat those stresses. At the same time, there are no guarantees that China's economy, once open, would see a flood of new investment and purchasing - certainly not immediately. And the immediate social stresses generated by an open economy may in fact discourage investment.

The WTO does not represent the difference between no trade and dynamic trade. It represents the difference between some trade, filtered through state imposed buffers, and an economy at the mercy of the markets. China is well aware of this, and has demonstrated a fundamental unwillingness to make the structural economic changes required by the WTO accession process by applying to join as a developing economy, which would abrogate many of these requirements.

To a lesser degree, WTO membership is also a political issue. The WTO is the only major global organization without Chinese representation since China re-entered the international community. Membership means final acceptance of China as a major player on all levels in the international community. There is, therefore, a symbolic, prestige dimension at work. WTO membership represents acceptance as a full member of international capitalism. That poses a problem. To what extent does China's leadership - and who among that leadership - want to be a member of the international capitalist community, at least at this moment in history?

China's WTO membership bid is also an internal matter. Prime Minster Zhu Rongji is committed to attaining WTO membership, as much for the process of achieving membership as for actually reaching that goal. The process of seeking membership provides an opportunity to control China's economic agenda and, with every preliminary bilateral trade agreement, to incrementally reform the Chinese economy. To join the WTO, an applicant must complete bilateral trade agreements with every current member. These agreements allow for a gradual economic reform process, as monetary and trade policies are brought into alignment with international norms to satisfy each new prospective trading partner. These agreements and treaties represent a formalized road to economic reform for those who are inclined to do so. Rather than fighting conservative elements in the party for each new change, Zhu Rongji and China's reformists have found a formal and institutionalized process that achieves the same ends. By establishing WTO membership as a national goal, Zhu is able to maintain control of China's economic agenda and to frame gradual economic reforms as necessary for China's global economic relations.

For the Chinese leaders who rate social and political stability and state control above economic reform, including President Jiang Zemin and National People's Congress head Li Peng, the WTO accession represents a creeping destabilizing force. Their goal is to either force a quick acceptance of China without substantial economic reforms or to torpedo the process altogether. To achieve the former, China's conservatives have pushed for admission into the WTO as a developing nation, bypassing many of the reforms on the road to WTO admission. In addition, by leveraging the United States' bombing of China's embassy in Belgrade, as well as other recent American diplomatic stumbles, China's conservatives may be attempting pressure the WTO into fast-tracking its accession and bypassing many of the difficult and costly reforms. The rumor that Zhu was being forced out for failing to win China membership in the WTO may have also been generated to pressure the WTO for early and lenient acceptance of China. Developing nation accession would delay foreign access to currently protected Chinese markets by several years, allowing a slow, gradual economic evolution.

Chinese conservatives also used the bombing to delay trade negotiations with the U.S. Since China must make trade agreements with America to complete the application process, the effect was to delay WTO accession. By derailing WTO accession talks and delaying the process until after upcoming global trade talks, the full accession procedure could be delayed several years, effectively halting the reform process and retaining central control of the economy.

Whether winning a hasty and lenient acceptance of China in the WTO or delaying the process indefinitely, the conservatives will have won a significant victory. By joining the WTO without passing through the gradual bilateral reform process, Beijing will be in a position to withstand further external reform pressures and will have taken the high ground away from reformists. Currently, the inertia of Chinese public policy is propelling the nation towards WTO accession, and the easiest path is through the bilateral negotiation procedure. If the process could be sped up or effectively halted, those working for reform would have lost the major impetus that provided significant support from all facets of the government. Zhu and the reformers in the Chinese government have a narrow path to walk, then. They want WTO accession to proceed as quickly as possible, but they must take care that the accession process not be shortened too much. Membership in the WTO is an honest goal for China, but it is the process of joining that is most important, and it is the process that will either generate the most reforms or deny them for years to come.

Rather than attracting foreign investment, Zhu's scheme highlighted just how desperate China's market reformers had become. On top of this, Zhu had earlier announced a new three-year plan, whereby state-owned enterprises were to increase efficiency to a specified point by the end of three years or face closure. For the hardline faction, led by Chinese President Jiang Zemin, Zhu's latest schemes had gone just too far. The plan to close inefficient state-owned enterprises, while in the long run possibly a prudent economic move, would just as likely trigger a wave of unemployment and the ensuing social upheaval that Jiang has worked strongly to contain. Another massive rise in unemployment from state firms would also further tax the state budget, which is already unable to keep up with pension payments for its unemployed and retired workers. And given that Zhu not only failed to gain China's entry into the vaunted WTO, but also had to resort to an unchecked and artificial rise in the Chinese stock market in hopes of winning foreign interest in a clearly declining Chinese economy, his credibility may be finally running out. The rumors of Zhu's resignation, rather than being pure speculation, may instead have been a way for the hardliners to send a warning to the reformers.

Jiang has worked intensely throughout this year to ensure social stability in China. As China's economic troubles have worsened and become more apparent, however, it has been harder for Zhu to promote more economic openness and reforms in the face of the growing economic decline. Clearly Zhu has run out of ideas on how to generate painless market reforms. Painless reforms are almost an oxymoron anyway. But with Zhu's economic experiments reaching the end of their service life, Beijing must make a critical decision. Either it moves ahead with reforms, acknowledging that they will generate pain, hoping that it can contain the ensuing unrest, or it must move quickly to consolidate what economic gains have been made, impose a new economic and political order, and place blame for China's current economic and social turmoil.

Considering the response to Zhu's recent stock market gambit, it appears that a decision on future economic strategy and blame laying may have been made. As far as Jiang is concerned, if Zhu can't do better than a fabricated stock market rally and an economic strategy promising future layoffs, maybe it is time for a new economic strategy, and strategist. The rumors of Zhu's dismissal and the intervention in the stock market may well be omens of the future as the hardliners move to regain control over China's economic policy.