China & the WTO
By Robin Hahnel
After declining to sign a "better deal" last April, the Clinton administration
signed off on conditions for permitting China to enter the World Trade
Organization (WTO) in November. Even though China’s premier was in Washington
last April begging for Clinton’s signature to lock in a victory for his faction
of economic liberalizers over their internal opponents, April was politically
inconvenient for the Administration. Anti-China sentiment in the U.S. had
crested over alleged thefts of U.S. nuclear secrets, alleged covert funding of
the Democratic Party, alleged Chinese saber rattling at Taiwan, and confirmed
repression of political dissent inside China. But in November the Clinton
Administration needed a "big win" to save the WTO meetings in Seattle where the
Administration program of accelerating liberalization appeared to be in more
trouble with every passing day.
The China Deal
In 1985 the U.S. exported $5 billion to China and imported almost exactly the
same amount. By 1998 the U.S. exported $14.4 billion to China and imported $71.2
billion, and in August 1999 the U.S. had a larger trade deficit with China than
with Japan. U.S. direct foreign investment in China never topped $200 million a
year between 1985 and 1992. By 1998 U.S. direct foreign investment in China had
reached $1.5 billion a year. Like NAFTA before it, while ballyhooed as a deal to
free trade, the deal clearing Chinese entry into the WTO is more about
liberalizing foreign investment and ownership than liberalizing trade. Steven
Mufson admitted as much in the Washington Post on November 16: "The biggest
benefits of the deal will be for American companies investing in China, not for
American exporters."
Most importantly the deal will greatly increase U.S. corporate investment in
China, opening whole new areas previously off limits like telecommunications and
finance. The deal will also expand U.S. agricultural exports to China
significantly. The deal will gradually increase U.S. imports of Chinese labor
intensive products like textiles and toys, putting more downward pressure on
wages in general, and the wages of unskilled U.S. workers in particular.
Finance: U.S. banks can offer services in local currency to Chinese enterprises
two years after China joins the WTO, and to individual Chinese after five years.
Foreign insurance companies can offer property and casualty nationwide
Telecommunications: Foreign phone companies, now restricted to equipment sales,
will be able to own up to 49 percent of all telecommunications service ventures
upon China’s entry into the WTO and up to 50 percent two years later
Agriculture: Foreign companies can sell China large amounts of wheat, corn,
rice, cotton, and other commodities. For example, China now imports roughly 2
million tons of wheat a year; the agreement immediately permits 7 million tons
with almost no tariff. Moreover, a substantial share of these goods can be
imported by private companies rather than Chinese State enterprises
Cars: Foreign auto companies will have full distribution and trading rights. By
2006 China will reduce tariffs on cars to 25 percent from the current 80 to 100
percent. China will also permit foreign financing of car purchases
U.S. Heavy Industry Exports to China: Chinese tariffs on imports of industrial
goods will drop from an average of 24.6 percent in 1997 to 9.4 percent in 2005.
Foreign companies will have the right to sell, distribute, and market industrial
goods, including steel and chemicals, without going through a Chinese
middleperson as is now necessary
Chinese Light Industry Imports into the U.S.: U.S. import quotas on Chinese
goods such as textiles, toys, shoes, bicycles, portable stereos and computer
parts will disappear in 2005. But China agreed to 4 years of protection after
the quotas are lifted for the U.S. textile industry and 15 years of special
protections for the U.S. against "dumping" of Chinese goods in the U.S. market
Internet: Foreign firms will be allowed to invest in Internet content providers
such as Sohu, the Chinese equivalent of Yahoo. Companies will be allowed to buy
49 percent of Chinese Internet firms upon China’s entry into the WTO and up to
50 percent 2 years later
Movies: China will import 40 foreign films a year, double the current number and
50 by the third year of the agreement, and foreign film and music companies can
share in distribution revenues for 20 of the films
Who are the Winners?
Listen to some who reacted with joy at news of the signing as quoted by John
Burgess in the Washington Post on November 16 and by Steven Mufson and Robert
Kaiser on November 25. Sy Sternberg, chair of New York Life Insurance Company:
"This is probably the most important economic development in China in the last
50 years. My company is working for a license to enter China." Scott Shearer,
director of national relations for Farmland Industries: "What we’re hearing is
that this will be the largest market-access agreement in U.S. agricultural
history." America Online Inc., who already has an online service in Hong Kong
and investment in an Internet company serving Hong Kong, China, and Taiwan: "We
welcome the agreement." Christopher Hansen, executive vice president and
Washington representative of Boeing Company: "The vote in Congress that would
enable China to join the WTO is really for all the marbles." Harry Kamen,
MetLife’s chair emeritus: "When the actuaries think about 1.2 billion lives,
their mouths water. It’s not only the number of people that are there, but
there’s very little life insurance being purchased relative to the rest of the
world. The Chinese savings rate—40 percent of earnings—also makes an impression
on insurance salesmen."
Listen to what the winners have been doing to promote their interests. In the
November 14 issue of the Washington Post Robert Kaiser and Steven Mufson report:
"Many farm groups around the country have joined executives of large businesses
in a coalition to press Congress for favorable action. This coalition has grown
from modest origins just five years ago into a broad, well-organized alliance.
Washington representatives of the interests involved meet at two different
weekly sessions to discuss policy options and politics. Both the Business
Roundtable and the U.S. Chamber of Commerce have organized national efforts
targeting about 60 members of the House through their home districts. For this
year’s vote on China’s trade status, two to four big corporations were assigned
to each of several dozen House members whose votes were in doubt." On November
25 the same two reporters told us: "Sandra Kristoff, New York Life’s
Washington-based executive vice president who formerly worked as senior director
for Asian affairs at the National Security Council, has seen nearly 100 members
of Congress since April and has been plying her views in congressional testimony
and op-ed particles in major newspapers." Mufson and Kaiser also lay to rest any
lingering doubts about who the Clinton administration is humping for in its
China negotiations: "The dean of the American insurance community in China—and
the executive most effective at wielding influence on both sides of the
Pacific—is Maurice "Hank" Greenberg, the AIG chair and former head of the
U.S.-China Business Council. As the WTO deal was wrapped up last week, the
73-year-old executive was waiting in his office in lower Manhattan for U.S.
Trade Representative Charlene Barshefsky to call from Hong Kong with the
details."
Who are the Losers?
Not all in the U.S. reacted with joy at the prospect of Chinese entry into the
WTO. John Sweeney, President of the AFL-CIO immediately warned: "This is a grave
mistake. China is a rogue nation that decorates itself with human rights abuses
as if they were medals of honor." (Washington Post, November 16). Sweeney
reiterated his anger in a speech at the National Press Club calling it
"disgustingly hypocritical for the White House to posture for workers’ rights in
the global economy at the same time it prostrates itself for a deal with China
that treats human rights as a disposable nuisance" (Washington Post, November
21). While Sweeney’s professed concern for human rights abroad is not as
hypocritical as Clinton’s, this is hardly the basis for Sweeney’s opposition to
Chinese entry into the WTO. He and the AFL-CIO correctly estimate that their
membership is the constituency within the U.S. most likely to suffer negative
consequences from the deal.
Will there be jobs lost or gained as a result of the deal? Former Secretary of
Labor in the Clinton administration, Robert Reich, offered a revealing comment
on this in the "Outlook" section of the Washington Post on Sunday, November 21:
"The deal won’t affect the number of American jobs one way or the other.
Trade-opening agreements don’t add to the nation’s stock of new jobs, as the
White House has been arguing since the NAFTA battle. Nor do they cause jobs to
succumb to giant sucking sounds elsewhere. We will continue to have as many jobs
here as Alan Greenspan and company allows. It may be hard for partisans to extol
the advantages of trade or to conjure up its horrors without resorting to hype
about job gains or losses, but this kind of talk clouds what’s really at stake."
There is an important truth to be found in the words of our former Labor
Secretary returned academic: "If those in charge of monetary and fiscal policy
deploy them in a way that maintains the demand for goods and services at the
level of production that would fully employ the nation’s labor force and
productive capacity, any shifting around in what we produce and consume, or what
we export and import need have no affect on the rates of employment and
unemployment." We should pause to savor the implication of this remarkable
confession: "The head of the Federal Reserve Bank, who is responsible for
monetary policy, and/or Congress and the White House, who are responsible for
fiscal policy, deserve to be held accountable for any unemployment we suffer
because they have the power to prevent it." This confession comes as no surprise
to radical economists or even liberal post- Keynesians. But there are few in
government who do not hide behind the fig leaf of "global competitiveness"
whenever jobs are lost or real wages fall in the U.S. Unfortunately, a growing
number of their constituents have come to accept the lie that lost jobs and
falling wages are the inevitable consequences of globalization as well.
Reich is dead wrong that trade-opening agreements don’t affect the number of
American jobs one way or the other. This is mainstream economics dogma and text
book economics at its worst. While economists such as Reich love to forget it,
there is a constant battle being waged over fiscal and monetary stimulus with
employers and wealth holders usually pressing for less stimulus. Less stimulus
means higher rates of unemployment, lower worker bargaining power, and therefore
less pay for more effort. Less stimulus means lower demand for goods and
services and lower inflation rates, which usually works to the advantage of
wealthy creditors.
On the other hand, those of us who work for a living and pay interest rather
than receive interest payments are usually better served by more monetary and
fiscal stimulus rather than less. Trade and capital liberalization tilts the
battle field farther in the direction of deflationary policies than it already
is. Capital liberalization increases the risk that lowering domestic interest
rates will lead to capital flight and/or downward pressure on the value of the
dollar. Trade liberalization makes it more difficult to keep labor markets
"tight" than it already is in economies where labor is the relatively scarce,
not abundant resource. When governments are forced to compete with one another
under less favorable circumstances to retain and attract investment, they
predictably tilt farther in the direction of deflationary policies that are
demanded by employers and investors.
To bury one’s head in the sand that fills most ivory academic towers these days
and deny these important real world forces is convenient if one is searching for
an excuse to support free trade, but it will certainly lead to inaccurate
predictions. In the end Reich simply assumes his conclusion: "Assuming monetary
and fiscal authorities maintain full employment in any and all eventualities,
trade deals will not affect levels of employment." Thank you, Professor Reich.
In reality there will surely be more jobs lost in light manufacturing industries
in the U.S. than gained in heavy manufacturing industries. Despite the fact that
the deal is lopsided and permits U.S. industries to retain greater protections
for longer than it permits Chinese industries, the fact remains that China’s
comparative advantage is in labor intensive production, while the U.S.
comparative advantage is in high-tech, capital intensive manufacturing and
agriculture. This means that more jobs will be lost in the U.S. than gained even
if the deal generated an extra dollar of exports to China for every dollar of
imports from China. But this is highly unlikely if one looks at the large and
growing trade deficit we have with China at present, and if one considers that
the U.S. capital account deficit with China will surely increase as a result of
the deal, making it all the more easy to finance a growing trade deficit. But
the real job losses will result not from liberalized trade, but from the export
of jobs to China as U.S. companies expand their investment and production there
instead of inside the U.S. Other low wage economies will suffer as well as
international companies flock to China, moving jobs out of countries like
Indonesia, Thailand, Vietnam, Brazil, and Mexico further aggravating
recessionary dynamics in those troubled, no-longer "emerging" markets. But
unleashing the Chinese Dragon will finish off a process that began decades ago
with the rise of the smaller Asian Tigers sounding the final death knell for
labor intensive manufacturing jobs in the U.S. That is what will happen if
things go well and according to "plan." If unemployment and social unrest in
China lead a desperate Chinese government to devalue the yuan all bets are off
since, according to the treaty, the U.S. government will no longer be able to
protect U.S. workers and industries from even cheaper Chinese imports with new
quotas and higher tariffs. Of course that assumes the U.S. government would
honor the agreement we just signed if and when it proves inconvenient.
The deal is also a disaster for Democrats in Congress and their hopes of
mounting a unified campaign to win back the House in the 2000 elections.
Representative Nancy Pelosi (D-CA), who opposes China’s entry into the WTO,
predicted: "This is going to be very damaging to the unity of the Democratic
Party," and went on "to blame President Clinton for putting his own legacy ahead
of party interests" (Washington Post, November 21). The problem for House
Democrats is that if the AFL-CIO decides to go to the wall on this, those who
most need support from organized labor for re-election will have to vote against
granting permanent normal trade relations (NTR) status to China. But the deck is
now stacked in a way that a yes vote is sure to win and Democrats who vote
against will face the wrath of business and farm backers. As Robert Kaiser
explained on November 21 in the Washington Post: "The U.S. administration, like
all governments that belong to the WTO, can admit China without congressional
approval. Congress will only vote on granting permanent NTR status. Under WTO
rules, the U.S. must give China permanent NTR status to receive the
market-opening concessions China has made to get into the world body. This
pleases lobbyists promoting Chinese membership, who look forward to arguing that
a negative vote in the House would only have the effect of denying the benefits
of China’s entry into the WTO to U.S. farmers and businesses while other WTO
members cash in." Moreover, the argument that retaining the option of annual
votes on temporary NTR status for China in any way serves to curb Chinese human
rights abuses is difficult to make since the House has voted China temporary NTR
status six years in a row. So House Democrats are reduced to praying that
organized labor will only be a mouse that roared on this on
The final tally in the U.S.—Wall Street wins, main street loses; high-tech and
finance win, light industry loses. The highly skilled win, the low skilled lose.
If you are lucky enough to keep your job and avoid a drop in your real wages,
you will be able to buy more (Chinese made) toys to put under your Christmas
tree. If you lose your job or, like most Americans, if you continue to fail to
get wage increases commensurate with inflation, Christmas will be all the more
bleak for you and yours when China enters the WTO.
What Does It Mean For China?
On the one hand, Chinese elites—both the old Party elite and the young educated
elite—should get much richer, and finally have their chance to take what I am
sure they consider to be their "rightful" place among the international economic
elite. On the other hand, it means that hundreds of millions of Chinese peasants
will lose their jobs to international food imports, joining the 100 million of
unemployed already sleeping in cardboard boxes in China’s cities where the
construction boom has slowed and almost every industry already has excess
capacity. It also means that hundreds of millions of Chinese workers in state
owned enterprises will lose their jobs as "downsizing" Chinese-style makes the
last ten years of downsizing in the U.S. look like a proletarian picnic. Since
only a fraction of these newest additions to the ranks of the world’s most
dispossessed will find employment in new, foreign-owned, labor-intensive
manufacturing enterprises, and since the Chinese version of a "social safety
net"—subsistence wages in State enterprises regardless of productivity—will have
been dismantled, it means that either the Chinese political repressive apparatus
will set new standards for brutality and effectiveness at the beginning of the
new century, or, hopefully, the feast of the Chinese and international corporate
elites at the expense of hundreds of millions of Chinese peasants and
proletarians will prove mercifully short lived.
Why Did China Do It?
Why has the leadership of China’s Communist Party signed such a lopsided deal so
likely to upset the Chinese apple cart? That is more difficult to understand.
Surely they must realize that reducing tariffs and dramatically increasing
quotas on imports of basic grains from the U.S., Canada, Australia, and
Argentina will put hundreds of millions of Chinese peasant farmers out of work,
further flooding urban labor markets? Surely they must realize that putting
Chinese savings into the hands of western financial enterprises will siphon
investment away from state and small Chinese enterprises into foreign or jointly
owned enterprises destroying many more jobs than are created, further swelling
the ranks of the unemployed? Surely the Chinese leadership must realize that the
only "social safety net" China has ever had is the "social contract" of
employment for all in State enterprises at subsistence wages irrespective of
productivity levels, and irrespective of whether or not there is demand for all
goods the State enterprises produce? Not only income support, but housing,
health care, child care, and old age care the entire spectrum of "social
services" provided through various government ministries and paid for by taxes
in Western capitalist economies—have all been provided in China through
employment in state enterprises. Of course they run losses. They have been
providing all the services provided for by non-military government spending in
Western economies—off budget. If officials at the World Bank are so worried they
are warning China to get busy building a Western-style "social safety net,"
surely Chinese leaders realize there is little chance to replace more than a
tiny fraction of the net they are dismantling with one of an entirely new kind
before it will be needed?
If my predictions are correct, the WTO deal will prove to be a catastrophe for
the Chinese economy. Not only is it a lopsided deal in which China has agreed to
dismantle far more of its economic defenses than its trading partners have
agreed to do in exchange, it could well lead to massive social unrest with
highly unpredictable consequences.
Moreover, because China had not opened up its financial sector as other Asian
economies did, only because China had not permitted foreign investment on the
scale other Asian economies did, only because China had resisted demands that it
make the yuan a convertible currency was China spared from the ravages of the
currency speculators and hedge funds and the contagion effects of massive
capital flight that brought other Asian economies to their knees in 1997 and
1998. Why would China, the Communist giant whose GDP more than doubled during
the 1990s, adopt the international economic policies of Russia, the fallen
Communist giant whose GDP fell by more than half during the same decade?
Greed, Arrogance, and Ignorance
As is often the case when ruling elites miscalculate, this decision on the part
of China’s rulers probably results from getting too greedy, being too arrogant
about their powers to suppress dissent, and not understanding the full
consequences of the forces they will unleash.
Greed: The old political elite believe they, as well as the young educated
elite, can profit handsomely from the deal, not only in the short run, but also
from the changes it will lock the Chinese economy into in the long run. Up to
now the Party elite have been like gate-keepers collecting bribes from foreign
firms seeking entry into China, and they have been appropriating assets from
State enterprises for new small private businesses of their own. They are quite
adept at both activities, but these are still only penny ante games. Bigger
money can be made by becoming stockholders in fabulously profitable enterprises
owned and operated jointly with foreign multinational companies. Bigger money
still can be made by lending other people’s money to these highly profitable
enterprises at highly profitable rates of interest. Unless I miss my mark
provisions have already been made to take the big Chinese fish aboard the 49
percent and 50 percent foreign-owned banks and insurance companies that will be
tapping into 40 percent of the income of 1.2 billion Chinese. Who will staff the
skilled jobs in these new foreign owned and mixed enterprises? No less an
authority than Robert Reich, former U.S. Secretary of Labor informs us
(Washington Post November 21): "The real deal isn’t about who will be selling
what to China. It’s about who will be hiring Chinese to make things or do things
there. Not only will American auto companies be assembling cars there, but every
major American service business able to enter China will be hiring Chinese to
provide the services to other Chinese. Under the terms of the deal, U.S.
life-insurance companies will have the right to market their products in China,
but don’t expect hordes of American agents to descend on Beijing. The sales will
be made by Chinese. Even the insurance products are likely to be designed by
Chinese because they will have a better idea of what will sell. Global banks
will have the right to open branches in China, but don’t expect bank tellers or
branch managers flying in from San Francisco. They’ll be Chinese too."
How wonderful. Young graduates from the top Chinese universities will finally
have a chance to get something close to their marginal revenue product. Those
who are even more ambitious and/or well connected, and able to obtain degrees
abroad, will do even better because they will get in on the ground floor with
foreign companies from the countries where they studied. Forget about reuniting
Taiwan with the mainland. This is a deal that can finally unite the interests of
the incredibly large and well-heeled foreign Chinese community that has been
filling commercial cracks around the globe for centuries with the domestic elite
that never left home. This is a deal so sweet it will disprove the adage "You
can’t go home again."
Arrogance: The Chinese Communist Party must believe it is more proficient at
stifling political dissent and repressing social unrest than either Stalin or
Hitle —neither of whom had to deal with the sheer number of hopelessly abandoned
victims China’s leaders will have to cajole in the decade ahead.
They certainly know the deal will create social unrest. Razeen Sally, a lecturer
at the London School of Economics, calls this approach by national leaders the
Nike Strategy—Just Do It! John Burgess explained in the Washington Post on
November 29: "They make a calculated decision that they would benefit from
opening, even if there’s pain up front as local industries and farms get knocked
around. China’s leaders seem to have accepted this risk as they move to join the
WTO." The question is what workers will do when they are laid off and what the
Chinese government will do when they do it.
The bigger question is what displaced Chinese peasants will do—because there are
eight times more of them than there are urban workers. Erik Eckholm warns: "Even
more daunting than the problem of urban workers, and receiving far less official
attention, is the task of creating new jobs and lives for millions of
inefficient farmers who are expected to lose out to global trade and may join
the country’s vast floating population of migrants who compete for bottom-rung
jobs in the cities." Eckholm would be closer to the mark if he said "hundreds of
millions" instead of "millions." If he wanted to provide a little historical
perspective, he could have reminded readers that China once before had a "vast
floating population of migrants who competed for bottom-rung jobs." For decades
leading up to the 1949 Revolution, China was a living hell for hundreds of
millions of dispossessed.
Ignorance: Despite all the evidence available to them from the last decade—that
dismantled Communist economies who embrace capitalism are far more likely to
join the ugly capitalist periphery instead of the alluring capitalist
center—Chinese reformers are apparently far more knowledgeable about the devil
they know, command planning, than the devil who was banished from China 50 years
ago and seems to have been forgotten, capitalist imperialism. They know the
frustrations of a system where "workers pretend to work and the government
pretends to pay them" all too well. But they have yet to meet a 21st century
global hedge fund. And apparently until they do, they are putty in the hands of
the sirens of neoliberalism and the mainstream economics text books their
universities have switched over to.
Who Are the Winners in China?
The nimble among the Party elite will get far richer than they have ever been
before, and have an easier time passing their wealth and power onto their
children than under Communism. The better educated and the well established in
mega cities like Shanghai will do well. As long as they are careful not to
challenge the political monopoly of the Communist Party, Chinese ex-patriots
will be welcomed home to an economy starved for their skills and capital.
Managers of the enterprises that soar will also do well.
But managers of the enterprises that sink will not do well. More importantly,
displaced peasants and workers—those who foreswore freedom and accepted grinding
poverty in exchange for the "iron rice bowl"—will suffer. Others who find work
for the profitable enterprises that survive the great shakedown are unlikely to
enjoy rising real wages to go along with their rising productivity. High levels
of unemployment, a ban on independent unions, and a highly repressive government
apparatus devoted to achieving high levels of investment so China can fulfill
its destiny to become an economic super power will conspire to keep the wages of
the fortunate who find work from rising for decades if all goes according to
plan.
I shudder to offer a final tally of winners and losers. Instead I prefer to hope
that all will not go according to plan. Sometimes "Just Do It!" proves to be a
poor plan. Hopefully, in this case, the Chinese Communist Party leadership has
greatly underestimated the powers of perception and resourcefulness of the
Chinese people. I know they have grossly underestimated the maelstrom of
"creative destruction" capitalism is about to wreak on China.
http://www.zmag.org/zmag/articles/jan2000hannel.htm
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