Sat, 13 Mar 1999

China not ready for membership in the WTO

By Christopher Lingle

DENPASAR (JP): At present, China does not belong in the World Trade Organization (WTO), regardless of the size of its economy or its role in international markets. This is not to say that WTO members should not trade with China. Indeed, engaging China through trade is perhaps the most effective encouragement to bring its institutions into line with international standards.

Even if Beijing's entry into the WTO was accompanied by significant reductions in its tariff and nontariff barriers to trade and investment, there is little guarantee that export credits and subsidized credits would not provide its enterprises with unfair advantages. China continues to impose numerous nontariff barriers, including quotas and license requirements on imports.

There are also obstructions to imports based upon technical requirements. To date, there is no timetable for the removal of such barriers. Were the Chinese to live up to their commitment to reduce entry tariffs to an average of 18 percent, this still would represent an average more than four times greater than among the members of the Organization for Economic Cooperation and Development (OECD).

Growing Chinese subsidies to exporters are a form of protectionism amounting to stealth devaluation. Many trading prices have little meaning since most state-run Chinese enterprises operate in the red and require handouts to remain in operation. At the same time, discrimination against foreign investors in recent bankruptcy proceedings of nonbank institutions operated by provincial governments gives little reassurance of equitable treatment for non-Chinese interests.

WTO rules allow members to continue state ownership in certain sectors. Yet, China has state trading monopolies in a wide variety of products explicitly prohibited by WTO covenants.

The most obvious practice which is in conflict with WTO membership is the extensive "lending" to loss-making state-owned enterprises (SOEs). Meanwhile, the Chinese impose investment ceilings and export performance requirements for foreign-funded companies. Also, Chinese authorities intend to seek "infant industry" protections for its domestic service sector.

Until China forces its state-owned firms to operate along the lines of their counterparts in industrialized economies, continued modernization will remain almost impossible. Doctoring accounts to provide false information about growth in output and profitability of SOEs is common. Overall economic losses for the SOEs continue to deepen and the distortions effect other sectors.

State banks have over a trillion yuan in nonperforming loans, making a mass default in the banking sector very likely. While China's banks face bigger problems than Japan's, Chinese companies are also as heavily indebted as Korea's chaebols, and its property bubble is larger than was Thailand's. Estimates suggest that nearly one-quarter of total earned savings the Chinese people have entrusted to state banks have been wasted.

At the same time, most of the capital raised on domestic stock markets and abroad during the last six years to finance the renovation of state-owned enterprises has been squandered. Shares issued to the public were for partial ownership in SOE factories managed by the same people with the same bad habits. Since most SOEs do not operate to earn profits, these companies cannot pay dividends to their shareholders. It is not surprising then that capital inflow from foreign investment dropped by 35 percent in 1998 from the levels reported in 1997.

It is implausible to expect that WTO membership will induce a bureaucratic and centralized regime, known for repressive brutality, to adhere to arrangements which demand members engage in sensitive negotiations. Such negotiations require mutual understanding and compromise in order to resolve conflicts. A review of Chinese tactics in their negotiations with the British over Hong Kong's fate gives little cause for confidence.

In short, there is little reason to believe that a regime obsessed with maintaining power will adhere to rules which may weaken its grip. History suggests that China will seek the benefits of WTO membership while avoiding the obligations. (But then the idiotic American conflict with the European Union over bananas raises doubts about whether the U.S. is worthy of membership.)

Without raising the human rights issue, economic issues seriously weaken the case for China's inclusion in the WTO. For example, U.S. imports from China are about four times the dollar amount than its exports to China. And then China has been a big disappointment for most foreign ventures, which have discovered that China's internal market remains drastically underdeveloped. Until transportation and communication networks are improved, most of China's economic centers will remain less connected to one another than they are with much of the rest of world.

If China wishes to qualify for WTO membership it would do well to follow the strategy laid out by Hong Kong and Singapore. They unilaterally opened their economies. China must open up its internal and external economy through successive rounds of lower trade barriers while removing interventionist measures used to manipulate international competition. Such acts of good faith would support China's entry into the WTO. Without such encouraging signals, China's case for WTO membership is very weak.

China does not belong in the World Trade Organization. At least, not yet. But Taiwan does. A signal should be sent to Beijing that countries with governments accountable to their citizenry and which are willing to play by international rules are rewarded. Letting China in first sends all the wrong signals and may entangle other WTO members with an unreliable partner.

The writer is an independent corporate consultant and adjunct scholar of the Center for Independent Studies in Sydney who authored The Rise and Decline of the Asian Century (Hong Kong: Asia 2000, 1998).

Window: Until China forces its state-owned firms to operate along the lines of their counterparts in industrialized economies, continued modernization will remain almost impossible.