China's Accession to the WTO
January 12, 1998
Before the end of President Clinton's term in office, Congress will debate in earnest China's application to join the World Trade Organization (WTO). Rhetoric in Congress during President Jiang Zemin's recent state visit tells us this debate may be highly contentious. The recent congressional defeat of the President's request for fast-track authority raised awareness in the international trade community that close attention must be paid to laying groundwork for critical national decisions on trade policy. It is not too early to address the new "China question."
Financial turmoil in Asia manifests the extent to which nations and regions are linked in a global economy. U.S. stock and bond markets move in response to overnight news from Japan and Korea, U.S.-based corporations adjust their earnings projections based on revised forecasts for Asian GDP growth, and U.S. Treasury officials arrange and manage a flow of credit while providing counsel on market reforms. As the impact of the Asian financial crisis hits the United States, voices for isolation and protection will again be raised, as they were raised during the Mexican peso crisis. Some may soon suggest that the United States insulate itself from the Asian crisis by erecting barriers to the import of goods made cheaper by sharply devalued currencies.
The United States is the leader of the world economic system that it has long championed, a system that operates based on the decisions of individual consumers. It cannot de-link itself from the world in response to economic turmoil. If the United States reacts to economic uncertainty with protection, its model will surely be followed by other nations.
The application of China to join the WTO should be considered in this context. The WTO now stands firmly-with the United Nations and the International Monetary Fund-as the third pillar of a system of international institutions designed to promote a world of peace, financial security, and economic prosperity. The WTO stands for the rule of law in international trade. By providing the legal framework for the transnational flow of goods and services, the WTO promotes the stability in international economic relations which is urgently needed in our intricately linked world economy.
This Insight is intended to serve as a primer for the coming debate on China's application to join the WTO. Rather than focusing on a single issue, it highlights a range of matters confronting trade negotiators at the WTO, and it discusses the process by which China's accession will be considered in the United States. There is much more to say on each of these issues and questions, and there are many good sources for finding more detailed discussion.1
In late October, President Jiang Zemin of China visited the United States in large measure to pave the way for its accession to the WTO. Leaders of the United States, European Union, Japan and other major trading powers unanimously support China's entry. The question is oft-repeated, "How can the WTO claim to govern world trade while more than one-fifth of the world's population, the second largest national economy, and one of the top ten trading nations, is excluded from its ranks?" 2
The reasons for encouraging China's accession are apparent. In joining, China would assume the range of legal obligations generally applicable to WTO Members. These include providing most favored nation (MFN) treatment to goods and services of all WTO Members, treating goods imported into its market on the same basis as domestically produced goods, abandoning the use of quotas, and protecting intellectual property rights. Perhaps most important, as China's economic integration with the rest of the world becomes more deeply imbedded, its stake in maintaining peaceful external relations will grow.
From China's side, as its economy has become more export-oriented, the prospect that other countries might close their markets has become a serious economic concern. Accession to the WTO would provide for more stable trade relations with other Members, including the United States. Following accession, China's access to foreign capital markets will improve as investors gain confidence in its capacity to make and implement decisions in accordance with internationally accepted rules. Once China takes its place in the WTO, all sides will have recourse to the settlement of disputes under the rule of law.
Yet under the surface of the logic supporting accession, a number of vexing political and legal issues remain. At the multilateral level, finalizing the terms of China's Protocol of Accession to the WTO requires resolution of critical questions about China's future status within the organization. For the United States, issues range from the appropriate level of market access commitments to be demanded from China, to what changes, if any, need be made in domestic trade legislation to accommodate China's status as a WTO Member. U.S. labor and other interests will oppose normalization of trade relations with China on domestic economic and social grounds. Within the U.S. body politic a question from the Cold War era lingers. Is China prepared to act as a responsible citizen of the world trade community?
Negotiations in the WTO
The legal instrument that will define China's specific obligations as a new WTO Member is a Protocol of Accession. This Protocol is under negotiation within the framework of a WTO Working Party on the Accession of China. Negotiations take place in two different settings. The first is multilateral, with China and all WTO Members negotiating general terms. The second is bilateral, with China and each WTO Member negotiating specific market access commitments regarding goods and services. Once market access agreements are achieved in the bilateral context, China's commitments will be set forth in schedules to the Protocol and multilateralized (or extended to all WTO Members) through its MFN obligations. Before discussing the specific negotiations to date, one point should be stressed. When (and if) China becomes a Member of the WTO, it will assume all of the obligations of WTO membership, except as those obligations are varied by the Protocol of Accession.
The Terms of the Protocol of Accession
Considerable progress has been made in both the multilateral and bilateral negotiating settings. In multilateral negotiations, China has agreed to apply WTO rules throughout its territory, to make its trading regime transparent, and to maintain independent tribunals for the review of administrative actions.3 The commitment to establish independent judicial review on trade matters is significant because each step taken in China to strengthen an independent judiciary may help to more widely establish the rule of law as a principle of domestic governance.
China has agreed to subject its state-owned enterprises (SOEs) to applicable WTO rules, to refrain from establishing new non-tariff barriers to trade, and to phase out existing GATT-inconsistent quotas and related measures in accordance with schedules. Though these schedules are not fully agreed upon, China's offers on non-tariff barriers are understood to be close to meeting the demands of WTO Members including the United States. The main exception is in the field of agriculture, where significant differences remain. China has agreed to comply with the terms of the Agreement on Technical Barriers to Trade, though there remain differences over special commitments being demanded of China in the technical standards area. WTO Members are seeking commitments from China to eliminate local content and technology transfer requirements, and there is distance among the parties on this question as well. It is important to the United States to achieve a sound agreement on the extent to which technology transfer may be made a condition of doing business in and with China.
Trade negotiators must decide whether China will be entitled to "developing country" status as a WTO Member. Ordinarily, this status is self-designated by WTO Members based on factors such as relative GDP per capita. Developing country status entitles a Member to take advantage of transition periods for implementing various WTO Agreement obligations, and it reduces the level of trade concessions that Member is expected to make in negotiations. China's trade officials assert that it is a developing country.
There is no legal restriction on the subject matter that may be regulated by an Accession Protocol, and China's status as a developing country Member could be addressed there. China's economic status is somewhat exceptional in the WTO context-it has a relatively low per capita GDP, but a very large and growing export trade surplus. For this reason, a compromise on developing country status spelling out WTO obligations that might be relaxed in China's favor should be workable. China, for example, might be entitled to take advantage of certain transition arrangements, but might not be entitled to favorable treatment in the granting of future trade concessions.
U.S. trade negotiators, among others, have suggested that it should be easier to restrict imports from China than imports from other Members, and that each WTO Member (including China) should be entitled to suspend the application of provisions of the WTO Agreement and Protocol for the duration of a trade dispute involving China. With regard to the possible inclusion of an open-ended escape or "safeguard" provision in the Protocol, one might well ask-as Judge Lauterpacht did in his seminal dissent in the Interhandel case-whether an agreement that allows parties to suspend obligations at their discretion is a legal obligation at all?
China's Tariff and Services Offers
In bilateral negotiations, China has made substantial offers to reduce tariff barriers across a wide range of goods. Though the United States continues to seek assurance that China's substantial reductions in average tariffs do not disguise tariff "spikes" directed at important U.S. export sectors, differences over tariff rates do not appear to be an obstacle to concluding a Protocol of Accession, particularly after President Ziang's commitment during his visit to the United States that China would join the International Technology Agreement, and thus eliminate tariffs across a range of high-technology imports.
In terms of market access commitments, the major obstacle to successful conclusion of a Protocol is in the field of services. Since entry into force of the WTO Agreement on January 1, 1995, Members have concluded a major Protocol to the General Agreement on Trade in Services (GATS) on reducing trade barriers in telecommunications, and have most recently concluded an agreement in the financial services sector. So far, China has been reluctant to make substantial offers to liberalize its services market. Following President Jiang's visit to the United States, China tabled new offers in banking, insurance, telecommunications, distribution and legal services; yet China's trade negotiators have already acknowledged that these offers do not adequately address the concerns of developed WTO Members.
U.S. and European trade negotiators, in conversation, acknowledge that China's services "market in transition" is not directly comparable to an OECD-country market, and that some concessions to its special situation need to be made. However, they fear that unduly favorable treatment of China might undercut the more global process of liberalizing trade in services. One approach to accommodating the special characteristics of China's services market, while avoiding backsliding in the wider process of global services market liberalization, would be to use transition arrangements such as are employed for some NAFTA services sectors. Recalling that the removal of barriers to trade in services has been slow as between the United States and Europe, there should be some room for allowing China's services enterprises to adapt to market conditions before fully facing competition from foreign service providers.
China as a Member of the WTO Community
Might admitting China to the WTO weaken the framework of what, by many accounts, has been the most successful of international organizations? The WTO (as the GATT did before it) operates on the basis of consensus among its Members, and in theory one Member could disrupt the consensus decision-making process.
There are three reasons why concern with this aspect of China's accession should be muted. First, while the WTO-GATT has operated by consensus, there are fairly elaborate voting rules that may be employed in the absence of consensus, and these could be used to circumvent obstructionist behavior by one or a few Members. Second, the WTO-GATT has always had to strike a balance between competing interests-for example, between developed and developing Members. Though China's entry will affect the balance among interests, China has not historically been looked to for leadership on economic issues by the developing world. While a leadership role may evolve, the differences between China's economic interests and those of countries such as India and Brazil seem sufficient to argue against a major realignment of interests within the WTO in the near future. Third, and perhaps most important, China is a permanent member of the UN Security Council, a member of the IMF, WIPO and other important international organizations. Though China should be expected to pursue its own interests in the WTO, and these interests will be different from OECD interests, China's conduct in the UN and other international organizations gives us little reason to believe that China will act other than as a responsible Member of the WTO.
China's Accession within the United States
Within the WTO, approval of China's Protocol of Accession requires either consensus or a favorable vote by two-thirds of the Members.4 Before the Protocol is approved, any Member (and the applicant) may give notice that it elects not to apply the WTO Agreement between itself and the new Member. Either the United States or China (or both) could elect not to bring the WTO Agreement into force between them when (and if) China joins the WTO.
The WTO Agreement was approved and implemented in the United States by the Uruguay Round Agreements Act (URAA). Section 122(b) of the URAA provides that "the Trade Representative shall consult with the appropriate congressional committees before any vote is taken by the Ministerial Conference or the General Council relating to - ... (5) the accession of a state or separate customs territory to the WTO Agreement ... if the action described ... would substantially affect the rights or obligations of the United States under the WTO Agreement or another multilateral trade agreement or potentially entails a change in federal or state law." At a minimum, the Executive Branch is obligated to consult with Congress prior to voting in favor of China's accession to the WTO.
Section 122(b) of the URAA must be read in light of the Jackson-Vanik Amendment to the Trade Act of 1974 (19 USCA Section 2432 (1997)). The Jackson-Vanik Amendment requires the President to deny MFN status to non-market economy countries which deny their citizens emigration rights. The President may grant such MFN status if he or she determines and reports to Congress that the subject country is permitting emigration, or the President may grant MFN status based on an annual waiver of the otherwise applicable restriction. Annual presidential waivers are subject to disapproval by joint resolution of Congress. China has been granted MFN status since 1980 based on a presidential waiver (and in accordance with the terms of a conditional U.S.-China trade agreement reciprocally granting MFN status).5 Annual congressional hearings on proposed resolutions of disapproval have been widely reported.
Section 102(a)(1) of the URAA provides "No provision of any of the Uruguay Round Agreements, nor the application of any such provisions to any person or circumstance, that is inconsistent with any law of the United States shall have effect." The Statement of Administrative Action transmitted by the U.S. Trade Representative and approved by Congress in the URAA, states:
...the section reflects the Congressional view that necessary changes in federal statutes should be specifically enacted rather than provided for in a blanket preemption of federal statutes by those agreements.
Accordingly, at this time it is the expectation of the Administration that no changes in existing federal law, rules, regulations, or orders other than those specifically indicated in the implementing bill and this Statement will be required to implement the new international obligations that will be assumed by the United States under the Uruguay Round Agreements. Should it prove otherwise, the Administration would need to seek new legislation from Congress or, if a change in regulation is required, follow normal agency procedures for amending regulations (at page 14).
Does the President require further Congressional approval before voting in favor of China's accession at the WTO? One could argue that (a) since the WTO Agreement contemplates accessions, and (b) Congress in the URAA explicitly required prior consultation if an accession might require a change in federal law, that (c) the President need only consult with the Congress before voting in favor of China's accession. However, since the USTR's Statement of Administrative Action says that the executive will seek new legislation from Congress if the WTO Agreement requires any change to federal legislation, the executive might have some difficulty in justifying this interpretation in light of Jackson-Vanik. The Jackson-Vanik Amendment is a rather complicated legislative enactment. With sufficient parsing of language USTR lawyers might be able to build a case for the President to grant permanent MFN status to China with the right certifications. It seems doubtful that Congress would view such an effort with favor. Since Congress has primary constitutional authority for regulating U.S. trade relations and could readily override a presidential decision that was inconsistent with the majority perspective, the President may decide to confront the Jackson-Vanik Amendment directly, seeking its amendment from Congress in connection with consultations regarding the accession.
What if Congress should decide to authorize a vote in favor of China's accession to the WTO while maintaining the Jackson-Vanik Amendment in force? In other words, what if it says in essence that the United States will grant China MFN status on a year-to-year basis through the mechanism of a presidential waiver? Would the United States be violating a WTO obligation?
There are several GATT dispute settlement panel decisions that hold that the maintenance in force of domestic legislation which permits GATT-inconsistent action, but does not mandate such action, is not subject to successful challenge.6 These decisions might suggest that mere maintenance in force of the Jackson-Vanik Amendment in respect to China would not violate the WTO Agreement. However, a recent WTO Appellate Body Report confirms that a WTO Member must establish sound legal mechanisms for implementing its obligations under the WTO Agreement.7 If, as a WTO Member, China faced an annual review of its MFN status in the U.S. Congress, would the United States have fulfilled its obligation to provide a sound legal basis for according MFN status to China in its domestic law?
Congressional debate on approval of China's accession to the WTO is likely to focus on issues that are not addressed in the Protocol of Accession. These issues will involve China's human rights record, the impact of open markets on U.S. workers, and China's evolving role as an Asian military power. These issues are certainly important, and they deserve the most serious discussion and attention. These issues should be considered in the broad context of U.S interests in the governance of the world community.
The end of the Cold War has shifted the focus of international policy-making from the security arena to the international economic arena. The WTO plays a key role in stabilizing the world economy and in promoting economic growth. While bringing China into the WTO will carry some risk, this risk must be weighed against the risk of isolating China from the world around it. China is a major economic and political force in Asia. Its economic policies will influence those of its neighbors, and those of the United States. There remain challenges in working out the details of China's accession. If these challenges can be met, it may be possible to integrate China into the primary institution governing world trade under the rule of law.
1 The issues discussed in this Insight are considered by a number of government officials, international trade lawyers and international economists in China in the World Trading System: Defining the Principles of Engagement (Frederick M. Abbott Ed.), Kluwer Law International, 1998.
2 For economic data, see East Asia Analytical Unit, Australia Dep't of Foreign Affairs and Trade, China Embraces the Market 1, 38 (1997). Reference to the relative size of China's economy is based on total domestic purchasing power. China's domestic purchasing power is projected to exceed that of the United States by 2020. Id.
3 As a matter of GATT-WTO practice, no term of the draft Protocol is agreed until all terms are agreed, and reference to China's acceptance of terms should be understood in this context.
4 This refers to the customary practice of decision-making by consensus, and the voting requirement that is specified to be used in the absence of consensus.
5 The Agreement on Trade Relations Between the United States and the People's Republic of China of July 7, 1979 permits a party to suspend application of the agreement "If either Contracting Party does not have the domestic authority to carry out its obligations under this Agreement..." Art. X:3. This escape clause leads me to characterize the agreement as "conditional."
6 For example, in United States-Taxes on Petroleum and Certain Imported Substances, BISD 34S/136, Report of the Panel adopted June 17, 1987, the panel held that U.S. legislation imposing certain discriminatory tax penalties, but allowing Treasury authorities to issue non-discriminatory implementing regulations, was not GATT-inconsistent (at paras. 5.2.9-5.2.10).
7 India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, Report of the Appellate Body, WT/DS50/AB/R, 19 Dec. 1997, e.g., at paras. 57-58.
About the Author:
Frederick M. Abbott is Professor of Law, Chicago-Kent College of Law, Chicago, Illinois.
Frederick M. Abbott
China's Premier, Zhu Rongji, is scheduled to visit the United States in early April 1999 to meet with President Clinton. As of late February 1999, the United States and China are involved in intensive negotiations toward concluding an agreement on terms for China's proposed accession to the World Trade Organization (WTO). China's Accession to the WTO was first published in early 1998, shortly following President Jiang Zemin's widely reported state visit to the United States. That visit generated tempered optimism that an agreement on terms of WTO accession might be concluded over the following year.
There was very little movement on the China accession question in 1998. The 1997/98 world monetary crisis resulted in a general slowdown in market access negotiations across all regions of the world, with China and Asia no exception. Whether the world economy is sufficiently less turbulent in 1999 to allow major new integration efforts is uncertain.
Major political developments since early 1998 may of course influence the course of the China accession negotiations. Perhaps the Clinton presidency is so weakened by events surrounding the now-concluded impeachment process that the Administration will not be able to take decisive action on the trade front. More important, though, is that the government of China is reported over the past year to have undertaken a systematic crackdown on internal political dissent, and to have threatened or imprisoned a number of important critics of the government. It should be no surprise to the government of China that such action may severely inhibit the willingness of the U.S. Congress to support China's accession to the WTO. Chinese government action certainly places a greater burden of congressional persuasion on the US Trade Representative, which already faced a formidable political task.
About the Author:
Frederick M. Abbott is Professor of Law, Chicago-Kent College of Law, Chicago, Illinois.