China Trade Approval Would Aid U.S.

Nicholas R. Lardy
Nicholas R. Lardy Anthony M. Solomon Senior Fellow

May 9, 2000

In what has been described as its most important vote this year, Congress will soon decide whether to provide permanent normal trade relations to China. A vote is required because, after 14 years of negotiations, China is poised to enter the World Trade Organization (WTO). Granting permanent normal trade relations (PNTR) to China is strongly in the U.S. national interest for several reasons. First, a negative vote would have no bearing on China’s entry into the World Trade Organization, but it would mean that U.S. companies would not benefit from the most important commitments China has made to become a member.

A positive vote is necessary if American companies are to gain the same opportunities that will accrue to firms from Europe, Japan and other WTO member states when China enters the World Trade Organization. Among the most important are the openings for substantially increased foreign investment in financial services, telecommunications and distribution (including wholesaling and retailing).

Second, and even more important, the failure of Congress to grant permanent trading status to China would undermine the positions of reformers in China. These reformers have overcome intense domestic opposition to membership in the World Trade Organization, in part by arguing that such membership is the only means of avoiding the process of annual renewal of normal trade relations with their largest export market—the United States.

The United States should embrace the commitment of the Chinese leadership to integrate China more fully in the world economy, rely more heavily on market forces to allocate resources within China, liberalize further the flow of information on which the market depends, expand the role of the private sector and provide greater protection to intellectual property.

In time, these commitments will have profoundly transforming effects within China and expand trade and investment relations with the rest of the world. The most effective way for Congress to signal support for these developments is to pass legislation authorizing the president to extend permanent trading status to China when it enters the World Trade Organization. Failure to do so plays into the hands of conservative elements in China that seek to constrain the role of the private sector, limit the role of the market, restrict the development of the Internet and generally control more tightly the flow of information.

Third, the failure of Congress to grant permanent normal trade relations to China would significantly undermine the position of our negotiators in the final stage of China’s entry to the World Trade Organization—the drafting of the protocol of accession and the report of the working party.

These two documents, to be negotiated in a multilateral setting in Geneva after China has concluded all the bilateral negotiations, will spell out in detail China’s commitments on all WTO rules. While some of these already have been specified in the far-reaching November bilateral trade agreement between China and the United States, several critical commitments remain to be set forth and clarified at the multilateral stage.

Among them are the details of the trade-policy review process that will track China’s compliance with WTO rules once it becomes a member. Because China has not complied fully with past international agreements, it is important that the leverage of U.S. negotiators be just as strong in the multilateral negotiations as it was in the bilateral negotiations leading to the November agreement. The best way to assure this is for Congress to provide the president with the authority to extend permanent normal trading status to China.

Finally, a positive vote would strengthen bilateral economic relations more generally. That may help place a floor on the broader bilateral relationship, which continues to face critical challenges on security issues, stemming largely from tensions between China and Taiwan, and on human-rights issues.

Indeed, a negative vote by Congress on the trade status could set off a downward spiral in U.S.-China relations that would have implications far beyond trade and investment.

Critics of permanent normal trade status for China argue that, by giving up annual renewal of normal trade relations, the United States will lose leverage to improve human-rights conditions in China. But Congress now has renewed China’s trade status every year for 20 years, even in the aftermath of the Tiananmen tragedy. The Chinese leadership no longer regards the possibility of nonrenewal as a credible threat. The United States has more effective means, such as the UN Human Rights Commission in Geneva, through which to pursue human-rights abuses in China.

Others oppose permanent trade relations because they fear it will lead to U.S. job losses. This argument also is misplaced. Because our market is already fully open to Chinese goods, granting permanent status will not reduce the cost of Chinese goods in the U.S. market. The U.S. economy already has been adjusting quite successfully to competition from increased imports from China—U.S. unemployment is at historically low levels.