China: Wto Or Bust?

Beijing may win a last-minute deal--but it's no sure thing

With the 11th hour looming, Washington and Beijing have suddenly reopened negotiations to secure China's entry into the World Trade Organization before the end of November. That's when leaders from WTO member countries convene in Seattle to launch a new round of liberalization talks. But the date has another significance: It's seen as the last chance for China to join the WTO for the next few years.

The pressure comes straight from the top. President Clinton and Chinese President Jiang Zemin had a lengthy telephone conversation on Nov. 6 that immediately sent U.S. Trade Representative Charlene Barshefsky jetting to China. Although the details of the two leaders' conversation are unknown, Washington clearly hungers for an agreement.

So does Beijing--or at least the upper echelons of the leadership do. Jiang has signed off on a last-minute negotiating push--if not ordered a deal itself. In a sign of China's resolve, a Chinese delegation greeting Barshefsky on Nov. 10 included Chinese conservatives who previously had opposed a deal. Yet there are still some diehard opponents left who could block the way. All depends now on the policy debates raging around Jiang and reformist Premier Zhu Rongji. "It has become completely political," says a Western diplomat in Beijing.

Seven months have passed since Zhu's trip to the U.S., when he offered surprisingly generous trade concessions in a high-profile bid to win WTO entry. The gambit failed when Clinton turned down the deal. Since then, U.S.-China relations have worsened, and China's powerful conservatives have won time to build resistance to WTO entry among various ministries, big state companies, think tanks, and an increasingly skeptical public.

TOUGHENING UP. But Jiang has already embarked on a high-level effort to win over his opponents and reassure the Chinese public that a WTO deal won't mean too big a sacrifice. He has also been pushing his deputies to spread the word on the benefits of joining "the WTO to skeptics in China's ministries and industries.

A recent toughening up on foreign investors could be part of China's WTO negotiating tactics. China has been imposing new restrictions on foreign investors in everything from the Internet to telecommunications to market research. That gives Beijing a better position from which to negotiate with the U.S.: If China has to gradually dismantle trade barriers once it enters the WTO, it makes sense to get those barriers as high as possible before a deal. And getting tough makes it easier to sell an agreement at home. "They are trying to prepare Chinese companies for global competition," says a Beijing-based telecom analyst.

Clinton, meanwhile, seems to have political forces finally lined up behind him. Senate Majority Leader Trent Lott (R-Miss.), despite earlier opposition, has assured the many business lobbyists virtually wearing out his carpet that he plans to back any eventual deal. He has also promised to deliver fellow Republicans for the vote on granting China permanent Normal Trade Relations status (formerly Most-Favored-Nation status), which would be scheduled after the WTO deal. Unless the U.S. grants China NTR, Beijing would not be required by the WTO to extend market-opening benefits to the U.S.

What's the impetus behind Jiang's push for WTO entry? The WTO deal would give Beijing cover for the tough restructuring necessary to fix its fragmented and inefficient industries. And while the market openings that come with WTO entry will challenge China's ailing state industries, the economy stands to get a big boost in foreign direct investment and exports. With pledged foreign investment down more than 20% in the first seven months of this year, China's leaders know that foreign capital could evaporate unless it gets easier to do business in China. "China needs to get confidence back among foreign investors and give its people some confidence about the direction of its economy," says Andy Xie, economist for greater China at Morgan Stanley Dean Witter, who predicts an agreement this year.

The danger to China's reformers, however, is that WTO concessions get viewed as kowtowing to foreigners. When Zhu offered deep concessions back in April, the office of the U.S. Trade Representative posted his terms on the Internet. That caused embarrassment back home--and gave WTO opponents a boost. Then the debate got mixed with nationalism following the U.S. bombing of China's embassy in Belgrade in May. Says Wang Yong, an associate professor researching U.S.-China trade relations at Beijing University: "Concerns about sovereignty and national dignity are now linked to economic nationalism."

ONE VOTE. With decision-making being more evenly shared among the elite, the economic setbacks of the last few months mean reformers are having a tougher time being heard. With more opposing views coming to the fore, conservatives such as National People's Congress head Li Peng are able to air their go-slow approach at Party meetings. "Zhu's power is shrinking, especially in the reform programs," says a Chinese political analyst. "Premier Zhu has only one vote."

In still-uncompetitive sectors such as automobiles, petrochemicals, and agriculture, resistance is strong to an agreement based on Zhu's April concessions. At one of China's largest and strongest auto manufacturers, Changchun-based First Auto Works, the nervousness is palpable. FAW has formed joint ventures with multinationals including General Motors Corp. and Volkswagen, but it wants the tariffs to remain. "We need another two or three years," says an FAW official commenting on the tariff schedule for China's WTO entry. "It's not just our company; the restructuring of the whole auto industry needs it."

New industries are protective, too. China's most vocal opponent to market openings, Information Industry Minister Wu Jichuan, has presided over explosive growth in China's telecommunications industry. But he is determined to keep the sector Chinese and has presided over a crackdown on some 40 companies, including France Telecom and Sprint, that have invested $1.4 billion in telecommunications services in China. He is now pushing to limit foreign investment in Internet-related ventures.

UNRULY. Recent hints that Beijing is considering tighter quotas on the local manufacture of foreign-branded mobile phones for Nokia, Ericsson, and Motorola are another example of China's protectionist urges. "The Chinese have said quite openly that they want to promote domestic companies and see them take a slice of the market," says the head of China operations at a foreign mobile-phone maker.

The impact of growing Chinese conservatism is being felt in businesses that have not previously experienced the weight of politics. Proposed rules call for all foreign market research companies and multinationals to submit polling questions and results to China's State Statistical Bureau. Outraged companies, including Motorola, IBM, and Coca-Cola, suspect an attempt to control potentially sensitive information and help local companies move into their lucrative businesses.

Jiang and Zhu clearly desire WTO entry. But even if they ordain a deal, the unruly officials in China's ministries have found a stronger voice--and will still be around for future battles.

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