Slow Dance With The Dragon

Despite progress, prospects are fading for China's swift entry into the World Trade Organization

After years of wrangling, U.S. trade officials returned from another round of talks in Geneva in early March full of hope that an agreement for China's entry into the World Trade Organization finally was falling into place. Beijing relented on dozens of U.S. demands on market access, including a promise to let foreign exporters sell in China without going through state-owned intermediaries. The Chinese even hinted they wanted to wrap up a deal in time for President Jiang Zemin's summit with President Bill Clinton late this year.

Sounds bullish, but the optimism isn't likely to last. True, a WTO agreement would be a diplomatic victory both for the White House and for Jiang. But faced with the daunting task of retooling a command economy dependent on trade protections and on the brink of a financial crisis, Chinese negotiators are insisting on a 10-to-12-year grace period for meeting WTO terms. That would be difficult for the Clintonites to sell in the U.S., where the ballooning $39.5 billion trade deficit means market access in China is getting to be an urgent political priority.

Worse, talks that were proceeding nicely in low-key diplomatic channels are now caught up in a maelstrom of congressional politics, joining the Donorgate probe and the annual China-bashing fest over renewal of most-favored- nation trade status. Frets one influential free-trade House Democrat: "I just hope they don't have a WTO accession agreement up [on Capitol Hill] this year."

The Administration desperately wants to keep the delicate trade talks on track. If they drag into midterm elections next year, the politics could get even more complicated. Some U.S. negotiators now think that by bringing the Donorgate hysteria to Beijing's attention, they can strengthen their hand. Fear of an even greater U.S. backlash on trade will soften Beijing to more concessions, they reason. These could include speedier timetables for scrapping industrial subsidies and allowing competition in service sectors, and "safeguard" clauses that will let Washington impose quotas and duties to prevent Chinese imports from flooding U.S. industries in the interim.

But judging from the most recent talks in Geneva, there is a long way to go. The two sides covered half of the issues that the ustr says China must resolve before it can enter the WTO. But they were the easy ones. Core areas that remain unresolved include subsidies to state industry, the weak dispute-resolution process in Chinese courts, product standards that discriminate against imports, and access to agricultural markets. Meanwhile, Chinese import duties remain four times as high as those of Japan. And to tap markets such as consumer electronics and automobiles, foreign companies must manufacture locally and transfer key technologies. Service sectors, such as banking, media, and telecommunications, are virtually off limits. "The really difficult part begins now," says Konrad Seitz, Germany's ambassador to China.

MONEY PITS. Even if Jiang and other top leaders sincerely want a WTO deal, there is growing doubt in U.S. policy circles that they'll be able to get many protectionist bureaucrats to implement the terms. The case for freer trade could be overwhelmed by the mess at China's 110,000 state enterprises, nearly half of which lose money. State business siphons off 60% of investment but produces less than 40% of China's output. And because of clumsy central planning and huge inefficiencies, much of what is produced is piling up in inventories that have reached $65 billion, according to official estimates, or a stunning 8% of gross domestic product. Stockpiles are said to include as many as 150 million men's shirts, 20 million bicycles, and 10 million watches.

Chinese officials recently lamented to visiting Commerce Under Secretary for International Trade Stuart Eizenstat that state enterprises would have to lay off 40% of their workers to straighten things out. A torrent of cheap imports could provoke upheaval in a nation where state companies provide jobs, medical care, and pensions to two-thirds of the urban population. With its weak tax system, Beijing can't afford to take over housing, schools, day care, and other services now provided by state companies.

BANK MESS. A looming financial crisis also endangers any deal. Anywhere from 20% to 40% of bank loans to the state sector are nonperforming. Yet banks have no loan/loss reserves. Refinancing would absorb two-thirds of government receipts for years, figures Nicholas R. Lardy of Washington's Brookings Institution. Letting foreign banks compete for domestic savings could devastate China's banks.

For now, though, Chinese leaders seem intent on WTO entry. Global prestige and permanent mfn status are big reasons, although some truly believe free trade will make Chinese industry competitive. They are supported by some coastal provinces, which account for most of China's exports and want cheaper imported materials and continued access to overseas markets. Chinese leaders "have decided that the opportunities are larger than the challenges," says Hai Wen, deputy director of the China Center for Economic Research at Beijing University.

U.S. negotiators are betting that the free traders will win and be powerful enough to ram WTO terms through the bureaucracy. So they want to keep up the momentum while Beijing is in wheel-and-deal mode. For one, they would like to lock in the promises China has made in recent months. And to close the deal, Washington still must sell it to the WTO's other 129 members.

But before China's top leaders risk their political necks over a WTO deal, they'll want to know that the ustr is bargaining from strength. That's not easy when leading members of Congress want to look over the shoulders of U.S. negotiators. The fear is that "paranoia" over China will lead to "an air of timidity that prevents us from saying we've negotiated a good agreement once we've done so," says U.S. Trade Representative Charlene Barshefsky. Crafting a WTO deal will be hard enough, but negotiators for both sides may find selling it at home even tougher.

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