Volume , Number 0
There are no articles.Commentary
There are no articles.Culture
There are no articles.Features
On Second Street
Hitchens on Serbia and East â€¦
China & the WTO
Slippin' & Slidin'
Justice is Blind and Gagged
The Road From Seattle
Will A Social Clause In â€¦
ZNet Presents: Z Magazine's WTO Primer
There are no articles.
NOTE: Z Magazine subscribers and sustainers have access to all Z Magazine articles here and in the archive. The latest Z Magazine articles available to everyone are listed in the Free Articles box at the top of the table of contents, and are starred in the list below. Questions? e-mail Z Magazine Online.
China & the WTO
declining to sign a "better deal" last April, the Clinton
administration signed off on conditions for permitting China to enter
the World Trade Organization (WTO) in November. Even though Chinas
premier was in Washington last April begging for Clintons signature
to lock in a victory for his faction of economic liberalizers over their
internal opponents, April was politically inconvenient for the
Administration. Anti-China sentiment in the U.S. had crested over
alleged thefts of U.S. nuclear secrets, alleged covert funding of the
Democratic Party, alleged Chinese saber rattling at Taiwan, and
confirmed repression of political dissent inside China. But in November
the Clinton Administration needed a "big win" to save the WTO
meetings in Seattle where the Administration program of accelerating
liberalization appeared to be in more trouble with every passing day.
The China Deal
In 1985 the U.S. exported $5 billion to China and imported almost exactly the same amount. By 1998 the U.S. exported $14.4 billion to China and imported $71.2 billion, and in August 1999 the U.S. had a larger trade deficit with China than with Japan. U.S. direct foreign investment in China never topped $200 million a year between 1985 and 1992. By 1998 U.S. direct foreign investment in China had reached $1.5 billion a year. Like NAFTA before it, while ballyhooed as a deal to free trade, the deal clearing Chinese entry into the WTO is more about liberalizing foreign investment and ownership than liberalizing trade. Steven Mufson admitted as much in the Washington Post on November 16: "The biggest benefits of the deal will be for American companies investing in China, not for American exporters."
importantly the deal will greatly increase U.S. corporate investment in
China, opening whole new areas previously off limits like
telecommunications and finance. The deal will also expand U.S.
agricultural exports to China significantly. The deal will gradually
increase U.S. imports of Chinese labor intensive products like textiles
and toys, putting more downward pressure on wages in general, and the
wages of unskilled U.S. workers in particular.
- Finance: U.S. banks can offer services in local currency to Chinese enterprises two years after China joins the WTO, and to individual Chinese after five years. Foreign insurance companies can offer property and casualty nationwide
- Telecommunications: Foreign phone companies, now restricted to equipment sales, will be able to own up to 49 percent of all telecommunications service ventures upon Chinas entry into the WTO and up to 50 percent two years later
- Agriculture: Foreign companies can sell China large amounts of wheat, corn, rice, cotton, and other commodities. For example, China now imports roughly 2 million tons of wheat a year; the agreement immediately permits 7 million tons with almost no tariff. Moreover, a substantial share of these goods can be imported by private companies rather than Chinese State enterprises
- Cars: Foreign auto companies will have full distribution and trading rights. By 2006 China will reduce tariffs on cars to 25 percent from the current 80 to 100 percent. China will also permit foreign financing of car purchases
- U.S. Heavy Industry Exports to China: Chinese tariffs on imports of industrial goods will drop from an average of 24.6 percent in 1997 to 9.4 percent in 2005. Foreign companies will have the right to sell, distribute, and market industrial goods, including steel and chemicals, without going through a Chinese middleperson as is now necessary
- Chinese Light Industry Imports into the U.S.: U.S. import quotas on Chinese goods such as textiles, toys, shoes, bicycles, portable stereos and computer parts will disappear in 2005. But China agreed to 4 years of protection after the quotas are lifted for the U.S. textile industry and 15 years of special protections for the U.S. against "dumping" of Chinese goods in the U.S. market
- Internet: Foreign firms will be allowed to invest in Internet content providers such as Sohu, the Chinese equivalent of Yahoo. Companies will be allowed to buy 49 percent of Chinese Internet firms upon Chinas entry into the WTO and up to 50 percent 2 years later
China will import 40 foreign films a year, double the current number
and 50 by the third year of the agreement, and foreign film and
music companies can share in distribution revenues for 20 of the
Who are the Winners?
Listen to some who reacted with joy at news of the signing as quoted by John Burgess in the Washington Post on November 16 and by Steven Mufson and Robert Kaiser on November 25. Sy Sternberg, chair of New York Life Insurance Company: "This is probably the most important economic development in China in the last 50 years. My company is working for a license to enter China." Scott Shearer, director of national relations for Farmland Industries: "What were hearing is that this will be the largest market-access agreement in U.S. agricultural history." America Online Inc., who already has an online service in Hong Kong and investment in an Internet company serving Hong Kong, China, and Taiwan: "We welcome the agreement." Christopher Hansen, executive vice president and Washington representative of Boeing Company: "The vote in Congress that would enable China to join the WTO is really for all the marbles." Harry Kamen, MetLifes chair emeritus: "When the actuaries think about 1.2 billion lives, their mouths water. Its not only the number of people that are there, but theres very little life insurance being purchased relative to the rest of the world. The Chinese savings rate40 percent of earningsalso makes an impression on insurance salesmen."
Listen to what the winners have been doing to promote their interests. In the November 14 issue of the Washington Post Robert Kaiser and Steven Mufson report: "Many farm groups around the country have joined executives of large businesses in a coalition to press Congress for favorable action. This coalition has grown from modest origins just five years ago into a broad, well-organized alliance. Washington representatives of the interests involved meet at two different weekly sessions to discuss policy options and politics. Both the Business Roundtable and the U.S. Chamber of Commerce have organized national efforts targeting about 60 members of the House through their home districts. For this years vote on Chinas trade status, two to four big corporations were assigned to each of several dozen House members whose votes were in doubt." On November 25 the same two reporters told us: "Sandra Kristoff, New York Lifes Washington-based executive vice president who formerly worked as senior director for Asian affairs at the National Security Council, has seen nearly 100 members of Congress since April and has been plying her views in congressional testimony and op-ed particles in major newspapers." Mufson and Kaiser also lay to rest any lingering doubts about who the Clinton administration is humping for in its China negotiations: "The dean of the American insurance community in Chinaand the executive most effective at wielding influence on both sides of the Pacificis Maurice "Hank" Greenberg, the AIG chair and former head of the U.S.-China Business Council. As the WTO deal was wrapped up last week, the 73-year-old executive was waiting in his office in lower Manhattan for U.S. Trade Representative Charlene Barshefsky to call from Hong Kong with the details."
Who are the Losers?
Not all in the U.S. reacted with joy at the prospect of Chinese entry into the WTO. John Sweeney, President of the AFL-CIO immediately warned: "This is a grave mistake. China is a rogue nation that decorates itself with human rights abuses as if they were medals of honor." (Washington Post, November 16). Sweeney reiterated his anger in a speech at the National Press Club calling it "disgustingly hypocritical for the White House to posture for workers rights in the global economy at the same time it prostrates itself for a deal with China that treats human rights as a disposable nuisance" (Washington Post, November 21). While Sweeneys professed concern for human rights abroad is not as hypocritical as Clintons, this is hardly the basis for Sweeneys opposition to Chinese entry into the WTO. He and the AFL-CIO correctly estimate that their membership is the constituency within the U.S. most likely to suffer negative consequences from the deal.
Will there be jobs lost or gained as a result of the deal? Former Secretary of Labor in the Clinton administration, Robert Reich, offered a revealing comment on this in the "Outlook" section of the Washington Post on Sunday, November 21: "The deal wont affect the number of American jobs one way or the other. Trade-opening agreements dont add to the nations stock of new jobs, as the White House has been arguing since the NAFTA battle. Nor do they cause jobs to succumb to giant sucking sounds elsewhere. We will continue to have as many jobs here as Alan Greenspan and company allows. It may be hard for partisans to extol the advantages of trade or to conjure up its horrors without resorting to hype about job gains or losses, but this kind of talk clouds whats really at stake."
There is an important truth to be found in the words of our former Labor Secretary returned academic: "If those in charge of monetary and fiscal policy deploy them in a way that maintains the demand for goods and services at the level of production that would fully employ the nations labor force and productive capacity, any shifting around in what we produce and consume, or what we export and import need have no affect on the rates of employment and unemployment." We should pause to savor the implication of this remarkable confession: "The head of the Federal Reserve Bank, who is responsible for monetary policy, and/or Congress and the White House, who are responsible for fiscal policy, deserve to be held accountable for any unemployment we suffer because they have the power to prevent it." This confession comes as no surprise to radical economists or even liberal post- Keynesians. But there are few in government who do not hide behind the fig leaf of "global competitiveness" whenever jobs are lost or real wages fall in the U.S. Unfortunately, a growing number of their constituents have come to accept the lie that lost jobs and falling wages are the inevitable consequences of globalization as well.
Reich is dead wrong that trade-opening agreements dont affect the number of American jobs one way or the other. This is mainstream economics dogma and text book economics at its worst. While economists such as Reich love to forget it, there is a constant battle being waged over fiscal and monetary stimulus with employers and wealth holders usually pressing for less stimulus. Less stimulus means higher rates of unemployment, lower worker bargaining power, and therefore less pay for more effort. Less stimulus means lower demand for goods and services and lower inflation rates, which usually works to the advantage of wealthy creditors.
On the other hand, those of us who work for a living and pay interest rather than receive interest payments are usually better served by more monetary and fiscal stimulus rather than less. Trade and capital liberalization tilts the battle field farther in the direction of deflationary policies than it already is. Capital liberalization increases the risk that lowering domestic interest rates will lead to capital flight and/or downward pressure on the value of the dollar. Trade liberalization makes it more difficult to keep labor markets "tight" than it already is in economies where labor is the relatively scarce, not abundant resource. When governments are forced to compete with one another under less favorable circumstances to retain and attract investment, they predictably tilt farther in the direction of deflationary policies that are demanded by employers and investors.
To bury ones head in the sand that fills most ivory academic towers these days and deny these important real world forces is convenient if one is searching for an excuse to support free trade, but it will certainly lead to inaccurate predictions. In the end Reich simply assumes his conclusion: "Assuming monetary and fiscal authorities maintain full employment in any and all eventualities, trade deals will not affect levels of employment." Thank you, Professor Reich.
In reality there will surely be more jobs lost in light manufacturing industries in the U.S. than gained in heavy manufacturing industries. Despite the fact that the deal is lopsided and permits U.S. industries to retain greater protections for longer than it permits Chinese industries, the fact remains that Chinas comparative advantage is in labor intensive production, while the U.S. comparative advantage is in high-tech, capital intensive manufacturing and agriculture. This means that more jobs will be lost in the U.S. than gained even if the deal generated an extra dollar of exports to China for every dollar of imports from China. But this is highly unlikely if one looks at the large and growing trade deficit we have with China at present, and if one considers that the U.S. capital account deficit with China will surely increase as a result of the deal, making it all the more easy to finance a growing trade deficit. But the real job losses will result not from liberalized trade, but from the export of jobs to China as U.S. companies expand their investment and production there instead of inside the U.S. Other low wage economies will suffer as well as international companies flock to China, moving jobs out of countries like Indonesia, Thailand, Vietnam, Brazil, and Mexico further aggravating recessionary dynamics in those troubled, no-longer "emerging" markets. But unleashing the Chinese Dragon will finish off a process that began decades ago with the rise of the smaller Asian Tigers sounding the final death knell for labor intensive manufacturing jobs in the U.S. That is what will happen if things go well and according to "plan." If unemployment and social unrest in China lead a desperate Chinese government to devalue the yuan all bets are off since, according to the treaty, the U.S. government will no longer be able to protect U.S. workers and industries from even cheaper Chinese imports with new quotas and higher tariffs. Of course that assumes the U.S. government would honor the agreement we just signed if and when it proves inconvenient.
The deal is also a disaster for Democrats in Congress and their hopes of mounting a unified campaign to win back the House in the 2000 elections. Representative Nancy Pelosi (D-CA), who opposes Chinas entry into the WTO, predicted: "This is going to be very damaging to the unity of the Democratic Party," and went on "to blame President Clinton for putting his own legacy ahead of party interests" (Washington Post, November 21). The problem for House Democrats is that if the AFL-CIO decides to go to the wall on this, those who most need support from organized labor for re-election will have to vote against granting permanent normal trade relations (NTR) status to China. But the deck is now stacked in a way that a yes vote is sure to win and Democrats who vote against will face the wrath of business and farm backers. As Robert Kaiser explained on November 21 in the Washington Post: "The U.S. administration, like all governments that belong to the WTO, can admit China without congressional approval. Congress will only vote on granting permanent NTR status. Under WTO rules, the U.S. must give China permanent NTR status to receive the market-opening concessions China has made to get into the world body. This pleases lobbyists promoting Chinese membership, who look forward to arguing that a negative vote in the House would only have the effect of denying the benefits of Chinas entry into the WTO to U.S. farmers and businesses while other WTO members cash in." Moreover, the argument that retaining the option of annual votes on temporary NTR status for China in any way serves to curb Chinese human rights abuses is difficult to make since the House has voted China temporary NTR status six years in a row. So House Democrats are reduced to praying that organized labor will only be a mouse that roared on this on
The final tally in the U.S.Wall Street wins, main street loses; high-tech and finance win, light industry loses. The highly skilled win, the low skilled lose. If you are lucky enough to keep your job and avoid a drop in your real wages, you will be able to buy more (Chinese made) toys to put under your Christmas tree. If you lose your job or, like most Americans, if you continue to fail to get wage increases commensurate with inflation, Christmas will be all the more bleak for you and yours when China enters the WTO.
What Does It Mean For China?
On the one hand, Chinese elitesboth the old Party elite and the young educated eliteshould get much richer, and finally have their chance to take what I am sure they consider to be their "rightful" place among the international economic elite. On the other hand, it means that hundreds of millions of Chinese peasants will lose their jobs to international food imports, joining the 100 million of unemployed already sleeping in cardboard boxes in Chinas cities where the construction boom has slowed and almost every industry already has excess capacity. It also means that hundreds of millions of Chinese workers in state owned enterprises will lose their jobs as "downsizing" Chinese-style makes the last ten years of downsizing in the U.S. look like a proletarian picnic. Since only a fraction of these newest additions to the ranks of the worlds most dispossessed will find employment in new, foreign-owned, labor-intensive manufacturing enterprises, and since the Chinese version of a "social safety net"subsistence wages in State enterprises regardless of productivitywill have been dismantled, it means that either the Chinese political repressive apparatus will set new standards for brutality and effectiveness at the beginning of the new century, or, hopefully, the feast of the Chinese and international corporate elites at the expense of hundreds of millions of Chinese peasants and proletarians will prove mercifully short lived.
Why Did China Do It?
Why has the leadership of Chinas Communist Party signed such a lopsided deal so likely to upset the Chinese apple cart? That is more difficult to understand.
Surely they must realize that reducing tariffs and dramatically increasing quotas on imports of basic grains from the U.S., Canada, Australia, and Argentina will put hundreds of millions of Chinese peasant farmers out of work, further flooding urban labor markets? Surely they must realize that putting Chinese savings into the hands of western financial enterprises will siphon investment away from state and small Chinese enterprises into foreign or jointly owned enterprises destroying many more jobs than are created, further swelling the ranks of the unemployed? Surely the Chinese leadership must realize that the only "social safety net" China has ever had is the "social contract" of employment for all in State enterprises at subsistence wages irrespective of productivity levels, and irrespective of whether or not there is demand for all goods the State enterprises produce? Not only income support, but housing, health care, child care, and old age care the entire spectrum of "social services" provided through various government ministries and paid for by taxes in Western capitalist economieshave all been provided in China through employment in state enterprises. Of course they run losses. They have been providing all the services provided for by non-military government spending in Western economiesoff budget. If officials at the World Bank are so worried they are warning China to get busy building a Western-style "social safety net," surely Chinese leaders realize there is little chance to replace more than a tiny fraction of the net they are dismantling with one of an entirely new kind before it will be needed?
If my predictions are correct, the WTO deal will prove to be a catastrophe for the Chinese economy. Not only is it a lopsided deal in which China has agreed to dismantle far more of its economic defenses than its trading partners have agreed to do in exchange, it could well lead to massive social unrest with highly unpredictable consequences.
Moreover, because China had not opened up its financial sector as other Asian economies did, only because China had not permitted foreign investment on the scale other Asian economies did, only because China had resisted demands that it make the yuan a convertible currency was China spared from the ravages of the currency speculators and hedge funds and the contagion effects of massive capital flight that brought other Asian economies to their knees in 1997 and 1998. Why would China, the Communist giant whose GDP more than doubled during the 1990s, adopt the international economic policies of Russia, the fallen Communist giant whose GDP fell by more than half during the same decade?
Greed, Arrogance, and Ignorance
As is often the case when ruling elites miscalculate, this decision on the part of Chinas rulers probably results from getting too greedy, being too arrogant about their powers to suppress dissent, and not understanding the full consequences of the forces they will unleash.
Greed: The old political elite believe they, as well as the young educated elite, can profit handsomely from the deal, not only in the short run, but also from the changes it will lock the Chinese economy into in the long run. Up to now the Party elite have been like gate-keepers collecting bribes from foreign firms seeking entry into China, and they have been appropriating assets from State enterprises for new small private businesses of their own. They are quite adept at both activities, but these are still only penny ante games. Bigger money can be made by becoming stockholders in fabulously profitable enterprises owned and operated jointly with foreign multinational companies. Bigger money still can be made by lending other peoples money to these highly profitable enterprises at highly profitable rates of interest. Unless I miss my mark provisions have already been made to take the big Chinese fish aboard the 49 percent and 50 percent foreign-owned banks and insurance companies that will be tapping into 40 percent of the income of 1.2 billion Chinese. Who will staff the skilled jobs in these new foreign owned and mixed enterprises? No less an authority than Robert Reich, former U.S. Secretary of Labor informs us (Washington Post November 21): "The real deal isnt about who will be selling what to China. Its about who will be hiring Chinese to make things or do things there. Not only will American auto companies be assembling cars there, but every major American service business able to enter China will be hiring Chinese to provide the services to other Chinese. Under the terms of the deal, U.S. life-insurance companies will have the right to market their products in China, but dont expect hordes of American agents to descend on Beijing. The sales will be made by Chinese. Even the insurance products are likely to be designed by Chinese because they will have a better idea of what will sell. Global banks will have the right to open branches in China, but dont expect bank tellers or branch managers flying in from San Francisco. Theyll be Chinese too."
How wonderful. Young graduates from the top Chinese universities will finally have a chance to get something close to their marginal revenue product. Those who are even more ambitious and/or well connected, and able to obtain degrees abroad, will do even better because they will get in on the ground floor with foreign companies from the countries where they studied. Forget about reuniting Taiwan with the mainland. This is a deal that can finally unite the interests of the incredibly large and well-heeled foreign Chinese community that has been filling commercial cracks around the globe for centuries with the domestic elite that never left home. This is a deal so sweet it will disprove the adage "You cant go home again."
Arrogance: The Chinese Communist Party must believe it is more proficient at stifling political dissent and repressing social unrest than either Stalin or Hitle neither of whom had to deal with the sheer number of hopelessly abandoned victims Chinas leaders will have to cajole in the decade ahead.
They certainly know the deal will create social unrest. Razeen Sally, a lecturer at the London School of Economics, calls this approach by national leaders the Nike StrategyJust Do It! John Burgess explained in the Washington Post on November 29: "They make a calculated decision that they would benefit from opening, even if theres pain up front as local industries and farms get knocked around. Chinas leaders seem to have accepted this risk as they move to join the WTO." The question is what workers will do when they are laid off and what the Chinese government will do when they do it.
The bigger question is what displaced Chinese peasants will dobecause there are eight times more of them than there are urban workers. Erik Eckholm warns: "Even more daunting than the problem of urban workers, and receiving far less official attention, is the task of creating new jobs and lives for millions of inefficient farmers who are expected to lose out to global trade and may join the countrys vast floating population of migrants who compete for bottom-rung jobs in the cities." Eckholm would be closer to the mark if he said "hundreds of millions" instead of "millions." If he wanted to provide a little historical perspective, he could have reminded readers that China once before had a "vast floating population of migrants who competed for bottom-rung jobs." For decades leading up to the 1949 Revolution, China was a living hell for hundreds of millions of dispossessed.
Ignorance: Despite all the evidence available to them from the last decadethat dismantled Communist economies who embrace capitalism are far more likely to join the ugly capitalist periphery instead of the alluring capitalist centerChinese reformers are apparently far more knowledgeable about the devil they know, command planning, than the devil who was banished from China 50 years ago and seems to have been forgotten, capitalist imperialism. They know the frustrations of a system where "workers pretend to work and the government pretends to pay them" all too well. But they have yet to meet a 21st century global hedge fund. And apparently until they do, they are putty in the hands of the sirens of neoliberalism and the mainstream economics text books their universities have switched over to.
Who Are the Winners in China?
The nimble among the Party elite will get far richer than they have ever been before, and have an easier time passing their wealth and power onto their children than under Communism. The better educated and the well established in mega cities like Shanghai will do well. As long as they are careful not to challenge the political monopoly of the Communist Party, Chinese ex-patriots will be welcomed home to an economy starved for their skills and capital. Managers of the enterprises that soar will also do well.
But managers of the enterprises that sink will not do well. More importantly, displaced peasants and workersthose who foreswore freedom and accepted grinding poverty in exchange for the "iron rice bowl"will suffer. Others who find work for the profitable enterprises that survive the great shakedown are unlikely to enjoy rising real wages to go along with their rising productivity. High levels of unemployment, a ban on independent unions, and a highly repressive government apparatus devoted to achieving high levels of investment so China can fulfill its destiny to become an economic super power will conspire to keep the wages of the fortunate who find work from rising for decades if all goes according to plan.
I shudder to offer a final tally of winners and losers. Instead I prefer to hope that all will not go according to plan. Sometimes "Just Do It!" proves to be a poor plan. Hopefully, in this case, the Chinese Communist Party leadership has greatly underestimated the powers of perception and resourcefulness of the Chinese people. I know they have grossly underestimated the maelstrom of "creative destruction" capitalism is about to wreak on China.