China & the WTO

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 year’s vote on China’s 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 Life’s 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 China—and the executive most effective at wielding influence on both sides of the Pacific—is 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 Sweeney’s professed concern for human rights abroad is not as hypocritical as Clinton’s, this is hardly the basis for Sweeney’s 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 won’t affect the number of American jobs one way or the other. Trade-opening agreements don’t add to the nation’s 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 what’s 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 nation’s 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 don’t 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 one’s 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 China’s 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 China’s 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 China’s 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 elites—both the old Party elite and the young educated elite—should 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 China’s 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 world’s 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 productivity—will 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 China’s 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 economies—have 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 economies—off 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 China’s 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 people’s 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 isn’t about who will be selling what to China. It’s 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 don’t 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 don’t expect bank tellers or branch managers flying in from San Francisco. They’ll be Chinese too."