Two from Saul Landau…China/Cuba

After declining to sign a "better deal" last April, the Clinton Administration has signed off on conditions for permitting China to enter the World Trade Organization (WTO). Even though China's premier was in Washington last April begging for Clinton's signature to lock in a victory for his faction of economic liberalizers over their internal opponents, April was politically inconvenient for the Administration because anti-China sentiment in the US had crested over alleged thefts of US nuclear secrets, alleged covert funding of the Democratic Party, alleged Chinese saber rattling at Taiwan, and confirmed repression of political dissent inside China. But now the Clinton Administration needs a "big win" to save the upcoming WTO meetings in Seattle where the Administration program of accelerating liberalization appears to be in more trouble with every passing day. The announcement that all barriers to China's entry into the WTO have finally been cleared away will undoubtedly be proclaimed by Administration spin doctors a sufficient "coup" to render the WTO meetings in Seattle a success no matter what actually occurs inside the meetings or at the demonstrations outside.

The Deal

In 1985 the US exported $5 billion to China and imported almost exactly the same amount. By 1998 the US exported $14.4 billion to China and imported $71.2 billion, and in August 1999 the US had a larger trade deficit with China than with Japan. US direct foreign investment in China never topped $200 million a year between 1985 and 1992. By 1998 US 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." Most importantly the deal will greatly increase US corporate investment in China, opening whole new areas previously off limits like telecommunications and finance. The deal will also expand US agricultural exports to China significantly. And the deal will gradually increase US imports of Chinese labor intensive products like textiles and toys, putting more downward pressure on wages in general, and the wages of unskilled US workers in particular.

Finance: US banks can offer services in local currency to Chinese enterprises two years after China joins the WTO, and to individual Chinese after 5 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% of all telecommunications service ventures upon China's entry into the WTO and up to 50% 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% from the current 80% to 100%. China will also permit foreign financing of car purchases.

US Heavy Industry Exports to China: Chinese tariffs on imports of industrial goods will drop from an average of 24.6% in 1997 to 9.4% in 2005. Foreign companies will have the right to sell, distribute and market industrial goods, including steel and chemicals, without going through a Chinese middleman as is now necessary.

Chinese Light Industry Imports into the US: US 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 US textile industry and 15 years of special protections for the US against "dumping" of Chinese goods in the US 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% of Chinese Internet firms upon China's entry into the WTO and up to 50% two years later.

Movies: 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 films.

What Does It Mean for the US?

Who are the Winners?

Just listen to those who reacted with joy at news of the signing as quoted by Steven Mufson and Robert Kaiser on November 25 in the Washington Post. Sy Sternberg, chairman of New York Live 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 we're hearing is that this will be the largest market-access agreement in US 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."

Who Stand to Lose?

Not all in the US 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 on November 19 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 US most likely to suffer negative consequences from the deal in the form of lost jobs and downward pressure on wages.

The Final Tally in the US:

Wall Street wins, Main street loses. High-tech and finance win, light industry loses. High skill wins, low skill loses. If you are lucky enough to keep your job and avoid a drop in your real wage, 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, 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 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 10 years of downsizing in the US look like a proletarian picnic. And 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 They Do It?

It was not difficult to understand why US multinational banks and businesses relentlessly pursued this deal. Nor is it any longer surprising that a "New Way" Democrat like Clinton would negotiate and sign a deal that is detrimental to the economic interests of a majority of Americans and the Democratic Party's core political constituency in particular. But why has the leadership of China's Communist Party signed such a lopsided deal guaranteed to create social unrest that may shake their ability to continue to rule? That is more difficult to understand.

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. And 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% and 50% foreign owned banks and insurance companies that will be tapping into 40% of the income of 1.2 billion Chinese. Arrogance: The Chinese Communist Party must believe it is more proficient at stifling political dissent and repressing social unrest than either Stalin or Hitler -- neither of whom had to deal with the sheer number of hopelessly abandoned victims China's leaders will have to cajole in the decade ahead. Hopefully they have overestimated their prowess. Ignorance: Despite all the evidence available to them from the last decade -- that dismantled Communist economies who embrace capitalism are far more likely to join the ugly capitalist periphery instead of the alluring capitalist center -- Chinese 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 twenty-first century global hedge fund.

Who Are the Winners?

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.

Who Stand to Lose?

Displaced peasants and workers -- those who foreswore freedom and accepted grinding poverty in exchange for the "iron rice bowl" of minimal health care and old age pensions -- will suffer. Hundreds of millions of them will suffer in ways that will be hard for Westerners to even imagine. Others who find work for the profitable enterprises that survive the great shake down 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.

The Final Tally in China:

I shudder to offer a final tally in China. Hopefully the Chinese Communist Party leadership has greatly underestimated the powers of perception and resourcefulness of ordinary Chinese people. I know they have grossly underestimated the maelstrom of "creative destruction" capitalism is about to wreak on China.