1998 Congressional Hearings
Special Weapons
Nuclear, Chemical, Biological and Missile




Testimony of Greg Mastel,
Vice President and Director of Studies,
The Economic Strategy Institute
Before the Subcommittee on Telecommunications, Trade, and Consumer Protection of the House Committee on Commerce.
May 14, 1998


Good afternoon, Mr. Chairman and Members of the Subcommittee.

My name is Greg Mastel and I am Vice-President and Director of Studies at the Economic Strategy Institute, a nonpartisan public policy research and education organization based in Washington, D.C.

Let me first commend the Subcommittee for holding this hearing. The United States and China have a very long list of important bilateral concerns ranging from human rights to arms sales. Certainly, each of these issues is important in its own right, but there are a number of international trade issues deserving of at least as much attention. In my testimony today, I will focus on what I believe is the most significant of these issues ? China's membership in the World Trade Organization.


WORLD TRADE ORGANIZATION MEMBERSHIP


The World Trade Organization ? usually known by its acronym WTO ? is the latest incarnation of the world trading system. Despite some institutional and coverage weaknesses, the WTO is an impressive organization that has the potential to liberalize global trade and bring the rule of law to international trade. The WTO is still in its infancy, however, and it faces a number of challenges. Probably the most difficult of these challenges is integrating a number of reforming non-market economies, most notably China and Russia, into the WTO.

As the largest of these economies and the first to join the WTO, China plays a crucial role. At current growth rates, China will be the largest economy in the world early in the next century. Thus, the agreement on WTO accession with China is of obvious direct importance.

But the importance of an agreement with China goes beyond just the direct stakes. Any WTO accession agreement with China will effectively become the template for similar agreements with all other reforming non-market countries. Thus, the stakes in these accession negotiations are very high indeed. The United States and other WTO members must make certain that the accession terms negotiated with China are the right terms. No trade negotiation on the horizon is more important to U.S. trade and economic interests.

Unfortunately, there are significant challenges to confront in integrating China into the WTO. In short, the WTO is a market-oriented, rule-based institution, but China is neither fully market oriented nor rule based.

Given China's record of compliance with trade agreements concluded with the United States, both its ability and its willingness to abide by the provisions of the WTO is open to question. The difficulties encountered in enforcing the agreements against intellectual property piracy in China provide a troubling example of potential difficulties.


STATE OWNED ENTERPRISES AND THE WTO


Beyond that, China maintains many relics of non-market economics. One of the most notable are State Owned Enterprises or SOEs. China has undertaken sweeping economic reforms, but SOEs are still responsible for about one third of China's GDP and more than half of its foreign trade. SOEs are not prohibited by the WTO, but there are limitations on both the subsidies that can be provided to SOEs and the role they can play in foreign trade.

For those interested in the topic, I am attaching a copy of a recent article I authored with Mr. Andrew Szamosszegi in International Economy that discusses the problems in reconciling China's SOEs with the WTO. I will not go into the details, but suffice it to say that there are a number of serious issues that must be addressed to bring China's SOEs into WTO compliance. The reforms are so sweeping in scope that it is unclear if China is presently prepared to undertake the necessary reforms.

I must emphasize, however, that an agreement that ignores the SOE issues will simply not provide the United States or other countries meaningful access to China's market.


CONCLUSION


In the long-term, bringing China into compliance with the WTO is unquestionably in the interest of the United States, China, and the world. The terms on which China is brought into the WTO, however, are critically important.

Though it may be the most complex, reconciling China's SOEs with the WTO is only one of at least a dozen critical issues that, including market access for goods, distribution rights, market access for services, investment restrictions, and subsidies that must be addressed to bring China into WTO compliance.

Unfortunately, if these terms are poorly negotiated or adequate precautions are not taken to ensure that they are fully enforceable, a WTO agreement could permanently lock into place trade asymmetries with China and the rest of the non-market world, weaken the WTO, and aggravate U.S. bilateral trade problems with China.

There have been calls to conclude some sort of agreement to complete the WTO accession negotiations or at least set some sort of deadline at the upcoming summit between President Clinton and President Jiang. Such an agreement could create some summit news, but unless it comprehensively addressed the issues I have mentioned, it would not be in the United States best interest.

China's WTO accession is an issue of great historic importance. Essentially, a WTO accession agreement will set the terms for China's full integration into the world economy. It is also an agreement at which the world will not get a second chance; it must be done right the first time. For that reason, it would be a mistake to allow any artificial deadline to compromise the substantive negotiations.

Let me be absolutely clear, China should become a WTO member as soon as possible. But WTO membership should only be possible once China has agreed to bind itself to all WTO provisions through an enforceable accession agreement.

Mr. Chairman, I would be pleased to answer any questions you and the Members of the Subcommittee have regarding the WTO or other trade issues involving China. I would also ask that the article I mentioned on China's SOEs be included in the hearing record.