Economics As Statecraft

We should not mistake the latest trade agreement with China--allowing it to enter the World Trade Organization--for only a trade agreement. It is much more: a calculated effort by both the United States and China to fashion the world order of the next century. We may not know for years or decades whether either nation achieves its aims, because their real intentions are both ambitious and ambiguous. But this agreement exemplifies post-cold-war geopolitics, where economic arrangements often supersede military alliances.

The cold war had at least one virtue: simplicity. We traded with our friends, not with our enemies. In the post-cold-war world, the distinction between allies and adversaries has blurred (exactly what is China?). So have our aims. Once we tried to "contain communism." Now we pursue loftier but mushier goals of preserving peace, promoting global prosperity and nurturing democracy.

In this sense, the new trade agreement's larger meaning overshadows its actual text. For China, WTO membership would accelerate economic modernization by demolishing protections around inefficient state-owned industries. An advanced China would then realize its destiny as a truly great world power. For the United States, the overriding aim is to ensure that a resurgent China shares with us--through prosperity, trade and a growing middle class--an interest in a stable world order and, gradually, democracy.

The obvious (and unanswerable) question is whether these national agendas are competing or complementary. Although both countries are gambling, China's risk is larger because the agreement provides it with few new trade concessions. The reason is that China already enjoys "most favored nation" (MFN) status in the United States. This MFN treatment--though Congress must renew it annually--means that China's exports face few tariffs. In 1998, China had a $35 billion trade surplus with the United States, estimates Daniel Rosen of ChinaOnline, an information service. (This figure covers trade with both China and Hong Kong.)

To enter the WTO, China would have to lower protectionist barriers. Tariffs on industrial goods would drop from an average of 24.6 percent in 1997 to 9.4 percent in 2005. China would quadruple the number of foreign films it permits annually, from 10 to 40 (50 after three years). Rules to invest in China's banking, insurance and telecommunications industries--including the Internet--would be liberalized. Restrictions on farm imports would be relaxed. China now imports about 2 million tons of wheat a year; the agreement immediately permits 7 million tons with almost no tariff.

By Rosen's reckoning, the initial increase in U.S. exports would be modest, $3 billion a year. But these could increase rapidly if greater foreign investment in China requires more overseas goods for, say, telecommunications networks. Why is China giving so much for so little?

The answer is that Prime Minister Zhu Rongji--architect of China's economic modernization-- "sees the WTO as a way of cementing his policies," says Charlene Barshefsky, the U.S. trade representative. "He wants telecom opened. He wants the insurance industry opened. China doesn't have the expertise or the money." For Zhu, the WTO commits China to changes that otherwise would be resisted by state-owned companies.

Superficially, there's a convergence of interests. Aside from more trade, Americans assert that the process will liberalize China. Foreign companies will improve Chinese labor standards. Joining a "rules-based" international organization, with clear standards and dispute-settlement procedures, will promote the rule of law. Commercial contracts will have to be written and enforced. Economics is statecraft. It sounds inspiring--and may be America's best chance to influence China. But so much could go wrong. In Russia, the United States also hoped (naively, so far) that free-market policies would work wonders.

For China, the economy itself is one problem. "They have excess capacity in industry after industry," says economist Nicholas Lardy of the Brookings Institution. In steel, perhaps a third of the annual production capacity of 190 million tons is surplus, he says. Since early 1997, oversupply has led to falling consumer prices. State-owned companies are suffering vast losses. Worried about jobs, consumers won't spend. Exports--once growing 15 percent annually--have stagnated. Greater competition from imports and foreign firms in China might worsen unemployment. Lardy cites one study estimating that 11 million jobs might be lost.

Here are the ingredients of a backlash--against economic "reform" and America as a symbol of reform. Barshefsky brags that the trade agreement contains many means of enforcement. If China's economy is strong, disputes might be minor irritants. In a weak economy, they could trigger nationalistic charges of interference. If China devalues to spur its economy, Americans could feel betrayed. Bargaining gains could be lost to a cheaper currency (a 20 percent devaluation would make China's imports 20 percent more costly).

Other tensions loom. There are spots of potential military conflict--Taiwan most obviously. China's Air Force recently said it would move from "territorial defense" toward long-range attack. Chinese leaders denounce U.S. plans for an anti-ballistic missile shield as upsetting the strategic balance. As for democratization, China's communist leaders have no plans to relinquish power.

"If you can't deal with contradictions, don't deal with China," says James Lilley, ambassador to Beijing between 1989 and 1991. He cites a Chinese saying--"rich country, strong soldiers"--as evidence that the country's leaders link economic and military modernization. He notes that China has projected that power against neighbors: India, Vietnam, Taiwan. Still, he "absolutely" believes Congress should support the trade agreement, because it emphasizes mutual interests. But there should be no illusions. Just because this is America's best bet doesn't mean it will work.