Subject: Chinese Community Forum (CCF#9915), April 28, 1999

===+==+==+== C h i n e s e C o m m u n i t y F o r u m ==+==+==+===

http://www.china-net.org

Wednesday, April 28, 1999

(Issue No. 9915)

===========***==========***==========**==========***==========***===========

Other irrelevant content is deleted.

----------------------------------------------------------------------------

Chinese Premier Zhu Rongji had returned home from his trip to the US

empty-handed, without the long-sought WTO deal from the US, the key

country that has been blocking the way for the Chinese entry of WTO for

more than a decade. It may not be a bad thing for Mr Zhu after all, with

more details about the fall-out deal are emerging now, as the US trade

negotiators are again sent to Beijing by President Clinton in order to

conclude the deal as soon as possible.

(1) Greediness Has Its Prices

To return to an old question: Why Clinton turned down Zhu's unexpectedly

generous offer in opening up Chinese market for American business? We had

discussed the domestic political factors in the last issue of CCF. In

addition, the opposition of Treasury Secretary Robert Rubin also played a

crucial role in Clinton's decision. It may sound contradictory, for Rubin

has been the most passionate advocate for the global free market in the

Clinton Administration. Yet it was Rubin among all the Cabinet members

wanted Clinton to say "No" to Zhu. Why? Because Rubin wanted more. He

wanted the maximum return when he had maximum leverage.

Had Chinese offered too little for Rubin's former colleagues on Wall

Street? Inspection over the itineraries of Chinese concession in opening

up China's financial market says otherwise. In fact, this would be the

most breathtaking step that China has taken since it opened its door to

the world two decades ago, and it has exceeded what the US thought was

possible and had been trying to get in the last decade. Were it the only

offer that Mr Zhu had brought to Clinton, Rubin would have jumped right

in.

Alas, what Chinese offered in the financial sector, breathtaking as it

was, paled in comparison with what they offered in other trade areas.

Rubin would have a hard time to explain to his former colleagues on the

Street how come he, the most important Cabinet member in economic areas,

should get less. Poor Mr Rubin, he must take the risk of losing

everything being offered to demand more, for the motto of the people on

the Street is "Win or Lose", rather than "win some, lose some".

Of course, Mr Rubin should not bear the major blame here. As Treasure

Secretary, he must follow the tradition and speak for the Wall Street.

It is the responsibility of the president to balance the relative gains

and costs in different areas and to make the final call. Clinton

chickened out from the challenge and chose the "safe way out". He may

well have lost the golden opportunity to take the leadership stand, open

up the last major market in the world for American business to explore in

the next century, and let the Congress to fight with the Corporate America

over policy details in the coming 2000 election campaign season.

This episode should also be put into the textbooks for negotiators as a

case study: Sometimes you can give nothing by offer more.

(2) MFN the Other Way

The American media has been trying to find out why suddenly China is

willing to make concessions unthinkable a few months ago. One issue

commonly mentioned is that maybe China wants to avoid the annual review by

the Congress of China's Most Favored Nation (MFN) status, now called

Normal Trade Relations (NTR). However, the policy makers on both China

and the US sides are quite clear that this has been a dead meat ever since

China called Clinton bluff and Clinton declared delinking trade from human

rights issues in 1993.

What Premier Zhu brought to Washington, DC, last month was in effect

giving the US a true MFN status, because the list of concessions that he

prepared to give the US business in hoping to get a WTO deal for exchange

far exceeded all previous deals between China and other developed nations.

Had Clinton taken the deal, American business would have got a start way

ahead of their European and Japanese competitors in the suddenly opened

huge market of China. Now the others have seen the list and they know

what is possible. They will press on to obtain the same MFN status for

themselves, maybe even before the Americans, if Chinese leaders have not

forgotten how to play cards like Deng Xiaoping did.

A century ago, the American diplomats in Beijing fought for the equal MFN

status from the Qing court for the United States as China had given to

other Western powers, with a fervor no less than the Chinese diplomats in

Washington now to keep the NTR status for China. They had been adamant

about open market and free trade then, because they did not want to see

China divided by the old colonial powers like the way that Africa was

partitioned and left nothing for American businessmen as late comers.

Would history repeat itself? Would American business find that again they

are the late comer?

(3) Backtracks and Back-to-track in Beijing

The news has been coming out, since the arrival of the US trade

negotiators to Beijing sent by Clinton after Zhu's trip to the US, that

Chinese are backpedaling away from what Zhu had brought to Washington. It

is no surprise. Let's put aside the issue that China has lost a great

deal of face by the US rejection after offered so much. The leaders in

Beijing now are much more skilled and stronger than the rulers in the last

century, they know better what is important in the long run. The

oppositions to the concessions that Zhu was willing to offer are not just

originated in politics and ideology. The people that Premier Zhu brought

with him in his trip to the North America are mostly related to the

ministry in charge of the foreign trade. They apparently have a strong

incentive to conclude the deal. In contrast, many other ministries and

agencies in Beijing may look at the WTO issue from a different angle.

There is no denial that many officials and government branches will lose

their privileged positions if China enters WTO. However, the criticisms

to Zhu's concessions could not all be counted as based on self-interest.

Even many most ardent supporters and admirers of Zhu are now questioning

the appropriateness of opening the gate so wide and so quickly. The

concerns are focus on the question: Will China's key industries be able

to survive the sudden flood of the "foreign invasion"?

In particular, the debate is centered around telecommunication and

finance, the two key industries in which Clinton had demanded China to let

the American business to take the majority control before he would sign

the WTO treaty with China. These are two of the most monopolized

industries in China so far. The effort to create internal competition in

telecommunication has been going on for years without significant

progress, thanks to the stubborn and effective blockade of the Ministry of

Information (and its predecessor). The financial sector is not much

better. Although there are now four commercial banks supposedly competing

with each other, they could not effectively do it without first lifting

the heavy burden of the bad loans accumulated over the years due to

corruption and "policy loan" to state-owned enterprises. As for the

brokerage, as part of Robert Rubin's demand, it just got started in China

recently. There is no hope for them to survive the pounding of the heavy

weight Wall Street firms.

Telecommunication and finance are unique not just because China's past

government monopoly in these two areas, or they are the two of the fastest

growing sectors of economy. They are, in a sense, true "global

industries". When a foreign corporation invests in China to built, say, a

hydraulic power plant, a dam, a bridge, a metro transportation system, or

even a chip manufacture factory, a major part of asset is LOCATED in

China. When a foreign investor buys securities on an open Chinese

financial market, he or she could move out within a few seconds, by

pushing a computer button. The economic security of the nation has no

protection if China opens financial market and has no strong domestic

financial industry base to maintain the supply of capital. The hardwares

of telecommunication networks cannot be moved so easily, but they are

useless without the software to run them. The security to keep the nerve

system of a modern nation running will be compromised if the nation does

not have a strong domestically based telecommunication industry to back up

in case of emergency.

As pointed out by Zhu himself and many inside and outside of Chinese

government, there is no question that China is marching toward the global

market. The question is when and how. The successful lessons of

developing countries catching up with the developed world demonstrate

almost without exception that they must protect their home grown

industries for a period of time, until they can be allowed to go out of

the nursery and face the Darwinian Jungle of the international

competition. The process may take decades. Even the advanced economies

such as the US, the European Union countries and Japan are still

maintaining many trade barriers to protect their agriculture and

industries. What magic does China have to make it an exception?

(4) "Why the Sudden Hurry?"

This is the question pondered over not only by American policy makers,

business executives and the press, but also by many concerned Chinese.

The interpretations of the signal depend on the angles of observation.

The response of an official accompanying Premier Zhu in his visit to the

US to this question was: Chinese economy now faces two choices. It will

either become like Singapore, or become like Russia. As from a typical

mandarin, his response cannot be taken literally, for Chinese economy can

never become like the port-city state Singapore, no matter how open it is;

nor it will become like Russia, even if China does not enter WTO this

year.

One guess from many China scholars in the US is that China is facing a

much more serious economic and social crisis than known outside. Zhu's

unexpected concessions are then viewed as a desperate effort by the

Chinese leadership to stimulate Chinese economy in order to avert the

imminent danger. Another interpretation is that Zhu and his men in the

government have been frustrated by the slow progress in fighting the

corruption. The introduction of foreign competition, especially in

telecommunication and finance, is a strategic move to force open the

monopoly grip, and hopefully will lead to a business environment less

conducive to corruption. This scenario also sounds desperate. When Zhu's

aid mentioned Russia, did he have the "Shock Therapy" of Russia and

Eastern European nations in early 1990s in mind? Will the "Shock Therapy"

turn Chinese economy into a mirror of what is in Russia now?

One of the officially declared motives is that China hopes to enter WTO

before it changes its rules at the meeting later this year. It was said

that if China would not be entering WTO now, all the previous work on

negotiation would be wasted and all the talks had to start from beginning

again. But this is hardly convincing. The WTO is not going to

metamorphose into something unrecognizable. It is an evolving entity, but

its major framework is not going to change fundamentally this year. Most

of what have been negotiated will still be valid. Of course the technical

details and paper work have to be re-done, but WTO is such a major step

that China is taking, why do it in a hurry just to save some bureaucratic

hours? A more convincing argument would be that China wants to gain some

influence or control over the change of WTO rules by joining it while they

are still on the drawing board. In view of the imminent joining of Taiwan

to WTO, this becomes more urgent. However, it is doubtful that Chinese

leaders would have much illusion about China's current weight in

influencing the global trade rules. WTO is not UN. This is a club

dominated by the rich countries (the G-5). Some concessions may be

negotiable to win an early entry, but these considerations have yet to

explain the major concessions that Zhu offered to the US last month.

China is rising to become a major economy in the world. A WTO without

China would be ineffective in many areas. The more China waits, the more

China will be wanted. It is therefore remains a mystery why Chinese

suddenly felt the urge to join WTO in a hurry.

(5) Calm Down on the Gold Rush to the Global "Free Market"

It would be too naive to believe that once China joins WTO, all the

hurdles like the annual MFN(NTR) renewal, anti-dumping measures against

Chinese products, political pressures due to trade imbalance, etc., will

go away. WTO treaty is a set of rules. Currently, China's leverage on

the power to set/change the rules and the power to enforce the rules are

very limited.

An interesting episode is that the US insisted to extend the period of

protection over its textile and steel industries during the negotiations

before Zhu's arrival at Washington. It is also ironic, for the major

reason for the US to reject China's bid to join GATT, the predecessor of

WTO, was that China wanted to have a long transition period, designated

generally to a developing country, to protect its industries, while the US

wanted to dismantle the protection in a shorter period, a standard applied

to developed nations. The difference is that China could claim to be a

developing country 13 years ago, while the US does not need to give any

explanation other than "domestic pressure". There are other issues

involving future protection, too, such as the anti-dumping protocols, that

the US wants to keep even if China joins WTO.

The global free market, a market without national boundary, is still a

concept, not a reality. National governments are still the most powerful

forces in the global trade. Even the most developed nations like the US

and the EU members are maintaining various means of protections. The

trade restrictions and government subsidies on agriculture are common

practice on both sides of the Atlantic, for example. The reality of the

world still is that each country pushes for the free trade in those areas

that will benefit itself the most. The more powerful a country is, the

most it is able to exert its own will over the "global community". It

doesn't mean that the weaker players would have no voice at all. But so

far their voices are weak, and they have not fully explored their

strengths in this "laissez faire contagion". They have not asked, for

example, why can't the labor market in the world be liberalized.

One of the possible reasons for the failure of the Clinton Administration

to seal the WTO deal with China is that they had viewed the Chinese

leadership as too naive, weak, and desperate, so the White House demanded

more. Only history can tell if this will become the biggest diplomatic

blunder this Administration has committed.

<ningluo@Inka.MSSM.EDU>

+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+

+ Executive Editor: Peter Yuen Associate Editor: Bo Peng +

+-------------------------------------------------------------------------+

+ For subscription: mail "Sub China-NT Your-First-Name Your-Last-Name" +

+ to listserv@uga.cc.uga.edu +

+ For unsubscription: mail "Unsub China-NT" to the above email address +

+ For back issues of CCF: +

+ anonymous ftp to: ftp.cnd.org[207.151.78.100]: pub/community/CCF +

+ gopher to: cnd.org: 2. English Menu --> Community --> ccf +

+ www : http://www.china-net.org +

+ For more information: visit the WWW site above +

+ For contribution and inquiry, mail to ccfed@china-net.org +

+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+