PNTR: The Coming China Vote in Congress



The upcoming decision of the 106th Congress to grant or deny permanent normal trade relations (PNTR) to China pits concerns over the potential weakening of U.S. leverage over China versus fears that U.S. firms will lose economic ground to other WTO member nations. Once agreements with its other major trading partners are completed, China will gain WTO accession regardless of the outcome of the congressional vote on the annual review process (form-erly known as Most Favored Nation or MFN). As the European Union comes closer to forging a WTO agreement with China, Congress must decide whether the cost of losing ground to other competitors outweighs the loss of a ready forum for criticism of the mainland government. Oppon-ents, an amalgam of labor, environment, human rights and manufacturing trade groups, argue that the U.S. will sacrifice its ability to influence labor, religious, and human rights in China. Advocates feel that a vote against PNTR will jeopardize U.S. export growth and blunt an opportunity to spur the development of civil society with-in China.

Ramifications of the NTR Vote

Although the decision to grant PNTR tariff status is often linked to China’s formal accession to the international tariff and trade body, China’s accession will take place regardless of the outcome in Congress. NTR status does not signify that preferential trading privileges have been gained. It denotes a simple reciprocity: non-discrimina-tory tariff treatment for U.S. imports from a given country in exchange for similar treatment of U.S. exports to that country. While the U.S. has extended NTR status to more then 160 countries, only six nations other than China have not been granted NTR.

Currently, under the Jackson-Vanik amendment to the United States Trade Act of 1974, the United States cannot grant NTR status to non-market economies without an annual presidential waver. This annual review process, originally designed to provide leverage over emigration policies of the Soviet Union, must be revoked or amended in order to not conflict with the 1994 Marrakesh Agreement. This agreement requires all WTO members to extend NTR to other members mutually and without conditions. If the U.S. has not granted China NTR by the time of its accession to the WTO, China may legitimately decide to deny non-discriminatory tariff treatment to United States exports to China. Other WTO member nations would be free to profit both from the reductions in tariffs negotiated under WTO agreements, putting U.S. exporters at a disadvantage.

Will the Trade Deficit Balloon?

The Congressional Progressive Caucus, a group of fifty three left-leaning Democrats in the U.S. House of Representatives, raised alarms in an early February statement over perceived negative affects of revoking the Jackson-Vanik amendment. The group said that permanent, unconditional Chinese access to American markets would expand an already widening trade deficit even further.

Advocates of extending PNTR counter this argument by charging that not only are current estimates of the trade deficit inflated, but that not extending PNTR would hurt U.S. exporters. Most economists contend that official U.S. trade deficit estimates are skewed by accounting and methodology differences in arriving at export and import totals, their treatment of the flow of goods through Hong Kong, and the exclusion of trade in services from the deficit total. Advocates of PNTR also argue that most substitutes for imports from China are imports from other labor-intensive markets, not U.S.-made goods. Moreover, since the U.S. is already one of the world’s most open countries, denying PNTR would have little affect on the U.S. trade deficit with China. In any case, the U.S.-China Bilateral WTO Agreement contains provisions that include an import surge mechanism that can be used to address rapid increases in imports from China. The U.S. will also continue to use non-market methodology in antidumping cases until China requests a review under U.S. law to determine that a sector or economy as a whole is market-oriented and no longer subject to the current methodology.

However, Mark W. Frazier, a senior advisor to the National Bureau of Asian Research, contends that the impact of these concessions may be less than anticipated. China has reduced tariff rates from an average of 42 percent in 1996 to an average of 17 percent in 1999. He contends that further reductions in tariffs will be less significant to export growth than the impact of China’s rate of domestic economic growth. While substantial reductions in certain sectors, such as automobiles and agricultural goods may lead to surges in export growth, other sectors can anticipate less consequential growth. Frazier and Peter M. Hansen conducted a structured survey of the U.S. corporate community to elicit business assessments of a WTO deal. Respondents varied dramatically in their views of short term-growth; many respondents had already incorporated accession into their short-term corporate strategies. While many foresaw modest short-term economic growth in exports in general, most stressed the greater importance of China’s long-term structural changes to export development.

Opponents, including AFL-CIO President John J. Sweeney, have argued that China’s objective record of past compliance with bilateral trade agreements cast serious doubts on its ability to honor WTO commitments. In contrast, Margaret M. Pearson in the January-Feb-ruary 2000 issue of the China Bus-iness Review 2000 maintains that China’s past record participation in international financial organizations, integration into the world financial markets, and liberalization of the regulatory environment within China bode for a less pessimistic outlook. Other experts anticipate that Chinese participation in WTO will bring the weight of the international trading system to bear on Chinese behavior. Certainly, the major shifts in economic policy, regulatory structures, business, and social practices needed for WTO accession will be difficult to implement. China’s complex bureaucratic structure, combined with local and regional protectionist challenges to central authority will make implementation that much more difficult. China’s economic reformers hope that the inflow of foreign competition will impel forward the transformation to a market-based economy. Changes in certain sectors such as agriculture, financial institutions, and state-owned industry will be profound; yet they are changes desperately needed to transform the economy and stimulate slowing economic growth.

How to Maintain Leverage: Finding a Forum

Proponents of extending PNTR assert that the increased economic liberalization gained through WTO accession will eventually result in greater political liberalization. As the private sector increases in sheer size and clout, the government will lose its ability to micro-manage society. An influx of American culture though American firms will accentuate American values and ideas. Advocates of extending PNTR also argue that by taking economic disputes out of a unilateral context, China’s commitment to the global rule of law is advanced.

However, groups such as the Congressional Progressive Caucus counter that the annual review process holds key political leverage in influencing the protection of worker, human, and religious rights in China. Recent actions in Beijing such as the crackdown on Internet content, saber-rattling in the Taiwan Straits, and repression of the Falun Gong movement may have strengthened the case for retaining the annual review in the minds of many. If the Clinton administration is to gain backing for Congressional approval of NTR this year, it may need to compromise with an alternative forum for addressing China’s progress on human rights, and environmental and labor rights.

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The US-China Bilateral WTO Agreement concluded November 15, 1999, contains significant tariff reductions and removal of non-tariff barriers in many sectors where the United States retains significant comparative advantage. Agreement highlights include:

Industry

Industrial tariff will fall to an overall average of 9.4 percent by 2005 On U.S. priority industrial products, tariffs will fall to 7.1 percent, with a majority implemented by 2003. Tariffs in information technology will fall to zero percent by 2005

Agriculture

Overall tariffs will fall to 17 percent; on U.S. priority products, tariffs will fall to 14.5 percent by January 2004 China will eliminate export subsidies and SPS barriers that are not based on scientific evidence China will establish a tariff-rate quota system for imports of bulk commodities and permit private trade in agriculture

Services

China will implement the Basic Telecommunication Agreement and phase out geographic restrictions China will phase out all restrictions on distribution services for most products within three years China has committed to full market access in five years for U.S. banks. All geographic limitations in insurance will be eliminated in 3 years, while the scope of activities will be expanded over 5 years.

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