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China, the WTO and U.S. Interests

Speakers: Jeffrey Fiedler, consultant, Food and Allied Service Trades (FAST), AFL-CIO, Robert D. Hormats, vice chairman, Goldman Sachs International, and Kevin G. Nealer, senior fellow, Forum for International Policy
Presider: David E. Sanger, White House correspondent, New York Times
October 16, 2001
Council on Foreign Relations

M: I will not introduce them at great length, since you have their biographies here. But Bob Kormat is from Goldman Sachs, and was I guess the chairman of the group that put this together. Kevin Neiler is a senior fellow at the Forum for International Policy. He’s also been traveling around the country explaining the report some. Jeff Fiedler from the AFL-CIO will also be commenting on it some today. Or I guess formally…what are you…still there, still there. You never really leave the place.

If you don’t know more about the panelists today, you probably shouldn’t be here. I’ve been given the word that we are going to keep each of their presentations to five minutes. It seems hilarious for me of all people to be saying this, but council meetings are considered deep background, and you cannot identify the speaker. Or as they say where I work, “It’s off the record unless they say something really interesting.” (Laughter)

This meeting was supposed to be a time of sort of celebration of China’s entry into the WTO, as is President Bush’s trip to China, which he leaves on Wednesday. And I thought for a moment I would talk about that. But I have to tell you first that there was a great rumor running around China earlier today which one of our correspondents called me with, that the President for the obvious security reasons wouldn’t actually be staying at his hotel, but instead would be staying on Air Force One in the evenings. This was dead serious, this was all over Shanghai today.

So I called over to the White House and I spoke to somebody. And I said, “So any truth to this? Or is it an urban myth?” He said, “Well, David, I’ve got good news and bad news for you.” He says, “The good news is the President is going to be staying at the Portnum Hotel in Shanghai, and he’ll be staying…the best we know, he’ll be sleeping there each night.” I said, “That’s great, what’s the bad news?” He says, “The bad news is, so are you.” (Laughter)

He said, “We are all in this together.” So there you have it. But it will be a fascinating meeting because this will be the first time that the President will be meeting Jiang Zemin. It will be a time for them to discuss the WTO, but also a time to set the tone for the US/China relationship which is really what this study group and the report is all about. It will be a time to repair whatever lasting damage was done from the EP3 incident. And it will be President Bush’s first real engagement with the leaders of Asia. And of course he wanted to do this at some leisure, going to Tokyo and then to Seol, and then to Shanghai and then to Beijing. But world events have conspired otherwise, and now the visit is contained to basically three days.

And its content will be quite different from what was first intended, because the President will use it to build his Coalition Against Terrorism, and also to deal with the global economic downturn, a subject that is very interwoven with how China actually implements its entry into the WTO. He may well have to moderate some of his earlier criticisms to the Chinese. He will have to walk a tightrope, because the Chinese very much want to equate terrorism and separatism, so that they can rap the Fong Gong or Tibetan Independence, or maybe even Taiwan issues, into anti-terrorism.

And this of course is all taking place against the backdrop of a very quiet power struggle over who is going to succeed Jiang, and of course Zhu Rongji who was so instrumental in the WTO agreement. So I’m going to ask each of our speakers, in addition to providing their analysis of the report and the issue, to put this some in the political context that we are facing it in, which is that the President has got a list of things he needs from China in addition to the issues that he normally planned to go over there. I found a number of interesting points in the report. And I urge you to read it, if you have a copy, to take it home…just a couple of facts that jumped out at me, I guess things that either I knew or should have known, but seen in black and white were particularly notable.

The fact that 6.5 million urban workers lost their jobs in China in 1999 I thought told me something. The fact that the state-owned enterprises that I used to write about when I was based in Asia accounted for 47 percent of economic output in 1993, and 28 percent in 1999 - I thought that was an astounding number. We’ll talk I’m sure about the problems that China has with no safety net, and the problems that they have with the very little provincial support that there is for this agreement that was reached by the central government.

And I also noted the observation in the report, which I assume was drafted long before September 11th, that American officials will need to recognize that too tough a position on China’s trade surplus “could undermine support for further reforms in Beijing, and could also weaken cooperation on broad foreign policy and security issues.” And I thought that line particularly resonated now. You didn’t come here to listen to me. So you came here to listen to all of them. And I will start with Bob Clemens.

BC: Thanks very much, David. I first of all thank you all for coming. We worked long and hard on this report, and there were times we weren’t sure we were going to get it out, because things were changing very rapidly. And it was also of course only at the very end that the final deal on Chinese accession was actually reached. So we were sort of making changes at the last minute, and Kevin did a fantastic job in responding to all the pressures and everyone in the group who wanted their own particular wording put in there. And he was able to broker this I think in a very Solomonic way. So particularly, thanks to Kevin.

David’s made a very interesting point - that things changed very quickly with respect to US/China relations on and just after September 11. And in a curious way, this pulls together a number of those strands. First of all, the meeting in Shanghai, both a multilateral meeting and a meeting between the President and President Jiang Zemin will both focus on the effort to deal with terrorism. And then the sub-theme is how do you pull the world out of this current downturn? China being one of the few countries not experiencing anything on the downturn. But in a way, trade is a vehicle for pulling some of these strands together in the following sense: It’s my view that you need an economic coalition to go along with a military coalition in the sense that economic cooperation today is important in its own right; and it’s also important I think because it serves as a way of…it serves as a vehicle for cooperation among countries who will be, to varying degrees, participating in the broader effort against terrorism.

Countries that are experiencing friction on economic and trade issues are going to find it more difficult to cooperate on some of these other issues of terrorism; whereas countries working together on the economic side, it enables them more easily to gain domestic support for their common effort against terrorism. So the effort to make sure the trading system works better and avoids trade frictions, or resolves them in an early way, is part of the overall effort of maintaining harmony in a broader sense, which is needed the support the Coalition Against Terrorism.

The second is that trade is an important vehicle for stimulating growth. Barriers to trade in fact are taxes; openness to trade is a stimulative force for the international economy. And I think that the importance of China joining the WTO is that it maintains momentum in the global trading system, a system which has come under considerable stress and criticism over the last several years, in the broader issue of anti-globalization and the focus on the WTO which has come in for a lot of criticism as being one of the major institutions of globalization.

With respect to the particular report, we tried in this report to look at the opportunities of closer cooperation between the United States and China on trade, and the opportunities presented by China’s membership in the WTO. We also tried to candidly look at the risks and the potential problems which could emerge. The Chinese have taken on a major set of obligations in agreeing to the terms that the United States and other countries insisted upon for China’s membership.

And as David has pointed out, in China there is considerable resistance in the provinces and among some ministries, and among some senior political leaders to the intense reforms, the changes that are required of laws and practices, increased competition, a whole range of things that China is going to have to do to conform. And the fact is a lot of new competitive forces are going to be injected into the Chinese economy as a result of this, in the banking sector, agriculture, manufacturing - across the board. How the Chinese cope in an environment where they are already concerned about unemployment, they’re already concerned about social pressures - this is going to be a big challenge for the Chinese.

But the government of China has made the judgement that we all in the group I think felt was a sound one. And that is that to take the Chinese economy to the next step of competitiveness, they need to undertake the kinds of reforms that were embodied in the WTO agreement, that this was something that they were…they were on a reform process, and this takes the reform process to a new level. So the changes that this accelerates, the accelerated changes, the accelerated reforms within China as a result of WTO membership, something that they felt was needed to increase the dynamism, the efficiency of the Chinese economy, realizing that there would be political costs, there would be costs in terms of more intense foreign competition.

They also sought as a way of giving China a major seat at the table when discussions of change in the global trading system began in a new round of trade negotiations. And I think we also have to look at this as a way for China, which is playing a major role in global political institutions, to play a major role in a major global economic institution, which is the WTO in China, will use its influence in the WTO as we go forward to determine whether there will be another realm, and what the shape of that realm is likely to be.

The other thing that I think is very important is to realize that we have been primarily conducting US trade relations with China over the last several years on a bilateral basis. This changes that, and now what we do with China will have a bilateral component in it but will be primarily within the context of multilateral rules. And it may well be that we, in using those multilateral rules will not always get what we want. And there will be disputes that go to the WTO, although we have also recommended here that so as not to put too much pressure on WTO institutions, there be other institutions and other ways of resolving disputes. But the WTO will be a central vehicle.

So we are moving trade relations from a primarily bilateral context to a primarily multilateral one. And this is going to be a change for us and it is going to be a change for China. And we are going to have to figure out new ways of working with the Chinese in that context, to resolve disputes and to insure compliance.

The last point I would like to make is the role of the private sector, which is very important in this process. While we’ve talked about the role of government, the private sector is going to play an increasing role. The private sector has placed a lot of emphasis on getting PNTR every year, PNTR as opposed to getting normal trade relations legislation every year. And this permanent normal trade relations has in a way removed one of the levers that we have on a bilateral basis. Now the private sector, having placed a lot of emphasis on WTO membership in PNTR wants to at least demonstrate that it’s getting results. And I think that politically in this country, it’s going to be extremely important for the administration and the private sector to see some tangible results relatively quickly. And this is going to be an interesting test, particularly if the trade imbalance widens, or if their frustrations in terms of the kind of results that are achieved, there could be political backlash in this country and a lot of concern that somehow the Chinese have not been able to do all they said they were going to do.

And the critics of China and those who were not supportive of this agreement would then say, “Well, perhaps you were too ambitious. The Chinese have not been able to deliver,” and there would be political backlash as a result of that, and resentment and a decline in confidence in the overall bilateral economic and multilateral economic relationship. So there are a whole lot of risks and a whole lot of opportunities in this process. I would simply conclude by saying that we regarded China’s accession to the WTO as an extremely important change for China and for the US in terms of its relationships with China. But also a real milestone in the evolution of the global trading system. The biggest developing country in the world is now going to become part of the WTO.

This has been in addition to the WTO or the GAP(?) before it, unlike any other country that has ever come in, any other emerging country that’s ever come in. It changes it very fundamentally. Poland and other countries that have come in don’t give us any real guide to how this is going to work. China is a big country, big in terms of receiving investment, big in terms of trade. And it is going to have a profound effect on the WTO and the trading system. We see it as a great opportunity, but one that is going to have to be managed very carefully.

And I would simply end with the following point which we highlight early on page four, where it says, “This report discusses many of the things that could go wrong during the transition period within which China implements its commitment to the WTO. But our primary goal is to address the many ways in which cooperation between the United States and China can improve prospects so things will go right.” I think that really encapsulates what we are trying to do here. And we have a number of recommendations that are achieving precisely that goal.

M: Jim?

J: Thanks. What a pleasure it is to work on any project with the likes of Bob Hormax(?), and Jeff Fiedler, and Bob Manning, and Liz Economy(?), here at the Council. If there is a voice of Solomon anywhere in this report, those of you who know me will have the good sense to realize it was theirs and not mine. The predicate for this was Less Geld’s instruction. And let me say, none of us were interested in writing one more report about China and the WTO. People in David’s line…and one in particular in David’s line of work has said to me that the most boring headline in history is “World Trade Talks Continue.” (Laughter)

We won’t inflict that anymore on you with respect to China. The charge instead was to look and admit frankly that USPRC relations are complicated, they are condemned to become more so over time. But as members of the group looked at this, we realized that the global system had a lousy record of managing the emergence of great economic powers. And we thought that China’s entry into the WTO was going to…on the best of circumstances, it was going to pose exquisite policy challenges for the US and for the entire international trade regimes, as Bob has said.

So with that in mind, the report really seeks just to do three pieces of work, I think. And that is to lower expectations and introduce an appropriate level of realism about what can be done with the WTO and what it means; to build confidence both in China and here, and let me say it’s very US-centric as I think this kind of council product must be; but to build confidence in the successful management of China’s entry. This is not going to be a process as Bob has made the point, that’s without problems. But it does contain enormous opportunities for both sides.

And finally it’s an effort to look frankly and without rose-colored glasses at how we can create a constituency, again both in China and in retail politics in the United States, that can help deliver durable benefits both to China and for US workers and companies. That’s a big idea. I’m not sure we got it in this short number of pages. But it is the beginning of a dialogue in which we are delighted all of you will be participating.

M: Thank you. Jeff?

JF: I…dissenting from the report. But actually, agree strongly with the underlying analysis that is embedded in the report. The lowering of expectations, the description of the problem confronting us and the Chinese. What I think is that we have not necessarily followed out to their logical conclusions the policy implications of the risks that face China. For instance, you will read in the report repeatedly observations about unemployment and social unrest, as the central concern in undoing China’s compliance. I think that that’s an understatement. That the problem of worker dislocation, worker unrest, is the central problem about to face us as a human rights issue, with the Chinese.

I never had high expectations. The high expectations were always a part of the political debate in order to pass it. This is how much we are going to gain. And now we are lowering those expectations. I understand that, that fight is over. The problem that remains is are the Chinese ready for a new level of mature business relationships with the United States? I would submit to you that it is not simply a problem of training more functionaries in China about the rules of WTO implementation. The problem that exist is the absence of the role of law or the absence of a culture of compliance.

And that is a party problem that is in existence of a political structure on compliance, that is sort of unknown in its implications. And I think many members of the task force were afraid of that, and have mentioned it. I think we didn’t quite go far enough in the problem of corruption and what it means to WTO compliance, as we did not go far enough into an economic analysis of the financial sector of China, and the banking system as that will impact. We make mention of it. My criticisms are only with regard to the depth.

I also don’t think, going back to the worker issue, that we’ve dealt with the following issue: what happens in the United States among US workers, when WTO compliance is used as the reason to repress workers when they resist the dislocations that they’re going to encounter. And we haven’t…I don’t think come to grips with that adequately. Well, I’ll leave it all up to your questions.

M: We will go to those questions. Thank you all for your very interesting views. I had one question I thought I would just start things off with, which I would ask of all three of you or anybody who wants to answer it. We are going to have a leadership change in China within the next two years. What do you think the chances are that the next group of Chinese leaders are going to have the depth of commitment to this document, to the WTO agreement, that the current President and Prime Minister have?

M: That remains to be seen. That is a question that we address, and I think in part it depends on internal conditions in China at the time. If the situation, the economy is less robust than it is today; if there are substantial increases in unemployment or there is additional social unrest, then I think it will be somewhat more difficult for them. On the other hand, I think the view of the current leaders of China is that this will have created enough pressure for some of the more difficult problems…for the government to deal with some of the more difficult problems in the sense that it will create pressure on the government to accelerate the restructuring of start enterprises. And that it also will have created a environment for more private investment coming into China which will create more jobs. So if Zhu Rongji and others who have been pushing this are correct, within a couple of years there will be risks and problems of more employment, but there will be benefits that are substantial enough to enable the leaders to carry on the commitments. But it’s still a…it is going to be a tough call.

M: I think that’s right. David, you know, you guys published the “Tiananmen Papers.” And be they true or be they manufactured, they offer a couple of lessons perhaps, one of which is that the continuity of ideas in senior leadership at the moment of crisis in Tiananmen Square, senior leaders didn’t turn to the party, didn’t turn to the standing committee. They turned to a group then called “the Immortals,” the eight guys who really knew what was going on. And one can hope that some version of that is going to survive the leadership transition.

But more to the point, I think the good news and bad news about the leadership view on WTO is not different than the good news and bad news for anybody who has ever worked in government about senior level attitudes towards the policy. The current leadership in the next group regard this as a done deal. They’ve checked the box, they’ve moved on. The leadership said yes to WTO as an agent of change. And how many times you are going to be able - you as an implementor of these ideas - are going to be able to go to Jiang Hi(?), to the senior leadership component, and say, “You know, I just need clarification on a few things, we’ve got a couple of tough choices”…I think are few and far between.

So I think that the fact that the leadership’s hand has written and moved on puts this down at the level where I hope we want to keep the focus, which is by and large on building a constituency of people who think that this is a good thing to be doing.

M: I think the check the box observation is wishful thinking, that whomever takes over has to consolidate…they’re largely unknown to the people of China at large. They have to establish their legitimacy. And I’m not sure I as a leader would want to establish my legitimacy at a time when I’m trying to comply with the WTO and cause a great dislocation. So I think it’s problematical that it is coming for compliance at a leadership change point.

M: The legitimacy in China is a little different from the legitimacy…they don’t have to get reelected.

M: No, no, I didn’t say anything about…I was very careful not to say…but they still need to establish some form of legitimacy.

M: But I think a large part of their legitimacy resides in legacy. And that is why I think the check the box model is probably more right than wrong.

M: Well, we’re open for (Overlap)

M: It’s all conjecture.

M: We ask that you identify yourself and your affiliation, before you speak. Paula? There is a mike coming.

(Background Conversation)

PS: Okay, Paula Stern of the Stern Group. I wanted to ask about the interrelationship, the trade laws in China now that they are becoming a member of the WTO, and competition, and the notion of competition policy. It’s my impression from my visit there several months ago that they are emulating or imitating, depending upon your point of view, the US in its active use of trade laws. Extremely interested, they’ve been…it’s really been racheted up, the number of cases that have been brought by the government in the form of these state organizations. And at the same time, they’re very interested in the Microsoft case and competition policy, et cetera. As pragmatic Chinese, do you believe that China will continue to kind of adapt this almost approach paradigm that the US has, which is that they keep trying to reform, keep trying to open up, and yet they are going to have trade laws. Or do you think that this thing would…am I just smoking suddenly…that somehow China is so particular and so peculiar that this idea that you can have this happy medium is impossible in China.

M: Well, look, I mean, I have no idea where the debate is now on competition policy. I think I saw John Jackson here and some others, and we’ll let them deal with that maybe. But I think our view if I can speak for us all is that they’ll treat WTO strictures opportunistically. I think in large major, the practical Chinese leadership has said to both the winners and the losers, “Don’t worry, we can modulate some of this over time. We’ve got room at the edges, both with implementation, some of the time features here, and in the way we carry out some of these rulings.” I think what is problematic and what scares us a bit - there is a lot that scares us - is that among other things, there is a court system in place in China which is not very friendly to the idea…It’s a civil law structure, and it is not very friendly to the idea of overturning existing laws, changing court rulings. It’s not the case. And just imagine, there is a fairly high penalty in the Chinese system for a Chinese judge to declare a law invalid. That’s not the way it works. Or to overturn other court decisions. So the need for a dynamic process of adjustment besides the one that happens inside the legislatures, is a source of worry. I think they will do it with typical Chinese characteristics, and that is not all bad. But what we try to speak to is our need to be equally flexible in our response.

M: Anybody else on that? Okay.

JCB: Julia Chang-Block, University of Maryland, College Park. I think the task force is quite right in having one of its objectives as lowering expectations, because I think most Americans don’t really understand, certainly underestimate, the degree of opposition and dissention in China against the country’s entry into the WTO. And how it is going to be for China to implement the requirements. Now, I just got the report so I haven’t had a chance to read it yet. But I wonder whether you might be more specific in terms of where expectations ought to be lowered, so that there isn’t a backlash in this country, when China doesn’t do what we think it ought to do.

M: Let me make sort of a parallel. The European Union established for itself - not negotiated with anyone else, for itself - a whole series of objectives, timetables, regulatory frameworks that they were going to put in place. In almost every case, they have slipped. They’ve slipped because they haven’t been able to get agreement within…among the countries, because some countries don’t implement all the directives all at once. Foot-dragging on the part of ministries in various countries. In trade, you set up objectives, and it’s implementing them, even in the European Union has proved to be very difficult.

In China we can’t expect that it is going to be that much different. Because these are, as you point out, Julia, tough commitments that the Chinese have made, and there is resistance as there has been in Europe, to what they’ve agreed even among themselves. So where I think you’ll find problems and disappointments is that in some cases, ministries that are told to do things will drag their feet. Or the regulation that they promulgate to meet the commitment will have elements in it that we feel don’t meet the word or the spirit of the agreement. There are going to be lots of these little differences, and in some cases perhaps large differences with the nuts and bolts of implementation. And there will be companies who will come along and say, “We thought they’ve agreed to this. But the regulation that they’ve put out at the ministerial level or in such-and-such a province doesn’t, in our judgement, comply with the wording or the spirit of the agreement.”

So there are going to be lots of these little things. They just are going to happen. It may well be that the central government has total commitment to implement all of this in a relatively orderly way. And they meet resistance from ministries or provinces or state enterprises, in some province that the government does not have full control or is simply not aware that they have not complied. I think there are going to be lots of little issues and maybe some large ones. But the point we try to make is because these things occur, we should not brand the agreement a failure. It just means you are going to have to work…it’s a big country, government control over every aspect of the economy is not nearly as great as we might think. That is going to be one of the frustrating parts of it.

M: The report calls for the setting up of an alternative dispute resolution process, to mitigate the flood of disputes that’s anticipated in the risk analysis. Now, that has an interesting set of problems. And the report addresses it somewhat in the analysis, and that is that the business community which was once unified will become dis-unified when it’s interests are different from the whole. When they’re now pursuing narrow self-interest and the failure of China to comply in their sector.

The political implications of that domestically, with business folks hectoring members of Congress, “Hey, you voted for this. I supported it and now they’re stiffing me,” is real. And that I think is reason for the alternative dispute process. Now, there is one line in the report that I think people ought to sort of attend to. Getting China wrong could be the last mistake WTO makes. You know, it’s just sort of like buried in…Kevin buried it, and he’s right. Okay? And of course there may be some people up in Ralph Nader’s organization or others who are hopeful that that may happen, that China doesn’t comply. But the stakes are very high, and I see major problems in the dispute resolution process being flooded. And I don’t believe that Europe is a good analogy, because there were so many other economic relationships that existed at that (Overlap)

M: No, I wasn’t saying that. I was saying that even Europe when it made an agreement among its own members, was not able to comply, so that was my point. It wasn’t the disputes, it was the difficulty of implementing even what you’ve agreed to within the European Union.

M: I might to add to that, what was fascinating about the Europe relationship was that the big disputes that threatened the existence of the WTO which were everything from sanctions to bananas, there was an immediate sense on both sides they had to work this out elsewhere. That you couldn’t break the WTO on it. It would be very interesting to find out of the Chinese leadership has that same temptation or not. Or the same culture of compliance.

M: Arnie?

AC: Arnold Cantor, Forum for International Policy. I’d like to pick up on the last point and ask the panel to look ahead to the implications of China’s membership in WTO. And say a little more about dispute resolution and how the Chinese are likely to participate and respond. But more generally looking ahead to the next round, on the one hand the Chinese historically have not been very active, and arguably even less effective in international organizations.

On the other hand, there ought to be real incentive for the Chinese to behave like every other current WTO member behaves. That is, to export their domestic, economic, political and social problems into the WTO arena to see if the WTO can’t give them some relief. So instead of asking what the implications of the WTO are for China, let me ask you to turn around and speculate a bit about the implications of China’s membership in the WTO, for the WTO.

M: Okay. I think the WTO is at risk. I don’t think the WTO is prepared for Chinese negotiations of dispute settlement. They want to negotiate these disputes, they want to take as much time as they can in order to get them put off, tire people out. It’s worked effectively in the past in bilateral relationships. And I don’t know that they are going to do anything but learn the hard way that that’s not acceptable behavior on an international level.

M: Well, I don’t know if it’s acceptable. Look at bananas. I mean, that’s ...

M: Bananas are a really terrible thing, because all Bananas, there was help…Carl Lidner and, you know ...

M: No, but the point is that other countries used these procedures and draw them out.

M: The United States.

M: Including the United States.

M: Yes, of course. Including the United States.

M: But it’s not on as many issues that are likely to be the case in (Overlap)

M: The problem is there will be a lot of issues, and that is why we put in this report ways of dealing with them that don’t necessarily have to go in the WTO.

M: And it’s going to be an (Overlap)

M: Right, it’s going to be an experimental thing.

M: But…(Overlap)

M: I’m sorry, go ahead.

M: David covered this issue, I remember. You recall when the US was talking

about taking the Japanese to the WTO on auto parts. Rugero’s reaction was something very close to the following, “Gosh, don’t do that. That’s far too important an issue to end up here.” Now that’s an extreme characterization. But in fact ...

M: I’ve heard one that (Overlap)

M: Yes, I think there is a sense of, you know, this mouse can’t eat this elephant, you don’t want to watch it try. But the part of Arnie’s question that I find intriguing is not just the dispute resolution process, and this is one we couldn’t really get our arms around to be honest - is what’s China’s agenda in the WTO, what does it want out of the next round? There are funny sorts of developments. Who might yell louder about European and Japanese ag subsidies than China because they want to get out of that business, and they don’t have the money to do it, and they don’t think it’s a winner. So we might find strange alliances with China on that score. But there are some larger issues, and I don’t know where they end up on them.

M: Look, I mean, the WTO has been…look at the Fisk issue, I mean, how long that has gone on, back and forth, back and forth, unresolved. So the WTO…it’s not as if WTO is unfamiliar with issues that take a long time and are of major significance like that one. I don’t know what the numbers are, Paul, but they’re big numbers. So…much bigger than bananas, that’s true. Much bigger. So this clearly…the dispute settlement process is clearly going to be one of the huge challenges. You’re right, Jeff.

M: And we accept that. The alterative of not having China in was one that no one thought was a very good idea. So that they’re going to come in, they should come in. It’s good for the global system that they do come in. But it presents unprecedented challenges. And it is going to take pragmatism to work them out. I guess that is the best we can say. And we are going to have to experiment with various ways of doing it. And we are going to also have to accept the fact that there may be disputes where we’ll lose and they will win, and we have to accept that too as we do with other countries.

M: John Jackson knows all about this, he should be doing this.

M: In the back room.

M: Who had their hand up? Yes.

(Next speaker has very strong accent - best efforts)

WA: W. Annasi(?), with Japanese government. I have two points. The first point is that the current Chinese situation has two commonalities with the Japanese situation in the 1980s. The first point is are the (Inaudible) devaluated currency. And the second point is a huge trade surplus. Our experience in the 1980s that the US government forced Japan to adjust to currency after that (Inaudible) agreement. So the Japanese yen was depreciated so much. And another comment was a huge trade dispute between US and Japan. So far, the Chinese currency is (Inaudible) to US dollar for seven (Inaudible) years, although their competitiveness or the fundamentals have been through so much. So then it is reasonable to think that currently the Chinese are (Inaudible) actually and devalued. But so far I haven’t heard of that, a big complaint about (Inaudible), I haven’t heard that, a complaint to a dispute between US and Japan. So my first question is, what is the difference which causes a different outcome between the current China/US trade relationship, and that relationship between US and Japan in 1980s?

My second question is after the entry of China to the WTO, and each Chinese government opened up to market as it committed, then the possibility, or one of the possibilities is the Chinese government will use or will abuse the anti-dumping measures to protect some specific (Inaudible). So do you think it is likely? And if that is the case, do you think that Chinese industries or American industries, American government, will complain about such kinds of abuse of anti-dumping by the Chinese government? And if it is the case, American domestic discussion on anti-dumping in the WTO will be changed after seeing the strategy of the Chinese government to abuse anti-dumping issues? Two points, thank you.

M: I’ll try to boil those down, to take them…question one is, is there room for a Plaza agreement for China. And I guess question two is, does the United States have the self-awareness to realize the irony of complaining about Chinese dumping laws. (Laughter)

M: These are really Bob’s questions. But I have a short answer for the currency. And you actually said what was the different between now and the Plaza accords. And my answer would be I hope we’ve learned something from the Plaza accord. Four things happen when you devalue, and if you’re Chinese…or if you float. And three of them are bad for China’s economy. So I’m betting we don’t deal with that real soon. And on the issue of do we appreciate the irony - yes, but trust me, that won’t stop us. (Laughter)

M: I can’t add anything to the last point. The first point, I think that we’ve gotten to this position several years ago of begging the Chinese not to devalue the RNB. And the Chinese…that was the most stable currency in Asia, and still is. So I don’t think we are going to fool around with the currency or press the Chinese or give them any advice on their currency. Governor Di has indicated on several occasions that they have, if they wish, the right to widen the band. It is really not exactly fixed as a band around it. And if they want they can widen the band. And I think we ought to let the Chinese manage their currency without the benefit of our advice, which probably wouldn’t be all that good anyway. I do think that they probably in their own interest should widen the band somewhat, when they decide they want to do it.

But I don’t think…the problem with China is exports now is that they’re getting weak, because the countries they sell to are experiencing a deterioration…a weakness in growth. And I don’t think their devaluing would help very much. And on the other hand, I don’t think they’re going to revalue their currency at this point. They want to keep it relatively close to the dollar, and I don’t see any advice that we can give them that is very different at this point.

M: Okay, do you want a piece of this? Ira?

IR: Ira Wolfe, with Senator Max Bachus in the Congressional Executive Commission on China. Does September 11 put a cap on what we can do in complaining about China trade policy at the WTO?

M: I think we’ll still…I mean, I think it makes…I think September 11 and the desire to work with the Chinese on fighting terrorism creates a broad framework of cooperation. As it should, because this is a top priority for us and it is a very high priority for ...

(SIDE B)

M:…issues, and I think we are still going to try to work trade issues out with the Chinese. I think it will probably reduce our willingness and theirs to allow these trade issues to blow up into major disputes. But I don’t think that it means that the trade agenda evaporates. And I think there will be a series of discussions and debates on compliance. It won’t go away. I think the tone of how we deal with it may change, but the substance probably will not change very much.

M: Rich Armidge’s now famous declaration that “history begins today” on the morning of the 12th, this to a foreign official who was complaining that they had rich histories, both the Taliban and the United States, I think applies to the US/China relations. And as Bob said, usefully so. I mean, instead of the point of departure being the neuralgia that characterized the EP3 and Embassy bombing episodes, which has sort of set the table going into Shanghai this week, we’ve got this bias in favor of cooperation, of finding mutual interesting. And that can’t hurt.

M: I think that September 11 changes the primacy of trade and investment as the basis of our policy with everyone, including China. And what that means, I don’t think anybody knows. But…because, you know, we go through this thing about how trade and economic relations are the centerpiece. And from those, all kinds of policies, positive policy implications happen, I think now security is the dominant force in US foreign policy, like it was sort of cold war, but not exactly cold war. I think security is much more important.

M: I think the cold war analogy, I mean, one of the things that (Overlap)

M: Well, I don’t mean that (Overlap)

M: No, but I…one of the things that we did, having worked in the government during part of the cold war, anyway, is it did provide a framework for other parts, other aspects of the relationship. And it was an incentive for the US and the Europeans, for instance, to try to contain their economic disputes. It’s not that disputes didn’t emerge from time to time. But it provided a set of incentives not to let those disputes develop into major confrontations because there were bigger sets of issues to be addressed. And I think that will be the same now. The fight against terrorism is going to provide a framework of cooperation and other aspects to the relationship will be dealt with within that broader framework.

M: The Chinese cannot be comfortable with us operating in Afghanistan, Uzbekistan, Tajikistan and other places so close, with such abandon. So I mean, they have ...

(Overlapping Voices)

M: No, I know, but I mean, we’re talking about now, what is important to them and what’s important to us. Lots of different things have changed. And so the Chinese have to be very uncomfortable with our activity at the moment, no matter what they are saying publically.

M: Well, I think they are uncomfortable with that reality. But they are more uncomfortable with instability in that part of the world.

M: Oh, they’ve got to be (Overlap)

M: And what they have dealt with, what the public…and as best as I can tell, private face on things, is in fact very different. I think where you started is where I end up. And that is that we don’t know yet what all this portends. But it has changed the quality of the debate. I mean, ask yourself, however, if you thought prior to September 11 you could talk about security issues with a family of interest that was nearly identical to the Japanese, the Chinese, the Russians and the United States. Yes, I admit, significant differences, but those are being subjugated for the time being in a way that is pretty useful right now.

M: If the message of our panel is that we are all going to hold a ceremonial bonfire of everything everybody in this room has written about the privacy, economics and security in this decade.

M: I would light it, I would light the bonfire.

M: Yes?

EF: I’m Ellen Frost with the Institute for International Economics. And I wanted to go back to the labor issue and ask you, Jeff, and Kevin, to comment. My impression from earlier studies of the trade problem is that a lot of the surge of imports into this country took place not at the expense of American workers, but at the expense of other Asian workers, and that it is indeed the rest of Asia which is particularly threatened by the expansion of China’s labor with its low wages and absence of unions, and so forth. And that worries me.

In the US, I just read Lori Klitzer’s work on displaced workers. And as we all know, the older and unskilled workers are still at risk, if they haven’t already lost their jobs. What I guess I’m wondering is if you see in China’s WTO accession a chance to really do something, for a change, on the labor side here, such as wage insurance schemes, for example. Or whether you think the unions will sort of fight expanded trade with China the way they still resist NAFTA. So I guess I’m really asking the same question to you from the labor movement and to Kevin as an observer of the Congress. I think labor is an issue that won’t go away, and responsible supporters of trade need to come to grips with it.

M: Yes, I…there are a couple of parts to your question, so let me make a couple of observations. One, yes, lots of workers in Asia who produce shoes in Korea lost their jobs to China. Also, by the way, all the remaining shoe jobs in Missouri and Arkansas were lost. A lot of clothing and textile workers lost their jobs. A lot of industrial workers are losing, increasingly, their jobs. Now, that being said, I’m tired of the misrepresentation that unions have always opposed trade. That is simply untrue. We only argue the conditions of trade.

And one of those conditions is the existence of independent trade unions who will determine what they want to do, not what US unions want them to do. And frankly, I would be all for all sorts of trade with China, if China would allow the existence of independent trade unions, and let those workers have their own voice. Now, that happens to be tantamount in most people’s minds to overthrowing the government. So what we are left with is unfortunately - and I fear this - is that that conflict, the absence of workers having their voice, compliance with the WTO, that the next repression will be in 30,000 person’s state enterprise factories, where the workers go crazy on the government. And that in order to put them down, you have to use the 1.5 million person People’s Armed Police, which was 300,000 people in 1984 and is a million and a half now. So they think they got a problem, and what do they intend to do with those people?

And then the question becomes what do we as American policy makers intend to do when they do that? And I tell you, you’ve got a political problem domestically in the United States when they start murdering Chinese workers, ala Tiananmen. That’s all.

M: Well, yes, and - and this is a step too far, and as soon as I say it I’ll regret that I said it - there is rich debate, the substance of which no one I know including the Chinese, are fully aware of inside China, about where this issue is going for precisely the reason that Jeff has identified. There are just the bare beginnings of some experiments. But there is a…you will hear from some people, a political vocabulary about the worker and worker’s rights. And it is dressed up in many different ways in China. But it’s not just from the lowest levels. In some cases, it occurs quite high up, about where ideology is going, since the Chinese Communist party is in effect dead from the neck down. You’ve got to have an organizing principle and you’ve got to have a place for those workers and for the adjustment that the country is going through. And they are talking about it.

I submit to you, the senior leadership, Zhu Rongji and others spend a lot more time talking about that issue than they do about US/China relations. I’m glad that that is the case. On the other side of the mirror, Ellen, I think in this country…and Jeff, forgive me, I can remember being a Senate staffer and getting chastened by an AFL rep when I was talking about trade adjustment assistance.

M: Only once? (Laughter)

M: Many times. But on this occasion, we were working very hard, like in ’84, on a bill that we thought would beef up the program. And I got to the end of my long explanation of how the AFL and its’ membership was going to be benefitted. And the guy just bellowed back into the phone, “Burial insurance!” I don’t know if the quality of the debate here is going to improve on how we deal with these issues, when it was Barbie Dolls and sizzle sticks, you know, it was easy. Now as the exports have migrated up value, it’s a much more complicated debate. And we are going to have it in a contraction, I guarantee you, we are going to be talking about this stuff a whole lot more, and I don’t know where it goes.

M: I promised you we’d be out of here by 7:30. So there’s probably time for

two, maybe three more questions. There is a hand in the back.

DL: Hi, Deborah Lair with Mayor, Brown, and Platt. For the past five years, virtually our whole trade agenda with China has been getting them into the WTO. And as rightly a lot of the discussion tonight has been over dispute resolution, it does sound like looking ahead, a lot of the trade is going to be very negative. Can you comment, as you have written through this report and (Inaudible) what the trade agenda with China looks like looking ahead?

M: Well, I mean, I think looking ahead, the trade agenda is going to be focussed very directly on China’s compliance with the commitments it’s made in the WTO. It seems to me that we have got a pretty clear trade agenda, and it is one that you and others have negotiated over the last several years. And now the question is how effectively the implementation process is executed. And there are going to be various metrics for measuring this. And I think that is one of the interesting things, we are going to have a monitoring process that is going to be very active here in this country and abroad. And I think we’ll be truing, using USTR and other instruments of government, to work with the Chinese to get that schedule of commitments implemented as faithfully as possible. And I think that is really the trade agenda. And I think that is going to be so time-consuming and energy-consuming, and manpower and womenpower consuming that that’s going to be the agenda.

On the other hand, I think there are going to be other economic issues on the agenda, in parallel with this. The whole terrorism issue of course, the political thing. But there is going to be economic components of that in terms of denial of money to terrorists. And the Chinese, we shouldn’t forget, are the most powerful financial power in the emerging world as well. So there are going to be a whole host of banking issues and investment issues, that will be on the agenda as well. So I think it is going to be an issue-rich agenda, with trade being an important part of it but certainly not the only part of it. And I would say that the banking and financial issues are going to be also extremely important, as China reforms its banking system, reforms its social security system, continues to attract large amounts of investment, those are going to be critically important items for both sides to deal with.

JG: Joe Grahams, ARD. A couple years ago, the Chinese had assigned at least one lawyer to the Asian Development Bank, somebody who was a specialist in the area of trade. To what extent have they geared up to really prepare for the compliance issues for any disputes that may come up?

M: Well, I think they have…it’s not a manpower shortage, right? They have made heroic efforts in the last year and more, and let me say that they’ve been…Deborah(?) and others have put them on notice 15 years ago. Or not Deborah 15 years ago, but the process that they needed to develop this capacity. And indeed, we talk about - it’s a business buzzword - but about “capacity building” there. MOTHTEK(?) has been going around at a provincial level, warning people that this was about to happen. And indeed in the end game in negotiation, it put folks on notice, state factories and township village enterprises said, “We can fix it for you but you’ve got till next Thursday to tell us what you want fixed.” It was that kind of a very goal-oriented…you know, it was not unlike the ISAK process here, but they had to invent it from the ground up.

You see them making this education effort. We try to build the case that we have to be a part of it, not just the United States but the whole of the multilateral system. We’ve got to make sure that this capacity building and this commitment to it continues, and that down at the provincial and the local level, this takes root so that there are people who can see a useful career in making these things happen. It is not going to be easy and you have nowhere near the number of people that they need to accomplish it.

M: There was one more hand back there.

DM: Dennis MacNamara, Georgetown University. For dispute resolution, it seems to me it is usually much more effective if there is the possibility of business to business associational dialogues, and obviously labor to labor. And we know there is going to be a problem labor to labor, although the ILO has stuck it out in Beijing and continues to try and work I think with the all-China trade union confederation. I’m just wondering, do you see any hope in that area? Perhaps more on the business side from the…certainly from the automobile associations, the chambers that we have, is there any hope that some of the dispute resolution could devolve to them and moderate the situation a bit. And then finally what about labor, is there any hope?

M: Jeff, do you want to start with that?

JF: As a matter of policy, we’ve long had a policy that we don’t have relationships with party controlled unions, government controlled unions, whether or not they’re left, right or somewhere in between. So I don’t think we are going to have any meaningful relationship with the ACFU who the Chinese workers think basically are only good for cheap movie tickets anyway.

M: On the business side, a more optimistic projection. I think that…in the very early stages of this report, one of the things that came out was that the various business groups in this country really were eager to have close relations with their counterparts in China. And we see this as extremely important that the business groups here, the associations, work with the Chinese to help them on the compliance process. Obviously there won’t always be agreement, but a dialogue is something that is seen by businesses here as an extremely important part of the process of compliance. Technical standards, for instance, helping them to figure out how they can adjust to change.

For instance, the banking system, the Chinese banking system is going to have to adjust. American banks are quite eager to work with their Chinese counterparts to help them with the adjustment process. How do they develop stronger credit standards? How do they develop stronger compliance standards? How do they monitor? I mean, this is…I think the business sees this as a constructive part of the processes, their closer engagement with the Chinese.

M: Thank you all for coming tonight. I promised we’d be out of 7:30 and it is exactly that hour. Thank our panelists for their presentation and their hard work on the report itself. (Applause)

M: Thank you. Well done.

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