The National Bureau of Asian Research
September 1999

China's Accession to the WTO:
A Candid Appraisal from U.S. Industry

Mark W. Frazier
Peter M. Hansen

It is widely assumed that large American corporations stand to benefit substantially from the liberalization measures that China has proposed as part of its accession to the World Trade Organization. While this claim is generally valid and frequently repeated by corporate executives and spokespersons, how specifically do representatives from the corporate community in the United States view the significance of China's WTO accession, and what precise benefits do they see their companies gaining from a WTO deal? To answer these questions, the authors developed and administered a structured questionnaire to executives from corporations and trade associations during the summer of 1999. Survey participants were guaranteed anonymity in order to encourage frank and candid assessments of corporate views of a China WTO deal. The survey responses, in contrast to claims made both within and outside the business community, reveal a more nuanced view of the expected changes that China's WTO accession would bring to corporate bottom lines and to broader measures. In general respondents claimed that China's WTO participation under the terms offered in April 1999 would have a modest short-term effect on corporate strategies, since many companies already anticipate accession, as well as a modest short-term effect on U.S. economic growth. However, many respondents saw substantial immediate gain for their particular companies. Whereas respondents generally agreed that in the long term WTO participation would impel China to restructure its economy further, they varied greatly in their assessment of the short-term impact of WTO accession on the Chinese economy. Many respondents pointed out that new challenges will lay ahead in implementing the terms of China's accession and resolving disputes within the WTO framework.

The debate in the United States over whether China should be granted membership in the World Trade Organization, and on what terms, has as much to do with politics as with international trade. It is a debate that will become even more politicized if and when U.S. and Chinese negotiators ultimately reach an agreement on China's WTO accession and the U.S. Congress takes up the issue of extending permanent normal trading relations (NTR) to China as part of the WTO protocols. Because the debate over China's WTO membership is largely political, it is important to step back from the claims that both sides in the fray have made and analyze precisely what results would accrue to U.S. businesses and the U.S. economy if China were a member of the WTO. While a number of studies have attempted to estimate the effects that China's WTO membership would have on the U.S. economy and U.S.-China trade, no studies to date have turned to companies themselves for their frank assessment of what China's participation in the WTO would mean for their operations and for bilateral trade relations more generally.

In order to evaluate the candid expectations that the U.S. corporate community holds regarding changes that China's WTO accession might bring, we conducted a series of interviews with corporate executives and trade association directors during the summer of 1999. The respondents in this survey offered mixed assessments of the impact that China's joining the WTO would have on corporate strategies, revenues from China trade, market access, overall U.S.-China trade relations, and other areas. The U.S. business community is by no means united in its appraisal of the net short- and long-term effects of China's accession to the WTO. Views from the 16 respondents ranged from strongly optimistic — for example, that China's WTO membership would trigger a long-awaited boom in trade with China on terms favorable to U.S. corporations — to strongly pessimistic and skeptical that China's participation would have any substantial impact on U.S.-China trade.

To encourage candid responses, the survey was conducted on the condition of anonymity. The questionnaire was distributed to 34 individuals from the corporate community in the United States, and ultimately we conducted telephone interviews with 16 individuals. The telephone interviews with executives from corporations and trade associations who agreed to participate in the survey were held in July and August 1999. Clearly this does not represent a scientific sample of the U.S. private sector or even of the firms that trade with or invest in China. However, the mixed response from this small number of large U.S. firms and trade associations suggests that policymakers and others should carefully analyze and understand the benefits and costs of China's joining the WTO. The survey consisted of a set of questions that allowed respondents to assess prospective changes in a number of areas if China were to join the WTO. The survey was set up to encourage more open-ended responses than a questionnaire that asks respondents to rate numerically their assessment of a particular issue. Therefore, we do not make claims that, for example, some percentage of the respondents rated the effect that China's WTO participation would have on market access as 5 on a scale of 1 to 5. However, our qualitative, discussion-based approach had the advantage of giving respondents the opportunity to elaborate on what each felt might be important or overlooked facets of potential WTO participation.

The group of survey respondents clearly does not represent a randomized sample of the U.S. private sector or even of the firms that trade with or invest in China. However, the mixed response from this small number of representatives from large U.S. firms and trade associations suggests that policymakers and others should carefully analyze and better understand the benefits and costs of China's joining the WTO. The survey results also reveal with greater precision than one can find in public discussions how the corporate community in the United States assesses what what exactly China's participation in the WTO might means for the U.S. economy, the Chinese economy, and U.S.-China trade relations generally.

One can find in the public debate over China's prospective WTO membership a number of common patterns and assumptions that need to be carefully analyzed. One widely-held assumption maintains that China's further integration into the global economy enhances the ability of China's trading partners, especially the United States, to influence China's behavior. This sentiment was made clear in remarks by President Clinton on July 27, 1999 in reaction to the House of Representatives vote on extending normal trade relations to China for another year. "NTR promotes China's integration into the global economy, which in turn strengthens market-oriented reformers within China," the President said. "Expanding trade can help bring greater social change to China by spreading the tools, contacts and ideas that promote freedom."¹

Another remark frequently heard is that WTO membership will alter China's internal politics. Sy Sternberg, President and CEO of New York Life, has stated in testimony before a Congressional committee that "China's accession to the WTO will significantly advance the broader agenda of political and legal reforms which we all want to see in China."² Many in the business community also claim that U.S. products will become more competitive and more available in China following China's WTO accession, as barriers to entry are lowered. All of these claims, while plausible, illustrate the sometimes inflated expectations that those favoring China's admission into the WTO present to the public and policymakers. The further liberalization measures that China promises to adopt upon entering the WTO might lead to political and legal reforms and increases in China's imports of U.S. goods, but market-driven changes have to be considered in light of many other critical intervening factors, domestic and international, that could influence China's political system and economy.

Opponents of China's joining the WTO likewise elevate the negative consequences of this event on the U.S. economy to implausible dimensions. U.S. labor representatives claim that China's participation in the WTO will cost the United States in lost jobs. Moreover, a recent Economic Policy Institute Briefing Paper posits that China's accession to the WTO would result in the loss of more than 600,000 U.S. jobs and a doubling of the U.S. trade deficit with China in the near future.³ Furthermore, John Sweeney, president of the AFL-CIO, voiced concerns in a recent Congressional hearing about China's unfair trading practices and "horrendous record of human and workers' rights violations."⁴ He warned that letting China into the WTO could undermine the ability of American policymakers to deal with China's violations of international trading rules and workers' rights. Other critics have cautioned that China could reap the benefits of membership in the WTO and still continue to elude obligations. While it is true that the engagement of the United States with China in trade disputes would shift from a bilateral to a multilateral framework, very little evidence exists to make the claim that China's WTO membership would cause lost jobs in the United States or radical changes in the bilateral trade balance. Moreover, concerns over China's implementation of the WTO accession protocols are valid, but China's record of participation in international organizations is on balance more positive than usually recognized.⁵

In order to gain a better understanding of the positive or strongly negative consequences that would accrue to the Chinese and American economies, bilateral trade relations, and U.S. companies if China were to accede to the WTO, we interviewed representatives from the U.S. corporate community. Putting the political content of the debate aside, we sought to determine what made China's WTO accession of such critical importance and why, for example, the corporate community made a strong public endorsement of the accession offer that China's Premier Zhu Rongji extended to U.S. trade negotiators on April 8, 1999 during his visit to the United States.

This offer, a summary of which the U.S. Trade Representative (USTR) made public to the dismay of China's negotiators, would have allowed foreign telecommunication companies 49-percent ownership in most services and 51-percent ownership in value-added and paging services in four years. The offer also included substantial liberalization of the insurance sector. Under the terms proposed, China would lift geographic restrictions on the operation of foreign insurers from the current limit of only two cities and permit nationwide access within five years. Foreign insurance companies, moreover, would have permission to hold majority ownership in Chinese firms, to choose their own joint venture partners, and to expand their scope of activities to include life, group, health, and pension services. Furthermore, the proposed deal included tariff cuts on numerous agricultural and manufactured goods and allowed for an expansion of distribution and procurement rights.

The business and policymaking communities have widely regarded the April 1999 offer that Zhu Rongji made during his visit to Washington as a rare window of opportunity to close a deal highly favorable to the United States. Analysts maintain that the White House rejected the offer due to domestic political considerations. Survey respondents, however, were not unanimous in their reaction to the much-acclaimed April 8 offer. Not surprisingly, respondents from sectors that stood to benefit significantly and rapidly from the terms of the accession package favored the deal. But as a group, the survey respondents offered a mixed picture. When asked to characterize the terms of Zhu's April 8 offer, respondents gave comments ranging from very enthusiastic to skeptical. Some said the terms were "stunning," (#6) "exceedingly positive," (#1) and "very lucrative," (#13) while others called the offer "incomplete, overrated, and full of loopholes" (#10) and "more of a political deal than anything else." (#11) Representatives of companies that would have greatly expanded access to the China market if current restrictions were lifted were quite positive about the terms. "Very few countries have agreed to an opening of this significance," noted one service sector executive, who also pointed out that the terms China offered would pressure other trading partners already within the WTO to come up to China's level of liberalization. (#12) Another service sector respondent noted that "this offer moves China from being one of the least liberalized markets to being an exemplar, if this deal is harvested." (#14)

One respondent who was skeptical of China's latest offer (#10) noted a potential semantic problem. This respondent discerned a distinction between "state-owned enterprises," which, according to the summary of China's April 8 offer released by the USTR, could not receive preferential treatment from the government, and "government entities," which the respondent claimed could be classified as exempt from WTO protocols. The Chinese government could simply reclassify particular firms as "government entities," the respondent reasoned. The USTR's summary of the offer extended by China in April gives insufficient evidence to evaluate the validity of this concern, specifying only that "purchases of goods and services by these state-owned and state-invested enterprises are not government procurement and thus are subject to WTO rules."⁶ Respondent #10 also alleged that "the USTR has not made all of the terms [of the Chinese offer] public, because they know it is full of holes." Other observers — though no respondents in this survey — similarly have expressed concern that the USTR has not fully disclosed the terms of the agricultural agreement reached in April, which is binding regardless of whether China accedes to the WTO. Some respondents warned that the unseen, not-yet-finalized details of the agreement ultimately would determine the significance of a WTO deal. According to a respondent from an electronics firm, "the devil is really in the details. We're not sure exactly what will make it into the fine print [of the final accession agreement], and that could matter a great deal." (#15)

Respondents also disagreed over what China's WTO accession would mean for the historically volatile U.S.-China trade relations. Nine respondents offered a positive view of the future of trade relations between the United States and China, reasoning for instance that WTO membership would "open Chinese culture and the government to more progressive forces" and would be "the most important step in bringing them closer to where we want them to be." (#6) Another respondent asserted that "the elimination of yearly NTR negotiations would be a big help. That causes a lot of conflict and bitterness on both sides." (#15) One service-sector executive predicted that "in many ways, [bilateral trade relations] would become more stable…. Disputes won't go away, but they will be handled within a more defined and stable structure." (#12) Another argued that despite its flaws the multilateral framework for dispute resolution would be a positive step, because under the current system "when disputes arise, U.S. companies have suffered, allowing foreign firms to luck into a few deals. The multilateralization of the dispute resolution process would be great for U.S. companies." (#4)

Despite these positive evaluations, several respondents argued that troubles lie ahead in U.S.-China trade relations. Many fear that trade disputes would increase after China entered a new multilateral framework. One respondent expressed concern that a surge of complaints would quickly overwhelm the WTO's dispute resolution process. (#10) The remarks of the following respondents illustrate a range of pessimistic assessments:

"Bilateral disputes [between the U.S. and China] will decrease, but overall disputes will increase, because China's accession to the WTO will raise expectations beyond what is realistic." (#7)

"After China's accession to the WTO, there will be a great increase in the number of disputes with China. There will be massive issues with implementation, especially at regional and provincial levels." (#5)

"Disputes will be more specific than they were in the past, centering on specific aspects of the agreement that aren't being met." (#3)

Other respondents simply expressed concern that too many in the business and policymaking communities expect China to undergo an overnight transformation into a good global-trading citizen following its WTO accession. One respondent predicted that "if China joins the WTO, people would be real surprised at how bumpy trade relations would become." (#10) Another reasoned that "the United States and China will face difficult problems on a number of fronts and will likely see an exacerbation of disputes. The wrenching changes required of the Chinese system will not happen overnight." (#9) Several respondents argued that the policymaking community in the United States has exaggerated the importance of China's WTO participation. One asserted for instance that "the USTR and others are touting this deal way too highly. They're simply not being realistic. In terms of trade relations, I think there will be a relatively difficult period." (#11)

Some respondents drew a parallel between problems that might arise if China joins the WTO and disputes that already have taken place within the WTO framework: "Europe and Canada are both in the WTO and we still seem to have plenty of problems with them." (#8) Another noted that some current WTO members have managed to subvert WTO rules and that it would not be surprising if China did so as well. "Take a look at India. India is in the WTO, but they have clearly not followed the spirit of the rules. We need to be realistic about China. On paper, China has agreed to a very favorable set of terms, but the implementation of these terms is a different matter." (#3)

Regarding the effect that WTO accession would have on their strategic planning for the China market, respondents also expressed mixed opinions. One respondent stated that it would have a "very significant impact" on short- and long-term strategies, especially given the liberalization of distribution rights. (#5) Another noted that corporate strategies "would be more closely wedded to market issues, with less concern for non-market issues such as politics." (#7) Other respondents suggested that their companies long ago established strategies based on the assumption that China at some point would join the WTO, placing them in a favorable position following the eventual conclusion of negotiations. "This will have very little effect on our strategies. We assumed this would happen and have geared our strategies accordingly," said one executive of a large manufacturing firm. (#3) Current strategies, however, might prove more effective beyond the short run, according to a respondent from the electronics sector: "In the short term there would be no huge effect…but within three years the scaling back of tariffs will have a big impact on our operations." (#4)

Many in the public discussion of China's WTO accession claim that the deal would bring expanded corporate revenues. In June 1999, Jack Valenti, president and CEO of the Motion Picture Association, stated in testimony before the House that lifting the barriers to film distribution would result in $80 billion of immediate revenues to U.S. film companies.⁷ (Legitimate sales and rentals of videos, he also noted, would supplant current losses due to piracy and result in another $120 billion in revenue growth.) In this survey, nine of the sixteen respondents stated with relatively few or no qualifications that prospects for corporate revenue growth would be greater if China joins the WTO in 1999 than if China remains outside the WTO for the foreseeable future. Again, it was not surprising that respondents from soon-to-be-liberalized sectors were most positive in assessing the potential for expanded corporate revenues. "China's joining the WTO is essential for the future of business operations in China," said one. (#6) Another respondent added that short- and long-term prospects for revenue expansion would be "far greater with China in the WTO than under the scenario in which China remains outside the WTO." (#5) A respondent from the agricultural sector stated that even though the U.S. and China consummated an agricultural agreement in April, which will remain in place regardless of China's WTO accession, the agreement "will be meaningless without the other provisions [that would come with WTO accession]. We would not see any real benefit from that unless the WTO deal comes through." (#13) One service sector employee stressed the importance of finalizing the WTO agreement by warning that the current market position of U.S. firms could worsen in the absence of such a deal: "If China remains outside of the WTO, the status quo could remain unchanged or things could actually get worse for us. Australia and Japan have already closed deals with China. They and others who close subsequent deals may receive benefits denied to American companies in the absence of a WTO agreement." (#2)

In addition to citing improvements in market position, a few respondents emphasized the benefits that would accrue from the reduction of tariffs on their products. One respondent predicted that the tariff reductions would lead to greater revenue growth for firms in his sector, but qualified this assessment by stressing the tremendous importance of the continuation of the reform program currently underway in China. (#16) According to this respondent, as a result of a recent reform measure, China has increased its imports of goods from the sector he represents by 70 percent over last year. Further continuation of this expansion depends less on WTO accession than on "the strength of the Chinese economy, the continuation of government reforms, and the maintenance of stability." Stating that growth is likely to continue as long as these conditions remain favorable, this respondent added that "on top of this current growth, WTO accession would help make our value-added products more competitive and allow us to achieve even greater growth." (#16)

On paper, some sectors such as banking and insurance could make substantial inroads in the previously untapped China market if the final terms of accession resemble those of the April offer. Overnight, the terms of the deal would erase barriers that impose stringent restrictions on the operations of firms in these sectors, opening the full expanse of China's client base to foreign firms. A respondent from the service sector expressed the potential significance of this opening by stating that "in the long term, we will have unrestricted access to the largest market in the world." (#12) Despite these positive evaluations, several respondents tempered their enthusiasm by offering qualifications of various sorts. Another respondent from the service sector stated that on paper the deal looks highly favorable to his industry, but raised the question of the maturity of the Chinese market: "Do the Chinese need or want sophisticated financial services? Is there a market for that? Maybe, maybe not. This may be a case of us having access to the market before it's ready." (#14)

Other respondents expressed similar sentiments, stating that China's entry into the WTO would have no effect on the revenue growth of U.S. firms operating in China, since revenue growth depends on many factors other than China's participation in the world trade body. "My guess is that in the near term revenue growth is dependent largely on factors exogenous to the WTO, such as the strength of the Chinese and other Asian economies," said one respondent. (#8) In line with this notion, many predicted that revenues would continue to expand with or without a WTO agreement. One respondent who anticipates significant revenue growth regardless of whether China joins the WTO asserted, "I'd be reluctant to suggest that WTO accession would give us an immediate boost in revenue growth." (#9) A respondent from the electronics sector went much further in denying the gravity of the immediate impact of China's accession to the WTO: "the USTR speaks of this as if it were very significant, but the embassy is much more realistic in viewing the implementation of the agreement as a 30- to 50-year process. Barriers to growth will not be eliminated in the near future." (#11)

Another respondent who expects substantial annual growth — "hopefully in the 15- to 20-percent range" — for an extended period of time even without China in the WTO asserted that, while WTO accession may allow his company to grow in new sectors, "from a short-term earnings standpoint, we might actually see somewhat of a downturn in some of our traditional sectors, because certain barriers will no longer give us the advantage over other exporters." (#3) The expected shift in advantages is criticized by some opponents of China's WTO accession. In fact, a harsh appraisal of the WTO deal came from another respondent. "This is not about free trade," he stated. "The driving force behind these negotiations are certain companies that are getting sweetheart deals. They are the ones who will benefit, not the U.S. economy as a whole." (#10)

In terms of the effect that WTO membership would have on China's domestic economy — a matter of heated debate among China's leaders — respondents generally noted that China's state-owned enterprises (SOEs) almost certainly would undergo a period of painful restructuring. As one respondent rather bluntly stated: "If this happens, SOEs will drop, fall, crash. They won't be able to compete." (#10) But as others noted, the shakedown would produce more competitive firms in China, a process that one respondent referred to as "more-or-less a revolution." (#16) "The impact on SOEs will be dramatic. In the long run it will benefit China — it will drive out the weak SOEs and private companies and make the rest globally competitive," noted a respondent. (#5) Another reasoned that "The private sector will help soak up workers who lose their jobs in SOEs and ease the social pressures that would result. That seems to be what Zhu Rongji is thinking and I hope he's right." (#4) A respondent from a manufacturing firm also noted that SOEs that emerge from the restructuring process could become globally competitive and invest heavily abroad and within China.

Conclusion

The candid appraisal that emerges from this survey suggests the need for a more realistic set of expectations regarding China's potential admission to the WTO. China's joining the 134-member trade body will not usher in a golden age in U.S.-China trade relations nor will it result in the export of U.S. jobs to the PRC. Firms whose operations have been restricted up to now will no doubt benefit greatly from China's WTO accession, and the Chinese leadership itself appears to understand that its long-term economic and political interests lie in WTO participation. However, as respondents to this survey suggested, the conclusion of many years of difficult negotiations over China's WTO accession is only the start of the equally arduous work of implementation and dispute resolution.

Appendix: Survey Participants

1. Executive from a manufacturing corporation
2. Representative from a trade association
3. Executive from a manufacturing corporation
4. Executive from an electronics corporation
5. Executive from a manufacturing corporation
6. Executive from a transportation equipment corporation
7. Executive from an electronics corporation
8. Executive from an electronics corporation
9. Executive from a transportation equipment corporation
10. Executive from a manufacturing corporation
11. Executive from an electronics corporation
12. Executive from a service sector corporation
13. Representative from a trade association
14. Executive from a service sector corporation
15. Executive from an electronics corporation
16. Representative from a trade association

Mark W. Frazier is assistant professor of political science at the University of Louisville and senior advisor to The National Bureau of Asian Research (NBR). Peter M. Hansen is a research assistant at NBR and a graduate student at the Center for East Asian Studies at Stanford University.

Copyright © 1999 The National Bureau of Asian Research