Saturday, April 14, 2007

China: The Tricks of Trade

In late June, Robert B. Zoellick, Washington's chief trade negotiator, let it be known that the U.S. was becoming increasingly skeptical about China's commitment to free trade. Despite joining the World Trade Organization in December, said Zoellick, China had not honored its promise to raise import quotas on corn and wheat, and was continuing to provide grain export subsidies to its own farmers in clear violation of WTO rules. Earlier this year, the U.S. waxed indignant when Beijing restricted imports of genetically modified soybeans--widely seen as a way to protect Chinese farmers. "China has not fully implemented the WTO accession obligations," says Allen F. Johnson, U.S. chief agriculture negotiator. "It's going to undermine what we're trying to do."
This is about much more than corn and soybeans, of course. Everyone knows China will have a hard time opening up the agricultural sector because its farmers are ill-prepared to take on foreign competition. Besides, Washington has little moral leverage, given its own cynical protectionism of steel producers and farmers. That said, there is growing concern in tradeland that Beijing's go-slow on agriculture is also happening in other crucial sectors, including banking, autos, and information technology. Moreover, trade experts say Beijing is not fully cooperating with the WTO as it prepares later this year to review China's free-trade commitments. "Overall, we give them a B-minus," says Christian Murck, Chairman of the American Chamber of Commerce in China. "There's a strong commitment from Beijing, but it's a messy process. Some things get resolved, but other problems come up."

One is domestic politics. China is set for a historic changing of the guard early next year, and its top politicians are eager to put off the massive layoffs that WTO compliance implies, at least until the new generation of leaders is in place. Moreover, various ministries and local governments are ignoring or overriding market-opening commitments that were negotiated last year by the Ministry of Foreign Trade & Economic Cooperation (MOFTEC). The State Development Planning Commission (SDPC), the ministry that issues import licenses for agricultural products, is doing its best to keep out foreign farm products. And the Ministry of Information Industry hasn't fulfilled promises to provide equal treatment for foreign and domestic technology companies.

As other agencies drag their feet, MOFTEC seems both helpless and unwilling to intervene. Already disparaged at home for pushing unpopular trade policies, MOFTEC was further weakened when Long Yongtu, a veteran Ministry bureaucrat and the chief WTO negotiator, was passed over earlier this year as China's representative to the world trade body in Geneva. "MOFTEC doesn't have the muscle" to push its market-opening policies, says an American in Beijing familiar with the WTO trade negotiations. "From the get-go, the other agencies have been saying: `We didn't sign this agreement."'

While much of the current backsliding concerns agriculture, China is blocking foreign participation in other sectors, too. For example, Beijing continues to hold up approval for foreign auto makers to enter the lucrative car-financing business. This was supposed to happen the moment China joined the WTO. "We're still waiting," says Zhang Suixin, Volkswagen China's chief representative. In the mobile handset market, the government is forcing the likes of Nokia Corp. and Motorola Inc. to source more of their parts locally than their Chinese rivals. Beijing also slaps a 17% tax on imported semiconductors; mainland chipmakers pay no more than 6%. U.S. officials have raised many of these issues with Beijing, but progress is slow.

China has a perfect excuse for its go-slow posture on welcoming free trade and investment: The Bush Administration's March decision to raise tariffs on imported steel. As a new member of the WTO, Beijing has lost no time in using the global forum to protect its interests--and turn the spotlight away from itself. On June 24, Beijing joined the European Union, Japan, and several other nations to register a complaint with the WTO against the U.S. tariffs. Moreover, China's efforts to protect its industries through indirect subsidies or by controlling import licenses are hardly original. The EU has long used import restrictions on genetically modified foods to protect its farmers. One could argue that China is simply learning the tricks of the trade trade.

There is some hope that once Beijing's new leaders feel sufficiently secure, they may begin to rein in the worst excesses of the wayward ministries. "China's leaders recognize that accession to the WTO is in the long-term interests of the country," says Patrick Powers, director of China Operations at the U.S.-China Business Council in Beijing. "It will help them reform their markets and institute rule of law." That is the prevailing theory, but China's domestic considerations mean trade disputes won't end anytime soon. Expect more histrionics ahead as China's economy is increasingly opened to the world.

By Dexter Roberts in Beijing, with Paul Magnusson in Washington