Even With China, WTO Can't Do It All

By Philip Bowring - International Herald Tribune

HONG KONG - The positive resolution of China's bid for membership in the World Trade Organization is a matter for relief more than for cheering. The negative, perhaps even dangerous, consequences of China's being denied were obvious. The practical benefits of membership for China and its partners will be slow to materialize.

In particular, the expectations of U.S. big business, which fought so hard for China, may once again prove greatly exaggerated. U.S. farm trade will benefit, but America's exporters of big ticket capital goods have little to gain except indirectly if WTO membership leads to a significant increase in China's rate of economic growth.

For most of these items the United States competes with other exporters from the Organization for Economic Cooperation and Development, not with China's own manufacturers. China will also continue to use big orders, such as for airplanes, for political purposes, playing the United States off against the EU, as it has done so effectively in the past.

Even with WTO, the trade imbalance is likely to become a major issue once the current U.S. boom ends and unemployment begins to rise again. Numbers vary, particularly according to how Hong Kong re-export trade is treated. But by conservative calculations trade is running at more than 4 to 1 in China's favor - a vastly greater imbalance than exists in any other major trading relationship. It is generating a surplus for China of about $5 billion a month.

Whatever the WTO benefits for U.S. exporters, only a recession in the United States can make a significant dent in this U.S. deficit. As it is, WTO membership is likely to encourage yet more American and other foreign investment in export manufacturing in China, making the United States more reliant than ever on importing its own inventions.

As world leader in most services, America hopes to gain more from new investment opportunities in China's fast growing service industries. But actually making profitable breakthroughs into sectors such as banking and insurance now dominated by a few state-owned behemoths will be a long and tortuous process, as phone companies have discovered.

In practice, liberalization may in fact come quicker to manufacturing industries because Prime Minister Zhu Rongji wants to use the WTO cuts in tariffs and nontariff barriers to force reform and efficiency on state enterprises.

But the trade benefits of easier access for imports will more likely go to Asia's highly efficient producers of cars, steel, chemicals and intermediate goods rather than to Western firms. Meanwhile cuts in the domestic prices of intermediate goods caused by tariff reductions will further spur labor intensive products in which China has strong comparative advantage over many other Asian (and Latin American) producers.

In the shorter term, the trade impact of China's WTO breakthrough is likely to be less important than its effect on the Taiwan question. Now that the congressional hurdle has been overcome, will Beijing turn up the pressure on Taiwan to commit itself to one China? Or will it facilitate Taipei's own membership in the WTO and seek to use it as a way of increasing the economic linkages across the Taiwan Strait?

WTO can be a lever to make Taipei agree to air and sea links and to abolish its discrimination against mainland products.

China's trade has grown dramatically over the past 20 years without WTO membership. This has been the result of China's own open door policies and the open doors of WTO members - notably the United States.

WTO membership can now help keep those doors open when global conditions become more difficult. But the WTO is no panacea, least of all for the imbalances now prevailing in the U.S. economy.