China Backs Off From Joining WTO

Faced with a slowing economy at home and a full-blown financial crisis in the rest of Asia, China has apparently cooled toward the idea of joining the world’s leading trade group--a blow to the hopes of companies across the globe yearning to take a crack at China’s 1.2 billion consumers.

Once eagerly sought after by Beijing, the prospect of membership in the World Trade Organization, a 132-nation club dedicated to open markets and free competition, has become increasingly unattractive in recent months to a government faced with mounting unemployment and potential social unrest.

Indeed, the region’s economic woes have in recent days prompted China to slap controls on its currency and impose other restrictions on economic activity--defensive steps that move Beijing in the opposite direction from the WTO’s free-market doctrine.

A growing number of economists in Beijing and abroad conclude that Chinese accession to the WTO is out of reach before the next millennium, which will force the trade body to cope with the absence of one of the world’s largest economies when WTO members sit down for talks late next year on how to open international markets further.

“What the trade and policy community needs to come to grips with now is how to run the international trading system with China on the outside,” said Nicholas Lardy, an expert on the Chinese economy at the Brookings Institution in Washington. “Recent years are the first time in the post-World War II period that one of the top 10 trading countries in the world has not been a member of the [WTO].”

It has not been for want of trying. The WTO has been as eager to enlist China as China has been to join. Membership in the trade body, which includes countries ranging from heavyweight Germany to tiny Djibouti, has traditionally been regarded by China as an important political status symbol, a stamp of prestige and legitimacy for the Communist regime.

But negotiations between China and the WTO have repeatedly snagged on how to open up China’s vast telecommunications industry, financial and banking market and tourism and service sector, all of which enjoy broad government protection.

And lately, as ambitious but painful domestic reforms kick in, a worsening economic climate has made entry into the WTO appear of questionable timing and value to the Beijing leadership, which is loath to do anything that might spark popular unrest.

That’s because joining the WTO would mean opening markets to outside competition, threatening jobs even as China’s economic growth slows and workers by the tens of thousands are thrown onto the street by economic reforms.

In addition to home-grown problems, the spread of Asia’s financial crisis around the world has provided a sobering glimpse of the future for Chinese leaders, who may now see value in remaining somewhat isolated in order to avoid infection from sick economies elsewhere.

To some extent, China has been shielded from greater impact because its currency, the yuan, is not fully convertible--an escape hatch that would have to be phased out after membership in the WTO.

“Free convertibility is not possible [now],” said Yang Fan, an economist at the prestigious Chinese Academy of Social Sciences, who agrees that governmental interest in joining the WTO is fading fast.

Whispers of waning Chinese enthusiasm for the WTO began to gain volume in June, when President Clinton’s historic visit to China produced no concrete progress on Beijing’s long-standing application for membership. Negotiators viewed Beijing’s proposals to pry open protected markets as inadequate to the WTO’s stringent rules on dropping tariffs and allowing competition.

“There’s been a lot of talk, but China’s not yet ready to walk the walk,” U.S. trade representative Charlene Barshefsky said in the Chinese capital at the time.

China contends that it should be admitted to the WTO under “developing nation” status, which would give it more leeway to phase in tariff reductions. Beijing argues that current conditions for membership are too onerous for the nation’s burgeoning, but fledgling, $3.4-trillion economy.

Nonetheless, the government publicly insists that it is as keen as ever on joining the WTO--and that the WTO would be incomplete without it.

“We have to accede to the WTO,” Long Yongtu, China’s chief negotiator, declared at a conference on trade in Shanghai. “The WTO is part of China’s opening-up policy.”

But other statements and actions by Beijing have convinced economists within China itself that their leaders’ thirst for inclusion in the international trading group has abated.

Perhaps most significant, the central government has scaled back its estimate of the 1998 economic growth rate, pinning part of the blame on this season’s devastating floods. Once pegged at 8%, if not higher, annual growth looks to fall somewhat short of that.

The figure is important because the Communist regime has long contended that a minimum 8% growth rate is necessary just to provide jobs for the millions of people who have been thrown out of work by China’s attempts to unload its money-losing state enterprises and streamline its bloated bureaucracy.

Add WTO membership and stiff foreign competition to the mix, and the jobless rate--officially at 3.5% but most likely higher--could balloon to dangerous levels, creating a pressure cooker of labor unrest.

“This is a very tough period for China,” said Hu Biliang, a senior economist in Beijing with French firm SG Securities. “They’re very cautious about opening markets.”

For WTO membership to be viable, some analysts estimate that annual growth would have to hit as high as 12% to absorb all the workers who would fall victim.

Popular dissatisfaction already has forced the government to pull back on some of its domestic economic reforms. Its sweeping plan to sell off or shut down unprofitable state enterprises within three years is faltering and reportedly will be granted extra time. Overhaul of the housing market has been delayed.

Subscribing to the WTO’s rules also would force Beijing to cede some control over such reforms as the reorganization of China’s ailing banking system--a worrisome idea to a leadership that wants to dictate the pace of change to suit its political needs.

For the moment, Beijing apparently favors shoring up internal stability and control over the glamour of becoming a card-carrying member of the WTO.

“As usual, they have an ambitious plan for reform of state-owned enterprises and the banks,” Lardy said, “but they want flexibility to slow down implementation of the plan when they encounter difficulties.”

If anything, prospects for WTO membership might get worse before they get better. Next year’s WTO talks will probably result in even greater liberalization of trade among member nations, some observers note, making it yet more difficult for China to comply with the WTO’s terms.