China’s Economy Entering Painful but Essential Phase

On hearing of the big U.S.-China trade deal this week, workers at Huadu Chicken Co. fell into active discussions of their own situation, a scene replayed in thousands of offices and factories across China.

Chickens eat lots of corn, and the company could now have access to American corn that’s almost 20% cheaper than local varieties, so that’s a plus. Once it’s time to sell the critters, however, Huadu would have to compete against imported American drumsticks selling at half the price, a big negative.

“If we can find the right strategy, it will be a big turning point for the company,” said Liang Wenquian, assistant to Huadu’s general manager. “If not, we’re headed for bankruptcy.”

These poultry-level trade-offs illustrate the risk and the promise for China in joining the World Trade Organization. Multiplied in hundreds of thousands of ways across this nation’s vast but antiquated economy, the stakes are impossible to exaggerate.

So with the gilded doorway to the international club of trading nations finally in sight after 13 long years of waiting, China is eyeing its immediate economic future with a combination of pride, dread and resolve.

The costs of global integration are widely recognized by everyone, from low-level employees at state-owned firms to the highest officials in the ruling Communist Party. For a nation long sheltered, both in approach and mind-set, joining a global body that exerts control over the domestic economy carries huge risks.

Millions of people will almost certainly find themselves on the street as foreign competitors make inroads against bloated, smoke-belching state cooperatives. Even more ominous for the Communist Party, those ex-employees could start organizing politically and threaten the social and political status quo. Furthermore, if the policy backfires, leaders could be quickly accused of selling out the country.

But there is widespread recognition that it’s too late to turn back.

WTO membership is in reality the culmination of a course set by China’s own leaders in the late 1970s. Each step has seemed perilous at the time and been greeted with deep-seated suspicion by conservatives.

Yet over the years, the wisdom of the approach has become increasingly evident. Greater openness has produced enormous benefits for ordinary Chinese, and in doing so, has arguably improved the job security of top Communist Party leaders. The gamble by the leadership is that a resourceful people can adapt to wrenching, but essential, change.

“China must occupy its place in the forest of nations,” said Long Yongtu, China’s chief WTO negotiator. “China has been excluded from the mainstream global economy for far too long, and this must come to an end.”

The agreement signed Monday between Washington and Beijing, which must be approved by Congress and matched by deals between China and other WTO member nations, commits China to lowering its barriers against a whole spectrum of foreign goods and services and to following global trade rules.

One clear winner will be the Chinese consumer. And in a nation of 1.2 billion people, that makes a lot of winners. China’s consumer market is still relatively small--it wasn’t too long ago that coupons and long lines were the norm--but it’s also among the fastest-growing, most vibrant parts of the economy.

From new telephone services and Internet connections to cars, computers and food, China’s increasingly affluent mall rats should see dramatic and relatively quick benefits as barriers fall, choices expand and quality improves.

“I think prices for things that young women like me want, such as cosmetics and electronics, are bound to come down, so of course I’m happy,” said Zhu Yan, a 25-year-old worker in a Beijing private enterprise, wrapped in a beige coat drawn tight against the cold. “This is a bold step for China, and we have a good chance of making a success of it.”

In many areas, added competition may also help China’s growing local business community improve its game.

“I think it’s good that 20 foreign films will come to China each year,” film producer Lu Guoqiang said. “Local filmmakers can borrow ideas and know what the market needs.”

Also high in the win column are labor-intensive export industries where China has a natural advantage. Under WTO rules, the United States will over time have to treat China like any other trading partner, giving Washington less leeway to create special barriers designed to keep certain Chinese products out. This should be a big boost to China’s apparel, textile, toy and steel makers.

“It’s a good thing for China to join,” said Liu Gaoyi, manager of the Zhongyi Leather Co., which now sells most of its fur, leather and knit coats to Russian traders but is interested in exporting to the West. “It will help the development of my company and China as a whole.”

Then there are the losers--possibly Huadu Chicken Co., and certainly millions of others. They are of enormous economic, political, social and psychological concern to China. And near-term, the losers will far outweigh the winners, with huge potential fallout, analysts say.

“In many areas, it’s going to be like a 13-year-old boxing against a gorilla,” said Qu Hongbin, a consultant with the Bank of China.

China’s state-owned enterprises employ an estimated 200 million people. And at least a third are losing money, siphoning off badly needed capital. Furthermore, outside the big cities, there’s often nothing else to replace these jobs.

But these aren’t the only pandas in the headlights. The agreement will also hit China’s farm-dependent peasants, who account for two-thirds of the population, by sharply reducing import barriers on corn, wheat, rice and grain. “That’s a big political problem,” said Andy Xie, analyst with Morgan Stanley.

With such clear pain ahead, why would Chinese leaders buy into such a plan? In large part because they have no choice, say China watchers.

The unofficial deal struck between the Communist Party and its people after the 1989 killing of students in Tiananmen Square was that people would overlook systemic problems if their lives improved.

“After 1989, they lost legitimacy. People didn’t believe in Marx and Lenin anymore,” USC professor Stan Rosen said. “So they said, ‘We’ll build a rich China, you can become a millionaire.’ ”

Over the past two years, however, growth has stalled and Chinese living standards have leveled off or even declined. Unemployment and corruption are on the rise, and foreign investment has dropped while demonstrations by laid-off workers and social activists have increased. All this has left the leadership shaken, analysts say.

Letting in more foreign companies provides the best hope of creating jobs. Foreign competition also keeps pressure on inefficient state companies to reform, because the market doesn’t let up in ways that some political institutions do.

WTO entry also provides an insurance policy that the United States, which takes in more than 30% of China’s exports, won’t slam shut its borders over some political irritant. Finally, more open borders promise to reduce corruption by Communist Party officials and the military--a huge source of discontent among ordinary Chinese--because there’s less incentive to smuggle.

“In many ways, [President] Jiang Zemin had no choice,” said David Zweig, assistant professor at the Hong Kong University of Science and Technology. “China has gotten so integrated with the world economy that the only way to solve this crisis is to build even deeper ties with foreigners.”

There is another reason top Chinese leaders can take such risks, analysts say: They don’t face general elections. A great deal of the benefits from open trade will be many years out, while most of the costs will come far sooner. Short of a revolution or a palace coup, the current leaders won’t be thrown out of office in the meantime.

“They’re better able to look beyond the immediate pressures,” said Lawrence Brahm, chief executive of the Beijing-based Naga Group, a business consulting firm.

Jiang and Premier Zhu Rongji are also arguably captives of a 20-year policy course set in motion by Deng Xiaoping in 1978. Deng essentially said that there could be deviation from Chairman Mao Tse-tung’s views--sheer heresy up until then--and that peasants could start producing for themselves and that reality, not ideology, should guide China.

For party members who had grown up with campaigns such as the Cultural Revolution and Great Leap Forward, this was anathema. But for an exhausted population trying to recover from the starvation of 30 million people during an earlier misguided campaign--testing the notion that China could be completely self-reliant--this change was greeted enthusiastically.

Deng faced many critics. But by the time he died in 1997, there was little question that China’s future lay with the rest of the world.

“Entering the WTO is like competing in the Olympics,” WTO negotiator Long said in summing up the deal. “We must compete with the strongest teams in the world for our economy to develop and reach a world-class level.”