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China's big trade: loss of control

Premier's US visit ends without WTO entry. But eventual accession means

By Kevin PlattStaff writer of The Christian Science Monitor / April 14, 1999



BEIJING

Shen Lihui has a revolutionary idea about the heavily regulated music industry in China: Make it about survival of the fittest, and get out of the way.

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"Some officials and musicians here fear that completely opening China's doors to Western imports could destroy our own culture," says Mr. Shen, who heads the alternative record label Modern Sky Music. Yet "forcing us to compete with the world will only hurt the artists who can't survive in a free market," he adds.

Beijing's cultural commissars fear that opening the Chinese market by joining the World Trade Organization could destroy their already faltering campaign to guard Chinese youths against Western influences, say film and music industry experts here.

The skirmish is part of a much broader battle between government officials who want to maintain thick screens on Beijing's "open door" policy and reformists who back quick integration with the rest of the world - in part through joining the trade organization.

If China wins its drive to gain admission to the global group, Beijing's rulers may find the result a mixed victory: It will eventually spell the end of communism here, at least at the economic level.

During a White House meeting last Thursday, President Clinton backed away from a deal with China's Premier Zhu Rongji, but both said they were committed to finalizing China's membership by the end of the year.

Joining WTO would force Beijing to phase out the government's ongoing domination of the economy and give equal treatment to private firms, effectively setting the country on an irreversible path to the free market.

Protecting trade and culture

Despite two decades of slow-paced reforms, vast sectors of the Chinese economy remain under the control of central-planning bureaucrats. And despite recent concessions, the government still has a monopoly-like grip over such key industries as insurance, banking, and telecommunications. Control is maintained through a great maze of regulations and practices that minimizes the presence of both Chinese and foreign private firms in select markets.

Protectionist tariffs and quotas strictly limit China's imports of everything from movies to produce. Beijing's goals range from protecting the Chinese masses against Western "cultural pollution" to shielding its 800 million peasants, whose labor-intensive farming practices are inefficient and ill-prepared to compete with the US high-tech agricultural sector.

Yet all of these practices must come to an end, says Claude Barfield, an expert on the WTO at the American Enterprise Institute in Washington. If it joins the trade organization, "China must phase out its subsidies to state-run companies under a timetable set by the WTO," along with lowering most barriers to foreign trade, says Mr. Barfield.

Because so few state companies are profitable, the ending of government subsidies could have devastating results for great swaths of the public sector, which in turn will exacerbate China's growing unemployment problem. Economists estimate that as many as two-thirds of all government companies are now running in the red.

Although the party last year outlined a massive privatization program, it has since put the brakes on the plan. "The government fears that by losing its control over the economy, it will also lose its hold over urban workers and part of its political power," says a former government official who now runs his own company.

The party is also apprehensive over the prospect of tens of millions of unemployed workers from bankrupt state companies taking to the streets. Surplus armies of labor each day gain new recruits in major Chinese cities, and sporadic protests have broken out in virtually corner of the country.

Hu Angang, an economist at the Chinese Academy of Sciences in Beijing, says "there are now 15 to 16 million unemployed urban residents, along with 40 million peasants who have flocked to the cities in search of jobs."

Yet within the storm clouds of fading state industries and rising unemployment are a number of silver linings in joining WTO, say both Chinese and Western scholars.

Long-term gains

Economist Hu says that while the worst government-run companies will go under, "the transformation of [other] state firms into private companies, joint ventures, and stockholding firms will ultimately improve the overall economy." With Beijing's entry into the trade body, foreign investors are likely to flock into the liberalized market, and with them will come millions of new jobs, Hu says.

Huang Yasheng, an economist at Harvard Business School in Boston, Mass., says an initial period of growing unemployment will be "offset by the faster growth of small and private firms that are competitive and ... are engines of job creation." The Darwinian market mandated by the WTO will also force Beijing to stop using banks to channel bailouts to state firms and to phase out practices that have long helped the least fit government-run companies to survive.

"Joining WTO is like taking part in the global economic Olympics," says Mr. Hu. "Playing under WTO rules will strengthen our best competitors, and improve the entire country's economic health." He adds that the move would also accelerate China's integration into the rule-based world community. "When we join the trade organization, the Chinese will be playing by not only domestic laws, but also international laws, and that will push ahead reforms here," Hu says.

A Western official in Beijing says that while the transformation China must undertake to conform with WTO rules will for a time be painful, the changes could catapult the country into the world's top economic ranks. "China now has the talent, the brainpower, the will, and the size to become an economic superpower," he says. "The only things preventing the country from reaching that goal have been its economic system and laws."