Extraordinary Accession

Ambassador Charlene Barshefsky Discusses China’s WTO Agreement

Charlene B Cover_1.jpg

On December 11, 2001, the global economy changed forever with China’s accession into the World Trade Organization (WTO). This was a historic event, bringing China into the fold of international trade, furthering China’s reform and opening up, and building an economic foundation between China and the US – a foundation which promised to one day dovetail into greater, constructive political engagement.

This accomplishment was 15 years in the making, requiring back and forths between the US and China from representatives of both governments, endless hours of closed-door discussion, and was an initiative that garnered both the ire and praise of US citizens, politicians, and businesses. Leading the US side of these negotiations as far back as 1993 – an expert in identifying the import of this monumental multilateral development – was former United States Trade Representative (USTR) Charlene Barshefsky.

From 1993-1997, Barshefsky served as deputy USTR where she negotiated heavily with China, focusing her attention on issues such as intellectual property rights, textiles, and a variety of market access issues. Barshefsky’s success in these areas saw her quickly promoted to the position of USTR, where she determinedly worked across two continents, championing the significance of China’s WTO accession to both governments, going head to head with then Premier Zhu Rongji, and, ultimately, finalizing the trade negotiations that led to China’s admission into the WTO. Today, there are few people who better understand the importance of China’s accession to the WTO, how it has led to today’s US-China trade dispute, or who can see through such an acute historical lens how things have gone off course, and more importantly, how that course can be corrected.

 

The Upside of an Exceptional Accession

Both the road preceding China's WTO entry and the one that followed saw great challenges, however, the rewards for the US, China, and the rest of the world have been staggering. Since China’s accession, the value of US agricultural exports to China has risen by 1,000%. American companies and consumers have seen the benefit of these trade normalizations, as well. Between 2013-2018, for example, Boeing delivered more aircraft to China than in the US. And, in 2015 alone, US exports to China directly and indirectly supported 1.8 million new jobs.

“The US and Chinese economies are infinitely more interconnected today than 20 years ago. That’s obvious on the basis of almost any measure, including the very structure of business and the advent of supply chains,” says Barshefsky. “The reform and opening leading to and following China’s accession, of course, was a great boon not only to the Chinese and US economies, but also to the global economy. China’s market became a world market, leading China – over time – to become the world’s second largest importer, right after the United States.” 

Preceding China’s accession to the WTO was nearly two decades of tireless negotiations in which historic conditions were placed upon China, including a series of widespread liberalization commitments, dropping of tariffs on goods, opening of agricultural trade, and the removal of barriers to foreign service providers. Barshefsky notes that, “The basis on which China entered the WTO was one of the strictest agreements in history. Apart from the historic liberalization of trade in goods, services and agriculture, the agreement contained special rules that pertained only to China, and have since pertained to no one else.”

“Through that process,” Barshefsky explains, “China’s economy opened at an extraordinary pace, allowing China to become, as previously mentioned, the world’s second largest importer. This would never have happened without the WTO. In the process, China also lifted hundreds of millions of people out of poverty in an effort that has no historic parallel.”

The former USTR is also quick to highlight the ways in which China’s accession has benefitted the international community, and global economy. “We know,” says Barshefsky, “that China was a stabilizing force in the 1997 Asian financial crisis, as well as in the 2008 global financial crisis. That crisis, in '08-'09 is, in part, what gave China room to become, on a very rapid basis, more muscular and more aggressive internationally.”

 

The Problem with Hindsight

Current USTR Robert Lighthizer has argued that the US had, “erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime.” However, the question then becomes, what would have been a better alternative, and what would the global economy look like had China not joined the WTO? In the case of China’s accession, identifying a superior alternative, even in hindsight, is surprisingly problematic – a point on which Barshefsky is clear.

“If we also consider that China is a fifth of the world’s population, a nuclear power, a permanent member of the UN Security Council and so on, including China in the WTO on very strict terms was absolutely the right thing to do,” says Barshefsky. “The disappointment is in the backsliding by China which began in 2006 – 2007, years after WTO entry. Frankly, because of political hesitation on the part of the US or a failure to understand that early backsliding had to be rectified, I think that a more serious response by the US was necessary far earlier than occurred.”

Nothing is ever certain – especially on the political stage. And, as Barshefsky posits, you must make the best decision at the time, knowing full well that there will always be uncertainty. “The backsliding is obviously of concern,” Barshefsky says. “Having said that, there are no guarantees whenever you do a trade deal. We’re not witnessing the end of history here. Policies can change. Donald Trump will be gone at some point. With new leadership, policies may toughen or change in different ways – one never knows. I am reluctant to say that what we see today is what will always be.”

Acknowledging the realities of China’s backsliding, the former USTR points to the origins of the nation’s divergence from market-based norms. “From Deng to 2006, or so, China had been on a more convergent course with market-based economies,” says Barshefsky. “But, beginning around 2006 or 2007, the reform and opening which had characterized the previous 20 years began to sputter. Policies such as ‘indigenous innovation’ were inaugurated. By the time Xi Jinping came into office, reform and opening had virtually halted. Indeed, even while Hu Jintao was president, the words ‘reform’ and ‘opening’ were rarely coupled together, and the word ‘opening’ began to drop out entirely.”

While China’s push for greater reform since 2006 has certainly slowed, the pace at which it opened leading to and immediately following China's WTO accession was, and continues to be, unprecedented, according to Barshefsky. “The WTO agreement took a Chinese economy that was in the process of internal economic reform on a very small scale, and vastly broadened, deepened, and extended that reform in a manner unprecedented among WTO members,” explains Barshefsky. “There is no historic parallel between the changes that China had to make to its economy under WTO and that of any other country in the world.”

As the market-based economies of the world attempt to reconcile China’s divergences, Barshefsky is quick to note that much of what is seen today was simply unforeseeable in 2001. “Today, one can point to a large number of features of the Chinese economy that do not comport with the spirit, if not the letter, of its WTO obligations. At the same time, a number of divergent actions encompass areas that the WTO does not cover, such as investment policy, or areas which it covers in an incomplete way, like new technologies that didn’t exist in 2001.”

 

Failures to Enforce

Looking back on how China’s divergent course has unfolded into today’s US-China trade dispute, Barshefsky underscores the US’s historically limited enforcement of China’s WTO agreement. “The WTO contained a number of provisions that were very China-specific, designed to prevent backsliding by China and to prevent import surges from China. For example, China’s WTO accession agreement contains provisions prohibiting forced technology transfer,” Barshefsky explains. However, the utilization of these provisions, according to Barshefsky, has been woefully lacking.

“Remarkably, neither the Bush, Obama, nor Trump administrations sued China on the basis of these technology transfer provisions. China’s WTO agreement also disciplines the commercial conduct of state enterprises, and the influence government can have on state enterprise decisions,” Barshefsky says.

These lapses in enforcement extend even further. “Perhaps most remarkably, China’s WTO protocol contained an anti-surge mechanism, preventing market disruption in the United States from Chinese imports,” she says. “Under that provision, the president had authority to do whatever was deemed necessary, including tariffs of the kind you see today, as well as import bans or other prohibitions.”

Much to her surprise, this anti-surge mechanism was “used only once by President Obama, and that was on tires. It was never used during the Bush administration, which denied relief four times. The provision expired at the end of 2013. Had it been used,” says Barshefsky, “the potential loss of US manufacturing jobs, which have been attributed to Chinese import surges during that period, would not have occurred.”

In the period from 2001 to 2011, it is alleged that about 1-1.5 million jobs were lost in manufacturing to Chinese import surges. Yet, the mystery remains as to why every administration failed to use the full force of the anti-surge mechanism to combat these losses.

Barshefsky remarks, “With respect to the anti-surge mechanism, if you were losing a million jobs as has been alleged, and you were president, you think you’d do something about it.” On the other hand, she does point to some likely explanations why past administrations did not proceed under these various provisions. “With wars going on in Iraq and Afghanistan, and the US financial crisis, I don't think [George W. Bush] wanted any more problems. I think he wanted a stable China relationship. My guess is that he denied relief largely on political grounds. Obama did use the provision once. But industry itself probably complained too little.”

“There was substantial lost opportunity: the prophylactic effect of enforcement would have been substantial,” says Barshefsky. “It would have created a great deal of legal leverage, a cause of action which China had agreed to in its accession.” Barshefsky goes on to state, “With respect to forced technology transfer and SOEs, it is partly a question of evidence, and that’s a problem that persists to this day. Additionally, companies tend to be reluctant to come forward.” The former USTR however counters that, “It still doesn’t explain why more trade associations, which tend to shield individual companies, didn’t come forward, and it doesn’t explain why the US wasn’t more proactive with respect to some of these issues.”

Barshefsky remarks that, “If you want to resolve issues with China, as we all know, it doesn’t take very many people in the room. The more people you have, the less likely you are to resolve anything. Dialogues such as the JCCT and S&ED became a way for China to manage the United States, not the other way around. The result is that the US lost a lot of time.”

 

The Future of the WTO

As the Ambassador plainly points out the copious administrative failures to leverage China’s WTO agreement, many today question the strength and utility of the WTO – especially in the case of China. However, Barshefsky firmly believes in the WTO’s imperative position as arbiter of fair trade across the globe, despite its need for reform. “I think the WTO, or an institution like it, is vital for the fair conduct of global trade,” Barshefsky says. “It’s vital as a source of agreed upon rules of the road. Period. I think reform of the WTO is needed however – reform geared toward the negotiation of meaningful agreements in a timely manner.”

Barshefsky highlights that what is most important for China, the US, and, indeed, all WTO members, is a framework built on agility, reflective of the pace of change under which today’s markets now operate. “The WTO agreement that most countries operate under was the agreement that came into effect in 1994. That agreement was based on an agenda first created in 1982 and subsequently revived in 1986. That’s really old.” Having said this, Barshefsky notes, “China’s agreement incorporates areas covered in 1995/96 such as the ITA, the global telecom agreement and the global financial series agreement – plurilateral deals under WTO auspices. But even these agreements are dated (except for ITA II). You need to have a WTO that reaches agreements quickly, which are commercially important, and that ensure the global trading system operates as intended – on a fair basis.”

“There’s a future for the WTO,” Barshefsky continues, “but only if the members recognize that if it becomes irrelevant, the US, China, and one or two other players will dominate. If you’re India, or Brazil, or South Africa, or any one of a number of other countries, I can’t imagine that’s the outcome that you’d want.”

Moving forward, with the dawn of advanced technologies, the question of a 25-year-old framework’s relevancy becomes more salient every day. “I think this is in part why you see the advent of bilateral and regional FTAs,” says Barshefsky. “When you’ve got a coalition of the willing, and a coalition of relatively like-minded economies, things are much easier to do. Unless the WTO begins again to operate on that basis, as we did in 1995/96, its downward slide will continue unabated.”  

 

Taking Care of Business

At such a turning point in US-China relations, Barshefsky discusses the US’s opportunities for recourse, looking at the nation’s historical sources of strength and its own divergences as a global power. “The American business community has always been the leavening force with respect to US policies on China and with respect to Chinese anti-Western rhetoric,” says Barshefsky. “But that community has been burned, either because of the theft of intellectual property, or because of the exercise of administrative discretion against foreign companies, or any one of the many reasons businesses well know, including abuse of the anti-monopoly laws by the Chinese authorities.”

“The business community today has relatively little interest in advocating for China,” she says. “I think China has been slow to recognize that current China policy is broadly supported in the US – maybe not the means, but the range of concerns is broadly agreed upon in the US by Republicans, Democrats, by the business community, and by many academics and scholars of China.”

“I think China has been slow to recognize the change in US mood, and how deep that change runs,” says Barshefsky. “That, I think, is very unfortunate. It has led to the repeated misreading of Trump by the Chinese, and it has exacerbated the current confrontation.”

While both sides wrestle with each other on the global stage, Barshefsky regards what she believes to be an even greater threat to the US – the US itself. “Above all else, the United States better get its own act together,” she says, “because if we don't, what China does to us is far less than what we’ll do to ourselves.” With a litany of areas circled for improvement, Barshefsky highlights that the US’s greatest way of maintaining a competitive advantage with China will not come from China’s reform, but from domestic reform’s reflecting the nation’s trajectory from years past.

Barshefsky highlights infrastructure, education, a return to basic R&D spending (with a reinstitution of the positive triangle between government, universities, and businesses), healthcare, and the full range of domestic economic issues, including greater economic equality which should be taking center stage in Washington. “Every one of these issues has been discussed ad nauseum,” says Barshefsky. “I can't even count the number of presidential commissions, agency commissions, think tank reports, and all of the rest, which surely number in the hundreds, all saying essentially the same thing – the US must embark on structural change and the full finding of key priorities, to maintain economic preeminence.”  

Despite the deluge of overwhelming evidence from myriad respected sources, today, there is little alignment between what the US should be doing, and what it is doing in terms of its economic preeminence and positioning on the world stage. Barshefsky simply says, “The US does relatively little, as you know every time you ride down the street and navigate the potholes or the crumbling bridges, or every time you look at K-12 education. It’s no answer to say that we still have great universities – the best in the world – when (A) you starve them of great foreign talent, and (B) other countries have marvelous universities, some of which are catching up to the US. The US must move forward in a productive way. That means both the administration and the Congress. There is no excuse. These are all things that we control ourselves. China is not culpable for our domestic inaction.”