China

On the Way to Global Status

By
China Shipping
China : On the Way to Global Status - Jonathan Story

In his speech to the National People's Congress on March 5, 2002, Zhu Rongji, stated that the country was "facing new difficulties and severe chal­lenges." In a two-hour speech about the last four years, he ran through a long list of problems faced by China, from corruption, to unemployment and "deep­seated" difficulties in the economy. He also repeated what he had often said before, that WTO membership would pose a severe challenge to many of China's less competitive industries. This has proved to be one of the Premier's prime achievements; one that creates a good deal of anxiety in China and around the world. In China, pessimists fear that agriculture and industry will suffer from the competition, creating serious social strains. Around the world, pessimists anticipate that China will undermine the WTO, side with India to form a pha­lanx of developing country complainants, and fail to implement its obligations.

My interpretation begs to differ: China's entry to the WTO this year helps underpin its reputation as a reliable partner, and embarks China on a process of regime change. The CCP will face the introduction of norms, rules and stan­dards dominant in the West. Let's look at a few reasons for why China's re­quest to join the world trade club took so long, the caravan of forces that unblocked the talks in 1997-98, China's new trade regime, and some reasons for China becoming a pillar of international society.

Lengthy Negotiations

Negotiations over China's accession opened in 1986, and dragged on in­terminably. As Premier Zhu Rongji quipped, "My hairs have turned gray wait­ing for the outcome." Why did they last such a long time? Many factors contrib­uted, such as the mechanics of the negotiation process, the expansion of mem­bership, an ever more ambitious global trade agenda, and the demands for far greater policy transparency placed on candidates. There were also the special complexities of China's claims on Hong Kong and Taiwan. When China submit­ted its application to the GATT, the UK and China agreed to include Hong Kong. The UK, on China's accord, announced that Hong Kong was a separate customs territory under the GATT, a status short of statehood. Taiwan re­quested a similar status, in order to avoid tensions with the mainland. Mean­while, China participated in the Uruguay Round as an observer, in other words as an informal participant. With such favourable political winds blowing, China's own economic reforms opened a vista on the country's eventual reunification. If all Chinese territories were to apply similar rules, powerful forces would be set in motion promoting the convergence on shared norms of market democracy.

The dream of convergence came unstuck over politics. The events of June 4 at Tiananmen put paid to any hopes, however exaggerated, of early acces­sion. The GATT talks were broken off. Beijing tried to shore up its relations with the Bush administration by co-operating in the Gulf war, but this China ­US rapprochement was greatly complicated by Taiwan's bid for accession to the GATT in 1990. The fear in Beijing was that the Western powers, including Japan, might be tempted to bring Taiwan into the WTO, and keep China out. Then came the flood of new candidates following the collapse of the Soviet empire. The list of those who joined reads like the Pied Piper's lost children: Bulgaria, Ecuador, Estonia, Kyrgyzstan, Latvia, Mongolia, Panama, Romania, and Oman. Thirty-three others applied, which can be listed in three categories: the politically important states of China, Taiwan, Russia and Saudi Arabia; the many transition countries from the old Soviet empire; and the rest, including Algeria. China was not alone in being invited to dust its feet on the club's threshold, while the members go about their business inside the walls.

In fact, the Chinese leadership was not ready to risk accession. Non-ac­tion was Li Peng's preference during his long premiership from 1987 to 1998. Often identified as a leader of the heavy industry brigade, he was in no hurry to negotiate. A committee had been set up in 1986 to co-ordinate positions among the varied ministries and agencies affected by the prospect of having to comply with international trade norms.1 It was never able to overcome opposition. All the major ministries and agencies owned their own corporations, made up the rules of the game as they went along, and acted as their own referee. They were experts at endless procrastination, eager to postpone decisions, and innovative at placing exorbitant demands. Their overlapping responsibilities for tariffs, quotas, production or issues of market access brought them into competition with one another, while many of the major industrial and sectoral ministries saw little opportunity and much danger in signing international trade agree­ments. In the trade arena, over 40 ministries, commissions, and agencies shared responsibility for state enterprises (SoEs), industrial policy and safety regula­tions. Local government officials included one-time reformers, entrepreneurial officials, or ideological opponents, who wished to protect local industries, par­ticularly in the huge, older SoEs of NE China.

There was little consensus over China's status. Initially, China's negotia­tors wanted to retain the country status as a developing country. That would have ensured continued industry protection. China abandoned the industry protection argument because the position became untenable, but not because China required shorter transition periods to win friends.2 Rather, it became untenable when Chinese negotiators discovered that the high nominal tariff rates inherited from the command economy were not being enforced. They were informed of the gap between nominal and actual tariff rates on New Zealand's mutton by New Zealand's negotiators. The mutton was entering the China market at zero rate. In other words, in a rapidly marketizing country such as China, high formal barriers to market entry create incentives for en­trepreneurs to get around them.

So much for the market aspect of transition. Its political meaning for China proved more important. "Transition" referred to a new category of states, defined in the jargon of the international institutions as "transition econo­mies," i.e. transiting from the planned to the market economy, from dictator­ship to democracy. The word's political career originated in Europe, so suitably enough it was the European Commission, which slipped the "t" word into its March 1995 position on EU policy towards China.3 In the case of China, its value lay in its malleability: everyone could read into "transition" whatever they wanted. The concept infiltrated the mid-1990s debate in the US on whether to "contain" or to "engage" China, and then coloured Chinese mainland and Taiwan political language.

The transition formula is so popular because it postpones classifying China as either a mature "socialist market economy" or a "consolidated market de­mocracy." It enables the United States to do business with China now, and leave democracy to evolve in China sometime later; the French and Germans may compete on Chinese markets, in return for China taking steps towards regime transformation; Premier Zhu Rongji could tell a U.S. audience to "not be too impatient" regarding human rights in China, because peoples with dif­ferent levels of income have different needs, and therefore different concep­tions of what constitutes human rights.4 In the longer term, he was saying, we'll all converge on greater wealth and political norms. In short, Chinese lead­ers hint, elliptically, that the price of joining the world trade club is for China to democratize eventually and, of course, to do so China-style. The "t" word allows all participants in the process of China's. irreversible inclusion in the global system to use the future as a place to locate present disagreements.

WTO accession was also delayed by the rise in economic nationalism, which emerged for numerous reasons in the early 1990s. The fear was that China's corporate minnows would be devoured by the giant corporations of Japan, the US and the EU. In general, economic nationalists believe that China must encourage domestic investment and indigenous economic development because the goal of most foreign investors is to profit from, not strengthen, China's developing economy. Economic liberals, on the other hand, believe that foreign investment may be the best and quickest way to develop the Chinese economy and strengthen the country as a whole. Proponents of this view are also found at all levels of society. Up to 1997, the party-state leaned in favor of consensus between the two strands of economic policy thinking. The 15th Party Congress declared certain strategic sectors off-limits to foreign in­vestors. Most importantly, the government began to encourage mergers and acquisitions among SoEs in all industries to improve economies of scale, as well as to create competition in industries, such as telecoms, which were vir­tual monopolies. The series of domestic and international factors that came together in the years 1996-98 made this status quo unsustainable.

China-U.S. Diplomacy and the WTO

A caravan of forces converged on Chinese party-state politics. Foremost among these was the agenda of "Greater China." Taiwan was and is the sole exception to the general rule of the world's chanceries' infatuation with the "t" word, as far as China is concerned. Taiwan yearns for certainty, not fudge. So it turns the argument to its own purposes, suggesting that re-unification has to wait until mainland China becomes a democracy and as prosperous as Tai­wan. This is fine with the communist party-state because it postpones democ­ratization on the mainland to an indefinite point in the future. It is the interim period that produces cross-Strait tensions: Taiwan seeks to end its de facto status as an appendage of the mainland with regard to international organiza­tions. In 1993, the Taipei government opened a campaign to upgrade the island's profile as an international player. There were two main reasons for this shift.5

Taiwan found itself a hostage to U.S.-China trade battles. The United States refused China developing-country status because of its high level of manufac­turing exports. Much of this flowed from Taiwanese investments on the main­land - by the turn of the century, numbering 43,000 projects, worth about $44 billion dollars. Because direct business contact with the mainland was unlawful, these exports derived in large part from assembly operations mounted via Hong Kong by Taiwanese businesses. Matters were made worse by reports that Taiwan businesses on the mainland were engaged in intellectual property theft.

The June 1989 tragedy on Tiananmen Square strengthened the Taiwan democracy movement and reinforced the idea that reunification with the main­land was out of the question, including within the ruling Kuomintang. This inflamed opinion with the mainland party-state, which broke off relations with Taiwan in June 1995, and then conducted military exercises, and missile firing tests off the Taiwan coast at the time of the general elections there in March 1996. Mainland threats prompted the United States to deploy two aircraft car­riers to the Taiwan Straits.

Both the United States and mainland China drew back from the precipice of confrontation, and by October 1997, the conditions were ripe enough for Clinton to set the tone.6 Emphasising the benefits for the United States of working closely with China in confronting the many challenges facing the coun­tries of the Asia-Pacific, the President insisted that China was being drawn into "the institutions and arrangements that are setting the ground rules for the 21st century - the security partnerships, the open trade arrangements, the arms control regime, the multinational coalitions against terrorism, crime and drugs, the commitments to preserve the environment and to uphold human rights." "This, he said, is our best hope, to secure our own interests and values and to advance China's in the historic transformation that began 25 years ago, when China reopened to the world." A pragmatic policy of engagement, he concluded, "of expanding our areas of co-operation with China while confront­ing our differences openly and respectfully"... is much better than a policy of confrontation, predicated on the belief that China's institutions will not evolve. Seeking to confront and contain China before it becomes too strong is "un­workable, counterproductive, and potentially dangerous."

The permissive conditions for a shift to "engagement" may be grouped in terms of significant changes in regime personnel; in Greater China affairs; in China's geopolitical neighbourhood; in the China policies of the major trading powers; and a very altered outlook for the Asia-Pacific economy:

  • Paramount leader Deng Xiaoping died in February 1997, at the age of 92, followed by the smoothest handover of power in modern Chinese his­tory. In September, the 151h Party Congress confirmed the party-state's commitment to market reform. In March 1998, Premier Li Peng, who had openly opposed WTO accession talks, was replaced by Zhu Rongji, the former mayor of Shanghai. Zhu Rongji considered globalization to be unstoppable, and that China had either to join or get left behind. The new premier accelerated the pace of reforms, notably with regard to the administration - he cut central government personnel by 50 per­cent in a few months - housing and education, banks, subsidies, and state enterprises. This was all in line with China's commitment to WTO principles.
  • On June 30, 1997, Hong Kong reverted to Chinese sovereignty, providing a window on the South China Seas, a major port, a monetary authority with $60 billion in reserves, a highly educated population, and a so­phisticated governance structure. Hong Kong was already a participant in the WTO, operating as a free port with very high standards of admin­istration, a predictable legal system, guaranteed property rights and a civil society enjoying free flow of information and per capita incomes 30 times that of the mainland. Over two-thirds of mainland exports to Hong-Kong represented outward processing arrangements often run by Taiwanese businesses, and going to U.S. markets, where Hong-Kong enjoyed large trade surpluses. In February 1998, the United States con­cluded a trade accord with the WTO on Taiwan's eventual entry. Greater China's unity seemed tantalizingly close, but also still distant as a prospect.
  • Taiwan's concerns at being left adrift in the wake of mainland-U.S. rela­tions prompted a speeding up of bilateral negotiations with the United States to pave the way for WTO entry. After 1 7 roupds, the talks were concluded in February 1998. In, June, President Clinton visited the mainland for a ten-day presidential trip. There, he delighted the leader­ship with his Three No's statement: No to Taiwanese independence; No to "One China, One Taiwan"; No to Taiwanese entry to international organizations where statehood is required for membership. Taiwan eyes were not asmile. US "engagement" with China is clearly conducted on the assumption that the Greater China of the mainland, Taiwan, Hong Kong, plus overseas Chinese in the Asia Pacific is already a virtual reality. (With Macao back under Chinese sovereignty in 1999, Greater China disposes of four seats in the WTO.)
  • The geo-strategic environment of China took a sudden turn for the worse during the course of 1998. In May, the Indian and Pakistani govern­ments exploded their nuclear devices, and in August, North Korea launched its ballistic missile, the Taepo Dong-1 and 2 over Japan. This dealt a devastating blow to arms control policies, prompted the United States to bring forward preparations on missile defence, and accentu­ated the attraction of the Clinton administration to China as an indis­pensable partner for the United States as manager-in-chief of Asia­Pacific affairs.
  • In September 1997, when ,Japan's Prime Minister Hashimoto visited China, the two sides reached the China-Japan bilateral accord in the WTO negotiations on market access for goods. The EU Commission outlined its strategy to engage with China in order to accelerate China's "transi­tion to an open society based on the rule of law and the respect for human rights." 7 The one exception among the rich trading powers was the United States, with whom no progress was recorded on China's WTO bid between Jiang Zemin's October 1997 visit to Washington D.C., and Clinton's visit to China in June 1998. Nonetheless, the climate of U.S.-Chinese relations was favourable. All rich countries were now embarked on a China-engagement policy.
  • The Asian financial crash began in June 1997 in Thailand, spread to Taiwan, Korea, and Indonesia, and then around the world and back. China experienced a slowdown in growth, a fall-off in d,omestic invest­ment, and a decline in exports. This clearly indicated that the world market was China's main motor for growth, and that the heart of that motor was ticking in the US and the EU. In January 1998, at the height of the 1997-98 Asian-Pacific financial crash, President Clinton proposed a "new round of global trade negotiations." The EU and Japan chimed in, as did thirteen medium sized countries with a similar proposal in a joint statement signed that year in Hong Kong.
  • Both the EU Commission and the Clinton administration took the lead in the 1990s on the liberalization of telecommunications and financial services. Both were keen to involve the Asian states. The major break­throughs occurred during the course of 1997: Sixty-nine countries signed an agreement guaranteeing market access to international telecommu­nications suppliers on a non-discriminatory basis. In March, forty coun­tries signed an Information Technology Agreement. Both agreements covered 90 percent of global trade. Then in December - at the height of the Asian financial crash - seventy countries agreed to liberalize their financial services. The hardware and the software for the world's com­munications and payments infrastructure were being laid hand-in-hand.

For China, the slow-down in domestic demand had to be compensated by attracting investors, and by maximizing external sources of revenue. This meant grasping the opportunity provided by the grand scale adjustment in the world's industrial structure, China's WTO negotiator, Long Yongtu, argued to the party cadres. 8 China had to deepen its already close relationships with the world's multinational corporations. There was no evading the difficulties, he argued, arising from the fact that the inherited state structure was incompatible with WTO membership: "A very major problem... is that every department is not only itself the appointed referee, but also a player in the game, and also [has] the same people who make up the rules of the game."9

With Zhu Rongji's appointment as Premier in March 1998, economic lib­erals won a major battle, as the new government proceeded to accentuate the drive to attract foreign direct investment to China, and to involve China more deeply in global networks.10 For Zhu Rongji, this meant that there had to be evidence of market-liberalization in China for U.S. observers. Hence, the Premier's two-dimensional strategy: WTO-consistent reforms of the party-state had to be accompanied by a package of concessions by China that Clinton could accept to shore up support for the deal in the United States. That pack­age had to be implementable in China if it was to be credible in the U.S. Propo­nents and opponents of China in the WTO on both sides of the Pacific reached out in mutual support. This feature of China's WTO entry saga is extremely significant: interdependence makes domestic structures, policies and perfor­mance the substance of international diplomacy. In fact, it breaches the prin­ciple of non-interference in the domestic affairs of other states.

The negotiations

The history of the negotiations from 1998 to 2001 may be sketched briefly. The Chinese leadership's renewed bid to join the WTO through bilateral nego­tiations with the United States started well enough in 1998 with a routine exchange of letters, nearly died over a serious negotiation breakdown in April 1999, then resumed in late summer to yield the U.S.-China accession agree­ment in November, only to be upstaged in December when a "Red-Green" lobby of advanced industrial country unionists, environmentalists and anti-globalizers brought the WTO meeting at Seattle to a standstill. In the United States, the accession agreement went before Congress in 2000. Then, just before the House vote in May 2000 on the extension of permanent trade status to China, the EU foreign ministers backed the Commission's proposed package for China's entry talks. As the EU Trade Commissioner Pascal Lamy said: "The US got 80 per­cent of what we wanted. Now the US will get, on top of what they got, what we get." Trade relations between China and Japan deteriorated as, Japan slammed on tariffs on stone leek, mushroom and rush imports from China, and China retaliated with 100 percent tariffs on a clutch of Japanese manufactures. But the tail-ends of business to bring China into the WTO were quickly wrapped up following the terror attacks of September 11 on the Twin Towers and the Pen­tagon, when China offered to co-operate with the US on the war on terrorism. China was duly ushered in as a member at the Qatar meeting of the WTO in November 2001.

China's New Trade Regime

With the major trading powers in agreement, the content of China's fu­ture trade regime was clearly discernible:

  • Services: Most of the negotiations with China and its trade partners were about opening China's service sector, ranging from telecommunications, to banking to insurance to the movie industry where U.S. firms domi­nated internationally. Services were still under extensive state control. A constant theme in negotiations turned around the continued effec­tiveness of investment barriers to foreign business, despite the fact that China had signed the Uruguay Round provisions. Barriers were geo­graphic in scope or, as often as not, limitations on foreign ownership.
  • Foreign banks could conduct business in the local currency, and geo­graphic restrictions were reduced. In investment banking, foreign firms were able to hold up to 49 percent in brokerage firms after three years following China's accession to the WTO. By contrast, foreign insurance companies were to be allowed 50 percent participation in joint ventures dealing with life insurance and 51 percent in non-life business. In tele­communications, because China was party to the Information Technol­ogy Agreement, all tariffs on computers, telecommunications equipment, and other high tech products would be eliminated. Ownership was the most contentious issue: eventually, foreign companies were granted a maximum 49 percent stake in joint ventures, rising to 50 percent within two years of China's entry. In the area of distribution, the government retains the right to restrict business, though full trading rights were to be granted within three years. In short, China's non-traded services sector is opening to foreign competition - how far remains to be seen.
  • Intellectual Property Rights (IPR): China is one of the world's prime sin­ners with regard to IPR. Hardly after plants making counterfeit prod­ucts are shut down by the authorities, the same owners open for busi­ness somewhere else. In the broader scope of things, China is an avid consumer of western technologies. When the United States revived eco­nomic sanctions on hi-tech exports to China after the Tiananmen inci­dents, the government looked to alternative suppliers. European and Japanese suppliers jumped into the market. Another running saga was the production of counterfeit compact discs: eventually, China and the United States reached an accord in June 1996 to dose up to 30 facto­ries in southern China, 12 of which were underground. The Chinese government, aware that foreign investors need some assurance about their property rights, has regularly sought to improve procedures'- dif­ficult to accomplish when many counterfeiter operations were under command of the army. Given the difficulties, China faces a 2005 dead­line for compliance: All WTO commitments have to be met from the date of entry.
  • Environment: China has opposed efforts to introduce environmental and workplace standards that could drive up local costs. Nonetheless, gov­ernment attitudes have evolved from outright opposition, to a more se­lective cooperation. The reason is simple. China's environmental prob­lems are growing: For instance, urban pollution is estimated to be kill­ing 180,000 people per annum; 10 percent of the land area of southern China suffers from acid rain; and the water level under Beijing has fallen to untenable levels, due to heavy exploitation for urban, indus­trial and farm usage.11 Efforts have been made to tighten up controls on air pollution, water purification and acid rain, and the government has kept an eye on foreign investments that aim to shift high-polluting industries from rich countries to China. Overall, as Li Peng, the former Prime Minister noted, "China has not only to provide people with riches and material products, but also gradually to improve the quality of life and environment as an important part of the quality of life."
  • Competition Policy: An effective competition policy can only operate in a market economy, where respect for property rights is assured through the law. China is not yet a market economy, and property rights are not assured. Consequently, throughout the negotiations, China's trade part­ners have been far from convinced that the central government will be able to live up to its commitments. The U.S. administration went out of its way to sell China's entry to the WTO on the grounds that, once in, China would be under surveillance of other members, as well as of the WTO itself. A new Commerce Department under-secretary post has been created to monitor China's trade commitments, along with a joint Con­gress-Executive human rights commission to monitor China's human rights record. Furthermore, the Chinese negotiators gave in to Ameri­can demands for import surge protection for 12 years as well as for the implementation of an anti-dumping regime to last 15 years. The EU negotiated similar terms - hardly a ringing statement bf confidence about China's future as a major world economy. As all signatories realized, enforcement depends on the center's ability to get provincial and city governments to tow the WTO line. This is far from assured.
  • Worker and human rights: Clinton adopted "engagement" as the best way to counter the arguments of China, Singapore and Malaysia in the early 1990s that Asian particularities prescribed a special reading of human rights. As mentioned, the Chinese government's approach is to state that the people's most basic human rights are to food, shelter and clothing, and that only after levels of education and prosperity have been spread widely should citizens' rights be extended to electoral par­ticipation. In fact, China found extensive support for its views in the UN Human Rights Commission from Russia, Japan, Australia, Canada, Switzerland and the EU states, as well as from others in Africa and Asia. At the root of the party-state's hostility to Western human rights activism lies the defense of its monopoly powers over the representa­tion of workers and peasants. Clinton by contrast reached an agree­ment with the U.S. apparel industry - including such household names as Nike, Reebok, Phillips, or van Heusen - to reduce the operations of sweatshops in China: the agreement included a ban on employing teen­agers under 15; prohibition of forced labor; a maximum 60-hour week; a ban on assault and harassment, and - anathema to the party-state -the rights of workers to join free-trade unions.
  • Protection: tariffs are to fall to 10.5 percent by 2005, from 17 percent in 1997. For China, the most sensitive area is agriculture. China is com­mitted to reduce tariffs, eliminate quotas and reduce subsidies. "Priority areas," such as wine and cheese, would be subject to negotiation and hence differing rates as well as potentially longer periods of pro­tected adjustment. This marks a major reversal in previous policy, predi­cated on the principle of food security, understood as self-sufficiency. In automobiles, quotas are to be eliminated, and tariffs reduced from 80-100 percent to 25 percent by 2005. Tariffs on auto parts are to fall to 10 percent. In textiles, China stands to gain as the world's largest gar­ment and textile fiber producer and exporter. The textily industry rep­resents 15 percent of industrial output, employs 10 percent of the workforce and accounts for just under one third of total exports. Under the world's existing textile regime, China is limited to a 17 percent share of the world market for garments. Despite pledges to bring the whole sector under WTO rules by 2005, the United States is to keep its safe­guards in place against rapid surges in exports from China until 2008, while the EU policy regarding China textile imports is one of reciproc­ity. Overall, China's new trade regime by 2010 will be more open than it has ever been.

Whether China meets these commitments within the transition periods is a general concern for China's trade partners. A pessimistic view holds that China joins a WTO that is not working well, and its presence will not help to make things any better. The main benefit for China is the breathing space negotiated in its WTO bilaterals to adapt its economy before the transition periods for the various sectors expire and Chinese firms face the full fury of competition in an open economy. But these transition periods average about five years. Before long, resistance by powerfully entrenched interests to inter­national competition can be expected, prompting a slowdown in the pace of party-state reforms. So which is China to be: a China with a gripe, and protec­tionist chip on its shoulder? Or a cheerful China, open to world markets?

China as a wrecker

Accession to the WTO means that China has to establish a reliable dis­pute-settlement mechanism, which implies greater uniformity of standards and transparency in the political process whereby laws are made, implemented and appealed. Traditionally, China is a "rule-by-law" state, contrasted to "rule-of­ law" civil societies that require an independent judiciary to challenge decisions of the state and local governments. Hence the Chinese custom of guanxi, whereby family and other trusted relationships are valued far more than written con­tracts. In political terms, this is expressed in tightly-knit policy communities, which helps to fragment the Chinese economy along functional or geographic lines, making the China-wide conduct of business more difficult and complex. All too often the center has to concede to provincial lobbies, as the last genera­tion of regional reformers become entrenched in office, and impose their deci­sions on companies that operate within their jurisdictions. In other words, China's traditional top-down "rule-by-law" generates ineffective central government: provincial power is essentially arbitrary and opaque; contracts are only loosely enforceable.

Much of the WTO reform program depends on whether Beijing succeeds in centralizing new powers, which would enable it to outflank the resistance of local interests. Those new powers would have to include taxation, finance, law and law enforcement as well as traditional areas such as defense and money1. Meanwhile, problems in implementing commitments, it is feared, will under­mine China's credibility internationally. This is what many WTO members ex­pect to happen, as judged by their refusal to drop safeguards such as anti­dumping measures against a country that many still quietly judge to be run as a non-market economy. Domestic protectionism in China is thus likely to jus­tify continued protectionism among the rich countries, providing Chinese di­plomacy with an incentive to take the lead as advocate of developing countries. Far from being a champion of open markets, China in such conditions under­mines competition, sometimes in co-operation with India, the other very large and population-rich member of the WTO. China, with India, tilts the balance heavily in favor of poorer countries, as each state has one vote.

China, the pessimists say, will turn out to be a wrecker, casting its vote with protectionist forces, and weakening international cooperation, in which it has little experience. Already open to charges that it is undemocratic, China's accession does the organization no favours. Its officials are unelected, like the WTO's, and China defends sovereignty as a principle of its diplomacy. If China fails to implement its commitments, the WTO can give a green light to injured parties to impose trade restrictions. To avoid this, China will use its freedom to settle disputes outside the WTO, through bilateral negotiations or in the con­text of regional fora. This only reinforces the trend to exclusive deals between the big trading powers, thereby undermining the WTO's effectiveness. In short, China's entry makes it more likely that the organization will be impaled by its dilemma: if its decisions bite, then the organization risks being accused of exceeding its legitimate mandate; if it does too little, it risks losing credibility in the eyes of governments and businesses dependent on global markets.

A Cheerful China

The opposite view holds that China has everything to gain by playing in the court of the great trading powers as a constructive partner. Little is to be won by becoming another Japan when circumstances over fifty years after the end of the world war are so different. Japan's business system built in the 1950s and geared to "export out, protect in" has little to make it attractive as a model for China in the 21st century. Greater China ambitions are best fulfilled for China within the WTO, as illustrated by China's entry ahead of Taiwan in 2001, on the conditions originally agreed upon and according to Clinton's "Three No's" policy. Entry of mainland China alongside Taiwan leaves open the pros­pect of evolution in China's "sort-of communist" polity, to paraphrase Ronald Reagan, and also buys time during which santong (the three direct links of trade, post and travel) and siliu (the four exchanges-academic, cultural, eco­nomic and athletic) are encouraged. These two are the first steps, according to Beijing, to implement the formula of "One Country, Two Systems."

China is fast becoming a trade power in its own right. Comparing the trade regime of 2010 with that of 1978 is like comparing night and day. In 1978, China was an impoverished country, cut off from the rest of the world. By 2010, it will have long since joined the leading group of world trade powers. China ranks fifth in the world economic hierarchy after the EU, the United States, Japan, and Canada at the turn of the millennium. By 2010, mainland China in all likelihood will have nudged Canada into fourth place, and be rac­ing to overtake Japan in third. A ranking capturing the commerce of the main­land, Taiwan, and Hong Kong - and including only the latter's exports of local output, not through-trade from China or elsewhere - places Greater China fourth in the world hierarchy already. China ranks third as recipient of inward investment, after the United States and the United Kingdom. Such a China is clearly going to demand a major say in the setting of world trade rules - indeed, China's prime foreign policy objective is prestige, and recognition of its weight in world affairs by the powers that be. As long as that is forthcoming, China will do everything to shore up its credibility as a reliable trade partner. In brief, China will turn out to be a team player, a pillar of international society.

In 2001, China's annus mirabilis, China went a long way to fulfil its ambi­tions: It acceeded to the WTO; Beijing was chosen to host the 2008 Olympic Games; the APEC summit was held in Shanghai; and. the national football team competed in the World Cup for the first time. China's regime, for long a political pariah, has become salonfahig - socially presentable in high interna­tional society. A practical benefit is that China will now be formulating the laws governing international trade together with the leading powers, rather than having the rules written for it from the outside. China wants special relations with the powers that be, and the ability to assert equality of rights in the international arena.

China has little interest in invoking the hackneyed argument of the world's legion of bien-pensants from the 1960s who suggested with their habitual en­thusiasm that countries of unequal development should be treated unequally. What they meant of course is that developing countries should be given special privileges. The reverse happened for the many states not enjoying special rela­tionships with the world's trading giants. Losing the battle over its definition as a developing country is therefore a blessing in disguise: China's negotiators will not be in a begging posture when the world's textile regime comes under WTO rules by 2005. On the contrary, China's membership in the WTO will help train the spotlight on rich countries' protectionist policies, as an alternative to Western focus on China's shortcomings in human rights. In effect, it delivers developing countries the moral high ground on a plate: global trade will boom or shrink for many years, depending on whether or not the rich countries comply with their commitments in the WTO. That, rather than developing coun­tries' import substitution policies of yesteryear, is the main threat to shared global prosperity in the post-cold war world.

The conclusion is simple: the rich Western powers that still set the tone on global trade policy have a choice between mounting barriers against China, as the anti-globalization forces in their societies want, or welcoming it into the WTO as a pillar of the global system, and agreeing on a gradualist policy of transition to a fully fledged market-democracy. The transformation of China's business system is the key to its insertion, satisfactory or otherwise, into world trade. Ineluctably, China is embarked on a regime change toward constitu­tional governance.

Professor Jonathan Story, who received his Ph.D from SAIS in 1973, is professor of international political economy at INSEAD in Fontainebleau, France. His areas of research include transition economies and European integration. This article is adapted from an upcoming book titled China: The Road to Power.