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Permanent Normal Trade Relations

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National Economic Council

Permanent Normal Trade Relations
and the Potential for a More Open China
Gene B. Sperling, Director
National Economic Council
Remarks before the Dallas Ambassadors Forum
Dallas, Texas
May 12, 2000

As Delivered

In only two weeks, Congress will vote on what is probably the most important foreign policy and economic issue our country will face this year – and perhaps in recent years: whether to grant China permanent Normal Trade Relations (PNTR).

Those who oppose the legislation don’t dispute its benefits for the American economy. Instead, they claim that PNTR will destabilize the well-being of some of our workers by throwing them to the vagaries of the global economy -- or that PNTR will send the wrong signal to China about its poor human rights record.

We certainly disagree. Today, I would like to explain why we believe that this agreement does not require a trade-off between growing our economy through more trade and the cause of human rights in China or helping our workers here at home. To the contrary, this deal is not only right for our economy; it is also right for our workers and right for the progress – however slow -- of reform in China.

Economic Benefits of the Agreement

A number of opponents of this agreement speak about it as if it were a free-trade deal in which both signatories agree to lower tariffs in the hopes of boosting prosperity in both countries. We in the Administration believe that such agreements – when they incorporate sound labor and environmental standards – can be beneficial.

But whatever the merits of these types of agreements, these considerations have no relevance in the debate about China-PNTR. That’s because when it comes to market opening, the agreement we negotiated with China is a one-way deal. So the economic question about PNTR boils down to this: will we accept China’s market-opening concessions or will we not? We agree merely to support China’s candidacy for WTO membership and to make permanent the Normal Trade Relations for China that we have passed each year for the past 20 years. So, I repeat, if we pass PNTR, we do not open our market or lower our tariffs one bit. Our market stays the same either way.

If we choose to accept the benefits – if Congress passes PNTR – we will choose economic growth for the country and also for Texas. Texas has $91 billion of exports each year – second highest of any state in the U.S. In Texas, 614,000 jobs depend on such exports. But less than $1 billion of this total trade is with China. As Mayor Kirk and Albert Black wrote in their op ed this morning – Dallas does tremendous trade with China, but only $63 million represents exports. Why? Because our market is already open. If we pass PNTR and get the full benefits of market-opening with China, there is no question that Texas’ trade can expand dramatically. Taiwan is already Texas’ third largest export market. If we pass PNTR and people are as smart as Mayor Kirk and the businesspeople planning a delegation to China next month, the opportunities for Texas can be enormous.

Consider a few examples, sector by sector:

  • Cotton: Texas is the country’s largest cotton producer; China is the world’s largest cotton consumer. Under this agreement, China will more than quadruple the amount of cotton it would allow to be imported, with Texas a big winner.

  • Beef: For Texas ranchers, tariffs on beef will decline from 45 percent to 12 percent. Moreover, China has agreed to eliminate unscientific barriers that in the past have been used to discriminate against Texas beef. Demand in China is expected to dramatically increase.

  • Information Technology: For the Dells, Texas Instruments and Compaqs, China will eliminate all quotas on information technology and reduce duties from 13 percent to zero by 2005.

  • Chemicals: Chemical manufacturers, a vital sector in Texas, will see Chinese tariffs drop by more than half.

  • Oil and Fuel:. Chinese tariffs on oil and fuel will drop by a third in this important Texas industry.

Let there be no mistake about it: passing PNTR will provide a tremendous economic boost to the Lone Star State.

The economic merits of the deal become even more clear when we consider what would happen if Congress rejects PNTR for China. Under that scenario, our firms may have some residual rights in China from earlier trade agreements. But we would lose virtually all market access we negotiated in the most cutting edge service, telecom and internet areas and we would lose distribution and enforcement rights contained in the November agreement for all of our products – from agriculture to machinery – while allowing our competitors in Japan and Europe to gain full access to these benefits. Simply put, our Congress would be going out of its way to put our companies at a competitive disadvantage by explicitly denying them the access to the world’s largest new market that we would be granting to our top foreign competitors, such as Japan and Europe.

Why on earth would our Congress specifically vote to deny our farmers, workers and companies the right to compete on even terms with our foreign competitors in the world’s fastest growing major market? That would be the closest thing to unilateral economic disarmament that I have ever heard of.

The Agreement Bolsters Reform in China

However obvious the economic benefits of this agreement, I would feel very differently about it if I believed it would set back the cause of human rights in China.

But before I make the case that, in fact, this agreement will push reform in China in the right direction, we should be clear about where the Administration agrees and differs with opponents of PNTR.

The opponents argue that China’s poor record on human and labor rights should disqualify it from WTO membership. We in the Administration share their diagnosis of the problem, but reject their remedy. The question before the Congress is not whether China’s record on human rights is defensible (it is not). The question is whether passage of PNTR will make positive change in China more or less likely.

We believe it will make positive change more likely. We base that belief not on a simple-minded faith that increased trade automatically engenders democracy or more respect for human rights. We base it on the conviction that increased engagement, openness to ideas, and movement to new market forces will promote economic freedom and strengthen reformers trying to move policy there in the right direction.

As in any country, politics in China features groups who favor change and those who resist. Whatever problems we have with the current Chinese leadership, these leaders are clearly engaged in a daring attempt to change China’s command-and-control system into a modern, market economy. And they are taking significant political risks to make it happen.

Who is the opposition? The entrenched managers of China’s state-owned industries, old-guard communists determined to preserve one-party rule, and the hardest-line elements in the People’s Liberation Army who feel their position – and military budgets – would be bolstered by tension with the United States, tension with China’s neighbors, and tension with Taiwan.

Why would Congress wish to hand a major victory to these opponents of reform and a stinging defeat to its champions? That’s exactly what Congress would do if it rejects PNTR.

And I’ll never understand why some opponents of China-PNTR -- people like Pat Buchanan, who have spent an entire career denouncing communism – now turn their backs on those in China working to move it from a command-and-control economy to one more based on markets and free enterprise.

This deal will help reform by helping the reformers. But it will also help by creating a number of social and economic conditions that favor reform.

First, consider the flow of information and how that can undermine an authoritarian regime. Right now only 12 percent of Chinese have phones; less than 1 percent have Internet access. But passage of PNTR coupled with Chinese accession to the WTO will help change this situation dramatically by allowing our world-beating telecomm firms to compete in the Chinese market. This will not only create jobs in the USA; it will also make the tools of communication cheaper, better, more reliable, and more widely available to the Chinese people. Because of this agreement, individual Chinese citizens, with a few clicks of a mouse, will be able to communicate with each other and with the outside world in a volume that nobody would have believed possible a few years ago.

There is no question that some in China’s leadership are nervous about this new-found freedom and have sought new regulations seeking to restrict the flow of information on the Internet. Good luck. How can the hard-liners hope to stuff the information genie back in the bottle when hundreds of millions of Chinese citizens will be using the web?

"Liberty," in the words of Chief Justice Earl Warren, "is the most contagious force in the world." So is free expression.

Second, the agreement will also promote reform in China by freeing up the movement of goods and delivery of services. Currently, anybody who does business in China will describe distribution as, at best, an enormous headache. Until now, Beijing has severely limited rights to import and export, to distribute goods once inside the tariff walls, and service those goods once they are sold. That the right to engage in ordinary commerce is a privilege granted by the Chinese government to an exclusive few has helped no one.

China’s WTO commitments turn these scarcely allotted privileges into rights that will be widely available to both Chinese and foreign businesses. China has agreed that within 3 years, all individuals and entities in China will be able to import most products into any part of China, and that foreign firms will be able to establish, own and operate their own distribution and related services.

The impact of these changes goes far beyond economic efficiency. As the weight of the bureaucracy on everyday transactions lightens, more and more Chinese will come into direct and daily contact with each other and with foreign firms. In the process, they will learn new skills and develop broader horizons. Indeed, it is precisely in the regions of China where foreign enterprises are clustered that entrepreneurial attitudes among Chinese are most pronounced.

Third, consider access to capital. Capital not only feeds economic growth, but also makes possible personal independence. As in other areas of economic life, this WTO agreement – by injecting competition into China’s capital markets -- promises to enhance private initiative in China at the expense of state power.

By some estimates, 80 percent of bank lending in China goes to inefficient state-owned enterprises, which produce just one-third of GDP. It is not surprising that the line of bad debts in China is a mile long-- 25-40 percent of GDP by most estimates. WTO accession promises to scale back Chinese government control in banking and finance by letting foreign banks play a more significant role. An increased foreign presence will help bring modern banking practices to China. Domestic banks will be forced by competitive pressure to develop a more advanced "culture of credit."

But again, more is at stake than a growing market of 1.2 billion people for our banks. The new rules required under this agreement will help break the one-party state’s monopoly on capital flows. Private citizens and entrepreneurs will find themselves less dependent on the arbitrary largesse of the state when they wish to turn their entrepreneurial ideas into economic reality.

Fourth, the agreement will also strengthen the rule of law in China – that indispensable building block of a healthy polity, economic confidence, and civil society. Currently, economic activity in China is often hampered by vague, unwritten, or unpublished rules that maximize the arbitrary power of Party officials. To obtain even the simplest permit in China, a petitioner needs "connections". You can imagine the scope this systems allows for petty despotism, cronyism, and outright corruption. WTO membership will reduce these abuses. For in order to join, China must publish its commercial rules and regulations in full, making it easier for our firms to do business without official harassment and for Chinese citizens to advance based on what they know, not whom they know.

But beyond the specific provisions that will encourage economic freedom, I believe employment in American firms will expose Chinese to foreign ideas, new ways of thinking and new practices – all of which will build momentum for reform. But a simple employment relationship with Chinese workers is not enough. It is incumbent upon American employers to go further, to start creating in each of their firms today the building blocks of more open China tomorrow.

That means nothing more than honoring the principles of their own organization, the American Chamber in China, which declares: "[t]he American approach to doing business and to corporate responsibility can and does foster positive change in China…We empower our employees to take initiative and give them a voice on how to do things. They in turn convey these values to their families and associates. We introduce high standards of worker health and safety as well as environmental protection."

Intel, a manufacturer of semiconductors, is an American firm striving to realize these principles. Each of Intel’s 1,000 Chinese employees receives a home computer and the company is in the process of providing each with home Internet access. Moreover, Intel’s operations in China are managed under the same environmental, health, safety and labor policies the company applies to its U.S. operations – all of which are higher than Chinese norms. Average base pay and health benefits are far more generous than those provided by Chinese competitors.

The more American companies bring not only our capital but also our values to Chinese soil, the more we can become a partner in unleashing positive change there.

These changes are already benefiting more and more Chinese – and making them hungry for more. Listen to the words of Bing Ho – written in English, I might add – an employee in the Shanghai office of Cargill Investments :

"…In 1997, I was recruited by Cargill…and I could finally work in Shanghai – the city which I dream to locate in…I, a common girl with no power and money, could hardly imagine all these things could be done several years ago. Now I have an apartment…a promising career and studying for MBA degree…Many of the Chinese people are longing for knowledge, techniques, and culture from western countries, especially U.S. We want our country to be more open, more advanced, we want to improve our lives and at the same time there will be mutual benefits for both our countries."

Bing Ho’s story provides hope. But employment in American firms by itself can’t ensure reform in China. And PNTR by itself cannot compel Beijing to respect the human rights of its people. Improvements will result from the internal changes sweeping China and external validation for China’s human rights activists. That’s why we sanctioned China under the International Religious Freedom Act last year, and why last month we again sponsored a resolution in the UN Human Rights Commission condemning China’s human rights violations.

The majority of human rights and democracy activists support this two-pronged approach of engagement and pressure. Says Dai Qing, a prominent Chinese environmentalist and independent political thinker: "How does international pressure work in promoting human rights and environmental protection in China? I would like to argue that such pressure works only when doors are kept open, when pressure presents positive solutions and, above all, when engagement is involved…All of the fights – for a better environment, labor rights and human rights – these fights we will fight in China tomorrow. But first we must break the monopoly of the state. To do that, we need a freer market and the competition mandated by the WTO."

Democracy activist Bao Tong agrees: "Entry into the WTO will definitely promote China’s economic reforms…and over the long term will help develop the legal system and moves toward democracy." Martin Lee, courageous leader of the Democratic Party of Hong Kong, also stresses the link between WTO accession and rule of law: "The participation of China in the WTO would not only have economic and political benefits, but would serve to bolster those in China who understand that the country must embrace the rule of law".

We must keep the faith with these heroes of democracy by passing China-PNTR and continuing to keep the pressure on Beijing to respect human rights.

That’s why the Administration is pleased that in the past few days a bipartisan group in Congress, led by Rep. Sander Levin and Rep. Doug Bereuter, is seeking to design a Helsinki-style commission that aims to provide an effective mechanism to press for improvement of China's human rights, religious freedoms, labor rights and the rule of law, without sacrificing the benefits that come from increased trade and commercial engagement.

Conclusion

As the President has said, we do not know what path China will take. All we can do is make the decisions most likely to push China in the direction of economic and political reform. It is hard to see how empowering communist hard-liners, slowing economic transition, and keeping American companies out of China will increase respect for human rights or lead to a more open society. It is possible, however, to see a better future for China if it opens its economy and reaches out to the world -- and to see how greater openness will make China into a better neighbor.

In the words of Li Ke, former Chinese editor of the democratic journal Fangfa: "For so many years of China’s reform and opening, areas couldn’t be opened and remained state monopolies. But if the economic monopolies can be broken, controls in other areas can have breakthroughs as well. These breakthroughs won’t necessarily happen soon. But in the final analysis, in the minds of ordinary people, it will show that breakthroughs that were impossible in the past are indeed possible."

Thank you.


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