China Wary of Terms in Bid to Enter Trade Club

China wants to reenter the world trade mainstream, but with as little economic disturbance as possible.

In a delicate balancing act, Beijing hopes to gain membership in the World Trade Organization (WTO) this year without upsetting its partially liberalized economy.

Joining the WTO would allow China to expand market access for Chinese exports and increase foreign investment. China left the world-trade sphere in the 1950s and has been trying to negotiate its way back in for nine years.

To sweeten its bid to enter the WTO, of which most nations are members, China is making overtures to lower trade barriers and meet demands from the United States and other major economic powers for more open markets.

But China won't liberalize its economy at any cost. Chinese authorities want to protect decrepit state enterprises and raise tax revenues even as they expand trade and foreign investment.

"That's a tall order," says a Western diplomat. "Just how they intend to do this isn't clear."

Tariffs to drop in April

China recently took one major step toward joining WTO in 1996 by cutting tariffs on more than 4,000 items effective April 1. The overall tariff level on imports will fall from the current average of 36 percent to 23 percent. The plan was first announced by President Jiang Zemin at the November summit of the Asia-Pacific Economic Cooperation (APEC) forum in Japan.

In December, economic czar Zhu Rongji said China will lower another barrier and make its currency convertible for all trade transactions possibly by next year, four years ahead of the previous timetable. At a round of talks in Geneva in December, China and its major trading partners said Beijing was moving closer to its goal of entering WTO.

Still, the United States and European Union say other major obstacles remain:

*China says it wants to allow more of its own companies to trade but at the same time prevents foreign firms with mainland factories from selling locally.

*Beijing insists on a slow liberalization of agriculture, frustrating the United States, Canada, Australia, and other large farm product exporters.

*China continues to protect and heavily support state-run industries, violating WTO rules on subsidies.

*The United States says that copyright piracy, a problem covered by a major trade agreement between Washington and Beijing in 1995, is again on the rise.

*Service industries such as banking, telecommunications, and insurance are not being opened as quickly as American officials would like.

"The negotiating atmosphere has improved," says a Western economist in Beijing. "But there still is a long way to go."

China's plan to scrap large tax exemptions on machinery and capital equipment imported by foreign investors is also clouding the business climate. Foreign companies are due to lose tax breaks on imports of capital goods, equipment and raw materials on April 1.

Projects worth more than $30 billion will continue to enjoy preferential treatment until the end of 1997. Joint ventures in China's six special economic zones will also be allowed a longer transition period, and other special extensions could be granted.

Chinese officials say the tax-break reductions are aimed at putting overseas and local companies on more equal footing. Foreign businessmen say the Chinese government, burdened with loss-ridden state enterprises, is closing loopholes to raise badly needed cash.

Contending they can make money in China only with the tax exemptions, many foreign companies rushed to push through deals before the new policy was finalized. The US-China Business Council in Beijing has estimated that ending duty-free capital imports will raise the cost of establishing a new business by an average of 28 percent.

"It's given a lot of lawyers a lot of work and ruined everyone's Christmas vacation," says Anne Stevenson-Yang of the US-China Business Council.

China's bid to enter the WTO is a major point of contention between Washington and Beijing. The US says the two sides remain at odds over at least 25 issues that must be resolved before China joins. One sticking point: Will China join as a developing country, making it eligible for years of exemptions and buying time for slower-paced reforms?

"The WTO is an all-or-nothing organization," says Charlene Barshefsky, deputy US trade representative. "It is a single undertaking with which all parties must abide, or they are not members."

China says the United States is demanding too rapid liberalization. "The US side's asking price is still very high," Chinese Foreign Trade Minister Wu Yi says. "China's fundamental principle for entering the World Trade Organization remains unchanged."

The issue is also a political football. After the sentencing of prominent dissident Wei Jingsheng to 14 years in prison, Clinton administration officials are sending signals that human-rights abuses could pose political barriers to China's WTO entry.

China is also taking a more belligerent tone over the trade issue. The official press says the standoff reflects Washington's reversion to a cold-war policy of containing China.

Threat of worker unrest

Domestically, China also wrestles with the issue of phasing out defunct state industries, whose subsidies violate WTO rules. The official newspaper China Daily has reported that more bankruptcies will be carried out next year in 52 large cities, although Western analysts predict the government will likely continue to limit defaults to small companies. The government fears shutting down large factories because of the threat of worker unrest.

With losses climbing at state-run enterprises (likely 20 percent higher in 1995 than in 1994), the demand for inflationary subsidies will continue, economists say.

"Is unemployment a greater threat to China or is it inflation? Both problems could become serious if they are not controlled, but inflation is an old problem and unemployment is a new one," says Hu Jian, a researcher at Beijing University.