The binds of free trade

It is said that China is the largest sociological and political experiment of the 21st century - the grand petri dish of the world, so to speak. Within China, critics of the World Trade Organization (WTO) have asserted that accession to the WTO will be sublethal to its working class in certain inefficient sectors of the economy because of an onslaught of competition.

To Westerners, China's admission to the WTO is the continuation of the centuries-old dream to conquer the Silk Road. Accession to the WTO means that America and the rest of the world will not have to kowtow in the palace, and everyone will stand on equal footing as tariffs in China, are reduced across the board for all WTO members.

The scenario, if played out correctly, means that Pepsi (or Coca-Cola) will be the carbonated drink du jour in most households in China while Ford and General Motors automobiles will flood the streets.

But what lurks behind this sanguine image is what might conceptually be called the transition misery index. This index can be calculated in many ways, taking into account various factors: infant mortality, healthcare accessibility, cost of food and housing relative to income, life expectancy, inflation, crime, and unemployment. While more than 200 million Chinese have been lifted out of poverty in the past decade under Deng Xiaoping's economic reforms, others may suffer as a result of the transition to WTO. This is to be expected in transitional economies, but the intensity of suffering is worth examining.

China's Ministry of Labor and Social Security estimates 11.74 million people will be unemployed by the end of 2000. This figure does not include the recent government announcements of 200,000 layoffs at China Telecom, 100,000 at China Petrochemical (Sinopec), and another 50,000 at Petrochina.

There is also concern about the political stability of over 25 percent of the world's population that survives with just 9.64 percent of the world's arable land. The continued industrialization of China will mean that factory sprawl will encroach on land used for crops. Currently, many jobs are being slashed in China as inefficient state-owned enterprises are shut down. Even more will be eliminated as foreign enterprises with much-needed know-how and financial backing gradually win over the hearts of consumers in China. (For instance, Carrefour, the French supermarket in Shanghai, has perpetual lines at checkout.)

With the passage of Permanent Normal Trade Relations in the Senate on Sept. 19, the road to WTO is all but assured for China. But the next set of issues China and members of the WTO must face are the social consequences of this massive economic undertaking.

In a strange way, as China's leaders brace for WTO and hum the dirge at many state-owned enterprises (SOEs), they may be ultimately drawn to resolving these dilemmas through a Keynesian, government-oriented economic approach - using monetary and fiscal programs to increase employment.

Other than Confucian practices of family support, there is no social safety net in China. The 100 million floaters in China - the estimated number of the ragtag group of unemployed - will grow, and grow. And the skill sets used in one job are not readily transferable to other areas. Learning to predict and minimize these socio-economic quakes will provide an effective hedge to domestic upheaval in China.

A genuine social security system must be in place expeditiously. This will ease the tensions of those in the hinterland and those with dead-end factory jobs. It will show that there is a glimmer of light at the end of the global trading tunnel and that somehow all is not lost with the emergence of WTO. Rather than reinventing the wheel, adopting an American-style Social Security is a good place to start for China.

Next, a credible taxation authority is imperative - the much-loathed, but absolutely essential entity to fund this program. The State Administration of Taxation is ineffective against large SOEs, which potentially owe the most taxes. But because of powerful connections, or guanxi, these SOEs remain virtually unscathed by the tax hatchet. By all unofficial accounts, the State Administration of Taxation's revenue intake is merely 12 to 13 percent of what it ought to be. For 1999, more than $3.6 billion in taxes remain uncollected.

However, there is a dichotomy to this taxation. In the rural sectors, there is an overtaxation that has led to an inequitable burden on peasants and has led to numerous revolts. The latest one occurring late August in a southern Jiangxi province.

There, 20,000 people protested the unfair taxes imposed by the township and province. Beijing meted out several warnings to local officials against overtaxing (one of which was executing an oppressive vice governor), but to no avail. Nonsanctioned taxation continues. Only a credible central taxation agency can instill fairness in the countryside while maintaining legitimacy in the urban areas.

China's leaders are well aware of one of Mao's enduring aphorisms: "It takes a single spark to start a prairie fire," referring to a grass-roots, peasant-led revolution.

In the end, there will be shifts of tectonic proportions in China. Whether these are tremors or quakes will depend on lowering the transition misery index.

-- Mark T. Fung is assistant director and research fellow of China Studies at The Nixon Center, a Washington think tank.

(c) Copyright 2000. The Christian Science Publishing Society