Gatt Membership for China?
| Publication year | 1994 |
| Citation | Vol. 17 No. 03 |
I. Introduction
In July of 1986, after an absence of over forty years, China officially applied to rejoin the General Agreement on Tariffs and Trade (GATT).(fn1) The government's motivations in doing so were complex. One important reason was the desire of the leadership for the enhanced international stature that GATT membership would give China.(fn2) After all, the GATT was virtually the only remaining major international organization of which China was not a member following its reentry into the world community in the 1970s. Another reason was, of course, the expected boost in export earnings that would come with access to a bigger market.(fn3) Finally, in the eyes of many policy makers, GATT membership was an important element of China's domestic economic reform.(fn4)
China's application has been difficult for the GATT parties to handle for several reasons. On the one hand, China is a major trading nation, ranking just below the top ten.(fn5) Around eighty-five percent of China's foreign trade is conducted with the GATT member nations.(fn6) On the other hand, China's economic, legal, and political institutions simply do not operate the way the GATT contemplates a country's economic, legal, and political institutions will operate. Variance from GATT norms was not a problem with the occasional small nonmarket economies like Romania or Poland, which could be let into the GATT primarily for Cold War reasons without any fear of disruption of the system.(fn7) But it is ironically China's presence in international markets which, while seeming to make it a natural candidate for membership, at the same time makes the current GATT members very nervous about its potential for disruption.
This Article will explore some of the conflicts between the premises of the GATT and China's current economic, legal, and political structure, as well as the extent to which China's institutions are moving in a GATT-compatible direction. It will conclude that while GATT membership would in itself promote the reforms that would make China's institutions more compatible with the GATT, such reforms are the object of considerable domestic opposition.
II. Fundamental Premises of GATT
The rules of the GATT were formulated with a particular politico-economic structure in mind and make sense only in the context of that structure.
First, the GATT assumes the existence of a market economy with some basic features. Decisions on buying and selling are assumed to be made by decentralized profit-maximizing actors with a hard budget constraint.(fn8) The role of government is to set the rules and act as a referee to ensure fairness. Trade barriers should be in the form of tariffs, which are visible and whose costs can be calculated according to market principles.(fn9)
The GATT shies away from numerical quotas and makes tariffs the preferred form of trade barrier not just because tariffs are more visible than other barriers and hence easier for those adversely affected to identify and lobby against. Tariffs are also the form of trade barrier that minimizes government interference and maximizes the autonomy of private market actors. Each importer can make for itself the decision whether it is worth it to import even at the higher tariff. There is no room for the corruption and favoritism that invariably accompany the granting of import licenses for less than market price.
The GATT aims for the reduction of trade barriers and the promotion of trade primarily through what we might call procedural guarantees. It does not require governments to increase imports; it attempts to promote a structure that will maximize the possibility of that happening. Thus, the GATT prefers tariffs to quotas because the harm is more obvious. This preference is also premised on the assumption that the lower tariffs are, the more imports will be bought because individual profit-maximizing buyers with a hard budget constraint will have an incentive to buy more as the price goes down, all other things being equal.
Second, the GATT assumes that a country's political structure involves a government limited by law and a certain degree of separation of powers. Thus, for example, Article XIV specifically contemplates that signatory governments may not have the power to make subnational levels of government abide by GATT provisions.(fn10) Similarly, the prevailing interpretation of paragraph 1(b) of the 1947 Protocol of Provisional Application(fn11) limits the scope of "existing legislation" to requirements on the executive authority that cannot be modified by executive action,(fn12) clearly assuming that such requirements might actually exist.
Third, the GATT presumes that member states are more or less open societies. It assumes a certain degree of, and strives to increase, transparency in law making and law enforcement. States could hardly object to trade barriers and seek their removal if the barriers were secret-for example, if the government sent secret directives to the managers of state-owned firms telling them to reduce imports of steel by fifty percent.
III. Problem Areas for China and the GATT
What are the problems of trying to fit China into this system? As a threshold question, one must ask whether conformity to GATT norms matters. Clearly, the domestic systems of Poland and Romania did not square with many of the assumptions of the GATT when they were admitted, and yet that was not considered an insuperable obstacle.
Even so, the admission of certain nonmarket economies is explainable by considerations that do not apply to China. First, their admission cannot be viewed apart from a Cold War strategy of trying to detach them from Soviet influence. Second, their small size meant that even though they did not operate according to GATT principles, they posed no threat of disruption to the global trading order. Moreover, GATT signatories did extract a numerical promise from Poland, for example, regarding import quantities.
China presents a much bigger problem than Poland or Romania because any unwanted effects of its GATT-incompati-ble polity will be magnified through its prominence in international trade.
China's political and economic structure confounds the GATT ideal in many ways. It is not just a question of the existence of economic planning; indeed, the value of production under the state mandatory plan dropped from 12% of total production in 1992 to 6.5% in 1993,(fn13) and approximately 90% of annual retail sales are made on the free market.(fn14) The problem is rooted in the fact that enterprises often serve a number of purposes, only one of which is the accumulation of profits. Consequently, enterprises do not necessarily act the way profit-maximizing actors do in economic models.
1. Soft Budget Constraint
First, many (although progressively fewer) of China's enterprises are relatively insensitive to the market signals that the GATT assumes will affect business behavior because they lack a hard budget constraint.(fn15) Enterprises lack a hard budget constraint when the decisive factor in their existence is not the difference between proceeds of production and costs of production, but whether they can get more infusions of money from the government. Costs are not as important as they would be to purely market-driven firms because these enterprises-like publicly regulated utilities in this country-can use...
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