Director, National Economic Council
Remarks to the Institute for International Economics
May 19, 2000
Remarks as Delivered
Thank you. And thanks Fred for inviting me here today to address this distinguished gathering.
I'm very happy to be here today. As Fred mentioned, there has been a lot of activity in the White House today, most of it concerning PNTR. But before I get to my speech, I have some announcements of late breaking news on the trade front.
First, China and the EU have concluded their WTO bilateral negotiations. We have not surveyed all the details yet. It is heartening that there has been progress in mobile telephony and perhaps also in fuels. While there is nothing major in this agreement, every little bit helps. And we welcome the progress of China's accession into the WTO.
We were also pleased today that Vice President Gore announced that the U.S. and China have signed a joint statement pledging stronger efforts to protect the environment, particularly to combat global climate change. This agreement affirms that growth and environmental protection can be harmonized. And probably most significantly, it shows a willingness to enter into creative and cooperative partnerships between LDCs and developed countries on climate change and related issues. We feel this is an encouraging sign of how engagement with China can produce positive results.
Third, today we are making public that on April 28 we reached an agreement with China that will effectively provide our fertilizer firms access to the Chinese market. This had been an open issue when Charlene Barshefsky and I left Beijing back in November. Subsequently, we held negotiations at the USTR and at the Department of Agriculture. We were able to work this out on April 28, but by agreement with the Chinese we agreed not to announce it until they had completed their negotiations with the EU. I'm sure that USTR and the Agriculture Department can provide more details for those interested.
Finally, the President of the United States will make a nationally televised speech on China on Sunday evening. We feel that PNTR is important enough to merit his making our case directly to the American people.
We in the Administration have long admired the outstanding work of the Institute for International Economics and we in the National Economic Council rely heavily on your publications. In fact, I liked one of your recent reports on PNTR so much that I hired its co-author, Dan Rosen, who is here with me today.
For us in the Administration, this PNTR vote is as much of an all-out, all-hands-on-deck effort as I can recall since the 1993 budget. Virtually every White House principal and Cabinet-level person on the economic and security teams are working very hard on this; this is their number one issue and has been for several months. The President strongly believes that PNTR is not only the most important economic issue of the year, and perhaps the most important legislative issue of the year, it is probably the most important development in our relationship with China since President Nixon's efforts in the early 1970's.
Economic Benefits of the Agreement
I'm sure that everyone in this room knows the basics when it comes to the economic benefits of the deal. The Chinese agree to lower their tariffs dramatically. In return, we don't lower our tariffs one bit. Instead, we agree merely to support China's accession to the WTO and to make permanent the normal trade relations we have granted to China every year for the past 20 years.
It is bit dismaying how even at this late stage in the debate, some people still believe that the agreement we negotiated in November is a NAFTA-type free trade deal. We in the Administration believe that such agreements when they incorporate sound labor and environmental standards can be beneficial. But whatever their merits, these considerations have no relevance in the debate about China-PNTR. It is not a free-trade agreement. This is a one-way deal. China lowers its tariffs. We do not. And our farmers, workers and businesses are the big winners.
The economic benefits of the deal become more clear if we consider what would happen if Congress rejects PNTR for China. Under that scenario, our firms might 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, such as telecom and internet. 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 to gain full access to all of these benefits.
Rejection of PNTR would not lock in the status quo in our trade relationship with China. That's not the way this WTO process works. No matter which way Congress votes, China will end up joining the WTO and our competitors will get the full benefits of the agreement we negotiated in November. I repeat: rejection of PNTR does not preserve the status quo; instead, it would undermine our ability to compete in the most important emerging market of the 21st century.
Why would 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 is exactly what a vote against PNTR does.
I'm sure a number of you are familiar with the 1979 bilateral agreement between China and the United States. One could argue that under the 1979 agreement we might get some of the tariff reductions in some sectors that China grants as part of its WTO accession package even if we were to reject PNTR. However, in the most cutting edge areas of our economy-- in services, in telecom, in the internet-- we would lose all of China's WTO concessions while allowing our competitors to have them. The distribution rights, the trading rights, the enforcement rights under WTO we would lose all these benefits. In any event, even if one does get a tariff reduction in a particular industry, what good is it without distribution rights on Chinese soil? If a competitor has that privilege and you don't, you are at such a significant disadvantage that even tariff reductions are virtually meaningless. Rejecting PNTR is the closest thing to unilateral economic disarmament that I have ever heard of.
The Agreement Will Bolster Reform in China
But however obvious the economic benefits of this agreement, I would feel very differently about it if I believed we would get those benefits at the expense of human rights in China.
Those opposed to passing PNTR 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. Martin Lee spoke to us here in Washington earlier. He started his presentation with an impassioned description of the lack of rule of law in China, even in Hong Kong, and all the human rights abuses he has seen. Then he pointed out that he himself may not set foot in China and that he had never even met Premier Zhu Rongji. Then he asked his audience: "why would someone so mistreated by the Chinese authorities support PNTR?" And he answered: "It's simple, what's the alternative?"
This is also the case we have tried to make. Because in any policy decision, you need to ask yourself a crucial question: which policy alternative is more likely to move the ball in the right direction? What is more likely to improve the situation in China?
We believe PNTR will make positive change more likely in China; by opening China's markets, by engaging China more with the United States, by forcing the Chinese to abide by the rule of law in the WTO, by encouraging their economy to be more open to emerging technologies -- all of these things are more likely than not to move China towards positive reform.
Let us start by looking at the various groupings within China and how they line up on this issue. 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.
I believe that making this rather daring transition clearly lies in China's long-term interest, because it offers the only way of modernizing their economy and raising the Chinese standard of living. But there is no question that it will lead to significant dislocation. The leadership there has made the decision to join the WTO because they believe that bringing in foreign competition and opening markets will help lock in and advance the reform process already underway. My question is simple: why would we choose not to support those wishing to move in that direction?
Who in China opposes PNTR and WTO accession? Let me read from a March 13th article by the Washington Post's Beijing correspondent, John Pomfret, who describes these opposition groups in detail:
"China's security services, its military and certain ministries and economic interests, such as the Information Industries Ministry, China Telecom, steel conglomerates, and some agricultural firms oppose the agreement. China's security agencies, including the People's Liberation Army, are concerned, analysts say, that joining the WTO will mark another step toward privatizing China's economy and importing even more Western ideas about management and civil society a headache for those whose job is to ensure the longevity of the one-party Communist state."
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.
Nobody can predict exactly what will move China in the right direction, but certainly passing the PNTR will, in my opinion, strengthen the hand of the reformers who are trying to do just that.
It will also help by creating a number of social and economic conditions that favor reform.
First, one needs to consider the power of ideas and free flow of information in undermining authoritarian regimes. Less than 12% of Chinese people have phones, less than 1% of people are on the internet. This WTO agreement will help create an explosion of foreign competition in China's telecom and internet sectors. The United States should allow its cutting edge companies to take part in this competition. Not just because China offers a huge market and because it will help create jobs in the USA. But also because all of our telecom imports into China will serve as tools of communication for millions of ordinary people in China
China's leadership is already nervous about this. But it will ultimately prove impossible for them to stuff the information genie back in the bottle. As Chief Justice Earl Warren once said, "Liberty is the most contagious force in the world." Free expression is also contagious and when people taste it, they will not give it up.
Second, in that it will break monopoly privileges to import and export, PNTR will promote reform by freeing up the movement of goods and delivery of services. China's WTO commitments turn these scarcely allotted privileges into rights that will be widely available to both Chinese and foreign businesses. 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, learning new skills and developing broader horizons. More transactions will take place freely among Chinese and between Chinese and foreign businesspeople. All this will undercut the power of the one-party state.
Third, it will inject new competition into China's capital markets. A look at these capital markets demonstrates that 80% of lending goes to state-owned enterprises that generate only one-third of GDP. Bad debts comprise fully 25-40% of China's GDP. This is clearly a dysfunctional capital allocation structure. Competition will not only be a boon to American financial institutions, it will also empower more Chinese entrepreneurs to have access to capital. The result will make private citizens less dependent on the power of the bureaucracy when they wish to turn their entrepreneurial ideas into economic reality.
Finally, it will strengthen the rule of law in China. The President and I had the opportunity to talk with Chairman Greenspan when he was at the White yesterday. He described the situation in China and in other countries like it, and how often the individuals at high levels make decisions based not on price competition but on arbitrary discretion which they get by granting their loyalty to somebody above them who also exercises arbitrary discretion. What does this do to the average person? It makes him or her completely dependent on bureaucratic caprice for the allocation of all sorts of daily things in life. In that the WTO requires transparency, the publication of rules, and the publication of tariffs, it will help reduce official meddling in daily transactions and increase the economic freedom of people to interact.
So I say this just to stress that these seemingly arcane requirements of WTO membership will unleash powerful, pervasive social forces that should help promote economic freedom within China.
Towards a New Consensus on Trade and Globalization
Those of us who believe in the power of markets to strengthen economies and spur reform and openness need to make sure that our belief in open markets and free trade is not confused with a callousness to the concerns of human rights or core labor standards or the environment. We must not allow our belief in the power of trade to raise living standards and to promote a more open society to become confused with the notion that we consider trade the sole answer to these issues, or that if we open markets, we can take a laissez-faire approach to human rights and simply go home.
As part of President Clinton's vision, we aspire to find the vehicles that both promote open markets and put a more human face on the global economy. That's why we disagree with many of our critics when they claim that the remedy for social and economic ills is to slow down and even halt free trade and increase isolationism. Most of us here today disagree with that vision. We believe that trade generally raises living standards and indeed can be critical for poverty reduction in developing countries. But our answer can't be simply that -- we can't simply work for more trade. If we present trade as the only solution, we miss the opportunity to create a new consensus for open markets in our country and in the world. Our goal therefore must be to find those avenues where we can project those conditionalities, linkages, and blockages that prevent the minimization of the benefits from open markets while finding the ways to still maximize our ability to ensure that globalization raises living standards for all.
That's why I am proud that we at the NEC don't just develop trade initiatives such as the Africa Growth & Opportunities bill, or the Caribbean Basin Initiative, or China-PNTR. We also devise ways to secure debt relief for developing countries, we develop strategies to combat infectious diseases in developing countries, we conceive policies that get us closer to universal education in developing countries, and to stop the most abusive forms of child labor.
None of these initiatives stands in the way of progress towards open markets. I believe we must search for ways to promote free trade and WTO expansion, while incorporating discussions of core labor standards and the environment in a way that does still facilitate the benefits of open markets.
The Levin-Bereuter Proposal
It is with that in mind that I congratulate Congressman Sandy Levin and Congressman Doug Bereuter and others who have worked so hard on their proposal announced today. As one who was very involved in these discussions over the past couple of months, I can attest that it was an effort to find exactly how to strike that balance between the concerns on human rights, on prison labor and other issues, without putting forth the conditionality, the linkage, the WTO-inconsistent provisions that would have undermined clean passage of this WTO agreement.
Through these discussions there has been a fairly remarkable outcome -- a bipartisan agreement to support clean passage of the WTO-PNTR Agreement. At the same time, included within it are several provisions that do not in any way impede the non-discrimination principle or open trade that is inherent in the WTO. Instead, they promote progress in various efforts to address the legitimate concerns that people have about human and labor and religious rights.
For example, Levin-Bereuter features a commission that will deal not only with human rights, but also with labor rights issues, religious rights issues, and that will have both congressional and executive representation. Unlike the past annual NTR votes, which had become virtually nothing more than an empty ritual, this commission will have the capacity to meet whenever it is appropriate to address whatever issues are appropriate. And in this way, it will have the capacity to shine a spotlight and to continue to apply pressure on China when it is appropriatewhen human, religious, or labor rights problems arise that we seek to address.
None of this conflicts with or contradicts the basic market opening and non-discrimination rules inherent in our WTO agreement. But there is an understanding that these things must be looked at in a larger perspective. In the agreement there is a task force designed to look into prison labor, which was agreed to in a bipartisan way. There is also an understanding that even though we are opening markets and there will be a general raising of living standards and improvements in the economy, there still can be instances when import surges could negatively impact certain portions of our economy. In this agreement, there exists a legislative application of the 12-year anti-surge provision that Ambassador Barshefsky and I negotiated in China that will give special bilateral protection beyond the conventional 201 protection for surges. These provisions are part of a very serious and thoughtful effort by lawmakers who believe in open markets, who believe in the power of engagement, but who also wish to make clear that open markets and freer trade alone cannot be the answer when we are dealing with a country that continues to abuse labor, human and religious rights.
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 far more likely, 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. I would be happy to take questions.
PNTR and the Levin-Bereuter Proposal: The Prospects for a More Open China
PNTR and the Prospects for a More Open China
Permanent Normal Trade Relations
Remarks of the Honorable Gene B. Sperling
Consumer Interests in the Global Trading System
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