TCS Daily

Glassman interviews Charlene Barshefsky, United States Trade Representative

By James K. Glassman - May 1, 2000 12:00 AM

Jim's guest for this week's Big Shot Interview is Charlene Barshefsky, United States Trade Representative and the author of the new trade deal with China. Ambassador Barshefsky tells us why free trade with China is a win-win for US companies and consumers - and for Chinese dissidents.

Jim Glassman: Ambassador Barshefsky, a lot of the press coverage lately has been about people demonstrating against your China trade deal. But let's talk about the benefits. Why is this a good deal for Americans in general, specifically for tech workers and technology?

Ambassador Charlene Barshefsky: Well, it's a good deal for American exporters across the board. This agreement will open up China's market across the full range of goods and services and agriculture. Virtually every area of China's trading economy is covered by this agreement. It is a series of one-way concessions, that is, we do not change a tariff in this country, we don't change the trade law, we don't change our laws governing controls on the export of sensitive technology. We do not change our market access regime one iota. Nada. Nothing. Zip.

All of the concessions, all are made on the Chinese side with respect to market access. This will help level the playing field in what has been a deeply unbalanced trade relationship. On the high-tech side, the agreement has a number of very important advantages. First off, under it, China will eliminate all tariffs on high-tech products by 2003. China will guarantee full trading rights, that is, the right to import and export directly, which does not exist now, and distribution rights within China over a similar time frame.

The telecom market for the first time since the 1940s will be open to direct foreign investment, and that includes direct foreign investment in the Internet. State-owned and state- invested enterprises will have to make their purchases on a commercial basis, and this is very, very important since it is state enterprises or state-invested enterprises that purchase substantial amounts of higher tech equipment. In addition, while we did not negotiate a relaxation of investment rules in China, because this agreement is intended to boost exports from the United States, to the extent an American company locates in China including a higher tech company, China will eliminate all local content, technology transfer requirements, and export performance requirements. These have been requirements imposed by China to draw jobs in technology from the US. Now, they will be prohibited as a condition of investment. And, last of course China will provide stronger protection for intellectual property rights with respect to joint venture partners. So on the high-tech side, as in virtually every area, this is an absolute win for American producers and American exporters.

Glassman: So why do the Chinese want to do this? It sounds like it's completely one way.

Barshefsky: Well, I think that there are several reasons, but the principal one is this. Economic reformers in China have embarked on a very ambitious program to modernize the Chinese economy and they recognize that the economy will not modernize, and China will not develop on a more rapid basis without market opening, that is, without engendering competition within their own market, without brining in foreign goods, particularly in infrastructure areas, and without providing the needed expertise and know-how, that for example, our services providers often bring into another country.

The WTO commitments that China has made, dovetail very, very well with the economic reform program they have been contemplating. And the Chinese leadership, as leaders in the former Soviet countries have recognized, understands that because domestic economic reform is hard to do, because you have so many vested interests against it, having external pressure to force reform is often needed. This is why the former Soviet Republics have lined up to join WTO, and it is why China does as well, that is, to create external pressure to help force through an ambitious program of internal economic reform.

Glassman: So, is that really part of your answer to the question about human rights and protecting labor rights: that essentially by having freer trade, the general level of income and wealth will rise and conditions will improve for the average Chinese? Is that the way it works?

Barshefsky: Certainly that is the way it works. But let me just answer you this way. Trade agreements are not an aggressive substitute for human rights policy. But we know, we know, that increased trade raises living standards. We know that as a country has become wealthier, people demand more of their governments. This has been the pattern most profoundly felt in Asia.

If you look at Thailand, at the Philippines, at South Korea perhaps the most pointed example. As incomes rose, as the economy opened more, as information flowed between that economy and the outside world over time, people demanded more. And in the case of the Philippines, and in the case of South Korea, they demanded democracy.

We may not see democracy in China as we know it, but if we see a more pluralistic political system that arises from an increased standard of living and more demanding discerning public, that will be an extraordinary accomplishment. As Ben Franklin said, "We know of no nation ever ruined by trade."

That is certainly going to be the case with China, and we believe that this agreement will help set the stage for greater openness of the Chinese economy, greater receptivity of foreign ideas and over time greater political pluralism.

I think it is noteworthy that the entity most opposed to China's WTO inclusion is the PLA, the Chinese army. Specifically, because the army heads believe that WTO inclusion will introduce further into China western values. And the army finds it a threat. I would say that is a pretty good endorsement of what this agreement could accomplish.

And last, let me say, if you look at some of China's leading human rights figures, Bao Tung, Rim Wang Ding, if you look at Martin Lee, the leader of Hong Kong's Democratic Party -- all support Chinese succession and the permanent normalization of our trade relations with China as the single most important step in reform in China in 20 years.

Glassman: Let me move to something more specific. For telecommunications companies and ISP companies, under this agreement, they will be able to own 49% of Chinese telecom companies. Is that right?

Barshefsky: Yeah. They will be able to be equity investors, in the case of basic service up to 49% and that percent equity will be reached within 2 years. In case of value added services including the Net, ownership can be 50/50. And in that context, one can negotiate for management control, even if only a 50/50 owner. Management control in that sense would be contractual, much the same way that it can be done now. But this will be direct equity investment, no need to go through the labyrinth of regulations and fictional companies that China now requires. That is a very important step.

Glassman: So China would be forbidden from using that kind of subterfuge from keeping --

Barshefsky: Yes. This is direct investment. It is not indirect investment in any sense.

Glassman: Right. But what happens if a US company owns 50% of the Chinese company? Where would they settle? I know if you had some kind of contractual agreement maybe you can make the management lines clear, but if you did not have that, would you go to a Chinese court to settle disagreements, or what?

Barshefsky: Well, in the case of strictly commercial matters, outside the range of the WTO, for example in the case of a classic contract dispute, one would go presumably to whatever choice of forum is specified in the joint venture package. Often you can specify a different choice of forum than in the country where the joint venture is located. Sometimes you don't. In the case though of any violation of the WTO obligation, that can go directly to dispute settlement in the WTO, that is impartial and would not involve in any respect Chinese courts.

Glassman: Now that brings up another issue. Some people are skeptical about the Chinese living up to this agreement. How does the enforcement mechanism work in the WTO, and does it put us on a better footing than we are with the Chinese not in the WTO?

Barshefsky: Much better footing...

Glassman: That was a softball question, by the way.

Barshefsky: Much better footing. Of course, there is not one enforcement mechanism, there are many, and we have more in this agreement than in any accession we have ever done. We have, of course, first off our own trade laws. You have multi-lateral pressure from 134 other countries in WTO with the same interests in market access in China as we. We have our own trade laws. We have the new anti-import surge mechanism, the new anti-dumping mechanism. The President has requested $21 million in his FY 2001 budget for substantially increased monitoring and enforcement capabilities by the US government.

And with respect to dispute settlement, China will have for the first time agreed to binding impartial dispute settlement, including the right of the winning party to retaliate in economic terms, retaliate against China for the infraction in the amount of damage caused. So this is really very, very significant. It buttresses substantially our own trade laws. It means we are not a country standing alone harping at China, but instead have the imprimatur of all 135 nations. This is a terribly, terribly important change and one that is absolutely to our advantage and benefit.

Glassman: You know, you talked about global access to the Internet for people around the world. One thing that this agreement doesn't cover is the ability of the Chinese to access whatever websites they want to visit. Is that going to be an issue in the future round of talks?

Barshefsky: Well, I think first off, it is going to be very, very hard for the Chinese government to control access. Certainly, as you know from various press reports, the Chinese leadership has tried to control content and has tried to control access to sites. But last year there were one million Net users in China. This year, the estimate is between 9 and 12. Next year the estimate is 30, and it is predicted at about 120 million three years after that. The government is not going to be able to control content. It is not going to be able to control access, keeping in mind as well, access can be provided cross-border. One does not have to locate in China to provide access. And I think that the net and the availability of information flow on the Net is going to have perhaps the single most profound change on China, engendering tremendous pressure on the Chinese leadership, on general restrictions to access the information that we have ever seen.

Glassman: You know, as you present it and as it seems to me the facts warrant, this is --

Barshefsky: It's a no-brainer.

Glassman: Right. That's a good way to put it. So why is it that we see the kind of opposition that we saw here in Washington, and that we are seeing in the US Congress?

Barshefsky: Well, I think with respect to China of course, the reactions are many and varied. Economically, this is a no-brainer; even those who oppose permanent NTR by and large recognize that. The general concern is two-fold. One of course concerns the human rights situation in China, issues pertaining to religious freedom and so on. These are serious concerns, but it is clear that linking these concerns to annual NTR has effected no particular positive change in China. All that this has done is to grant China NTR annually at the price of China doing nothing. So that is a net loss for the United States as far as I can tell.

But there are people very concerned about the situation as they should be. And our response to that is, as I said no trade agreement is a substitute for a human rights policy. We raised the issues in the UN, we raised them with China bilaterally, and as you know Congressman Levin has been out looking at a variety of proposals and ideas concerning a Helsinki-type commission, which is the human rights-related commission established to monitor the situation in central and eastern Europe. A Helsinki-type commission for China and I think that is a very excellent and productive idea. I think second, you have people reluctant to give up the so- called leverage on China of the annual NTR vote. And so while economically they view the agreement as a no-brainer, they do not want to give up leverage of the annual vote.

But as I was intimating, in response to the first question, those who argue that annual NTR is leverage are the same people who argue the human rights situation in China has deteriorated. Now it is either leverage or it is not. It is not. Why? Because it is in our national interest that China receive normal trade relations status. It is in our national interest not to have China as an enemy, not to sever the economical relationship with China, not to destroy Hong Kong's economy in the process, not to destabilize Asia, not to make an enemy of China.

So, annual NTR has been granted year in, year out by every President and every Congress since we normalized diplomatic relations in 1979. And since it is a matter of our own self-interest that we do this, it is of course not leverage designed to alter or capable of altering Chinese behavior. So the leverage argument is I think fatuous at best.

Glassman: But is there an argument made from the point of view of, say David Bonior or Richard Gephardt -- is there an anti-liberalization of trade argument that is raised?

Barshefsky: Well, there is and it is a curious argument coming from Americans. The argument would have to go something like this: As China opens and liberalizes, as new rules are introduced, as new enforcement mechanisms are introduced, as China becomes a more reliable partner, as rule of law is more firmly rooted in China, it will become an ever-more attractive place in which to invest. And our companies may therefore invest in China at a more rapid rate than currently, and export products back to the US.

Now the logical extension of the argument would be to say, we should insure that all countries with which we trade should remain lawless, so that investors won't locate there. That is to say I can't attribute any legitimacy to arguments that suggest it is not in our interest to promote the rule of law worldwide, or that it is not in our interest to promote notions of contract and enforceability worldwide. If our companies wish to invest abroad, there is very little we can do about that, and we are quite fortunate other governments do not restrict their companies from investing here, or we would be in quite a pickle as is obvious from the trade deficit figures.

We view this agreement as a means to promote US exports, exports from this country to China. To the extent companies wish to locate in China, they will make that business decision on whatever basis such decisions are made. But to argue that a more reliable China is a more dangerous China, I think is an argument that simply has no legitimacy whatever.

Glassman: One last question. Do you have the votes in the House?

Barshefsky: We don't have the votes as of today. We believe that we will have the votes and that we will prevail.

Glassman: Good. On that optimistic note and realistic note, thank you.

Barshefsky: My great pleasure.

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