China is one of Louisiana’s most important export markets, as well as a primary destination of shipments moving through its deepwater ports. The potential for future business is enormous in many areas as China reduces its tariff and non-tariff barriers as it prepares to join the World Trade Organization (WTO). The upcoming vote in Congress on the United States granting China Permanent Normal Trade Relations (PNTR) status directly affects Louisiana’s economy and port activity. Exports of Louisiana products and those from other states which were shipped to China from Louisiana ports totaled $704 million in 1999, consisting mainly of agricultural products ($348 million), chemicals and petrochemicals, processed foods, paper products, and industrial machinery. China’s trade concessions on U.S. agricultural exports are of special significance for Louisiana farmers and the maritime industry.

On November 15, 1999, the United States completed bilateral negotiations with the People’s Republic of China on its accession to the World Trade Organization (WTO). After a long series of discussions, China finally appears ready to join the organization, although it still must complete bilateral agreements with its other key trading partners, including the European Union. The agreement negotiated by the U.S. executive branch and announced last November still must be ratified by the House of Representatives and the Senate. In addition, China has to finish negotiating a protocol governing the terms of its accession to the WTO, which will face multilateral approval within the organization.

In accordance with the rules of the World Trade Organization, the United States must extend Permanent Normal Trade Relations (PNTR) to China if China becomes a member of the WTO. Article I of the General Agreement on Trade and Tariffs (GATT – the WTO’s predecessor organization) requires all WTO members to grant each other "any advantage, favor, privilege, or immunity" provided to other countries "immediately and unconditionally."

Congress, therefore, will soon debate amending the 1974 Trade Act (PL93-618) to end the annual review of China’s trade status with the U.S. If passed, this amendment will grant PNTR to China and end the yearly debate over the renewal of its trading privileges with the United States. For many years, the annual debate over this issue, now known as Normal Trade Relations (NTR) status and formerly known as Most-Favored-Nation (MFN) status, has been a political football, offering opponents from both sides of the political spectrum the opportunity to criticize China on a broad variety of issues. Despite these heated debates, Normal Trade Relations status has been granted every year since 1980 regardless of which party has been in control.

It is also necessary for the United States to grant PNTR to China in order for the U.S to enjoy the many benefits of China’s WTO membership. The U.S. has a rare opportunity to take advantage of the new relationship China is developing with its trading partners in anticipation of its accession. WTO rules state that an entrant must negotiate separate accords with each of its primary trading partners and offer the best terms pledged in any of these talks to all of the organization’s members.

The United States thus far has extracted more significant trade liberalization from China than any other WTO member has in bilateral negotiations and stands to benefit greatly from the concessions China has made on a variety of trade issues. But ironically, every country in the WTO except the U.S. would have the chance to benefit from these concessions if Congress votes against granting PNTR status to China. In addition, the current system of mandatory annual reviews injects uncertainty into any company’s decisions affecting imported merchandise from China.

Historical Background

Title IV (Jackson-Vanik Amendment related to emigration) of the 1974 Trade Act requires that certain economic benefits be denied to countries with non-market economies that:

1. Deny their citizens the right or opportunity to emigrate,
2. Impose more than a nominal tax on emigration, visas, or other documents required for emigration, or impose more than a nominal tax or other charge on any citizen as a consequence of the desire to emigrate, or
3. Impose more than a nominal tax or other charge on any citizen as a consequence of the desire to emigrate.

The amendment does, however, allow the President to waive the above requirement if it would serve to substantially promote the freedom of emigration in a given country.¹

The opponents of Normal Trade Relations with China each year have expanded the debate on this waiver beyond the narrow scope of emigration rights to include a variety of other issues, including China’s violations of human rights, unfair trade practices, and an uncooperative attitude in weapons and nuclear nonproliferation. Supporters of NTR, however, have maintained that these issues are best pursued through negotiations, and that withdrawal of NTR would prove counterproductive by increasing tension between the two countries and actually harming chances for serious reform by increasing Chinese intransigence.²

Revelations regarding Chinese interference in the U.S. Presidential election of 1996 and the theft of sensitive technology secrets have fanned the flames of protest in recent years among those opposed to yearly Normal Trade Relations (NTR) status for China, and these issues have entered into the current debate as well. Furthermore, Chinese belligerence towards Taiwan, especially with last month’s defeat of the Nationalist Party in Taiwan by Chen Shui-bian of the Democratic Progressive Party, which has until recently supported independence from mainland China, is also causing problems for supporters of PNTR. The debate in Congress over the Taiwan Security Enhancement Act also threatens to increase friction between the two countries over the course of the next year. China has, in fact, moderated its behavior since the Taiwanese election and appears to have assumed a "wait and see" posture regarding the situation in Taipei.

Meanwhile, for the past 13 years China has been negotiating its entry into the WTO and its predecessor organization, the General Agreement on Trade and Tariffs (GATT). A bilateral agreement was almost reached between the U.S. and China in April of 1999, but the negotiations were scuttled by divisions within the Clinton administration and the accidental bombing of the Chinese Embassy in Belgrade.³ A final series of discussions, however, allowed the two nations to finally come to an agreement last November and, as a result, President Clinton on March 8, 2000 submitted legislation to Congress that would establish PNTR with China.

Granting China PNTR status would be in line with the U.S.’s international trade policies since the end of World War II. Throughout the second half of the twentieth century, the United States promoted (and continues to promote) the expansion of free trade among its trading partners in order to foster stable relationships among nations and stimulate democratic reforms, along with generating the economic benefits which accrue to nations which trade freely with one another. For example, since 1994, approximately one-fifth of U.S. economic growth has been linked to the expanding export sector. In addition, export-related jobs are estimated to pay 13-16% higher than the national average.⁴

America’s current booming economy is in no small part due to the free trade policies that the United States has pursued during the 1990’s following the collapse of Communism in the Soviet Union and Eastern Europe and the resulting end of the Cold War. Additional markets for American goods and services have opened up around the world for many U.S. exporters and overseas investors.

Similarly, over the course of the last 20 years, the Chinese economy has expanded considerably in the wake of market reforms first undertaken by Deng Xiaoping. During this period, U.S. merchandise exports to China have grown from negligible levels to more than $14 billion annually.⁵ China has nearly a quarter of the world’s population, and in the words of Commerce Secretary William Daley, "after many years of slumber, China is opening up to the outside world . . . it is not to be ignored."⁶

The granting of PNTR status to China has attracted bipartisan support from a plethora of current and former leaders at the national and state levels. In addition to U.S. Secretary of Commerce William Daley’s efforts on this bill, eight former U.S. Commerce Secretaries have issued a letter to Congress urging support for PNTR as well.⁷ In addition, six former Secretaries of State have signed a joint letter to President Clinton asserting that "implementing the WTO agreement and extending Permanent Normal Trade Relations will promote transparency and the rule of law, thereby strengthening the underpinnings for a constructive relationship with China."⁸ Nine former Secretaries of the Treasury have also communicated their support in a letter in which they maintain that "As China opens its doors to American exports, American workers and the U.S. economy will benefit substantially."⁹ Other supporters include eight former Secretaries of Agriculture¹⁰, 47 State Governors¹¹, 200 corporate chief executives¹², and Federal Reserve Chairman Alan Greenspan¹³.

It is important to note that China has made unilateral concessions in its WTO accession agreement with the United States. The U.S., under this agreement, simply maintains its existing market access for Chinese goods imported into the U.S. while China has agreed to significant market opening concessions in almost every sector of its economy for U.S. products and services.¹⁴ Simply put, all America has to do is make permanent the same privileges it has already extended to China every year since 1980. In all likelihood, China will eventually join the WTO with or without the United States granting it PNTR status. However, without granting PNTR status, the U.S. could lose out on many of the advantages that will be included in China’s accession to the WTO. For example, the U.S. would not be able to guarantee many of the benefits negotiated with China last November, including provisions against import surges and the right to enforce China’s commitments through WTO dispute settlement. Failure to pass PNTR would allow the U.S.’s global trading competitors to reap these benefits while American exporters are left behind. China has stated clearly that it will not reduce its barriers to U.S. imports unless America follows through on the establishment of Permanent Normal Trade Relations. If America does not approve PNTR, China will be allowed to opt out of its reciprocal obligation to extend its liberalized trade regime to the United States. This would enable the U.S.’s trade competitors to take Chinese market share from the United States, resulting in a loss of opportunities and jobs in this country.

Assuming it does follow through and approve PNTR, the U.S. will benefit in many ways from China’s entry into the WTO. The U.S.-China Accession Agreement promises to expand the access of thousands of U.S, companies to the world’s most populous market through the following trade concessions:¹⁵

Agriculture – China’s tariffs will be lowered by more than one-half on U.S. priority agricultural products. The tariffs on those priority products will drop from an average of 31% to 14% by January, 2004, with even sharper reductions for various other commodities. Overall average duties on agricultural shipments will fall from 22% to 17.5%. China also will eliminate its trade-distorting export subsidies and allow U.S. companies to distribute directly inside of China nearly every type of U.S.-produced agricultural commodity, rather than having to go through various Chinese middlemen. Tariffs on U.S. industrial products imported into China will be cut from an average of 25% in 1997 to an average of 9.4% by 2005.

Distribution Networks - China currently restricts trading rights and the ability to own and operate distribution networks, which are essential to move goods and compete effectively in any market. China will phase in liberalized trading rights and distribution services over three years while also opening sectors related to distribution services, such as repair and maintenance, warehousing, trucking, and air courier services. This action will allow U.S. businesses to export products to China from home and to establish their own distribution networks in China, rather than being forced to set up factories there to sell products through Chinese partners and intermediaries.

Information Technology – Upon its accession, China will participate in the WTO Information Technology Agreement (ITA) concluded at the WTO’s Singapore Ministerial Conference in December 1996. The ITA requires the elimination of tariffs on products such as computers, semiconductors, and related products by 2005. U.S. information technology firms stand to profit greatly from this concession.

Services - This agreement also opens China’s market for services. It will greatly increase the opportunities open to U.S. professional services firms such as law firms, accountants, consultants, urban planners, medical firms, and providers of environmental services. China also agrees to lock in the level of market access already granted to U.S. services companies now operating in China, thereby protecting them against new restrictions.

Import Surges – The U.S.’s ability to ensure fair trade and protect against import surges, unfair pricing, and other practices that distort trade and investment will also be strengthened under the agreement. The Chinese have agreed to a country-specific safeguard that ensures that the U.S. can take action in case of increased imports of a particular product from China that threatens to cause market disruptions in this country. This safeguard applies to all industries and permits action specifically against imports into the U.S. from China with a lower showing of injury. Strong anti-dumping provisions allow the U.S. to employ special methods, designed for non-market economies, to counteract dumping in the U.S. for 15 years after China joins the WTO. Finally, the WTO already has rules that would allow the U.S. to block imports of goods from China made with prison labor regardless of NTR status.

Earlier this month, the U.S. International Trade Commission (ITC) prepared a report assessing the probable economic benefits for the United States of China’s accession to the WTO. And although the ITC’s report underestimates the benefits by restricting its analysis only to China’s tariff reductions (and includes none of the reductions in many non-tariff barriers), it projects an increase in U.S. exports to China of 10%, while U.S. imports from China would increase by 7%.¹⁶ The U.S Department of Agriculture estimates that China’s WTO accession would result in a $2 billion increase annually in U.S. agriculture exports to China.¹⁷

Unless the United States grants PNTR status to China, however, America will be unable to guarantee such benefits as WTO dispute settlement procedures and the strong provisions against import surges. The U.S. also will be unable to secure critical benefits such as the right to provide key services, including distribution and telecommunications services.

Louisiana, as with the U.S. on the whole, is well-positioned to gain from China’s WTO membership, as can be seen in the specifics of the U.S.-China Accession Agreement and how the concessions agreed to by China would impact Louisiana businesses. China already is one of Louisiana’s most important export markets, ranking fifth in 1997, third in 1998, and seventh in 1999 (see attachment I).¹⁸

Exports of Louisiana products and those from other states which were shipped to China from Louisiana ports in 1999 totaled $704 million, almost half of which ($348 million) were agricultural exports. (see attachment II).¹⁹ Other major items exported to China from Louisiana in 1999 were chemicals and petrochemicals ($255 million) and processed foods ($70 million in 1999, but in most previous years these were on the order of $250-$350 million).

As for cargo movements through Louisiana’s deepwater ports, China was the Port of New Orleans’ fourth most important trading partner in total volume in 1998 (the most recent year of available data) with 4 million short tons (7.7% of the port’s total) and tenth largest in cargo value at $608 million (3.1% of the total). (See attachment III.) In 1998, $352 million of U.S. exports were shipped through the Port of New Orleans to China, 40% of which consisted of soybean exports (see attachment IV).²⁰ China will further open its markets for these agricultural commodities as part of its agreement with the U.S. to join the WTO. Also in 1998, $256 million of U.S. imports from China (mainly minerals, coal, and petroleum products) transited the Port of New Orleans.²¹ (These Port of New Orleans export-import figures do not include shipments through Louisiana’s five other deepwater ports: Baton Rouge, Lake Charles, Plaquemines, South Louisiana, and St. Bernard.)

The further opening of the China market stands to benefit Louisiana-based producers and exporters, as well as the state’s entire maritime industry and other international trade service providers. According to the U.S Departments of Agriculture and Commerce,²² Louisiana is the nation’s 3^rd largest rice grower, and its rice exports worldwide were estimated at $169 million in 1998. China is today the world’s largest and lowest-cost rice producer. As a part of its accession agreement, however, China has committed to end its export subsidies, which will reduce its price competitiveness in other Asian markets, allowing Louisiana to make gains in those countries. Furthermore, China has committed to a nominal one percent tariff on all rice imported within a tariff-rate quota (TRQ) of 2.66 million metric tons. This TRQ will grow to 5.32 million metric tons by 2004. In 1998, China imported approximately 250,000 metric tons of rice.

Louisiana exported approximately $134 million in cotton worldwide in 1998. China is the world’s largest consumer and producer of cotton, and is also one of the largest overseas markets for U.S. cotton. China’s commitment to end export subsidies will reduce its price competitiveness in other markets. Under its accession agreement, cotton imports will be charged a nominal one percent tariff under a TRQ of 743,000 metric tons, which increases to 894,000 metric tons by 2004. In 1998, China imported less than 200,000 metric tons of cotton from all countries.

Louisiana’s soybean product exports were estimated at $131 million in 1998. China is the world’s largest growth market for these products and has taken steps under its accession agreement with the WTO to further open its markets to them. Tariffs will be bound at 3% on soybeans and 5% on soybean meal with no quota limits. For soybean oil, the tariff will drop to 9% and the TRQ will be eliminated by 2006.

The Louisiana lumber industry also would share in these opportunities. China has become one of the world’s largest wood importers and U.S. value-added wood exports to China are currently at record numbers. Under its accession agreement, China will significantly reduce its tariffs on a variety of wood exports.

Louisiana is also a large exporter of chemical products, and China will reduce average tariffs on chemicals by more than half to an average rate of 6.9% by January 1, 2005. In addition, China will eliminate all quotas on chemical products by 2002.

China will reduce its tariffs on paper and paper products (another major production item in Louisiana) to an average of 5.4% by January 1, 2005. Trading and distribution rights for paper products will be phased in over three years.

China is a leading producer of fishery products, but increased consumption has led to rising imports of these products from abroad. China will reduce its tariffs on fish and fish products to an average rate of 11.4% by January 1, 2005. China has also committed to a strong product specific safeguard allowing the U.S. to restrain increasing fish imports from China that cause or threaten to cause market disruption in the U.S. for up to 12 years after China’s WTO accession.

Even more important than the exports of products originating in Louisiana are those that are produced in other areas of the country and are shipped abroad through the state’s six deepwater ports. In 1995, the maritime industry in Louisiana contributed an estimated $11.4 billion overall to the Louisiana economy and was responsible for over 94,000 jobs throughout the state.²³ As exports increase, these numbers can only improve, pumping even more money and job opportunities into the state’s economy. Finally, as mentioned earlier, the Chinese agreement to eliminate its export subsidies will increase U.S. and Louisiana exports worldwide by reducing the price competitiveness of Chinese goods in other foreign markets.

The principle of free trade has been a primary focus of U.S. foreign economic policy for many years and has helped fuel economic growth around the world. International bodies such as the World Trade Organization help bring trading countries together under a consistent set of rules. Integrating China into a common global structure that facilitates communication and peaceful resolution of disagreements offers many advantages. China’s accession into the WTO presents the United States with a rare opportunity to benefit from unilateral trade concessions made by the Chinese to secure entry into the organization. In return for this increased access to China’s markets, the U.S. is required to do nothing more than make permanent the trade privileges it has accorded China every year since 1980.

The failure of global trade talks in Seattle last November has emboldened various environmental, labor, and consumer groups which seek to derail the U.S.’s trade liberalization efforts with China. Other critics argue that China’s questionable human rights record should be an issue in determining the nature of U.S. trade relations with China. But isolating China only serves to entrench its problems, while encouraging reform within such a system would expose it to the outside world. Although China remains a closed society where the flow of information is restricted, there can be no total restriction of the information and knowledge that infiltrate a society through increased contact with free and open markets. The new China-U.S. agreement and PNTR approval will encourage Chinese leaders to move in the direction of market reforms and strengthen the positions of those who wish to move the country toward greater economic freedom. They will also expose China to global competition and tend to encourage its leaders to privatize many of its industries.

Perhaps even more important to the cause of freedom, however, will be the acceleration of China’s privatization momentum through the opening of the telecommunications industry. As the Chinese people become more aware of foreign ideas and information, they will become more inclined to alter their own political system. China’s entry into the WTO is considered far more useful to the process of reform than attempting to isolate it economically. China will likely become an eventual member of the WTO regardless of how America votes on PNTR. The main question, therefore, will be whether the U.S. jeopardizes its ability to enjoy the benefits that the rest of its trading partners will receive from China’s accession to the WTO.

The U.S. economy has prospered greatly from free trade, and Louisiana, with its strategic position at the gates of international trade, also stands to profit further through increased trade with the world’s most populous country. The lowering of Chinese tariffs will open up new markets within China, while the curtailment of China’s own export subsidies will further open markets outside of it, especially throughout Asia. As with any such increase in international trade, while there may be temporary dislocations, both in China and the United States, the overall picture looks very promising for expanding U.S. and Louisiana economic interests with China.