Mar 23, 1988

CHINA GATT TALKS EXPECTED TO BE LONG-DRAWN AFFAIR

GENEVA MARCH 21 (IFDA/CHAKRAVARTHI RAGHAVAN) The talks in GATT over the Chinese request for "resumption" of its status as a Contracting Party to the general agreement are likely to be a long-drawn process, and not settled quickly, according to GATT sources.

The Chinese request is before a GATT working party, chaired by Amb. Pierre Louis Girard of Switzerland.

The working party was set up in March 1987, but held its first substantive discussions only this February, and the next one is set for April

Further meetings are expected to be held every two months, and from the initial remarks and statements of the major industrial nations, particularly the U.S. and EEC, the exercise could be a long-drawn out process, according to GATT sources.

One third world participant said that it seemed that the major industrial trading nations are approaching these talks, not only with an eye to extracting maximum trade concessions for themselves, as the price for allowing China to enter GATT, but also from the viewpoint of precedents it would create in relation to the expected soviet move seeking accession to GATT.

The KMT government of China was a founding Contracting Party to the general agreement, but withdrew in may 1950, soon after it had fled it the mainland to Taiwan, and found itself unable to deliver on its commitment.

Though it withdrew from GATT, the KMT regime continued to apply GATT rules in Taiwan, and through a web of bilateral agreements, has continued to enjoy all the GATT benefits in its trade with the major western powers and third world nations trading with it.

The Peoples Republic of China (PRC), which soon after the revolution laid claim to the Chinese seat in all international organisations, never showed any interest in the GATT, until the early 1980s.

Only in 1984, in the wake of the post-Mao liberalisation drive, the PRC advised GATT of its wish to resume its membership, and as a preliminary step wanted to be "associated with the work of GATT".

The PRC did not seek any "observer" status, but was granted that status, though the U.S., EEC and others in agreeing to this reserved their stands on the legal position about "resumption".

In 1986, the PRC formally applied to GATT far "resumption" of its status as a GATT Contracting Party (CP).

By then, the Soviet Union too was evincing interest in GATT, and sounding its members about a possible Soviet entry.

In this context, the Chinese request for "resumption" of GATT CP status posed a dilemma for the U.S., EEC and other industrial nations of the western alliance.

On the one hand they wanted to encourage China away from the socialist and central planning path towards evolving into a "market-economy", or at least lock it through trade and economic exchanges into their international system, and thus discourage any future prospect of approachment between China and the Soviet Union.

On the other hand they were also concerned over the possible effects on the GATT system and its market oriented approaches to trade, of the entry of such a large centrally planned economy.

They were not also willing to allow China entry into GATT without paying a price, by negotiating and exchanging concessions with existing members so that the latter could ensure far themselves a balance of rights and obligations vis-a-vis the PRC within GATT.

At the same time, the Chinese application for "resumption" of status provided them an opportunity to distinguish their support for it from their coolness and apposition to the Soviet soundings.

From the outset, the Chinese for their part had made clear that for their own domestic purposes, it was essential for them that they should be seen as "resuming" GATT membership, and thus the obligations associated with it, rather than be seen as "acceding" to GATT and taking an new obligations.

GATT itself has provisions to enable a CP to withdraw from the general agreement, but none for its "resumption".

The government of a country which is not a CP, could only seek accession under article XXXIII, which provides that such a government should agree on the terms with the Contracting Parties (CPS) as a whole, and with decisions to be taken by two thirds majority vote.

In practice in GATT, any such application is invariably referred to a working party, which examines the trade policy regime of the applicant vis-à-vis the provisions of GATT.

After such an examination, the working party recommends the terms of a protocol laying down the conditions of accession. In parallel, the applicant also negotiates bilaterally with all the existing CPS to exchange tariff concessions, and secure their agreement to its accession.

Through use of same ambiguous language, the GATT council, on March 4, 1987, referred the Chinese request to a working party.

The Chinese presented to the working party a detailed memorandum outlining their trade policy regime, and since then have submitted a supplementary memorandum responding to the detailed questions posed by various CPS.

At the meeting of the working party an February 23-24, the Chinese Deputy Minister for International Economic Relations and Trade, Mr Shen Jueren, presented the memorandum and the supplementary information, and reportedly outlined the reforms under way and the profound changes being brought about in the original Chinese economic structures.

Jueren reportedly explained that they were trying to further develop and improve a market system. Its highly centralised planning system had been turned into a "mandatory and guidance planning" and directs state administration over economic activities had been changed "to lay the foundations of a macro-economic control system based on indirect supervision of activities of enterprises".

The new system taking shape in China was described by the Deputy Minister as one in which "the state regulates the market and the market guides enterprises".

According to figures cited by Jueren, China exported 39.92 billion dollars worth of goods in 1987 and imported 43.86 billion, and accounted for 1.6 percent of world trade.

The U.S., EEC, Japan and others in their comments reportedly welcomed Chinese moves to introduce "market-orientation" in its economy, but were more cautious in their assessments of the ultimate outcome of the reform process, haw long it would take or whether China would ultimately emerge as a country with a market-economy.

All of them underscored their view that as of now China was a centrally planned economy, whose imports and exports were not dependent on "pricing" and other "market signals" or influenced by tariffs.

In presenting its case, China also reportedly underscored its status as a "developing country, and thus entitled to special and differential treatment (provided for in part IV of GATT and in the 1979 decision of GATT CPS), and thus entitled to obtain rights and concessions without having to make any reciprocal concessions.

When China first broached this concept, at the time of its application for "resumption", there had been resistance to this from a number of industrial countries.

But in the working party the Chinese contention about its status was reported to have been accepted, but without necessarily agreeing on what this meant.

In informal consultations preceding the working party, a number of industrial countries reportedly made the point that in GATT there was no agreed criteria far "developing country", and this was "self-elective". The implication was that any country could claim such a status, but this did not mean that others would automatically have to concede the rights going with it.

But India reportedly suggested that the issue of China's status as a developing country, an which there could be little argument, should be separated from issues arising out of China being a "non-market" or "rudimentary market-economy" country.

In the discussions, the U.S. would appear to have liberally punctuated its comments with references to China's status as a "centrally planned economy", while the EEC reportedly said it recognised China was "a developing economy", but not a "market-economy".

Japan, while viewing China's integration into GATT as beneficial to world economy and to China, reportedly made clear that the substantive provisions of article XXXIII (for accession) would apply.

The U.S. for its part is reported to have said that whether China was "acceding" or "resuming" membership, the process would have to be the same as for accession and the terms must be negotiated by China with the CPS, and these terms would have to ensure China's ability to adhere to GATT.

The EEC reportedly said that it wanted to ensure, in the conditions for "resumption", the application in Chinese trade policy regime of principles of transparency and predictability, and for application of GATT review procedures, so that the protocol would have provisions to safeguard the interests of other CPS.

In the EEC view, the Chinese export policy did not have economic mechanisms for pricing on a cost plus profit basis. The non-market mechanisms used would encourage subsidisation, and provide a measurable potential for subsidised exports. On the import side too there was a high degree of policy control and guidance, and imports outside the import plan seemed impossible.

Canada reportedly felt that the role of the state in the Chinese economy would need to be examined in depth in the working party. It also saw the final outcome of the exercise as drawing up of the terms of a protocol, the term used in GATT for accession.

The U.S. reportedly said it accepted Chinese assurances about its commitment to increase the market-orientation of its economy, and recognised that China's political leadership was irrevocably committed to carrying out the reforms it had announced.

But the U.S. did not know at what pace the changes would actually take place, or how effective they would be in creating "a more market-oriented system".

In a centrally planned economy, like China's now, sales and purchase decisions were not based on real costs, and technical adherence to GATT would not affect the basis an which international and domestic trade decisions were made, and thus would not increase market access or discipline export practices.

Even if elements of centrally planned systems could absorb significant market-oriented reforms, the nature of the system would continue to impede the operation of GATT articles to ensure market access, and thus would negate or limit the balance of rights and obligations.

In the U.S. view, pending completion of China's trade and price reforms, some safeguard mechanisms should be incorporated to protect other contracting parties from the remaining non-market aspects of China's trade regime.

This, in the U.S. view, could be done in the form of provisions as for other centrally planned economies.

(The protocols for some of the east European countries provide for an assured annual growth rate in imports)

Hungary reportedly said the working party should enable the contracting parties to define the terms of resumption of China's status as a CP. But the working party should proceed an the basis of findings and avoid unjustified generalisations - presumably a reference to the U.S. statement that however much market-oriented a centrally planned economy could not carry out its GATT obligations.

The U.S. and Canada also wanted China should agree to an annual review of its trade regime and compliance with the protocol.

However, the Chinese reportedly resisted this, arguing that once they resumed membership they would abide by all the obligations of the general agreement.

However, the EEC reportedly said that it interpreted the Chinese remarks to mean that if, as proposed in the Uruguay round negotiating group on the functioning of the GATT system, it was agreed to institute a regular process of review of trade policy regimes of all countries, the Chinese regimes too could be reviewed.

For the EEC this was adequate.