Global Policy Forum

By Mark O'Neill

China and the United States signed an historic agreement yesterday that will pave the way for Beijing to enter the World Trade Organisation (WTO), 13 years after it applied to join. While Beijing has still to complete negotiations with other WTO members, the US was the toughest party to deal with. The agreement, and after six gruelling days and nights of negotiations, opens the way for China to join the world's principal trading body and is the mainland's most important economic event since December 1979, when it switched from state planning and isolationism to reform and the open-door policy.

Zhang Ligang, chief executive of eLong.com, an Internet start-up firm that was illegal when it was founded last week but became legal yesterday with the lifting of a ban on foreign investment in the Net, summed up the day. "If we say that Deng Xiaoping opened China to the world in 1979, we can say that this time China has entered the world." The chief US negotiator, Trade Representative Charlene Barshefsky, described the deal as "profoundly important", "absolutely comprehensive" and an excellent one for American business. At a meeting with Ms Barshefsky yesterday afternoon, President Jiang Zemin called the deal "good, historic and realistic", and a win-win for both sides which showed that both countries saw the issue from a strategic viewpoint.

China's entry into the WTO will have profound ramifications for the country, binding her to international trading rules and encouraging foreign firms to invest by providing a system less based on rule by the idiosyncracies of an official and more on transparent laws and regulations. It will accelerate a process of closing money-losing and over-manned state companies and moving labour and capital into market-driven businesses. In the short term, it will drive up unemployment as inefficient, capital-intensive state industries shed labour and shut down.

It also marks a vital political victory for Prime Minister Zhu Rongji, the main proponent, along with Mr Jiang, of China's membership, who offered a similar deal in Washington in April. The war in Yugoslavia, in which Beijing sided with Serbia, and the Nato bombing of the Chinese Embassy in Belgrade, froze negotiations from May until September, when conservatives took advantage of anti-American sentiment sweeping the country to attack the April deal.

In internal meetings, they accused Mr Zhu of being like Li Hongzhang, a senior official of the last Qing dynasty regarded as a national traitor for signing the humiliating peace treaty with Japan that gave away Taiwan. Faced with such opposition and seeing his ambitious agenda blocked, Mr Zhu offered to resign in July, but Mr Jiang rejected the offer. For Mr Zhu, WTO membership will serve as a motor for reform of state companies, banking, insurance, securities and other industries. If Ms Barshefsky had left Beijing without an agreement, the prospects for Mr Zhu and his reform agenda would have been bleak indeed.

At a news conference just before she left China, Ms Barshefsky said the support of the two presidents had been crucial. Presidents Bill Clinton and Jiang Zemin met in Auckland and agreed to put the talks back on track, with a deadline of the next round of WTO talks that will begin in Seattle on November 30. Mr Jiang's support for Mr Zhu was essential to overcome domestic opposition. Ms Barshefsky, full of energy despite the six-day marathon, presented the agreement's main details. Overall tariffs will fall to an average of about 17 per cent and on farm goods to 14.5 per cent to 15 per cent, while China will make significant liberalisations on importing such goods, especially wheat, corn, cotton and other bulk commodities.

Beijing will eliminate non-tariff quotas within five years, some in two to three years. It will cut tariffs on imported cars from the current 80-100 per cent to 25 per cent by 2006 and allow foreign financial institutions to finance the purchase of cars. It will allow 49 per cent foreign investment in telecommunications firms from the date of entry, rising to 50 per cent in two years, and will allow foreign banks to conduct local currency business with domestic companies two years after accession and with domestic individuals five years after.

Beijing also agreed to lift a ban on foreign investment in the Internet. These are substantial concessions and, if fully implemented, will give foreign firms far greater access to the China market than they currently enjoy. In return, Beijing received a concession on textiles, with Washington backing down from its demand that quotas on China's exports remain until 2010. Instead they will end in 2005, but with an "anti-import surge" mechanism remaining for a further four years, to prevent a flood of exports.

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