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Proceedings of the Standing Senate Committee on
Foreign Affairs

Issue 12 - Evidence

OTTAWA, Wednesday, November 6, 1996

The Standing Senate Committee on Foreign Affairs met this day at 3:49 p.m. to examine and report on the growing importance of the Asia Pacific region for Canada, with emphasis on the upcoming Asia Pacific Economic Cooperation (APEC) conference to be held in Vancouver in the fall of 1997, Canada's year of the Asia Pacific.

Senator John B. Stewart (Chairman) in the Chair.


The Chairman: Honourable senators, this afternoon we continue our work with regard to Canada's relations with the Asia Pacific area. Our witness today is Wenguo Cai, research associate and coordinator of China and Vietnam projects at the Centre for Trade Policy and Law. He is a graduate of the School of Public Administration, Carleton University, and has undertaken research on trade policy and international development with particular focus on developing countries and non-market economy countries.

Before his graduate studies in Canada, he worked at the Ministry of Foreign Trade and Economic Cooperation of the Chinese government from 1985 to 1988. As an economist, he was responsible for trade policy analysis. He is the author of a long list of publications, the last of which is a book entitled, China and the World Trade Organization: Requirements, Realities, and Resolution. I have not read it yet, but it looks very good, and I recommend that all of you buy it.

It is our privilege then to hear this distinguished gentleman this afternoon with regard to our relations and the Asia Pacific area.

Would you begin with your opening statement, Mr. Cai? It would be very helpful to us. Thank you.

Mr. Wenguo Cai, Research Associate, Centre for Trade Policy and Law, Carleton University:Thank you, Mr. Chairman, and good afternoon, ladies and gentlemen. Thank you for inviting me to testify today before the committee on China's accession to the World Trade Organization.

First, I should like to express my appreciation for the committee's interest in the issue of China's accession to the World Trade Organization, since China is a very important trade partner in Asia Pacific for Canada. As well, China's membership in the WTO serves as a key to integrating China into the global community.

China is the world's fastest growing economy, with an average annual growth rate of about 10 per cent over the last 17 years. China is now the eleventh-largest trading nation in the world. It is widely reported that China is on its way to becoming the world's largest economy in the 21st century.

As the first nation among western countries to recognize China in 1970, Canada has developed a relatively good relationship with China. Currently, China is Canada's fourth-largest export market. The two-way trade between Canada and China reached $7.85 billion in 1995. Canada's foreign direct investment in China in 1995 was $340 million, bringing Canadian total foreign direct investment in China to about $3 billion.

China is currently in the process of negotiating membership in the World Trade Organization. It is in our best interest to integrate China into the world trading system through China's accession to the World Trade Organization. If China became a WTO member, it would consolidate China's economic reform towards a market economy, and substantially decrease the potential for destabilizing the world economy, since China is a big country. China's membership in the WTO would also increase China's willingness to work with the international community on other issues, including environment, security, and human rights issues.

Canada has been heavily engaged in the negotiations over China's membership in the World Trade Organization, both through the working party in Geneva and the bilateral negotiations between the two governments.

In the mid-1980s, when China applied for GATT membership, I was a member of the negotiating team for the Chinese government, responsible for trade policy analysis and multilateral trade negotiations. In the last ten years, I have closely followed the issue of China's accession to the World Trade Organization. Currently, I am research associate at the Centre for Trade Policy and Law, responsible for the centre's China and Vietnam program. One of the projects I was heavily involved in at the centre over the last three years was the examination of China's membership in the GATT/WTO, which is a research project financed by CIDA. The book which the chairman just mentioned was the output of this project.

For today's testimony, I should like first of all to review the current status of China's membership negotiations. Secondly, I will highlight some issues pertaining to China's accession to the WTO, which I think are still unresolved at the present time. Thirdly, I will share my personal insights on what can be done from here to make progress on the negotiations. Finally, I will share my preliminary thoughts with you on how Canadian policy makers may influence the negotiation process behind China's accession to the World Trade Organization.

Before I switch to where we stand, I have a slide here on the screen showing a chronology of China's membership in the WTO. Mr. Chairman, China was one of the 23 original members of the GATT in 1947. When the People's Republic of China was founded on the mainland in 1949, Taiwanese authorities notified the UN of its withdrawal from the GATT in 1950. However, the Chinese government claims that that action was illegal and invalid.

China formally applied to resume its membership in the GATT in 1986. Over the last ten years, many subsequent reforms to China's trading system were designed and introduced in order to bring China's trading system into conformity with GATT practices. However, even after extensive negotiations, China had not been able to regain membership in the GATT by the end of 1994, and thus failed to become a founding member of the WTO, which became operational at the beginning of 1995.

The failure to gain GATT membership for China happened in spite of the fact that China participated in the Uruguay Round multilateral trade negotiations from 1986 to 1993, and signed the final act of the Uruguay Round agreement at Marrakesh, Morocco, in 1994. China was frustrated at the failure of the working party to reach agreement on the draft protocol on China's membership in the WTO. At the present time, the negotiations for China's membership in the WTO are still continuing, although many problems remain to be resolved.

During the ten years of China's GATT membership negotiations, there were 19 formal sessions of the working party, and three informal sessions, held under the auspices of the GATT before the end of 1994. Under the WTO, two formal sessions have been held so far, the last of which was held just a week ago.

I will now move to the next slide. Where do we stand? China is presently negotiating WTO accession in two tracks: bilaterally and multilaterally under the working party group. The bilateral negotiations are on the market access commitments between China and major trading nations, including the United States, Canada, Japan and the European Union, as well as some developing countries.

The United States is the major negotiator in China's accession process. Current discussions between China and the United States are focused largely on the "road map" which the United States presented to China last November. This "non-paper" identified several demands from the United States, which the United States thinks should be resolved before China joins the WTO. Despite China's commitments on several points identified in the "road map", including a standstill commitment not to introduce WTO-inconsistent trade measures, the United States has said that China's offers still fall far short of U.S. demands.

China states that by signing the Uruguay Round Final Act at Marrakesh in 1994, it has already accepted the full obligations of carrying out the full range of the agreements under the WTO. After China becomes a WTO member, the Chinese leadership will have the binding international obligations necessary to implement the massive structural reforms that WTO membership requires of China. China will continue its economic reforms.

China further argues that it will only undertake its obligations as a developing country member in the WTO. However, if China is not permitted to join the WTO, it is under no obligation to implement WTO requirements outside the WTO. China further states that if China is not a member of the WTO, the WTO does not deserve its name, since China accounts for one quarter of the world's population.

Canada, along with the EU and Japan, maintains similar positions on the issues of China's accession to WTO. However, sometimes one or a number of these countries might favour a softer and quicker deal with China. During the visit of Prime Minister Jean Chrétien to China in November 1994, Canada expressed its strong support for China's membership in the GATT/WTO. It is believed that Mr. Chrétien will reconfirm Canada's support for WTO membership during his next visit to Shanghai this month. Having recognized that China's WTO membership is one of the pillars needed to consolidate China's integration into the global community, the Japanese government recently organized a large international seminar in Tokyo to support China's application for WTO membership.

There has been some discussion in the international community concerning how to resolve China's membership in the WTO. There are two distinct schools of thought relating to the timing of and conditions for China's membership in the WTO. However, both emphasize the great leverage that the international community could wield to influence the direction and the pace of the negotiations regarding China's membership in the WTO.

One school of thought favours the hard-line approach towards China's accession to the WTO, because China's application provides an excellent opportunity for the international community to force changes in China before China joins the WTO. The international community should use this opportunity to pressure China to make fundamental changes if China wishes to join the WTO. It suggests that unless China fulfils all the WTO requirements, China cannot be accepted as a WTO member. Some of the demands have gone beyond the Uruguay Round agreements, such as the treatment of China as a developed country, and China's participation in the government procurement agreement, which is not a part of the Uruguay Round single-undertaking agreements.

Another school of thought favours the balanced, flexible approach towards China's accession to WTO. It sees that engaging China in the WTO provides powerful leverage to effect changes in China after China becomes a WTO member. The international community could use the WTO requirements as a means to accelerate China's transition towards a market economy. Under this approach, a transition period for China to become a full WTO member should be designed and China should be forced to follow closely the timetable to make its trading system fully compatible with the WTO by the end of the transition period.

Although multilateral and bilateral negotiations concerning China's WTO membership are still being held, little progress has been achieved, because China made the assumption that substantial negotiations would not start until after the presidential election in the United States. If China and the major WTO members are engaged in substantial negotiations next year or the year after, it might be possible for China to join the WTO in 1998 or 2000, when the second and third ministerial conferences meet.

Let me now highlight some issues that are still pending.

The first issue is developing-country status. China has demanded that it be accorded developing-country status in the WTO, which means that it will enjoy some preferential treatment in some areas. The United States, in particular, opposes this position, not so much because of disagreements over the level of China's economic development, as that, because of the size of China's economy and its success in international markets, the United States argues that China does not warrant special treatment. ASEAN and Japan support China's developing-country status. Canada and the EU, and now the United States, agree that China's WTO status should be determined on a sector-by-sector basis.

But how poor is China? Is China a developing country? A recent World Bank study suggests that poverty in China is more widespread and the Chinese economy is much smaller than we previously thought. The bank's new figures suggest that the Chinese economy is 25 per cent smaller than previously estimated. How did that happen? In its recent report on poverty, the bank made two fundamental changes. First, the bank adjusted the income level at which a person is deemed to be poor upwards from 60 cents per day to $1 per day. Effectively, this increased the number of Chinese deemed to be poor from fewer than 80 million to well over 300 million. Second, the World Bank adjusted the Chinese per capita income from the previous level of $2,500 to the current level of $1,800. This change shrank the estimated size of the Chinese economy dramatically. Based on the World Bank's new figures, the Chinese authorities could argue that China is still a developing country that deserves special treatment under the WTO.

The second issue relates to China's market access commitments, which cover tariff and non-tariff barriers to trade and services. The WTO members want China to lower its tariff rates. The current Chinese tariff rates are about 23 per cent. The effective tariff rates are quite low, which the bank reports at about 5 per cent. Therefore, there is room for the Chinese to move downward. The WTO members are more concerned about China's non-tariff barriers. As well, the WTO members want China to further open its services sectors for foreign competition. The Chinese feel that the WTO members have asked for too much, too fast.

As a footnote, in November 1995, the Chinese President Jiang Zemin announced at the APEC Summit that China would make tariff reductions on more than 4,000 tariff items in 1996. China's stated goal is to bring its average nominal tariff down to 15 per cent in 1997.

The third issue is China's industrial policy. Trade partners have problems with China's industrial policy on automobiles which was announced two years ago as a pillar of China's economic policy. Its provision included preferential treatment for domestically produced parts and annual quotas for car imports. Of course, this is in violation of the GATT. It is reported that China is currently formulating some similar policies on electronics and machinery, which is a cause of concern to major WTO members.

China says that every country has its own industries which it will protect. For example, developed countries protect their textile industries. China is protecting the auto industry as an infant industry. Of course, the United States sees that China's industrial policy is proof that China has not committed to the multilateral trading system. Last month, in Washington, a senior Chinese trade negotiator promised to the United States that China will live up to the standstill commitments before China joins the WTO.

The fourth issue deals with China's foreign trading rights. WTO members want China to give foreign trading rights to every economic agent who asks for them. China argues that it has already given trading rights to 30,000 enterprises. WTO members say that this kind of requirement is discriminatory and contrary to WTO principles.

The next issue has to do with intellectual property rights protection. We are all familiar with the fact that the United States imposed trade sanctions on China for two or three years to force China to protect intellectual property rights. The issue was resolved only at the eleventh hour. In terms of IPR legislation, China has a complete set of laws and regulations. The problems, however, lie in the area of enforcement. Recently, the acting United States trade representative testified before the U.S. Congress that she is currently satisfied with China's enforcement of IPR. The 15 factories which produced faked CDs remain closed in the southern part of China.

The next issue is the selective safeguards clause which is to be included in China's protocol of accession. The European Union and the U.S. want the selective safeguards included in China's protocol. China opposes this inclusion because the European Union advised China to accept this clause in the protocol in order to advance China's negotiation concerning the WTO.

The next issue is the transitional review mechanism for China. WTO members want to have a trade policy review mechanism in the protocol every two years so that China's implementation of WTO agreements can be reviewed. The Chinese argue that, since there is a trade policy review mechanism in the WTO, there is no need for a special monitoring process mechanism for China.

The eighth issue is related to Taiwan's application to the WTO. Taiwan applied for WTO membership on its own as a developed country. The examination of Taiwan's application has almost been completed. However, Taiwan cannot formally become a WTO member because of its political problems with mainland China. China does not oppose Taiwan's application. However, China has to join the WTO first. The United States and Canada support Taiwan's application. Some U.S. congressmen link these two issues, that is, Taiwan's accession to the WTO and China's most favoured nation status, which makes China's accession to the WTO more complicated.

The final issue relates to the non-application clause in the GATT/WTO. The United States has domestic legislation that prevents the United States from applying the MFN status to a communist country, which China is. China's most favoured nation status is subject to annual review in the United States. This has created uncertainty for U.S. business people doing business in China. Renewal of China's most favoured nation status in the United States has become an annual battle. In 1994, the U.S. president formally delinked the human rights issues from trade. Now, some business communities have proposed to grant China permanent most favoured nation status.

There are three options here. The first is to repeal the Jackson-Vanik bill. The second is to graduate China from the list. The third option is to renew China's most favoured nation status on a multi-year basis. It is reported that the United States would like to resolve the issue of China's membership in the WTO before the first half of 1997. The reason is that they want to avoid another round of this debate, and at the same time they want to have China in the WTO before Hong Kong reverts to China in July 1997.

What can be done to make progress? There are three elements I would identify for the solution to China's membership in the WTO. The first element is political will and consensus building. There are some signs that the United States has the political will to make the process of negotiations in China's WTO membership move forward after the presidential election. It is reported that the U.S. would like to resolve the issue much faster. We have seen indications that some members of the business community in the United States would favour a softer stance on China's membership in the WTO.

It is also encouraging to note from the Chinese side that more concrete steps will be taken to move China's WTO membership forward next year. It is reported that after the second session of China's working party in Geneva last week China looks forward to working with other WTO members in resolving the pending issues behind China's membership in the WTO next year. Some concrete steps will be taken to achieve that goal. Hopefully, China will become a WTO member either in 1998 or in the year 2000.

The second element we have to think about is how to use a balanced and flexible approach to resolve the issue of China's membership in the WTO. Personally, I think that China's accession to the WTO is very much a balancing act. Certainly, at least the following aspects have to be balanced.

First, the rights and obligations of China and the WTO members have to be balanced. China will surely benefit greatly from participation in the World Trade Organization. In the meantime, China will have to undertake a number of obligations as a member of the WTO. Only balanced rights and obligations can be accepted by China and WTO members.

Second, how do we balance the Chinese WTO commitments and other domestic policy objectives? The WTO members have to realize that China's stability is in the best interests of the world, particularly of its neighbouring countries.

A rapid and dramatic trade liberalization may create massive unemployment and social unrest in China, which in turn will create problems for the rest of the world. Therefore, greater liberalization along with transitional arrangements would be a good choice for China.

Third, trade issues must be balanced with global and regional security, and with environment and development issues. China is a big country. China is one of the five permanent members in the Security Council of the United Nations. It plays an important role in global and regional security affairs. From a global perspective, it would be much better to engage China in the WTO in order to have China cooperating on other issues, rather than to leave China outside the organization. Moreover, given the fact that the WTO probably will cover the environment, labour and other social issues as well in the future, it becomes more important that China be part of it.

Finally, China's accession to the WTO is also important because once this step is taken, the issue of Taiwan's admission can move forward. China's accession to the WTO also has potential implications for Hong Kong, because Hong Kong is a member of the WTO already. After 1997, it is not clear how China will react to the situation. China is not a member and Hong Kong is.

If we agree with this kind of approach, we now have a design and a transitional arrangement for China.

Of course, China has to undertake minimum requirements in order to become a WTO member. A transitional period can be designed for China. For example, China could be given five to ten years of transition to fully comply with WTO requirements. During that period, China would be fully guided by the WTO to make China's trade policy completely compatible with WTO requirements by the end of this transition period.

China's membership in the WTO is a challenge to the world. In order to meet this challenge, we have to be creative, flexible and practical. As a matter of fact, China and the international community lost the opportunity to resolve China's membership before. Imagine, if China had entered the GATT in 1989, China would be committed to a far more open trading system than is currently the case. We all know that following the Tiananmen event, most western countries withdrew their support for China's membership for a while. Once again, China could not join the GATT by the end of 1994 to become a founding member of the WTO. Therefore, China is now under no obligation to conform to any GATT/WTO obligations. Therefore, China is still developing an industrial policy inconsistent with the WTO, just as an example. The longer China has to remain outside the WTO, the longer the actual adjustment period for China.

Is there any risk in having China become part of the WTO? Yes, there is. It is very difficult to predict how China will behave after China joins the WTO. Western countries might find that the rules of the game, including the rules of international trade, are challenged by the conflicting interests of China and the social and political values of China. I think that is a risk WTO members should be prepared to take.

At the same time, there are potential and significant gains for China in joining the WTO, in terms both of improved market access and, more important, a better framework in which to engage China in resolving problems through international cooperation. Moreover, when China is admitted, the international community will have a multilateral tool to encourage China's compliance with WTO principles and laws. It is also politically easier for Chinese leaders to obey WTO rules rather than to obey U.S. pressure.

Finally, what can we Canadians do about it? Canada has clearly signalled its strong support for China's membership in the WTO. As a matter of fact, Canada was the first of a quadrilateral group of trading nations to enter into bilateral negotiations with China on WTO accession. Canada and China have a number of bilateral agreements, including double taxation and investment insurance. WTO membership for China will serve to strengthen the bilateral relationship between China and Canada. However, there are a number of initiatives that will further strengthen China-Canada trade and economic relations. At the same time, they will assist China in joining the WTO.

First, Canada could play a more positive mediation role between United States and China with regard to China's accession to the WTO. Due to Canada's geographic location and general familiarity with the issues, Canada is well-positioned to bridge the gap between the United States and China on the issue of China's membership in the WTO. As a result of Canada's experience in dealing with the U.S. and its friendly relationship with China, it would be much easier for China to accept Canada's advice to avoid direct confrontation with the United States. Negotiations on China's WTO membership could be advanced much faster if the United States and China could be brought together to resolve their differences.

Second, during China's WTO membership negotiations, Canada should obtain improved commitments that would ensure more predictable and transparent access to the Chinese market for Canadian products and services. Thus, while supporting China's membership in the WTO, Canada should insist that China be accepted in the WTO with adequate commitments by China in both goods and services. Canada would also assist China in defining a transition period and a well-defined schedule of commitments to bring China's trade and legal regimes into conformity with the obligations of the WTO.

Third, Canada and China should establish a bilateral framework agreement to address the trading and investment barriers between the two countries. Since Canada applies high tariffs on some products from China, such as textiles, apparel and footwear, Canada does have potential areas where it can improve China's market access to Canada. Canada could apply most favoured nation treatment to China under the WTO Textile Agreement without discriminating against China, even if China does not immediately become a member of the WTO.

As well, Canada's SIMA applies a "surrogate approach" in determining the dumping margins in the Chinese dumping cases. This approach could be modified to directly use Chinese export prices to reflect Chinese ongoing economic reforms, especially for the exports of non-state-controlled enterprises. On the Chinese side, of course, there are many trade and investment barriers that remain to be addressed in the context of China's accession to the WTO. If Canada is prepared to reduce trade restrictions on Chinese exports, China should be prepared to address specific Canadian concerns about market access in order to reach Canada's goal of exporting $20 billion worth of goods and services to China by the year 2000. The eventual accession of China to the WTO will lead to substantial gains for Canadian exporters and investors.

Fourth, Canada could provide more technical assistance to China in areas of China's accession to the WTO and bilateral trade and economic relations. Full participation of China in the WTO will require new organizational structures and place new demands on the knowledge and skills of Chinese government officials. China's business community and general public should increasingly gain access to information about the WTO. For example, if China joins the WTO in two years, China will face a massive task to integrate its legal system into the WTO. However, there is no such program in place to help identify the gap between China's legal regime and the WTO requirements. In addition, further research on the impact of China's membership in the WTO, the training of trade professionals, and increased public awareness on WTO issues are urgently needed in China. In this regard, Canada has much to offer China, particularly through Canada's CIDA's country development program.

Specific examples for senators to consider are Canada launching a China-WTO law integration program, organizing Japanese-style international seminars on China's accession to the WTO to bring the Americans and Chinese together to discuss the issues, or instituting a bilateral framework to examine ongoing bilateral economic and development relations in order to export Canadian products and services to the Chinese market.

Finally, Canada could use APEC to promote bilateral cooperation between Canada and China. Canada has hosted several meetings in the past, and next year Canada will host APEC 1997. The Canadian government has declared 1997 the year of Asia-Pacific. Canada should use this opportunity, as host, to engage China in a full APEC dialogue.

During 1997, Canada and China could cooperate within APEC in furthering China's membership in the WTO and in promoting economic, environment cooperation and human resources development between Canada and China.

At this juncture, I should like to end my presentation and entertain your questions. I would express my thanks to the committee for the opportunity to contribute to a better understanding of the issues behind China's accession to the WTO and to share my view on what Canada and the rest of the international community can do in this respect.

The Chairman: We are most appreciative of your presentation. You will not be surprised that we have some questions.

Senator Andreychuk: I was interested in your comment that there are two schools of thought on China's membership in the WTO. I find that very few people are of a school that says that China should not be in the WTO. In fact, the whole object of the World Trade Organization is to get every country to become a member and to hammer out some consensus rules about trading.

What gives you hope that, if China were given a different entrance model from anyone else, all the good of which you speak would happen? You point out that certain concessions must be made for China's entrance. Every country would argue for special concessions, and every country has a meritorious case. China has its size going for it, more than anything else, but one could look to virtually every other part of the world, regionally or individually, and see a concession case.

One would make the concessions to bring such a large trading partner in, if one could be assured that giving these special rules would ensure that the other things you say should happen would indeed happen. Where in the stream of international organizations and past history do you find some assurance that the other things would happen? That, for example, if China were in the World Trade Organization, it would respond as a more appropriate citizen on human rights and would play by the rules on intellectual properties and all the other things, when in fact that has not happened in other international environments?

China is a permanent member of the Security Council. Yet, the UN has almost been made a joke of in that there are three Ts you cannot mention: Tiananmen Square, Taiwan and Tibet. We have yielded to China's agenda. Where is there an example of China's yielding to the UN agenda or to a global agenda? The examples the Chinese continue to use in their negotiations are where their best interests are not involved. It is their peripheral interests that they give up in those negotiations.

Not only would we find ourselves having to address the needs of other countries, if we started addressing the needs of China in a unique way, but we could find ourselves in a poorer position 10 or 20 years in the future because we would not have gained and might have lost.

How do you respond to that criticism, which is often raised when your plea for a special deal is made?

Mr. Cai: Thank you for the question. We all agree that it is very critical to engage China in the World Trade Organization. The question is how. I mention two schools in my presentation. One is a hard-line approach. The other is a more balanced and flexible approach. However, both agree that eventually we have to integrate China into the system.

First you must address the issues. You have to set out the minimum standards for China to join the WTO as an admission ticket. If China wants to join WTO, it will have to reach that standard. The United States has said that that standard must be on a commercial basis. However, I think that that basis should be established on the level of the developing country. Whether China is a big country or a small country, it is a developing country, and there are some commitments which China should undertake, as a minimum, to join the WTO.

You have asked me whether there is some institution in which China can play a constructive or positive role in order to have confidence to engage China in the WTO. In the early 1980s, before China joined the World Bank and IMF, there was some doubt about how China would behave in the bank or IMF, but as a matter of fact, China plays a very constructive role in the bank and IMF right now. China is the biggest recipient of the bank's financial development program. As well, China is the best utilizer of the bank's program.

That is just an example. In the UN, as you correctly point out, China is a permanent member of the Security Council. There are some issues that are sensitive for the Chinese government, that is true, but you have to engage China in the international organizations to deal with all these kinds of issues, rather than leaving China outside the organizations, for then you do not have the forum to discuss the issues.

It would be better for the World Trade Organization to have China in, as an important player in international trade. It would be better to have a big country like China within the organization rather than to leave China outside, where China could formulate some kind of rules or policy that are not compatible with the WTO. That is why I am saying that, if you engage China in the WTO, then you could decide on a transitional period, then set up a timetable, and establish a monitoring system, which might be important although China is opposed to that kind of idea. It is important to have this two- or three-year monitoring process to see whether China is following the timetable for economic reform, and for compatibility with the WTO requirements.

If you engage China in the WTO, I do not think China will introduce WTO-incompatible policies, but if China is outside the organization, China can claim it is free to do whatever China wants to do because China is not a member of WTO yet. China is under no obligation to undertake the WTO requirements at this moment.

Senator Andreychuk: One of the other rebuttals to doing that is that it gives an unfair trade advantage in the next number of years to China vis-à-vis other Asian countries around it, and it allows China to solidify its forces into these countries, which may in the end not be in all of our best interests and certainly may not be for the surrounding Asian countries.

Mr. Cai: That is true. I am thinking about two scenarios here. One scenario is China within the WTO; one is China outside the WTO. If China is within the WTO, you may think that some preferential treatment China is receiving under the WTO as a developing country might work in China's interest and not in our interest. However, if you compare that with the other scenario, with China outside the WTO, China is going to do that any way. So if you compare, it would be better if we had China under the WTO system rather than to leave it outside.

The second point I would like to respond to is your question regarding Asian developing countries and Chinese trade practices, and how China might take advantage of this kind of arrangement.

In the WTO agreement, after the Uruguay Round, the special treatment for developing countries has been substantially watered down. The only thing we get from the WTO, the package for the developing countries, is the transitional period for some developing countries or less developed countries, to have more years to adjust to the system in order to be compatible with the WTO requirements.

In that case, if China claims to be a developing country, that means China probably wants to have several years to adjust its policies in order to be fully compatible with WTO. As I told the Chinese negotiators, on one of my frequent trips to China to discuss these issues, it does not matter what label you are wearing, developing country or less-developed country. Why are you so insistent on this kind of label? Label is important for Chinese from a political point of view, but in terms of the economic point of view of the WTO, it does not matter too much, because after this transitional period -- five years, seven years or ten years -- then China will be treated the same because that is the way it is in the WTO.

So there is no point for the Chinese, I also advised them, to insist on the whole package as a WTO developing country member. It might be better for China to select one particular area China is more concerned about as a developing country rather than worrying about the whole package. For example, China claims since 1991 that it has reduced its export subsidies. There is no point in having China reduce the export subsidies again in order to qualify as a developing country, if they can phase them out after five or seven years.

Since you are competitive, you do not need export subsidies; do not do it. That is it. Why do we need to do this? China might be in a better position at the negotiation table by saying China does not have export subsidies. You might argue with your trade partner. In other areas China might need more time for adjustment.

Senator Bacon: One of the objections the United States had to China's accession to the WTO involved the protection of intellectual property. This is still pending. What measures has China undertaken in recent years to protect intellectual property?

Mr. Cai: That is very difficult area. Every year China has had a problem with the United States in attempting to enforce intellectual property rights. I recognize that the problem with China's implementation of intellectual property agreements with United States lies in the area of enforcement, rather than with legislation itself. China is a big country. There are difficulties resulting from different regional economic rules in Guangdong or in the coastal areas, and also with corruption, some of which probably even the central government is not aware of. This makes the enforcement of the intellectual property rights more difficult.

I read the note from the U.S. trade representative, Charlene Machevski, who recently testified before the Congress that she is now satisfied with the performance of China's implementation of the bilateral intellectual property agreements. I think she mentioned at one point that the security department in China had played a major role in enforcing this intellectual property law, as they probably had to do something about it. If China continues violating intellectual property rights, of course, then it is against the WTO agreements. We all understand that if China wants to join WTO, it has to respect intellectual property rights as one part of the WTO agreements.

Senator Bacon: Do you think the issues pending in order for China to become a member of the WTO are reasonable? Compromises were to be made. What issue is China less responsive to?

Mr. Cai: Compared to the intellectual property issues?

Senator Bacon: Yes.

Mr. Cai: Is it reasonable for the WTO members to have this issue contained in the WTO deal with China? It should be contained in the single undertaking package for all the WTO members. After the Uruguay Round agreement, the goods, services and intellectual property become a single undertaking package. You cannot pick and choose anymore. If everyone accepts this deal, why shouldn't China? China should accept it as well.

Of course, under the intellectual property agreement, there is some transitional period in which developing countries can make some adjustments. China can probably request this kind of adjustment period, which is suitable to the developing country status, to bring about the full enforcement by the end of this transitional period. But China must respect intellectual property. It is good for international business and it is good for China itself. If Chinese intellectuals are employed in companies that create some kind of intellectual properties, and other businesses will not respect those rights, who will undertake innovations as great as this? This is very important.

China is more interested, for example, in a textile agreement, or tariffs, or select safeguards -- in other words, the kinds of issues I identified during my presentation; but they are all important areas. However, it is up to the major trading partners to negotiate with China on the areas that we would like to focus upon and to emphasize that China should come to the basic commitments about goods and services and intellectual properties in order to join the WTO as an interim member during the transitional period. This could involve a period of five to ten years, but by end of this transition period China will have full member status like the other WTO members.

Senator Bacon: On all the issues that are still pending, is there one to which China is less responsive?

Mr. Cai: Yes. For example, selective safeguards is one. China probably does not want to talk a lot about it, because China and the WTO members have not come to an agreement on a general safeguard. The Chinese position on this issue is: "Why must there be selective safeguards against China anyway?" Article 19 of the GATT already specifies the general safeguards for every country, including China, Canada, the United States, and so on, so why do we need a special safeguard placed upon China? The European Union has suggested that selective safeguards be included on China's protocol. That was done because labour-intensive products made in China might flood the markets in other countries. It is important to include selective safeguards so that, if that happens, this clause can be invoked on Chinese products alone rather than approaching this on a most-favoured-nation basis, as outlined in Article 19.

In Article 19, general safeguards apply only on most-favoured-nation status. You cannot pick one particular country. In other words, even though your products flooded my market, I could not use quotas and the tariff or non-tariff barriers against you alone; it only applies to the products. That is why the European Union is in favour of this kind of clause. The Chinese government is not keen on it and does not want to talk about it. So it is less responsive about this kind of clause.

If China wants to join the WTO, however, it will accept this kind of clause during the transitional period. That is my opinion. After the transitional period, this clause will be phased out, as will the other temporary measures.

Senator Grafstein: I wish to thank the witness. This is an excellent inventory of issues that we must look at as we approach the increasing bilateral and multilateral relations with China.

One inconsistency was touched upon by Senator Bacon. On the one hand, your suggestion is that China will resist special transitional rules or safeguards for other countries vis-à-vis itself; yet on the other hand there is a plea from China to have special transitional rules for itself. In other words, they do not want special rules and safeguards, but want to be treated specially, because they have specific problems, on a case-by-case basis. That is, they want longer phase-in periods, and want to be dealt with on a product-by-product and case-by-case basis, and so on. There seems to be an inconsistency in that.

Perhaps I can go through several of these issues and the witness can give me a general answer.

You raise an issue that has bedevilled most exporters and importers, and most people who choose to invest in China, namely, the lack of a recognizable legal regime that is similar to theirs. Yet you suggest that China will have problems with Hong Kong, which it will reacquire next year and which has very definitive legal rules and protections. The model is already there. Why does China have to go any further than Hong Kong to develop a coherent system of trading patterns? Hong Kong has been a successful and very compliant member of the WTO. Canada could help on legal regimes, but the legal regime has already been established next to China.

The rule of international trading law is more coherent in Hong Kong and its surrounding environs. I do not know why China does not try to adapt its trading practices to the trading practices established by Hong Kong, which would be acceptable to everyone.

I raise that as another basic problem in terms of looking for a rule of law out there, when there is already a rule of law there that works. It is bilingual -- English and Chinese.

I agree with the general consensus that we should try to get China into the WTO as quickly as possible and on fair, equitable rules. If we moved forward too quickly on bilateral relations, as you suggested, Canada could be knocked off its feet in terms of export flows. It has happened before. We had a quota regime about ten years ago where Canada almost got knocked off its feet. Probably 300 or 400 bankruptcies were triggered because export flows came from the East. Essentially, they were from China, but we could not differentiate between China and Hong Kong and between high-level and low-level products. We almost devastated most of the high-level stores across Canada.It was a devastating problem that was quickly addressed by a quota, but we almost devastated a whole segment of our retail and manufacturing industry here. I am concerned about that. Essentially, trade flows from China are a problem.

Finally, the biggest area of mystery is how we can help China integrate into the WTO. Its industrial policy does not differentiate between state-owned and non-state-owned enterprises in a clear way, with huge subsidies, such as the iron rice bowl subsidy, where workers get everything. How can we integrate a state-owned enterprise to compete with a non-state-owned enterprise in the same product category in Canada?

I ask that not in a critical sense; but how do we work through these very complex problems? I cannot see the state-owned industries I am familiar with in China adhering quickly, say in five years, with a consequent tremendous disemployment in China. I do not see how those two can come in even in five or ten years.

Those are the areas. I thank the witness, because he has enabled me to sharpen my own thoughts about some of these questions.

Senator Bolduc: I understand that the Hong Kong Chinese invest a lot. As a matter of fact, they are invading China. If they do it, there must be some rule of law on the other side so that they accept the game. Maybe you could put that in your basket as well.

Mr. Cai: I agree with you that there is an inconsistency here. On the one side, the Chinese ask for special treatment. As a developing country, China wants a transitional period after it becomes a member of the WTO. On the other hand, China resists a special clause in the protocol, such as a selective safeguard, which could be a special treatment to safeguard other interests.

I do recognize that there is this kind of inconsistency. That is why I think that eventually China will accept this kind of special regime from both ends <#0107> that there will be a transitional period for China, to treat it as developing country, but that during the transitional period, China would have to accept the special clause of selective safeguards. However, I think that China eventually will insist that by the end of this transitional period it be treated the same. The transitional period and even the developing country status will be gone. There will be no further transition. Then, the selective safeguards will be phased out as well after the transitional period.

I agree with you that it is difficult for western businessmen -- Canadian, American or European businessmen <#0107> to do business in China. One of the problems is the lack of transparency of the legal regime. It is so hard to understand. That is true. China probably does not have a complete set of laws and regulations to guide international trade in a market economy, because China is in the process of transition.

As well, there is a cultural difference. The Chinese culture is difficult to understand. I am not saying it is a key factor, but it is one of the factors of doing business in China.

You mentioned Hong Kong's model. That is a good question. We must recognize that Hong Kong is a port city. Hong Kong, after 100 years of history under British governance, is a free port city. There are not many regulations in terms of trade restrictions. There is free trade, and there is strong support for Hong Kong's free trade.

China is a big country -- 1.2 billion people. It is not like the port city of Hong Kong. Moreover, China has had about 40 or 50 years of a social economy which is now experiencing a transitional period to a market economy. It does not have a complete set of laws which it can simply borrow from Hong Kong to apply in mainland China. Given that China has 1.2 billion people, how do we deal with this huge state enterprise which Hong Kong does not have? How would using Hong Kong law help China to deal with the massive unemployment that will follow if the trade liberalization process takes place?

This kind of law has been redesigned in accordance with the Chinese situation. You must bear in mind Chinese history and culture and the transition of the Chinese economy. This all must be taken into account. That does not mean, however, that China has nothing to learn from Hong Kong. Since Hong Kong will revert to China next year, there will be much collaboration between China and Hong Kong. There is a lot of trade flow between Hong Kong and China right now. Of course, China has a lot to learn from Hong Kong, but it cannot simply borrow everything and apply it in the case of China.

Canada has a lot to offer in the sense that Canada has lot of experience in dealing with the United States. China and the United States are two of the bigger players in world affairs. Since we have a good relationship with China and a good relationship with the United States, it might be good for us to bridge the gap, talk to important partners, and facilitate a dialogue.

As well, since Canada has in place a complete set of trade and investment laws and regulations, I think China has a lot to learn from Canada.

We do have a lot of problems with China in terms of trade and investment barriers. We should raise that issue on every account during discussions with our Chinese partners on a government level as well as on the private-sector level.

We have problems with Chinese state enterprises. This issue must be dealt with under Chinese accession negotiations as well, which makes me think that the question of Chinese accession to the WTO has actually brought a complete set of issues to the fore which we will have to deal with. It is not simply the issue of China joining the WTO. You must address all these other complicated issues at the same time.

I will emphasize that China is an important trading partner for Canada. It is a big country in the Asia Pacific. It is important to include China in the World Trade Organization so it can be our full trading partner.

Senator Corbin: Senator Grafstein and Senator Bolduc raised the topic of Hong Kong. That was to be the thrust of my question. I have received some answers, but I should like to approach this from another angle.

If we look at the way China deals with the colony of Hong Kong over a period of one or two years once it has reverted to China, would that not be the litmus test of China's determination to get aboard the WTO bandwagon as a good player prepared to follow the rules? It seems to me that Hong Kong is a challenge and an opportunity. It is a free-trade area, and a small port, relative to the size of China and its population. Nevertheless, the world is waiting to see what will happen to Hong Kong, and what the transformations will be. I should like you to respond to that.

You insist very much on Canada's acting as the broker for getting China into the WTO. The WTO, if I read between the lines, is bringing down some barriers of resistance especially on the part of the United States. Is this pitch being made to other countries as well as to Canada? Do you consider that Canada is unique and that this is the key role for Canada which no one else can play?

Mr. Cai: I agree that Hong Kong's transfer to China in 1997 will be a good test for the Chinese government, to see whether that government will respect the freedom of the colony. This time next year I will be referring to Hong Kong as "the territory". It will be a good test for the world community to watch what will happen in three to five years.

The Chinese government claims that the status of Hong Kong will not change for 50 years. However, Deng Xiao-Ping will not live for 50 years.

Senator Corbin: You said there have been a number of upheavals in China in the last 50 years, so stability is not necessarily guaranteed.

Mr. Cai: I agree with you. At this moment it is difficult to predict what will happen to Hong Kong after reverting to China in 1997. However, I personally think that, for a period of time, China will maintain the prosperity of Hong Kong.

First of all, there will be no sudden change under Chinese government leadership. The Chinese government wants to show the world that the People's Republic of China can do as well as the British government. They want to maintain that kind of stability and prosperity. That is a political reality.

Secondly, economics will maintain the status quo. The flow of trade between Hong Kong and China is significant. I do not know the exact figure, but the percentage of Hong Kong's assets from mainland China is very high. It is in China's best interests to keep the stability of Hong Kong after Hong Kong reverts to China, because it is in China's economic interest to have this kind of prosperity.

Thirdly, Hong Kong has been used by the Chinese government as a free-port city. Hong Kong still remains as the biggest trading partner of China. China could continue to use Hong Kong as a link to the world and other trading partners. Hong Kong will remain relatively the same unless there is some political change in Beijing. That is and will be unpredictable.

I agree with you that it is a challenge as well as an opportunity for Hong Kong.

On the other point, Canada's role is to mediate the difference between China and the United States, and I would say Japan is playing a similar role. Last month, the Japanese government organized a big conference. Three Canadians went to Japan to participate in an international seminar on China's access to the World Trade Organization, which Japan put in place to support China's accession to the WTO.

Japan saw China's accession to the World Trade Organization as a pillar of security and stability. Japan is a permanent member of the United Nations Council. Japan also provides massive aid to Asia-Pacific countries, and China is the biggest recipient of Japanese aid. For these reasons Japan benefits by maintaining close ties to China. That is why it organized this kind of international seminar in Tokyo.

Japan invited the people at the director general level or ministerial level in charge of China's accession to the WTO to participate in this kind of discussion in Tokyo. The Chinese Deputy Minister of Trade also participated. The WTO Deputy Director General also went to Tokyo for this seminar. Unfortunately, the United States did not send a high level delegation to Tokyo, and Japan was very disappointed about that.

This is an example of Japan doing something to bring China into the world trading system.

I mentioned that Canada has a unique position here. We are familiar with the issues. Canada is a founding member of GATT. As well, Canada is geographically close to the United States. No one knows U.S. policy better than Canada. Canada has profound information and advice to offer China on the topic of how to deal with the United States. Canada has a unique role to play in order to bridge the gap between China and the United States. It may be that Canada could organize a workshop or seminar similar to that of the Japanese, but on a higher level, to bring key players together.

Through the leverage of CIDA funding, Canada will be able to have a program in place to have China define its legal regime and make it compatible with WTO requirements. Instead of giving up bilateral trade and economic relations, it will be in Canada's best interests to understand China. We can use our model to assist China, because we know our system well. We should do that rather than, as it stands now, if China is developing inconsistent rules, just complaining.


Senator De Bané: As you know, a number of businesses argue that China should not be allowed to join the World Trade Organization until it adopts different trade policies. They argue that if we allow it to join before it makes any changes, we will have legitimized its reprehensible trade practices. How do you respond to this argument?


Mr. Cai: There are some misunderstandings here on the Chinese side and in the international community on the conditions for China to join the WTO.

It is my understanding that, if China wants to join the WTO, China must fulfil some basic requirements on the WTO, which, as I mentioned, should be comparable to those of other developing countries. When you read statements made by the Chinese government or trade negotiators, they always contain complaints that the United States or other developed countries are asking too much, far beyond the WTO requirements.

On the other side, we all say that we cannot make exceptions for the Chinese to get into the WTO without fulfilling the basic requirements. We are talking the same language here, but we have a different perception. If we agree on one basic point, if China and the major WTO members agree that China should fulfil the basic requirements that are comparable with developing countries as outlined in the WTO agreements, that is it.

Of course, in some areas, China must invoke the developing country status. In that case, some preferential treatment is available not only to China but also to other developing countries which are already WTO members. In that case, China should be allowed to have this special treatment as well. This treatment would apply to India or to other developing countries.

In that case, if we agree, China should follow the basic requirements and then China should be allowed to join the WTO. After China joins the WTO, we should try to design a transitional period in order for China to fulfil its full obligation under the WTO. As a matter of fact, there will be a transitional period for other developing countries as well. That period was designed during the Uruguay Round negotiations. That transitional period allows the developing WTO members to fully apply the WTO rules and obligations after the transitional period ends. Such a transitional period should apply to China as well.

However, we cannot make exemptions in the Chinese case that would lead to misconceptions that China got an excellent deal. For example, I read the recent testimony of a U.S. official -- I have forgotten her name -- who told the U.S. audience that, after the WTO becomes operational, there are four cases for accession, including Bulgaria and Mongolia. These four cases are not signed yet. She said they got a sort of deal, even more than the WTO agreements required.

I read these kinds of statements and try to relate them to the Chinese case. Maybe that is what the United States and other developed countries wanted. It might be more than what the WTO agreements require of China. That should not be the case for China or for other countries.

If we all agree on the basic requirements for all countries, including China, then we will have a common understanding that China should be brought to the world trading system to follow set rules and regulations. China would have the same claim and should be treated the same as other developing members. China just wants her transition. After the transitional period, China should respect all rules and regulations the same as other members. China is not asking for special rules, just during the transitional period as a developing country.

After these ten years of negotiations, there are still misconceptions. If we can have this common understanding, probably we can move the negotiations forward.


Senator De Bané: Does China still require certain high tech firms, in return for the right to sell their products in China, to transfer their technology to China? Is this policy still in effect?


Mr. Cai: I think so, yes. I have heard some complaints from the U.S. or Canadian business people doing business in China. They say that some joint venture contracts require the foreign partners to provide some kind of technology to the Chinese partner.

First, I would not think a technology transfer agreement is exactly part of the WTO agreement. The international community is negotiating in technology agreements right now. Of course, these are related issues. Intellectual property issues are related, I agree. The partial answer to your question is yes.


Senator De Bané: Undoubtedly this explains why the U.S. high tech industry, particularly companies that manufacture electronic components and semi-conductors, cannot support China's membership in the World Trade Organization because they are being asked to transfer their technology and know-how abroad in return for access to China's marketplace. This is the reason for their opposition.


Mr. Cai: To some degree I agree with this concern, that you do have problems and that the U.S. business people and the high-tech companies have some concerns about this kind of requirement. As I mentioned, technology transfer requirements are not exactly addressed in the WTO agreement package.

The second claim of the Chinese government is that, because China is not yet a part of the WTO, China is free to do whatever China sees as necessary. However, if China joins the WTO, then from that day on China will make its systems and practices as compatible as possible with WTO requirements. But if you keep China outside of the WTO, China will insist on requirements, such as the technology transfer requirement or some kind of local sourcing requirement or export performance requirement, for these foreign companies that are doing business in China.

If you get China into the WTO, you can go to each provision of the WTO agreement and tell China that, as a member now, it must follow these rules one by one. China will probably follow them, rather than staying outside the WTO.

If you ask China to follow all the rules before joining the WTO, China will probably say that it will not do that. If China is a member of the WTO, it is a possibility that China will do it.

Senator Bolduc: I have two questions. You consider that the world is divided between developed and underdeveloped countries and that China falls into the underdeveloped category. It seems to me that China is much more developed than that. If we look at purchasing power parity, for example, it seems that in 10 to 15 years China will have the second or third largest economy in the world. In terms of instruments of development, China is not at the same level as the Russians, for example, in some areas. The Chinese are much more developed than that.

There must be a way to distinguish between some African or Asian countries, for example, and China and the developed world. I agree with the concept of a period of transition. However, it is not the same as that which would be applicable to, say, Bangladesh or Nigeria. What do you have to say about that?

Mr. Cai: I agree with you on the point that China's level of economic development varies from area to area, from region to region. There are some high-tech industries, such as the aviation industry, which are well developed in China. However, there are many areas in which China is underdeveloped. Some coastal areas and some industrial cities are well developed, but there are some rural and inland areas that are underdeveloped.

It is very important to distinguish the level of Chinese development on a sector-by-sector basis and on a region-by-region basis. It is important for the international community to negotiate the package with the Chinese in order to recognize the difference between the sectors and the regions.

You mentioned Bangladesh and Nigeria as examples of two of the least developed countries in the world. I do not think China is seeking a least-developed-country status. China is seeking developed-country status, which is a higher level than the least developed countries.

In this case, if one accepts the concept that China is a developing country, while in some sectors it is well developed, then China could accept more obligations. There are some sectors in China which are not well developed. China could seek some kind of protection in those areas under the label of "developing country", something which is allowed by the agreements.

Senator Bolduc: My next question relates to cultural differences. As you may know, we have only one full-fledged anthropologist in the room. I refer to Senator Stollery. I do not qualify. Nevertheless, on many occasions I had to go to Africa for the World Bank where I worked for various western French African countries. I realized there that cultural differences are so important that, sometimes, you cannot make yourself understood.

I agree with you when you say that there are some important cultural differences in China. Could you give us a few examples of that? For example, does a "yes" with a smile mean "yes"? Does "yes" without a smile mean "no"? Do you have a good book to recommend about anthropology in China?

Mr. Cai: I am not aware of any book on this subject. However, I will find out whether such a book is available.

With respect to your second point, when you do business in China many things are not straightforward. You really have to get the right person to talk to about business. The person whom you meet in your first meeting might not be the one who will make the decision. You really have to find out who is the decision maker. It is very important.

It is good advice to use a Chinese contact, someone who works for you and who knows the culture, to identify what the problems are in order to reach a deal with the Chinese.

Sometimes we use "yes" or "no". However, you really have to read something in writing to confirm whether or not you are really getting the point.

The Chairman: Thank you very much, sir. This has been a most interesting session. There is no question in my mind after having heard the initial presentation and the answers to the questions that the committee could devote its entire energy and time to our relations with China. However, we will not be able to do that. Certainly, you have helped us a great way along the road. We are most appreciative. Thank you very much.

The committee continued in camera.