China vs. The WTO

Will international commerce change China for the better? We all thought so when the Chinese joined the World Trade Organization at the end of 2001, which was hailed as the most important event in East-West economic relations since Marco Polo's voyages in the 13th century.

Many said that increased commerce would bring democracy to the world's most populous state. Others told us that China's membership in the rules-based organization would reform its non-rules-based economy. Now almost every hopeful prediction is being proven wrong.

Yes, it's true that Beijing has dropped tariffs and opened some sectors as a result of its membership, but Chinese leaders still view international commerce as a zero-sum exercise. And by employing mercantilist tactics, they have accumulated large surpluses. China's trade surplus against America amounted to $233 billion last year. That was on top of $202 billion in 2005 and $162 billion the year before that.

Why has Beijing done so well against the largest and strongest economy in the world? Almost every pundit, commentator, and analyst points to structural reasons such as rock-bottom wages and nonexistent environmental standards. But there is one more factor at work: China is a trade outlaw.

The Chinese reaped especially big sums from commerce after 2001 because they enjoyed the best of all possible worlds — they took the benefits of being inside the large trading club without suffering much of the pain of adhering to the promises made to join it.

The West at first was tolerant, sending only small warnings to Beijing. The first was in March 2004 when Washington filed a WTO complaint against China's preferential refund of value added tax for domestically produced or designed integrated circuits. Beijing had no leg to stand on and quickly repealed the offending tax break. Nevertheless, the Chinese did not take the hint. In February 2006, America warned China that its informal grace period was over, and, after more Chinese foot dragging, Washington and Brussels took the unprecedented step of jointly filing a complaint at the end of March. The case targeted China's discriminatory auto-parts tariffs. Although the tariffs are indefensible, Beijing has refused to repeal them.

Although the auto-parts tariffs are regrettable, they are violations that can be easily remedied — just like the integrated circuits provisions were — with just a few strokes of the brush. Every country breaches trade rules, and these violations by themselves do not mean that China is unfit for WTO membership.

Yet other trade violations, integral to the Chinese economy and political system, do. Some of them are the subject of three more trade cases filed against China in the last three months. In early February, Washington complained of nine sets of manufacturing subsidies. The incentives apply "across the spectrum of industry sectors in China," according to the U.S. trade representative, Susan Schwab, and benefit about 60% of China's exports as well as domestic manufacturers producing for their own market.

The complaint, as broad as it is, does not cover the two largest subsidy provisions in the Chinese economy. First, the central government manipulates its currency most every business day to keep it artificially depressed, thereby making Chinese goods cheap. Second, Beijing maintains a banking system that provides credit at low cost or, in many cases, at no cost whatsoever. The Chinese government runs the largest manufacturing subsidy program in history.

Then last week America filed two more WTO complaints. One concerned the piracy of foreign intellectual property. China makes about 70% of all the counterfeit goods in the world. The Chinese government not only benefits from and protects this massive theft, it also participates in the counterfeiting as a manufacturer and distributor. Despite more than a decade of Western efforts to reduce Chinese piracy, the problem is getting worse, not better.

China's thievery is probably the biggest crime of all time, and criminal activities are now so tightly interwoven into the fabric of the economy and society that they have become integral to the maintenance of the country's political system. As a result of the pervasiveness of the problem, no WTO complaint can ever provide a remedy.

The other case filed last week also involves China's political system, but in an even more fundamental way. Washington has complained of Chinese restrictions on the distribution of foreign films, music, books, and videos. Beijing's lifting of these limitations would first lead to the diminution of the Communist Party's control over ideas and then the loss of its political monopoly. From Mao Zedong to Hu Jintao, Beijing's leaders have all devoted themselves to one principle: the right of the party to rule China for all time. It is unlikely that today's supremos will reverse course, adhere to their WTO promises, and open up the country completely.

China was not ready to join the World Trade Organization in 2001, and, after more than a half decade, it is not prepared to meet its obligations as a member today. Either the WTO surrenders the concept of rules-based trade, the reason why the organization exists in the first place, or asks China to leave. It was a grand idea to use the WTO to reform China, but now we know this concept cannot work.

Mr. Chang is the author of "The Coming Collapse of China."