NTR is neither a special privilege nor a reward -- it is the standard tariff treatment nearly all US trading partners enjoy.

What is NTR?

Normal Trade Relations (NTR, formerly known as Most Favored Nation tariff status) refers to the standard or non-discriminatory tariff treatment the United States extends to other trading partners in return for reciprocal tariff treatment for US exports. NTR is neither a special privilege nor a reward--it is the standard tariff treatment nearly all US trading partners enjoy. Over 160 countries have NTR tariff status with the United States. The only countries to which the United States currently does not grant NTR are Afghanistan, Cuba, Laos, North Korea, Serbia/Montenegro, and Vietnam.

The United States provides special tariff treatment, more favorable than NTR, to more than 30 countries and territories under special tariff programs, including the North American Free Trade Agreement (NAFTA); the Agreement on Trade in Civil Aircraft; the Automotive Products Trade Act; the Caribbean Basin Economic Recovery Act; the United States-Israel Free Trade Area; and the Andean Trade Preferences Act. Under these programs, designated products may be imported at reduced or duty-free rates. China is not eligible for any of these programs.

Why PNTR?

The 1994 Marrakesh Agreement establishing the WTO requires members to extend NTR to other WTO members, mutually and without conditions. However, under the Jackson-Vanik amendment to the United States Trade Act of 1974, the United States may not grant NTR status to non-market economies unless the President waives ineligibility, which he must do each year. This amendment was originally directed at the Soviet Union because of restrictions on emigration of certain Soviet citizens. But the Jackson-Vanik amendment applies to all non-market economies. Thus, for the United States to enjoy WTO benefits with respect to China after PRC accession, Congress must amend or repeal Jackson-Vanik to permit extension of PNTR to China.

Should Congress fail to do so, at the time of its accession China could elect to invoke the WTO's Article 13, which permits China not to apply WTO benefits to the United States. Under WTO rules, the United States also may invoke Article 13. In either case, however, non-application of WTO benefits by either country would deny US firms the greater access to China's markets that WTO accession would bring.

WTO and the US Trade Deficit

The US trade deficit with China often assumes center stage in discussions of the US-China commercial relationship. In 1998, the US Department of Commerce (USDOC) put the bilateral deficit at $56.9 billion--but eminent US economists have argued that a more accurate figure would be $35 billion. As the United States evaluates whether benefiting from China's WTO accession is in its interest, it is useful to remember that China's WTO obligations call for reduction or elimination of many of the PRC barriers to US goods and services that contribute to the trade imbalance. Moreover, the deficit is not the most important barometer of US economic health or of the benefits to either side of US-China trade, for a number of reasons:

• US figures overstate the trade deficit by not accounting for entrepot trade through Hong Kong. Economist Nicholas Lardy estimates that current USDOC methodology overstates the deficit by 30 percent.

• Different US measurements for exports and imports further skew the trade-deficit figures. US exports are calculated on a free-along-side (FAS) basis and US imports are measured on a cost, insurance, and freight (CIF) basis. According to Stanford University economist Lawrence Lau and University of California economist K. C. Fung, US exports should be adjusted up by 1 percent, and US imports adjusted down by 10 percent to achieve equivalent values. Such adjustments yield a deficit of $36.9 billion.

• Merchandise trade figures tell only part of the story--they exclude trade in services. The overall bilateral US trade deficit with China is even smaller when bilateral trade in services is included--according to Lau and Fung, the 1998 deficit falls to $35 billion after this additional adjustment.

In the 1990s, the United States has enjoyed a small but growing surplus in trade in services with China. In 1998 alone, US exports of private services to China grew by 8 percent, among the most rapid rates in the region. Once China j oins the WTO and its market-access commitments kick in, US-China trade in services will expand even more quickly.

• Imports from China substitute for other imports, not US-made goods. According to an Institute for International Economics study, 90 percent of US imports from China are substitutes for US imports from other low-wage economies, largely in East and Southeast Asia. Top US imports from China are low-tech electrical machinery, toys, footwear, and apparel. Only 10 percent of imports from China compete directly with US-made goods.

• China's 1987-97 export growth reflects the relocation of export-processing ventures from Southeast Asia to China. Processed exports accounted for 57 percent of total PRC exports in 1998, of which foreign-invested enterprises produced more than 21 percent. Imports accounted for 60 percent of the content in PRC processed exports in 1998, according to PRC Customs statistics. And the combined annual US trade deficit with Hong Kong, Singapore, South Korea, and Taiwan declined from $34 billion in 1987 to around $22.7 billion in 1997, while the deficit with China climbed from $3 billion to $57 billion, according to US official (unadjusted) figures.

• Does the deficit matter to the US economy's health? While China's WT O accession is impo rtant to key industries in the United States, trade with China accounts for less than 1 percent of US GDP, which was $8.5 trillion in 1998.