Chinese Quotas Kill the Pain but Not the Problem

In successfully putting pressure on China to impose quotas on clothing and textiles exports to Europe, the European Commission has achieved the trade policy equivalent of injecting Novocaine into a compound fracture. It killed the pain without curing the problem. That is malpractice.

Yes, quotas – or the currency revaluations pushed by the Bush administration and the US Congress – will temporarily dull the economic aches western companies feel from their low-cost Chinese competition. But there is nothing healing or strategic about them.

The future of global trade with China depends far more on the willingness of the world's fastest growing economy to enforce its own laws. The new quota system announced in Beijing last month does little to help integrate China into the global trading community. Even worse, that seeming "concession" may actually achieve the opposite result.

The benefits of free trade are not built on legal loopholes and broken commitments. A new strategic framework for trade with China should be based on three principles that transcend currency speculation and just-in-time protectionism.

First, free trade requires respect for the rule of law. That is true whether those laws protect intellectual property, contractual promises or workers' safety. Unfortunately, despite the commitments made when joining the World Trade Organization, China's readiness to enforce its own laws has failed to keep pace with its economic growth. This is really where China cheats its trading partners and itself as an emerging superpower.

It is emphatically not about seeking to impose western standards on Chinese culture. Many of China's labor laws are even more demanding than international standards. Yet, as the US Department of State's 2005 human rights reports note, workers' rights in China are routinely and egregiously violated in spite of rigorous laws on safety and working hours. Chinese workers are forced to work illegal overtime and in unsafe conditions.

Second, permission to export should be granted only to manufacturers that comply with their legal obligations. Factories that violate Chinese law should not be given a free ride to "compete" in global markets. The truth is, these companies are like American baseball players on steroids: they are cheating, pure and simple.

Perversely, under China's new quota system, cheats prosper. The pending regulations calculate export licenses based on a company's exports in the previous 12 months. Factories that have achieved significant exports by evading regulations and ignoring their legal obligations will receive greater export opportunities than their law-abiding competitors. Insisting China enforce its own domestic standards would positively change the economics of trade. Greater enforcement would undoubtedly raise the costs of Chinese exports, at least for those companies in breach. Factories previously benefiting from expropriating intellectual property or exploiting workers would bear the true costs of production.

At the national level, greater respect for the rule of law would reduce the likelihood of trade disputes, as Chinese authorities better appreciate the need to honor their global commitments. On the factory floor, nurturing a culture where workers know and can act on their rights will facilitate China's transition to a market economy from one based on command and control.

Third, innovative frameworks require institutional innovation. An independent third party, such as the International Labor Organization, should monitor and report on companies' legal compliance and China's progress. An ILO program, backed by the Chinese and western governments, would also give teeth to the numerous voluntary programs already being pursued by the private sector. Retailers as diverse as Nike, Wal-Mart and Gap have adopted "codes of conduct" requiring their Chinese suppliers to comply with local law. Their efforts have been hampered by the lack of consistent government enforcement.

The era of "constructive engagement" with China must be replaced by a new strategy of constructive alignment. Simply expanding trade and investment will no longer fuel economic and political reforms. A policy based on targeted, market-based incentives – which clearly align commercial interests with public policy goals – will both reduce China's trading surplus and strengthen China as a trading partner.