International Commmentary

China, PNTR and WTOÐRealism and Caution

The current phase of American trade and foreign policy towards China, which began with the recognition of the Communist regime by the Nixon administration in 1972, will reach another milestone on May 22, when Congress votes on granting (or withholding) “Permanent Normal Trading Relationship” (PNTR) status to the People’s Republic of China. How vital is passage of PNTR, and how will it affect the insurance industry? One can’t answer these questions without examining Chinese culture and the actual state of China’s economy.

The provisions concerning insurance, which were agreed on by Chinese and American negotiators last November, provide for an opening of the Chinese market and a substantial lessening of regulatory barriers.

The China Trade Relations Working Group summarized them as follows: “China has agreed to grant licenses on a prudential basis, without numerical restrictions or discretionary ‘economic needs’ tests. Companies can obtain a license if they have more than 30 years of experience in a WTO member country, a representative office established in China for two consecutive years, and global assets of more than $5 billion.” Passage of PNTR would validate these provisions, and lead to China’s membership in the World Trade Organization (WTO).

The insurance industry is enthusiastic about the apparent market opportunities which adoption of PNTR will open up in China. All the major insurance trade associations, led by the American Insurance Association (AIA), joined in writing an open letter to the members of the House and Senate urging passage.

John Savercool, AIA vice president of federal affairs, stated in a press release: “China is particularly in need of property-casualty insurer expertise as its infrastructure and economy expands.” He saw U.S. insurers helping China become part of the global economy, and offering the Chinese people increased opportunities to protect themselves against disasters.

Clearly missing from this rosy scenario are the agents and brokers who play a vital role in the U.S. The same working group quoted above sums it up in one word: “excluded.” So far, despite the protests of the Council of Insurance Agents & Brokers (CIAB), no provisions for brokers or agents are in the accord. This isn’t surprising, considering the fact that insurance brokers, outside of Hong Kong, didn’t exist in China until last February, when the government licensed the first three brokers to commence business as part of the four groups who control insurance sector activities in China.

Nevertheless, on paper PNTR appears to be a significant breakthrough for the industry, agents and brokers excepted. Most of the companies, especially the ones who are already in the Chinese market-AIG, Chubb, Hancock-or have applied for licenses, are equally enthusiastic. But, what’s the real value of PNTR, and what trade gains can the U.S. industry realistically expect to achieve?

It’s a trade agreement-nothing more, nothing less-and basically acknowledges what military commanders and CIA operatives like to refer to as “facts on the ground.”

The U.S. buys 21 percent of China’s exports, the same amount as Japan. Twelve percent of China’s imports come from the U.S. The much discussed “trade deficit” with China amounted to $56.927 billion in 1998 and $68.668 billion in 1999. These are large numbers, but insignificant compared to America’s $9-trillion-plus economy. Congress’ decision will not significantly affect these established trading patterns.

In the enthusiasm over the agreement, everybody seems to have lost sight of the background and the nature of China’s relationships with the rest of the world, and the special character of its oldest civilization, whose structure, like Japan’s, differs in fundamental ways from what has evolved in the West.

U.S. insurers may indeed have gained legal sanction to do business in China, but that doesn’t guarantee they will be successful without a thorough understanding and acceptance of the way business is conducted there.

“The basis of business in China, and the whole concept of risk, is subsumed under the aegis of familial responsibility and custom,” said Herbert Gooch, chairman of the Department of Political Science
at California Lutheran University. “Traditional capitalist insurance concepts of impersonal, much less individual, sharing of risk may be hard to translate and sell well into the Chinese culture.” The fundamental problem insurers face is the nature of Chinese society itself, not the legal barriers which PNTR addresses.

John Fairbank, in his classic work “China-The Great Tradition,” asked readers to imagine what Western Civilization would be like if the Roman Empire had never fallen, but continued to exist and adapt into modern times. This is what China has experienced. (Can you imagine California being ruled by a Roman governor?)

China has been a unified country with its own culture, religions, laws, philosophy, and for the most part, a strong central government for more than 2,200 years. U.S.-style insurance operations are not part of this historic pattern.

Have the tumultuous events China experienced in the 19th and 20th centuries substantially altered this world-view? The 1911 revolution and the forced introduction of a Communist (actually more Leninist) system of government in 1949 abolished the Mandarin system and the imperial government forever. But it didn’t fundamentally alter China’s conception of itself. Mao actually tried to and failed when he launched the Cultural Revolution in 1965. Since then China has followed a less violent and more pragmatic path, but it hasn’t become a Western-style democracy.

The current system is therefore the one with which the rest of the world must deal. If it’s going to change or evolve into something more open and less authoritarian, it will be because Chinese leaders themselves feel this is necessary, not because of any outside factors or pressures. The vast majority of the population will adhere to the policies of whoever is in control as long as they are confident that the goal of making China strong is being achieved.

That control, and the mindset that goes with it, manifests itself in several important ways. To begin, China has never developed a western style legal system. For Westerners, especially Americans, awash in lawyers and legalities, China’s legal processes are unfathomable.

Greg Mastell, vice president of the Economic Strategy Institute, put it this way in testimony before the Senate Finance Committee in March 1999: “The central problem is that China has neither a rules-based country, nor a true market economy. The former head of the Chinese Peoples’ Congress is fond of saying ‘China is a country of strong leaders, not strong laws.’ This lack of a rule of law has a direct impact on U.S. concerns ranging from human rights to trade.”

Furthermore, a strong state presence suppresses individual rights. The leaders of a society which sees itself as trying to fight off barbarians don’t feel the need to grant those who may disagree with them any right to do so. Hence “dissidents” are suppressed, often brutally, as in 1989 at Tien An Men Square. Chinese courts don’t examine independent evidence; they don’t render decisions based on it; they don’t assume the accused is innocent until proven guilty; they impose punishment. This system exerts powerful pressures on individuals to conform. It also stifles initiative and prevents economic development.

Lastly, “all’s fair in love and war,” and trade for China’s leadership is a form of warfare, albeit a benign one. Chinese leaders are trying to keep their authoritarian dictatorship in power, and at the same time grow the economy by adopting capitalist-style competitive markets.

Such a scheme creates tensions, which many experts feel will erupt. But China’s relations with its trading partners are based on this dichotomy, which often resembles the ancient Chinese ploy of playing barbarians against each other. China has been practicing this form of warfare for a very long time and is very good at it. It can bully Taiwan, and at the same time complain about American “interference” in the rest of the world, and it can routinely ignore the terms of its agreements if it finds them inconvenient.

Does the insurance industry, therefore, really expect China to embrace the PNTR provisions in toto, and to observe them? Experience indicates otherwise, as Mastell noted when he posed the following rhetorical question to the Senate Committee: “If China ignores relatively straightforward agreements on matters such as agriculture and intellectual property protection, is it realistic to assume that a complex multilateral agreement on services, investment and other matters will be obeyed?”

That’s the first question that needs to be addressed in assessing the impact of PNTR on U.S./China relations. The insurance industry cannot automatically count on the Chinese to strictly adhere to its provisions nor to WTO rules. China plays by its own rules, and if an insurance company is going to be successful in that market, assuming there is one, which is the next big question, it had better learn what they are.

Next issue: Is there really a Chinese market?

Topics USA Agencies China Market