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4. I said that these were of course more than just legal questions: they went to the heart of the substantive negotiations. The EC (and every other Contracting Party, with the exception of the US, who were more muted) had welcomed the Chinese application, and were keen to make the negotiations a success. But there were a number of questions on which assurances would be needed eg:
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How were foreign trade prices determined, and how would they be affected by domestic price reform?
How autonomous were foreign trade enterprises?
How did the Chinese define a subsidy, and how could internal market prices be determined in a non-market economy?
How transparent were the Chinese foreign trade system and its accompanying regulations and policies?
The EC were of course apprehensive of the effects of assimilating a major command and developing economy into the GATT, at a time when the more prosperous developing countries were being weaned away from their privileged positions in the open trading system. There would be pressure for adequate safeguards to be worked into the terms of agreement. But this did not mean that the difficulties were in any sense insuperable.
5. McDonnell said that he understood the political background. The Chinese were seeking nothing ab initio: anything they obtained in the course of negotiations they would pay for in full. They would in effect graduate themselves. It would be better to have the safeguards contained in a reformed Chinese economic system rather than a cluttered Protocol of Accession. He acknowledged that this all depended on eg satisfactory definitions of normal value and subsidies. But there would be political problems if the Chinese were told at the outset that theirs was not a market economy. It was too early to judge what the Chinese economy would look like after reform. It was not impossible that, with the introduction of wholly autonomous foreign trade companies, and the realisation of a process of capital formation (with new laws admitting foreign capital), the economy might be comparable to that of Mexico by the early 1990s.
6.
He added that the Chinese would not in any case be seeking concessions from the EC or US in the early part of the negotiations. They would probably focus initially on Japan, and look for concessions in areas where they were prospective major suppliers of products made with Japanese participation or investment. He did not foresee too many items outside the textile area which should trouble the EC: most sectors had MFN treatment under the 1978 Agreement.
7. On the detailed points that would need to be discussed in the negotiations, McDonnell had the following comments:
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