China Policy: Fostering US Competitiveness and Bilateral Relationship
Anderson, Donald M., The China Business Review
Editors note: This position paper was presented to the President-elect and top members of his Administration by Council President Donald M. Anderson in December.
Developing and implementing the "right" China policy is bound to be one of the most challenging foreign policy issues your Administration will face. The United States has vital economic, strategic, and political interests in China that necessitate a thoughtful, well-rounded approach to our relations with that country. In brief, these interests include:
* US ECONOMIC COMBATIVENESS--China's economy is the fastest growing in the world. By the end of this decade, it will be larger than those of all but a handful of countries. The United States must be well positioned to compete successfully in this huge potential market.
* REFORM IN CHINA--China is striving to transform its rigid, centrally planned economy into one driven by market forces. The United States must encourage both economic and political liberalization of Chinese society, by clearly articulating our interests and concerns, establishing a dialogue on these issues, forcefully pressing to advance our interests, and using targeted sanctions when necessary.
* INTERNATIONAL COOPERATION--The United States must have Chinese cooperation in the United Nations and in other multilateral organizations to solve international crises and promote global arms control and environmental protection.
Our interests in China cut across a wide number of issues, many of which will not be easy to reconcile with each other or with the Chinese. The US-China Business Council, a non-profit organization of 200 US companies doing business in China, urges you to adopt a prudent, patient approach with China; many of the US objectives that seem contradictory in the short run in fact complement each other over the long run. In your efforts to coordinate the various aspects of US China policy, we hope you will consider our views and concerns, which are presented on the following pages.
FOSTERING ECONOMIC RECOVERY
You have said that the principal task of your administration is to revitalize the US economy and adopt policies that develop the long-term economic interests of this country. Creating new, high-wage jobs and promoting American competitiveness should be the cornerstone of US economic and trade policy. China will be key to these efforts.
* With current economic growth of around 12 percent, China is the world's fastest-developing country. After little more than a decade of economic reforms, its real GNP already exceeds that of every European country except Germany. According to The Economist, China may become the world's largest economy by the year 2010.
* China is already an important buyer of US agricultural commodities, and sends a critical emerging market for high-technology American industries such as aerospace, telecommunications, industrial machinery, chemicals, computers, autos and auto components, power generation, and medical equipment. This year alone, the US and Foreign Commercial Service estimates that the US will sell over $8 billion worth of goods to China an increase of 27 percent over last year, distinguishing China as one of our fastest growing export markets (see Table 1). (Table 1 omitted)
* China intends to spend $300-350 billion on imports during its 1991-95 Five-year Plan. The US and Foreign Commercial Service has targeted the sectors in Table 2 as good prospects for strong US export growth to China. (Table 2 omitted)
* China's foreign exchange reserves now exceed $45 billion--the sixth largest in the world. US companies cannot afford to ignore the growing wealth and potential of the China market--our competitors do not. In 1992, China attracted over $30 billion in new direct foreign investment, with Asian investors leading the way. Japan, Canada, and the European countries all maintain significant concessionary lending programs to China, and even former foes are moving to establish diplomatic relations with China in order to participate in the country's economic growth. South Korea, Israel, Russia, Saudi Arabia, and Vietnam all established or upgraded relations with China this year. The United States is the only country that continues to consider imposing new trade sanctions against Beijing, thereby threatening US economic competitiveness in this critical market.
HOW CAN WE IMPROVE OUR ECONOMIC PERFORMANCE IN CHINA?
During your campaign, you promised to create jobs at home and spur US competitiveness abroad. To compete aggressively in the global market, the United States must compete effectively in China. Already, our $8 billion in exports to China creates nearly 153,000 American jobs (according to Department of Commerce estimates that each billion dollars' worth of exports creates 19,100 jobs), and the potential to significantly boost this figure is great. If the Clinton Administration is to help US companies compete effectively in China and thereby promote US job growth, it must:
* Create a stable and predictable framework within which US companies can formulate trade and investment strategies.
A stable commercial environment is critical for business planning. In commercial terms, uncertainty means risk, and risk constrains business. The most important way to ensure stability is to de-politicize the Most Favored Nation (MFN) renewal process. MFN is the foundation of all US commercial relations with China and should not be made the focal point for gaining leverage on other issues on the US agenda.
Over the last few years, the congressional review of the President's extension of MFN has injected a high level of risk and uncertainty into US commercial relations with China. Threats to withdraw MEN, or to base renewal on conditions beyond those stipulated by the Jackson-Vanik amendment, pose a dilemma for the US business community; US companies must assume that the conditions will not be met and the status will be withdrawn. In such an unstable, unpredictable environment, long-term relations with Chinese partners cannot be forged.
Clearly, past congressional efforts to withdraw or condition MFN were fueled by Congress' frustration with an executive branch it perceived as unwilling to adequately promote US human rights, security, and commercial interests in China. Now, however, it should no longer be necessary for Congress to use MFN to prod the executive branch to action. With your Administration firmly committed to engage in diplomatic efforts to promote democracy and human rights in China, there is no reason for the Congress to preempt your leadership. Furthermore, the costs to the United States of removing or conditioning China's MFN are significant:
* MFN status is reciprocal; if we threaten MFN status for Chinese exports to the United States, Beijing will do the same to US exports to China just as our exports are starting to boom.
* Over 2,000 US investments worth more than $6 billion depend on MFN status to import US parts and components for their China projects. If MFN status is withdrawn or limited, the US will lose these exports and billions of dollars of US investment in China will be put at risk.
* Threats to China's MFN status undermine US competitiveness in other markets. US companies may be deemed unreliable trading partners not just by the Chinese, but by other developing countries and by foreign companies seeking suppliers for China projects.
* PROMOTE GREATER ACCESS TO CHINA'S MARKETS.
US commercial policy must make reducing the bilateral trade deficit with China a priority. This will require a multi-pronged strategy:
* The United States must press for further opening of China's markets. The recently completed Section 301 agreement made considerable progress in addressing such non-tariff barriers to trade as import licenses, quotas, and testing restrictions. More needs to be done. China retains a complex web of foreign exchange controls that restrict imports. Excessively high tariffs also unfairly protect China's domestic producers.
To overcome these obstacles, United States should closely monitor the Section 301 market access agreement to resumed for feasibility studies in sectors that promote the well-being of the Chinese populace and provide significant opportunities to US companies, such as the environment and health care. Similarly, US companies should be permitted to obtain insurance from the Overseas Private Investment Corp. (OPIC) for China projects. Further, the Export-Import Bank's "war chest" should again be made available to protect US exporters in imminent danger of losing China sales to foreign competitors backed by concessionary financing.
* The US should ensure that its G-7 allies honor OECD guidelines limiting concessionary aid to China. Passed in December 1991, the guidelines seek to keep soft loans from being used to fund commercially viable projects in such key sectors as telecommunications, power, construction, and transportation. US companies have been at a distinct disadvantage in these sectors, as Japanese and European tied loans have financed many of the largest projects. The United States should press other OECD members to implement the guidelines on a sector-by-sector rather than case-by-case basis, and should also accept feedback from US companies to ensure that all projects financed by OECD countries meet the criteria laid out in the guidelines.
* The United States should press its COCOM allies to support removal or relaxation of unnecessary export controls. While a system for controlling high technology exports to China is still needed, liberalization of export controls has failed to keep pace with the rapid development of new technologies. Our COCOM partners have stalled on liberalizing controls on computer and telecommunications equipment not for reasons of national security, but because they are not as competitive at the higher end of these sectors.
a The United States must consult with China to establish a mutually acceptable system for determining bilateral trade flows. Currently, the two governments use different methods for calculating the large amount of goods re-exported through Hong Kong.
Moreover, the Department of Commerce must consider our trade deficit with China in conjunction with those with Taiwan and Hong Kong. Over the past five years, Hong Kong and Taiwan have moved much of their light industrial export processing industries to China. As a result, US trade deficits with Hong Kong and Taiwan have declined, while the deficit with China has increased. However, our overall trade balance with these three entities together referred to as Greater China has remained constant (see Chart l). (Chart 1 omitted)This trend is driven by macroeconomic forces (i.e., rising wage rates and appreciating currencies) and will continue as South Korean companies join those from Taiwan and Hong Kong in establishing low-cost export platforms in China. The US trade deficit with China must therefore be looked at in a regional context, and not in isolation..
* Promote China's integration into the world economy
US commercial policy should seek to integrate China into the international economic community by encouraging it to accede to--and comply with--international conventions and agreements. The objective is to get China into the game, and then use multilateral organizations and international peer pressure to ensure that China plays by the rules.
* The United States should seek China's admission to the GATT, provided China's protocol of accession ensures greater transparency of its trade regime, elimination of the foreign exchange allocation system, decontrol of State foreign trade corporations, national treatment for all commercial enterprises in China, and tariff reductions for products and services in industries in which the United States is competitive.
* The United States should monitor China's compliance with international norms of intellectual property protection and raise any transgressions through US-China JCCT meetings and the offices of the Berne and Universal Copyright conventions.
* The United States should support the World Bank program in China. The Bank has a good deal of clout in China and is an effective proponent of structural reforms of the Chinese economy. We should support the Bank's efforts to liberalize the State sector and promote sustainable development in China.
The United States should not undermine the World Bank's effectiveness by politicizing the institution. Besides, other major donor nations have given no indication that they will support efforts to curtail the Bank's program in China. The United States should also keep in mind that aside from being a useful tool for promoting reform of the Chinese economy, the World Bank provides short-term commercial opportunities for American contractors seeking an entree to the China market. These opportunities are extremely important given the lack of concessionary financing available to US companies. The value of World Bank disbursements to American companies working on China projects since 1988 exceeds $500 million, and this figure does not even cover those US goods sold to China through US subsidiaries or agents in Hong Kong, China, and elsewhere in Asia.
Is it possible to strengthen our economic position in China and, at the same time, promote reform and progress toward democracy and respect for human rights in China? The answer is yes, provided we adopt a pragmatic attitude. There are limits to what we can realistically demand of China and how fast our demands can be implemented. We should not hold our considerable commercial and strategic interests hostage to well-intended but ill-conceived ideological goals. The point is to keep China moving forward with reforms.
China is a sovereign nation with few democratic traditions but a long history of authoritarian rule. Since 1978, Beijing has taken giant strides to reform China's economy and transform Chinese society. These efforts were temporarily derailed in 1989, but now appear to be moving forward again at an unprecedented pace: at the Chinese Communist Party's 14th Party Congress in October, the delegates overwhelmingly endorsed market economics as the key to the country's modernization and wrote the goals of "reform and opening" into the Party's constitution.
China's economic dynamism is both the driving force behind and a result of Beijing's reform program. These reforms are diluting central control over the economy and populace, thereby helping create an increasingly prosperous, decentralized, and pluralistic society. Such a society represents the greatest threat to the political dictatorship in Beijing.
US policy should thus be aimed at promoting the evolution of a society that will be able to press for political reform on its own behalf. To accomplish this, the US government should promote contact with the Chinese populace and encourage Beijing to join various bilateral and multilateral bodies that can monitor and critique its behavior.
THE UNITED STATES SHOULD:
* Hold China to its human rights commitments. China is a party to several international conventions and protocols addressing human rights--such as the Cruel, Inhuman or Degrading Treatment or Punishment--and, as a member of the United Nations, is obliged to uphold others, such as the Universal Declaration of Human Rights. The US government should work through relevant institutions such as the UN Human Rights Commission and the International Labor Organization to bring human rights abuses and labor violations to the world's attention and press for these abuses to stop.
To back up such activities at the national level, the United States should establish a bilateral commission with China to address human rights concerns. Such a commission would provide the United States with a specific forum through which it could regularly discuss human rights concerns with the Chinese.
The United States should also press Beijing to permit the International Red Cross access to political prisoners in China.
* Expand cultural and educational exchanges. In sharp contrast with the former communist regimes of Eastern Europe and the Soviet Union, China has permitted over 50,000 students and scholars to come to the United States. These people will be the future leaders of China, and we should make every effort to advance this important means of influencing long-term change in China.
Likewise, the United States should encourage the study of China by US students and scholars. The US government should press Beijing to remove restrictions on social science research conducted by foreigners in China, and should also send Peace Corps volunteers to China and increase the number of Fulbright awards granted for China study.
* Strive to reduce and eliminate travel and communication restrictions between the United States and China, such as the jamming of Voice of America (VOA) broadcasts. The US government should also consider expanding VOA programming to China, an option more timely and cost-efficient than setting up an entirely new broadcasting operation.
CARROTS AND STICKS
During the election campaign, you rightly pointed out Americans' unease with China's human rights record. We believe it would be both ineffectual and counterproductive, however, to use MFN as the "stick" to force through the changes we all want and hope to see in China. Conditioning renewal of MFN on China's behavior on human rights issues is not necessary and would not be successful in fostering positive change in Beijing's behavior for several reasons:
* The regime will seek to preserve its prestige and sovereignty in the face of foreign demands. Chinese history amply demonstrates that when Beijing has to choose between maintaining political control and preserving foreign economic interests, it will always choose preservation of the political regime. The 301 and Special 301 negotiations were successful precisely because they were not political; Beijing did not lose "face" in coming to an agreement with the United States because the agreements were cast within the larger economic framework of making China's economy GATT-compatible. The issuance of public ultimatums by the United States on matters of internal Chinese politics would definitely be rejected; the Chinese would not want to be seen to "kowtow" to a foreign power.
Trying to target the impact of MFN by limiting withdrawal of the status to products made by China's State enterprises is also a vain exercise. Aside from the fact that the proposal is not feasible the--US Customs Service, the Congressional Research Service, and others have documented that it would be impossible to identify such enterprises--it undoubtedly would be rejected by China and would spark retaliation against the products of US companies.
* Real political change in China cannot be dictated by Washington; it must be the result of sustained domestic pressure. The most effective means of inducing such pressure is to promote interaction between China and the foreign community; such interaction fosters the transfer of information and ideas. Eliminating or reducing US commercial interchange with China will only diminish our ability to promote political and economic liberalization there, and will hamper our efforts to improve US economic competitiveness.
Just as threatening to withdraw or condition MFN for China will not foster democracy there, legislative imposition of a stringent code of ethics on American businesses operating in China will not succeed, either. Such a policy might actually make matters worse, by politicizing the commercial activities of private companies.
American businesses do not need legislation to compel them to promote human rights in China; they are doing so already. Promoting human rights makes good business sense. For instance, US investments in China have had a positive impact on the individual freedoms of the Chinese populace by pressing for labor and management reforms that have increased labor mobility and reduced the prevalence of political patronage in the workplace. The growth of foreign investment in China should accelerate the transfer of ideas and practices that stimulate demands for greater individual freedom's throughout Chinese society. Instituting a code of ethics with an explicitly political agenda can only stunt this progress by increasing suspicion about the motives and operations of US companies. This would adversely affect their competitiveness in an increasingly competitive environment.
ENSURING REGIONAL STABILITY
China is a power both regionally and globally (by nature of its seat on the UN Security Council), and failure by the United States to recognize this fact could have substantial economic and political costs. It is in the US interest to bring China into the global community of nations as a friendly, non-allied power. We must take special note of three broad areas in which China plays a significant role with regard to US policy.
* ARMS CONTROL
The United States must remain engaged with China to maintain China's participation in international efforts to control proliferation of conventional and nuclear weapons. China is an increasingly important arms supplier to developing countries. The United States must ensure that China's arms sales do not undermine US peace initiatives in critical regions. But we must also recognize that substantial progress has been made: most notably, China's March 1992 accession to the Nuclear Non-Proliferation Treaty (NPT) and its commitment to adhere to the Missile Technology Control Regime (MTCR). Arms control issues are, of course, critical to US national security, and the United States must use multilateral pressure to ensure Chinese cooperation.
MFN status gives China an economic stake in cooperating on efforts to prevent proliferation of weapons of mass destruction and conventional arms sales to unstable regions; it gives China an incentive to heed US concerns. Loss of MFN would both undercut US influence and increase the value to Beijing of its hard currency earnings from military sales. The United States must ensure that markets for China's civilian goods remain open, if we wish to limit Beijing's arms sales. There are already sanctions available under US law for transfers that violate MTCR guidelines or NPT limits, and these, not the threat of MFN withdrawal, should be used when violations occur.
* Hong Kong and Taiwan
It is in the US interest to ensure peaceful relations between China, Hong Kong, and Taiwan. In recent years, improving ties across the Taiwan Strait have helped reduce the potential for armed conflict in this region. Taiwan and Hong Kong have developed strong economic ties with the PRC that could suffer severe damage were China's MFN status to be withdrawn.
Hong Kong will become part of China in 1997; the transition is already underway, and the integration of the Hong Kong and South China economies is already well advanced. Hong Kong relies heavily on trade with China and would suffer unduly were the United States to limit that trade by denying or attaching conditions to China's MFN status. Likewise, investment by Taiwan companies in the mainland has skyrocketed over the past few years, and is expected to exceed $7 billion-in 1992. Many of these investments export a large amount of their output to the United States, and would be hurt severely by US limits on China's MFN status.
In fact, withdrawal of China's MFN status could be more damaging to Hong Kong than to China., The Hong Kong government estimates the territory would lose $4.7-6.3 billion in re-export trade, $1.5-2 billion in income, and 44,060,000 jobs. Further losses in income and jobs would be expected if, as is likely, China were to cut back on its imports as a result of the loss of MFN. Manufacturers who manage their China investments from Hong Kong might also move their operations elsewhere, leaving behind a Hong Kong with little confidence in its future. This in Rim would accelerate the already high rate of emigration from the territory.
The US business community would also feel the blow: over $7 billion has been invested in Hong Kong by US businesses, which also hire an estimated 250,000 people in the territory. Moreover, Hong Kong, which is expected to purchase over $8 billion worth of American products this year, would undoubtedly reduce its imports from the United States.
Such a situation is contrary to the interests of the United States, which should seek to ensure Hong Kong's smooth transition to Chinese sovereignty so that it continues to be a strong engine for economic and political liberalization of the mainland. The Governor of Hong Kong, Christopher Patten, has said, "I don't want to see the future of Hong Kong tied up in the debate about the future of MFN. I want to make it absolutely clear that it is in Hong Kong's interests...that MFN is renewed unconditionally."
* PACIFIC RIM
The United States and China are crucial players in the economy and security of the Pacific Rim. China, in particular, plays a key role in regard to the stability of the Korean peninsula and Indochina. The United States must ensure that China plays a constructive, not destabilizing, role in the region, particularly given the decline in the former Soviet presence in the Pacific.
Asian leaders view China as important in maintaining peace and prosperity' in the region, and hope to see the Clinton Administration orchestrate a consensus in US government policy toward China after the two-party schism of recent years. Leading policy- and opinion-makers in Pacific Rim nations such as Singapore and Hong Kong are vocal proponents of the United States continuing China's MFN status without new conditions. They believe democratization in China will go hand-in-hand with expanding economic reforms and economic interdependencies with foreign nations, and will contribute to long-term stability in the region.
THE EARLY BIRD CATCHES THE WORM
It is our hope that under your leadership the United States will forge a new consensus on China policy that takes into consideration the significant time and resources companies and individuals on both sides of the Pacific have invested in building the US-China relationship. While we are aware that China's behavior on certain fronts is bound to continue to be problematic, we encourage you to deal with the problems in a focused manner with the appropriate tools. We believe it is unwise to use MFN status as the "stick" in US-China relations--MFN in the cornerstone of the American presence in China, and the processes it unleashes create the most pervasive, consistent pressure for reform in that country.
We also hope you will keep in mind that China's economic modernization presents great opportunities to US business. If we are to bolster our economic performance and enhance our long-term economic security, US companies must move quickly to capitalize on the world's fastest growing market. To do so, they need government policies that enable them to plan long-term strategies and that promote free and fair trade. The US-China Business Council will be pleased to help in whatever way it can to promote and implement these goals.…
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Publication information: Article title: China Policy: Fostering US Competitiveness and Bilateral Relationship. Contributors: Anderson, Donald M. - Author. Magazine title: The China Business Review. Volume: 20. Issue: 1 Publication date: January-February 1993. Page number: 10+. © U.S.-China Business Council Mar/Apr 2009. Provided by ProQuest LLC. All Rights Reserved.
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