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USIS Washington File

22 July 1998


(A New Framework for U.S.-China Economic Relations)  (4270)
Washington -- Senator Joe Lieberman (Democrat-Connecticut) and
Representative Robert Matsui (Democrat-California) called for the
renewal of most-favored-nation (MFN) trading status for China and
introduced a new framework for U.S.-China economic relations.
The two introduced "End the Annual MFN Circus," a paper written by
Lieberman legislative assistant Naotaka Matsukata for the Progressive
Policy Institute (PPI), during a July 21 Democratic Leadership Council
(DLC) news conference.
In his paper, Matsukata said the United States must continue to ride
the momentum generated from President Clinton's visit to China by
renewing its MFN trading status if it wishes to continue improving
U.S.-China relations.
"The MFN debates have only served to provide a platform for China
critics to air their views and fire off negative legislation aimed at
isolating China," Matsukata said.
The United States needs to pursue a strategy, he said, that eliminates
the annual MFN debate so that both countries can benefit from improved
Matsukata recommended three policy steps to better U.S. relations with
-- China's accession to the World Trade Organization (WTO) on
'commercially viable terms';
-- Following WTO accession, Congress should amend Section 402 of the
Trade Act of 1974, the Jackson-Vanik Amendment, to grant China
permanent MFN status; and
-- Finally, the President should lift any remaining economic sanctions
on China.
Following is the text of Matsukata's paper:
(begin text)
End the Annual MFN Circus
A New Framework for U.S.-China Economic Relations
By Naotaka Matsukata
President Clinton's recent summits with Chinese President Jiang Zemin
close a tense chapter in U.S.-Sino relations that began with the 1989
tragedy in Tiananmen Square. As the June summit demonstrated, the
United States government has laid its bet on improving relations with
China as the best way to ensure that this huge and growing power will
become a constructive member of the world community. Yet the upcoming
congressional debate over most favored nation (MFN) status for China
threatens once again to derail the progress.
U.S. economic relations with China have helped promote enormous social
and political change in China. These changes have had a positive
impact on the people of China, who are now experiencing higher living
standards and greater political freedom. For the United States to
continue influencing change in China, it must unite behind an
aggressive and strong economic policy toward China.
Just as the most recent summit concludes and the two nations attempt
to move forward in building a new relationship, Congress is about to
launch its annual debate to renew MFN trading status for China. Every
year, U.S.-Sino relations have been complicated by this congressional
intrusion into the executive branch domain. No other country is
subjected to this kind of congressional micromanagement. The MFN
debates have only served to provide a platform for China critics to
air their views and fire off negative legislation aimed at isolating
China. Pressure groups now use MFN as a club for a wide variety of
purposes. The positive effects of U.S. trade and investment relations
with China have been too little recognized during these MFN debates.
This year's debate over President Clinton's decision to grant MFN to
China carries greater significance than it has in the past. It comes
at a time when U.S.-Sino relations are at their strongest in more than
a decade, thanks in no small part to two summits. Almost all aspects
of the relationship -- political, strategic, and especially
economic-have improved since the last MFN vote in July 1997, and
Beijing has pledged to broaden individual freedoms within China. In
this environment of improving relations lies the opportunity to
eliminate the annual MFN circus and to create a new framework for
U.S.-China relations that satisfies both critics and advocates of the
President's engagement policy. Building on the accomplishments of the
summit, the Administration and Congress have a unique chance to
challenge old assumptions and establish new goals with respect to
economic relations with China.
This analysis offers a strategy for eliminating the annual MFN debate
and replacing it with a more constructive approach to relations with
China. It calls for permitting China's accession to the World Trade
Organization (WTO) to lock the country into a rules-based multilateral
organization; granting China permanent MFN upon accession to the WTO
to put some predictability into the economic relationship; lifting
remaining economic sanctions that have been hurting United States
interests more than they have been punishing China; and negotiating
fundamental bilateral and multilateral economic agreements to put
stability, reciprocity and normalcy into U.S. economic relations with
For the past several years, China has been experiencing a dramatic
transformation that is reshaping its economic and social landscape. It
has grown into one of the largest economies in the world and is on
track to become an important strategic player in the 21st century.
China's Economy and the United States
In the past decade, the Chinese economy has made steady progress,
dramatically increasing the living standards of the average Chinese.
In the last 25 years, China's economy has grown from the equal of the
1996 GDP of Ohio to the world's third largest. Between 1970 and 1996,
China's GDP as a percentage of world GDP increased more than 300
percent from 3.2 percent to 10.5 percent. In the last ten years alone,
China has doubled its GDP per capita and is on track to double it
again in the next five years.
China's economic significance to the United States has developed on a
similar path. China is already the fifth largest trading partner of
the United States and the sixth largest export market for U.S.
agricultural goods. In testimony before the Senate Finance Committee
last year, United States Trade Representative Charlene Barshefsky
reported that exports to China support more than 170,000 U.S. jobs and
thousands more indirectly. An examination of trade figures brings to
light the growing magnitude of U.S. trade and investment relations
with China. Two-way trade between the United States and China has
increased almost ten fold between 1990 and 1997, increasing from $10.4
billion to $75 billion. U.S. foreign direct investment in China is
also on the rise. Between 1995 and 1996, the stock of U.S. investment
in China rose by 36 percent, from $1.9 billion to $2.9 billion.
Looking to the future, it appears that China will continue to grow at
a healthy pace. One economist has estimated that China's share of
world income will grow from 8.8 percent in 1993 to as high as 15.5
percent in 2003. This expected rise in purchasing power by China's
growing middle class holds enormous potential for U.S. exports. A rise
in China's purchasing power will be paralleled by a projected 56
percent increase in two-way trade between the United States and China
by the year 2000. Most impressive is the World Bank's estimate that
China will have $750 billion in infrastructure needs over the next
China's Reforms
For China to achieve its economic potential, China's new economic
leadership must steer the country through a period of disruptive
economic reforms. China's new economic czar, premier Zhu Rongji, has
set an ambitious agenda that includes privatizing state-owned
enterprises (SOEs), restructuring the banking industry, privatizing
health care, and selling state-owned housing. These reforms are
placing enormous economic and social pressures on China. Chinese
leaders would like to weather these reforms by minimizing civil unrest
and maintaining stable external relations.
State-owned enterprises have traditionally dominated China's economy.
Although some privatization and closings have diminished their
influence, more than 300,000 SOEs still account for more than 30
percent of national output and 60 percent of total employment (1). In
the first ten months of 1997, SOEs accounted for 56 percent of China's
exports and 43 percent of its imports (2). The SOEs have also been
running at a loss for sometime. From 1985 to 1996, the percentage of
SOEs losing money has increased from 10 percent to more than 35
percent. As of 1994,more than 45 percent of China's SOEs have
liabilities exceeding or equal to assets (3).
In addition, more than 15 million workers in the past four years were
laid off from state-owned industries and found new jobs in the
emerging private sector. An additional 10 million workers remain
officially employed by the state-owned sector, but are out of work.
The enormous outflow of workers' is putting pressure on China's social
order. There have been reports of government crackdown of riots in
rural areas particularly effected by the shutdown of SOES. The
problems are expected to get worse before reforms are completed and
unemployment is expected to rise significantly.
China's banking system is also in serious turmoil. The poor
performance of the SOEs has contributed to bank insolvency and
non-performing loans. It is estimated that several of China's largest
banks are insolvent because their non-performing loans are greater in
value than their own capital assets (4). Resolution of banking
problems in China will take some time and depend upon sustained
economic growth.
The falling value of Asian currencies, in particular the weak yen, has
slowed China's exports and increased economic pressures at home.
Slower exports have had a particularly negative impact on SOES. Given
the economic difficulties that have been brought about by reform and
the current Asian financial crisis, it is astonishing that China has
resisted devaluation of its currency and maintained domestic reform
policies. If the steep decline of the Japanese yen and other
currencies is not stopped, China may be forced to devalue its
currency, setting off another set of competitive devaluations that
would have devastating consequences on the economies of Asia and the
economy of the United States.
These economic and social reform efforts are slowing Chinese economic
growth. Add to it the current economic crisis in Asia and WTO
implementation commitments, and economic growth will be constrained
for several more years. In the long term, however, China's economy may
begin to resemble some of the macroeconomic characteristics of the
United States economy, a vast continental economy that is
self-sufficient in some of its natural resource needs and driven by
domestic demand. Until China becomes a continental economy, it will
rely heavily on favorable external economic conditions for economic
growth and stability. China will need the United States market far
more than the United States will need China's market for many years to
Effecting Change in China
The United States has had considerable success in promoting reform and
change in China. After imposing a number of sanctions after the
Tiananmen Square tragedy nine years ago, the United States has changed
course and taken a more positive approach of engagement with China. As
a result, economic, political, and strategic contact has increased and
a number of important grassroots programs in areas such as building
capability for the rule of law have developed between the two
China remains outside the group of countries that are perceived as
responsible actors in the areas of international human rights,
nonproliferation, religious freedom, and environment. Nonetheless,
some progress is evident. China has agreed to participate in several
important multilateral human rights organizations and most recently
agreed to sign the International Covenant on Civil and Political
Rights that guarantees freedom of thought, conscience, religion, and
expression. China has also agreed to sign the International Covenant
on Economic, Social, and Cultural Rights that guarantees the right of
just and favorable conditions for work. In addition, the Chinese have
agreed to consider giving the International Committee of the Red Cross
access to Chinese prisons. John Kamm, a private citizen who seeks the
release of political prisoners in China, has reported progress in
working with Chinese leaders on the release of prisoners (5). The most
encouraging sign of China's softening stance on human rights was its
decision to release Wei Jingsheng late last year and Wang Dan earlier
this year.
In the last several years, the strategic dimension of the U.S.-China
relationship has taken on a higher profile. Following the Taiwan
Straits crisis in 1996, the United States and China have worked
closely to bring greater transparency and better communication into
the relationship. The November summit produced important advances in
communication with an agreement to set up a hotline between Beijing
and Washington for emergency situations and an agreement to develop a
protocol to handle encounters at sea between U.S. and Chinese naval
vessels. The recently concluded summit produced an agreement to
detarget missiles aimed at each other. Trust and better communications
will be necessary in order to work with China on resolving several
important regional issues such as the future of Taiwan, Korean
unification, nuclear proliferation in South Asia, and moderating
ethnic tensions in Indonesia.
China has shown some good faith in the area of nuclear proliferation.
Although evidence suggests that China may have provided Pakistan with
nuclear-missile technology sometime ago, it has agreed not to transfer
any military nuclear technology to either Pakistan or India. The
Chinese have also stopped exports of nuclear technology to Iran. They
are less cooperative, however, on issues related to chemical and
missile technology.
The Chinese have a mixed record on environmental issues. At home, they
have started to acknowledge the enormous need for pollution prevention
and reduction. For example, more than 38 Chinese cities, including
Beijing, are now publishing daily air quality reports, using new
methods of transparency and openness to build public acceptance for
industrial changes necessary to improve health standards. Bilaterally,
the United States and China, under the umbrella agreement on science
and technology, have taken measures to improve cooperation on
sustainable development and the environment. The Chinese have
cooperated with the United States on environmental issues in the Asia
Pacific Economic Cooperation (APEC) forum, but have stonewalled the
Framework Convention on Climate Change by refusing to participate in
the reduction of greenhouse gases. In addition, the Chinese have not
fully participated in the Montreal Protocol on Substances that Deplete
the Ozone Layer, or the Convention on International Trade in
Endangered Species.
In each of these areas, the United States has the best opportunity to
effect change in China by having as much contact with the Chinese as
possible. For example, the public broadcast of President Clinton's
press conference with President Jiang and his address at Beijing
University were two of the more significant developments that have
taken place in U.S.-Sino relations. Through these appearances,
President Clinton was able to communicate directly with the people of
China and speak to them in an honest and open manner about our
differences and political values. By encouraging events such as these
and by participating on the ground in China through established
programs run by the International Republican Institute or the Asia
Foundation, the United States has a better chance of promoting reform
than by imposing punitive sanctions or leveling attacks from the floor
of the House or Senate during the annual MFN debate.
Policy Implications
The first step toward a more stable relationship with China is for the
U.S. House of Representatives to approve MFN this year by a wide
bipartisan majority. A strong majority will propel Congress to the
all-important stage of considering China's accession to the WTO and
the granting of permanent MFN status. It will also provide the United
States with more leverage to negotiate a favorable WTO accession
Support China's Accession to the World Trade Organization
Getting China into the WTO on "commercially viable terms" is key for a
new U.S.-Sino economic framework. Bringing China under the umbrella of
the WTO, a rule-based body, will enhance U.S. efforts to establish the
rule of law in China and provide more stability in economic relations.
For the past five years, the United States and China have been
negotiating a package for China's WTO accession. Late in 1995, the
United States identified a number of basic issues that had to be
agreed upon before the United States supports China's entry into the
organization. These issues included: meaningful market access, tariff
reductions, trading rights, investment rules, safeguards against
import surges into the U.S. market, elimination of import quotas, and
whether China would be defined as a developing or developed economy at
the rime of accession.
Since that time, negotiations have progressed slowly but steadily and
there is a consensus that China's accession might take place as early
as the end of this year. For the United States to support China's
entry into the WTO, the final package should include the following
-- No transition period for fundamental obligations. China must be
accepted into the WTO as an economically developed nation, not as a
developing nation with privileges such as longer phase-in periods of
WTO obligations;
-- Real market access, including:
- An average tariff rate of 8 percent;
- The right of judicial appeal of administrative decisions. The
Chinese must agree to eliminate arbitrary policy decisions by the
government that subject foreign firms to the caprices of government
agencies without the right of appeal or due process;
- Basic trading rights to ensure that foreigners have the same right
to import and export in China;
- "National treatment" to ensure that foreign and Chinese goods,
services, and investments are treated in the same manner;
- The elimination of non-tariff barriers and increased of openness and
transparency of process;
- An agreement for services that includes the right to establish
business without undue requirements upon China's accession,
particularly in the areas of insurance, value-added
telecommunications, financial services, distribution, and business
services; and
- The elimination of sanitary and food safety standards inconsistent
with WTO standards.
The Administration should also create enforcement mechanisms in the
Office of the United States Trade Representative, the Commerce
Department, and internationally to monitor China's implementation of
its WTO obligations. Such a system would increase support in Congress
for granting China permanent MFN, protect U.S. economic interests, and
provide for a mechanism to pressure China during the implementation
In addition, Congress and the Administration must provide China with
incentives to maintain its current path of economic development.
Accession to the WTO should be characterized as part of and not as the
end of the process to bring China into the global economy. Genuine
reform could, for example, lead to China's participation in the OECD
and G-8.
Grant China Permanent MFN
After China accedes to the WTO, Congress should amend Section 402 of
the Trade Act of 1974, the Jackson-Vanik Amendment, to grant China
permanent MFN status (6). Since all countries except the United States
have granted China permanent MFN, nothing would be gained by
withholding it from China. It would only prevent the United States
from taking full advantage of China's accession to the WTO and would
seriously destabilize economic relations by creating friction in the
In addition to granting permanent MFN, the United States should enter
into an agreement with the Chinese that would require them to promote
rule of law in China. A rule of law provision in the permanent MFN
legislation will underscore the importance of the judicial and legal
framework in enforcing commercial and individual rights. Such a
provision will also reassure those members of Congress who continue to
believe that MFN renewal should be linked to human rights performance.
Such members have traditionally withheld their support for MFN on the
basis that China is not improving its human rights record and that the
United States should not have relations with countries that do not
respect the individual rights of its citizens under law.
China's authoritarian policies that limit individual rights are
largely driven by a fear of social unrest and a lack of rule of law.
The central government's fear of a popular uprising is well founded.
Not only has China had a long history of revolutions against central
authorities, but currently there is general civil unrest and severe
economic dislocation as a result of economic reforms and the
privatization of SOEs. In sharp contrast to its neighbor, Japan, with
its long history of a highly centralized government and homogeneous
population, the Mandarins in Beijing for centuries have had to juggle
dozens of provinces with competing interests and varied ethnic
backgrounds that have been
traditionally suspicious of each other and of central authority.
The United States can have an impact on improving conditions in China,
not by sanctioning and cutting economic intercourse, but by promoting
rule of law programs to train Chinese in civil and commercial law.
Rule of law in China would provide U.S. companies protection against
arbitrary administrative action, and more importantly, it would
provide Chinese citizens with enforceable individual rights.
In addition, permanent MFN legislation should institutionalize funding
for new and ongoing grassroots programs in China. Additional programs
similar to those administered by the National Endowment for Democracy,
the International Republican Institute, the Asia Foundation, and a
number of other NGOs in China should be supported with U.S. government
funds. On-the-ground assistance and support of Chinese reforms will
make the United States an integral partner in China's economic and
political development. It will also provide members of Congress a more
direct means of participating in China's reforms.
Lift Remaining Tiananmen Sanctions
After the Tianamnen tragedy, the United States suspended the
activities of the Overseas Private Investment Corporation (OPIC), the
Export-Import Bank of the United States, and the Trade Development
Agency (TDA) in China. In addition, U.S. firms were prohibited export
licenses for items on the U.S. Munitions list for export to China and
were suspended from providing nuclear generation equipment to China.
Since 1994, President Clinton has exercised his waiver privilege and
reopened U.S. Export-Import Bank programs for China.
One year after China is granted permanent MFN, the President should
begin lifting any remaining economic sanctions on China. By waiting
one year, the United States maintains some leverage to promote
economic reform and rule of law development in China after granting
permanent MFN status. If measurable progress is not evident, the
President should maintain the Tiananmen sanctions.
The President should open OPIC programs for China incrementally.
Instead of opening OPIC up to China as a whole, he should only waive
OPIC restrictions to the provinces that have met OPIC's human rights,
labor, and environment standards. This would provide incentives for
Chinese provinces-desperate for foreign investment-to begin taking
action apart from Beijing and to compete with other provinces to
improve provincial standards in the areas of human rights, labor
conditions, and the environment.
Institutionalize Economic Relations
After the United States has agreed to China's WTO accession, granted
China permanent MFN, and lifted all economic sanctions, it should take
steps to institutionalize economic relations with China. Normalization
would take place by entering into a series of bilateral agreements
that provide reciprocal benefits and systematize economic interaction
between the two countries. For example, the United States and China
should pursue bilateral tax and investment treaties. In addition, the
two countries should formalize consultations between their respective
central banks and treasury and trade ministries.
Ever since the Tiananmen crisis, there have been pockets of resistance
in the United States to a deeper economic engagement policy toward
China. In particular, some members of Congress have advocated a
tougher approach, calling for economic sanctions and at times
advocating isolation of China. While their policy assumptions are too
ideological to gain a substantive following, they have successfully
prevented the United States from keeping pace with other nations
convinced of China's emerging global significance.
Unless a consensus China policy can be pursued, U.S. interests will
suffer. Promoting closer economic relations and fostering stronger
grassroots ties will unify public opinion on China and allow for
closer and more stable relations with this unavoidable, rapidly
emerging power. Ending the annual MFN debate is a crucial step toward
developing this consensus on U.S. China policy.
(Naotaka Matsukata is a legislative assistant to U.S. Senator Joseph
I. Lieberman (D-CT) and teaches at the Paul H. Nitze School of
Advanced International Studies of Johns Hopkins University. He holds a
Ph.D. in history from Harvard University.)
1. Harry G. Broadman, "The Chinese State as Corporate Shareholder," a
paper prepared for the China/ WTO Accession Project (March 1998), P.
2. Greg Mastel and Andrew Szamosszegi, "Can China Avoid the Asian
Disease?" International Economy, (March/April 1998), p. 46.
3. Testimony of Nicholas Lardy before the Senate Foreign Relations
Committee, May 22, 1997.
4. Ibid.
5. Testimony of John Kamm before the Subcommittee on Asia and the
Pacific, Committee on International Relations of the U.S. House of
Representatives, April 30,1998.
6. Since 1980, when the United States and China signed an agreement
that set the basis for bilateral trade relations, the President of the
United States has annually granted China Most Favored Nation status by
waiving the Jackson-Vanik Amendment of the Trade Act of 1974. The
President's waiver has then been subject to a congressional vote on a
resolution of disapproval. The House of Representatives has for the
past five years routinely defeated the resolution of disapproval,
although last year 32 more representatives voted against the
President's decision to waive the Jackson-Vanik Amendment than in the
previous year. The Senate does not vote on the President's decision
unless the House passes the resolution of disapproval.
(end text)

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