Our Position on China Jude Wanniski December 18, 1996

\To: Ambassador Li Daoyu, Chinese Embassy
From: Jude Wanniski
Re: The attached Study Paper

This is a statement that one of our China specialists wrote for the Joint Economic Committee this past year. Although you and I have discussed it, I thought you would be interested in seeing our official position again.
I am looking forward to seeing you at our February conference in Boca Raton.

ENGAGEMENT OR CONTAINMENT: A CLEAR CHOICE
By Cheryl L. Hart*
SUMMARY

The political and economic transition taking place in China is one of the most significant events of the post-Cold War era. Success or failure of Chinese market liberalization will have far reaching implications on the world's future political and economic landscape. China is now at a critical point in this transition, having to react to U.S. policymakers who are caught in a debate between those who favor a policy of engagement and those who argue for containment. From the world's point of view, engagement — both on the part of U.S. and as a policy for other countries toward China — is obviously the preferred outcome of the debate. The debate, though, is being influenced by how China reacts to it by word and deed. Because China already feels its growing economic and political strength and because it fully intends to be a great power in the next century, the development of its relationship with the United States is and will continue to be a complex process. It will be characterized by moments of heightened tension and moments of celebration as the tensions are resolved by heightened communication and skillful diplomatic efforts on both sides. The containment side of the U.S. policy debate is driven by those who are pessimistic about our ability to remain a cordial relationship with a nation of 1.2 billion people that is growing rapidly within a political framework that remains authoritarian at the top. These forces include not only national security pessimists, but also commercial interests that are concerned about the nature of the competition that might arise from a powerful China in the next generation or two. These are, of course, legitimate concerns, as long as they do not become dominant. If the U.S. continues to appear hostile toward China at this pivotal moment, anti-Western sentiment could be fueled helping to revive the conservative political faction in China. As a world leader, the U.S. has a responsibility to engage China to set an example for other nations, and to positively contribute to China's economic and political development.

ENGAGEMENT VS. CONTAINMENT

In the same way, policymakers in Beijing are struggling to gain support for the "open door" policy and the market reforms first initiated by Deng Xiaoping in the late 1970s. As it stands, the reformers, including Qiao Shi, Zhu Rongji, and Li Ruihuan are in control of policy direction and promote a continuation of progressive economic policy. They are, however, faced with resistance from a faction of hard-liners who advocate a slowing, and in some cases a reversal, of reform. Misguided U.S. policy has, at times, contributed to the momentum of the hard-liners. Linking Most-Favored-Nation (MFN) status to the human rights record is a key example. U.S. threats to penalize China's economic potential, by charging higher tariffs or by limiting access to U.S. markets, have served only to strengthen the conservatives in Beijing by foiling reformers' efforts for economic expansion, and by turning popular opinion away from central authorities associated with Western-style reforms. Economic development is the driving force helping China to overcome human rights problems and to comply with international standards of trade, conduct, and law.

Engagement, therefore, supports the current leadership and promotes China's economic and political advancement. Economic growth will prevent social upheaval, and allow for the rapid reform of the state-owned enterprises, contributing to political stability in post-Deng China. As long as China is expanding economically, with the help of international support for domestic reform, the optimists will remain in power and China will emerge as a peaceful, competitive global partner.

HISTORY AS AN EXAMPLE

Misguided policy of a similar stripe contributed to economic and political setbacks in Japan. The Smoot-Hawley Tariff Act of 1930 penalized Japanese silk (among a host of other things) with 100% tariffs. Japan suffered a major economic setback, as almost every farmer's wife depended on silk earnings to balance the family books. As a result of Smoot-Hawley, popular opinion turned against the pro-U.S. leadership and in support of the xenophobes in the military faction. The foundations of democracy, as characterized by the pro-U.S. government, were snuffed out. Instead of building on grass-roots democracy and economic opportunity, the Japanese focused on the creation of a strong military, laying the foundation for the second World War.

CURRENT SITUATION

There is a worrying trend of the Chinese becoming more inclined to reject political figures in Beijing who associate themselves with Western ideology, democracy, capitalism, and freedom of speech. A new book titled "China Can Say No," strongly critical of the U.S., is flying off the shelves in Beijing. Its popularity reflects hostility towards the U.S., and recent U.S. behavior is largely to blame. In May, acting U.S. Trade Representative Charlene Barshefsky was heard demanding that the Chinese government force the closure or legalization of factories believed by U.S. authorities to be violating international property rights agreements as signed by the Chinese government in February 1995. The Clinton administration threatened US$1.2 billion in trade sanctions if the Chinese government failed to comply with U.S. demands. At the same time, Senators and Congressmen in Washington were gathering votes to try to block renewal of China's MFN trade status. There has also been U.S. resistance to China's participation in the World Trade Organization (WTO), despite widespread international support for China's membership. Washington seems to be holding WTO membership as a carrot in front of Beijing's leadership, to be given only if China agrees to constantly shifting U.S. standards and terms for entry. Despite reaching an agreement on international property rights, staving off sanctions, and renewing of MFN in June, the overall impact of recent U.S. policy mishaps has left Chinese suspicious of Washington's true intentions.

What appears to be anti-Western rhetoric emanating from central authorities in Beijing is not, for the most part, a campaign designed to create anti-U.S. sentiment so much as a response to anti-U.S. sentiment already felt by the Chinese people. In Beijing last fall, a young person confessed to me that he used to admire and respect the U.S. as a model for the rest of the world. However, his opinion of the U.S. had soured while he attended a London university where the free press allowed him a true look at Washington's behavior. He, along with numerous other individuals I met, thought the U.S. was intruding into China's internal affairs, and by so doing jeopardizing China's peaceful, positive development as a  member of the international community.

Still, overall, the optimists are eclipsing the pessimists in China in the struggle for transforming the country to a free-market society. Grass-roots democracy already is evident in local elections. In some corporations, employees are being allowed to vote for senior representatives. The financial system is rapidly modernizing. Convertibility in the current account has materialized ahead of schedule and domestic lending institutions are opening their doors to foreign participation. Swap markets are being phased out and central government authorities are discovering new ways to utilize domestic capital to enhance infrastructure development and promote economic growth. Despite political rhetoric laced with Maoist-sounding ideology, Jiang Zemin and others are putting economic growth first.

Furthermore, the current leadership is encouraging more international involvement, hoping to expand China's global role. The more China is allowed to participate in international forums, the less threatening it becomes. WTO membership would hold China to higher standards and further support internal market liberalization. China's impressive economic emergence is attributed in part to a long period of political stability. Should China's economy cease to expand, a window of opportunity will be opened for the conservatives to regain defining influence in policymaking. A major turn toward nationalist policies would damage relations with Washington, harm U.S. multinationals investing in China, and hinder Asia's phenomenal growth potential.

REASON FOR HOPE

Recently there have been positive signs in Washington of improved China policy. U.S. National Security Advisor Anthony Lake's visit to Beijing in June laid the foundation for a possible summit meeting between President Clinton and President Jiang. Security talks seem to be back on track, and Washington seems to be taking a less confrontational approach toward China. Clinton's support of MFN renewal was encouraging, as was Assistant Secretary of East Asian and Pacific Affairs Winston Lord's recent trip to meet with the Chinese.

The U.S. should encourage increased Chinese involvement in international organizations such as the WTO. As a member, China would have to adhere to international standards and would be able to establish itself as a respectable member of the international community. Ending yearly MFN status reviews also would go a long way toward opening China's markets, improving relations and showing China that the U.S. is sincere in contributing toward China's economic growth and development.

* Cheryl L. Hart is a Policy Analyst for Polyconomics, Inc. in Morristown, NJ. She is the editor of numerous articles on economic and political policy in Asia.

This selection is from China's Economic Future: Challenges to U.S. Policy, printed for use of the Joint Economic Committee of 104th Congress, 1996.