Heritage Foundation Leadership for America

What Happened in 2002

In 2002, even as China's threatening military posture against Taiwan broadened, economic ties between China and Taiwan deepened. Taiwan firms increased their investments and business holdings in China to about $140 billion from about $100 billion in 2000; yet trade across the Taiwan Strait remained hamstrung by a lack of direct air and shipping links. Fearing it would legitimize the Taiwan regime, Beijing refused to engage Taipei in negotiations on bilateral transportation issues. In turn, Taipei refused such negotiations with unofficial Chinese entities. On August 3, Taiwan's president explicitly declared that Taiwan was a sovereign independent nation not subordinate to the People's Republic of China and that "there is one nation on either side" of the Taiwan Strait. Taiwan's president repeated this stance several times.

China's military modernization accelerated, its deployments of ballistic missiles against Taiwan increased, its purchases of advanced Russian submarines were stepped up, and overall military preparations for war against Taiwan were strengthened. In response, Taiwan began budget authorizations for several expensive defense items that had been approved by President George W. Bush in April 2001, including Kidd-class destroyers with sophisticated missile-defense and combat-control systems, diesel-electric submarines, long-range radar, and communications networks.

Taiwan made significant contributions to the war on terrorism after September 11, such as immediately opening its airspace to U.S. overflights supporting the air campaign in Afghanistan. U.S. officials acknowledge Taiwan's significant contributions but decline to discuss them openly. They indicate, however, that by mid-2002, Taiwan sources had provided significant financial intelligence on terrorist money-laundering channels. By September 2002, Taiwan had contributed over $100 million in aid to Afghanistan and relief for victims of September 11 in the United States. By mid-November 2001, early in the Afghan campaign, Taiwan had contributed over $7 million directly to Afghan reconstruction programs and had earmarked an additional $33 million to support U.N. agency work. Separately, private Taiwan non-governmental organizations contributed over $30 million in trucks, food, blankets, tents, and relief supplies, and arranged for transportation to Afghanistan via both Pakistan and Iran.1

What to Do in 2003

The United States should publicly acknowledge Taiwan's contributions to the war on terrorism and its vibrant democracy, and it should continue to support Taiwan on the international stage. More important, it should maintain strategic clarity by reiterating America's determination to help Taiwan defend itself against military and economic coercion, including assistance in developing a credible deterrent against invasion. Specifically, the United States should:

• Make appropriate defense technology and services available to Taiwan. These should include fighter aircraft, missile-defense systems, anti-submarine systems, naval surface and subsurface ships, and a hardened information infrastructure.
• Work with Taiwan to reform its military command structures. Additionally, the United States should help Taiwan improve military education and training and encourage Taipei to enhance civilian control of the military.
• Coordinate with Taiwan with respect to its role in the development of a U.S. theater missile defense network for the Western Pacific. With Taiwan's planned procurement of the Patriot PAC-III anti-missile system, U.S. defense specialists will begin to advise Taiwan on integrating the system into Taiwan's own military structure. However, as a theater-wide ballistic missile capability develops, U.S. regional missile defense architecture must incorporate Taiwan-sourced data. Such coordination must begin in 2003.
• Continue to support Taiwan's involvement in international organizations that accept its membership. Such organizations include the Asia Pacific Economic Cooperation (APEC) forum, the Asian Development Bank, and the World Trade Organization (WTO). The United States also should firmly support opportunities for Taiwan's voice to be heard in organizations where its membership is not possible, such as in specialized agencies of the United Nations like the World Health Organization and the International Civil Aviation Organization, and various arms control bodies. The Administration also should encourage Taiwan's participation in international disaster relief efforts.
• Conclude the U.S.-Taiwan free trade agreement. Taiwan has been one of America's top 10 export markets for over two decades. Despite Taiwan's membership in the WTO, however, significant non-tariff barriers to some U.S. agricultural goods remain, and major amendments are needed in Taiwan's laws protecting intellectual property. These problems can be resolved with the negotiation of a U.S.-Taiwan free trade agreement.
• Treat Taiwanese officials and diplomatic institutions with the dignity befitting Asia's most vibrant democracy. For example, Taiwan's quasi-diplomatic and consular offices in America should be allowed the flexibility to change their office names and titles to reflect their functions accurately. The self-imposed restrictions on the ability of the American Institute in Taiwan (AIT) to function as an office that represents the United States should be reviewed. And U.S. Cabinet-level visits to Taiwan should be normalized as necessary to promote U.S. economic, commercial, cultural, defense, and other interests.

CHINA

ACTION: Encourage political and economic freedoms as well as market reforms and market-driven trade practices in China while ensuring U.S. national security in the face of China's rapid military modernization.

The Issue in Brief

After Britain relinquished control of Hong Kong to China in 1997, Beijing promised to maintain a "one country, two systems" policy that would allow Hong Kong functional independence and allow its Commonwealth government to continue in its democratic form. America's recognition of Hong Kong as politically and economically separate from China is based on the integrity of this policy. Through 2002, Chinese entities continued to supply Iran, Syria, Libya, and Pakistan with technology and equipment that significantly enhanced their missile and/or chemical weapons programs, and the U.S. Director of Central Intelligence reported that some of this aid was done with the knowledge of the Chinese government. Human rights abuses remain widespread in China and include the suppression of labor rights, arrests of religious figures, the destruction of churches, and the detention and arrest of democracy activists. Western media also continued to report the persistence of official torture and extra-judicial killings as late as November 2002.

What Happened in 2002

In 2002, the Hong Kong government announced its intention, under Article 23 of Hong Kong's "Basic Law," to pass legislation criminalizing a broad range of political activities under the rubric of "treason, secession, sedition, subversion, theft of state secrets, and consorting with foreign organizations." Purportedly, it was an effort to protect China's national security, continuing a disturbing trend that enables Beijing to exercise greater control over Hong Kong.

The Pentagon and a congressional commission issued voluminous reports in July 2002 to call attention to China's rapid military modernization program and the potential threat it posed to U.S. interests in the Western Pacific and Southeast Asia. The U.S. General Accounting Office (GAO) studied China's dramatic progress in acquiring U.S. electronics technology, especially in semiconductor fabrication, and warned that U.S. export control laws are not being effectively implemented. In October 2002, it became clear that Pakistan had sold nuclear weapons and uranium enrichment technology and equipment--including Chinese-origin enrichment technology--to North Korea. There were reports throughout 2002 that Chinese firms had sold nuclear and chemical weapons-related items to Iran, Pakistan, and North Korea.

China formally joined the World Trade Organization in early 2002 and immediately began to adopt major market-opening measures that were welcomed by foreign firms. However, in October, the American Chamber of Commerce in Beijing issued a report summarizing hundreds of instances of bureaucratic foot-dragging and outright WTO violations in a broad spectrum of areas, including a lack of regulatory transparency, unfair tariff and customs levies, hidden quotas, new and more complex licensing requirements, and pressure on foreign firms to reveal proprietary information or otherwise compromise intellectual property. U.S. businesses still face significant barriers to market entry in banking, agriculture, telecommunications, automobiles, internal cargo shipping, construction and real estate, and retail marketing.

Most of these restrictions arise from internal demands by China's state-owned enterprises for continued protection against foreign competition. Yet Chinese firms have gained deep market access abroad, especially in the United States, for Chinese exports. In 2002, the GAO reviewed China's commitments to establish a baseline for analyzing compliance, but it did not evaluate compliance issues.

By many measures, it appears that the Chinese government has boosted its competitiveness with a somewhat undervalued currency, which has been at a fixed peg to the U.S. dollar since 1994. The average inflation rate since 1997 has been negative, with consumer prices slightly lower now than five years ago. Moreover, industrial prices have fallen an average of 2 percent per year, as have prices of China's exports. China maintains over $258 billion in foreign exchange reserves (the second highest in the world after Japan) and claims it had about $50 billion in direct foreign investment in 2002 alone. Although these statistics point to a relatively stable monetary foundation, China's state-controlled banking system also is said to be laboring under an overhang of as much as $500 billion in non-performing loans.

China's low labor costs and undervalued currency, as well as the size of its legendary market, have conspired over the past five to seven years to attract massive foreign direct investment at the expense of its Southeast Asian neighbors. China will be reluctant to adopt free-market policies that undercut its advantages against its Asian competitors.

What to Do in 2003

The United States should continue to support the development of a democracy and an open market in China and its neighbors. To this end, it should:

• Continue to place human rights issues at the center of bilateral exchanges. At the appropriate U.N. forum, the United States should direct international attention to the continuing human rights abuses in China, such as the suppression of religion, denial of labor bargaining rights, control of the media, and prison abuses including extra-judicial killings.
• Demonstrate to Beijing that the United States is committed to supporting democratic systems in Hong Kong. For example, the United States should extend indefinitely provisions of the U.S. Hong Kong Policy Act of 1992 (P.L. 102-383). This act requires the State Department to issue annual evaluations--until March 31, 2006--of Hong Kong's trade, judicial, and security independence from Chinese jurisdiction. However, China's proposed "Article 23" legislation against a broad range of political activities calls into question Hong Kong's continuing judicial independence from China. As it now stands, the Hong Kong Policy Act allows the United States to treat Hong Kong as a separate entity for trade and customs purposes, but there is no provision for annual evaluations after 2006. In light of the impending Article 23 laws, there is a need for annual reviews for the indefinite future.
• Support dialogue between the Tibetan government-in-exile and Beijing. U.S. diplomatic efforts should work toward the restoration of self-rule in Tibet.
• Discourage China's dangerous proliferation of weapons of mass destruction (WMD) technology and delivery systems and hold it responsible for past proliferation behavior. China has proliferated nuclear weapons materials and technology directly to Pakistan and WMD materials to Iran; indirectly, China's weapons, materials, and technology then proliferated from Pakistan to North Korea, Egypt, Syria and Libya.

To hold China responsible for its proliferation activities that threaten global and U.S. security, the United States should (1) maintain existing trade sanctions, including a ban on U.S. use of Chinese space launch services; (2) strengthen export controls on advanced technology dual-use commodities and equipment; (3) enforce existing export control laws, which generally ban the export of technology less than two generations behind U.S. levels; (4) encourage allies to coordinate export control policies with the United States; (5) tighten restrictions on Chinese companies' purchase of U.S. firms engaged in national security and military-critical technology production, research, and/or development; and (6) tighten the access of Chinese scientists, engineers, and technicians to U.S. advanced technology firms and research centers.

• Monitor China's compliance with its WTO commitments to ensure that American goods and services gain the kind of access to China's markets that Chinese goods have in U.S. markets. This will require the U.S. Trade Representative (USTR) to respond swiftly, both bilaterally with China and in the WTO, when the U.S. business community identifies serious Chinese violations of its WTO promises. Congressional oversight and the prospect of targeted trade legislation will enhance the USTR's credibility in negotiations with the Chinese.

The Administration and Congress should (1) hold hearings on Chinese WTO compliance, review reports by the USTR, the American Embassy in Beijing, and the various American Chambers of Commerce in China and Hong Kong to gauge China's progress in WTO compliance, and have the GAO follow up its 2002 effort with a broad survey of China compliance issues, and (2) encourage China to let its currency float, preferably in the near term, to open its financial markets to American and foreign financial institutions.

• Give priority to free trade agreements with top Asia-Pacific trading partners. To right the balance among Asian economies, the Administration also should strengthen trade and investment ties with other Asia-Pacific economies. With the substance of the U.S.-Singapore free trade agreement completed and ready for signature, the USTR should schedule free trade agreement negotiations with other qualifying Asia-Pacific trading partners, including Thailand, Taiwan, Australia, and New Zealand.

John J. Tkacik, Jr., is Research Fellow for China, Taiwan, and Mongolia in the Asian Studies Center at The Heritage Foundation.

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