The Heritage Foundation

Backgrounder Update #179

May 12, 1992

May 12, 1992 | Backgrounder Update on

Yet Again, China's Trade Status Should Be Renewed

(Archived document, may contain errors)

5/lZ92 179


(Updating Asian Studies Center Backgrounder No. 104, "Washington's Agonizing Decision: To Extend or Revoke China's Most-Favored-Nation Status," May 8, 1990, and Backgrounder Update No. 160, "The Case For Renewing China's Trade Status," May 9, 199 1.) The Washington-Beijing relationship is beset by problems. The People's Republic of China's 1991 trade surplus with the United States was $12.7 billion, up $2.3 billion from 1990, and could leap to $15 billion by the end of this year. This would make the U.S. deficit with China greater than with any coun- try except Japan. The trouble with the mushrooming trade deficit with China is that there is a growing feeling that it is caused in part by Beijing's refusal to open China's markets fully to American goods. To make matters worse, the Chinese apparently use some prison labor in manufacturing to lower the price of exports. Then there is significant evidence that the Chinese are peddling missiles and nuclear technol- ogy to Algeria, Pakistan, and other Third World customers in defiance of multilateral efforts to ban such sales. And Beijing has yet to make a full accounting of the fate of pro-democracy demonstrators arrested after the 1989 Tianamen Square massacre. It is in this environment that George Bush will be challenged to decide by June 3 whether to renew China's most-favored-nation MFN) trading status. Such status, granted to China in 1980 and approved annually since then, gives Chinese goods exported to the U.S. the same tariff treatment as that received by the 100-plus other nations to which Washington accords MFN status, including Iraq and Syria and a host of other unpleasant regimes. Equal Treatment. Although the expression "most-favored-nation" suggests that a country is ac- corded special trading privileges, the term actually means something quite differem A country that re- ceives NIFN status merely is entitled to those trade benefits and concessions granted by the U.S. to any other MFN country. MFN thus confers no special trading status; it simply treats all NTN recipients equally. Generally, NIFN is a permanent status. The only exceptions am communist countries which, under the Trade Act of 1974, either annually or semi-annually must seek renewal. Specifically, Title 4 of the Act, known as the Jackson-Vanik Amendment, named after the late Senator Henry M. Jackson of Washing- ton and former Representative Charles A. Vanik of Ohio, both Democrats, states that hON status can be given to "non-market economies" if those countries permit substantially free emigration of their citizens. The law works like this: If the President wants to extend MIFN status he must either certify to Congress that the country under consideration is not in violation of the Amendment's human rights criteria or he can waive the criteria for the country involved on an annual basis because such a move would "substan- tially promote the objectives" of Jackson-Vanik. Once President Bush certifies that China over the past year has allowed free emigration, Congress effectively has ninety days to approve or disapprove China's NFN status. Their vote is then subject to presidential veto.

Separate Categories. America's problems with China thus fall into two categories-the economic and the political. Washington should deal with them accordingly: Economic problems should be ad- dressed with economic mechanisms; political problems with political ones. If Beijing employs a complex system of tariff and non-tariff controls on American goods entering the Chinese marketplace, such as increasing the number of import licensing regulations and bans, then China should be identified under the 1988 Omnibus Trade and Competitiveness Act as a so-called "prior- ity" country that has established "systematic" barriers to U.S. exports. This law sets procedures for deal- ing with unfair "priority" foreign trade practices through trade retaliation. The Bush Administration, in fact, initiated an investigation of Chinese market access barriers on October 10, 1991. Conversely, the current political problems in the Sino-American relationship should be addressed through political mechanisms. China's continuing human rights abuses in Tibet, its likely use of some prison labor to manufacture goods for export, and its sales of advanced weapons to dangerous nations should elicit vigorous condemnation from the highest levels of the U.S. government. The agenda during Secretary of State James Baker's three-day Beijing visit last November was crowded with such unpleas- ant items. Under Secretary of State for Political Affairs, Arnold L. Kanter, arrived in Beijing last week to press Chinese officials on human rights issues. What is not warranted is mixing the economic and political issues. China no more should be punished economically for its unacceptable political actions than Japan should be exempted for political reasons from economic punishment for its unacceptable economic actions against American products. If Beijing violates the Jackson-Vanik amendment's freedom-of-emigration provision, then China's NFN status should be revoked. Otherwise, the issue should be subject to the same considerations by which Washington has deemed it proper to extend NEFN to some 180 other nations. Other factors also argue against ending China's NIFN status. To do so would: * Dramatically raise duties on Chinese exports to America and thus hike the prices that Americans pay for these goods. Products from China now account for one-third of the American toy market, 10 percent of the American footwear market, and 15 percent of the American imported apparel market. * Cost the export industries of South China up to two million jobs. It is this area in which the fire market and pro-democratic forces are strongest. Ending MFN thus would penal- ize those Chinese whom American policy ostensibly seeks to help. * Reduce China's access to hard currency, further squeezing Beijing's ability to service its $52.5 billion international debt. * Close Cbinese markets to American exporters. last year, U.S. exports to China totaled $6.3 billion, an increase of 30.8 percent in a single year. Among the biggest American losers would be wheat growers, whose 1990 sales approached $1 billion; commercial air- craft manufacturers, for whom China has become a dependable $500 million a year mar- ket; and phosphate fertilizer manufacturers, who consistently sell one-sixth of their en- tire annual output to China. * Create enormous new problems for Hong Kong at a time when the colony can least af- ford anything that undermines confidence in its future. Some 70 percent of American im- ports from China are shipped through Hong Kong. As Hong Kong's largest foreign mar- ket and one of its principal investors, U.S. interests he in a politically assured and eco- nomically healthy Hong Kong. Uncertain about their future, 60,000 Hong Kong citizens leave the territory each year. Denying China M[FN status may well speed the exodus.

Increase Beijing's dependence on arms sales for cash. Cutting off American markets to Chinese goods could force Beijing to rely even more greatly on the international weap- ons market for hard currency. Emotional 1ssues. Almost three years after the violence in Beijing, Washington policy makers con- front a recalcitrant, unapologetic, and defiant China. A long and potent list of U.S. grievances still in- creases. In such light, it is emotionally easy to make a case for punishing Beijing. If so, then appropriate punishment should be sought, and inflicted. Yet ending China's NIFN status is not appropriate. If it is, then Washington must review the domestic political behavior of scores of other countries and prepare to revoke their U.S. MFN status. To end MIFN for mainland China, moreover, barely will pinch Beijing's aging leaders who are the authors of the repression. Instead, it will hurt reformers in China, consumers in America, and deal a heavy blow to Hong Kong. Washington should recognize this. It should separate the economic and political issues at stake. And then it should conclude that there continue to be no grounds for revoking U.S. most-favored-nation trade status for China.

Andrew B. Brick Senior Policy Analyst

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