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Backgrounder #1367 on Asia

May 5, 2000

How to Trade with China Benefits Americans

By and

The debate in Washington over granting permanent normal trade relations (NTR) status to China has been fractious. Conservatives and liberals disagree, even among themselves, over whether increased trade with China will effect improvements in its human rights record, religious freedom, fair labor practices, or security concerns.

Now the President is asking Congress to grant China permanent normal trade relations, and the House and Senate are expected to take up the issue later this month. It is the breadth of the concerns over China that makes the decision so difficult. If these concerns are dealt with piecemeal, then the United States will face trying to stamp out a myriad of small but regenerating brush fires while failing to bring about real change in China's political or social environment. Clearly, foreign and trade policy--and relations--would flounder. A carefully designed long-term strategy is required.

In dealing with Beijing, Washington should seek policies that generate mutual benefits for the people of both countries in addition to protecting U.S. national security and promoting a climate of stability in China and the Asia-Pacific region. Encouraging China to move toward democratization and establish a market economy based on international norms and the rule of law can facilitate such a climate and help improve its human rights practices. Granting China permanent NTR--a status afforded to most other countries that trade with the United States--will boost this process. It will increase people-to-people contact and give important sectors of the U.S. economy greater access to China's market.

Granting permanent normal trade relations to China, therefore, is good policy. Trade expansion will enhance America's ability to address a broad range of interests, such as its long-standing commitment to protect U.S. national security and promote freedom in Taiwan and China. To demonstrate its commitment to these goals, the United States should:

  • Grant an unconditional extension of permanent normal trade relations status to China. Granting permanent NTR to China would allow America's strongest economic sectors, particularly the agricultural, automobile, computer, financial services, and telecommunications industries, to compete in China's market and help expand its small but growing private sector.

  • Seek the simultaneous entry of Taiwan and China into the World Trade Organization (WTO). U.S. access to China's potential market and Taiwan's significant current market will grow once they accede to the WTO.

  • Explore new ways to monitor and address human rights concerns in China. The Helsinki Commission, for example, recommended coordinating the monitoring of human rights developments on a continuing basis rather than annually.

  • Identify Chinese companies that produce armaments or serve as fronts for the People's Liberation Army (PLA). The names of these companies should be made available to the public and to U.S. allies.

  • Enforce existing legislation, such as the Export Administration Act and the Arms Export Control Act. This would ensure that American companies do not do business with the PLA. The U.S. embassy should verify that U.S. products reach the approved recipients.

Only such a long-term strategic approach to U.S.-China trade relations will achieve America's goals in helping China to further liberalize its political and economic systems and promoting increased opportunities for American businesses and consumers.

WHY TRADE WITH CHINA?

For the first time since the normalization of diplomatic relations with China 20 years ago, the United States is considering granting a permanent extension of China's normal trade status. Between 1979 and 1989, Congress approved the President's extension of this status (then called "most favored nation" status) annually and without objection. Throughout the 1990s, concern over human rights abuses in China, as well as threats to U.S. national security and ominous gestures toward Taiwan, motivated Members of Congress consistently though unsuccessfully to introduce resolutions to block the extension of NTR to China.

Having concluded a comprehensive market access agreement with China--a prerequisite for its entry into the World Trade Organization--last November, the Clinton Administration is calling on Congress to make China's normal trade status permanent. The U.S. House of Representatives is scheduled to address the issue during the week of May 22. The Senate is expected to follow soon thereafter.

Permanent extension of China's normal trade status is important for U.S. interests. Beyond economic development and profit, it will promote private initiatives, support U.S. jobs, lower barriers to trade that raise prices, increase people-to-people contact, help to limit government control of people in China, and, as choice increases, empower the Chinese people to take charge of their own destinies.

Contrary to some arguments, the vote in Congress on granting permanent NTR to China is not a vote on the merits of China's accession to the WTO. China will join the WTO with or without permanent normal trade relations with the United States. Instead, this vote will be a referendum on the terms of the recent agreement giving America access to China's market. Moreover, failure to extend permanent NTR to China would deny Americans the opportunity to benefit from trade concessions made by China during the WTO accession process.

Although improving economic ties with China may increase its stake in a stable and peaceful international system, trade should be seen as only one element--albeit an important one--in a comprehensive approach to protecting U.S. security and promoting freedom in China. There are limits to what permanent normal trade relations can do in affecting the human rights climate in China, particularly in the short term. A comprehensive strategic approach, however, would enable permanent normal trade relations to bring about deeper reforms in China than will the annual issue-by-issue fight that now occurs in Washington.

People who support freedom and democracy in Taiwan and Hong Kong--indeed, some of Beijing's harshest critics--find permanent extension of normal trade relations with China to be consistent with their broader goals. Former Hong Kong Governor Chris Patten and Hong Kong Democratic Party leader Martin Lee have strongly supported permanent U.S. extension of NTR to China while holding nothing back in their criticism of Beijing for its failure to respect international human rights norms and democratic principles. Taiwan's President-elect, Chen Shui-bian, also believes that permanent extension of NTR to China will be conducive to Taiwan's accession to the WTO and will facilitate economic development as well as more normal and stable relations with the mainland.1

Benefits for America

Granting permanent normal trade relations to China will afford many benefits to Americans. It will allow the strongest sectors of the U.S. economy to compete in China--most notably, the agricultural, automobile, computer, financial services, and telecommunications industries, as well as commercial businesses on the Internet.

The U.S. agricultural sector is the most productive in the world, and access to China's market will enhance this productivity. China's tariffs on U.S. farm products will drop from 31 percent to 14 percent over a four-year period once China accedes to the WTO. At the same time, competition will compel China's agricultural sector to become more efficient. Thus, while American farmers will profit, the standard of living and nutritional levels of the Chinese people will improve.

The argument that permanent NTR is only good for America's big businesses is misleading if this is interpreted to mean that only large multinational companies will benefit. "Big business" does not package or transport grain or agricultural products; American workers do. Thus, increased trade with China should increase jobs in the agricultural sector in the United States.

In the financial services sector, American companies should compete very well in China. In Shanghai, China's most populous city with 13 million residents, foreign-owned insurance companies enjoy a 10 percent share of total premium revenues. Allied Insurance has sold some 700,000 personal life insurance policies in China.2 International credit standards are being applied to these agencies and companies.

As these examples and the following facts show, the agreement negotiated by the U.S. Trade Representative in November will directly benefit Americans once China becomes a member of the WTO and the United States extends permanent NTR to China.3

  • China would no longer be able to impose unacceptable protectionist barriers on imports of U.S. wheat, citrus products, fruit, and meat.

  • China would have to eliminate export subsidies on its agricultural products, allowing American corn, cotton, and rice to become more competitive in the world market.

  • China would reduce its tariffs on U.S. products from 31.5 percent to between 14 percent and 17 percent, making these products more attractive. Tariffs on U.S.-produced dairy products such as cheese and ice cream would be slashed by more than half. Tariff rates on bulk American agricultural commodities, now as high as 121 percent, would decrease to an average of between 1 percent and 3 percent, making the sales of products such as barley, corn, cotton, rice, soybean oil, and wheat more profitable in China. China's prohibitive tariffs on American fruit would be cut to about one-third of current levels.

  • Agricultural trade between private parties would be allowed so that American businesses would no longer have to go through China's government and Communist Party-controlled state trading companies.

  • American industrial products would enjoy approved import and distribution rights. Imports of priority goods, such as fiber optic cable, would be allowed without requiring that the manufacturing capability for these goods be transferred as well.

  • The huge tariff reductions would help sales of American cars, trucks, and auto parts in China. Moreover, Chinese citizens would be able to get automobile loans from U.S. companies.

  • Tariffs on electronic equipment from the United States, such as computers, semiconductors, and Internet-related equipment, would be eliminated over five years.

  • Professional services such as financial and business consulting, as well as travel and tourism-related services, would be able to operate in China.

  • Geographic and customer restrictions on U.S. banks in China would be reduced or removed over a five-year period.

Trade is a major component of the income of U.S. workers. Improving trade will benefit labor union members and their families. The goods that come from China will be unloaded at U.S. ports by American workers. Containers of goods will be shipped across the United States on American rail lines and delivered by American truckers. And American workers will stock the shelves in the stores that sell the goods.

In 1998 alone, over 1.5 million metric tons of goods were shipped between China and the United States through the port of Seattle, Washington--almost 20 percent of the value of all U.S. trade that traveled through that port. All of these goods were loaded and unloaded by American laborers. If trade with China were cut, as many of the protesters at the Seattle meeting of the WTO last November hope, the longshoremen whose livelihoods depend on this commercial activity would be forced to take cuts in pay.

Despite rhetoric to the contrary, granting permanent NTR status to China goes beyond party politics and big business or special interests. The decision will affect the lives of every American. China is the fourth largest U.S. trading partner. Granting permanent NTR to China would ensure that jobs are protected from the vicissitudes of congressional politics. Over the long term, it will ensure that Americans fully benefit from China's eventual accession to the WTO. Membership in that body will require China to lower its current restrictions on many American products. The increase in demand for U.S. goods that results from this should lead to greater productivity, which in turn would mean more jobs and job security for American workers.

TRADE RELATIONS AND NATIONAL SECURITY

The recent uproar over the sales of sensitive technologies to China brought attention to the Clinton Administration's loosening of export restrictions. Granting permanent normal trade relations to China does not mean that sensitive technologies would fall more easily into the hands of the People's Liberation Army. Nor will it mean that America must export goods to China. Rather, granting permanent NTR (and China's accession to the WTO) would mean that China would have to limit its tariffs on U.S. products. The United States still would be able to exercise national security control over the export of critical military and "dual-use" (military and civilian) technologies.4

The executive branch must protect U.S. national security through the diligent enforcement of existing laws and regulations. The National Defense Authorization Act of 1999 (P.L. 105-161) established stringent requirements on the sale of commercial communications satellites. In other areas, however, laws may be adequate but enforcement weak. The executive branch should ensure that the U.S. intelligence community and the U.S. Department of Defense are given the proper authority over who receives export licenses in order to prevent whole categories of exports and materials with military application from being sold to China.5

Strong congressional oversight can ensure that no Administration ignores U.S. security in favor of trade with China, as the Clinton Administration did when it transferred authority to the Commerce Department to control sending satellite launching technology and data to China.6 The Export Administration Act of 1979 (P.L. 96-72), which controls the export of dual-use items, and the Arms Export Control Act of 1976 (P.L. 94-329), which regulates the export of weapons and defense-related information, should be thoroughly reviewed to ensure that they prevent trade with China from strengthening the PLA's military capabilities.

The May 1999 report of the Select Committee of the United States House of Representatives on U.S. National Security and Military/Commercial Concerns with the People's Republic of China contains a number of detailed recommendations on what manufacturing processes and materials may require national security protection. These prudent suggestions should be considered during all licensing deliberations by executive branch agencies, and all license decisions should be subject to congressional oversight.7

Concerns About the People's Liberation Army

A valid argument made by some opponents of permanent trade relations with China is that a number of Chinese companies engaging in business with the United States are owned by the People's Liberation Army, which may use the products they acquire to supplement its military budget or to acquire better technology. The U.S. intelligence community, which has identified many of these companies, has made little of this information available to the public. In 1995, the U.S. Defense Intelligence Agency published an unclassified directory listing many of China's defense industrial trading organizations.8 However, dissemination of this document was restricted to official use within the federal government. U.S. corporations as well as U.S. officials who approve and oversee export licenses should have access to such information.

Former Secretary of Defense William Perry's ill-conceived "Defense Conversion" program (under the Joint Defense Conversion Commission) led to the 1995 release by the Department of Commerce, in cooperation with the Department of Defense, of a list of Chinese military-related companies.9 Secretary Perry and the Administration announced that the goal of this program was to convert China's military industry to civilian production. But China's leaders were more realistic about the program. They made it clear that the goal was to improve China's military production by engaging in parallel civilian production of similar goods within the same manufacturing plants--not to convert defense industries to civilian use.10

Fortunately, pressure from Congress and the media forced the Administration to abandon this program,11 but the list of PLA-related companies gathered during this effort provides a baseline of valuable information that would enable U.S. companies to avoid doing business with military-related companies in China. Moreover, U.S. companies should have access to the directory published by the Department of Defense, China's Defense-Industrial Trading Organizations, which lists more than 50 major state-owned, military-related industrial conglomerates and factories in China that are seeking to improve their ability to manufacture defense items by importing dual-use production items.

TRADE AND THE EXPANSION OF FREEDOM

Although productivity in the private sector far surpasses that of the state-owned sector and the private sector's share of gross domestic product (GDP) is ever increasing, a majority of Chinese workers still are employed by some form of collectively owned enterprise.12 The liberation of China's workers from the state sector is a key to expanding freedom in China. Trade and investment, the byproducts of extending China permanent normal trade relations and its accession to the WTO, will increase private enterprise and individual ownership of property in China.

Beijing exercises control over the livelihood of the Chinese people largely through state-owned enterprises. State workers are paid incredibly low wages--as low as $400 a year--but subsidized housing, health care, child care, food, clothing, and education are provided as non-wage compensation. The level of compensation Chinese workers receive for their work is not as important as the way they are compensated. State workers are forced to depend on government-subsidized benefits. Because they are not paid enough to be able to choose private alternatives, they must comply with intrusive government regulations, like family planning and controls on speech, or risk the loss of the vital benefits. To break this cycle of dependence, Chinese workers need greater access to private-sector employment alternatives.

Increasing the presence of American firms in China can assist in the development of its private sector. Employees at American firms earn higher wages and are free to choose where to live, what to eat, and how to educate and care for their children (yes, even more than one child). As the private sector grows, so too will the scope of these freedoms. This real and measurable expansion of freedom in China does not require waiting for a middle-class civil society to emerge; it is taking place now and should be encouraged by increasing trade with China.

Empowering Democracy

Currently, the Chinese people lack the means to change the officials and laws that govern them at the national and provincial levels, but significant progress has been made at the local or village level. Chinese citizens choose local officials in competitive elections, and although these local officials lack the authority to change national family planning policy or to improve the incomplete legal and judicial process, they are the level of government closest to the people and must face the discipline of competitive elections. Thus, they are more responsive to the interests of the citizens as they interpret and apply the national and provincial regulations. Local village elections are a small step toward freedom, but to the several hundred million Chinese citizens in rural areas who now have some measure of democracy in their lives, they are important.

Taiwan's Example. The experience of democratization in Taiwan offers some lessons. Nearly 50 years ago, when the Nationalists on the mainland fled to Taiwan after their defeat in the civil war, the Kuomintang (KMT) under Chiang Kai-shek began to hold elections at the village level. For much of the past half-century, Taiwan remained a one-party state in which all national, provincial, and county officials were loyal to the KMT and citizens lived under martial law. Even at the village level, only KMT and some "independent" candidates were allowed to run for office. Despite significant amounts of diplomatic, military, and economic assistance from the United States, it still took more than 35 years for the government of Taiwan to legalize opposition parties and lift martial law.

Throughout the 1950s, 1960s, and 1970s, U.S. assistance to Taiwan represented not only a short-term investment in the strength of a strategic ally, but also a long-term investment in a free Chinese society. Direct investment helped stimulate growth in Taiwan's economy, but investments in human capital had an equally profound effect. Decades of broad-based business, cultural, and academic contact changed attitudes and empowered the development of a strong middle class, which began to push for political change.

By the 1980s, Chiang Kai-shek's son, Chiang Ching-kuo, began to see the need to open Taiwan's political system to those who had resided in Taiwan before the "mainlanders" arrived. Taiwan-born leaders, like current President Lee Teng-hui, were promoted and opposition parties were legalized in order to allow the government to better reflect the people governed. Martial law was lifted. In the 1990s, direct popular elections were held for Taiwan's highest government offices. In March 2000, Chen Shui-bian, the candidate of a former illegal opposition party was elected President, and the first-ever peaceful transfer of power in Chinese history from one party to another is now underway in Taiwan.

Taiwan's experience demonstrates that freedom and democracy are not inconsistent with Chinese civilization. It also demonstrates that, even with a very close and generous relationship with the United States, democratization can be a slow and incremental process. In Taiwan, it began nearly 50 years ago with local village elections. Democratization on the mainland does not have to take 50 years, but Americans should not expect the development of democracy for the 1.2 billion people on the mainland to be more rapid or smoother.

Trade alone cannot guarantee that China will have a stable democratic transition. But the extension of permanent NTR will be conducive to the spread of freedom throughout China, allowing the people to take greater control over their lives and enhancing the stability of free and democratic forces that already exist in Hong Kong and Taiwan.

Human Rights

In addition to efforts that promote freedom through private-sector expansion in China, the United States should seek more effective means to address China's failure to live up to the international human rights covenants it has signed, such as the International Covenant on Civil and Political Rights. The perennial debate in Washington over China's trade status has not induced Beijing to improve its treatment of the Chinese people.

One method for addressing human rights concerns would be to establish an executive-legislative commission to coordinate monitoring of human rights developments on a continuing basis, rather than annually seeking international censure of China's activities. Representative Sander Levin (D-MI) advocates this approach based on the Helsinki Commission as a means to press Beijing for progress on human rights without tying it to an annual debate over China's trade status. Senator Spencer Abraham (R-MI) made a similar proposal in the China Policy Act of 1997 (S. 1164). This approach would make clear America's intentions to press for substantive progress on human rights while moving forward on the longer-term strategy of expanding trade.

HOW TO ADVANCE U.S. INTERESTS

The United States should extend permanent NTR to China, but throughout the process it must not falter in its commitment to protect U.S. national security interests and promote freedom in Taiwan and China. Trade expansion is a critical factor in a comprehensive strategy toward China that can enhance America's ability to address a broad range of interests.

To demonstrate its commitments to these goals, the United States should:

  • Grant an unconditional extension of permanent normal trade relations to China. Granting permanent NTR to China would allow America's strongest economic sectors, particularly the agricultural, automobile, computer, financial services, and telecommunications industries, as well as Internet-related commerce, to compete in China's large market, which would help expand China's small but growing private sector. Greater private-sector employment will offer the Chinese people the wealth and freedom they need to choose private alternatives to government subsidies in education, health care, housing, and other basic needs that come with increased restrictions and regulation.

  • Seek the simultaneous entry of Taiwan and China into the WTO. WTO membership for China and Taiwan would increase U.S. access to their markets. By emphasizing the positive-sum benefits of trade liberalization as opposed to the zero-sum sovereignty disputes, the WTO also will provide an international forum through which cross-Strait economic relations can be enhanced and normalized.

  • Explore new ways to monitor and address human rights concerns in China. The White House and Congress should review the lessons learned from the Helsinki Commission and consider their applicability to the challenge of human rights in China. The establishment of an executive-legislative commission, as proposed by Representative Sander Levin and Senator Spencer Abraham, merits Congress's thoughtful debate.

  • Identify the names of known Chinese companies that serve as fronts for the People's Liberation Army. The names of Chinese companies that produce armaments or serve as fronts for the PLA, which seeks to improve military production by engaging in civilian production of similar goods, should be made available to the public and to U.S. allies.

  • Enforce existing legislation, such as the Export Administration Act and the Arms Export Control Act. American companies should not do business with the PLA. Moreover, the U.S. embassy should be staffed adequately to verify that the approved end-users of U.S. products have received those goods.

CONCLUSION

Granting permanent normal trade relations status to China supports U.S. interests in a number of ways. China would be forced to reduce its restrictive tariffs on U.S. goods, which would increase access to China's large potential market. Moreover, it would help further the goal of democratization by providing more choices for the Chinese people and supporting the creation of a middle class whose lives are not dependent on the Communist Party or the government. It would facilitate accession to the World Trade Organization by China and Taiwan, improve the rule of law, and facilitate cross-Strait dialogue and contact, which would reduce tensions in the region.

All of these goals can be achieved in ways that protect U.S. security interests and do not improve China's military capabilities.

In the long run, facilitating people-to-people interaction through increased trade will benefit both America and China. It will help integrate China into the world's economic system and create the conditions that empower the people of China to seek additional freedom and democracy. After all, people who can choose what to buy, where to live, and where to work will want to exercise choice in determining who will lead their government. A stable democracy and free market in China is vital to the peace and stability of the Asia-Pacific region, which is one of America's key strategic interests.

Stephen J. Yates is a former Senior Policy Analyst in, and Dr. Larry M. Wortzel is Director of, the Asian Studies Center at The Heritage Foundation.

 

Endnotes

1. The Honorable Chen Shui-bian, "A New Era of Opportunity for Taiwan," Heritage Foundation Lecture No. 664, April 28, 2000; speech delivered at The Heritage Foundation, Washington, D.C., April 12, 2000.

3. For the full text of the "U.S.-China WTO Market Access Agreement," see http://www.uschina.org

4. The Honorable Fred Thompson, "Balancing Trade and Security in the 21st Century," Heritage Foundation Lecture No. 656, March 17, 2000; Larry M. Wortzel, "Export Controls and National Security in an Age of Globalization," Heritage Lecture No. 652, January 18, 2000.

5. Strict enforcement of Code of Federal Regulations, "International Traffic in Arms Regulation" (22 CFR Parts 121, 123, 124, and 126) would be a step in this direction. See also U.S. General Accounting Office, Export Controls: Better Interagency Coordination Needed on Satellite Exports, GAO/NSIAD-99-182, September 1999, and Export Controls: 1998 Legislative Mandate for High Performance Computers, GAO/NSIAD-99-208, September 1999.

6. U.S. General Accounting Office, Export Controls: Better Interagency Coordination Needed.

7. U.S. House of Representatives, Report 105-851. See also Bernard B. Cole and Paul H. B. Godwin, "Advanced Military Technology and the PLA: Priorities and Capabilities for the 21st Century," in Larry M. Wortzel, ed., The Chinese Armed Forces in the 21st Century (Carlisle, Pa.: Strategic Studies Institute, 1999), pp. 159-218. Cole and Godwin review specific technologies and military processes with advanced military application and assess China's ability to manufacture military goods. The discussion provides a blueprint for the products the United States may want to protect through export control regulations.

8. U.S. Defense Intelligence Agency, China's Defense-Industrial Trading Organizations, PC-1921-57-95, October 1995.

9. United States-China Joint Defense Conversion Commission, China Defense Industry Directory (Washington, D.C.: Bureau of Export Administration, U.S. Department of Commerce, May 1995).

10. Jin Zhude et al., Guofang Jingji Lun [A Discussion of the National Defense Economy] (Beijing: Jiefangjun Chubanshe, 1987), pp. 68-109; Junshi Kexueyuan, Deng Xiaoping Zhanlue Sixiang Lun [A Discussion of Deng Xiaoping's Strategic Thought] (Beijing: Junshi Kexue Chubanshe, 1994), pp. 185-206.

11. Bill Gertz, "GAO Probe of Perry's Actions in China Deals," The Washington Times, February 28, 1996, p. A6; Kenneth R. Timmerman, "The Peking Pentagon: China's Military Loves Bill Perry," The American Spectator, April 1996.

12. Data provided by Horizon Research, a privately owned polling and public affairs research company in Beijing. See http://www.horizon-china.com.  Horizon Research provides joint venture and private companies in China with demographic materials for marketing and advertising using survey methods.

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