PRESIDENT CLINTON announced on June 3 that he would again waive the law and grant a one-year extension of China’s “normal trade relations” (NTR) with the United States. “Maintaining NTR with China,” he said, would “promote America’s economic and security interests.”
Clinton’s waiver drew immediate applause from those who have economic interests in China. The U.S.-China Business Council, which claims “300 leading companies” as members, released the following statement: “The U.S.-China Business Council believes that this year ought to be no different. In spite of the serious controversies that have arisen between the U.S. and China in recent weeks, the economic relationship of the two nations brings benefits to both, and under-girds all aspects of the broad U.S.-China engagement.”
Clinton was required by law to make his announcement on trade relations with China by June 3, and as soon as the Cox Report outlining Beijing’s threat to U.S. security was made public, on May 25, the business press started damage control. A Financial Times editorial on May 26 called on Washington to be “tough on security and positive on trade.” Two days later, the Journal of Commerce asserted, “The simple fact is that the overall issue of trade with China is largely separate from the troubling defense issues.”
In truth, nothing could be more simple-minded (and self-serving) than to claim that economic activity is conducted in a vacuum and has no impact on the balance of power. Moreover, supporters typically exaggerate the economic benefits of trading with China.
Thus, Clinton, in his statement, called normal trade relations “good for Americans,” adding, “Our exports to China have quadrupled over the past decade.” With characteristic verbal ingenuity, the president used “quadruple” to give an impression the figures do not warrant. The actual importance of the China market to the American economy is minuscule. In 1998, the United States exported only $ 14.3 billion worth of goods to China, barely 2 percent of American exports. This was an increase of only $ 5.5 billion over 1993. During this same five-year period, U.S. goods exported to the rest of the world increased by $ 204 billion. Even in a state of economic depression, Japan and the Pacific Rim provided an export market for American goods worth $ 142 billion in 1998, nearly ten times that of China.
What business sees in China is not an export market, but a chance to profit from the development of Chinese capabilities. The USA* Engage Web site, which claims to speak for over 500 firms, drools over China’s ten-year plan for $ 750 billion in domestic infrastructure projects. A recent study by the U.S. Commerce Department’s Bureau of Export Administration found that “the underlying and stated objectives of China’s foreign investment and trade policies . . . are modernization and self-sufficiency of China’s industrial and military sectors.”
Beijing’s economic policy conforms with the doctrine of Jean Baptiste Colbert, the mercantilist finance minister of Louis XIV who believed that “trade is the basis of finance, and finance is the sinew of war.” Paul Kennedy has noted that “the more China pushes forward with its economic expansion in a Colbertian, etatiste fashion, the more likely that development will have power-political implications.” It is these implications that must be the concern of U.S. national policy makers.
Trade with America facilitates a pro-China shift in the Asian balance of power in four major ways.
(1) China’s trade surplus with the United States provides Beijing with the foreign exchange needed to buy foreign weapons and military technology. This hard-currency surplus gave China $ 58 billion in 1998 and $ 215 billion since 1994. Russia has been the main source for arms. As Princeton’s Kent Calder has observed, with Russia holding the greatest military yard sale in history, “the Chinese, flush with hard currency from their soaring, multi-billion-dollar transpacific trade surpluses, stocked up.” And the Chinese hoard of dollars is tempting other countries, including some in NATO, to do military deals with Beijing.
Chinese purchases have spanned the entire spectrum of weapons systems, but the emphasis has been on improving air, missile, and naval capabilities in order to project power around the Pacific Rim — that is, toward American allies. Open access to the U.S. market is financing a military buildup that threatens the balance of power both in Asia and beyond, as China extends to rogue states in other parts of the world the technology it acquires.
(2) An enormous amount of militarily valuable “dual use” technology is transferred by American firms in the course of their normal operations in China. Though media attention has focused on a few sensational cases, such as the Loral/Hughes satellite-launcher scandal, technology transfer is an everyday occurrence. The Bureau of Export Administration’s report on “U.S. Commercial Technology Transfers to the People’s Republic of China” confirms this, noting: “The majority of industry representatives interviewed for this study clearly stated that technology transfers are required to do business in China,” and, “U.S. high-tech firms seem willing to pay the price — technology transfers — in exchange for limited market access.”
The Bureau of Export Administration also found that “China’s investment policies are geared toward shifting foreign investment into the central and western parts of China. . . . China’s national laboratories and the majority of China’s military/industrial enterprises are located in this region, some of which are involved in foreign joint ventures.” For example, Pratt & Whitney’s Canadian unit and China National South Aeroengine & Machinery Co. formed a joint venture to produce components for gas-turbine and jet engines that could be adapted to cruise missiles. Though officially these new engines will be for civilian use, the site chosen was a plant that produced engines for cruise missiles.
(3) China’s aggressive export strategy, encouraged by easy access to the U.S. market, has undermined the economic stability of the Pacific Rim. China and the Pacific Rim states are direct competitors. They all export similar products: labor-intensive manufactured goods such as footwear and apparel, electrical machinery, computers, consumer electronics, and toys. As export-led strategies collided, world prices for manufactured exports started to fall in 1996. By 1997, many of the Rim economies saw their current accounts deficits reach crisis levels.
China gained an edge on its trade rivals by devaluing its currency in 1994. Within a year, it moved from a trade deficit to a trade surplus. Thanks to Washington’s unconditional grants of most-favored-nation trade status, China was able to double its share of the American market in many sectors at the expense of the Rim.
Indonesia, Malaysia, and Thailand have had to make major cuts in their defense programs (including cancellation of American equipment orders). On Asia’s other flank, South Korea has done the same. The Philippines needs economic expansion to finance the modernization of its anemic armed forces in the face of Chinese expansion in the Spratly Islands. Across the region, joint exercises with the U.S. military are being cut back. Most important, since the already vulnerable Japanese banks have invested heavily in Southeast Asia, the region’s economic fragility undermines both anchors of the U.S. security system on the Pacific Rim, Japan and the Association of South East Asian Nations. Ending the “normal” trade status of a China whose behavior is far from normal would give the trade advantage back to our friends and allies.
(4) As transnational corporations form closer commercial alliances with the Beijing regime, China gains a strong voice in American domestic politics through the lobbying of business groups and the media. Proponents of “engagement” may talk of commerce as a vehicle of reform in China, but the fact is that capitalist democracies are far more open to foreign influence than are authoritarian one-party states. American firms know that only by supporting an appeasement policy in Washington that hobbles efforts to respond to Chinese provocations can they maintain a “friendly” environment hospitable to their interests in China.
Instead of feeding the ambitions of Chinese mercantilists, American trade should follow the American flag. The axiom is that both parties benefit from trade. But in the case of trade between American corporations and the Beijing regime, the gain to the corporations takes the form of private profit while the gain to the regime is an increase in its military-industrial capabilities. This increase in China’s strength poses a threat to American national interests. The cost of meeting that threat — not to mention the cost of failing to meet it — swamps the private commercial gains in scale and importance to our country.
William R. Hawkins is a visiting fellow at the U.S. Business and Industry Council in Washington, D.C.
