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Date: Wed, 22 Sep 1999 20:22:27 EDT

Subject: China Update

TO: Washington State China Relations Council Members & Friends

FROM: Joseph J. Borich, Executive Director

     The following two e-mail messages, sent by former U.S. Foreign Service officer and China specialist Joe Borich, address directly the topic under discussion in this special section of American Diplomacy. A separate urgent message appeals for help for the victims of the recent earthquake in Taiwan; please give it your generous consideration. The author, who has contributed to this journal previously, here provides his analysis of current U.S.-China issues and his assessment of the post-summit state of relations. ~ Ed.

AUCKLAND SUMMIT: RELATIONS BACK ON TRACK

As planned, Presidents Clinton and Jiang met September 11 on the margins of the APEC leaders meeting in Auckland. U.S. National Security Advisor Sandy Berger characterized the one-hour meeting as “productive, friendly, non-polemical and quite comprehensive.” Berger also pronounced the relationship between the U.S. and China as “back on track, with, of course, many challenges still facing us.”

For Clinton, issue number one was the speedy resumption of WTO negotiations and an agreement this year. Clinton also called for a resumption of discussions on arms control and human rights issues, along with the restoration of military-to-military contacts, all of which were suspended by China after the accidental bombing in May of the Chinese embassy in Belgrade. Also on Clinton’s agenda was energy and sustainable development, in particular, climate change. Clinton raised the Taiwan issue last, saying that Taiwan President Lee’s statements had made thing more difficult for both the U.S. and China, reaffirming the U.S.’ one-China policy, but warning that China’s resort to force would have “grave consequences.”

Jiang’s response began with Taiwan, which he said was the most important issue between the U.S. and China. He stated that Beijing wanted a peaceful resolution based on one China, two systems (a formulation challenged by Lee’s “special state-to-state relationship” formula). But he also stated China would not renounce the possible use of force if Taiwan were to take actions toward independence. He also urged Clinton to discontinue arms sales to Taiwan. Jiang also agreed to resume WTO negotiations (in fact, technical discussions had already resumed a week earlier). He added that other issues raised by Clinton — i.e., arms control, military-to-military contacts, the environment, and human rights — could be addressed by the two sides in a positive manner, implying that China was ready again to fully engage.

In the two-week period prior to the “mini-summit” in Auckland, Beijing gave several other indications it was ready to improve relations with Washington. Leading newspapers and journals in China lowered the invective against the U.S. that had been in fashion throughout the summer, claiming instead that strong ties with the U.S. were important to China’s interests. After a long delay, China also gave its formal concurrence to the appointment of Joseph Prueher, former Commander-in-Chief of the Pacific Command, as U.S. Ambassador to China. Also in that same period China permitted the first visit to Hong Kong by an U.S. Navy vessel since the May bombing.

Nevertheless, while the Auckland meeting was straightforward and short on polemics, it was also short on breakthroughs. The atmospherics have warmed considerably and a broad ranging dialog is likely to be reinstated in the weeks ahead, but the major issues that have troubled the relationship are still there, and virtually unchanged.

CHINA AND WTO: THE RACE TO SEATTLE

The commitment by Presidents Clinton and Jiang to resume WTO negotiations notwithstanding, negotiations both immediately before and after the mini-summit apparently failed to produce any narrowing of the remaining gap. U.S. participants at the sessions described the negotiations as “wandering in circles,” without substantive engagement on the issues left over from Premier Zhu Rongji’s offer in April. For that matter, it wasn’t even clear if Zhu’s entire offer was still on the table. The two sides are to resume talks within 2-3 weeks.

Several recent high-level statements in China suggest, in fact, that Beijing may be seeking to roll back some of Zhu’s April offer.

  • Information Industry Minister Wu Jichuan declared that foreign participation in the China internet market - whether by internet service providers, or internet content providers - was prohibited by law. Last year Wu closed 40 foreign investments in mobile phone services. Wu threatened to resign in April after learning of Zhu’s offer to open the information technology and telecommunications sectors to foreign participation.

  • Some of China’s leaders may also be resisting foreign competition in agriculture. There have been recent indications that China will insist on maintaining agricultural subsidies for its farmers, subsidies that maintain prices in China for grain, cotton, edible oils and sugar up to 50 percent above world market prices.

  • Even more worrisome, perhaps, was President Jiang’s statement to journalists at the APEC Leaders meeting that “China can only join the WTO as a developing country,” a claim that appeared to contravene the spirit and most of the substance of Zhu’s April offer.

There were probably relatively few issues unresolved by Zhu’s proposal last April. The U.S. still sought further liberalization in telecommunications, banking, and financial services, and greater protection from Chinese exports of textiles, steel and export surges generally. China wanted: an end to U.S. quotas on its exports; permanent Normal Trade Relations status from the U.S.; and accession to the WTO — hopefully by the time the “Seattle Round” starts. The rest of Zhu’s offer appeared to address fully — or, in some cases, even go beyond — what U.S. negotiators had been seeking.

Even assuming that negotiations can pick up substantively where they left off, closing the remaining distance will be more difficult now than in April. Mindful of the intense criticism his premier has been under since April, it will be extremely difficult politically for Jiang to concede any more to the U.S., improved atmospherics or not. On the other hand, Clinton must press for more concessions, else why did he not accept Zhu’s offer in April?

Moreover, the political landscape has shifted in the U.S. since the spring. Politicians on both the left and right are likely to hold China to a tougher standard because of allegations of Chinese nuclear espionage. Big labor has also come out strongly against China’s admission to the WTO, and both labor and the environmentalists say they would not support an agreement that did not satisfactorily address issues dear to each. All of this means that Clinton, improbably, must get a much better deal than Zhu offered, both to assure passage of permanent NTR in Congress and to keep the support of labor and other traditional Democratic constituencies intact for Al Gore.

Though both presidents insisted there is no fixed timeline to conclude negotiations, there is great pressure on China to wrap things up in time to accede at the start of the Seattle Round of WTO negotiations. China has its own agenda for economic reform and the sooner that WTO discipline can be brought to bear on reforms, the better. Moreover, many of the issues that will be on the table at the Seattle Round — agricultural trade being one — are considered extremely important in Beijing. China clearly wants to have a hand in writing the remaining rules that will govern international trade.

Whatever its tactical flaws (the better perceived through hindsight), there is no question that the Clinton Administration would like to usher China into the WTO. The potential benefits to the U.S. economy, and to the stabilization of the global economy and global security are too huge to ignore. The legacy Clinton has sought for his presidency, in fact, might well be defined by the downstream benefits of bringing China into the council of trading nations.

The question is, can he do it? Time is running out. The Seattle Round begins in barely two months. Congress, which must bless permanent NTR for China, will likely recess in early November. Senate Majority leader Trent Lott said that a permanent NTR measure is unlikely even to come up for a vote in this session, given the limited amount of time left and the Congress’ crowded agenda. Secretary of Commerce Daley issued a similar warning during the APEC meeting in Auckland. In the House, Majority Leader Dick Armey said this week that the votes are not there in the House even if permanent NTR makes its way to Congress’ fall agenda.

If the measure fails to come to a vote (or does, and fails to pass) in this session, the administration could still seek to revive it early in the next. However, the primary season would then be starting and Clinton might find himself politically distanced from candidate Gore and Democratic members of congress, unless the agreement reached with China was good enough to assuage Democratic constituencies such as labor, and that is unlikely.

There is another possibility, but it is not enticing. The U.S. and China could reach a bilateral agreement, and China could go on to conclude bilaterals with its other major trading partners. The members of its WTO working party on protocol rules would have to reach a consensus and the accession package would then be brought before the current WTO members for a vote. If two-thirds voted in favor, China would accede to the WTO. If by this time congress has still not approved permanent NTR for China, the U.S. would have no choice but to invoke the non-applicability clause. This would mean that China would not be bound to extend its market openings to American companies, and all of its concessions would apply to U.S. competitors in Europe, Japan and elsewhere.

The apparent long odds against China’s accession this year may, however, serve to focus negotiators on both sides to work for the best possible deal, and quickly. The warning flag has also been raised for the administration and congressional supporters of permanent NTR that there is much consensus building to be done, and little time remaining.

MEANWHILE, ECONOMIC REFORM MOVES AHEAD IN CHINA

The Fourth Plenary Session of the 15th People’s Congress opened in Beijing September 20. This annual event was expected to convene in October this year, but was apparently advanced to resolve more quickly disagreements that have emerged within the party over the pace and direction of state-owned enterprise reform, and the conditions for WTO entry. As is almost always the case in plenary sessions, this one will also reveal a reshuffling of senior party positions, and the new line-up. Changes at the top are not expected, but there will likely be a number of changes among the various party commissions and among provincial and municipal party leadership posts.

There appears to be a significant split between party economic reformers and conservatives over the issue of SOE reform. Led by Premier Zhu Rongji, the reformers want to speed up the pace of marketization and reduce government involvement in economic activity. In the process, most of China’s SOEs would be privatized, either through direct sale to private (including foreign) investors, or through reducing government ownership of SOE stock to less than 50 percent. The reformers see this as the best — and possibly only — way that China’s economy can compete effectively in the global market. The conservatives dispute this argument either on economic and ideological grounds, or over concern for wholesale layoffs that would likely result from privatization, or both.

This debate is also tied to China’s WTO bid. The reformers view WTO accession and the discipline that would be forced on China by the WTO as an important lever to accomplish economic reform and SOE privatization. Thus, the plenary session debate will not only set the course and pace for economic reform, it will also very likely dictate the outer limits of what China will concede in order to join the WTO. This may well help explain the apparent reluctance of China’s WTO negotiators to move more forthrightly in the wake of the Clinton-Jiang decision to resume WTO negotiations.

Even as the debate goes on, however, there are indications that China is still moving forward and economic reform and SOE restructuring:

  • The People’s Bank of China (China’s central bank) recently announced a further liberalization of rules applied to foreign branch banks. Foreign branches authorized to conduct Renminbi transactions now have a substantially expanded geographic area in which to conduct such transactions, and can lend a higher percentage of their foreign currency debt in Renminbi. For the first time, they can also enter into lending agreements with Chinese banks for up to one year.

  • MOFTEC has liberalized rules for foreign invested companies and will now allow FIEs to: act as agents or distributors in the Chinese market for sales of products they produce in China; provide warehouse and transport services for themselves; and purchase Chinese products and commodities in China for sale outside of China.

The bottom line is that economic reform will continue, but the question of reform pace and direction will likely be continue to be revisited — even after the current plenum.   


Read Borich August 5 Memo  
Read appeal for Taiwan Earthquake aid  
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Focus on
CHINA

Minxin Pei asks, Is China Unstable? “China... will face rising instability if the regime fails to undertake significant political reform in the next decade.”

Carl Fritz on China in 1945: One Man's Experience. “My unit was an air service group, and when the war ended members of the unit were widely scattered all over China.”

Ralph D. Sawyer on Chinese Warfare: The Paradox of the Unlearned Lesson. “From any reasonable perspective China’s continuity has been cultural rather than political, its heritage throughout one of incessant conflict as different peoples, states, and popular movements fought to control its populace and resources.”

Thomas D. Grant on Taiwan Trouble. “Taiwan had almost all the traits of a separate state, except that it never claimed to be a separate state.”


 Elsewhere in this issue:

Also by Joe Borich in American Diplomacy:

On U.S. relations with a Changing China:
"
Whether we like China or not, and for better or worse, China will dominate the U.S. foreign policy agenda throughout most if not all of the twenty-first century." (Summer 1998)


Commentary in this issue:

Barry Ryland-Holmes on Waging Peace in Kosovo: "Western intervention, however civilized it may appear, runs the risk of replacing the economic imperialism of the nineteenth century with a cultural imperialism for the twenty-first."

Lawyers Harry Inman and Walter Gary Sharp on Revising the UN Trusteeship System – Will it Work?: "The international community has all the legal authority it needs to solve humanitarian crises and armed conflicts around the world. The real difficulty is gaining a consensus on what should be done and how resources will be provided."


 Elsewhere in this issue:

Joe Borich is Executive Director of the Washington State China Relations Council. He was closely associated with U.S. policy toward China throughout his long career in the U.S. Foreign Service and served as U.S. Consul General in Shanghai during 1994-1997.

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