----A Chinese Perspective

After tumultuous years of hard bargains and dashed hopes, China and the United States finally reached an agreement in mid-November of 1999 which paved the way for China’s entry into the World Trade Organization (WTO). The agreement, as described by the negotiators of the both countries, is a win/win one. It should have resolved many of the unresolved bilateral economic and trade issues from the past in a positive way.

Although there is still a rocky road ahead before China can get in the WTO, "A historic door has been opened," as Mike Moore, Director-General of the WTO, put it, " Now we all have to walk through that door together." No one would expect immediate economic consequences from the deal, but the long-term benefits for both China and the US are indisputable. For China, as many observers cited, this accord will integrate China with the world marketplace, give a new impetus to the current sluggish domestic demand, restructure the economy toward market-oriented, and reinforce the rule of law. For the US, it has achieved the long-sought goal of entering the last huge market in the world.

In terms of bilateral trade relations, however, this accord has not resolved all problems. Because of the differences of both countries in social system, ideology, culture, and particularly because of the worsening of bilateral political relations at times, Sino-US trade relations were fraught with frictions and disputes in the past decade. Even after China’s formal entry into the WTO and the US grant of permanent Normal Trade Relations (NTR) status to China, these problems will remain. Hopefully, they can be settled through negotiations on equal basis at the working level.

An Overview of the Impact on Bilateral Trade

From the first sight of the agreement, the economic benefits might be unevenly distributed among different industries of the both countries. Since the US has long complained about the alleged huge trade deficit with China, this accord should improve the bilateral trade balance in US favor.

The major gains for the US involve market access and tariff reduction. Overall Chinese tariff level will decline from an average of 22.1 percent to 17 percent. As a result, US exports to China are likely to grow faster, in percentage terms, than imports. The US International Trade Commission estimated that reduction of Chinese tariff would boost US exports by about 10 percent and its imports from China by about 6.9 percent. It would also create more US high-paying export-related jobs in such field as aerospace and automobile industry.

The more favorable term in the deal is in US agriculture sector, where Chinese tariff will drop to 14.5-15 percent, or even lower, by 2004. This will affect the bulk of US commodities: cotton, wheat, corn, and soybeans, which will see a big surge in exports to China. In the mean time, China has committed to eliminate all quantitative restrictions, and adopt tariff-rate quotas (TRQ, i.e. a system in which imports up to the quota level are charged a minimal tariff—usually 1-3 percent—and above that level a high tariff). This system provides a strong incentive for state enterprises to purchase bulk commodities at world market rates. In addition, China will end export subsidies of agriculture commodities. This should be regarded as a major concession from Chinese side given the fact that total elimination of agricultural export subsidies has yet to be discussed until the next WTO round after 2000.

Another important beneficiary is US automobile sector. In a separate package, China agreed to phase down auto tariff from 80-100 percent to 25 percent by 2006, and grant foreign car manufacturers the authority to provide financing for car purchases from the date of China’s WTO accession. In addition, foreign auto companies are given full distribution rights and trading rights. It means that foreign companies will be able to import and export without Chinese middlemen and provide after-sale repair and maintenance.

Probably the biggest winners are American telecommunications and Internet companies, which can finally exploit Chinese telecom and Internet market, as well as financial services. Foreigners may invest in Chinese Internet businesses, and own up to 50 percent stakes in Chinese telecom ventures in two years. Foreign banks also may offer services to Chinese customers in two years, and own 33 percent of other financial services providers, and later increase to 49 percent. The gains in above sectors, however, will substantially expand US services trade with China in which the US has already enjoyed surplus, and may have less impact on improving merchandise trade balance with China in the near future.

The only loser seems to be the US textile industry. According to the agreement, the US will abandon quotas on Chinese textile imports in 2005. But many analysts contend that fears about big surge of Chinese textile imports to the US are overstated, and that this agreement will not change the picture all that much. The vast majority of Chinese exports to the US basically come at the expenses of other foreign suppliers, and so one wouldn’t expect significant additional pressure from this deal.1

To be sure, China’s entry into the WTO could boost China’s overall exports, including exports to the US. But these exports usually contain some imported components, thus should increase China’s demand for US merchandise. Although the recent WTO deal should stimulate America’s exports at least in equal amount to its imports, unfortunately, only those affected by higher imports, like textile industry, will be heard from.

What is more, under the agreement, the US also managed to set series of special rules protection against possible sudden influx of Chinese imports. This will be done using so-called "safeguards." Under current WTO rules, nations can institute safeguards for a four-year period, renewable once. They cannot single out individual nations for special action, and they must gradually phase out the protection. Under the US-China deal, however, the US forced China to accept this highly protectionist action for 12 years, or in the textile sector for nine years.

In addition, the US negotiators have succeeded to try to block Chinese imports surge to the US through the application of anti-dumping methodology. As the recent WTO meeting in Seattle demonstrated, most developing as well as developed countries condemned anti-dumping actions as a protectionist front for uncompetitive domestic industries. The Clinton administration continued to define China as a "nonmarket economy" for 15 years, thereby perpetuating an even more arbitrary methodology to determine whether Chinese exports are "selling below costs." Using non-market criteria allows the complainant to ignore local Chinese prices and use surrogate or constructed prices. The US Commerce Department repeatedly used this practice to manipulate data and ably blocked Chinese exports over years. Although the US law and regulations provide for graduation of sectors or an economy as a whole, as Charlene Barshefsky stated, from non-market rules, in practice the US government agencies in recent years always succumbed to interest groups pressure against such graduation. Therefore, China will be in anti-dumping treatment for the full 15 years.

From above overview we can see that terms of the new deal would, at least in theory, boost US exports to China and reduce Chinese imports to the US, thus improving bilateral trade imbalance which the US government and public always complained. But there is no guarantee that this would happen unless both countries resolve the following long-standing disputes: method of calculating trade figures, US sanctions and high-tech exports, the alleged currency manipulation, and human right issues.

The Overstated Sino-US Trade Imbalance

China and the US have totally different official estimates of the bilateral trade imbalance. According to US official data, the US runs a merchandise trade deficit of $56.9 billion with China in 1998, whereas the Chinese statistics put this figure at $21 billion. There is a difference of $36 billion. If China and the US cannot reconcile a fair, scientific, and mutually accepted method of calculation, the US deficit in dollar terms will continue to widen. So, Sino-US trade will remain a hot political issue in the United States. A sensation has been made by US media that the US trade deficit with China could soon exceed the US deficit with Japan.

Table 1

Chinese and US Trade Data

(In billion US dollars)

Sources: US Foreign Trade Highlights, US Department of Commerce, various years; China’s Customs Statistics, various years.

The main reason for this big discrepancy between Chinese and US data seems to be the different methods both countries use to calculate Chinese exports via Hong Kong. The U.S. uses "country of origin" principle, recording Chinese goods re-exported by Hong Kong to the U.S. as Chinese exports. On the other hand, the PRC, using country of destination principle, excludes those goods exported to Hong Kong and re-exported to the U.S. from Chinese exports to the U.S. for the following reasons:

1, The export value data are compiled from Chinese Customs, which have no specific knowledge of the ultimate disposition of those goods exported to Hong Kong, whether consumed in Hong Kong, or re-exported to third countries. This is why China has incurred a huge trade surplus with Hong Kong for decades.

2, The goods exported by China to Hong Kong may be re-exported to many countries, not only to the U.S. So the Chinese Customs find it difficult to determine the value of the re-exported goods to the U.S. unless they get prior information of that value.

3, The re-exports of Chinese goods from Hong Kong to the U.S. have contained value added by Hong Kong firms. Such value may include Hong Kong's profits from marketing, product development, banking and insurance services, transportation, and storage. Chinese Customs have no way to calculate such value.

What makes the bilateral trade picture more complex and unfair is that the US Customs, while count Chinese exports to Hong Kong then re-exported to the US as Chinese exports to the US, do not treat US goods that are first shipped to Hong Kong and then re-exported to China as US exports to China. This grossly understates the real value of US exports to China, distorts the bilateral trade balance and swells the US trade deficit with China.

Since 1993, the Chinese Customs have improved the data-compiling method by trying to differentiate between exported to Hong Kong goods that are re-exported to the US, and that are consumed in Hong Kong or re-exported to third countries. Those are re-exported to the US are recorded in Chinese exports to the US. So, in my view, after 1993 onward the Chinese data on Sino-US trade is more reliable, close to the reality. Of course, it might be far from perfect. Because the re-exported goods in Hong Kong change ownership, the Chinese Customs still face difficulty to know where these goods will eventually end up. Anyway, as we can see in Table 1, Chinese data show significant surge of China’s trade surplus vis-a-vis the US.

If the re-exports are only a small fraction of Sino-US trade, we can just ignore them. But

Hong Kong plays an increasingly important role in the marketing of Chinese goods in the U.S. These re-exports are a very large portion of Sino-US trade. According to Chinese data, total exports to the US in 1998 amounted to $38.0 billion. Re-exports from China via Hong Kong to the US were at $31, or 81.5 percent of the total exports to the US. Hence, any estimates of Sino-US bilateral trade balance that do not adjust for re-exports will be totally inaccurate.

Many economists in the US, China and Hong Kong made efforts for years to adjust Sino-US trade figures. There are few examples.

Nicholas Lardy used method of taking into account US goods sold initially to Hong Kong and then re-exported to China which are omitted in US Department of Commerce data, as well as subtract the value added by Hong Kong firms to imports from PRC to US via Hong Kong. He concluded US trade deficit with China in 1997 was $36.15 instead of $49.74. From 1988 to 1997, he estimated, the US overstated its trade deficit with China by 37-126 percent.2

J.P. Voon and Y.Y. Kueh of Hong Kong, adjusting Chinese exports to the US on a MCO (multiple-country-of-origin) basis, reported even lower US trade deficit with China in 1997, only $14.12 billion, rather than $49.74 as US claimed. He stated that the unadjusted statistics were inflated in all cases by about 250 percent relative to the adjusted ones.3

More comprehensive study has been done by K.C. Fung and Lawrence Lau of Stanford University. The two scholars first adjusted official US trade data (deficit of $56.9 billion with China in 1998) on a f.o.b. basis, because all imports are measured on a c.i.f. basis, which may be 10 percent above the f.o.b. cost. Furthermore, they adjusted exports of both countries to each other for re-exports via Hong Kong that are not calculated in US official data. The results show that these adjustments have decreased the US trade deficit with China by another $11 billion. Finally, the two scholars pointed out that the US imports from China via Hong Kong contain markups the Hong Kong businessmen have earned, which are estimated at about 25 percent of the cost of the re-export goods. By subtracting this part, they concluded that the US merchandise trade deficit with China in 1998 is $36.9 billion instead of $56.9 billion.4

Fung and Lau’s findings, however, missed a probably most important part of the issue. That is, the outward-processing accounts to very large proportion in Chinese exports to the US. China has argued that the valued-added content of Chinese exports to the US is low. Fung and Lau admitted that "there is some truth in the Chinese arguments," but "additional research is required to resolve this interesting question."

Again, if China’s processing part in Sino-US trade is small, we can just ignore it. The fact is, however, it is a very large proportion, accounting for 72 percent of China’s exports to the US in 1997. Indeed, since China’s opening-up and economic reforms, more and more foreign, including American, and overseas manufacturers have shifted their production and assembly lines to China, especially those from Hong Kong and Taiwan. Final products of these ventures are exported to the US or other countries. There are two major categories of such kind of production: contractual processing and ordinary processing. Contractual processing refers to processing and assembling of raw materials or components supplied by foreign firms for a processing fee. The processed outputs belong to the foreign firms and are exported by them. Ordinary processing, on the other hand, refers to processing with imported materials. Most of this kind of business is fully foreign-owned enterprises, equity joint ventures, and contractual joint ventures. Instead of earning a processing fee as in the case of contractual processing, foreign firms sell the processed exports for a profit.

It is obvious that most returns to capital generated by these enterprises do not accrue to Chinese government. The rate of processing margin, which is quite low, can be simply represented in the following formula:

M = ( E - I ) / E

A Chinese scholar Y.W.Sung, using Chinese Customs and Hong Kong statistics, estimated Chinese processing margin rate for Hong Kong-owned enterprises over the period 1992-1997 at 23.9 percent.5 Kueh and Voon concluded that in Hong Kong- and Taiwan-owned firms in China making export products, China contributed on average only about 27.2 percent to the total cost of processing goods.6 The reason why China value-added content is so low is that foreign (including American) and overseas (mainly Hong Kong and Taiwanese) partners played major role in the value-added process. It is they who perform substantial initial and final value-adding services for processing operations in China, including product design, production technology, production management, marketing, raw material sourcing, quality control, financing, shipping, etc. while China only performs the functions of assembly or fabrication.

Take China-made Barbie doll that has been popular in the US market as example. Its retail price in the US is $9.99. The US retailer paid only $2 per unit to Chinese exporter. But out of this $2, the raw materials come from the Middle East and are processed into semi-products in Taiwan; the wigs are made in Japan; the packing materials are supplied by the US. These three parts total $1, plus another $0.65 as transportation and management fee. As a result, China only earns $0.35 as processing fee. Under the country of origin rule, the $2 unit price was put into China’s export value to the US, which in no way reflects the real trade balance between the two countries.

Above example shows that the existing single-country-of-origin (SCO) rules simply do not reflect the origin of production. Using these rules, the importing country often regards the outward-processing country as the origin of its imports though the latter’s value added could be very small by proportion. It also does not take into account the multiple flows of processing goods between importing and processing countries prior to exporting to a third country. As more and more labor-intensive goods shipped to China for processing and assembling, China has been mistakenly treated as the origin of production. The SCO rules apparently "punish" the country to which goods are sent for processing and assembling.

In this context, a multiple-country-of-origin (MCO) appears conceptually to be more fair and appropriate. Unlike SCO, MCO facilitates the measurement of value-added contribution by two or more partner countries in their processing production and export. It allows each country’s current account to be compiled using the value-added export and import figures.

In summary, if we take into account China’s processing content of its exports to the US that was omitted in both Lardy’s and Lau’s estimates, assuming over 70 percent of Sino-US trade is processing and around 27 percent of China’s processing margin rate, the US trade deficit with China adjusted by Lardy and Lau should be scaled down further substantially. It might be close to Voon and Kueh’s estimates. Thus, in my view, the Chinese official data is more accurate and reliable. That is, the US deficit with China in 1997 was around $16 billion, and in 1998--$21 billion.

Table 2

Comparative Estimates of US Trade Deficits with China

(In billion US dollars)

To be sure, the US still incurred some trade deficit with China. But if we consider another three factors, the deficit seems not so serious as the figures say. First, there is a "trade transfer affect" between the US and its Asian trading partners. As above mentioned, China’s foreign partners, particularly Hong Kong, Taiwan and other Asian countries, have successfully exported through outward-processing in China to the US. China’s trade surplus with the US is largely a mirror image of the shrinking trade surplus of the Asian partners vis-à-vis the US. The US trade deficit with China must therefore be looked at in a regional context, and not in isolation. Second, by the end of 1998, American direct investment in China reached $21.4 billion. For example, Motorola set up factories in China, sold products in Chinese market, and remitted profit back to the US. It actually substituted China’s import of mobile phones from the US, and its profit offset part of the US merchandise trade deficit with China. Third, the US trade deficit we are talking about is referred to merchandise trade. But the US strength is in the service sector in which it had a $1.6 billion surplus with China in 1998. It is predicted that could grow substantially under the WTO deal, by $3 billion to $5 billion a year.7

Indeed, since 1990, sales by US firms to China have more than tripled, making China the most rapidly expanding of US top ten foreign markets.

Table 3

Largest US Export Markets

(Ranked by Export Growth)

* Adjusted for US goods initially sold to Hong Kong and then re-exported to China. If using unadjusted, i.e. the US Department of Commerce data, the growth rate would be 15.02 percent, still the fastest among the top ten.8

By any measurement, the US trade imbalance with China is significantly smaller compared to that with Japan. There is no reason to capitalize on the trade issue as a hostage in the US domestic partisan struggle and thus poison Sino-US political relations. The issue of calculating methodology is complex. Both China and the US can talk on how to unify the two different principles in calculating bilateral trade flows. Also, a multilateral negotiation is underway within the framework of the WTO on the "Harmonized Rules of Origin" but is yet to be completed. Before reaching agreement on this issue on bilateral and multilateral level, any unilateral overstatement and politicizing of this issue would not be conducive to resolving the bilateral trade problems.

Technology Transfer and US Sanctions

The most important factor for Sino-US trade imbalance appears to be the US economic sanctions high technology export control to China. The Sino-US WTO accord has not resolved this issue.

If the US intends to expand its exports to China, it should pay attention to the changes of demand in Chinese market. Such US traditional export goods to China as wheat, fertilizer, steel, etc. have no longer appealed to Chinese customers because China can already export these products. At present, China is speeding up its modernization programs, needing to import advanced technology and equipment worth tens of billion US dollar each year. If the US cannot adjust its structure of export goods to cater to the new market needs, its export volume would not be increased.

In 1983, The Regan administration decided to move China from Group P to Group V in the list of countries under export control, then extended its "green area" of technology transfer to China to 32 categories. The released control led to fast growth of US export value to China. In early 1989, the US Department of Commerce further released its restriction on technology export to China covering 13 categories. And the US basically maintained trade surplus with China until early 1990s when it started to impose economic sanctions against China.

The US sanctions against China are comprehensive and cover a broad range of technology and equipment. Among others, export of satellites prohibited; nuclear trade and cooperation suspended; control of "dual-use" technologies tightened, including high performance computer, machine tools, telecommunication equipment with encryption capability, mobile phone technology known as CDMA (Code Division Multiple Access), etc.; export licenses for crime control and detection equipment prohibited; Overseas Private Investment Corporation and Trade and Development Program activities suspended.

In early 1980s, Chinese firms begun to talk with Westinhouse and General Electric on purchasing nuclear power plant equipment for Qinshan (300 thousand kilowatt) and Daiya (900 thousand kilowatt). Due to US export control, these long talks ended up with failure. Despite China and the US concluded an agreement on peaceful utilization of nuclear energy in 1985, the US Congress refused to ratify until early 1998. Thereafter, this agreement has never been implemented due to the political noise in the US about the so-called "Chinese espionage." In fact, the potential of Chinese nuclear power market is huge. At present, there are only three nuclear power stations in operation. It is estimated that before 2020, China would increase nuclear power capacity at least by 50 million kilowatt. American nuclear power equipment suppliers’ exports to China could reach $1.6 billion annually, which could create 25,000 high-paying jobs.

China and the US may have great opportunity to cooperate in the area of space program. As a matter of fact, using Chinese rocket to launch an American commercial satellite (such as it did in Loral’s case) has saved at least $50 million for US partners. Cooperation between the two countries in this area could bring tremendous benefits to American businessmen. Due to the well-known political reasons, however, the US government banned such cooperation in the future. In early 1999, Washington denied export of a satellite to China worth $450 million.

In recent years, as China has begun to upgrade its industrial structure, it needs to import machine tools, computer chips and parts, telecommunication equipment, but the US government barred almost all these items. It is ridiculous that while Pentium III computers can be purchased in every computer stores or from online dealers all around the world, sale of such microprocessors by the US firms to China require US government special approval. The US government put China in "Tier III" category. That means any export of computers at speed of 2,000 MTOPS (millions of theoretical operations per second) to countries under this category is restricted, despite the current common speed have long before exceeded 2,000 and reached 10,000 to 30,000 MTOPS. Again, the long review process cost US businessmen billions dollars.

The US economic sanctions against China have proved counterproductive in terms of expanding US exports to China. In this case, many other developed countries see US sanctions as commercial opportunities to grab lucrative Chinese market from American companies. When US government denied Westinhouse’s sale to China in 1980s, European and Japanese companies have sold $15 billion in nuclear power technology to China. As a result, Westinhouse has reportedly been forced to lay off 3,500 workers. As many American business leaders pointed out, the recent restriction of CDMA equipment export to China could cost US firms such as Motorola and Lucent billions dollars. Continuing the existing export control would hurt American companies more than it would hurt China, they stated, because Chinese customers can go elsewhere in the world to buy advanced technology from licensed dealers.

Although the US is the most advanced country in the world in terms of science and technology, it accounts for only a relatively small share in China’s technology imports. At the American expenses, Japan and European Union have steadily increased their market share in Chinese technology market. In 1998, the US contracted technology transfer to China valued only at $3 billion, amounting to 18.3 percent of all foreign technology transfer to China. In the same year, the US exported to China its machinery and electronics products worth only $8.9 billion, while Japan’s value of the exported same products to China was $15.1 billion, and European Union----$14.8 billion. While the US still maintains the economic sanctions it imposed against China after the spring of 1989, Japan and European Union lifted theirs within a few months, and always incurred surplus in their trade with China. In 1990, US, European, and Japanese exports to China were roughly equal. Since that time, European exports have grown 1.5 times as fast as US exports, and Japanese exports have grown twice as fast. Meanwhile, these countries also aggressively and generously extended export financing and aid programs to China that the US has barred.

It is contradictory that the US, on the one hand, underscores its trade deficit with China, on the other hand, it does not want to lift export restrictions on China. This has become main obstacle in developing and expanding Sino-US trade and economic ties. Both Chinese and American business circles call for relaxation of export control, restoration of Trade and Development Program and Export-Import Bank’s credit.

Imposing sanctions or threatening with retaliation at discretion is not a solution. It violates the principle of multilateral trade system, works against effective settlement of disputes, and makes the issue even more complicated.

The Alleged Currency Manipulation

One of Sino-US economic issues has been US charges of the alleged China’s manipulation of its exchange rate. According to the 1988 Trade Act, the US government assesses annually whether US trading partners manipulate their exchange rates in order to gain unfair competitive advantage in their trade with the US. Since 1992, the US Treasury Department concluded, and reiterated in the following years, that China was manipulating its exchange rate and currency reserves and thus impeded US exports to China.

At the height of the Asian financial crisis in the second half of 1997 through now, however, the US has applauded this "manipulation." President Clinton, Treasury Secretary Robert Rubin, Federal Reserve Chairman Alan Greenspan, and Secretary of State Madeleine Albright lavishly have praised China for holding its exchange rate constant in the face of massive devaluation in other Asian countries.

Paradoxically, the US, on the other hand, has insisted on its long-standing demand for a rapid opening of China’s financial market, and set it as a condition for China’s entry into the WTO. It is strange that the US may not know that liberalization of financial systems would certainly lead to a real devaluation of China’s currency.

How to interpret this US inconsistent, conflicting attitudes toward China’s exchange rate system? Apparently, the former groundless charges of China’s manipulation of currency were used to press China to reduce its trade surplus with the US. The current US urge to hold Chinese currency stability may derive from an acute sense of self-interest too. According to some estimates, a devaluation of renminbi by five percent would add $ 4.3 billion in its trade deficit with China.9

The fact is when the US Treasury Department charged in early 1990s that renminbi’s exchange rate was manipulated and devalued by the Chinese authorities, China was then running a global trade deficit. It is hard to sustain an argument that a currency is undervalued while the country is running trade deficit.

Moreover, renminbi’s value has experienced an upward trend after the exchange rate reform in 1994. Since supply of foreign exchange was higher than demand in the market, some modest appreciation was subsequently recorded, leaving the renminbi’s value change from 8.7:1 in 1994 to 8.27:1 in 1998 and 1999, a 4.8 percent of appreciation.

Table 4

Renminbi’s Exchange Rate

(1 US dollar=yuan)

Sources: China Statistic Yearbook, and midpoint exchange rate published by People’s Bank of China on each day.

Several factors seemed to determine the upward movement of renminbi’s value. The new rule of buying and conditional selling foreign exchanges by banks has brought most foreign exchange income of enterprises into the market. In the meantime, demand for foreign exchanges was restricted in scope and quantity. In addition, since 1994 China has run trade surplus, reaching $4.3 billion in that year and $19.5 billion in 1996 thus supply of foreign exchanges in the market significantly augmented. The country has also recorded surplus in capital account, reaching $32.6 billion in 1994 and $22.9 billion in 1997. This is the major reason for renminbi’s appreciation.

In view of all this, the US charge that the alleged manipulation of exchange rate by the Chinese government had curtailed US exports was unwarranted.

When China formally joins the WTO and the commodity and capital markets are liberalized, however, the current renminbi’s exchange rate might change.

Lower tariffs will mean steep rise in imports, which will put pressure on China’s current account balance. In the 11 months of 1999, China enjoys trade surplus in $26.4 billion. But it is predicted that this surplus would gradually decline and eventually break even in five years from now. In the meantime, foreign debt will incrementally be due over this period. Repayment of the bulk of foreign debt may turn the current account to deficit. While the capital account might still keep positive balance largely due to increased FDI, possibly no less than $40 billion a year, the profits of foreign investors could reach $100 billion. Should all these proceeds remit from China, the foreign exchange reserve, now stands at $154.6 billion, could be drained. Then the renminbi’s exchange rate will face pressure of devaluation. Or, a more flexible, floating foreign exchange rate arrangements could be adopted.

If this will happen, it should be regarded as a consequence and cost of China’s WTO accession, not a so-called "currency manipulation" by the Chinese government.

Human Rights and Permanent NTR

The US Congress has no power to approve or deny China’s accession into the WTO; it can only decide whether to extend the permanent MFN (now NTR, Normal Trade Relations) status to China. It is well known that, according to general WTO requirement, any WTO member should extend to all other members permanent and unconditional MFN. But the US Congress, using the excuse of the so-called human rights conditions in China, decided extension of MFN on the basis of annual review. Every year from 1990 to 1999, there was a heated debate on China’s MFN treatment among different parties and interest groups. It has wasted much energy of the politicians and the money of American taxpayers.

Linking human rights with MFN not only conflicts with the fundamental principles of GATT and WTO, it also lacks a legal source. The Jackson-Vanik Amendment to the Trade Act of 1974 conditioned freedom-of-emigration to the MFN. It was a legacy of the Cold War, and was aimed at the former Soviet Union for free emigration of Soviet Jews. There is not a single word in this law about human rights as stipulated in President Clinton's May 1993 executive order. As for China's emigration policy, Mr. Deng Xiaoping once offered to allow as many as ten million Chinese to emigrate to the U.S. annually. Will the US accept?

The MFN treatment has become a global standard for normal trade. It does not render a favor, but assumes reciprocal obligations. Over 120 countries now have lower tariff rates than those under MFN---Mexico, Canada, Israel, the Caribbean Basin Initiative members, etc, and every country enjoys the Generalized System of Preferences (GSP). Only eight countries do not have MFN. Trade is trade. It should not be linked with non-economic issues. Although many ordinary Chinese would agree that the human rights situation in China is far from perfect, they might question the human rights situation in the U.S. too: its extremely high crime rate, the explicit racial discrimination, and many citizens living below the poverty line. All these point to the fact that at least two Freedoms---freedom from want and fear----have not been completely realized in the U.S. People might argue why doesn't the U.S. improve its human rights first before trying to change other nations.

No other nation would support the U.S. policy of linking trade preferences to human rights and follow the U.S. in its course of action. Many Asian leaders criticized America's "double standard" with respect to race, culture or civilization, and complained that the U.S. emphasis on human rights concentrated more at Asia than at other parts of the world. In WTO ministerial meeting in Seattle in late November of 1999, the US again tried to put a "human face" on the global trade issues and threatened to use sanctions if the WTO is not able to work out labor standards for wages, working conditions and other labor issues. Delegates from developing countries were angered by the US statement and warned that they could walk away from any agreement on a new round of talks.

Conclusion

The trade frictions and disputes between China and the US mainly fall in the area of economic benefits distribution among certain industries and enterprises, nothing related to the fundamental national interest of the both countries. They can be settled through negotiations on equal basis, which has been fully proved by the past experience. Within the next six years from 2000 to 2005, in order to meet the need of modernization programs, China import value will exceed $1,300 billion. The year of 1999 has already seen significant increase of Chinese imports. As long as the US can get rid of interference of noneconomic factors in the trade relations, completely lift the out-dated sanctions against China and relax its export control, the American medium- and large-sized enterprises will have the ability and possibility to capture more Chinese market share. The combination of American capital, technology and managerial skills with China’s huge market, low-cost labor and resources will bring tremendous benefits to the economic growth of the two countries.

 Endnotes:

1. Comments by Jeffrey Schott of the Institute for International Economics. See The Asian Wall Street Journal, November 17, p.11.

9. See Marcus Noland, Sherman Robinson, and Zhi Wang, The Continuing Asian Financial Crisis: Global Adjustment and Trade, Institute for International Economics, 1999, A five percent Chinese devaluation plus 20 percent Japanese depreciation and 4 percent productivity loss will increase US trade deficit with China by US$ 4.3 billion. (Table 7)