Why China Should Receive MFN Status

PRESIDENT BUSH has decided to request extension of the People's Republic of China's ``most-favored-nation'' (MFN) status, which significantly lowers US tariffs and permits China to sell to the United States on the same basis as other trading partners. Congress has the power to reverse or modify the president's recommendation, and some congressional leaders have already expressed their intention of blocking renewal of MFN for China. There is also some sentiment in Congress to approve extension of MFN for a limited time, with future renewal conditioned on specific improvements in China's human rights positions. Congress has 30 days to overturn or modify the president's request, and it is possible the issue could become a political hot potato, especially because of the coincidence of a renewal failing during the anniversary of the events in Beijing last June. The Chinese are fearful that we may eliminate this trade benefit based on the Tiananmen Square and the suppression of the democracy movement in China. While China's MFN status represents very little to the US financially, denying China this trade advantage would be truly disastrous for the fragile Chinese economy. Moreover, denying China MFN status would most injure the wrong Chinese - urbanites who favor economic and political reform. There would also be an immediate increase in prices to US consumers of several products we import from China - apparel, toys, and radios. Even Japanese banks, which have made large loans to China, are concerned about the ability of the Chinese economy to make loan payments if US trade is cut.

There are several additional reasons we should not terminate China's MFN status:

1. Further trade sanctions against China won't work. China will retaliate. It will erect barriers to US sales and investment. In 1988, the US exported $5 billion worth of goods to China. During the past decade the US invested an estimated $3.5 billion there. These sales and investments may well be threatened if China retaliates in kind. Wheat sales, in particular, will suffer. Markets once lost would be hard to regain. US competitors elsewhere would benefit at our expense.

Moreover, it has been proven that trade sanctions are effective only when used for limited purposes and against small countries. This is simply not the case with sanctions to obtain changes in China's human rights policies. The US does not have the leverage with the Chinese leadership to effect policy changes through the use of sanctions. China will simply dig in its heels.

The Chinese leadership is paranoid about the appearance of foreign intervention, and it deeply resents what it views as US efforts to affect its ``internal affairs'' through the use of sanctions. China has traveled a long road without foreign support, and it is prepared to do so again. Saving face is important to the Chinese. They will simply be unable to accept an insult without attempting to strike back. During a recent trip to China one official told me, ``There is a Chinese saying: Eat bitterness. We have eaten bitterness before, and we are prepared to do so again.''

2. Innocent people in unrelated places such as Hong Kong, Japan, and Taiwan will suffer. Hong Kong's astonishing, exuberant trade posture is largely dependent on trade with mainland China. If China's MFN status is eliminated, and trade with China suffers accordingly, Hong Kong will suffer. The American Chamber of Commerce in Hong Kong predicts the colony will lose between $5 and $9 billion in import and export contracts if the US acts against China. The Chamber in Hong Kong found removal of China's MFN status ``would have a devastating impact on Hong Kong and the more than 900 American firms'' based there. Taiwan will suffer. Japanese and Hong Kong banks, the primary private lenders to China, are concerned about loan repayment.

3. Eliminating MFN helps the anti-reform faction in Beijing. China's leadership is deeply divided between a geriatric, tough, go-it-alone faction, and a younger element open to economic and political democracy. Any action by the US interpreted as designed to hurt the Chinese people and force change will give ammunition to the old guard. Even the younger elements in the leadership prize stability. Destabilizing action will result in entrenching the ``I told you so'' element.

4. The US should not misdirect concern with Lithuania by being excessively ``macho'' with China. President Bush is being criticized for not being sufficiently ``tough'' with China and now with the Soviet Union for its Lithuanian policies. It is possible Congress may decide that we have to show some ``macho.'' The political consequences of doing so would be far less detrimental if we were to retaliate against the Chinese rather than the Soviets.

I'm convinced it would be petty-spirited and counterproductive for the US to now impose further trade sanctions on China. Although the massacre in Beijing was outrageous, we should swallow hard and maintain our trade relationship with China.

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