Why Give China (M)ore (F)or (N)othing?

The MFN debate should include the high economic costs of continued US trade with a nation whose market is no pot of gold

Later this month the House of Representatives in all likelihood will vote to renew China's trade status with the United States for another year. Such an outcome is based largely on the perception created by business groups that continuing the commercial relationship with China will give American exports access to an enormous, lucrative market. These exports to China, business groups argue, will help sustain and create high-paying jobs in the United States.

This image of a Chinese market as the pot of gold at the end of the rainbow has enthralled Western traders for centuries, but it flies in the face of reality. China is a poor country, which carefully protects its domestic market with a web of trade barriers to encourage foreign investment and pursues a deliberate strategy of building its economy based on exports. For the US, this has translated into an increasing trade deficit (see chart) that reached more than $39 billion in 1996.

If we disregard the fact that the United States bears the brunt of Chinese economic development and accept the myth of the Chinese market, we debate most-favored-nation (MFN) renewal on incorrect assumptions. We fail to examine whether we should pay the economic costs of a continued trade relationship for the sake of engagement with China.

Raising critical questions about the bilateral trade relationship and its role in overall US-China policy is anathema to most business advocates. They fear it could lead the US government once again to try to use MFN as leverage to change objectionable Chinese policies ranging from human rights abuses to sales of weapons of mass destruction.

To make their case, business groups have exaggerated the importance of the Chinese market. They cite China's astonishing economic growth rate of almost 10 percent in 1996, as well as the fast growth of US exports over the last decade. They emphasize how US exports support more than 200,000 US jobs.

Numbers hiding facts

These numbers hide the fact that total US exports of goods to China in 1996 amounted to approximately $12 billion, or about 2 percent of US exports overall. That is less than the share of exports the US ships to much smaller Asian economies, including South Korea, Singapore, and Taiwan. In addition, China's growth rate in 1996 did not translate to increased US exports, which stayed flat that year. Whether this is a temporary pause remains to be seen, but US exports so far this year have decreased about 7 percent.

It is true that US exports to China over the past five years grew at an average annual rate higher than that of US exports overall. But much of this growth may be due to demand from firms in China's so-called special enterprise zones, which produce goods for export. A recent analysis by the Federal Reserve Bank of New York concludes that most exports to China from the US and other countries are capital equipment for the factories located in these zones or components for products that are then exported from China. The bank estimates that only about 20 percent of all foreign goods entering China make it to the Chinese domestic market.

That market is heavily protected by trade barriers, which China has erected to protect its state-owned enterprises and to develop its key industries. Faced with these barriers, foreign firms often opt to invest in China, helping the Chinese government achieve its goal of transforming China into an industrial power. As a condition of investment, foreign-owned joint ventures routinely agree to transfer technology to their partners, who can then use it to become competitors. Foreign firms are also obliged to export part of their production from China.

Fighting to save trade barriers

China's policies are unlikely to change with its entry into the World Trade Organization. In negotiations for entry, China is fighting to keep in place trade barriers in the automotive and electronic sectors for 12 years, longer in other sectors. This would give China time to develop these industries into world-class competitors. In general, Chinese negotiators are pressing to keep their obligations under international rules to a minimum, with outright exemptions or long transition periods.

We must engage in an honest debate on the economic costs and benefits of a continued trade relationship with China. Even if we find that the costs outweigh the benefits, we may decide that it is a price worth paying for the larger goal of integrating China into the international community.

But if so, let's be honest about why we grant China MFN. Maybe it is worth paying China for its cooperation on security issues, such as dealing with the North Korean nuclear threat. Political rhetoric aside, we will most likely find that even in the post-cold-war era, trade and economics sometimes still take a back seat to a larger national interest.

* Jutta Hennig is chief editor of Inside US Trade, published weekly in Arlington, Va.

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