Taiwan Communiqué No. 71, June 1996

Trading with China

(Self-)deception, lies and videotapes

In May and June 1996, the following separate but related trade issues were under discussion between the United States and China:

1. Non-proliferation. On 10 May 1996, the State Department decided the US would not impose mandatory economic sanctions against China for the sale of nuclear technology to Pakistan.

2. Intellectual Property Rights (IPR). On Wednesday, 15 May 1996, the United States Trade Representative (USTR) published a list of US$ 3 billion worth of Chinese goods, which would be subject to increased tariffs if China did not stop the continued widespread Chinese violations of copyrights through the pirating of compact disks and videotapes.

3. Most Favored Nation (MFN) status for China. On Monday, 20 May 1996, Mr. Clinton announced in a speech to the Pacific Basin Economic Council that he favored extension of MFN for China.

In the second half of May 1996, two additional prickly issues were added to this already quite sensitive list:

4. On 21 May 1996, U.S. Defense Secretary Perry announced that the US had learned that China was seeking to obtain SS-18 strategic missile technology from Russia and the Ukraine. The liquid-fueled multiple warhead SS-18 is Russia's main long-range missile, and has a range of 11,000 kilometers. Mr. Perry warned all three countries that sale would constitute a violation of both the Strategic Arms Reduction Treaty (START) and the Missile Technology Control Regime (MTCR) ("U.S. warns Russians on SS-18 sales to Chinese", International Herald Tribune, 22 May 1996).

5. On 23 May 1996, major newspapers in the United States reported that federal agents had arrested at least eight suspects and indicted seven others on charges of smuggling 2,000 AK-47 fully automatic Chinese rifles into the United States ("Chinese sought in plot to import arms to the U.S.", New York Times, and "U.S. arrests suspects with ties to Chinese arms firms in gun smuggling sting", Washington Post, 23 May 1996).

On the following pages we will briefly discuss each of the above issues. Our conclusion is that the Clinton Administration is far too soft on China: A much more forceful approach is needed in order to convince China to bide by international standards, and respect the rights of its own citizens and its neighbors.

The MFN debate

The MFN-debate is a prime example of the (self-)deception presently prevailing in Washington. When Mr. Clinton became President he made the (right) decision to link human rights and the annual extension of MFN-status to China. However, in 1994 he caved in to pressure from major corporations wanting to do business with China and decided to de-link the two issues again.

The Administration's main arguments in favor of extension are that MFN-status is "normal" trading status, and that extending it will accelerate economic reform and a free market system, which will nudge the PRC towards democracy.

It has apparently not dawned yet on the Administration and proponents of extending MFN that economic relations with China are not "normal", but as out of balance as can be. One glance at the trade balance between the United States and China confirms this.

Another essential piece of information seems to be escaping Washington: as was pointed out in an article in the Wall Street Journal ("In a trade war, China takes the bigger hit", WSJ, 17 May 1996) China is far more dependent on trade with the U.S. than the U.S. is on trade with China. About 40 percent of China's exports go to the United States, while less than 2 percent of U.S. exports go to China.

The Administration's argument that trade is helping human rights and democratization in China was discarded by the New York Times, which stated in an editorial that "...there is little evidence that trade is fostering political liberalization there" ("The annual China brawl", New York Times, 12 May 1996).

Taiwan Communiqué comment: It is self-deception to think that more trade with China will lead to economic and political reform. The developments over the past two years only indicate that China is becoming a more powerful, hostile, and belligerent bully, which is less likely to be restrained by the niceties of human and political rights, and more apt to break agreements on anything from non-proliferation to trade.

Congress has 60 days to decide on the MFN-renewal issue. We strongly suggest that Congress rejects it: during the past year, China has not shown itself to be a responsible member of the international community, it has violated non-proliferation and trade agreements, trampled the rights of the Tibetan people, and threatened Taiwan with missiles and military maneuvers.

The U.S. should make it crystal clear to China that MFN-status can only be extended if China abides fully by non-proliferation and trade agreements, fully respects human rights in Tibet, and recognizes Taiwan's right to exist as a free and independent nation. The U.S. has the leverage, it should use it to stand up for the basic principles on which this nation was founded.

Copyrights and Human Right

The May 15th 1996 decision by the United States Trade Representative (USTR) to threaten with trade sanctions if China does not stop the continued widespread violations of copyrights, is a rerun of a similar exercise in February 1995. At the end of that episode the Chinese government signed an agreement that it would take measures against pirating. The USTR has now concluded that pirating is as rampant as ever.

The U.S. has now announced a list of $ 3 billion in Chinese products ranging from silk clothing to shoes, which would be subject to tariffs if by June 15th the Chinese do not take immediate action to stop the pirating of compact disks and videotapes. According to Mrs. Charlene Barshefsky, the acting USTR, the Chinese copyright violations damages the U.S. software and entertainment industry to the tune of US$ 2.3 billion, "...more than five percent of the U.S. work force ... and growing at three times the rate of the rest of the economy."

According to the International Federation of the Phonographic Industry (IFPI) China's production of pirated compact disks had increased to some 88 percent of the total production. The Federation stated that since 1994, China had almost tripled its CD production capacity to some 150 million CD's per year.

China responded to the May 15th USTR announcement by publishing its own list of American products which would be hit with extra tariffs. These included automobiles, telecommunication equipment, and "other goods," presumably including aircraft, and agricultural products.

Taiwan Communiqué comment: while the forceful USTR moves are to be applauded, the Clinton Administration is giving the overall impression that copyrights are more important than human rights or nuclear proliferation.

Mr. Clinton would do well to be as forceful and outspoken about the recent crackdown in Tibet, where according to press reports, two Buddhist monks were killed and dozens of nuns injured by Chinese troops for displaying pictures of the Dalai Lama. Or are Tibetan lives worth less than Mickey Mouse ?

Export of nuclear technology to Pakistan

On 10 May 1996, U.S. Secretary of State Warren Christopher decided not to impose mandatory economic sanctions against China for the sale of nuclear technology to Pakistan. The case surfaced in the beginning of February (see Taiwan Communiqué no. 70, p. 14-15) and prompted the U.S. government to ask the Export-Import Bank to temporarily suspend any new financing for American companies doing business with China.

Mr. Christopher's main arguments were that top Chinese officials "probably did not know about the transfer", and that Chinese Foreign Minister Qian Qichen had told Christopher in a private one-on-one meeting in The Hague on 19 April 1996, that China would in the future not allow any more sales of ring magnets to foreign nuclear facilities not subject to international inspection.

However, the Washington Post reported on 16 May 1996 ("Christopher defends agreement with China") that Mr. Qian's pledge was not even mentioned in China's public statement on the resolution of the case. In an editorial, the Washington Post chided the Administration for being so gullible, and for not insisting on a public acknowledgement by the Chinese ("Tough on China", 16 May 1996).

It is also becoming increasingly clear that State Department officials simply made up the argument that top Chinese officials didn't know about the transfer because they wanted to prevent the issue from coming to a boil at the same time as the conflict with China over copyrights and the MFN-issue.

Taiwan Communiqué comment: Mr. Christopher and his officials might gain some insight from (re)reading Lucian Pye's February 19th article in the New York Times ("China's Quest for Respect"), in which Mr. Pye states:

"American politicians ... tend to believe that honest communication is best realized in face-to-face meetings behind closed doors, and that public statements are unreliable.... The opposite is the rule in Chinese political culture. There, private settings are where hypocrisy usually prevails .... One knows where the other really stands only from public statements...

Arms smuggling into the United States

The case of arms smuggling into the United States is politically a serious matter, because the arrested and indicted men were associated with two Chinese state-owned companies, China Northern Industrial Corporation (Norinco) and Polytechologies. Norinco is one of China's main arms manufacturers. According to the Washington Post ("Charges raise ticklish issues for US policy", 24 May 1996) it is directly controlled by China's State Council, the nation's supreme policy-making body, chaired by premier Li Peng. Polytechnologies Inc. is headed by Mr. He Ping, who just happens to be the son-in-law of Mr. Deng Xiaoping.

American officials said the companies tried to disguise the weapon's origin, listing them as "hand tools", and shipping them through Japan and Hong Kong. They said that the weapons had all Chinese markings removed, and North Korean markings stamped on them "...to further establish plausible deniability." The U.S. officials stated that the Chinese thought that the weapons were destined for streetgangs in the United States.

Wall Street Journal: the McDonnell Douglas case

In several recent articles, the Wall Street Journal has highlighted the case of McDonnell Douglas, which was deceived and double-crossed by Chinese officials into transferring technology and even manufacturing equipment, which surreptitiously ended up in a military plants in Nanchang making Silkworm missiles ("A sellout to China", WSJ, 12 March 1996, and "McDonnell Douglas's High hopes for China never really soared", WSJ, 22 May 1996).

" In the end, we were betrayed"

McDonnell Douglas executive

The McDonnell Douglas case is only a foreboding what could happen to U.S. and European companies that are so eagerly chasing the mirage of the Chinese market.

Another interesting case, which recently came to light was that of the Dow Jones Company, whose China representative Mr. James McGregor (who also heads the American Chamber of Commerce in Beijing), came to Washington recently to lobby in favor of MFN. While he was in DC, the Chinese authorities announced tough new regulations restricting the activities of foreign economic news services such as Dow Jones ("East is East, West is West and Dow's man in the middle", Washington Post, 24 April 1996).

What could really happen is perhaps best reflected in a recent article in the Washington Post by Mr. Harry Wu, one of the few Chinese who dares to stand up to the Communist rulers in Beijing. He states:

"As Deng's rule comes to an and, several potential political crises threaten to shake up the Communist Party. In the face of changed political beliefs, bureaucratic corruption .... the party's next power struggle could result in violent surges sweeping and splitting the whole nation in civil war. Western businessmen who ignore this risk do so at their peril and today the Western cash is just fuel in the tank driving the Communist vehicle."

Harry Wu, "A Chinese word to remember: Laogai"

(Washington Post, 26 May 1996)

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