From @UBVM.CC.BUFFALO.EDU:owner-china-nt@UGA.CC.UGA.EDU Sun May 22 01:23:49 1994 Date: Sun, 22 May 1994 01:21:03 -0400 Reply-To: ccf-editor@ifcss.org Sender: China-Net From: ccf-editor@ifcss.org Subject: Chinese Community Forum (#9425, Weekend Edition) Comments: To: china-nt@uga.cc.uga.edu To: Multiple recipients of list CHINA-NT ==+==+==+== C h i n e s e C o m m u n i t y F o r u m ==+==+==+=== Sunday, May 22, 1994 (Issue No. 9425, Weekend Edition) +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= Chinese Community Forum (CCF) is an e-journal published on China-Net. CCF is dedicated to the discussion on the issues related to the Chinese community. The opinions expressed here do not necessarily represent the views of the Editorial Board of CCF. Contributions to the discussions and suggestions of new topics are very much appreciated. +=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+= # of Table of Contents Author | Lines ===========***==========***==========**==========***==========***=========== Most Favored Nation Status and China: An Economic Analysis of Linkage..................Phillip C. Saunders 731 1. Defining MFN 2. The Volume of Sino-U.S. Trade and Its Measurement 3. The Impact of Non-Renewal of MFN to China's Economy 4. The Impact of Non-Renewal of MFN to the U.S. Economy 5. Selective Sanctions 6. Results of Linking MFN With Human Rights 7. Conclusion ===========***==========***==========**==========***==========***=========== -- From The Editor -- Perhaps few issues in the recent history of Sino-American relation can boast of having drawn so much public attention and generated such a large body of public discourses. Almost everything within the scope of human imagination that is remotely related to MFN has been exhaustively analysed and synthesized: human rights, the ideology of the "free world" versus that of a communist country that is "hanging on there", the repercussion of its revocation on various aspects of the economies of both countries, the emerging Pacific Rim, nationalist interest, the list could go on and on. All these aside, MFN may be used as an ideal text-book illustration for the inter-connectedness of everything, and an example for the spectacular twentieth century textual production/reproduction of an "issue" (a magical word) once it starts to circulate in the public sphere (another magical term); it stands for a post-modern impasse that will not, or refuses to exhaust itself; besides, it may also serve as a moral tale against seeing any issue in isolation, or from a purely political, economic, social point of view -- indeed it calls into question the validity of these seemingly discreet categories. The question is, are these discussions enlightening or mystifying, or both? Paradoxically it seems that it is precisely in the midst of the accumulating discourses that we are most likely to lose sight of the "real" culprit, MFN. Therefore it is refreshing to read Phillip Saunders's long but highly readable article that collects in a nutshell all the relevant and essential facts (historical and otherwise) and statistics we need to know about MFN in order to see it in the larger context of Sino-US relation, including the diplomatic intrigues and maneuvers on both sides concerning this issue, as well as the roles China and US are to some extent scripting for themselves and for each other to play now and in the next century. With the conscious pleasure of doing a public good, we present Phillip Saunders' at once substantial and lucid "case study" of MFN. ===========***==========***==========**==========***==========***=========== Most Favored Nation Status and China: An Economic Analysis of Linkage..................Phillip C. Saunders 731 ---------------------------------------------------------------------------- [Phillip Saunders is a graduate student at the Woodrow Wilson School of Public and International Affairs, Princeton University, where he is studying international relations. He holds an A.B. from Harvard College in American and Asian History.] This paper will assess the utility of linking renewal of China's Most Favored Nation (MFN) status to human rights, trade, and other foreign policy issues. It will begin by defining MFN status and outlining the legal basis for MFN renewal in terms of U.S. law and U.S. treaty obligations. The paper will then examine the volume of Sino-U.S. trade and consider methodological problems in measuring the Sino-U.S. trade balance, concluding that U.S. customs statistics are the best measure of the trade balance. It will assess the economic impact of non-renewal of MFN on China's economy, concluding that loss of MFN would have a large impact on the Chinese economy, particularly for export-oriented sectors in coastal provinces, which have been driving Chinese economic growth. Next it will estimate the economic impact of non-renewal on U.S. consumers, producers, and distributors, taking likely Chinese retaliatory measures into account and concluding that costs to the United States would be significant but less than costs to China. The paper will then consider the possibility of more selective sanctions in place of MFN removal. After analyzing economic aspects of MFN, the paper will examine the results of linkage. It will list the variety of human rights, economic, and foreign policy issues explicitly or implicitly linked to MFN renewal and assess the relative success of linkage in different issue areas, concluding that MFN has been most effective in securing economic concessions, less effective in achieving foreign policy objectives, and only marginally effective in securing human rights. The paper will argue that MFN is too blunt an instrument to form the basis of U.S. policy towards China and that the threat of non-renewal is becoming less credible and imposing increasing costs on bilateral ties. The U.S. should handle issues on a bilateral basis and develop a more selective set of sanctions to pressure China on foreign policy and human rights issues. 1. DEFINING MFN Most Favored Nation status refers to the tariff rates charged on imports. Countries with MFN status are subject to column one tariffs, which reflect the seven rounds of General Agreement of Trades and Tariffs (GATT) tariff reductions prior to the latest Uruguay Round reductions.(1) Afghanistan, Cambodia, Cuba, Laos, Montenegro, North Korea, Serbia, and Vietnam are the countries currently denied MFN status.(2) Imports from countries without MFN are subject to column two tariff rates, which were promulgated in the Smoot-Hawley Tariff Act in 1930. The average tariff rate under Smoot-Hawley in 1930 was 44.9 percent; the average tariff rate on dutiable U.S. imports in 1992 was only 5.2 percent.(3) U.S. tariff rates typically include a per-unit duty and a percentage of the total value of the imported goods. Effective tariff rates depend on both the volume and value of trade in specific Harmonized Tariff Categories. If the composition of trade shifts, the overall effective tariff rate will change. Based on the composition of 1992 imports from China, the average duty rate under MFN was 7.9 percent. Without MFN, tariffs would have been at an average duty rate of 46.1 percent.(4) Based on the composition of 1990 imports, the average MFN rate was 8.8 percent and the non-MFN duty rate would have been 50.5 percent.(5) Loss of MFN status would significantly increase the cost of Chinese products to U.S. consumers and greatly reduce the volume of Chinese imports. (The economic impact of loss of MFN is considered later in the paper.) The table below shows effective MFN and Column 2 tariff rates for the top ten U.S. imports from China. MFN and Column 2 Tariff Rates, Top Ten U.S. Imports from China (1992) ============================================================================ HTS Item, Description, MFN duty Column 2 64029915, Certain plastic footwear, not covering the ankle, 6.0% 35.0% 61109000, Silk Blend Sweaters, 6.0% 60.0% 95039060, Misc toys, 6.8% 70.0% 64039990, Certain female leather footwear, 10.0% 20.0% 95034110, Stuffed toys, 6.8% 70.0% 27090020, Crude Oil, .105/brl .210/brl 62061000, Female woven silk blouses, 7.5% 65.0% 64039960, Certain male leather footwear, 8.5% 20.0% 67029035, Artificial flowers, 9.0% 71.5% 03061300, Frozen shrimp, 0.0% 0.0% =========================================================================== Article I of the General Agreement of Trades and Tariffs specifies that MFN tariff rates will be applied to all 105 official GATT members; extension to non-members like China depends on the discretion of the GATT member. The United States used its discretionary power to provisionally grant MFN status to China in 1973.(6) China and the United States formally granted each other MFN status in the U.S.-China trade act signed in mid-1980. Since China was a non-market economy, MFN status was subject to the provisions of the Jackson-Vanik amendment to the Trade Act of 1974. The Jackson-Vanik amendment, originally intended to encourage the Soviet Union to allow free emigration of Jews, required the president to certify annually that the government of a non-market economy either granted freedom of emigration to its citizens or that extension of MFN status would encourage free emigration.(7) Annual certification provided Congress a means of evaluating the president's policy towards Russia; the annual recertification process also became the key forum for debate over the president's China policy after 1990. The issue of immigration was not important initially; Chinese leader Deng Xiaoping offered to send the United States as many immigrants as it wanted.(8) Most Favored Nation status was routinely renewed until Chinese troops massacred student protesters in Tian'an'men Square on June 4, 1989. The Bush administration responded to Tian'an'men with a set of sanctions that suspended military sales to China, postponed high-level military and diplomatic exchanges, announced that Chinese students in the United States would not be forced to return to China, postponed loans to China from international financial institutions, and suspended a range of technology transfers. Bush, who had served as the American envoy to China in the mid-1970s, was conscious of China's strategic value and determined to preserve the Sino-U.S. relationship. A few members of Congress called for immediate revocation of China's MFN status, but the sanctions bill passed by Congress in July 1989 only codified and slightly extended the sanctions Bush had imposed. Members of Congress became increasingly dissatisfied with the failure of sanctions to have a dramatic impact on Beijing's human rights policies and the Bush administration's disinclination to press China harder for political reform. The House passed bills to disapprove renewal of China's MFN status and to impose conditions on 1991 renewal based on China's progress towards a series of specific political reforms, but neither won Senate approval.(9) Congress passed legislation establishing conditions for the renewal of China's MFN status in 1991 and 1992, but Bush vetoed the legislation, preferring bilateral measures such as technology restrictions and Super 301 cases which would have a more limited impact of Sino-U.S. relations. U.S. policy towards China was an issue in the 1992 presidential election, with Clinton accusing Bush of coddling China and promising to impose tougher human rights conditions on the renewal of MFN. Once in office, President Clinton signed an Executive Order on May 28, 1993 which renewed China's MFN status unconditionally for 1993 but imposed a detailed set of human rights conditions for renewal in 1994. The specific conditions in the executive order and Chinese responses will be considered later in the paper. With the legal framework in mind, this paper will now discuss the potential economic impact of the withdrawal of China's MFN status. 2. THE VOLUME OF SINO-U.S. TRADE AND ITS MEASUREMENT A variety of methodological issues arise when analyzing Sino-U.S. trade. The first and most important is "Whose figures should be used?" Chinese and U.S. official Customs figures each show that their country is running a trade deficit in bilateral trade! U.S. China Trade (PRC Customs Statistics, Billions of U.S. Dollars)(10) ============================================================================ 1987 1988 1989 1990 1991 1992 Chinese Exports 3.00 3.40 4.40 5.20 6.159 8.594 Chinese Imports 4.80 6.60 7.90 6.60 8.008 8.900 Chinese Trade Deficit -1.80 -3.20 -3.50 -1.40 -1.849 -.306 ============================================================================ U.S. China Trade (U.S. Customs Statistics, Billions of U.S. Dollars)(11) ============================================================================ 1987 1988 1989 1990 1991 1992 1993 U.S. Exports 3.497 5.021 5.755 4.806 6.278 7.418 8.760 U.S. Imports 6.293 8.511 11.990 15.237 18.969 25.728 31.530 U.S. Trade Deficit -2.796 -3.490 -6.235 -10.431 -12.691 -18.310 -22.770 ============================================================================ Both countries calculate exports based on FOB (free on board) and imports on CIF (cost, insurance, and freight), resulting in a 10-15 percent discrepancy in figures. The largest difference lies in transshipment of goods through Hong Kong. The United States considers Chinese goods shipped through Hong Kong to be Chinese exports, even if value was added there, but considers American goods shipped through Hong Kong to China to be exports to Hong Kong. Conversely, China considers most American goods shipped through Hong Kong to be imports from the United States and Chinese goods shipped to the United States through Hong Kong to be exports to Hong Kong.(12) In 1990, for example, the discrepancy between U.S. and Chinese figures for Chinese exports to the United States was $10.037 billion, a figure that closely corresponds with official Hong Kong figures of $10.500 billion of Chinese goods re-exported to the United States.(13) Since approximately 70 percent of Chinese exports to the United States are transshipped through Hong Kong, this is the largest source of the discrepancy between trade figures and a reason to prefer U.S. figures.(14) Some analysts argue that the rapid growth of direct investment from Hong Kong and Taiwan and the transfer of production facilities to the mainland make U.S. trade balances with "Greater China" a better measure of the true trade deficit.(15) Chinese officials estimate that 36 percent of Hong Kong's industry has moved across the border to Guangdong province.(16) U.S. Trade with Greater China (U.S. Customs Statistics, $US Millions) ============================================================================ 1987 1988 1989 1990 1991 1992 U.S. Expts. to Greater China 14.893 22.837 23.381 23.114 27.597 31.745 U.S. Impts. fr Greater China 40.769 43.463 46.025 47.525 51.271 60.117 U.S. Trade Deficit -25.876 -20.626 -22.644 -24.411 -23.674 -28.372 ============================================================================ This table indicates that the U.S. trade deficit with Greater China has not increased dramatically over the last five years. However this is because U.S. exports to Hong Kong and Taiwan have increased fast enough to cover most of the dramatic expansion in imports from China. (U.S. imports from Hong Kong and Taiwan declined slightly over this period). This aggregation of data hides the fact that Chinese import restrictions have limited the increase in U.S. exports to China, a relevant factor in the bilateral trade relationship. Moreover, the loss of MFN status would only affect Chinese-origin goods, making trade with China the appropriate measurement. The remainder of this paper will use U.S. customs figures. 3. THE IMPACT OF NON-RENEWAL OF MFN TO CHINA'S ECONOMY This paper will critically evaluate two studies which attempt to calculate the effect of the loss of MFN on Chinese exports to the United States. The first study is by the World Bank using the World Bank-UNCTAD SMART trade projection model.(17) The second study is a 1993 study by the International Business and Economic Research Corporation (IBERC) using the U.S. International Trade Commission CADIC model.(18) Comparison of Model Characteristics ============================================================================ Model World Bank-SMART model IBERC ITC-CADIC model Type Partial Equilibrium Partial Equilibrium Data 1990 U.S. Customs 1992 U.S. Customs Elasticities of Demand empirical estimates 1.0 and 0.75 Elasticities of Supply infinite 3.0 Elasticity of Substitution 1.5 3.0 (crude oil=5.0) Tariff Pass Through 100% 100%, 75%, 50% ============================================================================ The World Bank study examined the top 15 four-digit SITC imports (which made up just over half of 1990 U.S. imports from China) and calculated the change in trade volumes caused by imposing column two tariffs on Chinese imports. The study considered two cases: Scenario I allocated the trade destruction effect caused by higher import prices across all countries and Scenario II allocated all the trade destruction to China. The IBERC study considers two primary cases, with three variations on each. The first case examines the impact on the top twenty-five Harmonized Tariff System (HTS) import categories, which made up 33.9 percent of 1992 U.S. imports from China. This method tends to underestimate the impact on trade, since the tariff increases on two of the top twenty-five goods (crude oil and frozen shrimp) are .6 percent and 0 percent respectively. The second case considers HTS chapters selected on the basis of the potential change in trade volume, a method which tends to overestimate the impact on trade. The selected chapters make up 71.0 percent of 1992 U.S. imports from China. The IBERC study then considers the impact of Chinese absorption of the higher tariffs in an effort to maintain export markets. In the 100 percent pass-through case, U.S. consumers pay the full cost of the higher tariffs; in the 75 and 50 percent cases, Chinese exporters bear some of the costs of the higher tariffs in order to maintain exports. Both studies extrapolate from the subset of imports modeled to obtain estimates of the total impact of the loss of MFN. The table below shows the decline in Chinese imports calculated under each case. The shaded cells represent calculations in the original study; the other cells are extrapolations based on the estimated percentage decline in the volume of trade multiplied by the dollar value of Chinese imports in the given year.(19) The extrapolations introduce two additional sources of error: they ignore changes in the composition of imports from China and they assume that elasticities are constant as the volume of trade changes (since both studies use isoelastic estimates for the elasticities of demand, supply, and substitution, the second source of error is probably not significant). Nevertheless, the extrapolations are worthwhile because they allow comparisons between the two studies and provide an estimates of the impact of the loss of MFN based on 1993 trade volumes. Impact of the loss of MFN on U.S. Imports from China (US$ bn) ============================================================================ Trade Decline 1990 1991 1992 1993 U.S. Imports from China 15.237 18.969 25.728 31,530 World Bank Scenario I -42.90% -6.537 -8.138 -11.037 -13,526 World Bank Scenario II -96.40% -14.688 -18.286 -24.802 -30,395 IBERC Top 25 imports, 100% -62.70% -9.554 -11.894 -16.131 -19,769 IBERC selected HTS chapters, 100% -84.10% -12.814 -15.953 -21.637 -26,517 IBERC Top 25 imports, 75% -49.20% -7.497 -9.333 -12.658 -15,513 IBERC selected HTS chapters, 75% -74.00% -11.275 -14.037 -19.039 -23,332 IBERC Top 25 imports, 50% -33.60% -5.120 -6.374 -8.645 -10,594 IBERC selected HTS chapters, 50% -51.00% -7.771 -9.674 -13.121 -16,080 ============================================================================ These figures allow calculating a range of values for the probable decline in U.S. imports from China. The IBERC figures are preferable to the World Bank estimates, because the errors induced by extrapolation are lower. The IBERC study proposes the 75 percent pass-through case as its best estimate of the impact of the loss of MFN. Based on 1992 data, the IBERC study suggests Chinese exports to the U.S. would fall by between $12.658 and $19.039 billion. Based on 1993 data, the IBERC study suggests Chinese exports to the U.S. would fall by between $15.513 and $23.332 billion. A decline in exports to the U.S. is not a total loss; the goods can be sold elsewhere or the resources that would have gone to produce them can be reallocated. The partial equilibrium models reviewed above cannot estimate the overall impact of the loss of MFN status on the Chinese economy. Nevertheless, a large decline in exports would have ripple effects throughout the economy, significantly slowing China's growth rate. Sun Shangqing, a senior Chinese economist, claims that loss of MFN would seriously affect only ten percent of China's exports, that the bulk of these exports could be redirected to Asian markets, and that China would be able to meet its 9 percent growth target even with the loss of MFN.(20) However a recent World Bank study found that across-the-board loss of MFN could slash China's economic growth from 1993's 13 percent to as little as 6.5 percent.(21) Yizi Chen, an economist who left China after Tian'an'men Square, notes that "Chinese officials are trying to underplay the impact on its economic development for political reasons." Chen estimates that withdrawal of MFN status would result in the loss of more than 5 million Chinese jobs, a figure far higher than the 2 million that the Chinese government has projected in unofficial forums.(22) The political impact of increased unemployment in the affected sectors is unpredictable; it is by no means certain that the loss of MFN would promote political reform, since the Chinese government might crack down if the economic slowdown caused political unrest. The hardest hit Chinese exports would be toys, shoes, and apparel, sectors where the increase in tariff rates is high and China commands a large share of the U.S. market. The immediate short-term impact would be greatest on the factories producing for the U.S. export market; these tend to be the private and collective firms in the southeastern coastal provinces that have been driving China's economic growth. Many of these firms are financed by capital from Hong Kong, Taiwan, or (in some cases) the United States. If MFN was expected to remain suspended, production of many goods would begin to move back to Hong Kong or Taiwan. 4. THE IMPACT OF NON-RENEWAL OF MFN TO THE U.S. ECONOMY Removing China's MFN status would impose costs on U.S. consumers. The IBERC study estimates the 1992 increase in consumer cost (in the 75 percent pass-through case) at $13.395 billion using the top twenty-five HTS items and $16.001 billion using the selected HTS chapters. These figures are obtained by estimating the higher prices and lower sales volumes using the model, resulting in cost increases of $4.464 billion using the top twenty-five HTS items and $5.334 billion using the selected HTS chapters. The IBERC study scales these figures up by a factor of three "to incorporate the standard assumption of markup in price from the first or landed cost to the price at the retail or final consumption level."(23) Scaling may be appropriate, but the IBERC study fails to note that these transfers take place entirely within the United States, representing a transfer from U.S. consumers to U.S. producers and distributors.(24) Consumer costs would rise most on items such as toys, shoes, and artificial flowers, with increases of as much as 22.4 percent.(25) A lobbyist described the higher toy prices as "a lump of coal in the stockings of kids all across America."(26) The increase in costs to consumers must be balanced against increased tariff revenues and additional producer surplus for domestic producers and distributors. The additional tariff revenues obtained by removing MFN status from China could be estimated by applying the average increase in duty against the volume of trade that remains. This estimate would overstate the increase in revenues, because trade will drop most for those goods which have the highest increase in tariffs. Instead, this paper calculates the new tariff revenues by multiplying the remaining imports from China in specific sectors by the higher tariff rates in that sector. Old tariff revenues are then subtracted from new revenues to get the change in revenue. Using the top twenty-five HTS items and 75 percent pass-through assumptions, tariff revenue from China increases by an estimated $2.425 billion. Using the selected HTS chapters, tariff revenue increases by only $.125 billion, but this underestimates additional revenue because these chapters were selected on the basis on a large change in volume. Some additional tariff revenue is also generated by increased imports from foreign countries, but since this revenue is taxed at lower MFN rates and the IBERC study does not include these values, this revenue has been omitted.(27) These lost revenues are more significant for the selected HTS chapters, since more trade is replaced by foreign imports in this case. Higher prices for domestic producers represent an increase in domestic producer surplus which cannot easily be calculated from the IBERC data. Additional dead-weight loss from higher tariffs has also been omitted. The unscaled increase in consumer cost and changes in tariff revenues allow an approximation of the direct costs of MFN suspension to the United States. Due to the inability to precisely calculate additional tariff revenues from foreign countries and additional producer surplus, these estimates are likely to be high; the estimate based on the top twenty-five HTS items is likely to be more accurate. Estimated Direct Costs of MFN suspension to the United States (US$ bn) ============================================================================ Top 25 HTS items Selected HTS chapters Higher consumer costs 4.464 5.334 Tariff revenues -2.425 -0.125 Producer surplus unknown unknown Dead weight loss unknown unknown Total loss to U.S. 2.039 5.209 ============================================================================ These direct costs estimates ignore the impact of Chinese retaliation against U.S. exports. U.S. exports are granted Most Favored Nation status in China, although the value of MFN is reduced due to high Chinese tariffs and import restrictions. China would likely retaliate by removing American MFN status, but no estimates of this impact are available. Additionally, and more importantly, China could use import restrictions and purchasing decisions to maximize the domestic political costs of denying MFN. Other countries offer ready substitutes for fertilizer, wheat, and most chemical products; China would probably shift its purchases to other countries to hurt U.S. exporters. Aircraft purchases are the single largest U.S. export to China; China is expected to buy $40 billion in new aircraft over the next fifteen years.(28) China would almost certainly publicly target purchases of U.S. aircraft in order to make President Clinton pay a large political price for denying MFN status. China is also a large and growing market for telecommunications equipment. Robert E. Allen, CEO of AT&T, calls for unconditional renewal of MFN, citing fierce competition with foreign rivals for part of China's massive telecommunications market. He notes that "China is becoming the largest market in the world for almost any product you can name."(29) U.S. exports to China are listed below. Major U.S. Exports to China, 1992 (30) ============================================================================ Commodity Value(US$ mn) Aircraft and parts, including engines, parts, $2,056 and navigation instruments Fertilizer 629 Optical, measuring, recording, medical and surgical instruments 435 Chemical products, except fertilizer 367 Wheat 273 Vehicles other than railway 273 Plastics and plastic products 223 Petroleum products 200 Cotton 186 Wood pulp, paper, and paperboard 171 Copper and articles of copper 167 Telecommunications equipment 164 Data processing equipment and parts 155 Oil, gas field, and mining machinery and equipment 152 Wood and wood products 136 Textile products, other than cotton 136 Iron, steel, and articles of iron and steel 119 Aluminum and articles of aluminum 60 Total this list $5,902 Total 1992 exports to China $7,470 ============================================================================ Some businessmen estimate that China would retaliate for loss of MFN by halting almost all imports of U.S. products.(31) However China is likely to continue to import raw materials and machine tools needed for exporting industries and to carefully target vulnerable sectors of the U.S. economy to maximize the impact of its response. Its political objective would be to regain MFN status while making a minimum of concessions, a goal which will tend to temper Chinese retaliatory measures. Retaliation might reduce the $8.760 billion in 1993 U.S. exports to China by fifty percent or more. This would have a significant impact on jobs. Using the Commerce Department's rule of thumb that 19,100 U.S. jobs are created for each billion dollars of exports, a fifty percent reduction in exports could cost 83,658 jobs; complete elimination of U.S. exports to China could cost 167,316.(32) In addition, U.S. businesses have invested nearly $6 billion in China.(33) U.S. investments which bring technology transfers to China are likely to be unaffected, but investments devoted to producing consumer goods or other products for the Chinese market could be subject to administrative harassment and denied access to raw materials. Estimated Costs of Sino-U.S. Mutual Suspension of MFN (1993, US$ bn) ============================================================================ China United States Loss of Exports $15.608-$23.476 $4.335-8.670 Direct Costs Unknown, but high $2.039-5.209 Lost Jobs 2 million jobs 83,658 jobs ============================================================================ This table summarizes the estimated costs of mutual suspension of MFN status and probable Chinese retaliatory measures. Export losses and direct costs are not comparable; comparisons must be made within categories. This table indicates that while both countries would suffer from suspending MFN, Chinese costs would be considerably higher than U.S. costs. An additional consideration is the impact on Hong Kong. Seventy percent of Chinese exports to the United States are transshipped through Hong Kong. The British government estimated that the loss of China's Most Favored Nation status could cost the colony $17-25 billion in trade and $2.451-3.355 billion in income, with an estimated loss of 54,000-75,000 jobs. Christopher Jackson, the Deputy Director-General of Trade, noted that a reduction of up to $9.936 billion in re-exports was double the 1990 estimate, reflecting the rapid growth in Hong Kong's re-exports of Chinese-made goods to the United States.(34) Hong Kong Governor Chris Patten has stated that "Because of the intimate, symbiotic relationship between Hong Kong and the Chinese economy, anything which damages the Chinese economy, anything which restricts trade between our two most important trading countries, is potentially bearing damage for us." Patten estimated that loss of China's MFN status could cut Hong Kong's economic growth in half, and warned that "Trade is a weapon with two edges, you can't cut the other person without cutting yourself." He stated "I think also there are many examples of other ways, legitimate ways of pursuing human rights issues and individual human rights cases."(35) 5. SELECTIVE SANCTIONS Recognizing the high domestic and international costs of withdrawing MFN, the Clinton administration appears to have backed off from the policy expressed in the May 1993 executive order. According to administration officials, President Clinton told aides and lawmakers in March that withdrawing China's trade benefits is the last thing he wants to do, but that he felt politically, morally, and legally bound to fulfill the basic terms of the executive order.(36) Treasury Secretary Lloyd Bentsen and Commerce Secretary Ronald Brown reportedly spoke out against the policy of linking China's MFN status to its human rights record during a March 22 meeting at the White House.(37) A senior official stated that the administration has told the Chinese, "Get us over the executive order, and we will consider all kinds of alternatives."(38) When Secretary of State Warren Christopher visited China in March to lay out the conditions for renewal of MFN, Chinese officials gave him a cool reception, arresting several prominent dissidents to signal their displeasure at U.S. tactics. The Chinese response to Christopher's visit has been interpreted as signaling Chinese confidence that the United States cannot afford to withdraw MFN status regardless of their compliance with the executive order's conditions. A State Department official admitted that the administration was considering selective sanctions in order to "signal that we're looking for a way to pull the trigger" on trade sanctions, an indication that withdrawal of MFN status is no longer considered a credible threat.(39) Administration officials are now considering options for narrower sanctions that could be imposed if China only partially complies with the conditions of the executive order. Winston Lord, Assistant Secretary of State for East Asia, stated that selective sanctions should be looked at because they would help preserve private enterprise and American investment in China.(40) Precise details of proposed selective sanctions have not been released, but administration officials are considering applying sanctions on industries and goods where most Chinese production comes from state-owned enterprises. A ban on imports of Chinese-made assault rifles has also been mentioned as a possibility.(41) House majority leader Richard Gephardt suggested that if China falls short of meeting the conditions in the executive order, its MFN status should be renewed with conditions like revoking trade benefits for state-owned Chinese industries while allowing them to continue for private enterprises. The goal of a policy of selective sanctions would be to keep the pressure on Beijing to permit more human rights "but not totally removing MFN so there can be no trade." Representative Nancy Pelosi, who has advocated revoking China's MFN status since 1989, suggested that targeted sanctions were better than no sanctions at all. Pelosi advocated "revocation that is targeted to products made by the Chinese military" and "targeting other products which are for the most part made by the state sectors." She noted that "The U.S. has an opportunity to initiate sanctions which impact the Chinese government the most, the Chinese private sector to a lesser degree, and the American consumer the least."(42) Officials state that targeted sanctions could be a legal and administrative nightmare to enforce.(43) Sanctions which target state-owned firms and military production while allowing similar goods produced by private companies to be imported invite fraud and "cooperative ventures" between private and state firms to disguise the origin of goods. Some trade experts regard selective sanctions as totally unenforceable, questioning how American customs officials could ever determine whether a dress of toy made in China was made by a state enterprise or a private enterprise.(44) Sanctions which target specific goods or sectors dominated by state and military enterprises to avoid this problem would inevitably hurt private firms to some degree. Targeted sanctions would probably still provoke Chinese retaliation, but this would likely be proportional to the size of U.S. sanctions. It is impossible to estimate the costs of targeted sanction without specific information on the measures being contemplated. 6. RESULTS OF LINKING MFN WITH HUMAN RIGHTS Evaluating the effectiveness of linking China's Most Favored Nation status with other U.S. policy goals is a difficult task. Because MFN is viewed as the United States' best leverage against China, it has been implicitly or explicitly linked with a wide variety of human rights, trade, and international issues. This linkage has been conveyed through a variety of official and unofficial means: direct communications through the State Department, official statements of policy, administration comments to the press, and Congressional opinions. A visit by the Secretary of State obviously has a different impact than a Congressman's offhand comment that MFN should not be renewed unless the Chinese grant freedom to Tibet. Moreover, many Chinese concessions have been the result of bilateral discussions not directly related to MFN. The implied threat of removal of MFN status may encourage Chinese concessions on other issues, but it is impossible to be sure when the linkage is so indirect. With these caveats in mind, this paper will briefly review 1990 and 1991 Chinese concessions that may have been linked to MFN and then assess recent Chinese performance against the standards set by Clinton's May 28th executive order. Congressional legislation in 1990 and 1991 proposed a wide variety of conditions on renewal of China's MFN status, including the release of prisoners arrested in the Tian'an'men crisis, greater freedom of the press, an end to jamming of Voice of American broadcasts, "significant progress towards ending religious persecution," loosening of travel and study-abroad restrictions, a ban on the export of goods produced with prison labor, an end to coercive abortions and sterilizations, unequivocal commitments to nuclear and ballistic missile non-proliferation, adherence to the joint declaration on the future of Hong Kong, a ban on the supply of arms to the Khmer Rouge, and significant progress towards human rights and the correction of unfair trading practices.(45) The legislation was not considered by the Senate in 1990 and was vetoed by President Bush in 1991, but gives a broad indication of the range of issues that Congress linked to MFN. Many of these issues resurfaced in President Clinton's executive order. Harry Harding suggests that Chinese concessions in 1990 were motivated by the threat of losing MFN and a desire to ease other U.S. sanctions, particularly restrictions on access to international loans. Chinese measures in 1990 included the release of some 800 dissidents, an agreement to purchase $2 billion of Boeing jetliners (with an option for additional purchases), the visit of a high-level trade mission to purchase U.S. goods, and allowing Fang Lizhi, a leader of the democracy movement who had taken refuge at the American embassy, to leave the country.(46) In 1991 Chinese officials announced that they would refuse to accept conditional renewal of MFN, but made a series of concessions such as promising to ban export of goods produced with prison labor, stopping illegal transshipments of textiles through third countries, pledging better protection for American intellectual property, and a promise to purchase more American goods. Other conciliatory measures included placing a reactor sold to Algeria under IAEA safeguards, an agreement to discuss limits on Middle East arms sales, and consideration of joining the nuclear Non-Proliferation Treaty and adhering to Missile Technology Control Regime export restrictions. Chinese Premier Li Peng acknowledged in late June 1991 that China had made "a great deal of efforts" to preserve Most Favored Nation status.(47) President Clinton's May 1993 executive order imposed a series of specific conditions for renewal of Chinese MFN status. There were two mandatory conditions: that MFN "substantially promote the freedom of emigration objectives" of the Jackson-Vanik amendment and that China comply with the terms of a 1992 bilateral agreement forbidding exports of products produced by prison labor. The executive order also called for "overall significant progress" towards: % Adhering to the Universal Declaration of Human Rights % Releasing Chinese citizens imprisoned or detained for the non-violent expression of their political and religious beliefs, including such expression of beliefs in connection with the Democracy Wall and Tian'an'men Square movements % Ensuring humane treatment of prisoners, by allowing international humanitarian and human rights organizations access to prisons % Protecting Tibet's distinctive religious and cultural heritage % Permitting international radio and television broadcasts into China [This clause referred to Chinese jamming of Mandarin-language Voice of America broadcasts]. The executive order also called for efforts to ensure that China abided by its commitments to fair treatment for U.S. businesses, and adhered to the Nuclear Non-Proliferation Treaty, the Missile Technology Control Regime guidelines and parameters, and other non-proliferation commitments.(48) Assistant Secretary of State for East Asia Winston Lord testified before the Senate in March, commenting of Secretary of State Christopher's visit to Beijing and assessing Chinese progress towards meeting the conditions in the executive order. Lord stated that the two mandatory requirements "seem to be in relatively sound condition." He noted that the Chinese foresaw no problems in dealing with the "less than ten" cases of families of dissidents who wish to leave China and had signed an agreement tightening the implementation of the 1992 bilateral agreement on prison labor and broadening the range of prisons which could be inspected by U.S. diplomats. Lord described modest progress on four of the five other objectives, but noted "There was no progress during this trip on Tibet, with the single exception of their willingness to provide information on 106 Tibetan prisoners."(49) China has also announced or instituted a variety of steps to tighten enforcement of previous agreements with the United States and reduce its bilateral trade deficit. The Ministry of Trade announced that it had fined four firms caught evading U.S. textile quotas by exporting goods with false labels and banned them from exporting for one to two years.(50) Chinese officials issued a statement detailing intellectual property rights and claiming to handle 13,000 cases of copyright infringement and counterfeiting a year, including 500 involving foreign trademarks.(51) Chinese authorities announced a crackdown on compact disc piracy, that included raids on 400 music stores and seizure of more than 53,000 pirated CDs, 2,700 pirated cassette tapes and almost 100 fake laser discs.(52) A Chinese trade and investment mission to the United States signed contracts worth over $11 billion; at least $600 million was in the form of purchases of U.S. commodities.(53) Foreign Trade Minister Wu Yi stated at the signing that MFN was a trade issue and the basis of economic relations between the two nations. "Mixing it with other issues is not wise. We hope that a practical attitude will be adopted and man-made obstacles excluded, so that U.S.-China relations can develop in a stable and healthy way."(54) China ordered nearly 800,000 tons of subsidized U.S. wheat under Washington's Export Enhancement Program, following a January purchase of 815,000 tons of U.S. wheat.(55) China also released Wang Juntao, a leader of the 1989 pro-democracy movement, from prison and allowed him to leave the country.(56) When the steps listed above are combined along with other Chinese moves such as signing the Non-Proliferation Treaty and Chemical Warfare Convention, agreeing to abide by the Missile Technology Control Regime, and acquiescence to U.S. actions in the Security Council, it is evident that China has made significant efforts to improve relations with the United States in the aftermath of Tian'an'men Square. How much of that effort is related to pressure on MFN is another question. Many of the international moves are commitments that may or may not be carried out, depending on U.S. responses.(57) China also has considerable leverage over the United States on the North Korean nuclear weapons issue. Chinese approval is necessary if the Security Council is to approve sanctions, and China must comply with the sanctions if they are to be effective. This is another "indirect linkage," but as Senator Sam Nunn noted "Our top priority in dealing with China must be the situation on the Korean peninsula." Nunn stated that "We're concerned about human rights; that will continue to be our concern... but I think we need to find better tools to deal with it than the MFN treaty."(58) China's responses to the threat of revoking MFN can be analyzed by issue area. Human rights have enjoyed some successes. On the whole, however, the successes have been marginal improvements which have not dramatically improved civil and political rights in China. In general, China has regarded U.S. efforts as violations of its sovereignty and unwarranted interference in its internal affairs. The regime has been unwilling to make human rights concessions which might threaten its power, and the threat of MFN withdrawal is unlikely to alter its views. Chinese leaders have viewed economic and trade issues as a legitimate arena for discussions. MFN has been a relatively effective tool in winning concessions, although most of the concessions have come through bilateral negotiations and through the use of other policy tools such as Super 301. MFN has certainly influenced the timing of Chinese concessions, but concessions of a similar magnitude might well have been achieved with other policy instruments. Foreign policy is harder to assess. China has certainly moved in favorable directions, but the linkage with MFN is unclear. China has strategic reasons for accommodating U.S. international interests that do not conflict with its international objectives. Moreover, the extent of Chinese compliance with its international commitments is uncertain. MFN may have played a role in altering Chinese policy, but the linkage runs both ways. China's critical role on the North Korea nuclear issue makes it difficult for the U.S. to withdraw MFN. 7. CONCLUSION The preceding analysis indicates that the increasing domestic and international costs of withdrawing China's Most Favored Nation status have gradually eroded the credibility of this threat. China is well aware of these costs and conscious that the United States does not want to carry out its threat. The mood of Congress has shifted from a desire to punish China at any cost to concern over the impact on the U.S. economy, job losses, and restrictions on access to Chinese markets. China is conscious that it holds considerable leverage on international issues like the North Korean nuclear weapons and feels that relatively minor political and economic concessions are sufficient to win renewal. Selective sanctions are likely to be more effective than MFN in the future, because they will do less damage to the U.S. economy, making them a more credible threat. Most Chinese concessions have come in bilateral negotiations that were not explicitly linked to MFN. Annual public debates over renewal of MFN strain Sino-U.S. relations and spill over into other areas of potential cooperation. A lower key approach that emphasizes diplomacy, bargaining, and the importance of saving face is likely to be more effective in advancing U.S. interests than the confrontational tactics currently associated with MFN renewal. The Clinton administration appears to have recognized this, promising that if China complies with the conditions in the May 1993 executive order, future recertifications of MFN will return to the routine basis which existed before 1989. As former President George Bush said recently, "To influence China you do not insult and humiliate China. China cannot be bullied."(59) --The End-- [Copyright Phillip Saunders 1994. ] [We greatly appreciate Mr. Saunders' kind permission for CCF reprinting the article. In order for CCF to carry this article in its entirety in one issue, we have left out the bibliography and footnotes. These are available through ftp and gopher services (file name: ccf-9425.bibliography). 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