Hearings on Changing Congressional Views of the U.S.-China Relationship

Nicholas R. Lardy
Nicholas R. Lardy Anthony M. Solomon Senior Fellow

June 18, 1998

U.S. Economic Interests in the Clinton-Jiang Beijing Summit

The United States has two major economic interests at stake in the upcoming summit meeting between President Clinton and President Jiang Zemin: minimizing the adverse effects of the Asian financial crisis and advancing China’s entry into the World Trade Organization.

China and the Asian Financial Contagion

President Clinton has credited China for its pledge to maintain the value of its currency in the face of dramatic declines in currency values elsewhere in Asia. A major Chinese devaluation could initiate another downward leg in the Asian financial crisis, further putting off the day that recovery might start. But it is important to note that to date there is little or no immediate pressure for devaluation of the renminbi. China in the first five months of 1998 continued to run a comfortable trade surplus and at least through April (the last month for which figures are available) inflows of foreign direct investment were approximately equal to last year’s record high level. Looking further ahead the Chinese, however, do have reasons to be quite concerned about the increasing cost of maintaining the fixed value of their currency. In May exports fell in absolute terms for the first time in 22 months and the prospect is that foreign direct investment inflows will decline, perhaps dramatically, over the balance of 1998. And the ability of the Chinese to raise funds on international capital markets has been greatly impaired by the Asian financial crisis. Last year China raised about US$7.5 billion in international equity markets alone. But in the first six months of this year the amount raised in these markets has slowed to a trickle of a few hundred million dollars. But increasingly the greatest Chinese worry is that a softening Japanese economy will set back the timetable for economic recovery of the Asian region. China recognizes that its prospects for maintaining its own relatively buoyant economic performance decline the longer the crisis goes on. Thus Chinese central bank governor Dai Xianglong and National People’s Congress Chairman Li Peng in recent days have publicly called on the Japanese government to take strong measures to stem the decline of the yen and to stimulate economic growth.

I believe that President Clinton should move beyond simply praising Chinese pledges to hold its currency constant. China’s contribution to recovery from the Asian financial crisis stems not simply from the stability of its currency but also from its ability to sustain its economic growth. Over the first seven years of this decade, China has been the fastest growing economy in the region, serving as a powerful locomotive of growth. The absolute expansion of China’s imports since 1990, for example, almost matches that of Japan. The President should specifically acknowledge that by maintaining its relatively robust economic growth that China is contributing importantly to recovery from the Asian financial crisis.

But China has recognized that sustaining its economic growth now requires a more aggressive reform program to deal with money losing state-owned enterprises, a fragile banking system, a dramatically weakend fiscal system, a primitive system of unemployment insurance, and a very limited housing market. Although the United States has spent hundreds of millions of dollars to support Russia’s economic transition, we have no parallel program to support bank, capital market, and fiscal reform in China. Indeed U.S. law currently prohibits any bilateral economic assistance, incuding technical assistance on any significant scale, to China. Thus while President Clinton may offer technical assistance for China’s accelerating economic transition in areas of banking reform, unemployment insurance, and the development of a mortgage market to support the privatization of housing, these initiatives will have to be undertaken with support from the private sector. I believe that the Congress should consider lifting the prohibition on economic assistance to China in order to begin a significant program of technical assistance to support China’s transition to a more market oriented economy. I am attaching an article published earlier this week in Foreign Affairs, which sets forth in some detail the challenges China faces in the further reform of its financial system.

China and the World Trade Organization

China is now among the top ten trading countries in the world and has also emerged as the 9th largest export market for U.S. goods (taking into account the U.S. goods sold initially to Hong Kong and then reexported to China; these goods are not reflected in U.S. Department of Commerce data on U.S. exports to China). Indeed, since 1990 sales by U.S. firms to China have more than tripled, making China the most rapidly expanding of our top ten foreign markets. The details are shown on an attached graphic.

China’s entry into the World Trade Organization is desirable both from the pont of view of U.S. interests and the future of the multilateral trading system. Entry would indicate a greater willingness on the part of China than has been the case to date to embrace all of the principles of the multilateral trading system and would result in an improvement in market access for all foreign suppliers, including the United States. It would contribute, moreover, to the further development of the multilateral trading system. In the entire post World War II era, it is only with the recent rise of China as a major trading country that one of the top ten trading countries has been outside of the disciplines of the General Agreement on Tariffs and Trade, or its successor, the World Trade Organization.

China has been engaged in discussions to enter the General Agreement on Tariffs and Trade, and its successor the World Trade Organization, since 1986. While these negotiations have been going on the Chinese have reduced their tariffs and agreed to future reductions. Average tariff levels have come down from 43 percent as recently as 1994 to 23 percent in 1996 and then 17 percent effective January 1997. The Chinese have offered to reduce their tariffs to an average of 10 percent by the year 2000. In addition they have phased out most of the quantitative restrictions, such as quotas and import licensing requirements, that existed in the early 1990s. Despite this progress, China’s tariff levels remain high in comparison with countries that have engaged a several rounds of multilateral tariff reduction negotiations under the auspices of the GATT/WTO. In addition, to date the Chinese have not evinced a willingness to embrace other important principles that govern the multilateral trade regime. These include national treatment in the area of professional and financial services, meaning that foreign providers of accounting, legal, banking, insurance, and other services could compete on a level playing field in the Chinese market with domestic providers of the same services. The Chinese also to date have been unwilling to give up statutory inspection requirements for a broad range of manufactured and agricultural products. The United States and other countries participating in China’s accession negotiations believe that these requirements violate the Technical Barriers to Trade (TBT) agreement.

While the United States should require that China commit fully to observe all of the features of the multilateral trading system, the United States and other members of the working party on the accession must give China appropriate transition periods to come into full compliance with international standards. For example, we must allow China an appropriate transition period to commercialize and recapitalize its banking system before its domestic market is fully opened to foreign banks. The Chinese realize that the fragility of their domestic banking system means that immediate liberalization could trigger a domestic banking crisis. If we demand such an immediate opening the likelihood is that China would opt to remain outside of the World Trade Organization.