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The West's Tough New Line Against China


International Business

THE WEST'S TOUGH NEW LINE AGAINST CHINA

On a steamy April day in 1989, a team of U. S. Customs Service agents visited the busy checkpost separating the Portuguese enclave of Macau from mainland China. They suspected that many of the goods Macau and other Asian countries were exporting to the U. S. were actually produced in sweatshops across the border. The reason: to get around U. S. import quotas on China's textiles.

Sure enough, the agents saw candles, artificial flowers, and garments--some with "Made in Macau" labels attached--roll through by the truckload. After complaining to Beijing and getting no results, Uncle Sam got tough. In December, the U. S. slashed China's 1991 quota for cotton sweaters, pants, and work towels by 50%. And on Apr. 30, citing new evidence, Customs announced another sharp cutback.

NO SLACK. As China's flagrant violations pile up in everything from textile dumping to prison-labor exports, the outside world is sending a tough, new message: Play by the rules or risk retaliation. Across the board, Western governments, banks, and companies, as well as international agencies, are no longer willing to give China the traditional leeway in meeting political and economic terms. As a result, China's 20-year-old thaw with the West faces a severe test in the coming months, particularly with the U. S.

Until recently, China's aging leaders have been under the impression that they could weave their way back into the international community on their own terms after the bloody June, 1989, crackdown in Tiananmen Square. The U. S. and other Western governments believed that given the proper incentives during a grace period, the Chinese would seek to improve their international standing. But instead of using the past two years to moderate its behavior at home and abroad, Beijing has doggedly clung to its old ways.

Now, faced with a growing list of irritants, the Bush Administration is standing up to China after years of kowtowing. At the center of the debate is China's most-favored-nation (MFN) trade status, which expires on June 3. Egged on by business, Bush would like to renew it. But he faces the fiercest MFN fight ever on Capitol Hill, as liberal Democrats and conservative Republicans join forces in a drive to crack down on China. Republicans were particularly angered by Beijing's sale of missiles to the Mideast and nuclear technology to Algeria and other countries. "MFN is in big trouble," admits a senior Administration official.

Congress isn't waiting for Bush's decision. "It's time to play hardball with China," says Representative Gerald B. H. Solomon (R-N. Y.), who on May 1 introduced a bill in the House that calls for immediate revocation of China's trade status.

It's likely that Congress will accept legislation to renew favorable tariff treatment for China this year--but only with strings attached. Representative Nancy Pelosi (D-Calif.) is the author of a bill that would yank China's trade privileges in 1992 unless Beijing ensures greater political freedom. Capitol Hill sources say that Senate Majority Leader George J. Mitchell (D-Me.) and Senator Richard G. Lugar (R-Ind.), a bellwether for moderate Republicans, are leaning toward a "renewal with conditions" approach.

Chinese Ambassador to the U. S. Zhu Qizhen has made it clear that Beijing would reject even this face-saving formula. "Any conditions attached to the extension will not be accepted by the Chinese side," said Zhu on May 7.

ADVANTAGE, WASHINGTON. As a former U. S. envoy to Beijing (1974-75), Bush fears that revoking MFN might derail U. S.-China relations altogether. But with Beijing's diminished importance as a world power now that Moscow and Washington have improved ties, the Administration has less incentive to tread softly.

To hammer home his concerns, the President dispatched Under Secretary of State for Political Affairs Robert M. Kimmitt, the most senior-level official to visit Beijing in nearly two years. In seven hours of talks on May 6, Kimmitt laid out in no uncertain terms U. S. demands for Chinese compliance on nuclear proliferation, trade, and human rights. The message, as a senior State Dept. official put it: "They need us a lot more than we need them." Without favorable trade status, China stands to lose up to a million jobs and 70% of its exports to the U. S.

Irritations extend across the entire relationship. Washington is dismayed at Beijing's estimated $15 billion trade surplus for 1991, caused in part by China's deliberate cutback in American exports. On Apr. 27, top trade officials threatened to slap sanctions on China for pirating U. S. goods, just as the U. S. cut Beijing's textile quotas.

Washington is far from alone in its deepening crisis with Beijing. Britain's relations with China have reached one of the lowest points since the Opium Wars in the 1840s. Six years before China is slated to take control of Hong Kong, the Chinese are precipitating a showdown by insisting on veto power over a new airport, judicial appointments, and the colony's cash reserves.

Trade links between Beijing and the European Community also have turned frosty. In the face of a $6 billion trade deficit with China, the EC is clamping down on Beijing for allegedly dumping such goods as videocassettes and small TVs. Even the Japanese are disappointing China by imposing stiffer financial terms and limiting technology.

INTERFERENCE. To protect their stakes, U. S. businesses in Beijing are eager to have the President push through favored-nation status. But they are also more vocal about their difficulties in doing business there. While some prominent U. S. companies, such as IBM and American Telephone & Telegraph Co., are increasing their investments, they have closed their Beijing offices, where interference from bureaucrats runs high.

At the same time, foreign lenders are extracting tougher terms from China, which is desperate for cash as it faces foreign debt of $50 billion, up from $45 billion only a year ago. World Bank lending to China resumed only last December after an 18-month freeze and will reach a mere $1.5 billion this year. But the U. S. is threatening to cut its contribution. Hotel projects, which had been a hot growth area of China's economy before the Tiananmen massacre, have turned cold. Those deals are now in default to the tune of $2.5 billion, say Hong Kong bankers.

The result is that many of the benefits Deng Xiaoping believed he could win from the outside world when he launched diplomatic relations with the U. S. more than a decade ago are proving elusive. It is now increasingly unlikely that China will be able to win membership in the General Agreement on Tariffs & Trade (GATT), one of Beijing's highest priorities. Nor is it likely that China will secure major new flows of credit to ease its debt crunch.

Even so, the Chinese seem to regard the international clamor as largely bluster. But they may be misreading the extent of the global toughening they face. In this new era, not only the U. S. but the entire world is taking a more critical stance. Even if China keeps its special U. S. trade status, there's no guarantee the pressures on Beijing will do anything but mount.

SIGNS OF

A FIRMER STANCE

-- Bush suspends satellite sales, citing prolifera-

tion worries

-- Bush receives Tibet's Dalai Lama, angering Beijing's leaders

-- The U.S. cracks down on China's textile ex-

ports, citing rules-of-origin cheating

-- European Community files antidumping cases

against Chinese televisions and videotapes

-- The U.S. lodges a trade action against China

for patent, software, and other intellectual-

property theft

-- Western banks tighten credit terms to China

-- IBM and AT&T close their Beijing offices

-- Liberal Democrats and conservative Republi-

cans in the U.S. join forces against renewing Chi-

na's most-favored-nation trading status

DATA: BWAmy Borrus in Washington and Dinah Lee and Pete Engardio in Hong Kong, with Karen Lowry Miller in Tokyo and Joyce Barnathan in New York


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