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Trade With China: Add Bite To America's Bark


Economic Viewpoint

TRADE WITH CHINA: ADD BITE TO AMERICA'S BARK

In June, the annual decision on whether to renew most-favored-nation status for China comes up. President Clinton will have to determine whether China's record warrants continued favorable trade access. If not, he'll pull the plug--and risk a tantrum from China, not to mention a major setback for American exports and investments.

China is not a member of the World Trade Organization. As a result, the MFN privilege, which allows China the same deal on duties as everybody else, needs to be renewed every year.

Tempers run hot on this issue. China is a major trading partner--$21.4 billion worth of exports to the U.S. (or $56.4 billion if we include Hong Kong), and $14 billion worth of imports, according to International Monetary Fund statistics. Many multinationals in such sectors as manufacturing, services, and finance see China as their single most important market. They want to deal--no questions asked.

Opposing MFN status for China are a wide array of forces, including old-fashioned protectionists, companies hurt by China's refusal to enforce intellectual-property commitments, human-rights advocates, and right-wing cold warriors. They all want to use trade policy to try to force China to mend its ways.

The China dilemma is likely to become a big election-year issue. The President can make a deal or take a stand--whichever gets more votes. Senator Bob Dole (R-Kan.) can look principled or craven. Already, Clinton and Dole are squirming. Of course, the issues go far beyond MFN and politics. The more basic question is how China integrates itself into the world community. So far, it has not done very well.

SLOWLY BUT SURELY? The prevailing policy in Washington has been to place its bet on transforming China from within by deepening trade relations, widening capitalism, and using the resulting economic progress as a fudge toward a peaceful posture and international cooperation. In other words, America is trying to foster an economic partnership that slowly creates an open, peaceful society.

But U.S. policymakers have forgotten that the late 19th century was also a great period of widening economic internationalism. Unfortunately, this globalism was followed by two world wars. Today, Russia's painful shift to a market economy is marked by demands for a return to empire. The U.S. plainly cannot take for granted that trade and free-market economics are sufficient guarantors of democracy. It has to assert its principles and then back them up with strong trade and finance sanctions--and, if necessary, the exercise of force.

Today, the assumption around the world is that the U.S. is unwilling to back its interests. In fact, the U.S. appears not quite sure what its interests are. Policy, such as it is, revolves around increasing exports and making deals.

ENDLESS RERUNS. American instincts are to delink politics and economics domestically as well as internationally. Politics should not get in the way of the free flow of goods, capital, and ideas. The Administration has been on that track with China for two years. Every time MFN comes up, there is a heated battle--and every time, economics is chosen over politics.

But the decision to delink trade and politics should not be a foregone conclusion when it comes to China. For one, China does not delink. Whenever trade issues come up, China gives contracts to European or Japanese competitors to pressure Washington. To show displeasure with the U.S., China recently gave Airbus Industrie a huge contract that Boeing Co. was expecting to get. Washington and Beijing are playing by a different set of rules.

There is also a wider issue. The U.S. government cannot afford to be seen as selling out to its export interests to the point that it sacrifices its global-security objectives. That would significantly cut into its standing as a world leader.

The solution is to put MFN on automatic pilot with a multiyear renewal. Let the U.S. give China MFN and avoid the annual haggling over renewal. But let Washington be smart about it: China gets MFN--but with a poison pill.

Washington should identify the key objectives in its China relationship. If China complies with these, MFN remains. If China fails, MFN is pulled automatically. That way, MFN status is China's to lose. In the meantime, let's get China into the World Trade Organization and Chinese trade issues out of the bilateral political arena.BY RUDI DORNBUSCH


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