Publication: China Brief Volume: 1 Issue: 2

During the June Asia Pacific Economic Cooperation meeting in Shanghai, the United States made further concessions to Chinese demands in order to move Beijing closer to World Trade Organization (WTO) membership. The concessions gave China de facto status as a developing country, which will allow Beijing much more latitude within the WTO to control how it will interface with the world economy.

The People’s Republic of China (PRC)—the economic growth of which is generating considerable fear among rival Asian states, and which has been conducting massive military exercises—hardly seemed a worthy candidate for such special treatment. The Clinton administration had glanced over the problem of China’s economic status when completing its 1999 bilateral accession agreement with Beijing, but had held firm in Geneva that China should be treated as a developed country subject to reciprocal trade obligations.

Chinese officials had repeatedly claimed that the talks were stalled because America was demanding “excessive” market-opening measures from China. Because Beijing was already receiving the primary benefit of WTO membership in the form of regular grants of “most favored nation” trading rights in the American market, it felt little pressure to make concessions. Instead, it was the Bush administration under the gun from the transnational business community to get China into the WTO before the November ministerial meeting in Qatar, at which another attempt will be made to launch a new round of global trade negotiations.

Who Gains What?

China’s membership in the WTO will not, however, work to the advantage of the United States, either in Geneva or in Asia. Quite the contrary. Beijing will use its WTO membership both to bolster and protect the policies it is using to gain preeminence in the Asian economy and to shift the balance of power in the region against American interests and allies.

Even without WTO membership, China actively participated in the Seattle ministerial meeting with observer status. Beijing sided with those opposing the main U.S. agenda item: the opening of world agricultural markets. China’s policy of “self-sufficiency in grain through self-reliance” puts Beijing firmly in the protectionist camp. European Union Trade Commissioner Pascal Lamy claimed victory when the talks failed, praising the strong anti-American coalition, which included China, that the EU had formed on this issue. Hailing Chinese support for the launching of a new WTO round at the Qatar ministerial, as the Bush administration has been doing, is misleading without reference to the fact that Beijing’s agenda is fundamentally at odds with Washington’s.

As for other hoped-for gains to the American economy from trade with China, these will continue to be “minor”—the term used by the U.S. International Trade Commission in its 1999 study of the benefits of China’s WTO membership. The ITC argued the expectation of meager results “is consistent with the fact that U.S. trade with China accounts for less than 1 percent of U.S. GDP.” And, by a margin of 6-1, that trade consists of the exports of goods from China, not from the United States. Between 1997 and 2000, U.S. goods exports to China increased from US$12.8 billion to US$16.0 billion, while Chinese goods exports to the United States increased from US$62.7 billion to US$100.6 billion.

Most U.S. exports to China were in the form of capital equipment for use in Chinese factories or of components for goods to be assembled in Chinese factories. This pattern reflects the general business approach to China concisely put by David Swift, president of Eastman Kodak’s Greater China Region operations: “In a market such as China, where the value of business is expected to grow rapidly, local manufacturing is simply a better business model.” Thus the U.S. trade deficit with China will continue to expand.

The business community’s interest in Beijing’s WTO membership is not about opening China to U.S.-based producers, but about keeping the American market open to exports from the factories they are building in China. This commerce, however, has strategic consequences. China’s mammoth trade surpluses with the United States—which have grown from US$10.4 billion in 1990 to US$83 billion last year—represent an enormous injection of hard currency into the Chinese economy. This trade pattern has enabled China not only to amass one of the world’s largest stocks of foreign currency reserves, but also to finance its major priorities. Although not all of this growing annual windfall is spent on the military, the simple fungibility of money means that trade-generated profits have made vast resources available to support Beijing’s foreign policy. China’s estimated military spending is roughly the same size as its trade surplus with the United States.

Since the early 1990s, Beijing has been buying a host of advanced weapons systems, including warships, strike aircraft, missiles and submarines, from Russia and Europe. In the long-term, however, it is the investment American firms are making in China’s industrial base and strategic infrastructure that will tip the balance of power in Asia toward Beijing.

The Technology Factor

A study on corporate technology transfers in China by the U.S. Bureau of Export Administration found that “China’s investment policies are geared toward shifting foreign investment into the central and western parts of China…. China’s national laboratories and the majority of China’s military/industrial enterprises are located in this region, some of which are involved in foreign joint ventures.” An AT&T press lease heralding new contracts with Beijing stated that “China has the opportunity to leapfrog almost overnight into the information age.” But this is also means the information warfare age.

With technology and know-how from both Russia and the West, China’s ability to build its own advanced aircraft, missiles and warships is steadily improving. Beijing still needs both help and time to learn how to integrate and use the technology and manufacturing infrastructure it is acquiring. Washington seems sanguine about giving it both. Yet the focus of Beijing’s military modernization is clear; it is to project power outward toward the Pacific Rim directly at American interests and allies. And the vanguard of this thrust is Beijing’s economic assault on rival states in the region.

U.S.-China trade patterns are weakening the allies that America needs in order to wage a successful strategic competition with the PRC in Asia. Nothing has destabilized China’s Asian neighbors more than the financial crisis of 1997, which is still depressing regional economies. China was a major cause of the crisis; its currency devaluations in 1994 and 1996 made it much harder for other Asian developing countries to compete as exporters to the region’s biggest customer, the United States. As an April Business Week cover story on China reported, “China is fast becoming a manufacturing threat to many Asian countries.” This echoes Singapore’s Senior Minister Lee Kuan Yew, who warned in February that China’s growing trade “dominance” could put its neighbors out of business. This trend is not unknown in Washington. The U.S. Trade Representative’s annual report for 2000 acknowledged that “as China’s share of U.S. imports has risen, those of other Asian countries have fallen, reflecting displacement by China of goods from other suppliers.” But this has not had any impact on policy. The United States continues to support the economic advancement of a belligerent China at the expense of America’s friends and allies.

Regional And International Effects

China could not have surged ahead had Washington not continued granting it “most favored nation” trade status throughout the 1990s. The unlimited market access China received not only crowded out rival exporters, but also encouraged global investors to shift capital to the People’s Republic. The impact has been felt from South Korea to India, but particularly in Southeast Asia and Indonesia.

There are even signs that Japan, whose security relationship with the United States is the linchpin of American strategy in Asia, may jump onto the China bandwagon in ways that hurt other Asian economies. The Tokyo Kyodo News Service reported April 20 that a draft 2001 white paper from the Ministry of Economy, Trade and Industry (METI) stressed the need to cooperate with China to build a new economic system in Asia, rather than continue competing with an ever more proficient People’s Republic. The proposed approach would give China’s developing neighbors roles to play, but envisions the People’s Republic as “the world’s production center” in a broad range of industries, including many in the high tech sector.

India has also expressed concern. In the annual report that India’s Ministry of Defense released May 31, it is noted that in South East Asia “the economic crises have also created additional opportunities for extra regional powers to gain increased security leverages in the region…. At a strategic level, the military balance between China and the other countries of South East Asia is altering further in China’s favor.” This is due both to China’s military buildup and to the fact that “most of the countries in the region have had to reduce their defense expenditures” due in turn to slower economic growth.

China will undoubtedly use its economic weight to weaken American influence in the region. Beijing has already used access to the China market to reward, punish or influence foreign firms and, through them, their home governments. Just look at how Beijing has turned some of America’s largest corporations into a powerful new China lobby that pushes Beijing’s positions not only on trade but on military sales to Taiwan, weapons proliferation policy and many other noneconomic issues.

This pattern of influence has been noticed overseas. The Indian defense report mentioned above warned “due to the economic stakes for the U.S. in China… the United States would become progressively less inclined to intervene on behalf of others against China.” By letting private business interests dictate its policy in Asia, Washington is undermining its credibility as the guarantor of peace and stability in the region. If the United States wants to compete strategically in East Asia, it should be trying to check China’s economic momentum, not boost it. It would be trying to deny China precious resources, not shower it with cash and technology. And Washington should be trying to lure its allies away from commercial involvements on the mainland that could weaken their resolve to support America’s geopolitical agenda in the region.


William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council Educational Foundation, Washington, DC.