Custom papers academic service

The relationship between united states economic issues and the foreign policy toward china

Relations between these two countries are crucial to the future development of the world economy. Unfortunately economic relations between the the relationship between united states economic issues and the foreign policy toward china countries are troubled.

China is large, rapidly growing, and still in the process of devising and implementing fundamental economic reforms. Despite its size and importance to the global economy, it is still not a member of the World Trade Organization WTOthe primary multilateral institution for managing the world trade system. As a consequence, trade disputes between China and the US are resolved almost exclusively in public, acrimonious bilateral negotiations. This pattern exposes both the strengths and the weaknesses of the US position.

By pressing China bilaterally, and using the leverage of access to its large and lucrative market, the US can largely set the agenda without concern for third party interests. At the same time, US trade policymaking is a complainant driven system prone to capture by special interests. Consequently the US can set the agenda, but the agenda may reflect the very particularistic demands of narrow groups and detract from the achievement of broader aims.

This paper reviews US-China economic relations and reaches a number of major conclusions: China's large bilateral surplus acts as a political lightning rod in the US and contributes to trade tensions, regardless of the economic merits of these political concerns, The impact of the rapid growth of bilateral trade on the US economy is positive, though probably not particularly large: Based on this analysis, the paper makes several recommendations for US policy: The US needs to get its own house in order, reducing its budget deficit so as to reduce the trade deficitand reform both disincentives to export, and the way in which the trade policy agenda is set, The annual debate over most favored nation MFN status is counterproductive and the Jackson-Vanik amendment should either be repealed or circumvented, And given the uncertainty surrounding the future Chinese regime, the US government should consider cultivating contacts outside the central government.

First, China is an incompletely reformed centrally planned economy. Agriculture has been decollectivized, the management of state-controlled firms has been decentralized, and property rights reforms have facilitated an explosion of businesses outside central government control, though most observers would conclude that China still lacks an effective system of guaranteeing property rights.

Goods and factor markets have been liberalized to a significant extent: China nevertheless retains a significant state-owned sector, and problems associated with lack of reform in this sector, combined with the relatively primitive nature of macroeconomic policy instruments, has lead to a stop-start pattern of growth and problems with inflation.

Moreover, a legacy of state control of the economy is the willingness of the state to intervene in what might be described as an erratic manner. A few examples should suffice. With respect to commodity markets, China is the world's largest importer of sugar and cooking oil, and the number of commodities for which it is the world largest importer may soon include wheat, corn, barley and cotton as China grows and incomes rise.

In April 1995 China reimposed import quotas on sugar, vegetable oil, grain, and cotton; China is sufficiently large that actions of this sort can wreak havoc on global markets. Internally, China has opened commodity futures markets, but the pricing of futures can be rendered impossible if the government remains willing to undertake significant price controls.

The government's response was in effect to erase the final 8 minutes of trading. The second fundamental point is that China is huge. The inevitable bumps along the way in the reform process that the rest of the world could largely ignore in the case of a smaller economy cannot the relationship between united states economic issues and the foreign policy toward china overlooked in the case of China.

China is not North Korea. China's sheer size means that the rest of the world has to take developments in China very seriously, if for no other reason than developments in China are the single biggest potential threat to the stability of the international economy.

Just imagine a Mexican-style crisis in China, or a crisis and capital flight from Hong Kong. Since the inception of economic reforms in 1979, China's economic performance has been nothing short of spectacular. Between 1979 and 1995, China's real growth rate has averaged more than 9. Yet difficulties in the development of effective tools of macroeconomic management have lead to a stop-start pattern of growth and problems with inflation.

The time path of Chinese economic growth is subject to considerable uncertainty. Thus any attempt to put the size of the Chinese economy into international perspective is subject to enormous uncertainty. With this caveat, an estimate of the Chinese share of world output derived from purchasing power adjusted data reported by the United States Central Intelligence Agency is reported in Table 1.

The remaining columns show China's share ten years hence under various scenarios. The bottomline is that even under the slow growth scenario, China clearly emerges as the world's second largest economy in the next decade. This conclusion is further reinforced if the figures for Hong Kong's share of output are added to China's. China's participation in international trade also has grown rapidly during the period of reform, and its share of world trade has risen from 0.

Chinese economic reforms not only spurred an enormous growth in trade, but the reforms have transformed the commodity composition as well, aligning China's pattern of trade more closely with its true pattern of comparative advantage Table 2.

Between 1980 and 1994, the share of exports accounted for by the light manufactures of SITC 8 rose from 16 percent to 47 percent.

Similarly, imports of capital equipment SITC 7 rose from 25 percent to 42 percent during this period. In addition to its rapid emergence in goods markets, China has also become a major player in international capital markets. China is now the leading developing country destination for foreign direct investment. Firms with foreign equity participation accounted for two-thirds of the increase in Chinese exports in 1992 and 1993. With regard to portfolio investment, external debt does not appear to be a problem: Much of Chinese finance is intermediated through Hong Kong, however, and a crisis of confidence surrounding the transfer of sovereignty or Chinese policy and administration in its aftermath could greatly complicate the situation for China and the region as a whole.

China is a major recipient of multilateral and bilateral official lending. The US appears to be isolated on this issue, though Japanese attitudes may be changing in light of its dispute with China over nuclear testing. Environmental issues are likely to play an increasingly prominent role in China's economic relations. Already the US Exim Bank has refused to grant export finance to participate in the Three Gorges Dam project because of environmental concerns.

China is also predicted to emerge as a major source of hydrocarbon emissions in the 21st century due to its rapid growth and reliance on dirty coal for energy. If there were to be an international tax on hydrocarbon emissions, it would presumably fall heavily on China.

It is not difficult to imagine China insisting on enhanced multilateral and bilateral concessional financing or increased access to developed country markets as quid pro quos for adherence to a strict anti-emissions regime. US-China Economic Relations The rapid integration of China into the global economy has posed particular problems for high income countries, including United States.

US-China Economic Relations

China has a rapidly growing aggregate bilateral trade surplus with the US, even according to Chinese data, and even when the miscounting of re-exports through Hong Kong are taken into account Table 3. Nor can this growing Chinese surplus be explained away as a function of the relocation of production from Hong Kong and Taiwan to China as was conceivable a few years ago Table 4. These imports are almost wholly labor-intensive manufactures, and economic theory suggests that this exerts downward pressure on the wages of import-competing domestic low-skilled labor, if production in such activities is actually carried out domestically.

With respect to exports, as shown in the top panel, the industrial sector with the greatest dependence on exports to China was agricultural pesticides which exported 40 percent of domestic production to China. It was followed in turn by phosphatic fertilizers 33 percentstructural metal parts 16 percentwelding apparatus 14 percentnoncellulosic man-made fibers 12 percentand vitreous plumbing fixtures 10 percent.

The sectors listed in the upper panel of Table 4 might be described as mostly chemicals and capital goods. The import figures in the bottom panel of Table 6 are both larger, and in a sense, more systematic. Sectors in which imports from China account for more than half of domestic consumption include dolls 75 percentrubber and plastic footwear 66 percentnarrowly defined miscellaneous manufactures which includes a laundry list of items such as cigarette lighters, umbrellas, and wigs-55 percentleather wearing apparel 53 percentand leather gloves 51 percentall of which are simple light manufactures.

The Department of Commerce's 1993 survey of foreign direct investment provides a considerable amount of detail on US investment in China. Most of this activity was in the petroleum sector, wholesale trade, machinery and chemicals sectors. Unfortunately most of the data on intra-firm trade and the destination of sales is not reported to avoid disclosure of data for individual firms. As a consequence it is impossible to tell how much of affiliate output is exported back to the US, or conversely what share of US exports to China are from parents to Chinese affiliates.

What the data that is reported indicates is that for majority owned affiliates, 20 percent of output is sold to related parties, which is slightly lower than the relationship between united states economic issues and the foreign policy toward china average for US majority owned affiliates worldwide 75 percent. In other words, intra-firm trade is probably somewhat less important in the case of US trade with China than with other countries.

Production by majority owned affiliates is exported to third countries at a noticeably lower rate 16 percent than the worldwide average 23 percent. The overall picture that emerges is for a pattern of investment which is probably a bit more geared to serving the needs of the host market, China, than is the case with other US direct investments around the world. A corollary is that intra-firm trade is probably not a big contributor to the bilateral trade imbalance.

US Policy Toward China The outside world has limited abilities to affect the development of the Chinese economy-the outcomes of the major economic policy issues that China faces will largely be determined internally. To give but one example: If the political leadership in China began to fear that centrifugal forces were pulling the country apart, there might well be a retrenchment of economic reform, and the Chinese government would become less responsive to the interests of foreigners and to fulfilling international obligations.

In such circumstances there would probably not be a whole lot that foreigners could do to reverse such a tendency. Contrary to recent calls to "contain" China, the overarching goals of US economic policy toward China are to promote political and economic liberalization within China which the Clinton Administration explicitly views as linkedintegrate China into global institutions, and pursue US commercial interests which the Administration largely identifies as exporters' interests.

The US also has strategic and political goals which may at times conflict with economic interests though there appears to be a lack of consensus in the domestic foreign policy establishment about prioritizing among these possibly conflicting goals as well as the effectiveness of alternative strategies and tactics to achieve them in the post-Cold War world. Policy is also influenced by the demands of a variety of domestic special interests import competing sectors, exporters, human rights activists etc.


As a consequence, US policy toward China is probably best regarded as a manifestation of competing interests in which no single goal predominates, and special interest groups may hold sway on particular issues.

This sometimes gives the impression of an inconsistent policy, but to a certain extent this is probably inherent in the structure of the US political system and the lack of domestic consensus over goals, strategies and tactics in the post-Cold War world. In the economic sphere, relations with China are played out in bilateral, regional, and global fora, and involve both trade and financial issues. There is obviously interrelationships between these different modalities, but for expository reasons, it is probably simplest to consider them separately in turn.

The first is proactively through US policies to encourage economic reform in China, and China's responsible integration into the international economy. The Administration regards technical assistance as the primary channel through which it can influence economic reform in China and by extension encourage political liberalization. Among the avenues of technical assistance which have recently been created or revitalized has been the US-China Joint Economic Committee led by the Treasury Department, with working groups on financial reform and the foreign exchange system.

The Securities and Exchange Commission has a group that works on securities regulation, and the Treasury and the Federal Reserve Board have a group to provide assistance on banking regulation and the implementation of monetary policy. Private nongovernmental organizations such as the American Bar Association also engage in institution building. The primary channel of economic cooperation is private business trade and investment, though. Similarly, bilateral intergovernmental relations are dominated by a second track of reactive trade conflict, largely the relationship between united states economic issues and the foreign policy toward china function of China's rapid growth, partially reformed economic system, and the complainant driven US trade policy making system.

However, the potential for Sino-American economic conflict is likely to worsen. Table 7 reports the shares of US trade accounted for by different trade partners, and projections of how these shares might change obtained by plugging the Table 1 figures, estimates of per capita income, measures of distance and other factors into a gravity model of bilateral trade.

Most Favored Nation Status Under the Jackson-Vanik Amendment to the Trade Act of 1974, most favored nation MFN status can be extended to nonmarket economies only if the President grants a waiver certifying that the country does not impede emigration. The law was originally passed to encourage the Soviet Union to permit the emigration of Soviet Jews. President Clinton exacerbated this tendency, first by criticizing then-President Bush during the 1992 campaign, and then in 1993 by tying renewal of MFN explicitly to immediate improvements in human rights in China.

The Executive Order signed by President Clinton in 1993 to extend MFN until 1994, included a laundry list of human rights objectives as conditions for future renewal.

Relations between the two countries continued to be rocky in 1994: Despite this, economists and business leaders successfully argued that revoking China's MFN and the ensuing retaliation would only hurt American exports while doing little or nothing for human rights. The Chinese, for their part, made a number of superficial concessions on human rights while cultivating the support US business. Despite an outcry from many Congressmen, human rights activists and the press, the Administration decided to announce that China had met the minimum requirements necessary for renewal.