Wang Jisi
Nicholas Lardy
Robert C. Berring
Shorenstein Reports on Contemporary East Asia
Number 2
October 1994
Chinese and U.S. goals regarding trade are closer than official policy on MFN has suggested, according to Wang Jisi and Nicholas Lardy, two of the three speakers at the Shorenstein Roundtable discussion on October 26, 1994. Robert Berring gave the third presentation, on the legal perspective, suggesting that Chinese actions today are best understood in light of hundreds of years of history.
Wang Jisi is Director and Research Professor of the Institute of American Studies at Beijing's Chinese Academy of Social Sciences. Nicholas Lardy is Director of the Jackson School of International Studies at the University of Washington in Seattle. Robert C. Berring is Professor of Law and Law Librarian at Boalt School of Law, the University of California at Berkeley. Here is a summary of their remarks.
Wang Jisi
Beijing's current policies, both internal and external, are characterized by Deng Xiaoping's use of pragmatism in contrast with Mao Zedong's resort to ideological propaganda. In 1991, when U.S. power and influence were seen amplified by its victory in the Gulf War and the formal demise of the Soviet Union, there were great pressures on and within the Beijing leadership to launch an ideological campaign against Western political ideas and Soviet leaders' betrayal of socialist principles. Deng, however, used his paramount clout to avoid predicating state relations on ideology, arguing that China's power and interest allowed neither a leadership role in the Third World nor a confrontational relationship with Western countries. Deng was quoted with this guiding principle for foreign relations: "Observe the development soberly, maintain our position, meet the challenge calmly, hide our capacities, bide our time, remain free of ambitions, and never claim leadership."
In Chinese perceptions today, a global trend toward emphasizing economic issues has emerged in the wake of the sea changes in world politics. Indeed, setting economic growth as the top priority in China is largely motivated by the realization that sustaining the Communist Party's leadership depends vitally on the Party's ability to improve the standard of living for the populace. The disintegration of the Soviet Union and the collapse of the Communist governments in Central Europe are explained by, among other things, their failure to deliver enough economic benefits to the people. The current economic difficulties in the former Soviet states give Chinese people little reason to admire the fundamental political changes that have taken place there in the last few years.
With the end of the Cold War, most Chinese observers expect economic competition and friction among industrialized countries to be more intense, a tendency likely to spur regionally based trading blocs or economic groupings led by big powers like the United States, Germany, and Japan. The Chinese official line hails what is described as the "multipolarization" of world politics and economics, in which the U.S. position is being weakened while the weight of other power centers (especially China) is increasing. In this conceptual framework, China's media often give nodding publicity to the Japanese negotiators who can say "no" to their American counterparts in trade dialogues.
China's leading political analysts doubt the virtue of what is referred to in the West as interdependence and globalization. They tend to see an increasingly chaotic world where assertive nationalism and fierce competition dominate international relations. In their eyes, world politics continues to involve a zero-sum game, and a hierarchy of power inevitably exists within which the more powerful nations dominate the weak.
On the other hand, pragmatic policies carried out in the last 15 years have changed Chinese minds in many positive ways. Since the early 1980s, economic interests have gradually replaced strategic/security concerns in sustaining the expansion of China's international ties. The "siege mentality" (i.e., the fear of China's being surrounded by hostile foreign powers) is gone. Beijing's foreign policy principally serves to maximize China's economic interest and political integrity. The enthusiasm toward participating in economic internationalization is not accompanied by a similar interest in irredentist claims. For instance, toward the disputed territories in the South China Sea, Beijing's attitude is increasingly pragmatic: despite the claim that these islands are Chinese territory, the PRC government has nonetheless made overtures for shelving disputes and initiating joint development programs with the relevant countries.
International economic linkages have become an indispensable part of China's national economy. At present, the total volume of foreign trade is approximately 40 percent of the PRC's gross national product. In such provinces as Guangdong, more than 60 percent of the local economy depends on overseas markets and investment. The absorption of foreign investment, technologies, management skills, entrepreneurship, and other market economy mechanisms nurtures a new generation of officials and professionals with more cosmopolitan, less nationalistic outlooks.
Economic opening and political pragmatism will continue to modify China's international behavior. As Chinese consumer goods and immigrants spread out to almost every corner of the globe, China's overseas commitments will increase. Economic connections have a "spillover" effect. Issues related to economic development, such as social welfare, education, population control, immigration, environmental protection, and intellectual property rights, have been pushed onto China's policy agenda. Even the topic of human rights has entered the U.S.-China official dialogue. As international undertakings in these areas have involved both official and unofficial participation, Chinese nongovernmental organizations, with their own interests, outlooks, and overseas connections, are already proliferating.
In the post-Cold War world, China defines its role as a developing Asian country preoccupied with domestic economic construction but ardently interested in taking part in international interaction. There is no doubt that China hopes to become a "comprehensive power" in the sense of being politically stable and unified, economically prosperous, and militarily strong. But the People's Republic is still a relatively new player in world affairs, especially a newcomer to settled institutional arrangements. Just as other parts of the world are puzzled by the rising power of China, the Chinese are opening their door with mixed feelings of hope, curiosity, and anxiety.
As many observers point out, with China's huge size, complexity, self-pride, and distinctive civilization, the country's destiny will be determined by its own people. However, considering China's sensitivity to international opinion and the extent to which the country is integrating itself into this interdependent world, the world community does have a strong influence on Chinese policies and international behavior. A farsighted response to a resurgent China requires realism and wisdom to regard China as it is -- a rapidly changing and commercializing society with immense potentials as well as uncertainties.
It is an outdated notion to see the Chinese polity as a dichotomy between "the people" and "the dictators." The prediction that an economically powerful and politically authoritarian China would pose a serious threat to the world runs the risk of becoming a self-fulfilling hypothesis, because it would provoke nationalistic tendencies in China that otherwise could be overcome. Instead, the world community should assure an environment in which China can integrate itself more confidently into a regional and global network of economic and security interests.
Nicholas Lardy
The United States has two fundamental economic interests in its relationship with China: the first is to further China's integration into the world economy; the second is to pursue commercial ties in both trade and investment.
Regarding the first interest, China is already significantly integrated into the world economy. As of last year, China was the tenth-largest exporter in the world and the largest recipient by far, among the developing countries, of foreign direct investment (FDI). We need to take additional steps toward easing China's integration. First, the United States must acknowledge that it has been China's outwardly oriented development strategy for the past 15 years that has made Chinese reforms successful and its growth rate high. We should be supporting China's strategies as best we can, especially in light of all the difficulties being experienced by the economies of the former Soviet Union.
The United States should also support China's integration into the world economy to ensure China's trading system comes into compliance with General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO) standards. China's compliance with these standards has significance even beyond China's large and rapidly growing economy: China will be setting compliance precedents for approximately 21 other transitional country economies, affecting in dramatic fashion the terms of these countries' entry into the GATT and WTO.
The second major reason the United States should retain a strong interest in the economy of China is to facilitate commercial ties, both trade andinvestment. China is the United States' fastest growing export market in the developing world. U.S. exports to China are growing twice as fast as those to Mexico, Taiwan, Singapore, and Hong Kong -- and several times faster than U.S. exports to South Korea. On the investment side, major U.S. multinational companies have been investing billions of dollars in China in the last few years of the 1990s. Clearly, China is very open.
Viewed within the East Asian context, China's economic prospects are good for three reasons. For one, China's savings rate is as high as or higher than the historical experience of Japan and most other countries of the region. Next, China has pursued relatively good strategies on human capital formation. The country has a high rate of literacy -- a critical precondition for rapid industrialization and productivity growth. Third, China's relative openness to the world economy has encouraged exports. Since the mid 1980s, China's exports have been growing at about 25 percent per year. These three factors should enable China to maintain rapid medium-term growth, with rates, on average, in the high single digits. China will remain one of the fastest growing economies in the world.
On the trade side, China's imports -- about 90 percent of which are capital goods -- are growing rapidly. If China continues increasing its imports as it has in recent years until the year 2000, it will import more than a trillion dollars' worth of capital goods, such as transportation equipment, telecommunications equipment, power-generation equipment, and computers. These are sectors in which the United States has a comparative advantage if we can develop sensible policies.
The most positive point in this regard is that because most-favored nation (MFN) is no longer subject to an annual fight with Congress, the U.S. share of the Chinese import market should increase well beyond its current 9 percent. Still, many frictions persist. The first is the imbalance in our trade, which is second only to the imbalance in U.S.-Japan trade. It was $23 billion as of last year; it's likely to be close to $30 billion this year, and it will only get bigger. As an economist, I have to tell you it doesn't really matter, but politically, it's clearly important. Intellectual property rights (IPR) are another friction. China is the largest pirater of software, compact discs, videotapes, and books; and U.S. companies estimate that they're losing $800 million a year as a result. The bilateral IPR agreement signed in 1992 has excellent provisions, but not all of them are being enforced. Similarly, the United States has found that China is systematically violating "country of origin" rules governing trade in textiles by shipping goods through other countries to escape quotas. Services are also a source of tension. China doesn't have an open market for services such as banking, insurance, tourism, accounting, and law. There has been progress but not enough, in negotiating for a more open environment under the new WTO arrangement (which emphasizes services, agriculture, and IPR).
Another point of friction between the United States and China is so-called currency manipulation. Beginning in May 1992 and four times thereafter, the Treasury Department has reported to Congress that China is manipulating its exchange rate "to prevent effective balance-ofpayments adjustment and gain unfair competitive advantage." From my perspective, this is a totally erroneous charge. Still, it is the subject of frequent negotiation between treasury officials and the Chinese.
Three central problems are the root of the persistence of trade tensions between the United States and China. First, China's role in the world economy in the 1990s far exceeds that ever played by a Communist state, and the Clinton administration has not come to grips with this fact. The administration's so-called strategy of enlargement is based upon an assumed link between the spread of the market and the growth of democracy. China is a problem because it's a rapidly growing economy, but not a democracy. Anthony Lake, national security advisor, classified China, along with Iran and Iraq, as a backlash state that threatens this linkage strategy. A strategy that postulates that markets and democracies go hand in hand is, unfortunately, wholly ignorant of the East Asian pattern, in which there is a substantial time lag between economic growth and the opening of the political system.
Second, China combines to an unprecedented degree a large economy with a low per capita income. No country with so low an income has ever played such a large role in the international economy. The relevant point here is that China wants to be classified as a developing economy for its accession to the GATT in order to garner "special and differential treatment" under the GATT and WTO. This classification seems reasonable if you look at per capita income and would give the Chinese more time to comply to about 40 separate standards. The view expressed by U.S. trade negotiators is that developing-country status is for countries that are unsuccessful in the international system. They have offered to negotiate item by item, providing more time to adjust to some standards while expecting more rapid compliance on others.
The third underlying problem is more specific to the United States: China combines a global trade deficit with a bilateral surplus in trade with the United States. Japan, to compare, has had a global surplus since 1981. Yet the United States wants to apply the same remedies to China as we apply to countries such as Japan. We haven't noticed that China is a deficit country. China is importing more than it is exporting; its debt will reach $100 billion by the end of 1994. China is far more open than Japan: it is allowing foreign investment in infrastructure and has attracted a lot more foreign investment than Japan has - ten times more. It is critically important to look at the number of foreign-owned firms and foreign-funded firms in China. In 1985 the share of exports coming from foreign-funded firms was less than 1 percent; today it's 35 percent.
In light of these factors, what should the U.S. policy toward China be? First, we should phase out the old Cold War restrictions. Second, we should provide more trade finance to help U.S. firms compete with firms from countries that are being very aggressive in China. Third, we need to revive some programs that were suspended in 1984, such as the Trade Development Assistance Program, which provides funding for feasibility studies, and OPIC, the Overseas Private Investment Corporation. Finally, China needs more incentives to bring its trade system into compliance with the GATT and WTO. We've underestimated the amount of disruption now occurring in China's domestic economy. We need to provide incentives as Chinese citizens absorb more and more of the costs of China's integration into the world economy. For example, we should phase out the multifiber agreement, which is highly protectionist. We ought to negotiate a separate side agreement. This would be very helpful for China. If China doesn't get the phaseout while other countries do, they will quickly encroach on China's market share in this sector. Also, we could provide permanent MFN to China after it becomes a member of the GATT. Together, these compromises could be the carrots necessary to resolve the on-going trade frictions between the United States and China outlined above.
Chinese law has frequently been criticized for its lack of substance. The traditional legal system was built on criminal principles that were completely intertwined with the cultural mores of Confucian culture. To American eyes it hardly appears legal at all.
In post-1978 China, the government has put its emphasis on economic development as enshrined in the Four Modernizations, and the legal system has been highlighted as a prime means of achieving this goal. The Chinese see law, defined as the predictability and regularity in economic transactions, as crucial to the attainment of economic goals. Hence Deng's call for 1,000,000 legal workers and the emphasis on the development of a socialist legal system.
But there is great dissonance here. We hear calls for more law and lawyers, but we see little development towards an independent legal system. The Chinese see a natural boundary between laws that concern economic matters and those that concern individual rights and political relationships. How can this be?
Studies of Chinese law are filled with problems of translation, ranging from linguistic barriers to conceptual ones. Linguistically we must understand that much Chinese legal terminology is borrowed, some of it coming from the Japanese after they had borrowed it from the Germans. These terms are translations, not native concepts, and they do no carry the same meaning or cultural roots that we see as normal.
There is also a problem of conceptual translation. When American legal scholars look for legal institutions, they look for institutions that resemble our own. They see something that looks like a court, and they immediately transfer to that entity the baggage of courts in our system. The Chinese saw that institution as something quite different. The institutional search also fails to turn up the informal legal system. It was the informal system that touched the lives of most people.
When the CCP took power in 1949, more confusion was added by the Russian influence. The CCP took Russia as a model, and imported Russian institutions as vehicles for modernization. Law in the Western sense was a part of this package. More linguistic and conceptual confusion resulted. Russian terms and institutions were borrowed just as crudely, with equal opportunities for misunderstanding.
When Mao's worldview was in the ascendant, the legal system was slotted with other hierarchical, professionalized systems as evil. Indeed Mao's rejection of the concepts that we view as central to legalism -- independence, predictability, fairness -- makes his approach easier to understand.
It is in the post-1978 period that things once more grew complex. Pressures for the development of a new legal system emerged. Such a legal system was seen as the road to economic development. China went on a veritable binge of lawmaking. There are new codes, new courts, and new lawyers. What does this mean for economic development?
Law in China remains far removed from the Western model. The linguistic and conceptual problems are still present. Foreigners who find themselves involved in legal proceedings quickly discover that reliability and predictability -- two of the most central concerns of business people -- remain scarce commodities. The traditional pattern of informal decision-making processes that are based largely on networks of personal influence continue.
There is a line between transactions that the government is willing to allow to continue independently and those in which the government feels that it has a stake. In traditional China this line was drawn by the Dynastic Codes. In modern China the line relates to economic development. As long as no state interests are imperiled, the system can grow. The CCP leadership recognizes the value of law as an instrument and will encourage its continued development so long as it does not impinge on party interests.
The difficulty here is that if the line continues to be fuzzy, it can be crossed in the interests of personal gain. Leaders and those protected by leaders can exert real pressures. The predictability needed to develop truly independent institutions is not present. A recent study by Professor Don Clarke of the University of Washington showed that almost no one can enforce judgments won in the courts on economic matters. To actually collect one must fall back on the informal system of old. The new system does not have teeth. Thus those conducting economic transactions with China still must be aware of personal networks and relationships in a way that is outside the realm of business law as we know it. This is not to say that "contact" and networking are not important in our system, it means instead that they are central rather than peripheral to legal activity in China.
Some contend that China possesses a different legal culture that represents an "alternative" to legalism. This may be so. But at this point the Chinese are caught between the two systems. As outward claims to Western style legality in economic transactions continue, reliance on the status based legal culture of the past will cause increasing tension. The law is not yet an independent force in Chinese society. Whether it will grow into one is an issue to watch over the next decade.
Rapporteurs: Ken Dubin, Laura Strausfeld
