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10
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3
3
THE WHITE HOUSE
Office of Cabinet Affairs
Routing Slip
From: Blumenthal
Date: 6-14
Sequence To
Has Seen
Disposition
Williamson
/
HW
R
Blumenthal
Wethington
Porter
Holiday
2
I
Watkins
A=Action
I=Information
R=Review
D=Dispatch
CC: Adair
Blumenthal
Buchholz
Casse
Farrar
Fitzhenry
Gunn
Holiday
Lefkowitz
Porter
Schall
Sechler
Wethington
Williamson
Comments:
THE WHITE HOUSE
WASHINGTON
June 14, 1991
MEMORANDUM FOR EDE HOLIDAY
FROM:
GARY BLUMENTHAL
SUBJECT:
China MFN
very
I will work with Bobbie on getting more help from the agriculture
community on China MFN. In the meantime, thought you'd find the
attached Farm Bureau letter of interest.
AFBFDC
P.2/2
Individually addressed to all members of the
House and Senate
A FARM BUREAU
SPEEDLINE
June 11, 1991
The Honorable
U.S. House of Representatives
Washington, DC 20515
Dear Representative:
The American Farm Bureau Federation. the nation's largest organization of farmers and
ranchers, strongly supports extension of non-discriminatory most-favored nation (MFN) tariff
treatment to China.
Withdrawal of MFN tariff treatment would halt all U.S. imports from China and result in
Chinese retaliation against American farm commodities. Our agricultural exports to China were
valued at over $800 million in 1990. and included livestock products, wheat and corron.
Retaliation is certain for two reasons: First, China retaliated against U.S. farm products the
last time the United States restricted imports of Chinese products, from 1983 to 1986.
Second, denial of MFN treatment to a country results in prohibitive and discriminatory U.S.
tariffs on that country's products. Despite what has been repeatedly reported. the granting of MFN
to a country does not mean that country receives "the most favorable tariff treatment in the United
States." Some 104 countries and another 26 foreign territories receive better-than-MFN treatment
under the Generalized System of Preferences. A number of those countries also receive better-
than-MFN treatment under the Caribbean Basin Economic Recovery Act (popularly known as CBI).
In addition, Canada and Israel receive better-than-MFN treatment under free trade agreements.
Granting MFN treatment to China simply purs China on an equal footing with about two
dozen developed countries. There is nothing especially favorable about that tariff treatment. On
the other hand. to deny MFN treatment would place China in a category with only 14 other
countries against which the United States imposes prohibitive and discriminatory tariffs, and with
which we carry out very little trade. Let there be no mistake. the result of applying such
prohibitive tariffs would be that Chinese products simply could not compete with the vast majority
of other countries in the U.S. market and virtually all trade between the two countries would end.
For some opponents of MFN. this may in fact be their main objective.
No one can condone the political repression that exists in China, but withdrawing MFN is
not the answer to that problem. If the United States applies discriminatory tariffs against Chinese
goods, China will discriminate against the United States in its purchases of agricultural products.
American farmers will once again take the main hit for our government using made policy as a
political weapon.
Sincerely.
Dean R. Kleckner
President
DRK/jb
AMERICAN FARM BUREAU FEDERATION
THE WHITE HOUSE
WASHINGTON
C
TO: Oin
0
FROM: EDE HOLIDAY M
steve F.
claire
/
FYI
Todd
Action
Comment
Gary
THE WHITE HOUSE
WASHINGTON
7-19-91
Dick Darman
Andy Card
Ede Holiday
TO:
FROM:
FRED McCLURE
7m
Assistant to the President
for Legislative Affairs
FYI
Comment
Action
Attached please find copy of President's reponse
to Senator Max Baucus on China-MFN. (Identical
letter sent to Leader Bob Dole)
THE WHITE HOUSE
WASHINGTON
July 19, 1991
Dear Senator Baucus:
I appreciated receiving your views on the importance of renewing
China's most-favored-nation (MFN) trade status while also seeking
to achieve progress with the Chinese on issues of vital concern
to the American people. We clearly share the same goals. We
want to see China return to the path of reform, show greater
respect for human rights, adhere to international norms on
weapons sales, and practice fair trade. China should contribute
to international stability and not detract from it.
You rightly note that withdrawing MFN would hurt not only
Americans but also the people of Hong Kong and the millions in
China who are working for progressive change. Continuing MFN is
essential to protect American consumers and exporters, and to
support the economic forces that have been driving reform in
China for more than a decade. It is no accident that the process
of reform accelerated with the increase in foreign businesses
operating in that nation. Those who would end political and
economic reform in China have the most to gain if MFN were
withdrawn. It is the economic forces pressing for the loosening
of state control and increased personal freedom that would suffer
the most. Other losers would be the thousands of American
workers and farmers who together produced in 1990 almost $5
billion in exports to China.
Since we started the process of normalizing contacts with China
in the 1970s, there has been strong bipartisan support for the
U.S.-China relationship. Building on the three U.S.-China
communiques, U.S. interaction with the government and people of
China has produced demonstrable progress. That interaction must
continue despite the recent severe setbacks. Nevertheless, I
support the view that strong measures are needed to address our
concerns in China and have not hesitated to use them in a
targeted fashion. To underscore our deep dismay about human
rights violations, I have kept in place a number of sanctions
since the Tiananmen Square crackdown which have affected arms
sales, high-level contacts, U.S. economic programs and U.S.
support for multilateral development bank lending to China.
The U.S. is currently the only nation maintaining its Tiananmen
sanctions and refusing to normalize relations until China makes
substantial progress on human rights. For example, while all our
allies and other World Bank members have supported virtually all
of the last sixteen World Bank loans to China, we have declined
2
to support seven because the loans would not serve basic human
needs.
At the London Summit, we raised China's human rights practices
with our G-7 allies and encouraged them to continue to stress to
China's leaders, as we have repeatedly, the importance that
democratic governments attach to human rights. We made clear
that the U.S. will continue its policy of supporting only those
multilateral development loans for China that serve basic human
needs (BHN), and our view that any non-BHN lending to China help
to promote market-oriented economic reform.
To advance our nonproliferation objectives, I recently authorized
a number of steps aimed at engaging the Chinese on their weapons
transfer policies and making clear our dissatisfaction with
transfers that contribute to regional instability. The Under
Secretary of State for International Security Affairs recently
traveled to Beijing for a detailed discussion of nonproliferation
issues, including our specific concerns about Chinese exports.
He pressed for China's adherence to the Nuclear Nonproliferation
Treaty and the Missile Technology Control Regime, actions I
called for in my commencement speech at Yale University on
May 27. We are pleased with the constructive role China played
in the July 8-9 Middle East arms control talks in Paris. The
Chinese endorsed all the key objectives of my Middle East arms
control initiative (such as efforts to freeze and ultimately
eliminate surface-to-surface missiles and block the production
and acquisition of nuclear useable material). The Chinese also
agreed to work rapidly in follow-on meetings to flesh out the
broad agreements reached in Paris.
At the same time, I have also taken measures to emphasize to
China that the U.S. is concerned about reports of destabilizing
missile-related transfers. In April, I rejected requests for
licenses to export satellite components for a Chinese
communications project because of the involvement of Chinese
companies in unacceptable missile equipment transfers. Just
recently, I approved trade sanctions against two Chinese
companies for that same reason. In addition, I directed that no
further licenses of high-speed computers and no further exports
of satellites to China be authorized until our concerns that
China adhere to accepted international nonproliferation standards
are satisfactorily addressed. The U.S. will be coordinating with
other countries in order that these measures not be undercut.
Our experience has demonstrated that such consultations will lead
to effective, multilateral technology transfer restrictions.
I have also instructed U.S. agencies to press vigorously our
concerns about Chinese unfair trading practices. In April, I
directed the U.S. Trade Representative to identify China as a
priority foreign country under the Special 301 provisions of the
Trade Act for failing to protect U.S. intellectual property
3
rights. If China does not make real progress during the 301
investigation, trade action will follow. Beyond intellectual
property protection, my Administration has invited senior Chinese
trade officials to Washington in August for continuation of
consultations begun in June regarding access for U.S. products to
the Chinese market. If these talks fail to produce Chinese
commitments to take substantial measures to improve market
access, the Administration will self-initiate further action
under Section 301 of our trade laws.
We are strictly enforcing the terms of our textile agreement with
China and have already made charges against China's quota because
of illegal textile shipments through third countries totalling
approximately $85 million so far. Following consultations in
July, we expect to make additional charges. If China does not
exert effective control over these illegal shipments, we are
prepared to take additional action against China.
Charges that China exports goods produced with prison labor are a
matter of serious concern. The Customs Service is investigating
these charges. In addition, we have obtained a firm high-level
commitment to prevent the sale of prison labor products to the
United States. We will continue to monitor China's behavior in
this area closely and will strictly enforce relevant legislation
concerning prison labor exports. In particular, I am ordering
the following additional measures: The Department of State will
seek to negotiate a memorandum of understanding with China on
procedures for the prompt investigation of allegations that
specific imports from China were produced by prison labor.
Pending negotiation of this agreement, the U.S. Customs Service
will deny entry to products imported from China when there is
reasonable indication that the products were made by prison
labor. The denial will continue until the Chinese Government or
the Chinese exporter provides credible evidence that the products
were not produced by prison labor.
I am also instructing the U.S. Customs Service to identify an
office to receive information on prison labor exports and
establish procedures for the prompt investigation of reports of
prison labor exports from interested parties. Additional customs
officials will be directed to identify prison labor exports and
aid in uncovering illegal textile transhipments.
Although it is not directly related to China's MFN status, I
share your interest in Taiwan's accession to the GATT. As a
major trading economy, Taiwan can make an important contribution
to the global trade system through responsible GATT
participation. The U.S. has a firm position of supporting the
accession of Taiwan on terms acceptable to GATT contracting
parties. The United States will begin to work actively with
other contracting parties to resolve in a favorable manner the
issues relating to Taiwan's GATT accession. Because China, our
4
tenth largest trading partner, could also make an important
contribution to the global trading system, I will seek to have
the Chinese Government take steps on trade reform so that China's
GATT application can advance and its trade practices can be
brought under GATT disciplines through the Working Party formed
for China in 1987. U.S. support for Taiwan's accession to GATT
as a customs territory should in no way be interpreted as a
departure from the long-standing policy of five administrations
which acknowledges the Chinese position that there is only one
China, and that Taiwan is part of China.
In sum, therefore, I am prepared to address the concerns you and
your colleagues have identified, and I am doing so. But
discontinuing MFN, or attaching conditions to its renewal, would
cause serious harm to American interests and would render futile
pursuit of the initiatives I have outlined, which are discussed
in greater detail in the attachments. Working together, I
believe we will best protect America's interests by remaining
engaged with China and the Chinese people.
Sincerely,
CyBul
P.S. At the recently concluded G-7 Summit in London, the leaders
of these Western Democracies all urged renewal of MFN.
Attachments:
Part I - Human Rights
Part II - Nonproliferation
Part III - Trade and Economic Issues
The Honorable Max S. Baucus
United States Senate
Washington, D.C. 20510
PART I: HUMAN RIGHTS
Human rights concerns have been at the heart of our relationship
with the PRC since the tragic events of June 1989. Every high-
level meeting since that time has at least touched on human
rights issues, and several -- such as the December 1990 visit to
China by Assistant Secretary Schifter -- have been devoted
exclusively to them. We have consistently stressed to the
Chinese leadership that there can be no return to the kind of
relationship we enjoyed before 1989 without substantial
improvements in China's human rights practices.
Our overall approach on human rights issues has consisted of:
Public expression of concern
--
President Bush condemned the brutal suppression of
demonstrations in Tiananmen Square in June 1989, the first
world leader to do so. He declared May 13, 1990 a National
Day in support of Freedom and Human Rights in commemoration
of the 1989 demonstrations, and issued another statement to
mark the anniversary of the crackdown in 1991.
In our human rights reports for 1989 and 1990, we were fair
but hard-hitting, and as accurate as available information
would allow. These reports have drawn high praise from
human rights groups, and harsh condemnations from the
Chinese government.
The State Department issued a statement on January 9, 1991
condemning the trials of nonviolent dissidents.
In April 1991 the President met the Dalai Lama at the White
House to demonstrate our respect for His Holiness'
nonviolent approach to conflict resolution and our concern
for human rights problems in Tibet.
Suspension of bilateral programs
On June 6 and June 20, 1989, the President announced the
suspension of a number of bilateral programs and changes in U.S.
approach to multilateral issues until the human rights climate in
China improved. Those suspensions generally remain in effect.
A multitude of high-level exchange visits that would
normally have taken place since 1989 have been canceled.
Only a very limited number of visits at and above Assistant
Secretary level have been approved on a case-by-case basis,
and only when they addressed issues of key concern to the
United States, e.g., like human rights, nonproliferation,
unfair trade practices, and narcotics.
Military exchange visits have been suspended completely.
2
Work on several existing military equipment and technology
projects has been suspended indefinitely.
We have stopped the transfer of military or dual-use
equipment or technology to Chinese military and security
services.
The U.S. sought to postpone all multilateral development
bank loans to China from June 1989 to January 1990. Since
then, we have supported only those loans that serve the
basic human needs of the Chinese people.
We have suspended grants, loans and insurance guarantees to
China under the Trade and Development Program and OPIC.
We have worked through COCOM to suspend planned
liberalization of export controls to China.
Engagement in dialogue
Through the few high-level visits that have been authorized, and
through regular diplomatic channels, we have engaged the Chinese
government in an unprecedented continuing dialogue on a wide
range of human rights issues.
The Scowcroft-Eagleburger missions of July and December 1989
were devoted primarily to laying out our human rights
concerns and suggesting steps the Chinese could take to
address them.
During Chinese Foreign Minister Oian's visit to Washington
in November 1990, President Bush and Secretary Baker
reiterated the need for progress on human rights, and
stressed that human rights is a cornerstone of American
foreign policy.
Assistant Secretary Schifter visited China in December 1990,
the first time our top human rights official has done so.
In sixteen hours of intense discussions with senior Chinese
officials, he spelled out in detail our human rights
concerns in a wide range of areas including accounting of
detainees, release of political prisoners, denial of due
process and fair and open trials, treatment of prisoners,
divergence of Chinese law from international standards,
respect for freedom of religion, abusive implementation of
family planning regulations, and human rights problems in
Tibet. He delivered a list of 151 representative cases of
reported political incarceration, and asked Chinese
authorities to clarify the status of the cases and release
those whose imprisonment violated international norms. He
suggested changes in Chinese laws and judicial processes
that would bring them into conformity with international
standards.
3
Under Secretary Kimmitt in May 1991 reiterated many of the
points made by Assistant Secretary Schifter, and called on
the Chinese government to declare an amnesty for all those
imprisoned for nonviolent political activities. He also
urged the Chinese to implement effectively their claimed
prohibition on export of prison labor products.
Results of actions
Most importantly, the Chinese government has acknowledged the
legitimacy of human rights as a subject of bilateral discussion,
both with us and with other concerned governments. they received
a Congressional delegation devoted exclusively to human rights
concerns in March 1991, and agreed to receive another later this
year. They also agreed to receive human rights delegations to be
sent by the governments of France and Australia. In addition,
they have taken a number of modest but positive steps to improve
the human rights situation in China.
-- Martial law was lifted in Beijing in January 1990 and in
Lhasa four months later. No part of China is currently
subject to martial law.
--
Most of those detained after the Tiananmen tragedy were
released by the end of 1989. Chinese authorities announced
the release of nearly 1000 more detainees in 1990, and about
70 have been released so far in 1991. Officials claim that
only 21 still await trial detention in Beijing, and at least
one of these -- labor leader Han Dongfang -- has been
released for medical treatment.
While at least 30 persons have been convicted on political
charges since the beginning of the year, the sentences meted
out to them were generally less severe than those imposed on
similar charges in previous years. THose released without
further punishment included prominent dissidents such as
essayist Liu Xiaobo, journalist Zhang Weiguo, playwright
Wang Peigong, and legal scholar Chen Xiaoping.
Leading dissident Fang Lizhi and his wife, who had obtained
refuge in the U.S. Embassy in Beijing for over a year, were
allowed to leave China in June 1990, and are now at
Princeton.
Most investigations of those involved in the 1989 protests
have ended, and most of our Chinese contacts report that the
oppressive atmosphere of 1989 has lifted significantly.
The Chinese have ceased the most odious forms of harassment
of Chinese students and scholars in the U.S.; harassment was
a serious problem in 1989 and early 1990.
Relatives of many, though not all, overseas dissidents have
been allowed to leave China and join them abroad. In some
4
of the remaining cases that we have raised with Chinese
officials, passports have subsequently been issued.
Several released dissidents, including Tiananmen hunger
striker Gao Xin and former Arizona State student Yang Wei,
have been allowed to leave the country.
Chinese authorities have undertaken to stop the export to
the U.S. of products made in Chinese prisons. We will
continue to monitor this situation closely, but it appears
that the Chinese government is taking increasingly specific
steps to enforce their prohibition on export of these
products.
In response to concerns expressed by Administration
officials and Members of Congress, the Chinese have provided
useful new information on the status of persons reported
detained for religious activities.
Economic reforms have resumed, in some cases matching or
exceeding levels reached before 1989. Some limited
political reforms, in important but relatively
noncontroversial areas such as the personnel system, have
continued. An Administrative Procedure Law that became
effective in October 1990 for the first time enables Chinese
citizens to sue abusive officials.
There are indications that further progress may be in the offing.
We are continuing to press the Chinese government to release all
remaining detainees, to commute the sentences of those nonviolent
dissidents already convicted, and to allow the departure of the
remaining relatives of overseas dissidents who wish to leave. We
are hopeful that a combination of dialogue and specifically
targeted pressure will lead to further movement on these and
other remaining issues of concern. And in the longer term, we
are confident that the momentum toward greater freedom and
democratization in China, built up during the decade of reforms
and dramatically reflected in the 1989 demonstrations, will prove
irreversible.
5
PART II: ADMINISTRATION'S ACTIONS WITH RESPECT TO
PROLIFERATION CONCERNS
The United States is engaged in a high-level dialogue with the
Chinese that began early in our relationship. Looking at the
broad trends in China's nonproliferation policy since
normalization in 1979, it is clear that our dialogue has paid off
in important areas, demonstrated by China's evolution toward
international consensus on nonproliferation in areas of great
importance to us. For example, China, which once held an
antagonistic view of multilateral controls on nuclear exports,
joined the IAEA in 1984 and sent observers to the Nuclear
Nonproliferation Treaty Review Conference in 1990.
Middle East/South Asia
China's support for the Middle East arms control initiative is
another case in point. China's participation in the initiative
is a positive step that will strengthen international
nonproliferation efforts and indicates China's resolve to
contribute to efforts to attain stability in the Middle East. In
addition, China's willingness to participate in multilateral
efforts to reduce tension in South Asia will be crucial to
establishing stability in that volatile region.
Moreover, we have seen Chinese arms sales restraint in some areas
where we have vital interests. For example, to the best of our
knowledge, apart from the 1987/88 sale of missiles to Saudi
Arabia, China has not delivered medium-range missiles to the
Middle East. It is clear that in other specific cases China has
taken international concerns into account and declined proposed
missile exports to prospective buyers.
Underscoring Our Concerns
It is because serious concerns remain that we want to maintain a
constructive nonproliferation dialogue with Beijing. We do not
intend to ignore current problems, but isolating China by
dismantling the framework for our relations is not the way to
advance our nonproliferation objectives.
We have the means available to underscore our concerns where
there are differences in our approaches to nonproliferation and
we have used these legislative and executive branch tools. For
example, we have imposed trade sanctions mandated by the National
Defense Authorization Act on Chinese entities involved in
missile-related activities. We have also announced the
Administration's decision that, pending progress toward our
nonproliferation objectives, we will not license high speed
computers and will not issue further waivers of legislative
restrictions on satellite exports. These new sanctions have been
imposed in addition to the existing sanctions announced
immediately following the June 1989 assault on Tiananmen and
amplified by Congress in the Department of State Authorization
6
Act for FY 1990-1991. Moreover, we have not certified China
under the bilateral agreement for nuclear cooperation that took
effect in 1985.
Our policy mix of sanctions and cooperation at any given time is
necessarily dependent on Chinese behavior. We are encouraged by
China's indication in June that it is reviewing its policies with
respect to Missile Technology Control Regime (MTCR) and the NPT.
We seek China's adherence to the NPT and the MTCR guidelines and
will encourage the Chinese to take concrete steps toward
adherence to the key multilateral standards for international
behavior established by these institutions. The Administration
will continue to use the legislative authority that already
exists and will take resolute action if the Chinese do not
address favorably our nonproliferation concerns.
7
PART III: TRADE AND ECONOMIC ISSUES
The Administration is committed to achieving with China the same
goals that have guided our trade policy with all other countries.
We seek open markets and the opportunity for U.S. firms and their
products to compete on fair and equal terms. To achieve these
goals, and realize the principles of equality, mutual benefit and
non-discrimination set forth in the U.S.-China Bilateral Trade
Agreement, this Administration has pursued a policy of
negotiation and engagement on trade issues with China. In
particular, the Administration has sought to improve U.S. access
to China's marketplace; to bolster Chinese protection of
intellectual property; to end fraudulent practices by Chinese
textile exporters using false country of origin declarations;
and, to induce Beijing to undertake the economic and trade
reforms required for membership in the GATT.
Reciprocal MFN tariff treatment underpins our ability to work
constructively with the PRC. China's desire to retain access to
the U.S. market has enabled us to engage Chinese leaders even
during periods of tension. We believe that discontinuing MFN, or
attaching conditions to its renewal, would cause serious harm to
our trade interests and erode our ability to influence China's
behavior on key trade issues.
The Past Decade of Bilateral Trade Relations
After decades of adhering to an import-substitution strategy that
focused on minimizing China's reliance on outside sources of
machinery and equipment, China began in the 1980's to seek
outside sources of these goods. It also has increasingly drawn
on foreign technology, expertise, and funds by actively
encouraging joint ventures.
China's opening to the outside world has helped transform its
economy, bolstering reform-oriented sectors that are not directly
controlled by the central government. For example, the state
sector now produces just over half of China's industrial output;
in 1978, its share was 78 percent. China's dynamic rural
industries, which are privately and collectively owned, have
burgeoned. There are 30,000 foreign-invested ventures now in
China, with a total contracted value of $40 billion. The impact
of China's open door has been particularly pronounced in the
southern and coastal provinces, where 90 percent of the foreign
investment and more than three-fourths of China's trade
activities are located. This region, in turn, has become the
primary engine of economic reform in China largely as a result of
the introduction of market concepts to Chinese employees of joint
ventures and to citizens engaging in commercial exchanges with
the West. The economic autonomy fostered by this interaction
contributes to increased political and even individual self-
determination.
8
The United States has been a vital partner in this
transformation. Following Congressional approval of the
bilateral trade agreement, the United States and China
established formal trade relations and reciprocally granted most-
favored-nation (MFN) status in 1980. Growth in our commercial
ties has helped to change China and to bring it into the global
trading system. Since the resumption of normal trade relations,
U.S.-China two-way trade has increased almost 770 percent, from
$2.3 billion in 1979 to over $20 billion last year.
--
We are now China's second-largest trading partner and its
largest export market.
--
China is our tenth-largest trade partner, up from fifteenth
in 1981.
--
Over 1,000 U.S. firms have invested more than $4 billion in
China and another $5 billion in Hong Kong related primarily
to trade with the PRC.
--
In 1990, the United States exported $4.8 billion worth of
goods to China, including:
--
$749 million worth of aircraft
--
$544 million worth of fertilizer
--
$512 million worth of grain
--
$281 million worth of cotton yarn and fabric
--
$273 million worth of chemicals
--
$264 million worth of electric machinery
--
$238 million worth of wood and wood pulp
--
$227 million worth of scientific instruments.
Commercial relations with the United States have exerted positive
influences on China's business and economic practices since 1980.
China has shifted away from total reliance on a strongly
centralized economy, shown greater tolerance for experimentation
with market mechanisms to regulate its domestic economy, and
decentralized and liberalized its foreign trade practices.
Regression in China's Trade Policies
China's opening to the outside world has not been smooth. Over
the past decade, attempts to accelerate the implementation of
market-oriented reforms have been followed by Beijing's
recentralization of control, as concern about the country's
ballooning trade deficit led Beijing to step in to regain some of
the trade authority it had relinquished.
Moreover, throughout the period since the normalization of trade
relations and the granting of reciprocal most-favored-nation
trading status in 1980, China's web of barriers to imports has
made it difficult for many U.S. exporters to gain access to the
Chinese market. U.S. firms have also had difficulty securing
protection for their intellectual property.
9
U.S. trade negotiators have long been engaged with the Chinese
Government, both in bilateral negotiations and in multilateral
consultations at the GATT held to review China's application for
membership. We have sought to ensure that bilateral commercial
relations develop in accord with the principles that underlie our
bilateral trade agreement: equality; mutual benefit; and
nondiscrimination. From 1979 through 1987, Chinese authorities
made some progress in reducing nontariff barriers to imports, in
improving transparency, and in protecting the intellectual
property of foreigners.
This trend has been reversed over the last three years.
Since 1988, Chinese trade policies and practices have become
more protectionist, nontariff barriers to imports have
proliferated, and the trade system has become less
transparent. These policies undoubtedly contributed to a 17
percent decline in U.S. sales to China in 1990. China was
the only major foreign market for U.S. goods and services in
which our exports declined in 1990.
Despite intensive bilateral negotiations with Chinese
authorities since the USTR in 1989 placed China on the
"priority watch list" of countries providing inadequate
intellectual property protection--including three rounds of
meetings over the past five months--China has failed to live
up to the commitments contained in the bilateral Memorandum
of Understanding (MOU) signed in May 1989.
At the same time, other problems have developed in our bilateral
trade relationship. For example, to bypass U.S. textile and
apparel quotas, Chinese exporters have increasingly resorted to
shipping these products to the United States via third countries
using false invoices and counterfeit visas. Also of concern to
us has been the apparent lapse in China's commitment to economic
and trade reforms that would bring the country in line with the
GATT's free-trade principles. China's reassertion of central
control over the past few years has called into question its
willingness and ability to undertake the obligations that would
be required of China as a contracting party to the GATT.
Steps the U.S. Government Has Taken and Will Take to
Address Bilateral Trade Problems
In six key areas of our bilateral trade and economic relations,
the Administration has taken steps to resolve trade problems. We
are prepared to do more.
On Market Access
--
Beginning in the fall of 1990, the Administration
resumed sub-cabinet level meetings with the Chinese,
that had been suspended since June 1989, to secure
Chinese actions to reverse the growing list of new
protectionist measures.
10
In April 1991, the Administration formally set in
motion a market access initiative that continued with
the visit to Beijing, in mid-June, of an interagency
delegation to discuss market access issues. In
meetings with senior Chinese officials, U.S. Government
officials raised nine types of market access barriers,
including: the lack of transparency in rules and
regulations; the expansion of import licensing
requirements; the use of import substitution policies;
the proliferation of import bans and quotas; the growth
of standards, testing, and certification requirements,
including discriminatory "quality standards" procedures
for imports; the high level of many import tariffs; the
unnecessary use of certain phytosanitary regulations;
the uncertainties regarding government procurement and
tendering regulations; and the lack of information
regarding China's major development projects.
--
The Administration has proposed holding another round
of market access consultations in August 1991. If that
round of negotiations fails to yield substantial
commitments from the Chinese authorities to dismantle
market access barriers, the Administration will self-
initiate Section 301 action to address those barriers
the removal of which offers the most potential for
achieving U.S. trade policy objectives and increasing
U.S. exports.
On Intellectual Property Protection
--
On April 26, 1991, USTR identified the PRC as a
priority foreign country that denies adequate and
effective protection of intellectual property rights.
Accordingly, on May 26, 1991 USTR initiated a Special
Section 301 investigation on the basis of four problem
areas: (1) inadequate copyright protection, (2)
inadequate patent protection, (3) inadequate trade
secret protection and (4) ineffective enforcement of
trademarks. Consultations with the Chinese are
ongoing. The first round of consultations under the
Section 301 investigation occurred in mid-June and a
second has been proposed for August.
--
The deadline for making a determination under Section
301 is November 26, 1991. This may be extended for
three months if China is making substantial progress in
drafting or implementing measures that will provide
adequate and effective protection of U.S. intellectual
property rights. At that time, the USTR must determine
whether the acts, policies and practices of the PRC are
actionable under Section 301 and what retaliatory
action, if any, is appropriate.
11
--
If the consultations fail to produce adequate and
effective protection of intellectual property rights,
the Administration will take retaliatory action.
On Textile Transhipments
--
The U.S. Customs Service has been vigilant in
documenting cases of Chinese textile transhipments over
the past year.
--
In August 1990, USTR held consultations with Chinese
authorities on the transhipment issue. Additional
consultations took place in November 1990, March 1991,
and May 1991.
--
The U.S. Government "charged" China's quotas for goods
that were sent to the United States under false country
of origin declarations valued at over $85 million.
--
China has begun to take actions to curtail textile
fraud since the December charges were made. For
example, it issued regulations prohibiting reexports
through a third country to countries that have signed
textile agreements with China. Further, the Chinese
Government has issued provisions for the punishment of
those who violate the regulations.
--
The Administration has prepared more charges valued at
about $14 million that we anticipate will be levied
after consultations with China next month.
--
The Administration will increase the number of U.S.
Customs officials dedicated to investigating
circumvention.
--
If transhipment persists, we will be prepared to take
additional action against China.
On Forced Labor
--
The importation of goods produced with forced, convict
or indentured labor is prohibited by 19 USC Section
1307, which also directs the Secretary of the Treasury
to prescribe regulations for enforcement of the
provision. The Secretary of the Treasury, under 19 CFR
Section 12.42, has delegated to the Commissioner of
Customs, authority to determine that a class of goods
is the product of forced labor and exclude those goods.
--
Customs has been investigating imports alleged to be
the product of forced labor in China. Customs has
interviewed emigres about forced labor practices in
China. Customs is also analyzing import samples to
determine if they match the descriptions provided by
the emigres and others. Additional special agents have
12
been detailed to Hong Kong to assist in the
investigation.
--
Although the letter from Senator Baucus and fourteen
co-signers did not specifically address the issue of
prison labor imports, appropriate action is called for
to fulfill the intent of existing law. The
Administration therefore proposes to negotiate a
memorandum of understanding with China on procedures
for the prompt investigation of allegations that
specific products exports to the U.S. are being
produced by prison labor.
--
Pending negotiation of the MOU, Customs will
temporarily embargo specific products from China when
there is reasonable indication that they are made by
prison labor. Embargoes will be lifted only after the
Chinese Government or the Chinese exporter provides
credible evidence that the products are not produced by
prison labor.
Multilateral Lending to China
--
The G-7 consensus, led by the United States, was
successful in prohibiting all MDB lending to China from
June 1989 to February 1990 in response to the
international outcry against the crackdown by the
Chinese authorities at Tiananmen Square.
--
From February 1990 to July 1990, the G-7 consensus
supported a gradual resumption of World Bank lending to
China for projects that clearly met basic human needs
(BHN). The consensus held firm and actively prohibited
other loans from Board consideration. Only five loans
(totalling $590 million) were approved in WBFY 1990.
This is substantially less than pre-Tiananmen Square
levels of World Bank commitments to china, which were
$1.4 billion in WBFY 1988 and $1.3 billion in WBFY
1989.
--
At the Houston Summit in July 1990, several G-7
countries decided that China's long-term development
needs argued for lending outside the BHN limits favored
by the United States. Accordingly, the G-7 Houston
Summit Declaration of July 1990 on MDB lending to China
expanded the boundaries of permitted MDB lending to
China to include loans which were environmentally
beneficial or which supported market-oriented economic
reform. Only BHN loans were considered by the World
Bank Board until December 4, 1990 when the market
oriented economic reform loan for Rural Industrial
Technology was approved by the Board. On November 29,
1990, the ADB approved its first loan to China since
Tiananmen Square, Agricultural Bank Project, which the
U.S. did not support. Despite the approval of
infrastructure project loans by the World Bank and the
13
Asian Development Bank, the U.S. has and will continue
to withhold support on all loans that do not meet BHN
criteria.
On GATT Accession
--
Since China applied for GATT membership in July 1986,
the United States has been a leading participant in the
collective efforts of major GATT Contracting Parties to
develop terms for China's GATT participation that will
support the objectives of the GATT and will influence
Chinese Government policies to become, over time, more
compatible with the GATT framework for world trade.
-- U.S. and other major GATT contracting parties' concerns
about China's ability and willingness to live up to
GATT obligations, particularly since June 1989, have
stalled progress in the Working Party established to
consider China's application for membership in the
GATT.
--
The Administration intends to continue to press Beijing
to undertake trade and economic reforms so that its
GATT application can advance and its trade practices be
brought under GATT disciplines.
--
At the same time, the Administration will begin to work
actively with other GATT members to resolve in a
favorable manner the issues relating to Taiwan's GATT
accession. U.S. support for Taiwan's accession as a
customs territory would be consistent both with GATT
legal criteria and the "one-China" policy which
acknowledges the Chinese position and has been adhered
to by successive U.S. administrations.
Taiwan's GATT accession would yield substantial trade
and commercial benefits to the United States and to the
international trading system.
--
Taiwan has indicated that it is prepared to accede
to the GATT as a developed economy, to bind
virtually all its tariffs, and to join the major
non-tariff measure GATT codes.
The Importance of MFN
As highlighted above, the Administration is aggressively seeking
to resolve outstanding bilateral trade issues with the PRC. MFN
underpins our ability to work constructively with the PRC. We
believe that discontinuing MFN, or attaching conditions to its
renewal, would cause serious harm to our trade interests, and
would render futile pursuit of the initiatives outlined above.
It would reduce our leverage in market-access, intellectual
property rights protection, and other trade-related negotiations.
China's desire to retain access to the U.S. market has enabled us
14
to engage Chinese leaders in consultations on bilateral and
multilateral issues even during periods of tension. Because
China is not a GATT member and not bound by GATT trade
disciplines, it is especially important to have many levers that
enable us to engage the Chinese on trade issues.
It would hurt U.S. exporters. If the United Stated rescinds
China's MFN trading status, China will not only discontinue MFN
tariff treatment for the United States, but would likely cease
purchasing billions of dollars of U.S. wheat, aircraft,
fertilizer, cotton yarn and fabric, wood and wood pulp, electric
machinery, scientific equipment, and chemicals. Foreign
competitors, whose goods would be subject to lower tariffs, would
be quick to exploit our departure. Lost shares of China's market
would not easily be regained even if MFN were restored at some
future date.
It would hurt U.S. consumers. Tariffs on the 25 most important
U.S. imports from China would rise from the present average
tariff rate of 8.8 percent to an average rate of 50.5 percent.
These increases would mean sharply higher prices for lower-end
Chinese goods. The costs to U.S. consumers would be largely
borne by poorer Americans, who are primary consumers of low-cost
Chinese products.
It would damage America's reputation as a reliable trade partner.
Our trade competitors will not join us in denying MFN status to
China. Other Chinese trade partners, especially in Asia, urge
that China's MFN status be retained.
It would hurt investors, businesses, and workers in Hong Kong.
Loss of MFN would impede China's integration into the regional
economy, a development crucial to regional stability particularly
as we near the 1997 deadline for Hong Kong's reversion to Chinese
sovereignty. It could cost over 43,000 jobs in Hong Kong and
result in direct revenue losses of approximately $1.2 billion
dollars. Hong Kong's GDP growth could be curtailed by as much as
two percent.
It would set back efforts to bring about meaningful economic
reform in China. A disproportionate burden of the MFN denial
would fall on the primary engine of economic reform in China--the
economies of the southern and coastal provinces. In Guangdong
province, for example, 40 percent of industrial output is
produced for export, half of which goes to the United States.
Sectors that fall outside of the direct control of the central
government have been especially important to China's development
as an exporter; one-third of China's exports currently come from
rural (individual and collectively owned) industries and from
foreign-invested ventures. The foreign ties these provinces and
non-state-owned factories developed with the outside world prior
to Beijing's reassertion of central control in mid-1989 enabled
these provinces to weather the austerity program; without these
foreign markets, Beijing's grip would have been all the tighter.
As Beijing's influence over the regions and sectors most closely
integrated into the global economy has diminished, these regions
15
and sectors have become increasingly sensitive to global economic
conditions. Revocation of China's MFN trading status would cause
unemployment to rise and factory losses to mount in export-
producing regions.
Conclusion
Those who engineered the violence in China in June 1989 are
unlikely to bear the economic costs associated with the denial of
MFN. Instead, those who suffer would be American businesses and
their employees, American consumers, and the people of Hong Kong
and the progressive areas of China.
China's opening to the outside world over the past decade has
accelerated growth in the non-state sectors of the economy;
resulted in strong links between China's coastal regions and the
global economy that have enabled this reformist region to weather
Beijing's periodic efforts to reimpose central government control
over economic activity; and introduced market concepts to a
generation of Chinese managers involved in joint ventures, trade
negotiations, and training in the West. For this process to
continue, China's most-favored-nation treatment in the United
States is essential.
OEde
Elizabeth
WTM
PRESIDENT
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE
UNITED
OFFICE OF MANAGEMENT AND BUDGET
FYI
WASHINGTON, D.C. 20503
Ferrar
July 15, 1991
(Senate)
our clare
STATEMENT OF ADMINISTRATION POLICY
(THIS STATEMENT HAS BEEN COORDINATED BY OMB WITH THE CONCERNED AGENCIES.)
S.J.Res. 153 - Resolution of Disapproval of the President's
Decision to Extend MFN to China
(Cranston (D) California)
S. 1367 - United States-China Act of 1991
(Mitchell (D) Maine and 24 others)
The Administration strongly opposes S.J. Res. 153, which would
deny China most-favored-nation (MFN) trade status, and S. 1367,
which would place additional conditions on MFN renewal. If
either of these bills is presented to the President, his senior
advisors will recommend a veto.
The President extended China's MFN waiver because he determined
that China met the legal requirements under the Jackson-Vanik
amendment and that continuing MFN would serve broad U.S. economic
and foreign policy interests and promote reform in China. Over
the past year, China has continued its relatively open emigration
policy. Extension of MFN substantially promotes U.S. freedom of
emigration and travel objectives, and its withdrawal would place
at risk the substantial gains already achieved in these areas.
Extension of MFN is also important for promoting reform in China.
Foreign trade keeps China open to the outside world and supports
the economic forces that are driving domestic political and
social change and encouraging a loosening of state control and
more personal freedom. Millions of Chinese depend on a healthy
commercial relationship to justify business and social contacts
with the United States. MFN withdrawal would hurt all Chinese,
but would hurt most those Chinese, particularly in the market-
oriented coastal provinces, who have the greatest stake in
economic reform.
A fundamental pillar of our relationship with the Chinese people,
MFN is essential if we are to stay engaged with China on a broad
range of issues, including human rights, nonproliferation, prison
labor exports, and trade. Eliminating MFN would seriously erode
our ability to influence Chinese behavior on these issues. It
would also hurt U.S. exporters and consumers, and undermine
confidence in Hong Kong where the United States has substantial
economic interests.
2
Conditional renewal is not acceptable because it would make China
less likely to respond to U.S. concerns. Hardline Chinese
leaders would claim that national honor and sovereignty preclude
any concessions to the United States. Imposing new conditions
for renewal would, in effect, hold our single most powerful
instrument for influencing China -- trade and the openness which
it brings -- hostage to the reactions of the Chinese Government.
Where particular issues are unresolved and the Chinese are not
forthcoming, the President has the tools necessary to pursue U.S.
interests in a targeted fashion. MFN's withdrawal is the wrong
tool because of its indiscriminate impact and adverse effect on
all Chinese, particularly those who continue to seek reform. The
Administration believes that MFN should be renewed
unconditionally now on its own merits, as the most effective
means for influencing China's behavior on a range of U.S.
interests.
*****
(Not to be Distributed Outside Executive Office of the President)
This draft position was prepared by LRD (Rooney) in consultation
with IAD (DuSault/Dorsey), BASD (Lind), GC (Rettman), State
(Davis), USTR (Janow), Commerce (Dalmut), Treasury (Levy), NSC
(Paal), Agriculture (Vial), CEA (Staiger), and OCA (Korfonta).
This SAP, which is virtually identical to one used for the House,
was also provided to Defense, Labor, Justice, and WH Counsel
which were unable to respond within the deadline.
Background
Section 402 of the Trade Act of 1974 (the "Jackson-Vanik
amendment") stipulates three objectives relating to freedom of
emigration which must be met before a non-market economy country
may be granted most-favored-nation (MFN) trade status. (MFN
grants a country low tariffs on exports to the United States.)
Section 402 also authorizes the President to waive these freedom
of emigration requirements annually, if he determines that so
doing will substantially promote the objectives of freedom of
emigration. Title IV of the Trade Act includes congressional
procedures for disapproving a Presidential extension of MFN,
which require Congressional adoption of a joint resolution of
disapproval within 60 days of the beginning of the period for
which MFN is being granted. Additional time is provided for
congressional action in the event of a Presidential veto.
The People's Republic of China has received MFN status through
the annual waiver process since 1980. On May 29, 1991, President
Bush notified Congress of his decision to waive the Jackson-Vanik
3
freedom of emigration requirements and extend MFN trade treatment
to products from China for an additional year which begins
July 3, 1991.
Administration Position to Date
This position is virtually identical to the one provided to the
House during its consideration of H.J.Res 263 and H.R. 2212,
which disapprove and condition China MFN trade status,
respectively. On July 10, 1991, the House passed H.J.Res. 263
and H.R. 2212 by 223-204 and 313-112, respectively.
Provisions of S.J.Res. 153
S.J.Res. 153 disapproves the President's decision to renew MFN
status for China. This joint resolution is identical to House-
passed H.J.Res. 263.
Provisions of S. 1367
S. 1367, which was reported without recommendation by the Senate
Finance Committee, includes many of the same conditions as the
House-passed conditional MFN bill (H.R. 2212), but the bills are
not identical.
S. 1367 provides that MFN status may not be extended to China for
the 12-month period beginning July 3, 1992, unless the President
includes in his report to Congress, required by section 402 of
the Trade Act, that China has:
-- accounted for those citizens who were detained, accused, or
sentenced because of pro-democracy protests leading up to,
during, and after the 1989 crackdown in Tiananmen Square;
-- released citizens imprisoned because of Tiananmen Square
protests;
-- ceased exporting goods produced using forced labor;
-- ceased supplying arms and military assistance to the Khmer
Rouge; and
-- is adhering to the Joint Declaration on Hong Kong, which
lays out the terms for the transfer of the territory from
Britain to China.
4
In addition, the President would also be required to report that
China has made "significant progress" in specific areas,
including:
-- fulfilling its commitment to engage in high-level
discussions on human rights issues;
-- taking appropriate action to prevent gross violations of
human rights and fundamental freedoms in China and Tibet,
including an end to religious persecution and removing
restrictions on freedom of the press and Voice of America
broadcasts;
-- ending intimidation and harassment of Chinese citizens in
the United States;
-- granting access by humanitarian and human rights groups to
prisoners, trials, and places of detention;
-- providing adequate protection of U.S. patents and
copyrights, and other intellectual property rights;
-- providing greater access for U.S. exports to China by
lowering tariffs and other trade barriers; and
-- adhering to limits and controls on nuclear, chemical, and
biological arms proliferation.
S. 1367 also requires that, 15 days after enactment, MFN status
would be withdrawn unless the President certifies to Congress
that China has not transferred certain ballistic missiles or
launchers to Syria, Iran, or Pakistan. In addition, MFN would be
withdrawn, if the President determines that missiles or launchers
were transferred subsequent to the date of enactment.
Scoring for the Purpose of Pay-As-You-Go and the Caps
According to IAD (DuSault/Dorsey), BASD (Lind), and GC (Rettman),
S.J.Res. 153 is subject to the pay-as-you-go requirement of the
Omnibus Budget Reconciliation Act of 1990. Specifically, if MFN
status is terminated significantly higher duties would be imposed
on Chinese imports, which would increase revenue on a reduced
level of imports. IAD estimates increased revenue for FY 1992 of
$47 million, and no effect in the outyears. S. 1367 is not
subject to the pay-as-you-go requirement of the Omnibus Budget
Reconciliation Act of 1990 because continuation of MFN status in
July 1992 is dependent upon the President's reporting to Congress
that certain conditions have been met.
CBO is estimating increased revenue of $435 million for FY 1992
and zero for the outyears for Res. 153 and no paygo effect
for S. 1367. CBO and OMB's estimates are based on elasticity
5
factors which incorporate the effects of imports from all
sources. In addition, CBO estimates additional revenue for
imports from other non-Chinese sources. OMB and CEA staff
believe that, given the nature of the elasticity estimates,
revenue for these additional non-Chinese sources is already
accounted for and its inclusion is duplicative.
LEGISLATIVE REFERENCE DIVISION DRAFT
7/11/91 -- 5:00
THE WHITE HOUSE
Office of Cabinet Affairs
Routing Slip
From:
Olin Wetnington
Date: 7/22/91
Sequence To
Has Seen
Disposition
Williamson Cuth
/
EC
R
1
Blumenthal
Wethington
Porter
Holiday
2
I
Watkins
A=Action
I=Information
R=Review
D=Dispatch
CC: Adair
Blumenthal
Buchholz
Casse
Farrar
Fitzhenry
Gunn
Holiday
Lefkowitz
Porter
Schall
Sechler
Wethington
Williamson
Comments:
THE WHITE HOUSE
WASHINGTON
July 19, 1991
Dear Senator Dole:
I appreciated receiving your views on the importance of renewing
China's most-favored-nation (MFN) trade status while also seeking
to achieve progress with the Chinese on issues of vital concern
to the American people. We clearly share the same goals. We
want to see China return to the path of reform, show greater
respect for human rights, adhere to international norms on
weapons sales, and practice fair trade. China should contribute
to international stability and not detract from it.
You rightly note that withdrawing MFN would hurt not only
Americans but also the people of Hong Kong and the millions in
China who are working for progressive change. Continuing MFN is
essential to protect American consumers and exporters, and to
support the economic forces that have been driving reform in
China for more than a decade. It is no accident that the process
of reform accelerated with the increase in foreign businesses
operating in that nation. Those who would end political and
economic reform in China have the most to gain if MFN were
withdrawn. It is the economic forces pressing for the loosening
of state control and increased personal freedom that would suffer
the most. Other losers would be the thousands of American
workers and farmers who together produced in 1990 almost $5
billion in exports to China.
Since we started the process of normalizing contacts with China
in the 1970s, there has been strong bipartisan support for the
U.S. -China relationship. Building on the three U.S.-China
communiques, U.S. interaction with the government and people of
China has produced demonstrable progress. That interaction must
continue despite the recent severe setbacks. Nevertheless, I
support the view that strong measures are needed to address our
concerns in China and have not hesitated to use them in a
targeted fashion. To underscore our deep dismay about human
rights violations, I have kept in place a number of sanctions
since the Tiananmen Square crackdown which have affected arms
sales, high-level contacts, U.S. economic programs and U.S.
support for multilateral development bank lending to China.
The U.S. is currently the only nation maintaining its Tiananmen
sanctions and refusing to normalize relations until China makes
substantial progress on human rights. For example, while all our
allies and other World Bank members have supported virtually all
of the last sixteen World Bank loans to China, we have declined
2
to support seven because the loans would not serve basic human
needs.
At the London Summit, we raised China's human rights practices
with our G-7 allies and encouraged them to continue to stress to
China's leaders, as we have repeatedly, the importance that
democratic governments attach to human rights. We made clear
that the U.S. will continue its policy of supporting only those
multilateral development loans for China that serve basic human
needs (BHN), and our view that any non-BHN lending to China help
to promote market-oriented economic reform.
To advance our nonproliferation objectives, I recently authorized
a number of steps aimed at engaging the Chinese on their weapons
transfer policies and making clear our dissatisfaction with
transfers that contribute to regional instability. The Under
Secretary of State for International Security Affairs recently
traveled to Beijing for a detailed discussion of nonproliferation
issues, including our specific concerns about Chinese exports.
He pressed for China's adherence to the Nuclear Nonproliferation
Treaty and the Missile Technology Control Regime, actions I
called for in my commencement speech at Yale University on
May 27. We are pleased with the constructive role China played
in the July 8-9 Middle East arms control talks in Paris. The
Chinese endorsed all the key objectives of my Middle East arms
control initiative (such as efforts to freeze and ultimately
eliminate surface-to-surface missiles and block the production
and acquisition of nuclear useable material). The Chinese also
agreed to work rapidly in follow-on meetings to flesh out the
broad agreements reached in Paris.
At the same time, I have also taken measures to emphasize to
China that the U.S. is concerned about reports of destabilizing
missile-related transfers. In April, I rejected requests for
licenses to export satellite components for a Chinese
communications project because of the involvement of Chinese
companies in unacceptable missile equipment transfers. Just
recently, I approved trade sanctions against two Chinese
companies for that same reason. In addition, I directed that no
further licenses of high-speed computers and no further exports
of satellites to China be authorized until our concerns that
China adhere to accepted international nonproliferation standards
are satisfactorily addressed. The U.S. will be coordinating with
other countries in order that these measures not be undercut.
Our experience has demonstrated that such consultations will lead
to effective, multilateral technology transfer restrictions.
I have also instructed U.S. agencies to press vigorously our
concerns about Chinese unfair trading practices. In April, I
directed the U.S. Trade Representative to identify China as a
priority foreign country under the Special 301 provisions of the
Trade Act for failing to protect U.S. intellectual property
3
rights. If China does not make real progress during the 301
investigation, trade action will follow. Beyond intellectual
property protection, my Administration has invited senior Chinese
trade officials to Washington in August for continuation of
consultations begun in June regarding access for U.S. products to
the Chinese market. If these talks fail to produce Chinese
commitments to take substantial measures to improve market
access, the Administration will self-initiate further action
under Section 301 of our trade laws.
We are strictly enforcing the terms of our textile agreement with
China and have already made charges against China's quota because
of illegal textile shipments through third countries totalling
approximately $85 million so far. Following consultations in
July, we expect to make additional charges. If China does not
exert effective control over these illegal shipments, we are
prepared to take additional action against China.
Charges that China exports goods produced with prison labor are a
matter of serious concern. The Customs Service is investigating
these charges. In addition, we have obtained a firm high-level
commitment to prevent the sale of prison labor products to the
United States. We will continue to monitor China's behavior in
this area closely and will strictly enforce relevant legislation
concerning prison labor exports. In particular, I am ordering
the following additional measures: The Department of State will
seek to negotiate a memorandum of understanding with China on
procedures for the prompt investigation of allegations that
specific imports from China were produced by prison labor.
Pending negotiation of this agreement, the U.S. Customs Service
will deny entry to products imported from China when there is
reasonable indication that the products were made by prison
labor. The denial will continue until the Chinese Government or
the Chinese exporter provides credible evidence that the products
were not produced by prison labor.
I am also instructing the U.S. Customs Service to identify an
office to receive information on prison labor exports and
establish procedures for the prompt investigation of reports of
prison labor exports from interested parties. Additional customs
officials will be directed to identify prison labor exports and
aid in uncovering illegal textile transhipments.
Although it is not directly related to China's MFN status, I
share your interest in Taiwan's accession to the GATT. As a
major trading economy, Taiwan can make an important contribution
to the global trade system through responsible GATT
participation. The U.S. has a firm position of supporting the
accession of Taiwan on terms acceptable to GATT contracting
parties. The United States will begin to work actively with
other contracting parties to resolve in a favorable manner the
issues relating to Taiwan's GATT accession. Because China, our
4
tenth largest trading partner, could also make an important
contribution to the global trading system, I will seek to have
the Chinese Government take steps on trade reform so that China's
GATT application can advance and its trade practices can be
brought under GATT disciplines through the Working Party formed
for China in 1987. U.S. support for Taiwan's accession to GATT
as a customs territory should in no way be interpreted as a
departure from the long-standing policy of five administrations
which acknowledges the Chinese position that there is only one
China, and that Taiwan is part of China.
In sum, therefore, I am prepared to address the concerns you and
your colleagues have identified, and I am doing so. But
discontinuing MFN, or attaching conditions to its renewal, would
cause serious harm to American interests and would render futile
pursuit of the initiatives I have outlined, which are discussed
in greater detail in the attachments. Working together, I
believe we will best protect America's interests by remaining
engaged with China and the Chinese people.
Sincerely,
CyBul
P.S. At the recently concluded G-7 Summit in London, the leaders
of these Western Democracies all urged renewal of MFN.
Attachments:
Part I - Human Rights
Part II - Nonproliferation
Part III - Trade and Economic Issues
The Honorable Robert J. Dole
United States Senate
Washington, D.C. 20510
PART I: HUMAN RIGHTS
Human rights concerns have been at the heart of our relationship
with the PRC since the tragic events of June 1989. Every high-
level meeting since that time has at least touched on human
rights issues, and several -- such as the December 1990 visit to
China by Assistant Secretary Schifter -- have been devoted
exclusively to them. We have consistently stressed to the
Chinese leadership that there can be no return to the kind of
relationship we enjoyed before 1989 without substantial
improvements in China's human rights practices.
Our overall approach on human rights issues has consisted of:
Public expression of concern
--
President Bush condemned the brutal suppression of
demonstrations in Tiananmen Square in June 1989, the first
world leader to do so. He declared May 13, 1990 a National
Day in support of Freedom and Human Rights in commemoration
of the 1989 demonstrations, and issued another statement to
mark the anniversary of the crackdown in 1991.
In our human rights reports for 1989 and 1990, we were fair
but hard-hitting, and as accurate as available information
would allow. These reports have drawn high praise from
human rights groups, and harsh condemnations from the
Chinese government.
The State Department issued a statement on January 9, 1991
condemning the trials of nonviolent dissidents.
--
In April 1991 the President met the Dalai Lama at the White
House to demonstrate our respect for His Holiness'
nonviolent approach to conflict resolution and our concern
for human rights problems in Tibet.
Suspension of bilateral programs
On June 6 and June 20, 1989, the President announced the
suspension of a number of bilateral programs and changes in U.S.
approach to multilateral issues until the human rights climate in
China improved. Those suspensions generally remain in effect.
--
A multitude of high-level exchange visits that would
normally have taken place since 1989 have been canceled.
Only a very limited number of visits at and above Assistant
Secretary level have been approved on a case-by-case basis,
and only when they addressed issues of key concern to the
United States, e.g., like human rights, nonproliferation,
unfair trade practices, and narcotics.
--
Military exchange visits have been suspended completely.
3
Under Secretary Kimmitt in May 1991 reiterated many of the
points made by Assistant Secretary Schifter, and called on
the Chinese government to declare an amnesty for all those
imprisoned for nonviolent political activities. He also
urged the Chinese to implement effectively their claimed
prohibition on export of prison labor products.
Results of actions
Most importantly, the Chinese government has acknowledged the
legitimacy of human rights as a subject of bilateral discussion,
both with us and with other concerned governments. they received
a Congressional delegation devoted exclusively to human rights
concerns in March 1991, and agreed to receive another later this
year. They also agreed to receive human rights delegations to be
sent by the governments of France and Australia. In addition,
they have taken a number of modest but positive steps to improve
the human rights situation in China.
-- Martial law was lifted in Beijing in January 1990 and in
Lhasa four months later. No part of China is currently
subject to martial law.
-- Most of those detained after the Tiananmen tragedy were
released by the end of 1989. Chinese authorities announced
the release of nearly 1000 more detainees in 1990, and about
70 have been released so far in 1991. Officials claim that
only 21 still await trial detention in Beijing, and at least
one of these -- labor leader Han Dongfang -- has been
released for medical treatment.
While at least 30 persons have been convicted on political
charges since the beginning of the year, the sentences meted
out to them were generally less severe than those imposed on
similar charges in previous years. THose released without
further punishment included prominent dissidents such as
essayist Liu Xiaobo, journalist Zhang Weiguo, playwright
Wang Peigong, and legal scholar Chen Xiaoping.
Leading dissident Fang Lizhi and his wife, who had obtained
refuge in the U.S. Embassy in Beijing for over a year, were
allowed to leave China in June 1990, and are now at
Princeton.
Most investigations of those involved in the 1989 protests
have ended, and most of our Chinese contacts report that the
oppressive atmosphere of 1989 has lifted significantly.
--
The Chinese have ceased the most odious forms of harassment
of Chinese students and scholars in the U.S.; harassment was
a serious problem in 1989 and early 1990.
Relatives of many, though not all, overseas dissidents have
been allowed to leave China and join them abroad. In some
2
Work on several existing military equipment and technology
projects has been suspended indefinitely.
We have stopped the transfer of military or dual-use
equipment or technology to Chinese military and security
services.
The U.S. sought to postpone all multilateral development
bank loans to China from June 1989 to January 1990. Since
then, we have supported only those loans that serve the
basic human needs of the Chinese people.
We have suspended grants, loans and insurance guarantees to
China under the Trade and Development Program and OPIC.
We have worked through COCOM to suspend planned
liberalization of export controls to China.
Engagement in dialogue
Through the few high-level visits that have been authorized, and
through regular diplomatic channels, we have engaged the Chinese
government in an unprecedented continuing dialogue on a wide
range of human rights issues.
The Scowcroft-Eagleburger missions of July and December 1989
were devoted primarily to laying out our human rights
concerns and suggesting steps the Chinese could take to
address them.
During Chinese Foreign Minister Qian's visit to Washington
in November 1990, President Bush and Secretary Baker
reiterated the need for progress on human rights, and
stressed that human rights is a cornerstone of American
foreign policy.
Assistant Secretary Schifter visited China in December 1990,
the first time our top human rights official has done so.
In sixteen hours of intense discussions with senior Chinese
officials, he spelled out in detail our human rights
concerns in a wide range of areas including accounting of
detainees, release of political prisoners, denial of due
process and fair and open trials, treatment of prisoners,
divergence of Chinese law from international standards,
respect for freedom of religion, abusive implementation of
family planning regulations, and human rights problems in
Tibet. He delivered a list of 151 representative cases of
reported political incarceration, and asked Chinese
authorities to clarify the status of the cases and release
those whose imprisonment violated international norms. He
suggested changes in Chinese laws and judicial processes
that would bring them into conformity with international
standards.
4
of the remaining cases that we have raised with Chinese
officials, passports have subsequently been issued.
Several released dissidents, including Tiananmen hunger
striker Gao Xin and former Arizona State student Yang Wei,
have been allowed to leave the country.
Chinese authorities have undertaken to stop the export to
the U.S. of products made in Chinese prisons. We will
continue to monitor this situation closely, but it appears
that the Chinese government is taking increasingly specific
steps to enforce their prohibition on export of these
products.
In response to concerns expressed by Administration
officials and Members of Congress, the Chinese have provided
useful new information on the status of persons reported
detained for religious activities.
Economic reforms have resumed, in some cases matching or
exceeding levels reached before 1989. Some limited
political reforms, in important but relatively
noncontroversial areas such as the personnel system, have
continued. An Administrative Procedure Law that became
effective in October 1990 for the first time enables Chinese
citizens to sue abusive officials.
There are indications that further progress may be in the offing.
We are continuing to press the Chinese government to release all
remaining detainees, to commute the sentences of those nonviolent
dissidents already convicted, and to allow the departure of the
remaining relatives of overseas dissidents who wish to leave. We
are hopeful that a combination of dialogue and specifically
targeted pressure will lead to further movement on these and
other remaining issues of concern. And in the longer term, we
are confident that the momentum toward greater freedom and
democratization in China, built up during the decade of reforms
and dramatically reflected in the 1989 demonstrations, will prove
irreversible.
5
PART II: ADMINISTRATION'S ACTIONS WITH RESPECT TO
PROLIFERATION CONCERNS
The United States is engaged in a high-level dialogue with the
Chinese that began early in our relationship. Looking at the
broad trends in China's nonproliferation policy since
normalization in 1979, it is clear that our dialogue has paid off
in important areas, demonstrated by China's evolution toward
international consensus on nonproliferation in areas of great
importance to us. For example, China, which once held an
antagonistic view of multilateral controls on nuclear exports,
joined the IAEA in 1984 and sent observers to the Nuclear
Nonproliferation Treaty Review Conference in 1990.
Middle East/South Asia
China's support for the Middle East arms control initiative is
another case in point. China's participation in the initiative
is a positive step that will strengthen international
nonproliferation efforts and indicates China's resolve to
contribute to efforts to attain stability in the Middle East. In
addition, China's willingness to participate in multilateral
efforts to reduce tension in South Asia will be crucial to
establishing stability in that volatile region.
Moreover, we have seen Chinese arms sales restraint in some areas
where we have vital interests. For example, to the best of our
knowledge, apart from the 1987/88 sale of missiles to Saudi
Arabia, China has not delivered medium-range missiles to the
Middle East. It is clear that in other specific cases China has
taken international concerns into account and declined proposed
missile exports to prospective buyers.
Underscoring Our Concerns
It is because serious concerns remain that we want to maintain a
constructive nonproliferation dialogue with Beijing. We do not
intend to ignore current problems, but isolating China by
dismantling the framework for our relations is not the way to
advance our nonproliferation objectives.
We have the means available to underscore our concerns where
there are differences in our approaches to nonproliferation and
we have used these legislative and executive branch tools. For
example, we have imposed trade sanctions mandated by the National
Defense Authorization Act on Chinese entities involved in
missile-related activities. We have also announced the
Administration's decision that, pending progress toward our
nonproliferation objectives, we will not license high speed
computers and will not issue further waivers of legislative
restrictions on satellite exports. These new sanctions have been
imposed in addition to the existing sanctions announced
immediately following the June 1989 assault on Tiananmen and
amplified by Congress in the Department of State Authorization
6
Act for FY 1990-1991. Moreover, we have not certified China
under the bilateral agreement for nuclear cooperation that took
effect in 1985.
Our policy mix of sanctions and cooperation at any given time is
necessarily dependent on Chinese behavior. We are encouraged by
China's indication in June that it is reviewing its policies with
respect to Missile Technology Control Regime (MTCR) and the NPT.
We seek China's adherence to the NPT and the MTCR guidelines and
will encourage the Chinese to take concrete steps toward
adherence to the key multilateral standards for international
behavior established by these institutions. The Administration
will continue to use the legislative authority that already
exists and will take resolute action if the Chinese do not
address favorably our nonproliferation concerns.
7
PART III: TRADE AND ECONOMIC ISSUES
The Administration is committed to achieving with China the same
goals that have guided our trade policy with all other countries.
We seek open markets and the opportunity for U.S. firms and their
products to compete on fair and equal terms. To achieve these
goals, and realize the principles of equality, mutual benefit and
non-discrimination set forth in the U.S.-China Bilateral Trade
Agreement, this Administration has pursued a policy of
negotiation and engagement on trade issues with China. In
particular, the Administration has sought to improve U.S. access
to China's marketplace; to bolster Chinese protection of
intellectual property; to end fraudulent practices by Chinese
textile exporters using false country of origin declarations;
and, to induce Beijing to undertake the economic and trade
reforms required for membership in the GATT.
Reciprocal MFN tariff treatment underpins our ability to work
constructively with the PRC. China's desire to retain access to
the U.S. market has enabled us to engage Chinese leaders even
during periods of tension. We believe that discontinuing MFN, or
attaching conditions to its renewal, would cause serious harm to
our trade interests and erode our ability to influence China's
behavior on key trade issues.
The Past Decade of Bilateral Trade Relations
After decades of adhering to an import-substitution strategy that
focused on minimizing China's reliance on outside sources of
machinery and equipment, China began in the 1980's to seek
outside sources of these goods. It also has increasingly drawn
on foreign technology, expertise, and funds by actively
encouraging joint ventures.
China's opening to the outside world has helped transform its
economy, bolstering reform-oriented sectors that are not directly
controlled by the central government. For example, the state
sector now produces just over half of China's industrial output;
in 1978, its share was 78 percent. China's dynamic rural
industries, which are privately and collectively owned, have
burgeoned. There are 30,000 foreign-invested ventures now in
China, with a total contracted value of $40 billion. The impact
of China's open door has been particularly pronounced in the
southern and coastal provinces, where 90 percent of the foreign
investment and more than three-fourths of China's trade
activities are located. This region, in turn, has become the
primary engine of economic reform in China largely as a result of
the introduction of market concepts to Chinese employees of joint
ventures and to citizens engaging in commercial exchanges with
the West. The economic autonomy fostered by this interaction
contributes to increased political and even individual self-
determination.
8
The United States has been a vital partner in this
transformation. Following Congressional approval of the
bilateral trade agreement, the United States and China
established formal trade relations and reciprocally granted most-
favored-nation (MFN) status in 1980. Growth in our commercial
ties has helped to change China and to bring it into the global
trading system. Since the resumption of normal trade relations,
U.S.-China two-way trade has increased almost 770 percent, from
$2.3 billion in 1979 to over $20 billion last year.
--
We are now China's second-largest trading partner and its
largest export market.
--
China is our tenth-largest trade partner, up from fifteenth
in 1981.
--
Over 1,000 U.S. firms have invested more than $4 billion in
China and another $5 billion in Hong Kong related primarily
to trade with the PRC.
--
In 1990, the United States exported $4.8 billion worth of
goods to China, including:
--
$749 million worth of aircraft
--
$544 million worth of fertilizer
--
$512 million worth of grain
--
$281 million worth of cotton yarn and fabric
--
$273 million worth of chemicals
--
$264 million worth of electric machinery
--
$238 million worth of wood and wood pulp
--
$227 million worth of scientific instruments.
Commercial relations with the United States have exerted positive
influences on China's business and economic practices since 1980.
China has shifted away from total reliance on a strongly
centralized economy, shown greater tolerance for experimentation
with market mechanisms to regulate its domestic economy, and
decentralized and liberalized its foreign trade practices.
Regression in China's Trade Policies
China's opening to the outside world has not been smooth. Over
the past decade, attempts to accelerate the implementation of
market-oriented reforms have been followed by Beijing's
recentralization of control, as concern about the country's
ballooning trade deficit led Beijing to step in to regain some of
the trade authority it had relinquished.
Moreover, throughout the period since the normalization of trade
relations and the granting of reciprocal most-favored-nation
trading status in 1980, China's web of barriers to imports has
made it difficult for many U.S. exporters to gain access to the
Chinese market. U.S. firms have also had difficulty securing
protection for their intellectual property.
9
U.S. trade negotiators have long been engaged with the Chinese
Government, both in bilateral negotiations and in multilateral
consultations at the GATT held to review China's application for
membership. We have sought to ensure that bilateral commercial
relations develop in accord with the principles that underlie our
bilateral trade agreement: equality; mutual benefit; and
nondiscrimination. From 1979 through 1987, Chinese authorities
made some progress in reducing nontariff barriers to imports, in
improving transparency, and in protecting the intellectual
property of foreigners.
This trend has been reversed over the last three years.
Since 1988, Chinese trade policies and practices have become
more protectionist, nontariff barriers to imports have
proliferated, and the trade system has become less
transparent. These policies undoubtedly contributed to a 17
percent decline in U.S. sales to China in 1990. China was
the only major foreign market for U.S. goods and services in
which our exports declined in 1990.
Despite intensive bilateral negotiations with Chinese
authorities since the USTR in 1989 placed China on the
"priority watch list" of countries providing inadequate
intellectual property protection--including three rounds of
meetings over the past five months--China has failed to live
up to the commitments contained in the bilateral Memorandum
of Understanding (MOU) signed in May 1989.
At the same time, other problems have developed in our bilateral
trade relationship. For example, to bypass U.S. textile and
apparel quotas, Chinese exporters have increasingly resorted to
shipping these products to the United States via third countries
using false invoices and counterfeit visas. Also of concern to
us has been the apparent lapse in China's commitment to economic
and trade reforms that would bring the country in line with the
GATT's free-trade principles. China's reassertion of central
control over the past few years has called into question its
willingness and ability to undertake the obligations that would
be required of China as a contracting party to the GATT.
Steps the U.S. Government Has Taken and Will Take to
Address Bilateral Trade Problems
In six key areas of our bilateral trade and economic relations,
the Administration has taken steps to resolve trade problems. We
are prepared to do more.
On Market Access
--
Beginning in the fall of 1990, the Administration
resumed sub-cabinet level meetings with the Chinese,
that had been suspended since June 1989, to secure
Chinese actions to reverse the growing list of new
protectionist measures.
10
--
In April 1991, the Administration formally set in
motion a market access initiative that continued with
the visit to Beijing, in mid-June, of an interagency
delegation to discuss market access issues. In
meetings with senior Chinese officials, U.S. Government
officials raised nine types of market access barriers,
including: the lack of transparency in rules and
regulations; the expansion of import licensing
requirements; the use of import substitution policies;
the proliferation of import bans and quotas; the growth
of standards, testing, and certification requirements,
including discriminatory "quality standards" procedures
for imports; the high level of many import tariffs; the
unnecessary use of certain phytosanitary regulations;
the uncertainties regarding government procurement and
tendering regulations; and the lack of information
regarding China's major development projects.
--
The Administration has proposed holding another round
of market access consultations in August 1991. If that
round of negotiations fails to yield substantial
commitments from the Chinese authorities to dismantle
market access barriers, the Administration will self-
initiate Section 301 action to address those barriers
the removal of which offers the most potential for
achieving U.S. trade policy objectives and increasing
U.S. exports.
On Intellectual Property Protection
--
On April 26, 1991, USTR identified the PRC as a
priority foreign country that denies adequate and
effective protection of intellectual property rights.
Accordingly, on May 26, 1991 USTR initiated a Special
Section 301 investigation on the basis of four problem
areas: (1) inadequate copyright protection, (2)
inadequate patent protection, (3) inadequate trade
secret protection and (4) ineffective enforcement of
trademarks. Consultations with the Chinese are
ongoing. The first round of consultations under the
Section 301 investigation occurred in mid-June and a
second has been proposed for August.
--
The deadline for making a determination under Section
301 is November 26, 1991. This may be extended for
three months if China is making substantial progress in
drafting or implementing measures that will provide
adequate and effective protection of U.S. intellectual
property rights. At that time, the USTR must determine
whether the acts, policies and practices of the PRC are
actionable under Section 301 and what retaliatory
action, if any, is appropriate.
11
--
If the consultations fail to produce adequate and
effective protection of intellectual property rights,
the Administration will take retaliatory action.
On Textile Transhipments
--
The U.S. Customs Service has been vigilant in
documenting cases of Chinese textile transhipments over
the past year.
--
In August 1990, USTR held consultations with Chinese
authorities on the transhipment issue. Additional
consultations took place in November 1990, March 1991,
and May 1991.
--
The U.S. Government "charged" China's quotas for goods
that were sent to the United States under false country
of origin declarations valued at over $85 million.
--
China has begun to take actions to curtail textile
fraud since the December charges were made. For
example, it issued regulations prohibiting reexports
through a third country to countries that have signed
textile agreements with China. Further, the Chinese
Government has issued provisions for the punishment of.
those who violate the regulations.
--
The Administration has prepared more charges valued at
about $14 million that we anticipate will be levied
after consultations with China next month.
--
The Administration will increase the number of U.S.
Customs officials dedicated to investigating
circumvention.
--
If transhipment persists, we will be prepared to take
additional action against China.
On Forced Labor
--
The importation of goods produced with forced, convict
or indentured labor is prohibited by 19 USC Section
1307, which also directs the Secretary of the Treasury
to prescribe regulations for enforcement of the
provision. The Secretary of the Treasury, under 19 CFR
Section 12.42, has delegated to the Commissioner of
Customs, authority to determine that a class of goods
is the product of forced labor and exclude those goods.
--
Customs has been investigating imports alleged to be
the product of forced labor in China. Customs has
interviewed emigres about forced labor practices in
China. Customs is also analyzing import samples to
determine if they match the descriptions provided by
the emigres and others. Additional special agents have
12
been detailed to Hong Kong to assist in the
investigation.
Although the letter from Senator Baucus and fourteen
co-signers did not specifically address the issue of
prison labor imports, appropriate action is called for
to fulfill the intent of existing law. The
Administration therefore proposes to negotiate a
memorandum of understanding with China on procedures
for the prompt investigation of allegations that
specific products exports to the U.S. are being
produced by prison labor.
--
Pending negotiation of the MOU, Customs will
temporarily embargo specific products from China when
there is reasonable indication that they are made by
prison labor. Embargoes will be lifted only after the
Chinese Government or the Chinese exporter provides
credible evidence that the products are not produced by
prison labor.
Multilateral Lending to China
--
The G-7 consensus, led by the United States, was
successful in prohibiting all MDB lending to China from
June 1989 to February 1990 in response to the
international outcry against the crackdown by the
Chinese authorities at Tiananmen Square.
--
From February 1990 to July 1990, the G-7 consensus
supported a gradual resumption of World Bank lending to
China for projects that clearly met basic human needs
(BHN) The consensus held firm and actively prohibited
other loans from Board consideration. Only five loans
(totalling $590 million) were approved in WBFY 1990.
This is substantially less than pre-Tiananmen Square
levels of World Bank commitments to china, which were
$1.4 billion in WBFY 1988 and $1.3 billion in WBFY
1989.
--
At the Houston Summit in July 1990, several G-7
countries decided that China's long-term development
needs argued for lending outside the BHN limits favored
by the United States. Accordingly, the G-7 Houston
Summit Declaration of July 1990 on MDB lending to China
expanded the boundaries of permitted MDB lending to
China to include loans which were environmentally
beneficial or which supported market-oriented economic
reform. Only BHN loans were considered by the World
Bank Board until December 4, 1990 when the market
oriented economic reform loan for Rural Industrial
Technology was approved by the Board. On November 29,
1990, the ADB approved its first loan to China since
Tiananmen Square, Agricultural Bank Project, which the
U.S. did not support. Despite the approval of
infrastructure project loans by the World Bank and the
13
Asian Development Bank, the U.S. has and will continue
to withhold support on all loans that do not meet BHN
criteria.
On GATT Accession
--
Since China applied for GATT membership in July 1986,
the United States has been a leading participant in the
collective efforts of major GATT Contracting Parties to
develop terms for China's GATT participation that will
support the objectives of the GATT and will influence
Chinese Government policies to become, over time, more
compatible with the GATT framework for world trade.
--
U.S. and other major GATT contracting parties' concerns
about China's ability and willingness to live up to
GATT obligations, particularly since June 1989, have
stalled progress in the Working Party established to
consider China's application for membership in the
GATT.
--
The Administration intends to continue to press Beijing
to undertake trade and economic reforms so that its
GATT application can advance and its trade practices be
brought under GATT disciplines.
--
At the same time, the Administration will begin to work
actively with other GATT members to resolve in a
favorable manner the issues relating to Taiwan's GATT
accession. U.S. support for Taiwan's accession as a
customs territory would be consistent both with GATT
legal criteria and the "one-China" policy which
acknowledges the Chinese position and has been adhered
to by successive U.S. administrations.
--
Taiwan's GATT accession would yield substantial trade
and commercial benefits to the United States and to the
international trading system.
--
Taiwan has indicated that it is prepared to accede
to the GATT as a developed economy, to bind
virtually all its tariffs, and to join the major
non-tariff measure GATT codes.
The Importance of MFN
As highlighted above, the Administration is aggressively seeking
to resolve outstanding bilateral trade issues with the PRC. MFN
underpins our ability to work constructively with the PRC. We
believe that discontinuing MFN, or attaching conditions to its
renewal, would cause serious harm to our trade interests, and
would render futile pursuit of the initiatives outlined above.
It would reduce our leverage in market-access, intellectual
property rights protection, and other trade-related negotiations.
China's desire to retain access to the U.S. market has enabled us
14
to engage Chinese leaders in consultations on bilateral and
multilateral issues even during periods of tension. Because
China is not a GATT member and not bound by GATT trade
disciplines, it is especially important to have many levers that
enable us to engage the Chinese on trade issues.
It would hurt U.S. exporters. If the United Stated rescinds
China's MFN trading status, China will not only discontinue MFN
tariff treatment for the United States, but would likely cease
purchasing billions of dollars of U.S. wheat, aircraft,
fertilizer, cotton yarn and fabric, wood and wood pulp, electric
machinery, scientific equipment, and chemicals. Foreign
competitors, whose goods would be subject to lower tariffs, would
be quick to exploit our departure. Lost shares of China's market
would not easily be regained even if MFN were restored at some
future date.
It would hurt U.S. consumers. Tariffs on the 25 most important
U.S. imports from China would rise from the present average
tariff rate of 8.8 percent to an average rate of 50.5 percent.
These increases would mean sharply higher prices for lower-end
Chinese goods. The costs to U.S. consumers would be largely
borne by poorer Americans, who are primary consumers of low-cost
Chinese products.
It would damage America's reputation as a reliable trade partner.
Our trade competitors will not join us in denying MFN status to
China. Other Chinese trade partners, especially in Asia, urge
that China's MFN status be retained.
It would hurt investors, businesses, and workers in Hong Kong.
Loss of MFN would impede China's integration into the regional
economy, a development crucial to regional stability particularly
as we near the 1997 deadline for Hong Kong's reversion to Chinese
sovereignty. It could cost over 43,000 jobs in Hong Kong and
result in direct revenue losses of approximately $1.2 billion
dollars. Hong Kong's GDP growth could be curtailed by as much as
two percent.
It would set back efforts to bring about meaningful economic
reform in China. A disproportionate burden of the MFN denial
would fall on the primary engine of economic reform in China--the
economies of the southern and coastal provinces. In Guangdong
province, for example, 40 percent of industrial output is
produced for export, half of which goes to the United States.
Sectors that fall outside of the direct control of the central
government have been especially important to China's development
as an exporter; one-third of China's exports currently come from
rural (individual and collectively owned) industries and from
foreign-invested ventures. The foreign ties these provinces and
non-state-owned factories developed with the outside world prior
to Beijing's reassertion of central control in mid-1989 enabled
these provinces to weather the austerity program; without these
foreign markets, Beijing's grip would have been all the tighter.
As Beijing's influence over the regions and sectors most closely
integrated into the global economy has diminished, these regions
15
and sectors have become increasingly sensitive to global economic
conditions. Revocation of China's MFN trading status would cause
unemployment to rise and factory losses to mount in export-
producing regions.
Conclusion
Those who engineered the violence in China in June 1989 are
unlikely to bear the economic costs associated with the denial of
MFN. Instead, those who suffer would be American businesses and
their employees, American consumers, and the people of Hong Kong
and the progressive areas of China.
China's opening to the outside world over the past decade has
accelerated growth in the non-state sectors of the economy;
resulted in strong links between China's coastal regions and the
global economy that have enabled this reformist region to weather
Beijing's periodic efforts to reimpose central government control
over economic activity; and introduced market concepts to a
generation of Chinese managers involved in joint ventures, trade
negotiations, and training in the West. For this process to
continue, China's most-favored-nation treatment in the United
States is essential.
Document No.
CA
OFFICE OF CABINET AFFAIRS STAFFING MEMORANDUM
Date:
5-24-90
Due by:
Fact Sheet
-
MFN for China
Subject:
From:
ACTION CONCUR FYI
ACTION CONCUR FYI
BATES
JACKSON
DANZANSKY
MCBEE
ADAIR
SCHALL
BUCHHOLZ
WETHINGTON
D'ANDREA
WILLIAMSON
DEWITT
YALE
DUGGAN
EVANS
FARRAR
HEIMBACH
Comments:
FACT SHEET ON CONTINUATION OF MFN FOR CHINA
-- China Meets the Emigration Requirements of Jackson-Vanik.
Approximately 17,000 Chinese nationals received U.S.
immigration visas to travel from the mainland in 1989.
Chinese immigration continues to meet U.S.-imposed limits.
Other visa levels are about the same as the previous year's,
with privately sponsored students up sharply and government
sponsored students down.
-- U.S. Business Would Be Hurt. Investments of $4 billion
in China would be put at risk, as would U.S. exports to
China which totaled nearly $6 billion in 1989. The Chinese
would retaliate for loss of MFN with higher duties,
particularly on products where the U.S. has serious
competition. Major exports at stake are:
-- Wheat. $1.1 billion (20% of US exports)
-- Aircraft/Aerospace Equipment. (Current prospects of
$1 billion per year with big contracts pending)
-- Fertilizer. $487 million.
-- Cotton. $259 million.
-- Timber/paper. $262 million (10-20% of US log
exports)
-- Computers/machinery. $342 million.
-- Acids. $162 million.
-- U.S. Consumers Would Be Hurt. China supplies about one-
third of US toy consumption, 9% of footwear, 13% of imported
apparel, and a rapidly increasing volume of electronic
products. Non-MFN duties would raise landed costs an
average of 40%.
-- Hong Kong Would Be Hurt. Already shaken by the events in
China, MFN loss would damage the colony by costing as many
as 20,000 jobs and as much as 2.5% of GNP growth.
-- Denial of MFN Will Harm Reformers and Strengthen
Hardliners. In China, the advocates of political and
economic reform and of greater human rights depend on
outside contacts and support. Cutting them off will weaken
them while giving hardliners a nationalistic scapegoat for
their failing policies.
-- Sanctions Remain in Place. US pressure for reform is
contained in the sanctions already enacted. The
Administration will continue to press for progress on our
human rights and other concerns. MFN status is not a
concession; it is the basis of everyday trade. Our
competitors will not follow us in denying MFN.
-- Engagement Pays Off in the Long Run. Western involvement
in China has helped produce the major social and economic
changes behind the Tiananmen demonstrations. Despite the
past year's repression, greater interaction will lead
ultimately to greater influence.
MOST-FAVORED-NATION (MFN) TRADE STATUS FOR CHINA
The Administration and Congress both share the same goals
in China--make clear our deeply held views on human rights
and encourage conciliatory policies and a reinvigoration of
political and economic reform.
The President, after careful consideration, decided to
extend China's most-favored-nation (MFN) trade status for
another year. In reaching this determination, the
President weighed not only the requirements of the
Jackson-Vanik amendment, which obligate him to consider
whether MFN renewal would substantially promote freedom of
emigration, but also the broader question of whether MFN
would advance the cause of human rights and reform in
China. On balance, the President concluded that extending
MFN would promote US objectives in both these areas and
protect other vital US interests as well.
Emigration. Approximately 17,000 Chinese emigrate from the
mainland to the United States every year. This emigration
flow has continued since the military crackdown in June
1989. While the Chinese Government has imposed some new
travel restrictions on students, it has continued to permit
emigration travel since Tiananmen. US numerical
limitations, and not Chinese restrictions, limit the number
of Chinese who emigrate to the United Sates.
-- In our judgment, continuation of MFN status will help
to preserve the gains already achieved on freedom of
emigration and encourage further progress in the
future. Thousands of Chinese families have been
reunited in the United States through emigration. The
contacts which these immigrants maintain with friends
and relatives in China help to encourage positive
change there and promote friendly relations with the
US. Denying China MFN status removes an important
incentive for permitting emigration and invites
retaliation in the form of new travel restrictions.
Broad Human Rights. The President believes that a
continuation of MFN for China is vital to advancing the
cause of human rights and in supporting those Chinese who
seek a modern, progressive China.
Granting China MFN status, which is the tariff treatment
the US accords all but a small number of its trading
partners, was one of the key elements in a package
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normalizing diplomatic relations in 1979-80. It signaled
that the US would treat China as an equal with other
countries and facilitated a major expansion in our economic
relations. But MFN's impact extended far beyond commerce
and trade.
The prospect of rapid modernization through increased trade
and investment with the US encouraged a broader opening to
the West, gave further impetus to market-oriented economic
reforms, created expanded opportunities for
people-to-people contacts, and justified the sending of
thousands of China's best and brightest students to the US
for higher education where they were exposed to Western
values and democratic ideals.
Denying MFN status would adversely affect our ability to
maintain those contacts and thereby to help sustain the
impetus for internal reform.
--
China would view MFN denial as a hostile act, and a
further deterioration in the relationship would
result.
--
In this strained atmosphere, Chinese contacts with
Americans across the board--business, academic and
scientific--would be more difficult and may be
severely curtailed. Those Chinese with an interest in
furthering China's opening to the West and seeking
positive change would be most affected.
--
MFN denial would likely bolster the position of
conservatives in the leadership who want to restrict
Western influence, give internal policies a more
ideological orientation and maintain strict government
controls on society and the economy. On the other
hand, reformers, who could up until now point to
substantial benefits from good relations with the US
and a deepening of market-oriented policies, would be
put on the defensive.
MFN denial would remove an important incentive for China to
take into account a broad range of US interests--on human
rights, missile and arms sales, fair trade practices
abroad, and cooperation on regional issues, such as
Cambodia and Korea.
Allied Solidarity. The US and its G-7 allies (France,
Germany, UK, Japan, Canada and Italy) have thus far
maintained a united position on China policy. Since the
Paris Summit in July 1989, there has been a G-7 consensus
against a general resumption of World Bank lending to
China. Other G-7 countries have also suspended arms
exports to China and are limiting high-level contacts.
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-- While our allies all agree China should do more to
improve the human rights situation, they also believe
that MFN is important and plan to continue this trade
status for China. The US would be the only Western
country to withdraw MFN if the President did not renew
the waiver. We believe a united G-7 position puts
more pressure on China than unilateral US actions.
Economic Implications. The economic consequences of
removing China's MFN status would also be severe-for US
business, US consumers, Hong Kong and workers in export
industries in China.
Since receiving MFN status in 1980, US-China trade has
nearly quadrupled, reaching $18 billion in 1989. US
exports totalled $6 million, and China remains a
potentially large market for a broad range of US products.
Major US exports are: wheat, commercial aircraft, phosphate
fertilizer and high-tech equipment, such as computers and
scientific instrumentation. (See attached fact sheet for
details.)
The US has become China's largest market, absorbing 25
percent of China's total exports. China's top 20 exports
to the US by value would face average duty rates of nearly
60 percent if MFN status is revoked--in some cases
ten-times higher than with MFN privileges.
Retaliation is a certainty. China would apply its higher
non-MFN duty rates to imports from the US and could use a
variety of administrative measures to restrict market
access by US companies (e.g., through foreign exchange
allocations, import licenses, quality standards and
restrictions on imports competing with local production).
US firms that have worked hard over the last ten years to
develop business ties and market share within China would
lose that business-perhaps permanently--to other suppliers
in Europe and Japan. No other Western country is planning
to deny China MFN status. Retaliation therefore would be
on focused US firms.
Effect on Consumers. US consumers would also suffer. MFN
denial would lead to sharply higher prices on imports from
China. Chinese manufacturers currently supply one-third of
American toy consumption, 10 percent of footwear
consumption, close to 15 percent of imported apparel
consumption and a rapidly increasing volume of consumer
electronic products. According to the US-China Business
Council, non-MFN tariffs would increase the landed cost of
Chinese products by 40 percent. Given the mix of Chinese
exports to the US, the impact of increased prices is likely
to fall disproportionately on low-income consumers.
Hong Kong Impact. Revoking MFN status would also have
long-term negative effects on Hong Kong, threatening the
island's stability and prosperity in the run-up to 1997
when Beijing reassumes control.
--
Hong Kong entrepreneurs have invested in thousands of
Chinese enterprises, particularly in Guangdong's Pearl
River delta region in South China, to take advantage
of low-cost manufacturing. Hong Kong-invested
enterprises in South China employ some 2 million
Chinese. An additional 10,000-15,000 South China
enterprises do processing and assembly work for Hong
Kong companies.
--
Of a total of $25 billion in Chinese exports to Hong
Kong in 1989, $24 billion were re-exported to other
countries. The United States is by far the largest
market for Chinese reexports through Hong Kong, taking
more than $8.5 billion in 1989.
-- The dropoff in Chinese exports to the US would have a
direct impact on Hong Kong firms involved in
transshipment of goods to the US, including banking,
insurance, shipping, and legal services.
--
MFN withdrawal would be a serious blow to confidence
in Hong Kong. Net emigration from Hong Kong is now
running about 40,000-50,000 annually, resulting in a
serious shortage of skilled labor and mid-level
managers. A sharp deterioration in US-China trade
relations would heighten concerns about Hong Kong's
future at a time when confidence is already weak
because of Beijing's heavy-handed suppression of
dissent on the mainland.
In short, the President has decided to extend China's MFN
status because it serves clear US interests in several
important areas--emigration and human rights, the need for
reform in China, US business, US consumers and Hong Kong's
stability and confidence.
Need for Further Human Rights Improvments. In notifying
Congress of his determination to renew MFN for China, the
President emphasized that he remains seriously concerned
about human rights violations in China and is personally
disappointed that the Chinese Government has not taken more
decisive steps to demonstrate a commitment to
internationally accepted human rights, despite repeated
expressions of concern by the US and many other Western
countries. The President has also indicated that the US
Government intends to press vigorously during the coming
year for significant improvement in China's human rights
practices.
Sanctions to Continue. The extension does not signal a
return to business as usual with China. The President has
reaffirmed that he will maintain the sanctions against
China he authorized in June 1989 on arms exports,
high-level government exchanges and postponement of
multilateral development loans.
We should not let our frustration with Beijing's slow
response to our concerns lead us to take unilateral actions
which, in the end, only serve to undercut our long-term
objectives. Denying MFN would do just this. It would also
result in the United States losing the leverage it has
gained over the last decade to influence positively the
course of human rights developments in China.