from the pages of June 1994


The Houdini Strategy

by David Peterson


"We believe that the Bush administration erred by extending Most Favored Nation trade status to the People's Republic of China before it achieved documented progress on human rights," was how the Clinton-Gore team put the matter when it really didn't matter, in Putting People First, its manifesto for the 1992 campaign. "We should not reward China with improved trade status when it has continued to trade goods made by prison labor and has failed to make sufficient progress on human rights since the Tiananmen Square massacre."

Demanding freedom of emigration; full compliance with 1992's bilateral agreement calling for an end to the export of goods manufactured by prison labor; "steps to begin adhering to the Universal Declaration of Human Rights;" the release of prisoners of conscience; access to prisons by humanitarian organizations; the protection of Tibet's religious and cultural heritage; and an end to the jamming of Voice of America broadcasts--the executive order that placed these seven conditions on this June's decision to renew or not to renew China's most-favored-nation trade status would come back to haunt the Clinton White House. With a vengeance.

Last summer, the CIA reported that China's GDP had risen 13 percent in 1992, to $2.35 trillion, making China the third largest economy in the world, after the United States and Japan.

China has become "the single largest recipient and (probably) source of FDI [foreign direct investment] flows among developing countries," the World Bank reports, a fact that underscores the immense allure that China has to capital. FDI flows to China totaled $11.16 billion in 1992 (some of which represented capital having roundtripped from China to Hong Kong and back to China again); and in 1993, its FDI flows may have reached $15 billion. It would appear that China is doing something "right," to recall Treasury Under Secretary Lawrence H. Summers' prescription from last month's column, sniffing like a bloodhound the tracks left by international capital for evidence of what it finds so enticing about the developing world.

More important, the recent upsurge in developing market investment appears to be the beginning of a secular trend, as capital continues its centuries-old quest for the lost city of El Dorado, and peasants aplenty to lug its booty back to the waiting ships. In 1992, FDI flows to all developing countries totaled a record $47 billion, up 28 percent from the previous year; they may have risen to as high as $56 billion in 1993. On the other side of the ledger, however, FDI flows to the industrialized countries actually declined in 1992, down 15.6 percent overall, falling from a 1991 total of $122 billion to $103 billion. "[D]eveloping countries' share of global FDI jumped to a high of 31 percent in 1992 and (a projected) 35 percent in 1993," the World Bank estimates. Factors such as the size, potential rate of growth, and predictability of a country's political and economic systems, the abundance and availability of its natural resources, and the relatively cheap cost-structure it awards to investment and production, are what have been attracting capital to the developing world. That--and the diminishing returns to be found throughout the industrialized world. Where capital's favorite excuse for its own inadequacies has become the unemployability of its workforce. Indeed, the unsuitability of the human creature to be entrusted with the lofty and the noble mission that is capital accumulation.

"The vision I once had of a tri-polar global economy begins to fade," Under Secretary of Commerce for International Trade Jeffrey E. Garten said during a speech in January. "It is superseded by something quite different--an emerging global structure that comes back again and again to a new class of countries destined to play an increasingly significant role in our future."

Well, maybe not quite yet. To date, the distribution of both FDI and portfolio flows from the principal investing countries (in descending order: Japan, the United States, Germany, France, and the United Kingdom) to the developing regions of the world still supports the tripolar thesis--Garten's current attempt to dismiss it notwithstanding.

Nevertheless. "Of all the world trade growth in the next two decades, almost three-quarters is expected to come from the LDCs [less-developed countries]," Garten noted in his speech. "But a small core of those LDCs, the biggest of them, just ten economies, is likely to account for more than half of that growth. These are the Big Emerging Markets."

Count them: China, South Korea, Indonesia, India, Turkey, Poland, South Africa, Mexico, Argentina, and Brazil. (Or maybe you'd prefer the Philippines, Malaysia, Thailand, Vietnam, Pakistan, Greece, Nigeria, Venezuela and Colombia?) Combined U.S. exports to Garten's ten "Big Emerging Markets" totaled $87 billion in 1993. And of these ten, he singles out China (or rather the "Chinese Economic Area," as both Wall Street and the Clintonites call it--Hong Kong and Taiwan included) as the "Biggest of the BEMs," an "elephant among Asia's tigers."

Where there's as much smoke as Garten's BEMs have been producing ("The economic stakes in China are off the charts," he has said elsewhere), there's bound to be fire. By the time Clinton renewed China's MFN status, on May 28, 1993, some key congressional Democrats, including Senate Majority Leader George Mitchell, had already begun to circulate legislation that called for tough action to be taken against China, if it failed to improve its human-rights record. But this clearly wouldn't do. "Shunning China is not an alternative," Under Secretary of State for East Asian and Pacific Affairs Winston Lord told the Senate at the time--the same Lord who the Council on Foreign Relations would ostracize this year for his role in crafting a policy condemned by no less than three former secretaries of State for placing U.S. business interests at risk. But with roughly 8,000 American firms having established a presence in China (by the Foreign Ministry's count, anyway), the Clinton administration no more wanted to suspend its MFN status than the Carter, Reagan or Bush administrations did. And the only two times Congress had ever managed to pass legislation setting conditions on China's MFN, first in 1991 and again in 1992, Bush fed it to the shredder--just two out of a string of 35 consecutive vetoes that wouldn't be broken until Congress finally overrode Bush's veto of a cable-TV bill, his last, in October, 1992.

The threat of yet another round of congressional intervention into the MFN-fray confronted the Clinton White House with a serious problem. Namely, what to do about China? As in "Big Emerging Markets" China. (Hardly a voice in the wilderness--Garten's.) The China of 1.2 billion people. (Maybe one-tenth of whom have actually benefitted from Deng's Great Upheaval, it's worth remembering.) The China that "is becoming the largest market in the world for almost any product you can name." (AT&T CEO Robert E. Allen, who clearly understands what the real cornerstone of U.S. foreign policy is and has always been--Cold War or post-.) The China that, together with the other Asian and Pacific Rim countries, could spend upwards of $1 trillion on their infrastructure needs in the next decade alone. ("That's a Century Freeway every week," as Treasury Secretary Lloyd Bentsen reminded a Los Angeles business group on his way to the Honolulu summit of the Asia Pacific Economic Cooperation forum in March.) The China that, "absent some unexpected event, will be the largest economy in the world not too far into the next century." (National Economic Council director and former Goldman Sachs co-chairman Robert E. Rubin, showing he still knows that when you want to have your way with people, you promise them the sky.)

This China must be permitted to keep its MFN, the administration's policy holds, because of what the Commerce Department calls the "Export Imperative"--because "exports = jobs," that is, in Commerce's funny way of talking, "jobs" meaning the creators of jobs, and "exports" the profits they expect to reap. And because the likes of AT&T, Hughes Aircraft, Martin Marietta, Cray Research, Boeing, McDonnell Douglas, General Electric, Merck, Upjohn, Ford and General Motors need to find somebody new, somewhere, to buy their products. Whatever the costs.

"The Executive Order is a much more flexible instrument than we would have had if Congress had passed the statute that they passed in 1992 [the second of the two vetoed by Bush], and this time it would have become law," Secretary of State Warren Christopher told the American Chamber of Commerce in Beijing on his now-infamous trip to China in March. While in Beijing, Christopher declined to meet with any of the political activists whose plight was the alleged concern of his trip, despite the well-publicized willingness of some of them to meet with him. "I would look forward to a situation in which MFN is continued, but is continued on a basis where its renewal can be more routine than it's been over<193>the last four years," he added, his audience taking heart. "And, depending on the nature of the progress made, we are prepared to try to work out techniques that will achieve that result<193>."

Revealing comments for an individual so often accused of suffering from an anachronistic vision of foreign policy.

"Right now, we're in a box," a senior State Department official admitted to the New York Times, shortly after Christopher had returned to Washington from his now-infamous trip--an "unmistakable debacle," in the Financial Times 's judgment. (Winston Lord, perhaps? Even Christopher himself?) "And the question is, what's the Houdini strategy?"

Before long, the administration would find its skeleton key.

"The use of targeted sanctions has become the centerpiece of the new debate on China," the New York Times 's senior economics correspondent Thomas Friedman reported in late April. "The debate is no longer between those who want to totally withdraw Beijing's trade benefits,<193>and those who want to renew them unconditionally. It is now between those who would renew China's trade privileges while also imposing limited, targeted sanctions to keep the human rights pressure on Beijing, and those who would renew the privileges while looking for non-trade pressures to influence Chinese behavior."

No more talk about enhanced engagement or intensified engagement or any other kind of subtly qualified engagement, signifying nothing.

Nor about the need to broaden the Sino - American relationship beyond the terms of the Executive Order --terms the Chinese government isn't going to meet, the White House wishes it had never demanded in the first place, and couldn't give a damn about, anyway.

Rather, targeted sanctions and selective withdrawal are in. And de - linkage. (As in: I'll de - link your back, if you'll de - link mine.)

Upon hearing of the administration's (quote-unquote) new approach, the congressional human rights leadership was pleased. "If you have targeted revocation, you encourage the private sector while you send the message home to the Chinese government because its state-run industries are hit," California Rep. Nancy Pelosi, a member of the House Working Group on China, noted. "The U.S. government has an opportunity to initiate sanctions which impact the Chinese government the most, the Chinese private sector to a lesser degree, and the American consumer the least."

Besides this congressional liberal's eagerness to help the White House escape from an executive order that along with the rest of Congress, Corporate America, and Kissinger & Associates, it clearly regards as a straightjacket, Pelosi's embrace of a policy designed to use sanctions to encourage the private sector while sticking it to the state sector is worth understanding.

As with all state-owned enterprises the world-over, China's have some inherent flaws.

For example, they compete with privately owned enterprises--the human rights violation of human rights violations, and a crime against humanity if there ever were one.

Second, at least in principle, state-owned enterprises are beyond the autocratic control of private capital. Thus they confront private capital with the one thing it fears the most: an alternative form for organizing work and social relations in which the class of interests that predominates isn't private capital's.

And the truth be told, many state-owned enterprises represent excellent values. That is, they would sell at steep discounts to the actual value of their assets, were they to be put on the trading block, and privatized.

It wasn't for nothing that the APEC finance ministers who gathered under Lloyd Bentsen's wing for their summit in Honolulu just as Warren Christopher was returning to Washington from his trip to China trumpeted the Asian and Pacific Rim's urgent need to "finance high levels of private investment and infrastructure development," to "promote ongoing large and diversified inflows of foreign direct investment," and to "work on increasing the contribution that portfolio inflows can make to regional investment<193>."

Not to mention private profit. Capital accumulation.

And the God-given right of the child laborers of Guangdong Province to begin amassing their fortunes, almost as soon as they can walk.