Breaching the Great Wall

Illustration by Bob Dahm

"Breaching the Great Wall" is adapted from a Japan Policy Research
working paper by Chalmers Johnson entitled "Nationalism and the
Market: China as a Superpower.

Few nations loom larger on the global economic radar screen than
China. In 1993 the World Bank estimated that China had the world's
third largest economy but was the fastest growing of them all.
The Central Intelligence Agency, which already considers China's
economy to be the world's second largest, estimates the Chinese
will surpass the United States in total GDP well before 2020,
the target date for the Pacific free trade zone promised at the
Seattle, Bogor, and Osaka summit meetings of Asia-Pacific Economic
Cooperation. One analyst calculates that by 2020 China's economy
will be 40 percent larger than ours and that four of the world's
five largest economies—China, Japan, India, and Indonesia—will
be in Asia.

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Given China's size and population we should of course expect its
economy to eventually overtake the United States's in magnitude.
China's economic development is also politically desirable—it
is most likely to become a force for stability and peace when
its people have a substantial stake in economic prosperity. But
so far China's progress on political liberties has disappointed;
if anything, economic success has reinforced the political establishment's
belief in its repressive political philosophy. Meanwhile, China's
growth has extracted a price from the United States. As of this
year, the United States has a larger trade deficit with China
than with any other nation, thanks in part to a nationalist trade
policy that grafts Japanese-style mercantilism onto China's current
"soft totalitarianism." China continues to block access
to its markets; it continues to provide cheap workers, including
children and prisoners, whose presence undercuts labor's ability
to bargain for higher wages and benefits in the United States.
The piracy of intellectual products such as music and software
remains a problem, siphoning literally billions of dollars that
might otherwise flow back into U.S. firms and—eventually—the U.S.

Despite such troubling news, and despite 1992 promises about taking
a hard line on human rights, the Clinton administration remains
surprisingly confused in its China policy. While aggressively
promoting the interests of a few U.S.-based multinational companies
seeking access to the Chinese consumer market, the Clinton administration
has refused to condition market access to the United States on
reforms, as was at least attempted (with mixed success) in the
case of Japan. The Clinton administration has negotiated two agreements
with China to end piracy of intellectual property, but the U.S.
Trade Representative's office is far too small and too understaffed
with Asia specialists to monitor such agreements. Clinton has
consistently failed to retaliate against violations of such agreements
for fear that the economics tenurocracy and other ideologists
might label him a "protectionist." Finally—and perhaps
most memorably—Clinton has decided not to use China's most favored
nation trading status as a bargaining chip on political rights
and labor standards, arguing that the U.S. will be more influential
and the world will be more secure if the United States maintains
a friendly diplomatic posture.

In fairness to Clinton, his stance on human rights may be more
defensible than his critics concede—it's not entirely clear how
much leverage the U.S. has in this realm. Similarly, the national
security implications of a more antagonistic relationship are
hardly trivial. But when it comes to the balance of trade, at
least, the decision not to play hardball with China is troubling.
So long as China fuels its growth by engineering massive surpluses
with consumer nations, its ascendancy will jeopardize the well-being
of the U.S. economy by siphoning away capital for investment and,
eventually, dragging down the standard of living for American

The good news is that the next four years will present several
opportunities to redefine the U.S.-China relationship, beginning
with the expected consideration next year of China's membership
in the World Trade Organization (WTO). The bad news is that Clinton's
unwavering commitment to highly abstract principles of free trade—as
preached by both the American economics establishment and prominent
members of the administration—makes a policy switch highly unlikely.


In the textbooks, free trade is supposed to be mutually beneficial
to all involved, expanding the global economic pie and spreading
prosperity across borders and down the income scale. Nations agree
to drop tariffs and other policies that protect domestic industry
in the hopes that expanded trade will translate into more business
overall. It sounds great but to work in practice, free trade requires
tolerable symmetry—a mutual commitment among participating nations
to disavow promotion of domestic industry at the expense of trading

Until 1995, trade among the so-called "free market economies"
was governed by the General Agreement on Tariffs and Trade (GATT).
In January of that year, the GATT nations, with Clinton's eager
support, agreed to institutionalize the WTO. While GATT's purpose
was in large part strategic—the United States traded access to
its lucrative consumer market and technologies to cement anticommunist
alliances with nations such as Japan, South Korea, and Taiwan—WTO's
primary rationale is the expansion of free trade for its intrinsic
economic value.

The problem with the WTO treaty is that it does not outlaw the
main protectionist practices of the East Asian capitalist developmental
states but it does explicitly outlaw American attempts to protect
itself from such protectionism. Tariffs are no longer important
in international trade, but so-called nontariff barriers such
as national industrial development policies, regulations with
differential effects on foreign and domestic firms, unique standards,
collusion among a country's firms to keep out foreigners (China's
state-owned sector, Japan's keiretsu, South Korea's chaebol),
governmental administrative guidance of privately owned enterprises,
and the failure to enforce antimonopoly laws are all beyond the
scope of the WTO. On the other hand, Section 301 of the American
Trade Act, which allows the U.S. government to assist American
firms facing access barriers in foreign markets, is explicitly
barred. Unless and until the WTO faces up to the catch-22 in its
charter, it remains a menace to the livelihoods of all working
Americans. WTO is starting to work only because its members know
that without compromises it will ultimately drive the U.S. from
the organization.

Meanwhile, WTO admission has become China's primary diplomatic
goal—because it would mean even more access to lucrative markets
in the United States, Europe, and Japan—and the Clinton administration
has indicated it will go along without much fuss. But there's
one very important catch: China wants to be admitted with the
formal status of a developing country. Structurally, China is
still a Leninist economy and not ready for admittance as a regular
member. As a developing country, China would not have to open
its markets to foreign competitors on an equitable basis, and
it would be exempt from the provisions of the WTO treaty concerning
subsidies, investments in China, and intellectual property rights.
In other words, developing nation status would give China license
to continue some of its most effective mercantilist economic policies
and run up even higher trade surpluses with the United States.

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The potential cost is staggering. Already, the U.S. absorbs about
25 percent of all exports from Asia and runs $100 billion annual
trade deficits with the area. When China began economic reform
in 1978, its foreign trade totaled $20.64 billion. By 1993 it
had increased 950 percent to $195.8 billion. The Europeans and
Japanese also run trade deficits with China, but the U.S. trade
deficit is approximately 2 to 3 times those of the other major
trading powers. Some 80 percent of China's exports are manufactured
goods. China is the world's largest textile exporter and the largest
source of American textile and apparel imports. International
agreements are supposed to control the international textile trade,
but China gets around them by transshipping through third countries
and often by attaching false labels to avoid exceeding the quotas
to which it has agreed. "Made in Turkey" labels are
common in Chinese leather jackets.

Of course, admission to WTO would hypothetically require a real
commitment by China to end such ruses, to make progress on political
liberties, to stop the use of prison labor, and to live with a
more balanced trade relationship—in other words, a country needs
to show development to maintain developing nation status. Yet
China hasn't cracked down on prison labor or cut back on extensive
subsidies to state industries, as it promised. China cannot politically
face the unemployment that ending subsidies would cause and regards
foreign demands that it do so as attempts to subvert its political
system. Nor has China abandoned its strategy of swapping market
access for technology transfers from other nations. In 1995, for
instance, China very successfully played off General Motors against
Mercedes-Benz over which company would give China the most technology
in return for the right to manufacture and sell in China for fixed
periods of time. Both ended up giving to China sophisticated technology
to design and build new models.

This strategy that merges "the teachings of Chairman Mao
with the economic experience of Japan," as Greg Mastel of
the Economic Strategy Institute puts it, is the reason Business
noted last year that "China may already have eclipsed
Japan as America's number one trade headache." In a sense,
the China trade problem is not a trade problem at all but one
of "systems friction," the clash of different forms
of capitalism. One of the secrets of China's development strategy,
which borrows heavily from the experience of Japan and other successful
Asian nations, is to bend the rules and norms of capitalism in
order to achieve national wealth and power. In this view, economics
is inevitably a zero-sum game, in which some nations win and others
lose. China has never aimed at becoming a "market economy"
but rather at engaging and exploiting other market economies to
become a great power. It undertook economic reform in order to
preserve the Communist Party's political control and to achieve
through other means what it had failed to achieve through Leninism.

What's interesting about this strategy is that other nations—including
the ones who invented the strategy—show relatively little patience
with Chinese demands. When China insisted on technology transfer
in automobile manufacturing, Japan said "no thank you"
and opted out of the race. Japan has increasingly rebuffed China
and taken its investments elsewhere, astutely parlaying the neighborhood
effects of China's discovery of the market in order to expand
its own market share in countries like Indonesia and India. Japan's
approach is quite clever: Because China is currently attracting
so much foreign investment, countries like Indonesia have liberalized
their economies in order to grab a share of the available investment
funds and not be left behind. As of mid-1995, Japan had invested
$8.7 billion in China, but that was less than it had invested
in the city state of Singapore ($9.5 billion) and half of its
investment in Indonesia ($17 billion).

The United States potentially has a very strong hand when
it comes to dealing with China. Precisely because the United States
purchases so much of what China produces, even a partial loss
of access to the American consumer market would be a crushing
blow to Chinese economic expansion. Yet because such a threat
would violate the precepts of free trade, that option is not under
consideration. Instead, Clinton's strategy has been primarily
to try to induce or cajole China into reforming itself to look
more like the American form of capitalism, through relatively
modest changes. Thus, on November 10, 1994, the Washington
editorialized that in order to get into the WTO, China
would have to (1) publish its trade regulations in a transparent
form accessible to importers, (2) ensure that all foreign and
domestic companies receive the same treatment from the legal system,
and (3) stop using artificially low exchange rates to boost exports
and impede imports.

Unfortunately, this advice is based on a false premise—an economic
determinism almost as rigid as that of the Marxist-Leninists.
As explained by Henry Rowen, President Reagan's former national
intelligence chief, writing in the Fall 1996 issue of the National
, the theory is that policies like the kind described
in the Washington Post will cause democracy to break out
in China "around the year 2015." Rowen believes that
the "United States should . . . make most-favored national
status for China permanent and impose no extra obstacles to its
admission to the World Trade Organization," in order to facilitate
this development. And if China resists? He suggests that the United
States discipline China not through economic means but by "our
taking actions in security domain."

But this counsel courts real disaster. Any attempt to contain
China militarily will surely bankrupt the United States, separate
us from our Japanese allies, and militarize the Chinese leadership;
if a war ever did ensue, the U.S. would probably lose. Besides,
China's developmental strategy depends on peace in East Asia and
cooperation from the 55 million overseas Chinese. Those are greater
constraints on Chinese behavior than any forward deployed American
troops that no one believes would ever be used in a war with China.

The real problem with the Washington Post's position, however,
is that even if China agreed to such terms, an imbalance would
persist because of cultural differences between Chinese and American
business relations. In a speech to businessmen in Tokyo, the vice
president and senior economist for J.P. Morgan in Asia, Huan Guocang,
advised, "It is extremely important for . . . investors to
develop solid working relations with local authorities in the
regions where they have committed capital investment, as such
working relations can enhance their operations and hedge against
potential economic and political risk." This is a polite
way to stress the importance of guanxi (connections or
networks) in all Chinese trade dealings and helps explain why
the overseas Chinese—who have established intricate and successful
transnational networks—have been so far ahead of everyone else
in trade and investment in China.

This, at last, is the heart of the matter: Simply requiring China
to drop its tariffs, abolish prison labor, or stop domestic subsidies
is only the first step toward symmetry. Writing in Asian Survey,
Maria Hsia Chang explained,

Quite apart from their complementary interdependencies, the economic
integration of Hong Kong-Taiwan-Guangdong-Fujian is fueled by
the ability of the overseas Chinese to understand, utilize, and
exploit guanxi, the predominant mode of getting anything
done in mainland China. More often than not, guanxi includes
bribery, backroom and insider dealings, and other forms of corruption
that have become pandemic in China. Because of their language
and cultural affinities, not to mention kinship ties, ethnic Chinese
are better able than non-Chinese to develop guanxi—and
thus to do business in China.


So if simply forcing China to end protectionist policies isn't
enough, what is? How does the United States promote China's economic
development while preventing predatory trade from provoking international
conflict? The answer is managed trade—using public policy to manage
outcomes rather than procedures. It assumes that when private
companies in different economic systems trade with and invest
in each others' economies, a mutually beneficial outcome cannot
be assured merely through an agreement on the rules.

A great deal of international trade is already managed—in petroleum,
steel, textiles, agricultural products, electronic goods, and
many other products—even though global commerce continues to expand
to unprecedented levels. Still, the U.S. refuses to recognize
that management is needed and it therefore does a poor job compared
with other trading nations. Trade management need not seek exact
bilateral balances or zero trade deficits. Its criterion should
be the health of domestic high-value-added industries—in other words,
those that provide technologically advanced jobs for American

In 1960, at the height of the Cold War, when the United States
began to trade with Poland, Romania, and Hungary, it set goals
that these Leninist countries had to meet. The United States required
that Poland absorb more imports produced in GATT countries—a 7
percent annual increase—or else trade would be cut off. As Greg
Mastel says,

The parallels between the challenges the GATT faced thirty-five
years ago with Poland and the current challenge of integrating
China are compelling. Both cases involve an apparent desire on
the part of a non-market economy to move toward becoming a market
economy, but with central planning systems still in place and
functioning. . . . If China's accession agreement [to WTO] were
to include both targets for increased imports from WTO members
into China—perhaps tied to growth rates or other relevant economic
factors—and also special safeguards, many potential economic problems
could be addressed.

Another example is semiconductors. In 1986 the American semiconductor
industry was headed for the same graveyard in which the whole
American consumer electronics industry is buried. This situation
changed with the Japanese-American semiconductor agreement, which
demanded and got 20 percent of the Japanese market for imports,
and by domestic company reforms, including the creation of a joint
research consortium. Today both Japan and the United States enjoy
thriving semiconductor industries. The competition between them
gives rise to the innovations and price reductions that are occurring,
for example, throughout the computer and telecommunications industries.

It is therefore surprising that the Japanese have vowed never
again to enter into such an agreement, and American newspapers,
such as the Wall Street Journal and the New York Times,
editorialize against negotiated market shares among different
kinds of capitalist systems. This suggests that the Japanese in
1986 actually wanted to destroy the American semiconductor industry
rather than achieve a healthy trading relationship with the United
States, and that Americans are still so deluded by economic ideology
they are unable to recognize their own success.

There is no question but that America's trading partners would
grumble about an invigorated American economic policy. But that
would only signal the end of the Cold War trade-off between access
to the American market and such things as overseas basing rights
for American military forces. The current pretense that the United
States can continue to play the same international economic role
it did during the Cold War is the real source of instability in
the trading system and in U.S. relations with China.

The economic challenge of China will be the most difficult test
not just for American foreign economic policy but for American
foreign policy in general in the first quarter of the twenty-first
century. Unfortunately, Americans still remain confused by the
shift in the nature of power from military strength to economic
and industrial strength. They tolerate and even applaud bloated,
irrational defense budgets while doing nothing to rebuild and
defend the industrial foundations of national security. It is
not that the Americans are incapable of competing on this front.
They actually have a good record of institutional innovation when
they recognize that this is where the plane of competition lies.
The problem is one of political leadership, mobilization of the
country, appropriate staffing of the government, and redirection
of the foreign affairs, defense, technological, and intelligence
agencies to pay attention to Asia in general and to China in particular.
Unfortunately, there is absolutely no sign that this is actually

Related Resources

The World Trade Organization

Established on January 1, 1995, the WTO is the embodiment of the results of the Uruguay Round trade
negotiations and the successor to the General Agreement on Tariffs
and Trade (GATT).

The Economic Strategy Institute

An activist think tank developing briefing papers, articles, commentary, and books
on pertinent topics such as the GATT, the Japan Framework Talks, the flat panel
display initiative, and NAFTA.

CIA World Factbook: China

An overall look at the geography, people, government, economy, and
infrastructure of China.

Asia-Pacific Economic Cooperation EduNet

This recently launched site has its origins in the APEC Leaders Education Initiative proposed by
President Clinton in Seattle in 1993. The Initiative called on institutions of higher education to collaborate on APEC-related
issues and on the free exchange of ideas and technologies relevant to
economic development and cooperation in the Asia-Pacific region.

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