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Anxious Eyes on Beijing -- and Washington

At Oxygen Generating Systems Inc. in Niagara Falls, N.Y., executives are monitoring President Bush's handling of the touchy negotiations with China just weeks after a U.S. surveillance plane and a Chinese jet fighter collided. Sales to China provide 20% of the annual revenue for the company, which manufactures oxygen generators used in hospitals and waste-processing plants, and which has entered into a joint fish-farming operation there.

"The president seems to be keeping in mind that he doesn't want to ruin trade relations," says Robert Schlehr, vice-president for sales and marketing at Oxygen Generating, which has 15 employees and expects total export income of $4 million this year, up from $2.5 million last year. "It certainly makes us a little bit nervous," he concedes, adding: "We would hate to lose business in China."

So would the thousands of other companies that do business there, the majority of which are small or medium-sized. They are keeping a close watch on the tense negotiations taking place since the Apr. 1 collision between a U.S. surveillance plane and the Chinese jet fighter. Calls for boycotting Chinese goods have surfaced and a bill to rescind normalized trade relations has been introduced in Congress.

ECONOMIC INTERDEPENDENCE. Businesses fear deteriorating relations could affect U.S. exports to China, which soared by 22% in 2000, bringing the value of trade between the two countries to $123.9 billion. The value of that trading relationship, in the end, will overshadow today's political battle between the two countries, many experts say.

"Economic engagement has to be the central driver of the U.S.-China relationship," says Desmond Wong, partner and national director of China at Ernst & Young in Chicago, citing China's need for America's capital and America's need for China's supply of low-cost labor, as well as consumers. Economic interdependence is the only way "to build a relationship platform sufficiently strong to help support the resolution of the many disagreements between us," he says, referring to such issues as human rights, nuclear weapons proliferation, the treatment of Taiwan and, now, China's refusal to release the U.S. surveillance plane.

After this standoff is resolved, China will still be a market of 1.2 billion people, with a middle class bigger than the entire U.S. population and hungry for American products. That will be the glue that ultimately keeps U.S.-China relations intact, Wong says.

NEW ERA. The U.S. is China's No. 2 trading partner, in value of goods imported and exported, and China is the No. 4 trading partner for the U.S. Some attribute last year's big jump in U.S. exports to the fact that Congress voted in September for permanent normal trade relations with China, signaling a new era in U.S.-China relations. Others think the increased trade has more to do with the robust condition of China's economy, which is growing by 8% annually.

In New York State alone, exports to China were up 33% last year, to $982 million, says Kelly Jones, senior vice-president of the international division of Empire State Development, the economic development agency.

In California, "in the last seven months, our trade was amazing," says Claire Hervey, director of international marketing at the California Commerce Dept. In that state, which has the largest Chinese-American population in the U.S. and the most exporters to China, four out of five exporting companies are small (fewer than 100 employees) or medium (fewer than 500 employees) businesses, she notes. Last year, exports to China by California companies -- led by computers and electronics -- were up 44% over 1999.

"This plane incident harks back to Cold War issues," Hervey says. "Some people in Congress are up in arms about it." That could slow exports for a while, as newly wary business owners wait to see the outcome.

"STINK BOMB PAR EXCELLENCE." "Companies see that 30-some members of Congress are behind a bill to rescind trade relations," says Jon Paone, managing director of GoTrade New York, a coalition that lobbies lawmakers in support of international trade. Adds paone: "Small businesses -- because they don't have people in Washington watching these things -- might not know that this bill has almost no chance of passing."

Chances are that neither side will let U.S.-China relations deteriorate so severely that business will be affected, says Robert Kapp, head of the U.S.-China Business Council in Washington, an organization of American companies that trade and invest in China.

The surveillance-plane incident, although it represents a "stink bomb par excellence," has not affected the broad economic reforms China has made in the last several years, Kapp says. "We're a long, long way from declaring that the U.S. market is closed to...Chinese goods." Small businesses can expect much larger counterparts that are heavily invested in China -- the likes of General Electric, Procter & Gamble, and Ingersoll-Rand -- to help ensure that doesn't happen.

EYES ON CONGRESS. Kapp acknowledged that the plane collision is likely to be cited often when it's time to renew the official status of trade relations with China, in June. Although Congress voted for permanent normalized traded relations last fall, that status is not effective until China joins the World Trade Organization, so a vote on extending trade relations for another year will be required. China's entry into the WTO, which is expected to occur by yearend, has been delayed as the nation makes the necessary policy changes on issues that include intellectual property and the transparency of decision-making.

Those who do business there say China's culture and economy is undergoing Western-style changes. "Even in the [four years] we've been there, we can see a difference. Opening the market improves their situation, their lives," says Schlehr of Oxygen Generating. "You've got the political/military side of things, and then you've got the business side of things."

The dollar, it seems, will prove mightier than the sword. By Theresa Forsman in New York

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