China Vs. America

Last year, when Chrysler Corp. became the top contender for a $1.2 billion deal to produce minivans in southern China, U.S. companies seemed to be in the driver's seat in the world's most important emerging market. But on July 12, in a gesture apparently designed to jolt Washington, Chinese President Jiang Zemin took aim at Corporate America. During a visit to Germany, he snubbed the U.S. auto maker and handed rival Daimler Benz the project to make 60,000 minivans and 100,000 engines.

With alarming speed, the U.S.-China relationship is plunging into an abyss. Although political and economic tensions have been building for more than a year, the eruption came when the White House let Taiwan President Lee Teng-hui visit the U.S. in May. In the wake of the visit, senior Chinese trade official Wang Zhiquan had warned that courting Lee would damage "mutually beneficial" trade ties with the U.S.

It certainly has. Across the country, executive suites are witnessing China's fury. During the past two months, Chinese officials canceled a procurement trip to United Technologies Corp. and went to Europe instead. Then, a host of top U.S. chief executives were stood up when Shanghai's mayor called off a trip to New York. And Greiner Engineering Inc. was told by Chinese officials it lost out on a $35 million deal to provide high-tech equipment for a mainland airport because Beijing disapproved of U.S. policy toward China.

For U.S. companies, the sudden chill is ominous. China is regarded as the single most important overseas market for many of America's most strategic industries. Take Boeing Co., which has supplied over 70% of the roughly 350 commercial jets China has purchased since the early 1970s. Its prospects have dimmed considerably. "We're being told there's a lot of pressure" from senior Chinese mfficials "not to go ahead with Boeing," says Lawrence W. Clarkson, senior vice-president for planning and international development. "It's a very serious situation, and it's getting worse every day."

The cold shoulder signals much deeper problems in the U.S.-China relationship: The two countries have yet to find a framework for dealing with each other in the post-cold-war era. Washington hasn't crafted a coherent policy to cope with the new breed of superpower China is fast becoming: an economic giant with a political system that remains closed and repressive. And China has yet to learn how to behave on the global stage. It overreacts when Washington challenges it politically, even though it needs the U.S. market and U.S. technology to prosper.

UNSTEADY HANDS. All this adds up to the worst crisis in Sino-U.S. ties since the days after the 1989 Tiananmen Square massacre. Particularly worrisome is that neither country appears to have a leader who is firmly in control. Chinese President Jiang Zemin, embroiled in a power struggle to succeed ailing Deng Xiaoping, has no choice but to hang tough with Washington on matters relating to sovereignty. In addition, Chinese diplomats who best understand American politics are more on the sidelines now because they failed to predict the Lee visit. That has created a vacuum that party and military hard-liners are happy to fill.

Things aren't much better in Washington. Wary of appearing too pro-China with elections approaching, Clinton all but ceded the China agenda to the Republican-controlled Congress. Congressional leaders are eager to exploit issues ranging from human-rights abuses to Chinese missile-technology transfers to Iran and Pakistan. And the Republicans have just begun their assault. They're seething over the arrest of human-rights activist Harry Wu, a U.S. citizen. After entering the mainland, he was charged with stealing state secrets.

COSTLY SNUB. The Clinton Administration's bungled diplomacy, meanwhile, forced Beijing into a corner. While the Taiwanese president's trip didn't constitute an "official visit," Chinese leaders saw it as a clear departure from the "one-China" policy that has been the foundation of the Sino-U.S. relationship since 1979. To some of China's leaders, Clinton's reluctant O.K. for the trip seriously raised the prospect that Washington is moving toward recognizing Taiwan's independence. And the U.S. didn't help by doing nothing to brace the Chinese. In fact, just prior to Lee's visit, U.S. envoys had repeatedly assured Beijing it wouldn't take place.

In China, the Lee visit quickly escalated into a personal affront to President Jiang. In his campaign to win credibility among China's power elite, Jiang had tried for months to set up a meeting with Clinton. Most recently, he requested such a session when both leaders were in Moscow for World War II commemorations. But he was rebuffed. "When Clinton refused to see Jiang in Moscow, this was seen as a great loss of face for China," says a Beijing economist.

Now, if Jiang doesn't satisfy the Chinese military by taking a hard line on U.S. policy, he will give rivals a chance to discredit him. "For Jiang, political power is more important than anything else," says Shan Li, China economist at Goldman, Sachs & Co. in Hong Kong. "Even economic development is secondary." On July 10, China's Defense Minister went on national TV to rail at "hegemonism and power politics" in clear reference to the U.S.

Beijing is insisting that the ball is in Washington's court, and Chinese officials have indicated that they would like President Jiang to meet with Clinton in September when the Chinese leader visits the UN. "What they really are demanding is an invitation to talk with Clinton," says Huan Guocang, vice-president and senior economist at J.P. Morgan in Hong Kong. "They want assurances from the top that the U.S. is not altering its China policy."

Congressional leaders have their own words for Beijing. Senator Jesse Helms (R-N.C.) and Senator Russ Feingold (D-Wis.) are planning to introduce legislation to revoke China's low-tariff trade privileges. Says Representative Christopher H. Smith (R-N.J.): "The Chinese dictatorship must be told in no uncertain terms that its most-favored-nation trading status is dead as long as Harry Wu is captive." Further turning up the heat, on July 9, House Speaker Newt Gingrich declared that he would support full diplomatic recognition of Taiwan.

With China's trade surplus with the U.S. expected to top $32 billion this year, the backlash among populists in Congress will intensify if Beijing continues to discriminate against U.S. business for political reasons. Ironically, it was President Clinton who last year de-linked trade from politics when he renewed China's most-favored-nation trade status without human-rights conditions.

American companies had been counting on smoother sailing. Of course, investing in China has always had its frustrations, notably Beijing's heavy protectionism and slow pace of approvals. Nevertheless, since 1990, U.S. exports to China have nearly doubled, to $9.3 billion last year. Over the same years, annual investment rose 620%, to $2.2 billion in 1994. Scores of U.S. industries, such as telecommunications, power generation, and aviation are vying for big-ticket deals. Just six months ago, when Beijing agreed to a sweeping intellectual-property agreement with Washington, the doors of China's vast market began to open in such areas as computer software, films, and recorded music.

Now, American companies are targets. Take infrastructure deals such as the one Greiner lost. When Philip Carmichael, vice-chairman of the American Chamber of Commerce in Beijing, asked Chinese officials why Greiner lost the airport contract, they replied: "It's because your government issued a visa to Lee Teng-hui." Adds Carmichael: "Any high-profile deal over $30 million is looked at very critically by the Chinese government now."

Chrysler's minivan deal was well above that threshold. Before the Lee visit, the planned joint venture in Guangdong province was considered Chrysler's to lose. Even so, negotiations had been bogged down for months over Beijing's demands that the auto maker allow its Chinese partner to export its minivans and sub-license Chrysler technology. Mercedes is offering to export 20% of its Chinese-based engines and vans, based on its Viano model, scheduled to be launched in Spain in 1996. The deal also is part of a comprehensive manufacturing and technology-transfer program with Daimler Benz for its buses, trains, planes, and satellites.

LOW TEA. Still, an executive close to the deal says the U.S.-China tensions made it difficult for Chrysler to negotiate a compromise. For such big-ticket projects, he says, "you have to have good relations with the government." And the message from the barrage of snubs and slights U.S. executives are receiving is unmistakable.

In addition to canceled trips from mainland officials to the U.S., American CEOs visiting China rarely sip tea with the likes of Premier Li Peng or other top-ranking officials anymore. Instead, they get lower-ranking officials or scoldings. Red capitalist Rong Yiren, now China's vice-president, gave the "obligatory lecture" on American policy to a major U.S. food-and-beverage company, says Carl Goldstein, China-watcher for Washington's International Strategic Advisors Ltd.

The impact is even felt in the cultural sphere. A U.S. pop-music band, the Flying Burrito Brothers, was refused visas for the Fourth of July party at the U.S. Embassy in Beijing. And when a German company planned to give medical equipment to a Beijing hospital managed by a U.S. charity, the Chinese threatened to call off the donation ceremony. The show went on after the Americans promised to stay away.

For Europeans, it's the best of times. Airbus Industrie, which wants to break Boeing's hold by grabbing half of the Chinese market for imported planes by 2014, recently broke ground on a $50 million training-and-service center in Beijing. And after the Daimler ventures, China is expected to sign deals with other European companies soon.

The European Union isn't sitting still, either. On July 5, European Trade Commissioner Sir Leon Brittan unveiled a program to improve the EU's relations with China. He also called for more flexibility in allowing China to join the World Trade Organization--undermining Washington's demands that Beijing first meet stiff market-access requirements.

While the Europeans run up diplomatic points, getting Sino-U.S. relations back on track won't be easy. At the moment, the two sides are barely communicating. In mid-June, seasoned U.S. Ambassador J. Stapleton Roy abruptly left for a new post, and the Chinese promptly recalled their own ambassador from Washington. The Chinese have yet to give their informal approval to James Sasser, Clinton's choice as the next ambassador to Beijing. As a U.S. senator, Sasser constantly criticized China's suppression of Tibet.

And Congress's China-bashers are still turning up the heat. In the upcoming State Dept. authorization bill, representatives have inserted such provocative provisions as easing restrictions on arms sales to Taiwan and letting Taiwan subtly upgrade the status of the Taipei Economic & Cultural Representative Office, its de facto embassy, by renaming it the Taiwan Representative Office.

By backing Taiwanese independence, congressional leaders such as Gingrich "are going after the single most sensitive point on China's anatomy," warns William H. Overholt, managing director of Bankers Trust in Hong Kong. That could encourage a growing independence movement on the island. Taiwan's opposition Democratic Progressive Party (DPP) has been calling for independence--and gaining political ground. Some fear China would even declare war if the island--still regarded in both Beijing and Taipei as a Chinese province--declared independence.

But unlike China's other thorny disputes with the U.S., Taiwan is nonnegotiable. To most Chinese, the issue touches a nationalist chord. The Chinese military underscored the point in mid-July by conducting air and naval maneuvers off Taiwan's coast. More are expected. The July 11 U.S. decision to normalize relations with rival Vietnam also may fuel China's fears that Washington is trying to contain it.

How much can Beijing afford to pummel U.S. business over political tensions? If China pushes too hard, it will alienate the companies that have long backed its interests in the U.S. American corporations that have the telecommunications, electronics, aviation, and other technologies critical to China's modernization could get cold feet. They may end up viewing investment in China as not worth the risk--and shift capital to other emerging Asian dynamos, such as Indonesia and India.

A GAPING HOLE. China also risks provoking new limits on access to the U.S. market. No matter how hard China works to improve trade ties with Europe and its Asian neighbors, the U.S. absorbs at least one-third of China's exports. In 1995, those exports to the U.S. are expected to hit a record $47 billion. Without the U.S., China would have an enormous current-account deficit. Says Manu Bhaskaran, Singapore-based director at Crosby Securities Inc.: "At the same time they resent nannying from the U.S., the Chinese realize they need the U.S. market."

There still are opportunities for both sides to forge a reconciliation. On July 20, for example, the U.S. and China will meet in Geneva to discuss China's bid for admission to the World Trade Organization. The Clinton Administration may also set up high-level meetings to assure China that the U.S. is not seeking to undermine China's sovereignty. If activist Wu is released, Jiang and Clinton could possibly meet when Jiang visits the UN in September.

For now, though, the signs remain highly menacing. The U.S. and China appear to have entered an unpredictable and critical phase in their relationship. It requires both sides to balance their clashing economic and political goals while maintaining cool heads. "We're very anxious to have a good relationship with China," comments a senior Administration official. "But that can't mean we subordinate our interests every time they conflict with Chinese interests."

Considering the domestic political problems in both countries, it may be too much to hope for clearheaded, long-term thinking from either Beijing or Washington right now. If so, the bumpy ride U.S. companies are experiencing in China could get a whole lot rougher.


Fights over trade, human rights, and Taiwan strain relations

MAY 1993

China is accused of violating its 1992 agreement to stop exporting goods produced by prison laborers to the U.S.


China loses a bid to host the 2000 Olympics after strong protests from Congress.

MAY 1994

-- As the U.S. trade deficit with China soars, Clinton renews most-favored-nation trade status. Commercial issues are delinked from human-rights problems.


The U.S. thwarts China's entry to the World Trade Organization.


-- Under threat of trade sanctions, China bows to U.S. demands for protection of intellectual-property rights involving music and computer software.

-- Jiang and Clinton: The two nations still haven't found a framework for dealing with each other in the post-cold-war era

MAY 1995

-- Clinton yields to congressional pressure and allows Taiwanese President Lee Teng-hui's private visit to the U.S. China's Defense Minister cancels his U.S. visit.

JUNE 1995

-- The CIA charges that China shipped missile components to Iran and Pakistan.

-- China recalls its U.S. ambassador, while America's frustrated ambassador leaves his Beijing post.

-- China arrests human-rights activist Harry Wu, a U.S. citizen.

JULY 1995

-- China holds military exercises off its coast, causing jitters in Taiwan.

-- The Shanghai mayor cancels a trip to meet business execs in New York. President Jiang Zemin tours a Mercedes plant in Germany and hands Daimler Benz a $1.2 billion minivan-and-engine deal. Chrysler had been the front-runner.

How the China Problem Hurts Corporate America

CONTRACTS LOST Political tensions have cost Chrysler and Greiner Engineering big deals. Other major ventures are at risk.

EUROPEANS FAVORED Now that Mercedes has replaced Chrysler as the front-runner for a huge minivan deal, other European companies are poised to grab major contracts.

CANCELED TRIPS United Technologies officials in

Beijing note that the Chinese canceled a procurement trip, and IBM says Beijing has put off many visits.

POLITICAL LECTURES CEOs visiting Beijing are warned of China's deep displeasure with American policy.

MEETINGS DOWNGRADED Senior U.S. executives

are finding it difficult to meet with the top leadership.

Chinese officials are sending low-ranking representatives

to U.S. business receptions.

U.S. RETALIATION U.S. executives worry that Congress could stir up the debate again over China's most-favored-nation trade status.


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