The New Trade Superpower

On the political front, U.S.-China relations seem headed for a thaw after a long, frigid summer. The rapprochement ranges from new U.S. reassurances that it won't upgrade relations with Taiwan to Chinese promises to halt a sale of nuclear equipment to Iran. President Clinton even plans to meet with Chinese President Jiang Zemin in late October in New York.

When it comes to economic issues, however, there's trouble ahead. China's trade surplus with the U.S. is expected to hit a record of $40 billion this year. And if current trends continue, China will surpass Japan's $66 billion surplus with the U.S. before the end of the decade.

DISDAIN? In fact, U.S. economic policymakers believe that China may have already eclipsed Japan as America's No.1 trade headache. China's quasi-socialist mega-economy combines a mercantilist industrial policy with disdain for international norms, critics say. "I see a problem of immense proportions," says one senior Clinton Administration official. "[China] is a far more formidable economic concern for us than Japan."

Why are U.S. officials coming to this sudden recognition? One reason is the massive relocation of export industries from Hong Kong, Taiwan, and South Korea onto the mainland. Virtually the entire Hong Kong toy, watch, and garment industries are now in China. Taiwanese producers of Nike and Adidas shoes also have shifted output to China. The latest wave of relocations features compact-disk players, cellullar phones, portable stereos, and personal computers. That's partly why U.S. trade imbalances with Asia's Tigers are improving, while the deficit with China is worsening (charts).

It's also increasingly clear that the Chinese intend to use American and European investments to put themselves on the map in such export industries as autos and auto parts, semiconductors, and telecommunications gear. Ford Motor Co. says its new venture with Jiangling Motors Co. will produce minivans, not only for the Chinese market, but also for sale overseas. As Ford and General Motors Corp. compete for a $2 billion Shanghai family-sedan joint venture, they are both investing in the Chinese parts industry, raising the chance that Chinese vehicles and parts will reach international standards.

In short, China's export surge is just getting into gear, and already the surpluses with the U.S. have reached painful levels. That's a problem for Clinton, who has made opening markets the centerpiece of his foreign policy. U.S. officials' biggest worry: a vigorous assault next year on China's most-favored-nation trade status by an alliance of China critics and economic nationalists on Capitol Hill. "MFN is going to be in real jeopardy next year if China doesn't open its doors more to U.S. companies," says one political adviser.

The stakes for U.S. business are enormous. China's sheer size makes it impossible for multinationals to ignore. "Any international company that's not planning to do something in China is probably missing a bet," says J. Tracy O'Rourke, CEO of Varian Associates Inc., a California manufacturer of medical equipment. "It's like the frontier of days past."

But there's a dark side to China as the Wild East. In dealing with problems ranging from opaque licensing requirements to pressure to transfer technology, U.S. executives are discovering that China intends to limit imports while creating new rivals. "The Chinese are 10 years behind us," says one high-tech executive, "but if they can force us to take on partners and export our production, they'll build up the technology and capital eventually to compete with us."

That's why Corporate America is foursquare behind the Administration's insistence that China should be allowed to join the new World Trade Organization (WTO) only if it agrees to accepted international commercial rules. "We don't want them to be at the party without meeting their real global responsibilities," says Dana G. Mead, CEO of Tenneco Inc. and chairman of the National Association of Manufacturers.

Conditions for China's entry into the global trade system and other tough issues will come to a head in mid-October when Deputy U.S. Trade Representative Charlene Barshefsky visits Beijing. Barshefsky will turn up the heat on China's leaders to fulfill past pledges to halt counterfeiting of U.S. software, movies, books, and music recordings. She will also press for better access to China's markets for U.S. telecommunications and insurance providers and for elimination of unscientific standards that keep out U.S. wheat and citrus fruit.

Although some U.S. hawks argue that Washington should push much harder, that risks igniting a Chinese backlash. Chinese experts argue the solution is to admit China into the WTO and draw it into a deeper embrace, encouraging it to gradually open protected industries. They warn that any tougher steps will deepen fears that the U.S. is conspiring to "contain" China. "People are thinking, `The Americans keep asking for more and more,"' says Hai Wen, deputy director of the China Center for Economic Research at Beijing University. "This is becoming interference in our national independence."

But Beijing also has made a bad situation worse through its own failings. It hasn't been able to effectively police transshipments of textiles. Huge quantities of clothing made in China are relabeled "Made in Hong Kong" or other countries, all aimed at circumventing U.S. textile quotas. Beijing's crackdown on counterfeiting of U.S. intellectual property has been lackluster, at best.

ALARM BELLS. It is the Chinese strategy to enter newer high-end industries, however, that is helping to set off the latest alarm bells in Washington. China used to import up to 10,000 autos a year, placing its orders in high-profile shopping sprees timed for the annual spring debate over MFN. But since the Administration delinked China's trading status from progress on human rights, Chinese officials have virtually choked off auto imports.

Instead, Beijing is pitting Ford, GM, and other big automobile manufacturers against each other in a bidding war designed to transfer technology. "These companies are being pressured to build up their eventual competitors," says Greg Mastel, senior fellow at Washington's Economic Strategy Institute.

U.S. trade officials vow to keep the pressure on China to make good on its commitments. Their leverage? Blocking Chinese entry to the WTO until Beijing agrees to play by global rules. Says one top U.S. official: "We cannot allow to happen [with China] what happened with Japan for four decades--sanctuary markets at home and an open U.S. market."

For once, the Administration appears to be speaking with a single voice. At his Sept. 27 meeting with Foreign Minister Qian Qichen, Secretary of State Warren M. Christopher pointedly told his Chinese counterpart that he would have to deal with U.S. Trade Representative Mickey Kantor on trade matters. "It was a way of letting [the Chinese] know there would be no court of appeal" to the usually more sympathetic State Dept., says one U.S. official. Clinton also will have an opportunity to keep trade on the table if he meets Jiang in October. As Washington is starting to recognize, this is one battle that is just beginning.