China Shoves Back

Beijing is taking a hard line as the U.S. threatens trade sanctions

Inside the walls of Zhongnanhai, Beijing's exclusive leadership compound, the grounds are immaculate, and peach blossom petals drift onto a calm lake. But despite placid appearances, this is command central for hardball policymaking--particularly toward the U.S. Reacting to the perceived weakness of the Clinton Administration, a more assertive Chinese leadership is fed up with a U.S. foreign policy that harps on trade issues and intellectual property rights but avoids crafting a broader, overarching China policy. Irritation over the U.S. decision to deploy two aircraft carrier groups to defend Taiwan in March also has clearly changed the tone in Beijing.

The tougher stance appears to reflect the confidence of President Jiang Zemin and other top leaders that China is managing its internal challenges and can stand up to U.S. pressure tactics. On Apr. 19, Jiang told a small group of foreigners, including BUSINESS WEEK editors, that while he wants "sustained, rapid, and sound growth," competing pressures from both poor and wealthy provinces are prompting him to find a middle ground. "I have to wear a conservative hat always," he says.

The Clinton Administration has already agreed to give China what it wants most, most-favored-nation (MFN) trading status. But it could slap China with $2 billion in tariffs for ripoffs of U.S. software and similar products. And Congress could adopt selected sanctions that President Clinton could find difficult to veto in an election campaign year.

But the Chinese position is increasingly that the U.S. lacks the power to make any serious economic pressure work because of the huge interests of U.S. business in China. "You can resort to the hardest possible line with the outside world when you know you can do anything you want," says Martin Lee, the chairman of Hong Kong's Democratic Party and a leading Beijing critic. "With a market of 1.2 billion people, they know they will get what they want."

From an armchair in the Purple Light Pavilion, Vice-Premier Li Lanqing, a 64-year-old technocrat and potential premier, is the messenger for this harder line. Knocking his fists together during an interview with BUSINESS WEEK editors, he scolds Washington for its mixed signals and demands to know where the U.S. stands. "If you want to fight with us, you had better let us know," he says.

"UNENFORCEABLE." Following the flap over Taiwan, Beijing's leaders are threatening to retaliate for any U.S. sanctions, even selective ones. Li signaled that China may increase trade with Europe and Japan--or perhaps go as far as to create a protectionist East Asia trade bloc. "No matter how the U.S. reacts, sooner or later China will be politically and economically powerful," says a Chinese economist. "The choice is to be on good terms instead of being hostile."

Despite those threats, the Administration is readying punitive tariffs on billions of dollars worth of toys, clothing, and other goods from China for its failure to enforce a 1995 intellectual piracy accord. Some of the other sanctions (table) under consideration in Washington are clearly aimed at giving Congress and the Administration political "cover" for renewing China's MFN status, probably without any conditions. To avoid giving China critics running room, Democrats are urging the President to inoculate himself against charges that he's soft on China by taking a tough stance on non-MFN issues. A major guessing game: where Senate Majority Leader Bob Dole (R-Kan.), the GOP's Presidential candidate, will come down on the China debate.

One widely considered alternative in Congress would end Uruguay Round benefits for China, costing it about $1 billion. A second: ending preferential duties on goods made by companies controlled by the Chinese military. But determining the origins of many Chinese businesses could be a nightmare. "It might feel good to target the Chinese army, but it's probably unenforceable," says one GOP House staffer. A third: House Minority Leader Richard A. Gephardt (D-Mo.) is among those who want Congress to approve terms of China's entry into the World Trade Organization. Others would accelerate Taiwan's accession to the WTO.

AMERICAN SCHIZOPHRENIA. None of these moves would persuade Chinese leaders to shift policy. Nor would they put much of a dent in China's soaring trade surplus. Tariff increases against stuffed teddy bears, for example, will not force China to release political prisoners or to close down more compact-disk piracy factories.

But U.S. business leaders warn that those moves could prompt the Chinese leadership to penalize major American companies competing against both Japanese and European rivals for huge deals in China's market, which is enjoying economic growth of more than 10%. "The Chinese see all these measures [in Washington] as tantamount to declaring economic war and, in the case of Taiwan, as undermining our one-China policy," says one corporate lobbyist.

Premier Li Peng's recent deal to purchase Airbus Industrie jets instead of Boeing Co. planes is a case in point. Boeing and other companies are attempting to soothe the Chinese leadership, while discouraging Washington from taking actions that will roil the waters. "It strikes me as impossible to approve [Boeing sales] given the overall climate of uncertainty between the two countries," says Ronald B. Woodard, president of Boeing Commercial Airplane Group.

Reflecting the underlying American schizophrenia toward China, such commercial arguments don't cut much ice with the anti-China critics seething about Beijing's dismal human-rights record, its bullying of Taiwan, and its trafficking in missile and nuclear technology to Pakistan. "For us to do nothing and just renew MFN without conditions would be a moral issue," says Virginia Republican Frank R. Wolf. Adds a top Democratic staff member: "The climate has changed. People are looking for some sort of alternative [to MFN revocation] that has currency."

Thus the Washington debate over China's trading privileges is more than just a rite of spring. It is a sign of a deepening U.S. quandary about how to respond to China's growing economic and military power. Clinton's policy of "constructive engagement" is not widely seen as being effective. As a result, some policymakers are calling for an end to destructive rounds of trade battles.

But the Americans seem at a loss on how to achieve a broader, more effective engagement with Beijing. The key question now is whether election-year politics in Washington will combine with rising assertiveness in China to throw the relationship into an even deeper tailspin. A crucial test of will between two superpowers could be just beginning.

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