FOCUS : What Cutting Off China’s Trade Status Would Do : Asia: Analysts say removing its most-favored-nation status would hurt moves toward capitalism and would not erase the U.S. trade deficit with Beijing.

Richard Brecher, director of business advisory services for the U.S.-China Business Council, a Washington-based group representing American firms with financial interests in China:

If the MFN is not extended, the (American) business community would be damaged in a myriad of ways. If you’re an exporter and you’re selling to China, it’s most likely that China would retaliate against U.S. products. We would become the source of last resort (for China), and there are alternatives to American-made goods in most cases.

If you’re an investor with a joint venture project in China and you’re shipping (supplies) from the United States, those goods would be hit with tariff and import restrictions.

While the United States uses tariffs as the principal means of managing trade, China relies more on an import licensing system. It would be far easier for them to deny import licensing for goods from the United States. The net effect would be a drastic reduction in trade.

A drop in trade would hit (American) consumers in a variety of areas. It would hit low-income Americans harder than others because they are more dependent on the sort of cheap goods we import from China--particularly footwear and textiles. Most of the low-budget footwear in the United States is sourced from China. Retailers could shift their sourcing to low-wage sites in Southeast Asia, but until they adjust, prices will go up. We also import toys and electrical appliances like radios and toasters from China.

Elements of the Chinese economy would be devastated. The part of the economy that would be hit hardest is the most market-oriented, export-oriented segment of the economy--primarily located in South China. Many U.S. companies and Hong Kong firms representing American companies have operations in South China.

By eliminating MFN, we would stifle (South China’s) push for a market economy for their country. Such an action would also strengthen the state-controlled economic sector, which opposes more trade and interaction with the global economy.

If the MFN is eliminated, the winner would be state-owned enterprises and the hard-liners in the central government who want increased centralized control of the command economy. The losers would be the export-oriented enterprises in South China that want to compete in world markets.

Nicholas Lardy, economist and professor of international studies at the University of Washington:

The view that the U.S. deficit with China is going to go from $10 billion last year to $15 billion this year is unrealistic.

Three factors led to the Chinese trade surplus with the United States in 1990. First--and most important--was the reaction of financial institutions after (the Chinese government crackdown on pro-democracy dissidents in) June, 1989. World Bank and Asian Development Bank lending was curtailed, and the commercial sector seemed to be following suit. As a result, China did not have the same access to credit markets that it had in the past.

Given the fact that China has external debts, the Chinese had two choices--they could run a trade surplus or they could default on their external (debt) obligations. They chose the former . . . and ran a surplus--particularly in 1990.

Now that World Bank lending has resumed to some extent and a modest amount of Asian Development Bank lending has resumed--along with some increase in commercial credit--China will have the funds to purchase more goods. My prediction is that if MFN is continued, the deficit will decline.

The second factor in the trade surplus was the significant slowdown in China’s economic growth beginning in 1989 and continuing into 1990. That meant that demand for imports on the Chinese side was falling substantially.

The third factor was significant devaluation of the currency that occurred at the end of 1989 and the end of 1990, which limited China’s buying power.

We’re in a period when economic factors are moving China into a situation in which it is unlikely to have the record trade surplus it had in 1990. Denying China MFN status should not be seen as having any significant positive affects on our overall trade deficit. Our overall trade deficit has been coming down partly because of a decline in the value of the dollar, which makes U.S. products more affordable abroad.

There are adequate provisions for penalties and sanctions that can be imposed on China if the progress (on specific trade disputes) is inadequate. MFN is a gigantic weapon. If (MFN) is eliminated, the fabric of the entire trade relationship could be destroyed. If you take away MFN because of dissatisfaction with China over certain trade issues, you may reduce your leverage. Once you take MFN away, what would you do next?