Bush to Extend Favored Trade Status for China : Diplomacy: He argues that isolation will not bring change. Export of missile technology is banned.

President Bush, arguing that isolation will not make China change, said Monday he will renew the trade benefits granted to that nation by the United States. But he also said he will ban the export of missile technology and equipment to China because of what his Administration says are Chinese violations of regulations barring transfer of such equipment to third nations.

The President’s decision, announced in a major speech addressing the widening but troubled scope of U.S.-Chinese relations, is certain to plunge him into a new battle with Congress. In anticipation of Bush’s announcement that he would grant most-favored-nation trade status to China, members of Congress have introduced five bills that would make the extension conditional on China demonstrating greater respect for human rights.

Countries with most-favored-nation (MFN) status may export goods to the United States with the same low tariffs available to most other U.S. trading partners.

Bush made his announcement just one week before the second anniversary of the Chinese government’s violent crackdown on pro-democracy demonstrators in Beijing. He had until June 3 to decide whether to extend the trade status for another year.

Delivering a commencement address at Yale University, from which he was graduated in 1948, the President said U.S. policy toward China must encourage democratization there through increased Western contact, rather than seeking to punish China through isolation.

“We want to advance the cause of freedom--not just snub nations that aren’t yet wholly free,” he told about 2,800 new Yale graduates, their family members and faculty crowded into a quadrangle on Yale’s Old Campus on a breezy spring afternoon.

Bush addressed anticipated objections from Congress: “Some argue that a nation as moral and just as ours should not stain itself by dealing with nations less moral and just. But this counsel offers up self-righteousness draped in false morality. You do not reform a world by ignoring it.

“When we find opportunities to cooperate with China, we will explore them,” he said. “When problems arise with China’s behavior, we will take appropriate action.”

He added: “It is right to export the ideals of freedom and democracy to China. It is right to encourage Chinese students to come to the United States and for talented American students to go to China. It is wrong to isolate China if we hope to influence it.”

Bush used the words moral and morality 10 times in his speech as he sought to explain what he acknowledged is a “controversial” decision.

At the heart of the Administration’s thinking is that China, with one-fifth of the world’s population, plays a central role in Asian-Pacific stability, and its votes in the U.N. Security Council were crucial to the United States’ effort to present a united front against Iraq in the Persian Gulf War.

“The real point is to pursue a policy that has the best chance of changing Chinese behavior. If we withdrew MFN or imposed conditions that would make trade impossible, we would punish South China; in particular, Guangdong province, the very region where free-market reform and the challenge to central authority are the strongest,” the President said.

He added that placing higher tariffs on Chinese exports to the United States by denying it the favored trading status would jeopardize the jobs of 2 million Chinese workers and “deal a body blow” to the British colony of Hong Kong, through which much of the commerce flows.

Administration officials also argue that denial of the trade status to China would bring about sharp increases in the U.S. price of such Chinese-manufactured goods as shoes, sweaters, stuffed toys and fans, among other products. In some cases, the tariffs, which are passed along to consumers, would jump from 6.8% to 70%, Administration figures indicate.

Similarly, they argue that China would retaliate against the United States, which ships roughly $3.5 billion worth of agricultural products, aircraft equipment, fertilizer, computers, chemicals and timber products to China.

Bush Administration officials said that Chinese shipment of missile technology and equipment to Pakistan, which is believed to be working on the development of a nuclear warhead, triggered Bush’s decision to restrict the exports.

“For the sake of national security, we will ban technologies and equipment to any Chinese company found to violate rules outlawing transfers of missile technologies,” Bush said in his speech.

The shipment involved launchers for the M-11 missile, a relatively short-range weapon that can pass the prohibited range of more than 300 miles only after undergoing special modifications.

Administration officials emphasized the difficulties the missile decision will pose for China. As a result of the decision, one Administration official maintained, China will be denied the U.S. technology and equipment needed to launch nine satellites over the next three years. However, the material for two such launches was said to be already in China’s control, and the equipment needed for subsequent launches remains available from other Western sources.

This will mean, the Administration official said, that “no new satellite licenses will be issued to China until we’ve satisfied our missile technology control concerns.”

Speaking on the condition of anonymity, the official said that “as of today,” the Commerce Department will deny 20 pending license applications submitted by U.S. companies for permission to ship to China high-speed computers worth $30 million. The computers were being sought by the China Precision Machinery Import-Export Corp., a government-controlled organization that buys missile technology overseas.

The technology includes everything from explosive bolts to top-of-the-line computers needed to test equipment, direct missile launches and send satellites into orbit.

The decision, the official said, will have “a pretty substantial impact on the satellite program.”

Undersecretary of State Reginald Bartholomew is being sent to China next month on a long-planned trip, during which he is likely to discuss the new limitations, the official said.

Speaking with reporters in Portland, Me., Senate Majority Leader George J. Mitchell, one of those who have sponsored legislation to impose conditions on China for the renewal of trade benefits, characterized the President’s policy as “without any moral or logical basis” and said that the missile technology sanctions were “a joke.”

“I’m sure the Communist Chinese leaders are right at this moment celebrating,” he said. “What is especially offensive about the President’s statement is he seeks to clothe an immoral policy in moral terms.”

Thirty days after Congress receives formal notification of the decision, which will probably occur later this week, it will have 60 days to adopt a joint resolution of disapproval to turn the decision aside. Bush can then veto the joint resolution. A two-thirds majority of each house would be needed to override the veto, thereby denying the special trade status.

Should Congress take no action, the decision would go into effect automatically after 90 days. The denial of the missile technology licenses is by executive order and goes into effect immediately.

Mitchell said that a majority in Congress opposes the policy, but “whether it’s a two-thirds majority I don’t know.”

In visiting Yale, the President interrupted an extended Memorial Day holiday at his summer house in Kennebunkport, Me., where he has been relaxing and regaining his energy while undergoing treatment for his recently diagnosed overactive thyroid condition. On Sunday, he played 27 holes of golf. He had planned to play another round Monday after returning to Maine but remained at home with guests.

Bush’s visit to the campus, where he was captain of the varsity baseball team 43 years ago, prompted scattered protests of his Persian Gulf and domestic policies.

Times staff writer Jim Mann in Washington contributed to this report.