Sweeten the Carrot, Ease Up on the Stick : China: Set a longer time period for change to occur and to hold back high-tech items for which the U.S. is a key source.

In choosing to extend most-favored-nation trade status to China for only one year and keeping it on a conditional basis, the Clinton Administration created at least two dilemmas. The first is: What will the United States do in June, 1994, if the Chinese leadership continues with its current strategy of tight, authoritarian political control combined with capitalist economic development?

With an average annual growth rate of more than 10% and political dissent under close wraps, Beijing is unlikely to be impressed with new, brave talk from an Administration that has already retreated once. It is also reasonable to assume that the Communist Party hierarchy thinks it has an effective balance of policies and will stick with them despite international criticism.

Hence, the United States faces a classic choice between “values” and “interests.” It seems cumbersome to try to resolve this by setting an annual MFN time bomb that has to be repeatedly defused. Since we now have a year to think about it, can’t the United States come up with a better technique for pressing our legitimate concerns about political repression without making implausible threats that we are going to cut off important trade benefits?

It is more reasonable to set a longer time period for change and to hold back specific high-tech items for which the United States is a sole or key source. In this way, the Chinese would not feel they are put through an annual charade and the United States would have a tangible sanction.

The second and far more important dilemma comes from avoiding the question of how we should formulate a principled but effective long-term policy toward China. In the midst of the annual hand-wringing over MFN, many Americans lose sight of possible future complications. It is frequently argued that the best way to undermine the power of Beijing’s autocrats is to maintain economic growth and create an expanded middle class that will seek political rights and protection. The historical examples used for this analogy are the rise of the middle class in Europe and the gradual transition to democracy in Taiwan and South Korea. The problem with this argument, however, is that neither Taiwan, South Korea nor Western Europe in the 19th Century had a committed Leninist leadership.

China has given up Marxism but kept the techniques of tight political control advocated by Lenin. The Chinese government is basing its legitimacy on economic performance and betting that the public will not demand full democratic participation in political decision-making even while economic choice is increasingly free. It is well-known that Beijing’s political class is contemptuous of former Soviet President Mikhail Gorbachev, seeing him as a disastrous figure who allowed his country to disintegrate without laying the basis for economic growth. Not surprisingly, China’s Leninists see democracy as a gamble well worth postponing.

China’s economic performance is stunning. For decades, development economists said large nations were unsuited for the specialization and trade orientation that made the East Asian “dragons” grow so quickly. Nevertheless, once China got past Maoist ideology, it followed a time-tested approach: high savings rates, high levels of private sector investment and governmental decontrol. The model province is Guangdong (next to Hong Kong) where entrepreneurship is dominant, foreign investment is almost doubling every year, and GNP grew at 21% in 1992.

How will the coming Chinese economic colossus affect the United States? Should it trouble us? Not if China is going to be devoted predominantly to economic development. Then, our concerns can focus on such manageable issues as China’s surging trade surplus and specific irritants like protecting intellectual property rights and appropriate guidelines for technology transfers. Although U.S. exports to China are growing at about 20% per year (indicating a relatively open market), Chinese imports here are growing at 25% a year. If that type of imbalance continues for a decade, we could well have a repeat of our trade crisis with Japan.

The real challenge will come if China’s leadership stays Leninist and combines the current economic boom with a drive for superpower military status. China’s military modernization and interest in sophisticated weapons are significant. Given our inability to predict which direction Beijing will take, we need to identify and weigh our competing concerns. A democratic, low-profile China is the most desirable outcome, but not very likely. Trade and human-rights dialogues might influence Beijing, but we need to be prepared if we are rebuffed. A short-term focus on MFN could well distract us from dealing with the bigger items coming in the 21st Century.