China Trade Outlook Better Than We Think

For once it makes sense to accentuate the positive. Results of trade negotiations last week between U.S. and Chinese government officials looked bad. They failed to achieve full agreement on China’s access to the World Trade Organization.

But the outlook is better than the first impression. The talks passed several milestones in relations between the two countries and set the stage for successfully bringing China’s economy later this year under the regulatory body that governs commerce among the nations of the world.

Why is that important? Because membership in the WTO can help China reform its economy and help U.S. business by opening and expanding markets.

And because an agreement can help the U.S. deal more realistically with China and dispel some of the demonization of that country that threatens healthy relations. We need to understand the stakes.

An “anti-Chinese” political atmosphere in Washington hurt last week’s talks, said China’s Premier Zhu Rongji, who is on a nine-day visit to the United States.

Zhu’s basically right. The Clinton administration, politically weak to begin with, feared that Congress would reject any agreement because of opposition to China on all sorts of grounds, ranging from human rights abuses to allegations that China stole U.S. technological secrets.

The atmosphere of suspicion has already resulted in cancellation of an export order for a Hughes Electronics satellite. It threatens to make the U.S. retreat from engagement with China, a policy shift that would be counterproductive for both nations.

But eventual success on trade could return U.S.-China relations to a healthy course and open great possibilities for the future. The stakes are high, and the issues are complex.

China’s economy this year will produce roughly $937 billion in goods and services, less than the economy of California. Over China’s 1.2 billion population, that works out to $780 a year of gross domestic product per person.

That doesn’t sound like much, but it’s light years away from China’s economy 20 years ago, when reforms began with Deng Xiaoping telling farmers they could keep some of the money from selling their crops.

Agricultural output rose dramatically. Villages formed cooperatives, which became engines for almost two decades of rapid economic growth. Living standards rose, creating a growing middle class in China’s larger cities, for the first time in its history.

But China’s economy has slowed lately. Morgan Guaranty Trust estimates that growth this year will be 6.5%, followed by 5.8% next year.

With the middle class demanding more progress in living standards, Zhu and his government colleagues are under pressure. That is why the 70-year old former mayor of Shanghai has instituted economic reforms and pushed for China’s access to the WTO.

Zhu knows that opening China’s inefficient state-owned companies to international competition will hasten their reforms; opening China’s financial markets will help create the home mortgages Zhu wants so that Chinese workers can buy their own apartments.

“It is time for China, a big player and integral part of the global economy, to begin opening its industrial and financial markets,” says Charles Wolf, senior economic advisor to Rand Corp., the Santa Monica-based research firm.

But China’s development is not simply an economic question. The country is an ambitious, emerging world power. Officially China’s military spending is 1.1% of its gross domestic product, which works out to $10.3 billion a year at present.

But as in the Soviet Union before it, China’s military spending is undoubtedly larger, spread through budget items for science and industry and telecommunications.

So the serious question behind U.S. opposition to China is how to have healthy and growing economic relations and yet keep a guarded posture on goods and services with potential military value.

The answer is to divide the issues, says Rep. Christopher Cox (R-Newport Beach), head of the House national security committee that investigated leakage of military technology to China.

“We can deal with trade issues on sound commercial terms,” says Cox. And guarding against improper shipments of military goods and information, Cox says, is simple: “The U.S. should have a sturdy counterintelligence policy.”

The division makes sense for Cox, whose Orange County district has many small high-tech firms that count China as a good customer.

And it makes sense for the U.S. as a whole because the modernization of China’s economy is in everybody’s interest. For decades, the U.S. has nurtured the development of Asian economies by buying their imports. It still runs a large trade deficit with Japan and is now running a growing deficit with China.

That can’t and shouldn’t continue. The U.S. needs vigorous economies in Asia to buy the sophisticated goods and technology, as well as the agricultural produce, it has to sell. Trade has to become a two-way street.

And economies must develop along more fiscally disciplined lines, so that they can attract and use international investments--from U.S. pension and mutual funds and those of other countries.

China, for one, needs to reduce its economy’s dependence on state bank loans and put in place financial structures for more equity investments, says economist Wolf.

China, a very entrepreneurial Communist-led country, understands that. Share ownership is a goal of Zhu’s economic program. And companies in China are trying to learn corporate finance. Next month, teams of graduate business students and professors from USC will study companies in Shanghai and Nanjing and advise them on financial and operational structures.

Such reaching out for knowledge is typical of China. Businesspeople from Southern California are called upon regularly to consult with Chinese institutions on matters ranging from energy efficiency to health insurance.

An increase in such contacts as well as business for U.S. companies is what WTO access promises to bring about.

Last week’s negotiations were notable for the concessions China made in high-tech goods and in services, including insurance, telecommunications, legal, accounting, computers and business services. Those are just the kind of services that U.S. companies from American International Group Insurance to Microsoft want to sell--and are selling--in China.

In all considerations of China’s emerging economy, we need to keep different questions in perspective. The future of China’s military is a major strategic question, relating to Japan, the Philippines, the whole U.S. posture in Asia and the world.

Trade won’t solve or offset whatever military disputes arise--nor will growing prosperity necessarily foster democracy in China. But trade can further understanding, and prosperity can spread political freedom. That’s why James A. Baker III, former secretary of state, wrote last week that “China is the most important bilateral relationship the U.S. now has.”

More than we think is riding on the trade talks.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.