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The Fundamental Things Remain....

Dealing with the Asian financial crisis calls for reasoned US commercial policy and stable US-China relations

Robert A. Kapp

The line, of course, is from Dooley Wilson's immortal performance in "Casablanca." The rest of the line--and the name of the song--is "As Time Goes By." The song comes to mind as we enter an uncertain springtime of complex and confusing trends.

Among those tangled threads:

The Asian economic crisis This is now International Economic Issue Number One. The fallout from regional currency collapses is spreading. A major US political battle is shaping up over proposed legislation to enhance US support for the International Monetary Fund (IMF). Indeed, the debate over IMF replenishment may push some more narrowly China-focused legislative issues into the shadows this spring.

In the context of very troubling Asian economic difficulties, China has performed as a responsible world economic power, pledging in the most vigorous terms--and in spite of certain economic pain--not to pitch the struggling economies of the region into another catastrophic round of reciprocal devaluations by lowering the exchange value of the renminbi.

The importance of China's position to regional and, indeed, global economic health has been brought home to Americans by the high-profile engagement of key Treasury Department officials with China's top economic leaders. Here at home, in her address to the US-China Business Council's "Forecast '98" conference in Washington, DC, in late January, US Trade Representative Charlene Barshefsky took note of China's "most constructive role with respect to the current crisis." She added, "We think [this refusal to devalue] is very positive and constructive on the part of China."

While such matters as US commitments to the IMF do not normally fall within the scope of this Council's focus, it is worth wondering aloud: isn't there something inconsistent about calling on China to refrain from lowering the exchange value of its currency in the interests of broader Asian economic stability, while the United States itself hesitates to commit itself to support of the IMF instrument at the forefront of the battle against the Asian meltdown? If that inconsistency prevails, what implications does it hold for our persuasive power in the crucial trade dialogue with China?

The uncertain future of China's trade surplus with the United States Yet another respectable study, this time by economists at the University of California at Davis, has found that the PRC's real 1996 merchandise trade surplus was roughly $20 billion--neither as large as the US government claims ($39 billion) nor as small as the Chinese government claims ($10 billion). Still, the surplus remains politically volatile in the United States. The questions for 1998 are, will it rise or decline year-on-year and, as other struggling Asian economies increase their exports to the United States, will the China-US trade imbalance be as politically conspicuous as it has been in recent years? There is at least a possibility that China's annual surplus with the United States will turn downward, according to some specialists, and it seems inevitable that it will stand out less achingly as exports from nations with devalued currencies rise.

US-China relations in 1998 While the opening of the new congressional session augurs for renewed fiery exchanges over US China policy (and over broader US foreign policy issues in which China looms large), the file folder of positive news and favorable developments is actually much fuller this year than it was 12 months ago.

The end of February 1997 saw the extraordinary outburst over China from both ends of the US political spectrum. There is every likelihood that something will come wafting out of the mists again this spring. But in fact, the two governments are moving ahead on a number of fronts. A US presidential visit to China is expected before the end of the year and, already, some issues that might have turned nasty have been deftly deflected without major impact. Even the intricate ballet of PRC-Taiwan relations, so difficult for third parties to fathom and interpret on a day-to-day, communique-by-communique basis, appears to be on "simmer," not "boil." It will require some new brouhaha of extraordinary proportions for American pundits, policy pontificators, and political pros to fall back into the "Coming Conflict With China" frenzy of last spring.

China's extraordinary domestic challenges Those who still bravely argue that the PRC remains unchanged (some critics hold that it has remained essentially unchanged since the 1950s, and many seem to believe it has not changed since the days of the Cultural Revolution) will have a very difficult time defending their positions this year. The millions of layoffs already effected, and the many millions to come, are irrefutable evidence of the PRC's fateful decision to try to come to grips with the economic catastrophe of the money-losing State-owned sector and the concomitant looming crisis of the banking system.

The outcome of this massive economic gear-grinding exercise cannot be foreseen in detail. Estimates of overall PRC economic growth for 1998 have been revised downward, even as most Western observers assert that something on the order of 9 percent is needed simply to sop up the excess labor resources in the economy. Continuin g pluralization of industrial ownership forms, likely to be further advanced by the upcoming National People's Congress, runs up against the ancient and endemic problem of the central government's struggle to command regional and local adherence to national laws and policies. Just one day before Deputy Secretary of the Treasury Lawrence Summers arrived in Beijing to secure the central government's commitment to economic caution in the midst of the Asian crisis, the presumptive premier and top economic policy figure, Zhu Rongji, was in Guangzhou, berating South China's provincial and local officials for their failure to adhere to Beijing's instructions.

In other words, China is in particular institutional and economic flux in 1998, as a combination of domestic and external forces impinge on the making of coherent policy commitments.

The saga of China's World Trade Organization (WTO) accession The subject is always with us. Many American businesses are intensely impatient over the nearly endless negotiations. Others are determined to ensure that China's accession terms meet their concerns, and that their business sector not be sacrificed at the final negotiating table. Over the heads of US negotiators floats the specter of the Congress, and the stern requirement that any US-China WTO agreement be able to withstand ruthless scrutiny in a Congress that ultimately must make the crucial decision to grant China permanent MFN. Whether Congress's late-1997 rejection of so-called "fast-track" negotiating authority for the White House turns out to be the declaration of all-out cultural revolution that some fast-track opponents have gleefully dubbed it remains to be seen. But that vote certainly emphasized the reality that Congress will only implement controversial trade policy when the White House and pro-trade advocates have an overwhelming case.

In fact, there has been significant cumulative progress in US-China WTO negotiations. Our Chinese friends have a point when they urge us to recognize more fully the major commitments that they have already made. Now, the emphasis increasingly is on what remains to be done, rather than on where to begin. Moreover, the intensity of both countries' WTO efforts is clearly up.

But time does go by. The staple public lines ("commercially viable," "not if the price is too high," etc.) have long since lost their novelty. Periodically, someone from a third country comes out with a bright assertion that China's WTO negotiations have "entered the final phase"; ears quiver, eyebrows rise, and then the stillness settles in again. There is much left to do; it cannot be swept away by force of personality or wishful thinking. If anyone, in either camp, knows for sure where the two sides will be by any future date certain, the secret is exceptionally well kept.

Optimism among US businesses Meanwhile, we recently took an utterly unscientific and haphazard poll of our members' expectations, and the news is very good. Every year, at the Council's Forecast conference, I ask for a show of hands among several hundred businesspeople on the question, "Was your China business last year better than/roughly the same as/worse than the preceding year?" I also ask for hands on the question, "Do you expect the coming year to be better than/roughly the same as/worse than last year?" This crude survey was interesting this year: most people indicated 1997 was better than 1996, but a significant minority of hands (maybe 20 percent) said that 1997 was either no better than or worse than 1996. But on the question of how our audience viewed 1998 as against 1997, nearly every hand rose to signify "1998 will be better," and virtually none said "1998 will be so-so or worse than 1997."

The fundamental things remain, as time goes by. Patient, firm pursuit of stronger US-China economic and commercial engagement, rooted in stable policies and enforceable international commitments, is the vital prerequisite to broad advancement of US interests with China in a global context. The predictable assertions, sure to be heard in the next few months, that crippling US-China trade will bring about a new socio-political order in China are no more valid today than they were a year ago, no matter who makes them. We should hear such claims respectfully. But the fundamental things remain.

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Last Updated: 7-Mar-98