Stability of China Is Paramount U.S. Interest, Delaney Says

November 6, 2003
Delaney reminded students about how much China has modernized, despite having to manage change in a population of nearly 1.4 billion people.

The United States must diligently guard against the possibility of political or economic instability in China as the Asian colossus wades ever deeper into capitalist life and expands its middle class, international lawyer Paul Delaney told professor Tim Wu's International Trade class Oct. 23. Delaney was a young White House lawyer in 1972 when President Richard Nixon made his famous breakthrough visit to China in a bid to open normal relations with the long-shunned communist nation. Now a one-man firm with 30 years of experience resolving trade disputes between American companies and Chinese leaders, Delaney has developed an astonishing range of close personal contacts at the highest levels of the Chinese government. Chinese economic modernization is the foundation for its future political liberalization, he said, and the United States must do its best to support free-market practices and aspirations there.

China, under nationalist leader Chiang Kai-Shek, was a member of the General Agreement on Tariffs and Trade when GATT was organized in 1948 as a special agency of the United Nations, Delaney said. But communist leader Mao Zedong, who forced the nationalists to retreat to Taiwan in 1950, rejected membership in the trade protocols for fear that they would exert dangerous capitalist influences in the newly established People's Republic of China. As a result China struggled for years to regain normal trade relations with the United States.

"If you really want to sell in the U.S. you have to have the MFN [most favored nation] rates," Delaney said. A section in 1974 trade legislation dealing with non-market economies, better known as the Jackson-Vanik amendment, meant to ease Jewish emigration from the Soviet Union, required communist nations to get annual waivers of its conditions, certified by the president, in order to get favored tariff rates, he said. These annual certification rituals gave the United States some leverage over the Chinese. "Override bills [to deny the certification] were introduced every year in Congress and sometimes the votes were close," such as after the Tienamen Square massacre in 1989, Delaney said. Much of his talk focused on the history of Chinese efforts to win permanent normal trade relations (the lowest tariffs possible) with the United States, which President Bill Clinton ultimately granted in October of 2000, after compromising with Congress over limits on Chinese imports and the creation of a watchdog commission.

But China trade has ballooned lopsidedly nonetheless. In 1990, the China/U.S. trade deficit was $10 billion. In 2002 it reached $103 billion. "Right now, it's on a pace to be between $120 and $130 billion this year," said Delaney, who noted that part of that sum represents American companies sending goods back home. "The political implications of that are awful," Delaney said. "The deficits are being linked to the loss of 2 million jobs in the U.S.

"We thought we could get them down once China joined the WTO," he said, "but it's gone the other way." China keeps the exchange rate for its currency, the yuan, pegged at 8.2 to the dollar. Its value doesn't "float" (react to changes in the value of other nations' currencies) and it hasn't changed in years, he explained. But China is unlikely to start floating currency because that would "devastate" its present banking system, he said.

American leaders have been warning China recently about the imbalance and Congress may have to move toward imposing a 27 percent duty on Chinese goods in order to get the Chinese to budge some on its exchange rate, Delaney said.

"China hasn't experienced the punishments the WTO could impose," he explained. "They may know enough to do something to head it off and they may not. They may have to feel trade retaliation before they change. I don't think they have a game plan on this."

China's competition with rival Asian economies, especially Taiwan, South Korea, and Japan, who are feeling more irritated with Chinese trade practices, may also offer a leverage point.

Delaney reminded students about how much China has modernized, despite having to manage change in a population of nearly 1.4 billion people. Chinese leaders fret foremost over unemployment, fearing it could raise a challenge to communist party control, he said.

"China still gives a major economic role to state-controlled enterprises. It's trying to phase them out. They are making huge progress. Most of the population still lives in rural areas and needs to relocate to manufacturing centers," he said.

He also cautioned against using punitive or arm-twisting tactics against the Chinese. "The last thing we want is a destabilized Chinese economy. It is riddled with subsidies and interferences, but look how far they've come. Behind the scenes, China has been very helpful in the war on terrorism. Post 9/11, it's a different situation with China." He said the Chinese regard their relationship with the United States as their most important one and, all things being equal, they will choose American business partners over others.

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