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Briefing Paper : Most Favored Nation: What It Means for the Chinese


The News:

President Bush has recommended extension of China's most-favored-nation (MFN) low-tariff trade status with the United States. But Congress could impose a cutoff or insist on conditional renewal.

Bush's announcement last week came just days before today's second anniversary of the Chinese government's violent crackdown on pro-democracy demonstrators in Beijing, and it is certain to face opposition. Five bills have already been introduced in Congress that would make extension conditional on China's showing greater respect for human rights.

The Background:

Almost all U.S. trading partners enjoy MFN status, which simply means a country's products, when exported to America, are entitled to U.S. tariffs as low as any other nation's.

China was first awarded MFN in 1979, during the Jimmy Carter Administration. Two-way trade between the two countries more than doubled in a year, to $4.9 billion in 1980 from $2.4 billion the year before.

By last year, China enjoyed a $10.4-billion annual surplus in its trade with the United States, with exports totaling $15.2 billion and imports of U.S. goods worth $4.8 billion. U.S. officials have predicted that China's surplus will be even larger this year. Chinese officials have said that over the long term, they seek balanced trade. But meanwhile, this surplus places China in a stronger position to service foreign loans and to finance future imports.

Loss of MFN would be a serious blow, and could mean that China would face the virtual exclusion of its goods from the American market. The top 25 categories of U.S. imports from China are currently taxed at an average rate of 8.35%. If the same goods were imported under non-MFN status, the average tariff would jump to 47.48%. That would make the prices of many Chinese products uncompetitive. Loss of U.S. markets also would ultimately cut China's ability to import goods such as factory equipment and other items that contribute to the country's modernization drive.

The southern coastal provinces are especially dependent on exports, with the United States a key market. In Guangdong province, which has led the way in China's market-oriented economic reforms, goods made for export to the United States accounted for at least 17.5% of total output in 1990, according to recent congressional testimony by John Kamm, former president of the American Chamber of Commerce in Hong Kong. Kamm predicted that if MFN is canceled, nearly half the total damage to China will be inflicted in Guangdong, which is the most liberal and outward-looking part of the country.

Hong Kong, which is due to revert to Chinese sovereignty in 1997, would also suffer economic losses as an indirect result of reduced Sino-U.S. trade.

The Political Stake:

Cancellation of MFN status would be widely understood in China as a slap by the United States at the hard-line leaders, including Premier Li Peng and senior leader Deng Xiaoping, responsible for the bloody 1989 crackdown on the Tian An Men Square pro-democracy demonstrations. It is not clear, however, if this would weaken their power base.

Some observers say that damaged trade ties with the United States would actually strengthen the position of hard-liners by enabling them to blame future economic difficulties on this U.S. action.

Withdrawal of MFN would abrogate the 1980 U.S.-China Trade Agreement, a key element in the framework of Sino-U.S. relations, and lead to greater tension between the two countries for as long as current Chinese leaders remain in power.

Foreigners living in Beijing rarely encounter any Chinese who favor an end to MFN status. Even people who are privately critical of the government usually view closer trade ties with the United States as a factor for progress in China.

In the United States, criticism of China for its continuing suppression of civil liberties has been fueled further by evidence that goods made in Chinese prisons are sometimes exported, that China fails to protect copyrighted computer software, and that Beijing is exporting missiles and other arms to various Third World nations. The U.S. trade deficit with China has added to congressional dissatisfaction. And with the Soviet Union no longer perceived as such a dangerous threat, many members of Congress no longer see any great strategic need to preserve good relations with China.

The Goods:

Items in the top 25 U.S. customs categories of goods exported by China to the United States last year were worth $5.2 billion, or about one-third of total Chinese exports to the United States. Tariffs for the goods on this list totaled $437 million. If they had been imported from a country without MFN status, tariff payments would have been $2.5 billion.

Six categories of clothing and textiles on the list accounted for $1.19 billion worth of Chinese sales, with tariffs ranging from 6% to 34.2%. If MFN is withdrawn, tariffs on these items would range from 50% to 90%.

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