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10 Reasons to Retain China's Trade Status

June 22, 1997|MICHAEL J. BOSKIN | MICHAEL J. BOSKIN, former chairman of the President's Council of Economic Advisors, is Tully M. Friedman professor of economics and senior fellow, Hoover Institute, at Stanford University

The House of Representatives will soon debate the annual renewal of China's most-favored-nation trade status. The Senate will take it up shortly thereafter. President Clinton, with whom I do not always agree, was right to propose renewal, and renewal deserves support. That support is not only warranted but necessary and important to America's economic and geopolitical self-interest. It also would recognize the substantial improvements made by China, both economically and politically, despite heated rhetoric claiming the contrary.

To be sure, America has several serious China concerns, from human rights to dangerous arms proliferation to trade barriers, that require continued engagement and resolution. But any thoughtful analysis based on facts, rather than sophistical appeals to emotion, must conclude that MFN status for China deserves support and rapid passage.

First: Let's clear up one serious semantic problem. Most-favored-nation status is a misnomer. China is not asking for special trade treatment, only the same general low level of tariffs that all but a few pariah nations, such as Iran and Libya, receive. MFN should really be called "ordinary trade status."

Second: We have a large and growing volume of trade with China. Although we run a trade deficit, it is widely agreed that America's figures overstate, and China's understate, its true size.

It is also agreed that the bilateral deficit is by far more a reflection of fundamental trade and investment flows than unfair trade practices, although these should be eliminated.

Third: America is rightly concerned with the future of Hong Kong and successful implementation of a one-nation, two-system doctrine.

What has been remarkably absent in the debate over MFN is how devastating failure to renew MFN would be to Hong Kong. About half of China's trade with America flows through Hong Kong. Cutting off that trade by imposing exorbitant tariffs would be crushing to Hong Kong's economy.

Fourth: Trade is a positive, not zero, sum game. Despite the claims by protectionists, the expansion of trade benefits all trading parties (although not necessarily each individual within each trading party). California, for example, has a huge stake in China's retaining its MFN trading status, for China would surely retaliate against American exports and investment. If California's exports to Asia, including China, had not been growing at double-digit rates, the state's economic recovery would have been much more sluggish, unemployment much higher and the economic future much more fragile.

Fifth: It is hard to influence events anywhere, let alone in China, a nation with a quarter of the world's population and a proud culture and history stretching over millenniums. By shutting them out, saying they are not good enough to engage with us in commercial activities, we restrict our influence still further. Renewing China's MFN status is not tantamount to condoning any specific behavior. We can, and should, engage in these contentious issues with the Chinese. But we will have less standing to do so if we shut down trade with China.

Sixth: Remember that tariffs are taxes--price increases on American consumers of imported goods. And we are talking here about whopping tariff/tax increases--40% on average--that would greatly increase the prices of many items imported from China.

Seventh: Unilateral action by the U.S. will mostly hurt American firms and American workers because we will lose the opportunity to export a wide range of goods. Much of the demand from China will then be filled by commercial interests in other countries, such as Japan and the European nations.

Eighth: The annual ritual of every group with a complaint, valid or not, using MFN renewal as a platform is counterproductive. It backs the Chinese into a corner and on balance makes it less likely China's leaders will respond, for fear of appearing to cave in to external pressure. Once the political heat surrounding campaign finance scandals is resolved, serious consideration should be given to making MFN permanent.

Ninth: Successfully bringing China into the rules-based global trading system would benefit not only global trade but also the rule of law in other areas. China has signaled a desire to join the World Trade Organization by year's end. The country's leadership has issued a series of rules to make current and future trade practices consistent with the WTO norms that govern trade among almost all the world's economies. Although more needs to be done, especially in phasing out subsidies to state-owned enterprises, these are very good initial steps. China has generally been accorded high marks for playing by the rules of the other international economic organizations of which it is a member, such as the International Monetary Fund and World Bank.

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